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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
For the transition period from to
Commission file number: 001-39436
KE Holdings Inc.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Oriental Electronic Technology Building,
No. 2 Chuangye Road, Haidian District,
Beijing 100086
People’s Republic of China
+86 10 5810 4689
(Address of principal executive offices)
XU Tao, Chief Financial Officer
Telephone: +86 10 5810 4689
Email: ir@ke.com
Oriental Electronic Technology Building,
No. 2 Chuangye Road, Haidian District,
Beijing 100086
People’s Republic of China
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading | | Name of each exchange on which registered | |
American depositary shares (one American | BEKE | | New York Stock Exchange | |
Class A ordinary shares, par value | |
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2020,2022, there were 3,552,268,1353,725,379,187 ordinary shares outstanding, being the sum of 2,666,966,855 class3,568,952,291 Class A ordinary shares (excluding the 32,594,988 Class A ordinary shares issued to the depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise or vesting of awards granted under our share incentive plans) and 885,301,280 class156,426,896 Class B ordinary shares, par value US$0.00002 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ◻☒ Yes ⌧☐ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ◻☐ Yes ⌧☒ No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ⌧☒ Yes ◻☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ◻☐Yes ◻ No
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ◻☒ Yes ⌧ No
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP | International Financial Reporting Standards as issued by the International Accounting Standards Board | Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ◻☐ Item 17 ◻☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ⌧☒ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ◻☐ Yes ◻☐ No
TABLE OF CONTENTS
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| Material Modifications to the Rights of Security Holders and Use of Proceeds |
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| Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
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| Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 191 | |
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INTRODUCTION
Unless otherwise indicated or the context otherwise requires, references in this annual report to:
| “active agents” are to agents on our platform, including agents employed by us and from labor dispatching or outsourcing agencies, and agents affiliated with our connected stores and connected brands as employees, contractors, or through other service arrangements, as of a given date excluding the agents who (i) delivered notice to leave but have not yet completed the exit procedures, (ii) have not engaged in any critical steps in housing transactions (including but not limited to introducing new properties, attracting new customers and conducting property showings) during the preceding 30 days, or (iii) have not participated in facilitating any housing transaction during the preceding three months; |
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● | “ADRs” are to the American depositary receipts that may evidence the ADSs; |
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| “Beike,” |
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| “Hong Kong dollars” or “HK$” refers to the legal currency of Hong Kong; |
● | “Hong Kong Listing” refers to the listing of our Class A ordinary shares on the Main Board of the Hong Kong Stock Exchange by way of introduction on May 11, 2022. |
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● | “Hong Kong Stock Exchange” refers to The Stock Exchange of Hong Kong Limited; |
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● | “Main Board” refers to the stock market (excluding the option market) operated by the Hong Kong Stock Exchange, which is independent from and operated in parallel with the Growth Enterprise Market of the Hong Kong Stock Exchange; |
● | “ordinary shares” are to our class A and class B ordinary shares, par value US$0.00002 per share; |
| “WFOEs” are to Beike Jinke (Tianjin) Technology Co., Ltd., or Beike Jinke, Beike (Tianjin) Investment Co., Ltd., or Beike Tianjin, Jinbei (Tianjin) Technology Co., Ltd., or Jinbei Technology, and Realsee (Tianjin) Technology Co., Ltd., or Realsee Tianjin; |
● | “RMB” and “Renminbi” are to the legal currency of China; |
● | “SaaS” are to software-as-a-services; |
● | “Tencent” are to Tencent Holdings Limited (HKEx: 700), its subsidiaries and/or its controlled affiliated entities, as the context requires; |
● | “US$,” “U.S. dollars,” and “$” are to the legal currency of the United States; and |
● | “VIEs” are to Beijing Lianjia Real Estate Brokerage Co., Ltd., or Beijing Lianjia, Tianjin Xiaowu Information & Technology Co., Ltd., |
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When we calculate agents on our platform, we refer to agents who are affiliated with the real estate brokerage stores and subject to our Agent Cooperation Network, or ACN, rules.
In China, real estate brokerage refers to the activities of providing intermediary or agency services in connection with housing transactions by brokerage firms and agents, wherein brokerage firms and agents are allowed to collect commissions from either or both of buy side and sell side as long as the payment arrangement is prescribed in the brokerage service agreements.
Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report are made at a rate of RMB6.5250RMB6.8972 to US$1.00, the exchange rate in effect as of December 31, 202030, 2022 as set forth in the H.10 statistical release of The Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all.
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FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” Known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key Information—D. Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:
| our goals and strategies; |
| our future business development, financial condition and results of operations; |
| expected changes in our revenues, costs or expenditures; |
| our ability to empower services and facilitate transactions on our platform; |
| competition in our industry; |
| relevant government policies and regulations relating to our industry; |
| our ability to protect our systems and infrastructures from cyber-attacks; |
| our dependence on the integrity of brokerage brands, stores and agents on our platform; |
| our ability to develop home renovation and furnishing services; |
● | general economic and business conditions in China and globally; and |
| assumptions underlying or related to any of the foregoing. |
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations and our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial Review and Prospects” and other sections in this annual report. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. You should read thoroughly this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report, of which this annual report is a part, completely and with the understanding that our actual future results may be materially different from what we expect.
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PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
Our Holding Company Structure and the VIE Contractual Arrangements
KE Holdings Inc. is not an operating company in China but a Cayman Islands holding company with no material operations of its own and does not have a majority of equity ownership in the VIEs. We conduct our operations primarily through (i) our PRC subsidiaries and (ii) the VIEs, with which we maintain contractual agreements. Our value-added telecommunication services and certain financial services in the PRC have been conducted through the applicable VIEs in order to comply with the PRC laws and regulations, which restrict and impose conditions on foreign direct investment in companies involved in the provision of value-added telecommunication services and certain financial service. Accordingly, we operate these businesses in China through the applicable VIEs, and rely on contractual arrangements among our PRC subsidiaries, the VIEs and their shareholders to direct activities of the VIEs that most significantly affect the economic performance of the VIEs and receive economic benefits from the VIEs that could be significant to the VIEs.
The VIEs collectively held 22.2% of our cash, cash equivalents and restricted cash and 9.9% of our total assets as of December 31, 2022. Revenues contributed by the VIEs, excluding inter-group transactions, accounted for 1.4%, 1.2% and 0.8% of our total net revenues for the fiscal years 2020, 2021 and 2022, respectively. The VIEs and their subsidiaries are the operators of Beike and Lianjia mobile apps and websites and the license holders to provide the value-added telecommunication services on these platforms. To enhance the experience of the customers, agents or other business partners on our platform, we offer certain complementary services through our platform, such as online payment services, and the VIEs and their subsidiaries also hold relevant licenses and permits for these services. Some of our key domain names, including ke.com, are registered under the VIEs. The VIEs and their subsidiaries also owned approximately 3%, 5% and 11% of our issued patents, registered trademarks and copyrights to software programs, respectively, as of December 31, 2022. Therefore, the VIEs and their subsidiaries hold certain intellectual properties and licenses that are critical to the availability of technologies and workforce supporting our operations and services we provide on the Beike platform. At the same time, the employees under the VIEs and their subsidiaries were less than 1% of the total workforce as of December 31, 2022. As used in this annual report, “Beike,” “we,” “us,” “our company” or “our” refers to KE Holdings Inc., its subsidiaries, and, in the context of describing the consolidated financial information, the VIEs and their subsidiaries in China. Investors in our ADSs thus are not purchasing equity interest in the VIEs in China but instead are purchasing equity interest in KE Holdings Inc., a Cayman Islands holding company. This VIE structure involves unique risks to investors, and investors may never directly hold equity interests in the Chinese operating company. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
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A series of contractual agreements, including power of attorney, exclusive business cooperation agreements, equity pledge agreements, exclusive option agreements and spouse consent letters, have been entered into by and among our WFOEs, the VIEs and their respective shareholders. We depend on these contractual arrangements to provide our subsidiaries with a “controlling financial interest” in the VIEs, as defined in FASB ASC 810, making them the primary beneficiaries of the VIEs. Terms contained in each set of contractual arrangements with the VIEs and their respective shareholders are substantially similar, which enable us to (i) direct activities of the VIEs that most significantly affect the economic performance of the VIEs; (ii) receive economic benefits from the VIEs that could be significant to the VIEs; (iii) have the pledge right over the equity interests in the VIEs as the pledgee; and (iv) have an exclusive option to purchase all or part of the equity interests in and assets of the VIEs when and to the extent permitted by PRC law. As advised by our PRC legal counsel, Han Kun Law Offices, subject to the disclosure in this annual report, the terms of the contractual agreements are valid, binding and enforceable under the PRC laws and regulations currently in effect. Accordingly, we are considered the primary beneficiaries of the VIEs for accounting purposes and have consolidated the VIEs’ financial results of operations, assets and liabilities in our consolidated financial statements in accordance with U.S. GAAP. However, neither KE Holdings Inc. nor its investors have an equity ownership in, direct foreign investment in, or control through such ownership or investment of, the VIEs (except for Beike Tianjian’s 30% shareholding in Beijing Lianjia), and the VIE contractual arrangements are not equivalent to an equity ownership in the business of the VIEs. As of the date of this annual report, the contracts with the VIEs have not been tested in a court of law. For more details of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with the VIEs and Their Shareholders.”
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The following diagram illustrates our corporate structure, including our principal subsidiaries, principal VIEs and their principal subsidiaries, and other entities that are material to our business, as of the date of this annual report:
Notes:
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(1) | The registered shareholders of Beijing Lianjia are (i) Mrs. ZUO, Mr. SHAN Yigang, Mr. XU Wangang and entities controlled by Mr. PENG Yongdong or Mr. SHAN Yigang, holding 57% equity interests in aggregate (ii) Beike Tianjin, holding 30% equity interests; and (iii) several other individuals and entities associated with us, holding 13% equity interests in aggregate. Mrs. ZUO is the spouse of Mr. ZUO Hui, our founder and permanent chairman emeritus, and a principal shareholder of us. Each of Mr. PENG Yongdong, Mr. SHAN Yigang and Mr. XU Wangang is our director. The registered shareholders of Tianjin Xiaowu are Mrs. ZUO and Mr. SHAN Yigang, holding 94% and 6% equity interests, respectively. The registered shareholders of Yiju Taihe are (i) Beijing Lianjia, holding 80% equity interests; (ii) Mrs. ZUO, Mr. SHAN Yigang, Mr. XU Wangang and entities controlled by Mrs. ZUO or Mr. SHAN Yigang, holding 17% equity interests in aggregate and (iii) several other individuals and entities associated with us, holding 3% equity interests in aggregate. The registered shareholders of Beijing Beijia are (i) Mr. PENG Yongdong and Mr. XU Tao, holding 50% equity interests in aggregate and (ii) several other individuals associated with us, holding 50% equity interests in aggregate. The registered shareholders of Beijing Beihao are (i) Mr. XU Wangang, holding 4% equity interests; and (ii) several other individuals affiliated with us, holding 96% equity interests in aggregate. |
(2) | Beijing Zhongrongxin Financing Guarantee Co., Ltd. owns 95% of the total equity interest, and Beijing Zhonghetai Investment Consulting Co., Ltd., a wholly-owned subsidiary of Yiju Taihe, owns the remaining 5%. |
(3) | Shenzhen Fangjianghu Technology Co., Ltd., Chengdu Fangjianghu Information Technology Co., Ltd., Tianjin Lianjia Fangjianghu Technology Co., Ltd., Zhengzhou Fangjianghu Information Technology Co., Ltd., Xi’an Fangjianghu Information Technology Co., Ltd. and Wuhan Fangjianghu Information Technology Co., Ltd. |
(4) | Beijing Fangyuan Real Estate Consulting Services Co., Ltd., Beijing Lianjia Gaoce Real Estate Brokerage Co., Ltd., Shanghai Deyou Property Consulting Co., Ltd., Shenzhen Lianjia Real Estate Brokerage Co., Ltd. and Sichuan Lianjia Real Estate Brokerage Co., Ltd. |
Our corporate structure is subject to risks associated with our contractual arrangements with the VIEs. Investors may not directly hold equity interests in the VIEs or in the businesses that are conducted by the VIEs, and the VIE structure provides contractual exposure to foreign investment in the companies which involve foreign investment restrictions. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. This may result in the VIEs being deconsolidated, which would materially and adversely affect our operations, and our ADSs may decline significantly in value or become worthless. Our holding company, our PRC subsidiaries, the VIEs, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the VIEs and, consequently, significantly affect the financial performance of the VIEs and our company as a whole. The PRC regulatory authorities could disallow the VIE structure, which would likely result in a material adverse change in our operations, and our Class A ordinary shares or our ADSs may decline significantly in value or become worthless. The contractual arrangements may not be as effective as direct ownership in providing us with control over the VIEs, the shareholders of the VIEs may have potential conflicts of interest with us, and we may incur substantial costs to enforce the terms of the arrangements. As such, the VIE structure involves unique risks to investors of our holding company. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
We face various risks and uncertainties related to doing business in China that could result in a material change in our operations. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings and listings, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy. PRC government’s authority in regulating our operations and its oversight and control over offerings and listings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline or be worthless. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China.”
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For example, the PRC Data Security Law and the PRC Personal Information Protection Law promulgated in 2021 posed additional challenges to our cybersecurity and data privacy compliance. The Cybersecurity Review Measures issued by the Cyberspace Administration of China, or the CAC and several other PRC governmental authorities in December 2021, as well as the draft Regulations on the Administration of Cyber Data Security (Draft for Comments), or the Draft Regulations on Cyber Data Security, published by the CAC for public comments in November 2021, exposes uncertainties and potential additional restrictions on China-based overseas-listed companies like us. If the detailed rules, implementations, or the enacted version of the draft measures mandate clearance of cybersecurity review and other specific actions to be completed by us, we face uncertainties as to whether such clearance can be timely obtained, the failure of which may subject us to penalties, which could materially and adversely affect our business and results of operations and the price of our ADSs. See “Item 3. Key Information—Risk Factors—Risks Related to Our Business and Industry—Our business generates and processes a large amount of data and is subject to various evolving PRC laws and regulations regarding cybersecurity and data privacy. Failure of cybersecurity and data privacy concerns could subject us to significant reputational, financial, legal and operational consequences, and deter current and potential customers from using our services” for additional details.
In addition, on February 17, 2023, the China Securities Regulatory Commission, or the CSRC, issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Overseas Listing Regulations, and five supporting guidelines, which became effective on March 31, 2023. Pursuant to the Overseas Listing Regulations, PRC domestic companies that directly or indirectly seek to offer or list their securities on an overseas stock exchange, including a PRC company limited by shares and an offshore company whose main business operations are in mainland China and intends to offer securities or be listed on an overseas stock exchange based on its onshore equities, assets, incomes or similar interests, are required to file with the CSRC within three business days after submitting their application documents to the regulator in the place of intended listing or offering. Particularly, as for the PRC domestic companies that have directly or indirectly listed securities in overseas markets intend to conduct follow-on offerings in overseas markets, such companies are required to submit the filing with respect to the follow-on offering within three business days after completion of the follow-on offering. Failure to complete the filing under the Overseas Listing Regulations, concealing any material fact or falsifying any major content in its filing documents may subject the company to administrative penalties, such as order to rectify, warnings, fines. Its controlling shareholders, actual controllers, direct officers-in-charge and other direct personnel-in-charge may also be subject to administrative penalties, such as warnings and fines. At the press conference held by the CSRC on February 17, 2023 for the Overseas Listing Regulations, officials from the CSRC confirmed that the companies in mainland China that have been listed overseas before March 31, 2023 are not required to file with the CSRC immediately, but these companies should complete filing with the CSRC for their refinancing activities and future offerings in accordance with the Overseas Listing Regulations. Based on the foregoing, as of the date of this annual report, we are not required to complete filing with the CSRC for our listing on the NYSE and the Hong Kong Stock Exchange, but we may be subject to the filing requirements for our future capital raising activities and security offerings under the Overseas Listing Regulations. As the Overseas Listing Regulations was newly promulgated, there remain substantial uncertainties about how the Overseas Listing Regulations will be interpreted or implemented and how they will affect our operations and future overseas offerings. We cannot assure you that we will be able to complete such filing in a timely manner and fully comply with such regulations to maintain the listing status of our ADSs and/or other securities, or to conduct any securities offerings in the future. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s oversight and discretion over our business operations could result in a material adverse change in our operations and the value of our securities.”
Furthermore, the PRC anti-monopoly regulators have promulgated new anti-monopoly and competition laws and regulations and strengthened the enforcement under these laws and regulations. There remain uncertainties as to how the laws, regulations and guidelines recently promulgated will be implemented and whether these laws, regulations and guidelines will have a material impact on our business, financial condition, results of operations and prospects. We cannot assure you that our business operations comply with such regulations and authorities’ requirements in all respects. If any non-compliance is raised by relevant authorities and determined against us, we may be subject to fines and other penalties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Any failure or perceived failure by us to comply with the anti-monopoly and competition laws and regulations in the PRC may result in governmental investigations, enforcement actions, litigation or claims against us and could have an adverse effect on business, reputation, results of operations and financial condition.”
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding that the rules and regulations in China can change quickly with little advance notice and that the Chinese government may intervene or influence our operations at any time, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could materially and adversely affect us.”
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These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline or be worthless. For a detailed description of risks related to doing business in China, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China.”
Permissions Required from the PRC Authorities for Our Operations
We conduct our business primarily through our subsidiaries and the VIEs and their subsidiaries in China. Our operations in China are governed by PRC laws and regulations. In addition to the Business License issued by the relevant department of the State Administration for Market Regulation for each of our PRC subsidiaries and the VIEs and their subsidiaries, the relevant PRC subsidiaries and the VIEs and their subsidiaries are required to obtain, and have obtained the following requisite permissions for their main operations: the Filings for Real Estate Brokerage Business, the Operating License for Value-Added Telecommunication Business, the Qualification Certificate of Construction Enterprise, the Qualification Certificate of Construction Project Design, the Safety Production License, the License for Non-Financial Institution Payment Service, the Approval for Establishment of Micro Credit Company, the License for Financing Guarantee Business, the License for Insurance Brokerage Business, the Approval for Commercial Factoring Business and Filing on Commercial Franchising.
Apart from the permits and licenses above, we may be subject to additional licensing requirements for our business operation due to the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—If we fail to obtain or keep licenses, permits or approvals applicable to the various services provided by us, we may incur significant financial penalties and other government sanctions” for more details.
Furthermore, in connection with our issuance of securities to foreign investors, as of the date of this annual report, neither we, our PRC subsidiaries, nor the VIEs or their subsidiaries have received any formal inquiry, notice, warning or sanction from the CSRC, the CAC or any PRC governmental authorities in connection with requirements of obtaining prior approval or permission for our historical issuance to foreign investors. Our PRC legal counsel, Han Kun Law Offices, has advised us that, based on their understanding of the currently effective PRC laws and regulations as of the date of this annual report, we are not required to obtain any prior approval or permission from the CSRC, the CAC or any other PRC governmental authorities for our historical offshore offerings to foreign investors. However, our PRC legal counsel has further advised us that there remains some uncertainty as to how relevant rules published by the CSRC and the CAC will be interpreted or implemented, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form. We cannot assure you that relevant PRC governmental authorities, including the CSRC and the CAC, would reach the same conclusion as our PRC legal counsel, and hence, we may face regulatory actions or other sanctions from them. Besides, the PRC government has enhanced its oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers like us, and published a series of new rules in this regard, the interpretation and implementation of which remains uncertain. Therefore, there are substantial uncertainties as to whether we will be able to complete filing with the CSRC or will be required to obtain any specific regulatory approvals from the CAC or any other PRC governmental authorities for our future offshore offerings. If we had inadvertently concluded that such approvals were not required, or if applicable laws, regulations or interpretations change in a way that requires us to obtain such approval in the future, we may be unable to obtain such necessary approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could subject us to penalties, including fines, suspension of business and revocation of required licenses, significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Filings, approvals or other administration requirements of the CSRC, the CAC or other PRC governmental authorities may be required in connection with our future offshore offerings under PRC law” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s oversight and discretion over our business operations could result in a material adverse change in our operations and the value of our securities” for more details.
9
The Holding Foreign Companies Accountable Act
Pursuant to the Holding Foreign Companies Accountable Act, or the HFCAA, if the Securities and Exchange Commission of the United States, or the SEC, determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspections by the Public Company Accounting Oversight Board, or the PCAOB, for two consecutive years, the SEC will prohibit our shares or the ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong, including our auditor. In May 2022, the SEC conclusively listed us as a Commission-Identified Issuer under the HFCAA following the filing of this annual report on Form 20-F for the fiscal year ended December 31, 2021. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. For this reason, we do not expect to be identified as a Commission-Identified Issuer under the HFCAA after we file this annual report on Form 20-F. Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. If PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong and we continue to use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. There can be no assurance that we would not be identified as a Commission-Identified Issuer for any future fiscal year, and if we were so identified for two consecutive years, we would become subject to the prohibition on trading under the HFCAA. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor in the past has deprived our investors with the benefits of such inspections” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely auditors located in China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”
Cash Flows Through Our Organization
KE Holdings Inc., our Cayman Islands holding company, or the Parent, transfers cash to our wholly-owned Hong Kong subsidiaries (through intermediate holding companies in the Cayman Islands and the British Virgin Islands), by making capital contributions or providing loans, and our Hong Kong subsidiaries transfer cash to our PRC subsidiaries by making capital contributions or providing loans to them.
The Parent and its subsidiaries generally transfer cash to the VIEs by loans or by making payment to the VIEs for inter-group transactions. The Parent may transfer cash to one of the VIEs, Beijing Lianjia, by making capital contributions through intermediate holding companies in the Cayman Islands and the British Virgin Islands and our Hong Kong and PRC subsidiaries.
The following table sets forth the amount of the transfers for the periods presented.
| | | | | | |
| | Years Ended December 31, | ||||
|
| 2020 |
| 2021 |
| 2022 |
| | (RMB in thousands) | ||||
Loans from Parent to Cayman, BVI, and Hong Kong subsidiaries(1) |
| 38,818,154 |
| 4,581,814 |
| (5,267,047) |
Capital contributions from Hong Kong subsidiaries to PRC subsidiaries(2) |
| 538,439 |
| 300,000 |
| — |
Loans from Hong Kong subsidiaries to PRC subsidiaries(2) |
| 5,619,185 |
| 9,332,778 |
| 4,096,214 |
Net amounts paid / (received) by subsidiaries to / (from) VIEs(3) |
| (1,664,566) |
| 240,243 |
| 191,090 |
Transfer of intangible asset (advertising resources) from Parent to subsidiaries(4) |
| 2,036,154 |
| — |
| — |
Notes:
(1) | Represents the “Investments in and loans to subsidiaries and VIEs” of the Parent as in the condensed consolidating schedule of cash flow data. |
10
(2) | The items “Capital contributions from Hong Kong subsidiaries to PRC subsidiaries” and “Loans from Hong Kong subsidiaries to PRC subsidiaries” include the following: |
● | Cash flows from Hong Kong subsidiaries (included in the “Other Subsidiaries” column) to primary beneficiary of VIEs which are included in “Proceeds and loans from Parent and other Group companies” of primary beneficiary of VIEs in the consolidating schedules; and |
● | Cash flows from Hong Kong subsidiaries to other PRC subsidiaries, which represent cash flows between entities all within the “Other Subsidiaries” column and are thus eliminated in the presentation of the consolidating schedules. |
(3) | Represents the “Operating cash flow from the Group companies” of the VIEs plus “Proceeds and loans from Parent and other Group companies” of the VIEs in the condensed consolidating schedule of cash flow data. The cash flows between the subsidiaries and the VIEs included the following: |
● | Cash paid by the subsidiaries to the VIEs for financial platform and other financial related services provided by the VIEs; |
● | Cash paid by the subsidiaries to the VIEs for referral and other services; |
● | Cash paid by the VIEs to the subsidiaries for referral and professional services; and |
● | Intercompany advances from equity-owned subsidiaries to the VIEs, and repayment of intercompany advances by the VIEs. |
(4) | The “Transfer of intangible asset (advertising resources) from Parent to subsidiaries” is a non-cash transaction and the related disposal gain was recorded in the “Income from the Group companies” line of the Parent for the year ended December 31, 2020, and the unrealized profits originated from this transaction is eliminated and explained in Note 3 to the condensed consolidating schedule.” |
The cash received from loans and payment for acquiring the subsidiaries were used by the VIEs for returning the onshore capital to preferred shareholders in connection with the reorganization. Other funds have been used by the VIEs for their operations.
As of December 31, 2022, the Parent had made cumulative capital contribution of RMB4,064 million and provided cumulative loans of RMB28,846 million to our PRC subsidiaries through intermediate holding companies.
The VIEs may transfer cash to the relevant WFOEs by paying service fees according to the exclusive business cooperation agreements. Pursuant to these agreements between each of the VIEs and its corresponding WFOEs, each of the VIEs agrees to pay the relevant WFOE for services related to comprehensive technical support, professional training, consulting and marketing and promotional services at an amount based on 100% of the balance of the gross consolidated profits of each VIE after offsetting the accumulated losses for the preceding financial years and deducting the working capital, expenses, taxes and other statutory contributions required for any financial year, or the amount determined by the WFOE in accordance with the terms of the agreements. Considering the future operating and cashflow needs of the VIEs, for the years ended December 31, 2020, 2021 and 2022, no service fees were charged to the VIEs by the WFOEs, and no payments were made by the VIEs under these agreements. If there is any amount payable to relevant WFOEs under the VIE agreements, the VIEs will settle the amount accordingly.
For the years ended December 31, 2020, 2021 and 2022, no dividends or distributions were made to the Parent by our subsidiaries. For the years ended December 31, 2020, 2021 and 2022, no dividends or distributions were made to U.S. investors.
11
For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within Mainland China, assuming that: (i) we have taxable earnings, and (ii) we determine to pay a dividend in the future:
| | | |
| Taxation Scenario(1) | ||
| | Statutory Tax and | |
| | Standard Rates | |
Hypothetical pre-tax earnings(2) | 100 | % | |
Tax on earnings at statutory rate of 25%(3) | | (25) | % |
Net earnings available for distribution | 75 | % | |
Withholding tax at standard rate of 10%(4) | | (7.5) | % |
Net distribution to Parent/Shareholders | 67.5 | % |
Notes:
(1) | For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount, not considering timing differences, is assumed to equal taxable income in China. |
(2) | Under the terms of VIE agreements, our PRC subsidiaries may charge the VIEs for services provided to VIEs. These fees shall be recognized as expenses of the VIEs, with a corresponding amount as service income by our PRC subsidiaries and eliminate in consolidation. For income tax purposes, our PRC subsidiaries and VIEs file income tax returns on a separate company basis. The fees paid are recognized as a tax deduction by the VIEs and as income by our PRC subsidiaries and are tax neutral. |
(3) | Certain of our subsidiaries and VIEs qualifies for a 15% preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective. |
(4) | The PRC Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise, or FIE, to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the FIE’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution. For purposes of this hypothetical example, the table above assumes a maximum tax scenario under which the full withholding tax would be applied. |
The table above has been prepared under the assumption that all profits of the VIEs will be distributed as fees to our PRC subsidiaries under tax neutral contractual arrangements. If, in the future, the accumulated earnings of the VIEs exceed the fees paid to our PRC subsidiaries (or if the current and contemplated fee structure between the intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities), the VIEs could, as a matter of last resort, make a non-deductible transfer to our PRC subsidiaries for the amounts of the stranded cash in the VIEs. This would result in such transfer being non-deductible expenses for the VIEs but still taxable income for the PRC subsidiaries. Such a transfer and the related tax burdens would reduce our after-tax income to approximately 50.6% of the pre-tax income. Our management believes that there is only a remote possibility that this scenario would happen.
12
As KE Holdings Inc. is a Cayman Islands holding company with no material operations of its own, its ability to pay dividends depends upon dividends paid by our PRC subsidiaries. Our PRC subsidiaries in turn generate income from their own operations, and in addition enjoy all economic benefit and may receive service fees from the VIEs pursuant to the exclusive business cooperation agreement with the VIEs. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to distribute earnings or pay dividends to us. Under PRC law, each of our subsidiaries and the VIEs in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our subsidiaries and the VIEs in China may allocate a portion of its after-tax profits based on PRC accounting standards to a surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by the State Administration of Foreign Exchange, or SAFE, and declaration and payment of withholding tax. Additionally, if our PRC subsidiaries and the VIEs incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends or make other distributions to us. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until it generates accumulated profits and meets the requirements for statutory reserve funds. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies may delay us from using the proceeds of our offshore offerings to make loans or additional capital contributions to our PRC subsidiaries and to make loans to the VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.” Except these regulatory requirements, there are not any other statutory restrictions and limitations on our ability to distribute earnings from our PRC subsidiaries to the parent company and U.S. investors or the ability of the VIEs to settle amounts owned under the VIE agreements.
13
Financial Information Related to the VIEs
The following table presents the condensed consolidating schedule of balance sheet data for the Parent, our wholly owned subsidiaries that are primary beneficiary of VIEs, VIEs (inclusive of the VIEs’ subsidiaries) and other consolidated subsidiaries (“Other Subsidiaries”) as of the dates presented.
| | | | | | | | | | | | |
| | As of December 31, | ||||||||||
| | 2022 | ||||||||||
|
| |
| |
| Primary |
| |
| |
| |
| | | | Other | | Beneficiary | | | | | | |
| | Parent | | Subsidiaries | | of VIEs | | VIEs | | Eliminations | | Consolidated |
| | (RMB in thousands) | ||||||||||
Cash and cash equivalents |
| 12,818 |
| 15,797,420 |
| 1,728,975 |
| 1,873,989 |
| — |
| 19,413,202 |
Restricted cash |
| — |
| 2,374,274 |
| — |
| 3,806,783 |
| — |
| 6,181,057 |
Short-term investments |
| 7,372,995 |
| 27,665,330 |
| — |
| 447,583 |
| — |
| 35,485,908 |
Accounts receivable, net |
| — |
| 4,139,648 |
| — |
| 23,374 |
| — |
| 4,163,022 |
Amount due from the Group companies(1) |
| 1,226,906 |
| 52,614,073 |
| 46,617,540 |
| 3,041,482 |
| (103,500,001) |
| — |
Other current assets |
| 13,927 |
| 3,736,853 |
| 38,028 |
| 1,392,678 |
| — |
| 5,181,486 |
Total current assets |
| 8,626,646 |
| 106,327,598 |
| 48,384,543 |
| 10,585,889 |
| (103,500,001) |
| 70,424,675 |
Investment in subsidiaries(2) |
| 56,064,739 |
| — |
| 14,562,240 |
| — |
| (70,626,979) |
| — |
Net assets of VIEs(2) | | 3,716,231 | | 3,716,231 | | 3,716,231 | | — | | (11,148,693) | | — |
Long-term investments |
| 516,873 |
| 16,908,780 |
| 500,000 |
| — |
| — |
| 17,925,653 |
Right-of-use assets |
| — |
| 11,283,997 |
| — |
| 73 |
| — |
| 11,284,070 |
Intangible assets, net(3) |
| — |
| 2,528,006 |
| — |
| 33,786 |
| (874,816) |
| 1,686,976 |
Other non-current assets |
| — |
| 7,869,570 |
| — |
| 156,403 |
| — |
| 8,025,973 |
Total non-current assets |
| 60,297,843 |
| 42,306,584 |
| 18,778,471 |
| 190,262 |
| (82,650,488) |
| 38,922,672 |
TOTAL ASSETS |
| 68,924,489 |
| 148,634,182 |
| 67,163,014 |
| 10,776,151 |
| (186,150,489) |
| 109,347,347 |
Accounts payable |
| — |
| 5,780,411 |
| — |
| 62,910 |
| — |
| 5,843,321 |
Employee compensation and welfare payable |
| — |
| 8,978,638 |
| — |
| 386,874 |
| — |
| 9,365,512 |
Customer deposits payable |
| — |
| 1,279,725 |
| — |
| 2,915,103 |
| — |
| 4,194,828 |
Amount due to the Group companies(1) |
| — |
| 50,885,928 |
| 49,181,431 |
| 3,432,642 |
| (103,500,001) |
| — |
Other current liabilities |
| 4,129 |
| 13,662,471 |
| 14,468 |
| 256,589 |
| — |
| 13,937,657 |
Total current liabilities |
| 4,129 |
| 80,587,173 |
| 49,195,899 |
| 7,054,118 |
| (103,500,001) |
| 33,341,318 |
Deferred tax liabilities | | — | | 346,703 | | — | | 4,483 | | — | | 351,186 |
Operating lease liabilities | | — | | 6,599,907 | | — | | 23 | | — | | 6,599,930 |
Deficit in subsidiaries(2) | | — | | 1,186,172 | | — | | — | | (1,186,172) | | — |
Other non-current liabilities | | — | | 475 | | — | | — | | — | | 475 |
Total non-current liabilities |
| — |
| 8,133,257 |
| — |
| 4,506 |
| (1,186,172) |
| 6,951,591 |
TOTAL LIABILITIES |
| 4,129 |
| 88,720,430 |
| 49,195,899 |
| 7,058,624 |
| (104,686,173) |
| 40,292,909 |
TOTAL KE HOLDINGS INC. SHAREHOLDERS’ EQUITY (DEFICIT) |
| 68,920,360 |
| 59,780,970 |
| 17,967,115 |
| 3,716,231 |
| (81,464,316) |
| 68,920,360 |
Non-controlling interests |
| — |
| 132,782 |
| — |
| 1,296 |
| — |
| 134,078 |
TOTAL SHAREHOLDERS’ EQUITY (DEFICIT) |
| 68,920,360 |
| 59,913,752 |
| 17,967,115 |
| 3,717,527 |
| (81,464,316) |
| 69,054,438 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
| 68,924,489 |
| 148,634,182 |
| 67,163,014 |
| 10,776,151 |
| (186,150,489) |
| 109,347,347 |
14
| | | | | | | | | | | | |
|
| As of December 31, | ||||||||||
| | 2021 | ||||||||||
|
| |
| |
| Primary |
| |
| |
| |
| | | | Other | | Beneficiary | | | | | | |
|
| Parent |
| Subsidiaries |
| of VIEs |
| VIEs |
| Eliminations |
| Consolidated |
| | (RMB in thousands) | ||||||||||
Cash and cash equivalents |
| 55,235 |
| 12,254,154 |
| 5,671,331 |
| 2,465,384 |
| — |
| 20,446,104 |
Restricted cash |
| — |
| 868,862 |
| — |
| 5,417,243 |
| — |
| 6,286,105 |
Short-term investments |
| 81,906 |
| 26,406,831 |
| 2,589,120 |
| 324,804 |
| — |
| 29,402,661 |
Accounts receivable, net |
| — |
| 9,299,766 |
| — |
| 25,186 |
| — |
| 9,324,952 |
Amount due from the Group companies(1) |
| 1,997,867 |
| 39,562,161 |
| 25,522,236 |
| 2,805,071 |
| (69,887,335) |
| — |
Other current assets |
| 55,320 |
| 3,152,387 |
| 640 |
| 1,258,185 |
| — |
| 4,466,532 |
Total current assets |
| 2,190,328 |
| 91,544,161 |
| 33,783,327 |
| 12,295,873 |
| (69,887,335) |
| 69,926,354 |
Investment in subsidiaries(2) |
| 58,668,755 |
| — |
| 14,691,222 |
| — |
| (73,359,977) |
| — |
Net assets of VIEs(2) | | 3,620,309 | | 3,620,309 | | 3,620,309 | | — | | (10,860,927) | | — |
Long-term investments |
| 2,527,253 |
| 14,149,543 |
| — |
| 361,375 |
| — |
| 17,038,171 |
Right-of-use assets |
| — |
| 7,230,689 |
| — |
| 13,522 |
| — |
| 7,244,211 |
Intangible assets, net(3) |
| — |
| 2,231,564 |
| — |
| 40,754 |
| (1,131,045) |
| 1,141,273 |
Other non-current assets |
| — |
| 4,769,324 |
| 3,716 |
| 195,816 |
| — |
| 4,968,856 |
Total non-current assets |
| 64,816,317 |
| 32,001,429 |
| 18,315,247 |
| 611,467 |
| (85,351,949) |
| 30,392,511 |
TOTAL ASSETS |
| 67,006,645 |
| 123,545,590 |
| 52,098,574 |
| 12,907,340 |
| (155,239,284) |
| 100,318,865 |
Accounts payable |
| — |
| 5,946,929 |
| — |
| 61,836 |
| — |
| 6,008,765 |
Employee compensation and welfare payable |
| — |
| 9,429,532 |
| — |
| 404,715 |
| — |
| 9,834,247 |
Customer deposits payable |
| — |
| 774,120 |
| — |
| 3,407,217 |
| — |
| 4,181,337 |
Amount due to the Group companies(1) |
| — |
| 30,325,174 |
| 34,746,136 |
| 4,816,025 |
| (69,887,335) |
| — |
Other current liabilities |
| 32,669 |
| 8,221,055 |
| 68,725 |
| 589,339 |
| — |
| 8,911,788 |
Total current liabilities |
| 32,669 |
| 54,696,810 |
| 34,814,861 |
| 9,279,132 |
| (69,887,335) |
| 28,936,137 |
Deferred tax liabilities | | — | | 18,437 | | — | | 4,483 | | — | | 22,920 |
Operating lease liabilities | | — | | 4,299,518 | | — | | 3,416 | | — | | 4,302,934 |
Deficit in subsidiaries(2) | | — | | 2,160,146 | | — | | — | | (2,160,146) | | — |
Other non-current liabilities | | — | | 1,381 | | — | | — | | — | | 1,381 |
Total non-current liabilities |
| — |
| 6,479,482 |
| — |
| 7,899 |
| (2,160,146) |
| 4,327,235 |
TOTAL LIABILITIES |
| 32,669 |
| 61,176,292 |
| 34,814,861 |
| 9,287,031 |
| (72,047,481) |
| 33,263,372 |
TOTAL KE HOLDINGS INC. SHAREHOLDERS’ EQUITY (DEFICIT) |
| 66,973,976 |
| 62,289,064 |
| 17,283,713 |
| 3,619,026 |
| (83,191,803) |
| 66,973,976 |
Non-controlling interests |
| — |
| 80,234 |
| — |
| 1,283 |
| — |
| 81,517 |
TOTAL SHAREHOLDERS’ EQUITY (DEFICIT) |
| 66,973,976 |
| 62,369,298 |
| 17,283,713 |
| 3,620,309 |
| (83,191,803) |
| 67,055,493 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
| 67,006,645 |
| 123,545,590 |
| 52,098,574 |
| 12,907,340 |
| (155,239,284) |
| 100,318,865 |
15
The following table presents the condensed consolidating schedule of results of operations for the VIEs and other entities for the periods presented.
| | | | | | | | | | | | |
| | For the Year ended December 31, | ||||||||||
| | 2022 | ||||||||||
| | | | | | Primary | | | | | | |
| | | | Other | | Beneficiary | | | | | | |
|
| Parent |
| Subsidiaries |
| of VIEs |
| VIEs |
| Eliminations |
| Consolidated |
| | (RMB in thousands) | ||||||||||
Net revenues from third parties | | — | | 60,198,215 | | — | | 470,564 | | — | | 60,668,779 |
Net revenues from the Group companies(4) | | — | | 54,483 | | — | | 183,146 | | (237,629) | | — |
Total net revenues |
| — |
| 60,252,698 |
| — |
| 653,710 |
| (237,629) |
| 60,668,779 |
Cost of revenues - third parties |
| — |
| (46,649,250) |
| — |
| (238,782) |
| — |
| (46,888,032) |
Cost of revenues – Group companies(4) |
| — |
| (12,949) |
| — |
| (50,456) |
| 63,405 |
| — |
Total cost of revenues |
| — |
| (46,662,199) |
| — |
| (289,238) |
| 63,405 |
| (46,888,032) |
Gross profit |
| — |
| 13,590,499 |
| — |
| 364,472 |
| (174,224) |
| 13,780,747 |
Operating expenses(3)(4) |
| (140,148) |
| (14,497,841) |
| (40,530) |
| (292,567) |
| 357,433 |
| (14,613,653) |
Others |
| 93,988 |
| 1,082,864 |
| 124,698 |
| 62,041 |
| (238,395) |
| 1,125,196 |
Income from the Group companies(3) | | — | | — | | — | | — | | — | | — |
Share of income (loss) of subsidiaries(2) |
| (1,436,950) |
| 80,452 |
| (130,097) |
| — |
| 1,486,595 |
| — |
Income (loss) of the VIEs(2) | | 97,036 | | 97,036 | | 97,036 | | — | | (291,108) | | — |
Income (loss) before income tax benefit (expense) |
| (1,386,074) |
| 353,010 |
| 51,107 |
| 133,946 |
| 1,140,301 |
| 292,290 |
Income tax benefit (expense) |
| — |
| (1,648,935) |
| (3,716) |
| (36,923) |
| — |
| (1,689,574) |
Net income (loss) |
| (1,386,074) |
| (1,295,925) |
| 47,391 |
| 97,023 |
| 1,140,301 |
| (1,397,284) |
Net loss (income) attributable to non‑controlling interests shareholders |
| — |
| 11,197 |
| — |
| 13 |
| — |
| 11,210 |
Net income (loss) attributable to KE Holdings Inc. |
| (1,386,074) |
| (1,284,728) |
| 47,391 |
| 97,036 |
| 1,140,301 |
| (1,386,074) |
| | | | | | | | | | | | |
| | For the Year ended December 31, | ||||||||||
| | 2021 | ||||||||||
|
| |
| |
| Primary |
| |
| |
| |
| | | | Other | | Beneficiary of | | | | | | |
|
| Parent | | Subsidiaries | | VIEs | | VIEs | | Eliminations | | Consolidated |
| | (RMB in thousands) | ||||||||||
Net revenues from third parties |
| — |
| 79,805,556 |
| — |
| 946,883 |
| — |
| 80,752,439 |
Net revenues from the Group companies(4) |
| — |
| 399,217 |
| — |
| 184,717 |
| (583,934) |
| — |
Total net revenues |
| — |
| 80,204,773 |
| — |
| 1,131,600 |
| (583,934) |
| 80,752,439 |
Cost of revenues - third parties |
| — |
| (64,503,389) |
| — |
| (429,635) |
| — |
| (64,933,024) |
Cost of revenues – Group companies(4) |
| — |
| (16,547) |
| — |
| (189,293) |
| 205,840 |
| — |
Total cost of revenues |
| — |
| (64,519,936) |
| — |
| (618,928) |
| 205,840 |
| (64,933,024) |
Gross profit |
| — |
| 15,684,837 |
| — |
| 512,672 |
| (378,094) |
| 15,819,415 |
Operating expenses(3)(4) |
| (92,393) |
| (17,101,568) |
| (3) |
| (643,533) |
| 663,218 |
| (17,174,279) |
Others |
| 316,844 |
| 1,865,693 |
| 168,328 |
| 117,122 |
| 27,603 |
| 2,495,590 |
Share of income (loss) of subsidiaries(2) |
| (696,144) |
| 99,204 |
| 1,048,228 |
| — |
| (451,288) |
| — |
Income (loss) of the VIEs(2) |
| (52,436) |
| (52,436) |
| (52,436) |
| — |
| 157,308 |
| — |
Income (loss) before income tax benefit (expense) |
| (524,129) |
| 495,730 |
| 1,164,117 |
| (13,739) |
| 18,747 |
| 1,140,726 |
Income tax benefit (expense) |
| — |
| (1,557,553) |
| (69,121) |
| (38,818) |
| — |
| (1,665,492) |
Net income (loss) |
| (524,129) |
| (1,061,823) |
| 1,094,996 |
| (52,557) |
| 18,747 |
| (524,766) |
Net loss (income) attributable to non‑controlling interests shareholders |
| — |
| 516 |
| — |
| 121 |
| — |
| 637 |
Net income (loss) attributable to KE Holdings Inc. |
| (524,129) |
| (1,061,307) |
| 1,094,996 |
| (52,436) |
| 18,747 |
| (524,129) |
16
| | | | | | | | | | | | |
|
| For the Year ended December 31, | ||||||||||
| | 2020 | ||||||||||
| | | | | | Primary | | | | | | |
| | | | Other | | Beneficiary | | | | | | |
|
| Parent |
| Subsidiaries |
| of VIEs |
| VIEs |
| Eliminations |
| Consolidated |
| | (RMB in thousands) | ||||||||||
Net revenues from third parties | | — | | 69,460,679 | | — | | 1,020,299 | | — | | 70,480,978 |
Net revenues from the Group companies(4) | | — | | 237,173 | | — | | 187,299 | | (424,472) | | — |
Total net revenues |
| — |
| 69,697,852 |
| — |
| 1,207,598 |
| (424,472) |
| 70,480,978 |
Cost of revenues - third parties |
| — |
| (53,339,682) |
| — |
| (281,439) |
| — |
| (53,621,121) |
Cost of revenues – Group companies(4) |
| — |
| (191,365) |
| — |
| (209,074) |
| 400,439 |
| — |
Total cost of revenues |
| — |
| (53,531,047) |
| — |
| (490,513) |
| 400,439 |
| (53,621,121) |
Gross profit |
| — |
| 16,166,805 |
| — |
| 717,085 |
| (24,033) |
| 16,859,857 |
Operating expenses(3)(4) |
| (203,686) |
| (13,740,554) |
| (646) |
| (378,111) |
| 304,949 |
| (14,018,048) |
Others |
| 161,577 |
| 960,121 |
| 108,187 |
| 315,425 |
| — |
| 1,545,310 |
Income from the Group companies(3) | | 756,812 | | — | | — | | — | | (756,812) | | — |
Share of income (loss) of subsidiaries (2) | | 1,448,649 | | 16,556 | | 3,194,343 | | — | | (4,659,548) | | — |
Income (loss) of the VIEs(2) |
| 614,240 |
| 614,240 |
| 614,240 |
| — |
| (1,842,720) |
| — |
Income (loss) before income tax benefit (expense) |
| 2,777,592 |
| 4,017,168 |
| 3,916,124 |
| 654,399 |
| (6,978,164) |
| 4,387,119 |
Income tax benefit (expense) |
| — |
| (1,477,635) |
| (90,985) |
| (40,176) |
| — |
| (1,608,796) |
Net income (loss) |
| 2,777,592 |
| 2,539,533 |
| 3,825,139 |
| 614,223 |
| (6,978,164) |
| 2,778,323 |
Net loss (income) attributable to non‑controlling interests shareholders |
| — |
| (748) |
| — |
| 17 |
| — |
| (731) |
Net income (loss) attributable to KE Holdings Inc. |
| 2,777,592 |
| 2,538,785 |
| 3,825,139 |
| 614,240 |
| (6,978,164) |
| 2,777,592 |
17
The following table presents condensed consolidating schedule of cash flow data for the VIEs and other entities for the years ended presented.
| | | | | | | | | | | | |
|
| For the Year ended December 31 | ||||||||||
| | 2022 | ||||||||||
| | | | | | Primary | | | | | | |
| | | | Other | | Beneficiary of | | | | | | |
|
| Parent |
| Subsidiaries |
| VIEs |
| VIEs |
| Eliminations |
| Consolidated |
| | (RMB in thousands) | ||||||||||
Cash flows from operating activities: | | | | | | | | | | | | |
Operating cash flow from third parties | | — | | 949,542 | | — | | (949,542) | | — | | — |
Operating cash flow from the Group companies(4) |
| (58,875) |
| 9,115,656 |
| (8,185) |
| (587,842) |
| — |
| 8,460,754 |
Net cash provided by (used in) operating activities |
| (58,875) |
| 10,065,198 |
| (8,185) |
| (1,537,384) |
| — |
| 8,460,754 |
| | | | | | | | | | | | |
Cash flows from investing activities: |
| |
| |
| |
| |
| |
| |
Purchases of short-term investments |
| (5,869,466) |
| (39,658,233) |
| — |
| (1,389,897) |
| — |
| (46,917,596) |
Maturities of short-term investments |
| 284,156 |
| 47,818,976 |
| 2,589,828 |
| 1,644,207 |
| — |
| 52,337,167 |
Cash paid for business combination, net of cash acquired |
| — |
| (3,147,760) |
| — |
| — |
| — |
| (3,147,760) |
Purchases of property, equipment and intangible assets |
| — |
| (788,219) |
| — |
| (4,813) |
| — |
| (793,032) |
Investments in and loans to subsidiaries and VIEs(2) |
| 5,267,047 |
| (636,012) |
| (6,660,010) |
| — |
| 2,028,975 |
| — |
Loans to related parties |
| — |
| (50,124) |
| — |
| — |
| — |
| (50,124) |
Repayments of loans from related parties |
| — |
| 19,515 |
| — |
| — |
| — |
| 19,515 |
Financing receivables originated |
| — |
| (6,977) |
| — |
| (11,522,614) |
| — |
| (11,529,591) |
Collections of financing receivables principal |
| — |
| 46,977 |
| — |
| 11,509,224 |
| — |
| 11,556,201 |
Purchases of long-term investments |
| (196,695) |
| (10,915,167) |
| (2,241,491) |
| (50,797) |
| — |
| (13,404,150) |
Other investing activities |
| 1,863,698 |
| (148,131) |
| 1,741,491 |
| (43) |
| — |
| 3,457,015 |
Net cash provided by (used in) investing activities |
| 1,348,740 |
| (7,465,155) |
| (4,570,182) |
| 185,267 |
| 2,028,975 |
| (8,472,355) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds and loans from Parent and other Group companies(2) |
| — |
| 2,048,501 |
| 636,012 |
| (655,538) |
| (2,028,975) |
| — |
Proceeds from short‑term borrowings |
| — |
| 759,000 |
| — |
| — |
| — |
| 759,000 |
Repayments of short‑term borrowings |
| — |
| (400,000) |
| — |
| — |
| — |
| (400,000) |
Proceeds from funding debts |
| — |
| — |
| — |
| 133,400 |
| — |
| 133,400 |
Repayments of funding debts |
| — |
| — |
| — |
| (327,600) |
| — |
| (327,600) |
Repurchases of ordinary shares |
| (1,319,796) |
| — |
| — |
| — |
| — |
| (1,319,796) |
Other financing activities |
| 3 |
| — |
| — |
| — |
| — |
| 3 |
Net cash provided by (used in) financing activities |
| (1,319,793) |
| 2,407,501 |
| 636,012 |
| (849,738) |
| (2,028,975) |
| (1,154,993) |
| | | | | | | | | | | | |
Effect of exchange rate change on cash, cash equivalents and restricted cash |
| (12,489) |
| 41,133 |
| — |
| — |
| — |
| 28,644 |
Net increase (decrease) in cash, cash equivalents and restricted cash |
| (42,417) |
| 5,048,677 |
| (3,942,355) |
| (2,201,855) |
| — |
| (1,137,950) |
Cash, cash equivalents and restricted cash at the beginning of the year |
| 55,235 |
| 13,123,016 |
| 5,671,331 |
| 7,882,627 |
| — |
| 26,732,209 |
Cash, cash equivalents and restricted cash at the end of the year |
| 12,818 |
| 18,171,693 |
| 1,728,976 |
| 5,680,772 |
| — |
| 25,594,259 |
18
| | | | | | | | | | | | |
|
| For the Year ended December 31 | ||||||||||
| | 2021 | ||||||||||
| | | | | | Primary | | | | | | |
| | | | Other | | Beneficiary of | | | | | | |
|
| Parent |
| Subsidiaries |
| VIEs |
| VIEs |
| Eliminations |
| Consolidated |
| | (RMB in thousands) | ||||||||||
Cash flows from operating activities: | | | | | | | | | | | | |
Operating cash flow from third parties | | (10,302) | | 5,554,526 | | 2,961 | | (1,952,063) | | — | | 3,595,122 |
Operating cash flow from the Group companies(4) |
| — |
| (347,163) |
| — |
| 347,163 |
| — |
| — |
Net cash provided by (used in) operating activities |
| (10,302) |
| 5,207,363 |
| 2,961 |
| (1,604,900) |
| — |
| 3,595,122 |
| | | | | | | | | | | | |
Cash flows from investing activities: |
| |
| |
| |
| |
| |
| |
Purchases of short-term investments |
| (4,756,634) |
| (35,872,756) |
| (2,450,000) |
| (4,775,300) |
| — |
| (47,854,690) |
Maturities of short-term investments |
| 8,682,468 |
| 21,774,553 |
| 1,970,470 |
| 5,551,500 |
| — |
| 37,978,991 |
Cash paid for business combination, net of cash acquired |
| — |
| (21,842) |
| — |
| — |
| — |
| (21,842) |
Purchases of property, equipment and intangible assets |
| — |
| (1,419,401) |
| — |
| (10,576) |
| — |
| (1,429,977) |
Investments in and loans to subsidiaries and VIEs(2) |
| (4,581,814) |
| 1,112,757 |
| 765,526 |
| — |
| 2,703,531 |
| — |
Loans to related parties |
| — |
| (28,100) |
| — |
| — |
| — |
| (28,100) |
Repayments of loans from related parties |
| — |
| 21,690 |
| — |
| — |
| — |
| 21,690 |
Financing receivables originated |
| — |
| (70,478) |
| — |
| (32,895,707) |
| — |
| (32,966,185) |
Collections of financing receivables principal |
| — |
| 109,238 |
| — |
| 36,169,780 |
| — |
| 36,279,018 |
Purchases of long-term investments |
| (3,243,210) |
| (14,640,921) |
| — |
| (255,369) |
| — |
| (18,139,500) |
Other investing activities |
| 715,957 |
| 595,711 |
| (34,948) |
| (199) |
| — |
| 1,276,521 |
Net cash provided by (used in) investing activities |
| (3,183,233) |
| (28,439,549) |
| 251,048 |
| 3,784,129 |
| 2,703,531 |
| (24,884,074) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds and loans from Parent and other Group companies(2) |
| — |
| 3,923,208 |
| (1,112,757) |
| (106,920) |
| (2,703,531) |
| — |
Proceeds from short‑term borrowings |
| — |
| 260,000 |
| — |
| — |
| — |
| 260,000 |
Proceeds from funding debts |
| — |
| — |
| — |
| 507,543 |
| — |
| 507,543 |
Repayments of funding debts |
| — |
| — |
| — |
| (1,840,853) |
| — |
| (1,840,853) |
Other financing activities |
| 7 |
| (870) |
| — |
| — |
| — |
| (863) |
Net cash provided by (used in) financing activities |
| 7 |
| 4,182,338 |
| (1,112,757) |
| (1,440,230) |
| (2,703,531) |
| (1,074,173) |
| | | | | | | | | | | | |
Effect of exchange rate change on cash, cash equivalents and restricted cash |
| (12,822) |
| (443,407) |
| 14,088 |
| — |
| — |
| (442,141) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
| (3,206,350) |
| (19,493,255) |
| (844,660) |
| 738,999 |
| — |
| (22,805,266) |
Cash, cash equivalents and restricted cash at the beginning of the year |
| 3,261,585 |
| 32,616,271 |
| 6,515,991 |
| 7,143,628 |
| — |
| 49,537,475 |
Cash, cash equivalents and restricted cash at the end of the year |
| 55,235 |
| 13,123,016 |
| 5,671,331 |
| 7,882,627 |
| — |
| 26,732,209 |
19
| | | | | | | | | | | | |
|
| For the Year ended December 31 | ||||||||||
| | 2020 | ||||||||||
| | | | | | Primary | | | | | | |
| | | | Other | | Beneficiary of | | | | | | |
|
| Parent |
| Subsidiaries |
| VIEs |
| VIEs |
| Eliminations |
| Consolidated |
| | (RMB in thousands) | ||||||||||
Cash flows from operating activities: | |
| |
| |
| |
| |
| |
|
Operating cash flow from third parties | | (72,175) | | 9,907,895 | | 53,998 | | (527,769) | | — | | 9,361,949 |
Operating cash flow from the Group companies(4) |
| — |
| 1,664,566 |
| — |
| (1,664,566) |
| — |
| — |
Net cash provided by (used in) operating activities |
| (72,175) |
| 11,572,461 |
| 53,998 |
| (2,192,335) |
| — |
| 9,361,949 |
| | | | | | | | | | | | |
Cash flows from investing activities: |
| |
| |
| |
| |
| |
| |
Purchases of short-term investments |
| (13,152,338) |
| (28,487,954) |
| (3,500,000) |
| (7,825,781) |
| — |
| (52,966,073) |
Maturities of short-term investments |
| 9,295,994 |
| 20,670,203 |
| 1,512,368 |
| 8,289,079 |
| — |
| 39,767,644 |
Cash paid for business combination, net of cash acquired |
| — |
| (10,800) |
| — |
| — |
| — |
| (10,800) |
Purchases of property, equipment and intangible assets |
| — |
| (887,002) |
| — |
| — |
| — |
| (887,002) |
Investments in and loans to subsidiaries and VIEs(2) |
| (38,818,154) |
| 10,975,112 |
| 16,148,167 |
| — |
| 11,694,875 |
| — |
Loans to related parties |
| — |
| (29,953) |
| — |
| — |
| — |
| (29,953) |
Repayments of loans from related parties |
| — |
| 2,151 |
| — |
| 1,909,500 |
| — |
| 1,911,651 |
Financing receivables originated |
| — |
| (3,625,817) |
| — |
| (33,551,045) |
| — |
| (37,176,862) |
Collections of financing receivables principal |
| — |
| 612,361 |
| — |
| 34,772,082 |
| — |
| 35,384,443 |
Purchases of long-term investments |
| — |
| (996,123) |
| — |
| — |
| — |
| (996,123) |
Other investing activities |
| — |
| 195,361 |
| 10,082 |
| (179,986) |
| — |
| 25,457 |
Net cash provided by (used in) investing activities |
| (42,674,498) |
| (1,582,461) |
| 14,170,617 |
| 3,413,849 |
| 11,694,875 |
| (14,977,618) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash transferred from subsidiaries to parent company for Reorganization | | 2,351,587 | | (2,351,587) | | — | | — | | — | | — |
Proceeds and loans from Parent and other Group companies(2) |
| — |
| 22,669,987 |
| (10,975,112) |
| — |
| (11,694,875) |
| — |
Ordinary shares issued upon IPO, net of issuance costs | | 16,345,822 | | — | | — | | — | | — | | 16,345,822 |
Ordinary shares issued upon follow-on public offering, net of issuance costs | | 15,284,283 | | — | | — | | — | | — | | 15,284,283 |
Proceeds from short‑term borrowings |
| — |
| — |
| — |
| 250,000 |
| — |
| 250,000 |
Repayments of short-term borrowings | | — | | — | | — | | (970,000) | | — | | (970,000) |
Proceeds from funding debts | | — | | — | | — | | 3,260,988 | | — | | 3,260,988 |
Repayments of funding debts | | — | | — | | — | | (4,032,701) | | — | | (4,032,701) |
Proceeds from long-term borrowings |
| — |
| 42,040 |
| — |
| — |
| — |
| 42,040 |
Repayments of long-term borrowings |
| — |
| (4,528,725) |
| — |
| — |
| — |
| (4,528,725) |
Other financing activities |
| 169,915 |
| (335,237) |
| — |
| (80,135) |
| — |
| (245,457) |
Net cash provided by (used in) financing activities |
| 34,151,607 |
| 15,496,478 |
| (10,975,112) |
| (1,571,848) |
| (11,694,875) |
| 25,406,250 |
| | | | | | | | | | | | |
Effect of exchange rate change on cash, cash equivalents and restricted cash |
| (668,623) |
| (1,517,097) |
| 2,038 |
| — |
| — |
| (2,183,682) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
| (9,263,689) |
| 23,969,381 |
| 3,251,541 |
| (350,334) |
| — |
| 17,606,899 |
Cash, cash equivalents and restricted cash at the beginning of the year |
| 12,525,274 |
| 8,646,891 |
| 3,264,450 |
| 7,493,961 |
| — |
| 31,930,576 |
Cash, cash equivalents and restricted cash at the end of the year |
| 3,261,585 |
| 32,616,272 |
| 6,515,991 |
| 7,143,627 |
| — |
| 49,537,475 |
Notes:
(1) | Represents the intercompany balances among Parent, the Primary Beneficiary of VIEs, Other Subsidiaries, and VIEs, and the elimination among them. |
20
(2) | Represents the investment in and loans to the Primary Beneficiary of VIEs and Other Subsidiaries by the Parent, and intercompany loans among the Primary Beneficiary of VIEs, Other Subsidiaries, and VIEs, and the elimination among them, and share of income (loss) of subsidiaries and VIEs under the equity method of accounting. The Parent transfers cash to its wholly-owned Hong Kong subsidiaries by making capital contributions or providing loans, and the Hong Kong subsidiaries transfer cash to the Primary Beneficiary of VIEs and other PRC subsidiaries by making capital contributions or providing loans to them. The Primary Beneficiary of VIEs also have intercompany loans with Other Subsidiaries and certain VIEs as part of our cash management program. |
(3) | Represents the intercompany transfer of intangible asset (advertising resources) from Parent to subsidiaries in 2020, transfer of a trademark from VIE to subsidiaries in 2018, the adjustment of amortization in relation to these intangible assets, and the elimination of gain recognized in this transaction. |
(4) | Represents intercompany sales of services eliminated at the consolidation level, including payment platform, referral and other services provided by VIEs to Other Subsidiaries, and technical support services provided by Other Subsidiaries to VIEs. |
Set forth below is the table showing the movement of investment in subsidiaries and VIEs in the Parent’s financial statements as of and for the years ended December 31, 2020, 2021 and 2022.
| | |
Investment in subsidiaries and net assets of VIEs (RMB in thousands) | ||
January 1, 2020 | 16,630,877 | |
Share of income of subsidiaries | | 1,448,649 |
Income of VIEs | | 614,240 |
Share-based compensation costs incurred on behalf of subsidiaries and VIEs | | 2,252,589 |
Capital repatriation in connection with the Reorganization | | (2,351,587) |
Capital injection to subsidiaries | | 38,867,338 |
Ordinary shares issued to fund a subsidiary’s acquisition | | 605,395 |
Share of other changes in the capital accounts of subsidiaries and VIEs | | (51,228) |
Foreign currency translation | | (980,672) |
December 31, 2020 | 57,035,601 | |
Share of loss of subsidiaries | (696,144) | |
Loss of VIEs | (52,436) | |
Share-based compensation costs incurred on behalf of subsidiaries and VIEs | 1,537,995 | |
Capital injection to subsidiaries | 4,581,814 | |
Foreign currency translation | (117,766) | |
December 31, 2021 | 62,289,064 | |
Share of loss of subsidiaries | (1,436,950) | |
Income of VIEs | 97,036 | |
Share-based compensation costs incurred on behalf of subsidiaries and VIEs | 2,425,249 | |
Cash received from subsidiaries | | (5,267,047) |
Foreign currency translation | 1,673,618 | |
December 31, 2022 | 59,780,970 |
21
A. | Selected Financial Data |
The following selected consolidated statements of operations for the years ended December 31, 2018, 20192020, 2021 and 2020,2022, selected consolidated balance sheet data as of December 31, 20192021 and 2020,2022, and selected consolidated cash flow data for the years ended December 31, 2018, 20192020, 2021 and 20202022 have been derived from our audited consolidated financial statements included elsewhere in this annual report beginning on page F-1. The selected consolidated statements of operations for the year ended December 31, 2017,2018 and 2019, selected consolidated balance sheet data as of December 31, 20172018, 2019 and 2018,2020, and selected consolidated cash flow data for the year ended December 31, 20172018 and 2019 have been derived from our audited consolidated financial statements not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this “Selected Financial Data” section together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | For the Year Ended December 31, | ||||||||||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | ||||
|
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
|
| (in thousands, except for share and per share data) |
| (in thousands, except for share and per share data) | ||||||||||||||||||
Net revenues: |
| | |
|
|
|
|
|
|
|
| | |
|
|
| | |
|
|
|
|
Existing home transaction services |
| 18,461,231 | | 20,154,642 |
| 24,568,508 |
| 30,564,584 |
| 4,684,227 |
| 20,154,642 | | 24,568,508 |
| 30,564,584 | | 31,947,953 |
| 24,123,703 |
| 3,497,608 |
New home transaction services |
| 6,419,251 | | 7,471,924 |
| 20,273,860 |
| 37,937,886 |
| 5,814,235 |
| 7,471,924 | | 20,273,860 |
| 37,937,886 | | 46,472,378 |
| 28,650,374 |
| 4,153,914 |
Home renovation and furnishing | | — | | — | | 108,960 | | 197,452 | | 5,046,627 | | 731,692 | ||||||||||
Emerging and other services |
| 625,216 | | 1,019,933 |
| 1,172,538 |
| 1,978,508 |
| 303,220 |
| 1,019,933 | | 1,172,538 |
| 1,869,548 | | 2,134,656 |
| 2,848,075 |
| 412,932 |
Total net revenues |
| 25,505,698 | | 28,646,499 |
| 46,014,906 |
| 70,480,978 |
| 10,801,682 |
| 28,646,499 | | 46,014,906 |
| 70,480,978 | | 80,752,439 |
| 60,668,779 |
| 8,796,146 |
Cost of revenues(1): |
| | | |
| |
| |
| | ||||||||||||
Cost of revenues: |
| | | |
| | | |
| |
| | ||||||||||
Commission — split |
| (933,162) | | (1,393,167) |
| (11,154,698) |
| (24,847,023) |
| (3,807,972) |
| (1,393,167) | | (11,154,698) |
| (24,724,603) | | (31,633,827) |
| (20,499,632) |
| (2,972,167) |
Commission and compensation — internal |
| (15,663,301) | | (15,767,582) |
| (19,444,127) |
| (23,324,145) |
| (3,574,582) |
| (15,767,582) | | (19,444,127) |
| (23,318,664) | | (26,303,507) |
| (17,853,694) |
| (2,588,542) |
Cost of home renovation and furnishing | | — | | — | | (127,901) | | (195,869) | | (3,562,068) | | (516,451) | ||||||||||
Cost related to stores |
| (3,543,781) | | (3,400,545) |
| (3,078,672) |
| (3,206,601) |
| (491,433) |
| (3,400,545) | | (3,078,672) |
| (3,206,601) | | (3,809,757) |
| (3,346,436) |
| (485,188) |
Others |
| (597,397) | | (1,215,229) |
| (1,069,365) |
| (2,243,352) |
| (343,809) | ||||||||||||
Others(1) |
| (1,215,229) | | (1,069,365) |
| (2,243,352) | | (2,990,064) |
| (1,626,202) |
| (235,776) | ||||||||||
Total cost of revenues | | (21,776,523) | | (34,746,862) | | (53,621,121) | | (64,933,024) | | (46,888,032) | | (6,798,124) | ||||||||||
Gross profit |
| 4,768,057 | | 6,869,976 |
| 11,268,044 |
| 16,859,857 |
| 2,583,886 |
| 6,869,976 | | 11,268,044 |
| 16,859,857 | | 15,819,415 |
| 13,780,747 |
| 1,998,022 |
Sales and marketing expenses(1) |
| (998,575) | | (2,489,692) |
| (3,105,899) |
| (3,715,278) |
| (569,391) |
| (2,489,692) | | (3,105,899) |
| (3,715,278) | | (4,309,116) |
| (4,573,382) |
| (663,078) |
General and administrative expenses(1) |
| (4,281,571) | | (4,927,367) |
| (8,376,531) |
| (7,588,809) |
| (1,163,037) |
| (4,927,367) | | (8,376,531) |
| (7,588,809) | | (8,924,470) |
| (7,346,665) |
| (1,065,167) |
Research and development expenses(1) |
| (251,802) | | (670,922) |
| (1,571,154) |
| (2,477,911) |
| (379,756) |
| (670,922) | | (1,571,154) |
| (2,477,911) | | (3,193,988) |
| (2,545,549) |
| (369,070) |
Others |
| 625,553 | | 718,940 |
| 509,776 |
| 1,309,260 |
| 200,653 |
| 718,940 | | 509,776 |
| 1,309,260 | | 1,748,885 |
| 977,139 |
| 141,672 |
Income (loss) before income tax benefit (expense) |
| (138,338) | | (499,065) |
| (1,275,764) |
| 4,387,119 |
| 672,355 |
| (499,065) | | (1,275,764) |
| 4,387,119 | | 1,140,726 |
| 292,290 |
| 42,379 |
Income tax benefit (expense) |
| (399,283) | | 71,384 |
| (904,363) |
| (1,608,796) |
| (246,558) |
| 71,384 | | (904,363) |
| (1,608,796) | | (1,665,492) |
| (1,689,574) |
| (244,965) |
Net income (loss) |
| (537,621) | | (427,681) |
| (2,180,127) |
| 2,778,323 |
| 425,797 |
| (427,681) | | (2,180,127) |
| 2,778,323 | | (524,766) |
| (1,397,284) |
| (202,586) |
Weighted average number of ordinary shares used in computing net income (loss) per share, basic and diluted |
| | | |
| |
| |
| |
| | | |
| | | |
| |
| |
—Basic |
| 1,345,194,322 | | 1,362,565,880 |
| 1,378,235,522 |
| 2,226,264,859 |
| 2,226,264,859 |
| 1,362,565,880 | | 1,378,235,522 |
| 2,226,264,859 | | 3,549,121,628 |
| 3,569,179,079 |
| 3,569,179,079 |
—Diluted |
| 1,345,194,322 | | 1,362,565,880 |
| 1,378,235,522 |
| 2,267,330,891 |
| 2,267,330,891 |
| 1,362,565,880 | | 1,378,235,522 |
| 2,267,330,891 | | 3,549,121,628 |
| 3,569,179,079 |
| 3,569,179,079 |
Net income (loss) per share attributable to ordinary shareholders |
|
| |
|
|
|
|
|
|
|
| | | |
| | | |
| |
| |
— Basic |
| (1.07) | | (1.75) |
| (2.94) |
| 0.32 |
| 0.05 |
| (1.75) | | (2.94) |
| 0.32 | | (0.15) |
| (0.39) |
| (0.06) |
— Diluted |
| (1.07) | | (1.75) |
| (2.94) |
| 0.32 |
| 0.05 |
| (1.75) | | (2.94) |
| 0.32 | | (0.15) |
| (0.39) |
| (0.06) |
Note:
(1) | Share-based compensation expenses were allocated as follows: |
| | | | | | | | | | | | |
| | For the Year Ended December 31, | ||||||||||
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | ||
|
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands) | ||||||||||
Cost of revenues |
| — |
| — |
| 511,637 |
| 406,131 |
| 356,844 |
| 51,738 |
Sales and marketing expenses |
| — |
| — |
| 77,574 |
| 110,446 |
| 121,396 |
| 17,601 |
General and administrative expenses |
| 382,196 |
| 2,955,590 |
| 1,131,335 |
| 595,732 |
| 1,659,755 |
| 240,641 |
Research and development expenses |
| — |
| — |
| 532,043 |
| 425,978 |
| 287,254 |
| 41,648 |
Total |
| 382,196 |
| 2,955,590 |
| 2,252,589 |
| 1,538,287 |
| 2,425,249 |
| 351,628 |
422
| | | | | | | | | | |
|
| For the Year Ended December 31, | ||||||||
| | 2017 |
| 2018 |
| 2019 |
| 2020 | ||
| | RMB |
| RMB |
| RMB |
| RMB |
| US$ |
|
| (in thousands) | ||||||||
Cost of revenues |
| — | | — | | — | | 511,637 | | 78,412 |
Sales and marketing expenses |
| — | | — | | — | | 77,574 | | 11,889 |
General and administrative expenses |
| 475,783 | | 382,196 | | 2,955,590 | | 1,131,335 | | 173,385 |
Research and development expenses |
| — | | — | | — | | 532,043 | | 81,539 |
Total |
| 475,783 | | 382,196 | | 2,955,590 | | 2,252,589 | | 345,225 |
The following table presents our selected consolidated balance sheet data as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | As of December 31, | ||||||||||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | ||||
|
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands) | | (in thousands) | ||||||||||||||||||
Selected consolidated Balance Sheet Data |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
| | |
|
|
|
|
Cash and cash equivalents |
| 5,236,100 | | 9,115,649 |
| 24,319,332 |
| 40,969,979 |
| 6,278,924 |
| 9,115,649 | | 24,319,332 |
| 40,969,979 | | 20,446,104 |
| 19,413,202 |
| 2,814,650 |
Total current assets |
| 24,067,931 | | 27,374,784 |
| 51,912,486 |
| 87,539,101 |
| 13,415,954 |
| 27,374,784 | | 51,912,486 |
| 87,539,101 | | 69,926,354 | | 70,424,675 |
| 10,210,618 |
Total non-current assets |
| 7,512,004 | | 11,491,480 |
| 15,352,826 |
| 16,756,435 |
| 2,568,036 |
| 11,491,480 | | 15,352,826 |
| 16,756,435 | | 30,392,511 |
| 38,922,672 |
| 5,643,257 |
Total assets |
| 31,579,935 | | 38,866,264 |
| 67,265,312 |
| 104,295,536 |
| 15,983,990 |
| 38,866,264 | | 67,265,312 |
| 104,295,536 | | 100,318,865 |
| 109,347,347 |
| 15,853,875 |
Total current liabilities |
| 16,047,286 | | 20,572,881 |
| 27,797,675 |
| 33,633,346 |
| 5,154,536 |
| 20,572,881 | | 27,797,675 |
| 33,633,346 | | 28,936,137 |
| 33,341,318 |
| 4,834,038 |
Total non-current liabilities |
| 3,095,864 | | 3,434,843 |
| 7,932,045 |
| 3,869,674 |
| 593,053 |
| 3,434,843 | | 7,932,045 |
| 3,869,674 | | 4,327,235 |
| 6,951,591 |
| 1,007,886 |
Total liabilities |
| 19,143,150 | | 24,007,724 |
| 35,729,720 |
| 37,503,020 |
| 5,747,589 |
| 24,007,724 | | 35,729,720 |
| 37,503,020 | | 33,263,372 |
| 40,292,909 |
| 5,841,924 |
The following table presents our selected consolidated cash flow data for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | For the Year Ended December 31, | ||||||||||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | ||||
|
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
|
| (in thousands) |
| (in thousands) | ||||||||||||||||||
Selected Consolidated Cash Flow Data |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
| | |
|
|
|
|
Net cash provided by (used in) operating activities |
| (6,456,226) | | 3,216,797 |
| 112,626 |
| 9,361,949 |
| 1,434,781 | ||||||||||||
Net cash provided by operating activities |
| 3,216,797 | | 112,626 |
| 9,361,949 | | 3,595,122 |
| 8,460,754 |
| 1,226,695 | ||||||||||
Net cash provided by (used in) investing activities |
| (2,783,562) | | 2,609,149 |
| (3,873,722) |
| (14,977,618) |
| (2,295,420) |
| 2,609,149 | | (3,873,722) |
| (14,977,618) | | (24,884,074) |
| (8,472,355) |
| (1,228,376) |
Net cash provided by (used in) financing activities |
| 9,576,284 | | (1,282,408) |
| 23,026,396 |
| 25,406,250 |
| 3,893,678 |
| (1,282,408) | | 23,026,396 |
| 25,406,250 | | (1,074,173) |
| (1,154,993) |
| (167,459) |
Effect of exchange rate change on cash, cash equivalents and restricted cash |
| (330) | | 416 |
| (94,922) |
| (2,183,682) |
| (334,664) |
| 416 | | (94,922) |
| (2,183,682) | | (442,141) |
| 28,644 |
| 4,153 |
Net increase in cash, cash equivalents and restricted cash |
| 336,166 | | 4,543,954 |
| 19,170,378 |
| 17,606,899 |
| 2,698,375 | ||||||||||||
Cash, cash equivalents and restricted cash at the beginning of the period |
| 7,880,078 | | 8,216,244 |
| 12,760,198 |
| 31,930,576 |
| 4,893,575 | ||||||||||||
Cash, cash equivalents and restricted cash at the end of the period |
| 8,216,244 | | 12,760,198 |
| 31,930,576 |
| 49,537,475 |
| 7,591,950 | ||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
| 4,543,954 | | 19,170,378 |
| 17,606,899 | | (22,805,266) |
| (1,137,950) |
| (164,987) | ||||||||||
Cash, cash equivalents and restricted cash at the beginning of the year |
| 8,216,244 | | 12,760,198 |
| 31,930,576 | | 49,537,475 |
| 26,732,209 |
| 3,875,806 | ||||||||||
Cash, cash equivalents and restricted cash at the end of the year |
| 12,760,198 | | 31,930,576 |
| 49,537,475 | | 26,732,209 |
| 25,594,259 |
| 3,710,819 |
Contribution Margin and Non-GAAP Metrics
We also review contribution margin to measure segment profitability and adjusted net income (loss) and adjusted EBITDA, two non-GAAP measures, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.
Contribution margin
profitability. The table below sets forth the contribution margin for each of our business lines for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | For the Year Ended December 31, | | |||||||||||||||||||
|
| 2017 | | 2018 |
| 2019 |
| 2020 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | | | |||
|
| RMB | | RMB |
| RMB |
| RMB |
| US$ |
| RMB | | RMB |
| RMB | | RMB |
| RMB |
| US$ | | |
|
| (in thousands, except for percentages) |
| (in thousands, except for percentages) | | |||||||||||||||||||
Contribution (existing home transaction services) |
| 5,635,332 |
| 7,731,846 |
| 9,554,244 |
| 12,499,133 |
| 1,915,576 |
| | 7,731,846 | | 9,554,244 | | 12,499,133 | | 11,824,452 | | 9,612,865 | | 1,393,735 | |
Contribution margin (existing home transaction services) |
| 30.5 | % | 38.4 | % | 38.9 | % | 40.9 | % | 40.9 | % |
| 38.4 | % | 38.9 | % | 40.9 | % | 37.0 | % | 39.8 | % | 39.8 | % |
Contribution (new home transaction services) |
| 2,866,263 |
| 3,027,822 |
| 4,918,700 |
| 8,149,925 |
| 1,249,030 |
| | 3,027,822 | | 4,918,700 | | 8,149,925 | | 8,947,138 | | 6,764,354 | | 980,739 | |
Contribution margin (new home transaction services) |
| 44.7 | % | 40.5 | % | 24.3 | % | 21.5 | % | 21.5 | % | | 40.5 | % | 24.3 | % | 21.5 | % | 19.3 | % | 23.6 | % | 23.6 | % |
Contribution (home renovation and furnishing) |
| — | | — |
| (18,941) |
| 1,583 |
| 1,484,559 |
| 215,241 |
| |||||||||||
Contribution margin (home renovation and furnishing) |
| — | | — | | (17.4) | % | 0.8 | % | 29.4 | % | 29.4 | % | |||||||||||
Contribution (emerging and other services) |
| 407,640 |
| 726,082 |
| 943,137 |
| 1,660,752 |
| 254,522 |
|
| 726,082 | | 943,137 |
| 1,679,693 |
| 1,846,063 |
| 891,607 |
| 129,271 |
|
Contribution margin (emerging and other services) |
| 65.2 | % | 71.2 | % | 80.4 | % | 83.9 | % | 83.9 | % |
| 71.2 | % | 80.4 | % | 89.8 | % | 86.5 | % | 31.3 | % | 31.3 | % |
We define contribution for each service line as the revenue less the direct compensation to our internal agents and sales professionals, and split commission to connected agents and other sales channels for such services. We define contribution margin as a percentage of contribution bearing to revenue.
523
The following table presents the calculation to arrive at contribution from net revenues, for each of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | For the Year Ended December 31, | ||||||||||||||||||
|
| 2017 | | 2018 |
| 2019 |
| 2020 |
| 2018 | | 2019 |
| 2020 | | 2021 |
| 2022 | ||||
|
| RMB | | RMB |
| RMB |
| RMB |
| US$ |
| RMB | | RMB |
| RMB | | RMB |
| RMB |
| US$ |
|
| (in thousands) |
| (in thousands) | ||||||||||||||||||
Existing home transaction services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Net revenues |
| 18,461,231 | | 20,154,642 |
| 24,568,508 |
| 30,564,584 |
| 4,684,227 |
| 20,154,642 | | 24,568,508 |
| 30,564,584 | | 31,947,953 |
| 24,123,703 |
| 3,497,608 |
Less: Commission and compensation |
| (12,825,899) | | (12,422,796) |
| (15,014,264) |
| (18,065,451) |
| (2,768,651) |
| (12,422,796) | | (15,014,264) |
| (18,065,451) | | (20,123,501) |
| (14,510,838) |
| (2,103,873) |
Contribution |
| 5,635,332 | | 7,731,846 |
| 9,554,244 |
| 12,499,133 |
| 1,915,576 |
| 7,731,846 | | 9,554,244 |
| 12,499,133 | | 11,824,452 |
| 9,612,865 |
| 1,393,735 |
New home transaction services |
| | | |
| |
| |
| |
| | | |
| | | |
| |
| |
Net revenues |
| 6,419,251 | | 7,471,924 |
| 20,273,860 |
| 37,937,886 |
| 5,814,235 |
| 7,471,924 | | 20,273,860 |
| 37,937,886 | | 46,472,378 |
| 28,650,374 |
| 4,153,914 |
Less: Commission and compensation |
| (3,552,988) | | (4,444,102) |
| (15,355,160) |
| (29,787,961) |
| (4,565,205) |
| (4,444,102) | | (15,355,160) |
| (29,787,961) | | (37,525,240) |
| (21,886,020) |
| (3,173,175) |
Contribution |
| 2,866,263 | | 3,027,822 |
| 4,918,700 |
| 8,149,925 |
| 1,249,030 |
| 3,027,822 | | 4,918,700 |
| 8,149,925 | | 8,947,138 |
| 6,764,354 |
| 980,739 |
Home renovation and furnishing | | | | | | | | | | | | | ||||||||||
Net revenues | | — | | — | | 108,960 | | 197,452 | | 5,046,627 | | 731,692 | ||||||||||
Less: Commission and compensation | | — | | — | | (127,901) | | (195,869) | | (3,562,068) | | (516,451) | ||||||||||
Contribution | | — | | — | | (18,941) | | 1,583 | | 1,484,559 | | 215,241 | ||||||||||
Emerging and other services |
| | | |
| |
| |
| |
| | | |
| | | |
| |
| |
Net revenues |
| 625,216 | | 1,019,933 |
| 1,172,538 |
| 1,978,508 |
| 303,220 |
| 1,019,933 | | 1,172,538 |
| 1,869,548 | | 2,134,656 |
| 2,848,075 |
| 412,932 |
Less: Commission and compensation |
| (217,576) | | (293,851) |
| (229,401) |
| (317,756) |
| (48,698) |
| (293,851) | | (229,401) |
| (189,855) | | (288,593) |
| (1,956,468) |
| (283,661) |
Contribution |
| 407,640 | | 726,082 |
| 943,137 |
| 1,660,752 |
| 254,522 |
| 726,082 | | 943,137 |
| 1,679,693 | | 1,846,063 |
| 891,607 |
| 129,271 |
Contribution margin demonstrates the margin that we generate after costs directly attributable to the respective revenue streams, including existing home transaction services, new home transaction services, home renovation and furnishing, and emerging and other services. The costs and expenses related to the platform infrastructure built-upbuilding and enhancement, including cost related to our Lianjia stores and the development cost of our technological platform, which are not directly attributable to the respective revenue streams, are not deducted from revenue when calculating contribution.
Adjusted net income (loss) and adjusted EBITDA
In addition to net income (loss), we use adjusted net income (loss) and adjusted EBITDA to evaluate our business. We have included these non-GAAP financial measures because they are key measures used by our management to evaluate our operating performance. Accordingly, we believe that they provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors. Our calculation of these non-GAAP financial measures may differ from similarly-titled non-GAAP measures, if any, reported by our peer companies. They should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.
We define adjusted net income (loss) as net income (loss), excluding (i) share-based compensation expenses, (ii) amortization of intangible assets resulting from acquisitions and business cooperation agreement, (iii) changes in fair value from long term investments, loan receivables measured at fair value and contingent consideration, (iv) impairment of goodwill and intangible assets, (v) impairment of investments, and (vi) the tax effects on the above adjustments. We expand our business through acquisitions along the value chain of housing transactions, including the acquisition of Nanchang Zhonghuan Hulian Information Co., Ltd., or Zhonghuan, in 2019, a regional real estate brokerage firm. We also entered into a business cooperation agreement with Tencent in 2018, which grants us the access to its advertising resources and allows us to use Tencent's cloud services. Amortization of intangible assets arising from these acquisitions and the business cooperation agreement with Tencent is excluded as item (ii) above when adjusted net income (loss) is calculated.
We define adjusted EBITDA as net income (loss), excluding (i) interest income, net, (ii) income tax expenses (benefit), (iii) depreciation of property and equipment, (iv) amortization of intangible assets, (v) share-based compensation expenses, (vi) changes in fair value from long term investments, loan receivables measured at fair value and contingent consideration, (vii) impairment of goodwill and intangible assets, and (viii) impairment of investments.
Investors should note that some adjustment expenses are related to assets that contribute to revenue generation.
6
The following table presents a reconciliation of net income (loss) to adjusted net income and adjusted EBITDA for each of the periods indicated:
| | | | | | | | | | |
| | For the Year Ended December 31, | ||||||||
|
| 2017 | | 2018 |
| 2019 |
| 2020 | ||
|
| RMB | | RMB |
| RMB |
| RMB |
| US$ |
|
| (in thousands) | ||||||||
Net income (loss) | | (537,621) | | (427,681) | | (2,180,127) | | 2,778,323 | | 425,797 |
Add (less): |
| | | | | | | | | |
Share-based compensation expenses |
| 475,783 | | 382,196 | | 2,955,590 | | 2,252,589 | | 345,225 |
Amortization of intangible assets resulting from acquisitions and business cooperation agreement |
| 133,481 | | 127,825 | | 450,413 | | 604,806 | | 92,691 |
Changes in fair value from long term investments, loan receivables measured at fair value and contingent consideration |
| 4,015 | | 52,801 | | 428,422 | | (175,115) | | (26,838) |
Impairment of goodwill and intangible assets | | — | | — | | — | | 236,050 | | 36,176 |
Impairment of investments | | — | | — | | — | | 26,650 | | 4,084 |
Tax effects on non-GAAP adjustments(1) |
| (5,003) | | (4,339) | | 1,705 | | (3,599) | | (552) |
Adjusted net income |
| 70,655 | | 130,802 | | 1,656,003 | | 5,719,704 | | 876,583 |
Net income (loss) |
| (537,621) | | (427,681) | | (2,180,127) | | 2,778,323 | | 425,797 |
Add (less): |
| | | | | | | | | |
Interest income, net |
| (81,171) | | (121,374) | | (230,339) | | (163,600) | | (25,073) |
Income tax expenses (benefit) |
| 399,283 | | (71,384) | | 904,363 | | 1,608,796 | | 246,558 |
Depreciation of property and equipment |
| 674,202 | | 653,376 | | 561,995 | | 552,798 | | 84,720 |
Amortization of intangible assets |
| 137,001 | | 138,918 | | 477,323 | | 621,174 | | 95,199 |
Share-based compensation expenses |
| 475,783 | | 382,196 | | 2,955,590 | | 2,252,589 | | 345,225 |
Changes in fair value from long term investments, loan receivables measured at fair value and contingent consideration |
| 4,015 | | 52,801 | | 428,422 | | (175,115) | | (26,838) |
Impairment of goodwill and intangible assets | | — | | — | | — | | 236,050 | | 36,176 |
Impairment of investments | | — | | — | | — | | 26,650 | | 4,084 |
Adjusted EBITDA |
| 1,071,492 | | 606,852 | | 2,917,227 | | 7,737,665 | | 1,185,848 |
Note:
B. |
|
Not applicable.
C. |
|
Not applicable.
7
D. | Risk Factors
|
Summary of Risk Factors
An investment in our ADSs involves significant risks. Below is a summary of material risks we face, organized under relevant headings. These risks are discussed more fully in Item 3. Key Information—D. Risk Factors.
Risks Related to Our Business and Industry
● | Our business is susceptible to fluctuations in China’s |
● | Our business is subject to government
|
● | If we are unable to continue to provide satisfactory experience to
|
24
● | We may not succeed in continuing to maintain, protect and strengthen our brands, and any negative publicity about us, our business, our management, our business partners or the
|
● | If our platform is unable to continue to offer comprehensive authentic property listings, our business, financial condition and results of operations could be materially and adversely affected.
|
● | We have a limited operating history under our platform business model, and our historical growth and performance may not be indicative of our future growth and financial results.
Risks Related to Our Corporate Structure
25 Risks Related to Doing Business in China
26 Risks Related to Our Shares and ADSs
Risks Related to Our Business and Industry Our business is susceptible to fluctuations in China’s general economic conditions and housing related industry. Our business depends substantially on the general economic conditions of China. Changes in international, regional or domestic economic conditions, rising interest rates, fiscal or political uncertainty, policy adjustments, market volatility, disruption to the global capital or credit markets, or the public perception that any of these events is likely to occur may have a negative impact on the housing related industry in the PRC, which in turn will have material and adverse effects on us. See also “—Our business is sensitive to economic conditions. A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business, financial condition and operating results.” Meanwhile, we are also susceptible to market conditions of China’s housing related industry, where we primarily conduct our business. China’s residential real estate industry is volatile and fluctuated in recent years in terms of housing transaction volume and prices. Fluctuations of China’s housing related industry are caused by economic, social, political and other factors outside our control. Any prolonged slowdown in China’s economy, which leads to a decline or fluctuation in the housing related industry, may materially and adversely affect our business, financial condition and results of operations. Furthermore, there may be situations where China’s housing related industry becomes over-heated, and our platform becomes less appealing to customers, brokerage brands, stores and agents and other business partners, which could potentially adversely affect our business of facilitating housing transactions and services. In addition, our home renovation and furnishing business could also be adversely affected by China’s general economic conditions and fluctuations in housing related industry. Our business is subject to government regulations and policies guiding China’s economy in general and, specifically, on existing and new home sales and home rentals. The housing related industry in China is also subject to government regulations and policies. The PRC government has in recent years announced a series of measures aimed to stabilize the growth of the PRC economy and specific sectors, including the housing related industry, to a more sustainable level. Moves in regulations and policies on the housing related industry were more often made during the times when the housing prices are increasing overwhelmingly, in line with the central government’s principle that “housing is for living in, not for speculation,” which was clearly emphasized in the Outline of the 14th Five-Year Plan for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 for the People’s Republic of China, or the 14th Five-year Plan. The 14th Five-year Plan was formulated in October 2020 and approved by the National People’s Congress of the PRC, in March 2021. With the implementation of the 14th Five-Year Plan, the PRC governmental authorities have taken steps to strengthen the regulation of the real estate industry, including by promulgating new regulations and policies on the housing related industry aiming at achieving dynamic balance between demand and supply in the housing related industry, regulating speculative housing investment, and promoting social stabilization and welfare. For instance, in response to the highly volatile housing prices starting from the fourth quarter of 2020, the Ministry of Housing and Urban-Rural Development of the PRC, or the MOHURD, jointly with other seven PRC regulatory authorities, issued the Notice on Continuous Improvement and Regulation of the Real Estate Market Order on July 13, 2021, which aimed to strengthen the rectification of improper or illegal behaviors in real estate development, sales and leasing of properties, and property services by ways including, among others, rectifications of publishing false information of properties and illegal advertisements, which reflected the PRC regulatory authorities’ focus on stabilization and long-term healthy growth of the housing related industry. 27 On October 23, 2021, the National People’s Congress of the PRC authorized the State Council of the PRC to launch a five-year pilot property tax reform program in selected regions where the owners of residential and non-residential properties (excluding rural households) will be required to pay property tax. The State Council of the PRC has the discretion in deciding where and how the property tax will be implemented and administrated. We believe the pilot property tax reform program will also contribute to a healthier, more stable development of China’s housing related industry and the formulation of a long-term mechanism for growth. At the municipal level, many municipal governments have issued market control policies targeting at, among other things, restoring or strengthening restrictions on residential property speculation and tightening credit policy. In particular, during the times when the housing prices were increasing significantly, central and local government authorities introduced the policies to specifically stabilize the housing related industry, including limiting the maximum amount of monthly mortgages and the maximum amount of total monthly debt service payments of an individual borrower; imposing a value-added tax on the sales proceeds for second-hand transfers subject to the length of holding period and type of properties; increasing the minimum amount and percentage of down payment of the purchase price of the residential property of a family; tightening the availability of individual housing loans in the housing related industry to individuals and their family members with more than one residential properties; imposing a 20.0% individual income tax on the gain from the sale of second-hand properties; limiting the availability of individual housing provident fund loans for the purchase of second (or more) residential properties by employees and their family members; mandating the banks to contain their balance of all real estate loans and balance of all individual housing loans under a certain capped percentage of the total balance of all Renminbi loans provided by the bank; and publishing reference sale prices for existing home sales at different regions in a city. In 2021, the housing authorities of several cities, such as Beijing and Shanghai, issued notices on enhancing comprehensive management on housing related industry or agents with respect to advertising, sale of real estate properties, and financing for housing transactions. These measures have affected the growth rate of the housing related industry, and some have dissuaded potential purchasers from making purchases, causing a decline in transaction volumes and average selling prices in both existing home sales and new home sales in 2021. Specifically, certain measures regulating the conduct of real estate developers have a particular impact on the transaction volumes and prices of new home sales. The measures in turn not only have caused reduction in our customers’ demand for our platform services, but also prevented real estate developers from raising the capital they need, increased their costs to start new projects, and changed the sales and marketing strategy of the developers in a way that reduces their demand for our platform services. Since the end of 2021, in response to a slowdown in the real estate industry, PRC government has made various efforts to stabilize the housing industry and some local government authorities have selectively eased certain restrictions for the purchase of residential properties. Since the second half of 2022, PRC government also made targeted efforts to promote housing delivery and to resolve financing risks for real estate developers. Efforts include reducing the interest rate on individual housing loans for the purchase of the first residential property by an individual borrower, increasing the availability of individual housing provident fund loans for the purchase of residential properties by certain employees and their family members, and providing tax subsidies for the purchase of residential properties by individuals and families. The PRC governmental authorities may continue to adopt new laws, regulations and policies from time to time with an aim to stabilize and support the long-term healthy development of the housing related industry in certain regions in China, which might potentially affect our business. 28 The PRC governmental authorities also enact certain criteria to regulate the home rental market. For example, the State Council of the PRC promulgated the Opinions of the General Office of the State Council on Accelerating the Cultivation and Development of the Home-Rental Market in 2016, which require the local housing authorities to strengthen the administration of the home-rental market participants, including residential tenancy enterprises, intermediary agencies and professionals, in coordination with relevant departments, and keep credit records of relevant market participants. Moreover, the MOHURD published the Measures on Management of Residential Tenancy and Home Sales (Discussion Draft) for public discussion in May 2017, which require the relevant PRC authorities to enhance scrutiny on (i) the terms of duration and rent adjustments in lease agreements, (ii) the filing of lease agreements, and (iii) residential tenancy enterprises. In addition, the Measures on Residential Tenancy (Discussion Draft) published by the MOHURD for public discussion in September 2020, which has not taken effect as of the date of this annual report, state that (i) residential rental operators are prohibited from inducing tenants to utilize rental installment loans by providing rental discounts or by including any term of rental installment loans in the rental agreement; and (ii) commercial banks may extend a rental installment loan only if the lease agreement has been registered with local housing bureau and the term of the loan does not exceed the duration of the tenancy. Furthermore, the Opinions on Strengthening Regulation on Light-asset Residential Rental Enterprises, published in April 2021, set out regulatory measures on various aspects, including standards of qualification, online registration and filing of business operation, limitation and supervision on utilization of loans and monitoring of rents. If the PRC governmental authorities adopt any prohibitive measures or policies with respect to rental housing, or the interpretation of current laws and regulations relating to the home rental market becomes more restrictive and rigorous, they may depress the home rental market, dissuade potential tenants from renting apartments, and cause a decline in average rental rates. Frequent changes in government policies may also create uncertainty that could discourage investment in real estate. Our business may be materially and adversely affected as a result of decreased demand of rental apartments that may result from government policies. Nevertheless, we cannot assure you that the existing restrictive policies and measures will be eased or lifted in the future, nor can we assure you that the PRC government will not adopt additional and more stringent industry policies, regulations and measures in line with the changes of the real estate market. Changes in government policies may also create uncertainty that could affect the sentiment of potential investors in real estate. If these changes in government policies result in decreasing transaction volumes in the housing related industry in China or require us to make necessary changes to our businesses in compliance of new regulations and policies, our business and results of operations may be materially and adversely affected. In addition, the existing and future government regulations and policies may positively or negatively affect different segments of our business operations in varied ways and degrees, such as restricting our business practices and fee rates. As a result, we may adjust our strategies and business models in response to the evolving regulations and policies. We cannot assure you that these adjustments will be successful or materialize in positive business prospects and financial performance. If we are unable to continue to provide satisfactory experience to customers, our business and reputation may be materially and adversely affected. The success of our business substantially hinges on our ability to provide quality customer experience, which in turn depends on a variety of factors, including our ability to continue to offer integrated online and offline access to an extensive and authentic property listing database and to, together with the brokerage brands, stores and agents on our platform, provide convenient and secure housing transactions and services experience and satisfactory services to our customers. Interruptions or failures in the proper functioning of our platform hamper our delivery of satisfactory customer experience. These interruptions may be due to unforeseen events that are beyond our control or the control of the participants on our platform such as intensified competition due to market entry of new players with financial and other resources stronger than us, additional regulatory requirements which we cannot satisfy on a timely basis, or at all, or adverse development or negative publicity involving our platform participants. Moreover, although we endeavor to implement various service protocols and train the real estate agents and other related service providers on our platform to ensure the quality of their service, we cannot guarantee that we will effectively manage all the agents and other service providers to ensure satisfactory customer experience in all service settings. We have received customer complaints about various services on our platform from time to time. If we are unable to continue to provide satisfactory customer experience, customers may choose other service providers over our platform for their intended housing transactions and services, which could materially and adversely impact our reputation, business and results of operations. 29 We may not succeed in continuing to maintain, protect and strengthen our brands, and any negative publicity about us, our business, our management, our business partners or the housing related industry in general may materially and adversely affect our reputation, business, results of operations and growth. We believe that the recognition and reputation of our brands among real estate agents, customers, real estate developers and the industry in general have significantly contributed to the success of our business. Our ability to maintain, protect and strengthen our brands is critical to our market position. Maintaining and strengthening our brands will likely depend significantly on, among others, our ability to provide high-quality housing transaction services on our platform. We market our brands through efforts such as word-of-mouth marketing, sponsoring events, advertising and marketing through a variety of media. These efforts may not always achieve the desired results. If we fail to maintain a strong brand, our business, results of operations and prospects will be materially and adversely affected. Our reputation and brands may be impacted by various factors, some of which are difficult or impossible to predict or control and costly or impossible to remediate. Negative publicity about us, such as alleged misconduct by our employees, connected agents or other business partners on our platform, inauthentic property listings on our platform, unethical business practices, rumors relating to our business, management, employees, real estate agents on our platform, our shareholders and affiliates, our business partners or our competitors and peers, or negative publicity about other companies that use similar brand names as ours, can harm our reputation, business and results of operations. These allegations, even if factually incorrect or based on isolated incidents, may lead to inquiries, regulatory investigations or legal actions against us. Such actions could substantially damage our reputation and cause us to incur significant costs to defend ourselves. Any negative public perception or publicity regarding our business partners that we cooperate with, or any regulatory inquiries or investigations and lawsuits initiated against them, may also have an adverse impact on our brand and reputation. Moreover, any negative media publicity about the housing transactions and services industry, service quality problems of other players in our industry, including our competitors, or even negative sentiments against China-based listed companies as a group due to fraud or misbehavior of certain bad actors, may also negatively impact our reputation and undermine the trust and credibility of our platform. If we fail to maintain positive reputation, our ability to attract and retain customers, real estate agents, business partners and key employees could be harmed. If our platform is unable to continue to offer comprehensive authentic property listings, our business, financial condition and results of operations could be materially and adversely affected. We believe that our authentic property listings inventory is critical for us to gain trust from our housing customers, improve agent operating efficiency and maintain our competitive advantages. We have an obligation under PRC laws to review, monitor and verify the content of the listing information to ensure it is not fraudulent or misleading and is in compliance with applicable laws. We are not allowed to list certain property information for various reasons, including intellectual property infringement, non-compliance with real estate regulations and policies and non-compliance with advertising laws and competition laws, and we are legally required to delete such listing information that is reported by our customers as illegal or may constitute an infringement to others. Although we thrive to maintain the authenticity and accuracy of our property listings by enforcing strict authentic listing rules, constantly monitoring and checking the authenticity of property listings, timely updating or deleting unqualified listings and awarding customers for accurate reporting of incorrect information, we cannot assure you that all the real estate properties listed on our platform are authentic, accurate, up-to-date and not misleading at all times. See “Item 4. Information on the Company—B. Business Overview—Agent Cooperation Network (ACN)—Authentic Property Listings.” To the extent we fail to monitor and maintain the quality and authenticity of the listings in our property listing database, and the authenticity and accuracy of our property listings deteriorate, our platform could be less attractive to both housing customers and real estate agents and our transaction volume may decrease. We may also be subject to regulatory investigations or penalties if the issues raise regulatory concerns. A public perception that inauthentic property information is displayed on our platform, even if factually incorrect or based on a few isolated incidents, could damage our reputation, diminish the value of our brand and negatively impact our business, financial condition and results of operations. We have a limited operating history under our platform business model, and our historical growth and performance may not be indicative of our future growth and financial results. Although we have a long and successful operating track record in operating Lianjia, we have a limited history for operating Beike platform which was launched in 2018. Although we have experienced a relatively high growth in operating Beike platform, our GTV decreased from RMB3,853.5 billion in 2021 to RMB2,609.6 billion in 2022, and we may continue to experience decrease in our business. You should not consider our historical growth and profitability as indicative of our future financial performance. 30 We officially launched our home renovation and furnishing services, Beiwoo, in April 2020, and completed the acquisition of Shengdu in April 2022, and our Carefree Rent was developed at scale during the second half of 2022. These new businesses have their ramp-up period and our strategies may not be carried as planned and the growth of these businesses may be limited by factors out of our control. You should consider our future operations in light of the challenges and uncertainties that we may encounter, which include our ability to, among other things:
If the demand for completing housing transactions and services on an integrated offline and online platform does not develop as we expect, or if we fail to enhance efficiency and customer experience as we expect, our business and financial conditions may be materially and adversely affected.
|
● | complying with applicable laws, rules and regulations
|
In general, we expect that data security and data protection compliance will receive greater attention and focus from regulators, both domestically and globally, as well as the financial services business and internet-related business, which may lead to inconsistency and cause difficulties in compliance. In addition, it is possible that we may become subject to additional or new laws and regulations in this regard, particularly to data security and protection laws in other jurisdiction if we extend our business outside of the PRC in the future, which may result in additional expenses to us and subject us to potential liability and negative publicity. We expect that these areas will receive greater attention and focus from regulators and attract continued or greater public scrutiny and attention going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to penalties, including fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
We are subject to various cybersecurity and data privacy laws and regulations in China, including without limitation, the PRC Civil Code and the PRC Cybersecurity Law. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Internet Security and Privacy Protection.” Moreover, different regulatory bodies in China, including the Ministry of Industry and Information Technology of the PRC, or the MIIT, the CAC, the Ministry of Public Security, the SAMR, and the MOHURD, have enforced data privacy and protections laws and regulations with various standards and applications. The various standards in enforcement of data privacy and protection laws have caused us difficulties in ensuring full compliance and increase our operating cost, as we need to spend time and resources to deal with various inspections for compliance. While we have adopted a rigorous and comprehensive policy for the collection, processing, sharing, disclosure authorization and other aspects of data use and privacy and taken necessary measures to comply with all applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness of these policies and measures undertaken by us, or by the agents, brokerage brands and stores or other business partners on our platform. Any failure or perceived failure to comply with all applicable data privacy and protection laws and regulations, or any failure or perceived failure of our business partners to do so, or any failure or perceived failure of our employees to comply with our internal control measures, may result in negative publicity and legal proceedings or regulatory actions against us, and could result in fines, revocation of licenses, suspension of relevant operations or other legal or administrative penalties, which may in turn damage our reputation, discourage current and potential agents and customers, and subject us to fines and damages, which could have a material adverse effect on our business and results of operations.
Furthermore, the PRC regulatory and enforcement regime with regard to cybersecurity and data protection is still evolving. PRC regulators have been increasingly focused on regulation in the areas of cybersecurity and data protection. The following are examples of certain recent PRC regulatory activities in this area.
33
Personal Information and Data Privacy
On August 20, 2021, the State Council of the PRC promulgated the PRC Personal Information Protection Law, effective from November 1, 2021. The Personal Information Protection Law requires, among others, that (i) the processing of personal information should have a clear and reasonable purpose which should be directly related to the processing purpose, in a method that has the least impact on personal rights and interests, and (ii) the collection of personal information should be limited to the minimum scope necessary to achieve the processing purpose to avoid the excessive collection of personal information. Entities handling personal information shall bear responsibilities for their personal information handling activities, and adopt necessary measures to safeguard the security of the personal information they handle. Otherwise, the entities handling personal information could be ordered to rectify, or suspend or terminate the provision of services, and face confiscation of illegal income, fines or other penalties. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Privacy Protection.” The Anti-monopoly Guidelines for the Platform Economy Sector published by the Anti-monopoly Committee of the State Council of the PRC also prohibits collection of user information through coercive means by online platform operators.
Data Security
On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, which took effect in September 2021. The Data Security Law, among other things, provides for a security review procedure for the data activities that may affect national security. In addition, on December 28, 2021, the CAC, the NDRC, the MIIT, and several other PRC governmental authorities jointly issued the Cybersecurity Review Measures, which further restate and expand the applicable scope of the cybersecurity review. Pursuant to the Cybersecurity Review Measures, critical information infrastructure operators that procure internet products and services, and network platform operators engaging in data processing activities, must be subject to the cybersecurity review if their activities affect or may affect national security. The Cybersecurity Review Measures further stipulate that network platform operators holding over one million users’ personal information shall apply with the Cybersecurity Review Office for a cybersecurity review before listing on a foreign stock exchange. In addition, the relevant government authorities may initiate the cybersecurity review against the relevant operators if the authorities believe that the network products or services or data processing activities of such operators affect or may affect national security. However, there are substantial uncertainties as to the interpretation, application and enforcement of the Cybersecurity Review Measures. The PRC government authorities have wide discretion in interpretation and implementation of the Cybersecurity Review Measures, including cybersecurity review on certain activities of critical information infrastructure operators and other circumstances that affect or may affect national security. The exact scope of “critical information infrastructure operators” under the current regulatory regime remains unclear and the identification of critical information infrastructure operators is subject to specific identification rules stipulated by relevant industry regulators and the notice from the relevant regulators pursuant to the Regulations on Protection of Critical Information Infrastructure. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Internet Security and Privacy Protection.”
As of the date of this annual report, no detailed rules or guidance with respect to the implementation of such regulations has been issued by any government authorities and we have not been informed as a critical information infrastructure operator by any government authorities. Therefore, it is uncertain whether we would be deemed as a critical information infrastructure operator under PRC law, or be subject to the cybersecurity review. The PRC government authorities may have discretion in the interpretation and enforcement of these laws, rules and regulations. We cannot assure you that relevant regulators will not interpret or implement the laws or regulations in ways that negatively affect us. Our different lines of business are subject to evolving data security and protection laws and regulations regulating different businesses, such as the financial services business and internet-related business, which may lead to inconsistency and cause difficulties in compliance. In addition, it is possible that we may become subject to additional or new laws and regulations in this regard, particularly to cybersecurity and protection laws in other jurisdiction if we extend our business outside of the PRC in the future, which may result in additional expenses to us and subject us to potential liability and negative publicity.
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Furthermore, on November 14, 2021, the CAC published the Draft Regulations on Cyber Data Security, which reiterate the circumstances under which data processors shall apply for cybersecurity review, including, among others, (i) the data processors who process personal information of at least one million users apply for listing on a foreign stock exchange; and (ii) the data processors’ proposed listing in Hong Kong affects or may possibly affect national security. However, it provides no further explanation or interpretation as to how to determine what constitutes “affecting national security”, and there remain uncertainties whether we would be subject to the cybersecurity review pursuant to such measures. The Draft Regulations on Cyber Data Security also provide specific requirements for data processors in conducting data processing activities in China. For example, data processors processing important data or going public overseas shall conduct an annual data security assessment by themselves or through a third-party data security service provider and submit the assessment report to local agency of the CAC before January 31 of each year. As of the date of this annual report, there is no schedule as to when it will be enacted. Substantial uncertainties exist with respect to its enactment timetable, final content, interpretation and implementation.
The PRC government authorities also further enhanced the supervision and regulation of cross-border data transmission. On July 7, 2022, the CAC issued the Measures for Security Assessment of Cross-border Data Transfer, which became effective on September 1, 2022. These measures require the data processor providing data overseas to apply for the security assessment of cross-border transfer of data with the local provincial-level counterparts of the national cybersecurity authority under any of the following circumstances: (i) where the data processor intends to provide important data overseas; (ii) where a critical information infrastructure operator and a data processor who has processed personal information of more than 1,000,000 individuals intends to provide personal information overseas; (iii) where a data processor who has provided personal information of 100,000 individuals or sensitive personal information of 10,000 individuals to overseas recipients, in each case as calculated cumulatively, since January 1 of the preceding year intends to provide personal information overseas; or (iv) other circumstances where the security assessment of data cross-border transfer is required by the CAC. In addition, the data processor shall conduct a self-assessment on the risk of data cross-border transfer prior to applying for the foregoing security assessment. The data processors in violation of such measures are required to rectify such non-compliance incidents within six months of the effectiveness date thereof. Given that the above measures are relatively new, their interpretation, application and enforcement and how they will affect our business operation are subject to substantial uncertainties.
It also remains uncertain whether the future regulatory changes would impose additional restrictions on companies like us. We cannot predict the impact of these draft measures, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If the enacted versions of the draft measures mandate clearance of cybersecurity review and other specific actions to be completed by China-based companies listed on a U.S. stock exchange, such as us, we face uncertainties as to whether such clearance can be timely obtained, or at all. As of the date of this annual report, we have not been involved in any formal investigations on cybersecurity review made by the CAC on such basis. However, if we are not able to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, we may be subject to government enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations, or removal of our app from the relevant application stores, among other sanctions, which could materially and adversely affect our business and results of operations.
In general, compliance with the existing PRC laws and regulations, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, related to data security and personal information protection, may be costly and result in additional expenses to us, and subject us to negative publicity, which could harm our reputation and business operations. There are also uncertainties with respect to how such laws and regulations will be implemented and interpreted in practice.
As of the date of this annual report, (i) there had been no material incident of data or personal information leakage, infringement of data protection and privacy laws and regulations or investigation or other legal proceeding, pending or threatened against us initiated by competent government authorities or third parties, that will materially and adversely affect the business of us; and (ii) we have not been subject to any material fines, administrative penalties, or other sanctions by any relevant regulatory authorities in relation to the infringement of cybersecurity and data protection laws and regulations. In addition, we have maintained a comprehensive and rigorous data protection program and implemented comprehensive and strict internal policies, procedures and measures to ensure our compliance practice in data protection. We also set up an information security and data compliance committee to establish, implement and update data protection and privacy policies, thus ensuring our compliance with relevant data protection and privacy regulations and laws.
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In addition, regulatory authorities around the world have adopted or are considering a number of legislative and regulatory proposals concerning data protection. These legislative and regulatory proposals, if adopted, and the uncertain interpretations and application thereof could, in addition to the possibility of fines, result in an order requiring that we change our data practices and policies, which could have an adverse effect on our business and results of operations. The European Union General Data Protection Regulation, or the GDPR, which came into effect on May 25, 2018, includes operational requirements for companies that receive or process personal data of residents of the European Economic Area. The GDPR establishes new requirements applicable to the processing of personal data, affords new data protection rights to individuals and imposes penalties for serious data breaches. Individuals also have a right to compensation under the GDPR for financial or non-financial losses. Although we do not conduct any business in the European Economic Area, in the event that residents of the European Economic Area access our platform and input protected information, we may become subject to provisions of the GDPR. Compliance with such regulations and regulatory standards can be costly and any failure to comply with these regulations and regulatory standards could subject us to legal and reputational risks.
Our business may continue to be materially and adversely affected by the effects of the COVID-19 pandemic in China.
Beginning in 2020, outbreaks of COVID-19 resulted in the temporary closure of many corporate offices, retail stores, and manufacturing facilities across China. Normal economic life throughout China was sharply curtailed. We took a series of measures to protect our employees, including temporarily closing the brokerage stores on our platform, facilitating remote home tours arrangements for our agents, allowing employees to work from home, and canceling business meetings and travels. The operations of our business partners were also impacted. The population in most of the major cities was locked down to a greater or lesser extent at various times and opportunities for discretionary consumption were extremely limited. In particular, our operating efficiency and capacity were adversely affected by the COVID-19 pandemic mainly due to insufficient workforce as a result of temporary travel restrictions in China, a lack of willingness of customers to take home tours and inspections on site and purchase or rent property as well as make home renovations, a decrease of home tours and home renovation workforce due to pandemic control measures, and the necessity to comply with disease control protocols in our facilities. Due to concerns or fear of the spread of the disease, there had been noticeable reduction of in-person visits of housing customers to brokerage stores and properties in that period. These events have materially and adversely affected our business since 2020 and contributed to lower net revenues, increased accounts receivable turnover days, increased bad debt provision, and higher costs in certain periods of time.
China began to modify its zero-COVID policy at the end of 2022, and most of the travel restrictions and quarantine requirements were lifted in December. There were surges of cases in many cities during this time which caused temporary closure of certain brokerage stores on our platform, and there remains uncertainty as to the future impact of the virus, especially in light of this change in policy. The extent to which the pandemic impacts our results of operations going forward will depend on future developments which are highly uncertain and unpredictable, including the frequency, duration and extent of outbreaks of COVID-19, the appearance of new variants with different characteristics, the success or failure of efforts to contain or treat cases, and future actions we or the authorities may take in response to these developments. China may experience lower domestic consumption, higher unemployment and greater economic uncertainty, which may impact our business in a materially negative way as our business depends substantially on the general economic conditions and the general demand for residential real estate in China. Our business partners will also need time to recover from the economic effects of the pandemic even after business conditions begin to return to normal. Consequently, the COVID-19 pandemic may continue to materially and adversely affect our business, financial condition and results of operations in the current and future years.
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We cannot guarantee that our monetization strategies will be successfully implemented or generate sustainable revenues and profit.
Although we have a well-developed monetization model for our self-operated housing transaction business through Lianjia, we are at the early stage of our platform business and our platform monetization model is evolving. Our Beike platform generates revenues from existing home transaction services by earning platform service fees from real estate brokerage firms on the platform as a percentage of the transaction commissions they earned on our platform, commissions from housing customers for transactions facilitated by our Lianjia brand or a split for commissions from other brokerage firms acting as principal agents in collaboration with our Lianjia agents to complete transactions, franchise fees from brokerage firms under our franchise brands such as Deyou, and service fees for other value-added services. We also generate revenues from new home transaction services by earning sales commissions from real estate developers for new home sales completed by us as well home renovation and furnishing services. In addition, we generate revenues from a variety of other housing related services, including financial services and other newly developed businesses such as rental property management services. We cannot assure you that we can successfully implement the existing business model to generate sustainable revenues, especially with respect to our attempts in broadening monetization with limited track records, or that we will be able to develop new monetization strategies to grow our revenues. If we fail to maintain the implementation of our existing business model or develop new monetization approaches, we may not be able to maintain or increase our revenues or effectively manage any associated costs. In addition, we may introduce new products and services for which we have little or no prior development or operating experience. If these new products or services fail to meet our expectations or are unable to attract or engage users, real estate agents, business partners or other platform participants, as the case may be, we may fail to diversify our revenue streams or generate sufficient revenues to justify our investments and costs, and our business and operating results may suffer as a result.
We have incurred net losses in the past, and we may not be able to remain profitable or increase profitability in the future.
We incurred net losses of RMB525 million and RMB1,397 million (US$203 million) in 2021 and 2022 respectively. We expect to continue to incur costs to support our anticipated future growth. We also expect to continue to incur operating expenses as a result of both our growth and the increased costs associated with being a public company. Our costs and expenses may be greater than we anticipate, our investments to make our business and our technical infrastructure more efficient may not be successful, and our acquisition and consolidation of Shengdu Home Renovation Co., Ltd. (together with its subsidiaries and affiliates, “Shengdu,” a full-service home renovation service provider in China) may involve higher expenses than expected.
We face risk in collecting our accounts receivable and deposits from real estate developers.
We incur accounts receivable with, and pay earnest deposits to, real estate developers when we are engaged to sell new home projects and we grant them credit terms for our sales commissions in line with the industry practice in China. As of December 31, 2022, the balance of deposits paid to real estate developers was RMB0.6 billion (US$0.09 billion) and the accounts receivable due from them was RMB5.4 billion (US$0.8 billion). We may face risk collecting these amounts if the operation and liquidity condition of real estate developers deteriorate. Meanwhile, any policy change aiming at tightening regulations of real estate developers may limit their access to financing channels and may cause adverse impact on the collectability of our accounts receivable. For instance, since the end of 2020, the regulators have tightened the financial requirements for real estate developers to seek new debt financings, with the aim of curing the rapid growth of debts of real estate developers. Under the rules, the growth rate of debt financing allowed for a real estate developer is contingent on its satisfaction of three debt-related financial metrics, and if it fails to meet all three metrics, it will be restricted from obtaining any new interest-bearing debt financing. If any of the real estate developers with significant outstanding accounts receivable and deposits were to become insolvent or otherwise become unable or refuse, to make payments in a timely manner, or at all, we would have to make additional provisions against such accounts receivable and deposits, or write off the relevant amounts, either of which could adversely affect our financial conditions and profitability.
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Disruption or discontinuity in the features and functions of our infrastructure components, especially ACN, may materially and adversely affect our business.
We rely on the proper functioning of ACN and the modules of our infrastructure for the daily operations of our platform. Although we have implemented a comprehensive rules and protocols in ACN, we cannot assure you that all aspects of our ACN rules will be satisfactorily implemented in each housing transaction on our platform. With the increasing number of participating real estate brokerage brands and agents who were not previously familiar with ACN rules, it may be difficult for us to effectively monitor and control these brands and agents to ensure their business performance and conducts in accordance with ACN rules. If violations of ACN rules or other inappropriate actions occur, such as circumventing our platform to facilitate transactions that are required to be partitioned according to ACN rules, and if we fail to effectively prevent non-compliance or discipline the responsible brands or agents, the effectiveness of our ACN system may be diminished and other agents on our platform may be less willing to follow the rules, which could materially and adversely affect our business and results of operations. Any material disruption or malfunction of other modules, such as our SaaS systems and customer front end, may also compromise the service quality of our service providers on the platform and affect our operations materially and adversely.
We cooperate with various real estate brokerage brands, stores and agents on our platform. If we are not able to develop relationships with new real estate brokerage brands and agents or maintain our relationship with existing real estate brokerage brands and agents on our platform, our operations may be materially and adversely affected.
We believe the large and active network of real estate brokerage brands and their affiliated stores and agents contributes significantly to the success of our platform. As of December 31, 2022, there were approximately 37,400 community-centric active brokerage stores and over 349,000 active agents affiliated with these stores. Aside from the Lianjia brand that we own and operate, the connected brokerage brands and the sales channels we specifically procured for new home transactions contributed a substantial majority of the GTV on our platform in 2022. We enter into business cooperation agreements with brokerage brands. Under these agreements, we offer the brokerage brands access to the infrastructure on our platform, such as ACN and the SaaS systems. The brokerage brands, in turn, would commit to following our ACN as well as other protocols on the platform and subscribe to an agreed-upon fee structure. It is uncertain, however, that we are able to develop relationships with new real estate brokerage brands, stores and agents in line with our plan to expand our platform business, or that we are able to maintain our relationship with existing brokerage brands, stores and agents on commercially acceptable terms, or at all, after the terms of the current cooperation agreements expire. In the event that we are not able to develop new relationships or maintain our existing relationship, our ability to serve a large number of housing customers nationwide with superior housing transactions and to maintain and develop our extensive authentic property listing inventory may be restricted, which may in turn materially and adversely affect our platform operations.
If we fail to maintain our relationships with real estate developers or attract them to engage us, or otherwise fail to procure new real estate property listings at favorable terms, our business and growth prospects may suffer.
We cooperate with real estate developers for new property sales on our platform and established business relationships with major real estate developers in China. Maintaining strong relationships with real estate developers is critical to the results of operations and prospects on our new home sales business. We enter into strategic cooperation agreements with real estate developers, and these agreements typically do not restrict the real estate developers from cooperating with other real estate brokerage firms. We cannot assure you that the real estate developers we currently cooperate with will continue the cooperation on commercially acceptable terms, or at all, after the terms of the current agreements expire or after our cooperative arrangements end. Our ability to attract real estate developers to engage us in selling new homes will also affect the prospects of the new home sales business. If we cannot ensure that our channels sales are superior to their traditional way of sales, or, for example, the sales channels that do not utilize ACN are unable to meet real estate developers’ expectations or our VR initiatives are not effective in attracting housing customers, we might not be able to attract new real estate developers or even maintain our existing relationships. Even if we maintain strong relationships with the real estate developers or are able to attract them, their ability to provide adequate new property listings at competitive prices may be adversely affected by economic conditions, labor actions, regulatory or legal proceedings against them, natural disasters or other factors beyond our control. If we fail to attract new real estate developers to cooperate with us due to any reason, our business and growth prospects may be materially and adversely affected.
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We may not be able to effectively control the timing, quality and costs relating to our home renovation and furnishing services, which may adversely affect our business, results of operations, financial condition, and growth prospects.
The success of our home renovation and furnishing services depends on our ability to perform such services in a timely manner with high quality and within cost budget. Although we offer various levels of trainings to our home renovation and furnishing service providers to perform renovation and furnishing work, we are still exposed to various risks inherent to home renovation and furnishing business, including but not limited to (i) failures to complete work on time due to delays in supplies of services or materials, delays in completion of work by service providers and designers, or interruptions caused by COVID-19; (ii) poor workmanship caused by low-quality services provided by service providers and designers or low-quality materials; and (iii) potential cost overruns due to increases in labor costs, materials costs, etc. If our assumptions regarding the costs or timing of home renovation and furnishing prove to be materially inaccurate, our results of operations, financial condition, and growth prospects may be adversely affected. In addition, if we fail to control the quality of renovation and furnishing and experience any potential complaints from, or damages to, customers, we could be exposed to material liability and be held responsible for damages, fines or penalties and our reputation may suffer. If we are unable to effectively control the timing, quality and costs relating to our home renovation and furnishing services, our business, results of operations, financial condition and growth prospects may be adversely affected.
If we fail to lease the properties within a certain period, or the tenants or the landlords terminate the contracts early, our business and operating results may be materially adversely impacted.
Our decentralized rental property management business, Carefree Rent, is an important part of our home rental services. Under the Carefree Rent model, we are entrusted by the landlords to manage the properties and then lease them to the tenants. On the one hand, we are subject to rental property management agreements with specified terms entered in to with the landlords, during which early termination will be subject to damages for breach of contract. On the other hand, we are subject to lease agreements with specified terms entered into with the tenants and the landlords, during which early termination may result in paying damages for breach of contract.
We make profits on our Carefree Rent business partly from the rents collected from the tenants after deducting the rents due to the landlords. The profitability of our Carefree Rent business largely depends on how fast we are able to lease the properties. If we are not be able to lease the properties within a certain period, we will have to pay rents to the landlords without collecting rents from tenants. After we lease the properties, tenants may terminate their leases during lease terms by paying damages for breach of contract, exposing us to the risk of re-leasing our rental properties, which we may be unable to do on a timely basis, on favorable terms or at all. Our liquidity may be materially and adversely affected by tenants’ early termination. Besides, short-term leases may result in high turnover, which involves costs such as restoring the rental apartments, marketing costs and lower occupancy levels. In addition. we may not be able to terminate the agreements with the landlords at no costs even if we are unable to lease or re-lease the properties, since such early termination could subject us to damages for breach of contract. The landlords may also terminate the rental property management agreements early during the term of the agreement, resulting in the early termination of the lease agreements by us, subject us to the damages for breach of contract. As a result, we may not be able to make profits on our Carefree Rent business, and we may even incur losses. Therefore, our business and operating results could be materially adversely impacted.
If we fail to obtain or keep licenses, permits or approvals applicable to the various services provided by us, we may incur significant financial penalties and other government sanctions.
The real estate brokerage business in China is highly regulated by the PRC government. See also “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Real Estate Brokerage Business and Real Estate Agency Enterprises.” Pursuant to the Real Estate Brokerage Administrative Measures, to qualify as a real estate brokerage institution, an entity and its branches should have a sufficient number of qualified real estate brokers and file with relevant local real estate administrative authority within 30 days after obtaining its business license. The requirements of the local real estate administrative authorities for such filings may vary among cities and we cannot assure you that, to the extent that the filing is required by local authorities, we will be able to complete the filing in a timely manner, or at all. As of the date of this annual report, all of our subsidiaries and their branches operating real estate brokerage business have currently filed with the relevant authorities, except that a small subset of branches which are preparing for or in the process of completing such requirements. Thus far, the filing status of these branches has not caused any material adverse effect to our business operations. We cannot assure you that the outstanding filings and future filings will be completed in a timely manner, or at all. If not, we may be subject to penalties or other governmental sanctions for such failures.
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In connection with the online operations of our platform, the relevant VIEs or their subsidiaries are also required to obtain, and have obtained, value-added telecommunications service licenses in order to provide relevant value-added telecommunication services. In addition, to enhance the experience of our customers, agents or other business partners on our platform, we offer various auxiliary functions and complementary services through our platform and have obtained relevant licenses and permits for these services, such as the license for non-financial institution payment service, approval for establishment of micro credit company, license for financing guarantee business, license for insurance brokerage business and approval for commercial factoring business. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for these functions and services. We cannot assure you that if we are required to obtain these additional licenses, permits or approvals, we will be able to do so in a timely manner, if at all, and any non-compliance may result in fines or other penalties being imposed to us.
Furthermore, as some of our businesses or services are innovative, we cannot assure you that the authorities share the same view as ours on the identification or category of these businesses or services in the regime of foreign investment laws, including whether appropriate licenses or permits for them have been duly applied or obtained. If we enter into new service categories and businesses, or any of our current businesses or services are determined to be subject to new licensing or similar requirements in the future, especially due to the evolving application or interpretation of relevant laws and regulations, we may be required to obtain licenses or permits that we do not currently have, to upgrade the licenses or permits we currently have, or to satisfy other requirements arising from the government authorities. We will strive to obtain and upgrade the relevant licenses and permits and satisfy all such requirements, but we cannot assure you that we will be able to obtain or upgrade such licenses and permits and complete relevant administrative procedures in a timely manner, or at all.
Under applicable PRC laws, rules and regulations, the failure to obtain and/or maintain the licenses and permits required to conduct our business may subject us to various penalties, including confiscation of revenues, imposition of fines and/or restrictions on their business operations, or the discontinuation of their operations. Any such disruption in the business operations of our PRC subsidiaries or the VIEs could materially and adversely affect our business, financial condition and results of operations.
The proper functioning of technologies deployed by our platform is essential to our business. Any failure to maintain the satisfactory performance of our websites, mobile apps and systems could materially and adversely affect our business and reputation.
The satisfactory performance, reliability and availability of our platform, both online and offline, are critical to our success and our ability to attract and retain customers and real estate agents. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our online operations could reduce the transaction volumes and hamper transaction efficiency, and our platform as a whole will suffer. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to system interruptions, website and mobile app slowdown or unavailability, delays or errors in transaction processing, loss of data or the inability to accept and fulfill customer requests. Security breaches, computer viruses and hacking attacks have become more prevalent in our industry. Because of our brand recognition in the housing transactions and services industry in China, we believe we are a relatively attractive target for such attacks. We have experienced in the past such unexpected interruptions, and we have taken protective measures to enhance the security of our platform. We can provide no assurance that our current security mechanisms will be sufficient to protect our IT systems from any external intrusions, viruses or hacker attacks, information or data theft or other similar activities. Any such future occurrences could reduce customer satisfaction, damage our reputation and result in a material decrease in our revenues. If hostile hacking attacks result in revelation of personal data we are obligated to protect, we may be subject to administrative penalties or legal proceedings against us. If such attacks lead to leaked trade secrets, including our property listings, our business and results of operations may be materially and adversely affected.
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If we are unable to recruit, train and retain competent real estate personnel or sufficient workforce while controlling our labor costs, our business may be materially and adversely affected.
We will continue to recruit real estate personnel to support business operations and planned business growth. Our future success depends, to a significant extent, on our ability to recruit, train and retain competent personnel, particularly technical, marketing and other operational personnel with experience in the housing transactions and services industry as well as service providers for various value-added services on our platform. For the Lianjia brand we own and operate, we also strive to recruit, train and retain real estate agents. The effective operation of our managerial and operating systems also depends on the quality performance and diligence of our management and employees. Since our industry is characterized by high demand and intense competition for talent and labor as well as high turn-over rate, we can provide no assurance that we will be able to attract or retain staff, agents and managerial talents or other highly skilled employees that we will need to achieve our strategic objectives. Labor costs in mainland China and elsewhere have increased with the global economic development. In addition, our ability to train and integrate new employees into our operations may also be limited and may not meet the demand for our business growth in a timely fashion, or at all, and rapid expansion may impair our ability to maintain our corporate culture. If we are unable to meet our demand for workforce, our business may be materially and adversely affected.
We rely on our employees, real estate brokerage brands and their affiliated agents, real estate developers, financial institutions, and other business partners on our platform to provide quality services to customers. Their illegal actions or misconduct, or any failure by them to provide satisfactory services or maintain their service levels, could materially and adversely affect our business, reputation, financial condition and results of operations.
Real estate agents and certain personnel on our platform are the ultimate providers of the services offered on our platform, and our brands and reputation may be harmed by their actions that are outside our control. We rely on our employees, including Lianjia agents, supporting staff and platform operation staff to provide housing transactions and services. Notwithstanding the strictly enforced service protocols, our employees, especially our agents, may not fully comply with our protocols and relevant laws or regulations, and may engage in misconduct or illegal actions, which may result in negative publicity and adversely impact our reputation and brand image.
We rely upon connected agents to serve some of our housing customers. Although we have established comprehensive service protocols for agents on our platform and maintain rigorous governance mechanisms, we may not be able to exercise the same level of control over the conduct of connected brokerage brands and their agents as we would as if we owned them or they were our employees. In the event of any unsatisfactory performance, lack of certain qualifications or licenses, misconduct, inappropriate service performances for illegal purpose, or other illegal actions, such as dishonesty, personal torts or extortion, by connected real estate brokerage brands and their agents, the disputes resulted from such actions may involve us and we may suffer reputational and financial damage and incur liabilities and even administrative penalties. For example, if connected agents provide inaccurate information to housing customers on our platform, who submit complaints to regulatory agencies, we may be involved as a related party in such disputes. Such misconduct by real estate agents is subject to an increasing level of scrutiny by the regulatory authorities who would publicize such misconduct, which could damage our overall reputation, disrupt our ability to attract new customers or retain our current customers and diminish the value of our brand. Although we hold a deposit from each real estate brokerage store on our platform to cover potential financial damage, to the extent that the amount of financial damage incurred in such disputes exceeds the amount of deposit, our financial condition may be materially and adversely affected.
In addition to the services provided by real estate agents on our platform, we also rely on a large number of business partners on our platform and ecosystem, such as real estate developers to provide quality services related to new home transactions, financial institutions to provide effective and affordable financial solutions to housing customers, and home renovation companies to perform satisfactory work. To the extent they are unable to provide satisfactory services to housing customers and real estate agents, or they engage in any inappropriate or illegal actions, which may be due to factors that are beyond our control, we may suffer actual or reputational damage as a result. In particular, the real estate developers we cooperate with may breach the contracts with housing customers or violate laws and regulations, which may expose us to potential legal liabilities and subject us to housing customers’ claims for indemnifications and other remedies. Any of the failure to provide satisfactory services, potential misconduct or illegal actions discussed above could materially and adversely impact our business, reputation, financial condition and results of operations.
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Our business is sensitive to economic conditions. A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business, financial condition and operating results.
COVID-19 had a severe and negative impact on the Chinese and the global economy. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Our business may continue to be materially and adversely affected by the effects of the COVID-19 pandemic in China.” Meanwhile, the global macroeconomic environment is also facing other challenges, including the end of quantitative easing, interest rate increases, and reduction in bond holdings by the U.S. Federal Reserve, the conflicts in Ukraine, sanctions on Russia and the resulting economic turbulences, the economic slowdown in the Eurozone since 2014, uncertainties over the impact of Brexit, and the ongoing global trade disputes and tariffs. The growth of the Chinese economy has slowed down since 2012 compared to the previous decade and the trend may continue. According to the National Bureau of Statistics of China, China’s gross domestic product (GDP) growth was 8.1% in 2021 and 3.0% in 2022. There is considerable uncertainty over the long-term effects of the 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. In addition, there have also been concerns about the relationship between China and the United States, resulted from the current trade tension between the two countries. It is unclear whether these challenges and uncertainties will be contained or resolved and what effects they may have on the global political and economic conditions in the long term. 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 prolonged slowdown in the global or Chinese economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs. Our customers and business partners may reduce or delay spending with us, while we may have difficulty expanding our customer base and cooperative network fast enough, or at all, or to offset the impact of decreased spending by our existing customers and business partners.
Strategic alliances, investments or acquisitions may have a material and adverse effect on our business, reputation, results of operations and financial condition.
We have in the past and may continue to invest in or acquire assets, technologies and businesses that are complementary to our existing business, such as our investments in other national real estate brokerage companies and strategic acquisitions of real estate brokerage brands and Shengdu in the past. Our investments or acquisitions may involve significant risks and may not yield the results we expect. Challenges and risks associated with strategic alliances, investments or acquisitions include:
● | Investments and acquisitions could result in the use of substantial amounts of cash and, potentially dilutive issuances of equity securities. For instance, we acquired Shengdu for an aggregate consideration of RMB3.92 billion in cash and 44,315,854 of our Class A ordinary shares in equity, and the issuance of new securities had a dilutive effect on our existing shareholders. In addition, investments and acquisitions could involve, significant amortization expenses related to goodwill or intangible assets and exposure to potential unknown liabilities of the acquired business. If such goodwill or intangible assets become impaired, we may be required to record a significant decrease to our results of operations; |
● | Investments and acquisitions may require our management team to devote a significant amount of attention in implementation or remediation of controls, procedures and policies at the invested or acquired companies; |
● | The cost of identifying and consummating investments and acquisitions and integrating the acquired businesses into ours may be significant, and the integration of acquired businesses may be difficult or become disruptive to our existing business operations; |
● | We may also have to obtain approval from the relevant PRC governmental authorities or complete certain administrative procedures for the investments and acquisitions and comply with any applicable PRC rules and regulations, which may be costly; |
● | Actual or alleged misconduct or non-compliance by any company we acquire or invest in (or by its affiliates) that occurred may lead to negative publicity, government inquiry or investigations against such company or against us; |
● | Investments and acquisitions may raise regulatory concerns in relation to the anti-monopoly and competition laws, rules and regulations of China; |
● | Unexpected situations in the area where we conduct investments or acquisitions, such as local protectionism, may impede the closing of our investments or acquisitions and the proper functioning of the invested business; |
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● | Our financial conditions and results of operations |
● | In the case of foreign acquisitions, we face difficulties and
|
● | We may fail to retain and integrate qualified employees of the invested or acquired companies. |
In the event that our investments and acquisitions are not successful, our results of operations and financial condition may be materially and adversely affected.
Our failure to protect our intellectual property rights may undermine our competitive position, and external infringements of our intellectual property rights may adversely affect our business.
Our success and ability to compete depends in part on our intellectual property. We primarily rely on a combination of patent, trademark, trade secret, and copyright laws, as well as confidentiality procedures and contractual restrictions with our employees, contractors and others to establish and protect our intellectual property rights. However, confidentiality and license arrangements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. The steps we take to protect our intellectual property rights may be inadequate or we may be unable to secure intellectual property protection for some of our properties. Infringement of intellectual property rights continues to pose a serious risk of doing business.
We have filed, and may in the future file, patent applications on certain of our innovations. It is possible, however, that these innovations may not be patentable. In addition, given the cost, effort and risks associated with patent application, we may choose not to seek patent protection for some innovations. Furthermore, our patent applications may not lead to granted patents, the scope of the protection gained may be insufficient or an issued patent may be deemed invalid or unenforceable. In addition, we have filed, and may continue to file, applications on certain of our trademarks, which may not always be approved on a timely basis, or at all. We also cannot guarantee that any of our present or future patents, trademarks or other intellectual property rights will not lapse or be invalidated, circumvented, challenged, or abandoned.
If we are unable to protect our intellectual property, our competitors could use our intellectual property to market offerings similar to ours and our ability to compete effectively would be impaired. Moreover, others may independently develop technologies that are competitive to ours or infringe on our intellectual property. The enforcement of our intellectual property rights depends on our legal actions against these infringers being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed. In addition, defending our intellectual property rights might entail significant expense and diversion of management resources. Any of our intellectual property rights may be challenged by others or invalidated through administrative processes or litigations. We cannot provide assurance that we will prevail in such litigations, and, even if we do prevail, we may not obtain a meaningful relief. Accordingly, despite our efforts, we may be unable to prevent external parties from infringing or misappropriating our intellectual property. Any intellectual property that we own may not provide us with competitive advantages or may be successfully challenged by external parties.
We have been and may be subject to intellectual property infringement claims or other allegations, which may materially and adversely affect our business, financial condition and prospects.
We cannot be certain that our services and information provided on our website, operating and technology systems, Weixin Mini Programs and public accounts and mobile apps do not or will not infringe patents, copyrights, trademarks or other intellectual property rights held by external parties. From time to time, we may be subject to legal proceedings and claims alleging infringement of patents, trademarks, copyrights or other intellectual property rights, or misappropriation of creative ideas or formats, or other infringement of proprietary intellectual property rights.
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In addition, we allow our agents on the platform to upload listings to our mobile apps and websites, which may include images or other detailed information of houses. However, a small portion of such content posted on our mobile apps and websites may expose us to allegations by third parties regarding, among other things, infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of third-party rights. Our failure to identify unauthorized content posted on our mobile apps and websites may subject us to claims of infringement of third-party intellectual property rights or other rights, defending of which may impose a significant burden on our management and employees, and there can be no assurance that we will obtain final outcomes that are favorable to us.
The validity, enforceability and scope of intellectual property rights protection in internet-related industries, particularly in China, are uncertain and still evolving. For example, as we face increasing competition and as litigation is more frequently used to resolve disputes in China, we face a higher risk of being the subject of intellectual property infringement claims. Pursuant to relevant laws and regulations, internet service providers may be held liable for damages if such providers have reason to know that content infringes the copyrights of others. In cases involving the unauthorized posting of copyrighted content by users on websites in China, there have been court proceedings but no settled court practice as to when and how hosting providers and administrators of a website can be held liable for the unauthorized posting by external parties of copyrighted material. Any such proceeding could result in significant costs to us and divert our management’s time and attention from the operation of our business, as well as potentially adversely impact our reputation, even if we are ultimately absolved of all liability.
We face competition from other industry players. We may lose market share and customers if we fail to compete effectively.
The housing related industry in China is rapidly evolving and increasingly competitive. Although we believe no other industry player in China operates under the integrated platform business model similar to ours, we face competition from players in different segments of the housing transactions and services industry. We face competition with other online platform for housing transactions, property listings or traffic, and our housing database might be exposed to fierce competition. We may also face intense competition from other housing transaction companies for their agent networks. For our new home sales business, we also compete with other new home sales channels. In addition to these platforms and companies at the national level, we compete with offline traditional real estate brokerage stores and brands for real estate agents and housing customers locally. We also compete with other companies for housing related services, such as other providers of home renovation and furnishing services and rental property management services.
Increasing competition in the housing transactions and services industry would lead to declining market share and commission rate, make it more difficult for us to retain and attract real estate brokerage brands and agents, business partners and customers, or force us to increase irrational sales and marketing expenses, any of which could harm our financial condition and results of operations. We cannot assure you that we will be able to compete successfully against current or future competitors, and competitive pressures may have a material and adverse effect on our business, financial condition and results of operations.
The businesses of Ziroom, one of our related parties, involve, among other things, the leasing solutions and property-related services offered to property owners with respect to dispersed and centralized assets. Those businesses of Ziroom may potentially compete with our rental property management services, including Carefree Rent, which were developed at scale by us in the second half of 2022. However, in view of a number of factors, including, among other things, the differences in target customer clusters, rental products and principal business focuses between the businesses operated by Ziroom and us, as well as the corporate governance measures put in place by us, including the fiduciary duties of a director, the separate and independent management teams over the relevant businesses and measures adopted to resolve situations where a director may have a conflict of interest, we are of the view that there is no material competition between the businesses operated Ziroom and us. However, we cannot assure you that the competition between Ziroom and us will not become more intense. If such competition becomes more intense in the future, our business, financial condition and results of operations may be materially and adversely impacted.
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Tencent provides services to us in connection with various aspects of our operations. If such services become limited, restricted, curtailed, less effective or more expensive or become unavailable to us for any reason, our business may be materially and adversely affected.
We collaborate with Tencent, one of our principal shareholders and a leading internet service provider in China that provides communication and social, digital content, online advertising, fintech, cloud and other business services. We have entered into a business cooperation agreement with Tencent to cooperate in a number of areas, including customer access to our platform via Tencent’s social platforms, advertising and cloud services. We also entered into a cloud services and technical services framework agreement with Tencent, pursuant to which Tencent agreed to provide us with certain cloud and technical services. If services provided by Tencent to us become limited, compromised, restricted, curtailed, less effective, more expensive, or unavailable to us for any reason, including the availability of our Weixin Mini Programs, customer access to our platform via Weixin and the provision of cloud and other business services, our business may be materially and adversely affected.
We derive a substantial portion of our revenues from China’s major cities, in particular, Beijing and Shanghai, and we face market risk due to our concentration in these major urban areas.
Beijing and Shanghai are the two largest residential real estate markets in China. In 2020, 2021 and 2022, 32.0%, 33.2% and 31.9%, respectively, of our net revenues were generated from these two markets on a combined basis. We expect these two urban centers to continue to be the important sources of revenues in all of our revenue categories. Our business had been adversely affected by the travel restrictions adopted in response to the resurgences of COVID-19, including those restrictions in Shanghai from March to June 2022. If we fail to maintain our competitive positions in either of the two major urban areas, or if either of them encounters events which negatively impact the residential real estate industry or online platform business, such as a serious economic downturn or contraction, a natural disaster, or a decline in housing price or price control due to governmental policies or otherwise, demand for our products and services could significantly decline and our net revenues and profitability could be materially and adversely impacted.
Any unexpected material deterioration in the business and financial results of Lianjia may materially adversely affect our financial condition and results of operations.
Being the brand that we own and operate directly, Lianjia is also the leading real estate brokerage brand on our platform in terms of revenue. Thus far, Lianjia has accounted for a significant portion of our revenue. Accordingly, our revenues, financial condition or results of operations may be materially affected by fluctuations in the business of Lianjia. If Lianjia fails to continue to efficiently serve the needs of our housing customers and if other brands on our platform are unable to compensate the gap, or if any unexpected deterioration of the business and financial results of Lianjia occurs, our business, results of operations, financial condition and prospects will be materially and adversely affected.
We have granted and expect to continue to grant share-based awards in the future under our share incentive plans, which may result in increased share-based compensation expenses.
We adopted (i) a Pre-IPO Share Option Scheme in 2018, or the 2018 Share Option Plan, (ii) a 2020 Global Share Incentive Plan, as amended in April 2022 and effective in May 2022, or the 2020 Share Incentive Plan, and (iii) a 2022 Global Share Incentive Plan, or the 2022 Share Incentive Plan, to provide additional incentives to employees, directors and consultants. The maximum aggregate number of ordinary shares which may be issued under the 2018 Share Option Plan is 350,225,435. No options were or will be granted after our Hong Kong Listing in May 2022. The maximum aggregate number of ordinary shares which may be issued under the 2020 Share Incentive Plan is amended to 253,246,913 upon our Hong Kong Listing, excluding a total of 43,407,213 restricted share units representing the same number of Class A ordinary shares granted before. The maximum aggregate number of ordinary shares which may be issued under the 2022 Share Incentive Plan is 125,692,439, all of which were granted in the form of restricted shares. See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plans.” We have granted share-based awards and recorded RMB2,253 million, RMB1,538 million and RMB2,425 million (US$352 million) in 2020, 2021 and 2022, respectively, in share-based compensation expenses in relation to such share-based award grants. We also expect to continue to grant awards under our share incentive plans, which we believe is of significant importance to our ability to attract and retain key personnel and employees. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our financial condition and results of operations.
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If other companies copy property listings from our mobile apps and websites and publish or aggregate them for their own benefit, attractiveness of our platform may decline.
There is no assurance that other companies would not copy property listings or other information from our mobile apps, websites and Weixin Mini Programs, through website scraping, robots or other means, and publish or aggregate it with other information for their own benefit. When external parties engage in such conducts, housing customers may be misguided and driven away from our platform and complete their transactions somewhere else, which could materially and adversely affect our business and results of operations. We may fail to detect such anti-competitive conduct in a timely manner and, even if we could, we may find it costly to be fixed or not be able to prohibit it.
We have in the past been subject to legal and regulatory proceedings and administrative investigations and may continue to be subject to these proceedings and investigations from time to time. If the outcome of these proceedings or investigations is adverse to us, it could have a material adverse effect on our business, reputation, results of operations and financial condition.
We have been, and may from time to time in the future be, subject to various legal and regulatory proceedings arising in the ordinary course of our business. Claims and complaints arising out of actual or alleged violations of laws and regulations could be asserted against us by real estate developers and other business partners, agents, customers, our competitors, or governmental entities in administrative, civil or criminal investigations and proceedings or by other entities.
As we entered into contractual relationship with various real estate developers, brokerage brands and stores and customers, we have been and may be involved in disputes and legal or administrative proceedings in the ordinary course of our business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” We may also be involved and assume joint liability when we provide services to business partners on our platform who are named as defendants by customers due to various reasons including contract violations, lack of licenses or qualifications, lack of cash liquidity and bankruptcy of such business partners.
We have been and may continue to be subject to formal and informal inquiries, investigations and inspections from government authorities and regulators regarding our compliance with laws and regulations, many of which are evolving and subject to interpretation, which may vary in different regions in China. Most of these administrative actions may be routine in nature and carried out as part of the market monitoring and supervision functions of the regulatory authorities, but some of them may be triggered by our industry position in housing transactions and services industry or by complaints from third parties or customers. Especially, our industry position in housing transactions and services industry and our approach to expand our businesses through an online platform may draw heightened scrutiny from the regulatory authorities or cause to be paid close attention to our business operation.
The above-mentioned inquiries, inspections, investigations, claims and complaints can be initiated or asserted under or on the basis of a variety of laws and regulations in different jurisdictions, including real estate laws, advertising laws, value-added telecommunication services laws, home renovation service-related laws, intellectual property laws, unfair competition laws, anti-monopoly laws, data protection and privacy laws, labor and employment laws, securities laws, cybersecurity laws, finance services laws, work safety laws, tort laws, contract laws, property laws and customer protection laws. There is no guarantee that we will be successful in defending ourselves in legal and administrative actions or in asserting our rights under various laws. If we fail to defend ourselves in these actions, we may be subject to restrictions, fines or penalties that will materially and adversely affect our operations. Even if we are successful in our attempt to defend ourselves in legal and regulatory actions or to assert our rights under various laws and regulations, the process of communicating with relevant regulators, defending ourselves and enforcing our rights against the various parties involved may be expensive, time-consuming and ultimately futile. These actions could expose us to negative publicity, substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including but not limited to suspension or revocation of licenses to conduct business.
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We are subject to FCPA and other anti-corruption laws, trade sanction laws and export control laws, violation of which could adversely affect our reputation, business, prospects, operating results and financial condition.
We are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S. regulations such as the Foreign Corrupt Practices Act, or the FCPA, and other anti-corruption laws which generally prohibit companies listed in the U.S., their employees, and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business and which generally require companies to keep accurate books and records in reasonable detail. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions and other penalties. It may be difficult to fully control and oversee the conduct of contractors, business partners, representatives, third-party agents or our employees, including real estate agents on our platform, potentially exposing us to greater risk from their actions. If the aforesaid individuals or entities fail to comply with applicable laws or company policies governing our operations, we or our employees may face legal proceedings and actions which could result in civil penalties, administration actions and criminal sanctions. Any determination or publication that we or our employees have violated any anti-corruption laws or that our books and records are not sufficiently detailed or accurate could harm our reputation and have an adverse impact on our business and financial condition.
In addition, any changes in trade sanctions laws or export control laws may also restrict our business practices. Violations of these laws and regulations could result in significant fines, civil, criminal or administrative sanctions against us, our directors and officers or our employees, requirements to obtain export licenses, disgorgement of profits, prohibitions on the conduct of our business and our inability to market our services. Any changes to or violations of such laws could materially damage our reputation, brand, expansion efforts, ability to attract and retain customers and agents as well as our business, prospects, operating results and financial condition.
We may not be able to maintain our culture, which has been a key to our success.
Our culture, implicated in our grand vision and mission, is important to us, and we believe it has been critical to our success. We may have difficulties maintaining our culture or adapting it sufficiently to meet the needs of our future and evolving operations as we continue to grow, in particular as we have become a public company with the attendant changes in policies, practices, corporate governance and management requirements. Failure to maintain our culture could have a material and adverse effect on our business, results of operations, financial condition and prospects.
Our expansion into new service and product categories and businesses may expose us to new challenges and more risks.
Although we have been successful in expanding into new service and product categories and businesses, such as establishing our platform business, we cannot assure you that we will be able to continue our success in our expansion into new service and product categories and businesses in the future. For example, we are cooperating with more real estate developers for new home sales on our platform and we are expanding into adjacent opportunities such as home renovation and furnishing. Meanwhile, we are leveraging our technological capabilities to offer functions such as VR property showing. In recent years, we launched our home renovation and furnishing services through Beiwoo in 2020 and expanded such services through acquisition of Shengdu which closed in 2022. We also launched our home rental services including our decentralized rental property management services, Carefree Rent. Our lack of experience with these new service and product categories may adversely affect our prospects and our ability to compete with the existing market players in any of these service and product categories. Moreover, the expansion into new businesses may disrupt our ongoing business, distract our management and employees and increase our expenses to cover unforeseen or hidden liabilities or costs. We may also face challenges in achieving the expected benefits of synergies and growth opportunities in connection with these new service categories and businesses. Besides, we may be subject to additional compliance requirements for these new service and product categories and businesses. Failure to expand successfully may also diminish investor confidence in our decision-making and execution capabilities, which could materially and adversely affect our business, results of operations, financial condition and prospects.
If our expansion into new geographical areas is not successful, our business and prospects may be materially and adversely affected.
We have a track record of successfully expanding into new geographical areas. We cannot assure you, however, that we will be able to maintain this momentum in the future. As the conditions of the housing markets in any new local markets may vary significantly from where we currently operate our platform, expansion into new geographical areas involves new risks and challenges. Our lack of familiarity with, and relevant housing data relating to, these geographical areas may make it more difficult for us to keep pace with the evolving market conditions. In addition, there may be one or more existing market leaders in any geographical area that we decide to expand into. If we fail to cooperate with them, such companies may be able to compete more effectively than us by leveraging their experience in doing business in that market as well as their familiarity with the local customers.
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Regulatory uncertainties related to financial services in China could harm our business, financial condition and results of operation.
Our financial services may be subject to a variety of PRC laws and regulations governing financial services. The application and interpretation of these laws and regulations are ambiguous and evolving and may be interpreted and applied inconsistently between different government authorities or in different market environments. In particular, the PRC government’s regulatory framework governing the new and evolving online finance market and its ancillary services, which concerns the transactions that our platform facilitates between our customers and external financial institutions, the cooperation between us and financial institutions and other housing related financial services we provide, is evolving and is subject to further change, interpretation and uncertainties of local enforcement practice at this stage. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Financing.”
For example, pursuant to the Supplementary Provisions on Supervision and Administration of Financing Guarantee Companies, or the CBIRC Circular 37, which were issued in October 2019 and amended in June 2021,to further clarify that residential real estate guarantee companies shall be regulated under the financing guarantee regulations and shall acquire a financing guarantee business license before June 2020. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Financing—Regulations Related to Financing Guarantee.” As we offer guarantee services through guarantee companies under Beike Financial, we are subject to the CBIRC Circular 37 and other regulations related to financing guarantee companies. Beijing Zhongrongxin Financing Guarantee Limited Co., Ltd., a subsidiary of Yiju Taihe, and Shenzhen Beike Financing Guarantee Limited Co., Ltd., one of our PRC subsidiaries, have obtained the license for financing guarantee business. However, as the interpretation and implementation of laws and regulations on financing guarantee are uncertain and still evolving, we cannot assure you that our financing guarantee business do not and will not violate relevant laws and regulations in China.
As of the date of this annual report, we have not been subject to any material fines or other penalties under any PRC laws or regulations on our financial services. The PRC government may adopt a stringent regulatory framework for the online and mobile or even offline finance market in the future and impose specific requirements (including licensing requirements) on market participants, or enhance the implementation of existing laws and regulations. If our financial services or practice are deemed to have violated any existing or future laws and regulations, we may face injunctions, including orders to rectify or cease activities, and may be subject to other penalties as determined by the relevant government authorities. Furthermore, we may be ordered to adjust our finance services to meet the new requirements under the relevant laws, rules and regulations, which may require considerable resources and time, and could significantly affect the operation of our business.
If we fail to adopt new technologies or adapt our mobile apps, websites and systems to changing user requirements or emerging industry standards, our business may be materially and adversely affected.
We must continue to enhance and improve the functionality, effectiveness and features of our websites, mobile apps and Weixin Mini Programs. The internet and online mobile application industry are characterized by rapid technological evolution, changes in customer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license technologies useful in our business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. In recent years, we invested in the development of many new technologies and business initiatives, such as virtual reality, Smart Hardware and Internet-of-Things and big data. The development of websites, mobile apps and other proprietary technologies entails significant technical and business risks. We cannot assure you that we will be able to successfully develop or effectively use new technologies, recoup the costs of developing new technologies or adapt our websites, mobile apps, proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or user preferences, whether for technical, legal, financial or other reasons, our business may be materially and adversely affected.
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Some of our products and services contain open-source software, which may pose a particular risk to our proprietary software, products and services in a manner that negatively affects our business.
We use open-source software in our software and systems and will use open-source software in the future. The licenses applicable to our use of open-source software may require the source code that is developed using open-source software be made available to the public and that any modifications or derivative works to certain open-source software continue to be licensed under open-source licenses. From time to time, we may face claims from external parties claiming infringement of their intellectual property rights, or demanding the release or license of the open-source software or derivative works that we developed using such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open-source license. Our use of open-source software may also present additional security risks because the source code for open-source software is publicly available, which may make it easier for hackers and other parties to determine how to breach our website and systems that rely on open-source software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.
The successful operation of our business depends on the performance and reliability of the internet infrastructure and telecommunications networks in China. Almost all access to the internet in China is maintained through state-owned telecommunications operators under the administrative control and regulatory supervision of the MIIT. Moreover, we primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity. 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 telecommunications networks provided by telecommunications service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. However, we have no control over the costs of the services provided by telecommunications service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. Further, if internet access fees or other charges to internet users increase, our user traffic may decline, and our business may be harmed.
If major mobile application distribution channels change their standard terms and conditions in a manner that is detrimental to us, or suspend or terminate their existing relationship with us, our business, financial condition and results of operations may be materially and adversely affected.
We currently cooperate with Apple’s app store and major Android app stores to distribute our mobile applications to users. As such, the promotion, distribution and operation of our applications are subject to such distribution platforms’ standard terms and policies for application developers, which are subject to the interpretation of, and frequent changes by, these distribution channels. If these third-party distribution platforms change their terms and conditions in a manner that is detrimental to us, or refuse to distribute our applications, or if any other major distribution channel with which we would like to seek collaboration refuses to collaborate with us in the future on commercially favorable terms, our business, financial condition and results of operations may be materially and adversely affected.
Our business depends substantially on the continuing efforts of our directors, executive officers and other key persons. If we lose their services, our business operations and growth prospects may be materially and adversely affected.
Our future success depends substantially on the continuing efforts of our directors, executive officers and key persons. In particular, we rely on the leadership, expertise, experience and vision of our directors and senior management team. If one or more of our directors, executive officers or other key persons were unable or unwilling to continue their services with us, whether due to resignation, accident, health condition, family considerations or any other reason, we might not be able to find their successors, in a timely manner, or at all. Since the housing transactions and services industry is characterized by high demand and intense competition for talent, we cannot assure you that we will be able to attract or retain qualified management or other highly skilled employees.
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We do not have key man insurance for our directors, executive officers or other key persons. If any of our key persons terminate his or her services or otherwise becomes unable to provide continuous services to us, our business may be severely and adversely affected, our financial condition and results of operations may be materially and adversely affected and we may incur additional expenses to recruit, train and retain qualified personnel. Each of our executive officers and key employees has entered into an employment agreement with a non-compete clause with us. However, these agreements may be breached by the counterparties, and there may not be adequate and timely remedies available to us to compensate our losses arising from the breach. We cannot assure you that we would be able to enforce these non-compete clauses. If any of our executive officers or key persons joins a competitor or forms a competing company, we may lose customers, know-hows and key professionals and staff members.
Pandemics and epidemics, natural disasters, terrorist activities, political unrest and other outbreaks could disrupt our production, delivery, and operations, which could materially and adversely affect our business, financial condition and results of operations.
Global pandemics, epidemics in China or elsewhere in the world, or fear of the spread of contagious diseases, such as COVID-19, Middle East respiratory syndrome (MERS), Ebola virus disease, severe acute respiratory syndrome (SARS), H1N1 flu, H7N9 flu and avian flu, as well as hurricanes, earthquakes, tsunamis, or other natural disasters could disrupt our business operations, reduce or restrict the ability of real estate agents to provide services, or incur significant costs to protect our employees and facilities. Actual or threatened wars, terrorist activities, political unrests, civil strife and other geopolitical uncertainty could have a similar adverse effect on our business, financial condition and results of operations.
We rely on certain key operating metrics to evaluate the performance of our business, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We rely on certain key operating metrics, such as GTV, the number of active real estate brokerage stores and agents on our platform, among other things, to evaluate the performance of our business. Our operating metrics may differ from estimates published by third parties or from similarly titled metrics used by other companies due to differences in methodology and assumptions. We calculate these operating metrics using internal company data. There are inherent challenges in measuring such key metrics and company data, and measurement of such metrics and data may be susceptible to delays and technical errors. If we discover material inaccuracies in the operating metrics we use, or if they are perceived to be inaccurate, our reputation may be harmed and our evaluation methods and results may be impaired, which could negatively affect our business. If investors make investment decisions based on operating metrics we disclose that are inaccurate, we may also face potential lawsuits or disputes.
We have limited insurance coverage, which could expose us to significant costs and business disruption.
We maintain various insurance policies to safeguard against risks and unexpected events. However, we do not maintain business interruption insurance or key-man insurance. We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.
Our results of operations are subject to seasonal fluctuations.
Our business is subject to seasonal fluctuations, normally with relatively weaker performance in the first quarter, consistent with the residential real estate industry in general. The first quarter of each calendar year generally contributes the smallest portion of our annual revenue, primarily due to a reduced number of housing transactions completed during the Chinese New Year holiday period in the quarter. Although the seasonality of our business has been disrupted by COVID-19 pandemic and real estate industry policies imposed by the PRC government in 2021 and significantly offset by our expanding scale and service offerings, the seasonality fluctuation may still increase in the future. As a result, our results of operations and the trading price of our Class A ordinary shares or ADSs may fluctuate from time to time due to seasonality.
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Our use of some leased properties for offices and stores could be challenged by external parties or government authorities, which may cause interruptions to our business operations.
Certain lessors of our leased properties for offices and stores have not provided us with their property ownership certificates or any other documentation proving their right to lease those properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their lessors or permits from the relevant government authorities, our leases could be invalidated. If this occurs, we may have to renegotiate the leases with the owners or the parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. We may not have entered into written contracts with our lessors properly for a few of our leased properties in a timely manner and the lessors of such properties may claim to terminate our leases. We may not be able to find alternative properties to lease in a timely and reliable manner, or at all. Some of the leased properties may also be subject to mortgage at the time the leases were entered into. If no consent had been obtained from the mortgage holder under such circumstances, the lease might not be binding on the transferee of the property in the event that the mortgage holder forecloses on the mortgage and transfers the property to another party. In addition, a portion of our leasehold interests in leased properties have not been registered with the relevant PRC governmental authorities as required by PRC law. The relevant PRC governmental authorities may order us to register the lease agreements within a prescribed time limit. Failure to do so may subject us to a fine ranging from RMB1,000 to RMB10,000 for each lease agreement. As of the date of this annual report, we had not been ordered by any PRC governmental authorities to register any lease agreements and we do not expect the failure to register the lease agreements of these properties to be material to our business and results of operations in terms of revenue contribution.
As of the date of this annual report, we are not aware of any material claims or actions being contemplated or initiated by government authorities, property owners or any other third parties with respect to our leasehold interests in or use of such properties. However, we cannot assure you that our use of such leased properties will not be challenged. In the event that our use of properties is successfully challenged, we may be subject to fines and forced to relocate the affected operations. In addition, we may become involved in disputes with the property owners or parties who otherwise have rights to or interests in our leased properties. We can provide no assurance that we will be able to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from external parties’ challenges on our use of such properties. As a result, our business, financial condition and results of operations may be adversely affected.
Enforcement of stricter labor laws and regulations and increases in labor costs in the PRC may materially and adversely affect our business and our profitability.
China’s overall economy and the average wage have increased in recent years and are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers who pay for our services, our profitability and results of operations may be materially and adversely affected. Further, pursuant to the PRC Labor Contract Law, as amended, or the Labor Contract law, and its implementation rules, employers are subject to various requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to affect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.
In addition, under the PRC Social Insurance Law and the Administrative Measures on Housing Provident Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing provident funds, and employers are required, together with their employees or separately, to pay the contributions to social insurance and housing provident funds for their employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. Certain of our PRC subsidiaries and the VIEs and their subsidiaries have failed to make social insurance and housing fund contributions in full for their employees. In addition, certain of our PRC subsidiaries and the VIEs engage third-party human resources agencies to make social insurance and housing fund contributions for some of their employees, and there is no assurance that such third-party agencies make such contributions in full in a timely manner, or at all. If the relevant PRC authorities determine that we shall make up for social insurance and housing fund contributions or that we are subject to fines and legal sanctions in relation to our failure to make social insurance and housing fund contributions in full for our employees, our business, financial condition and results of operations may be adversely affected.
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Furthermore, pursuant to the Labor Contract Law, dispatched labor is only intended to be a supplementary form of employment, the number of which shall not exceed 10% of the employer’s total labor force. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Employment and Social Welfare—Labor Dispatch.” We have historically hired dispatched workers from employment agencies from time to time and the number of dispatched workers may have exceeded 10% the total number of our labor force in the past. Although we aim to not assign dispatched workers on significant tasks, there is no assurance that the assignments performed by them are always temporary and ancillary in nature. We have formulated and implemented a plan to contain the number of dispatched workers and stay compliant. As of the date of this annual report, the number of our dispatched workers does not exceed 10% of the total number of our labor force. However, we cannot assure you that the number of dispatched workers we use will not exceed 10% of the total number of our labor force as we continue to develop and expand our business. If the number of our dispatched workers exceeds 10% of the total labor force in the future, we could be ordered to rectify within a specified period of time, and could be subject to fines if we fail to do so, which could have a material adverse effect to our business, financial condition and results of operations.
We cannot assure you that our employment practices will be deemed to be in compliance with labor-related laws and regulations in China due to interpretation and implementation uncertainties related to the evolving labor laws and regulations, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.
Our online marketing services may constitute internet advertisement, which subjects us to laws, rules and regulations applicable to advertising.
We derive certain amount of our revenues from online marketing services and other related services. In March 2023, the SAMR promulgated the Administrative Measures on Internet Advertising, or the Internet Advertising Measures, which will become effective on May 1, 2023 and replace the Interim Administrative Measures on Internet Advertising promulgated by the SAIC (currently known as the SAMR) in July 2016. Pursuant to the Internet Advertising Measures, internet advertisements are defined as any commercial advertising that directly or indirectly promotes goods or services through internet media in texts, images, audio, video or other forms. Under the Internet Advertising Measures, our online marketing services and other related services may constitute internet advertisement, and we may be therefore subject to additional obligations as an adverting distributor. For example, pursuant to the Internet Advertising Measures, an adverting distributor must examine, verify and record identity information of its advertisers, such as the advertiser’s name, address and contact information, and maintain an updated verification of such information on a regular basis. Moreover, it must examine the supporting documentation provided by the advertisers and adverting operators. Where a special government review is required for specific categories of advertisements before posting, the adverting distributor must confirm that the review has been performed and approval has been obtained, and no edits or changes to the advertisements are allowed unless they are re-approved by the authority. If the content of the advertisement is inconsistent with the supporting documentation, or the supporting documentation is incomplete, the advertisement cannot be published. As for pop-up advertisements, advertising distributors shall clearly indicate the close button for the advertisements, and shall not engage in any activities that may hinder the users from closing the pop-up advertisements with one click, such as lacking the close button, containing a countdown timer for close, providing false or unidentifiable marks for the close button, requiring more than one click to close, and allowing the advertisement to pop up again after it is closed on the same page or file, etc. In addition, the Internet Advertising Measures require paid-for search results to be distinguished from natural search results so that consumers will not be misled as to the nature of these search results. As such, we are obligated to distinguish from others the listings characterized as paid-for search results and the real estate brokerage brands, stores or agents who purchase online marketing and related services or the relevant listings by these brands, stores or agents. Furthermore, the Internet Advertising Measures specify additional compliance requirements for internet advertising businesses. For example, any promotion in the name of knowledge or experience sharing or consumer review but containing links to purchase relevant products and services are also classified as a form of advertisement and thus shall be clearly indicated as “advertisements.” Internet advertisements shall not deceive or mislead users into clicking or viewing the advertisements with false or fabricated system or software update reminders or warnings or offer of rewards. If an advertisement contains any link directing to another advertisement, the advertisers, advertising operators and distributors of primary advertisements are responsible for verifying the advertisement contents to which the link is directed and are relevant to the primary advertisement. Internet distributors shall also establish and maintain an archive for the advertisers and advertisements and keep the record for at least three years after the end of the relevant advertisement.
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Violation of these laws, rules or regulations may result in penalties, including fines up to RMB2 million or of other amount calculated based on the amount of advertising fees, confiscation of advertising fees and orders to cease dissemination of the advertisements. In circumstances involving serious violations, the PRC government may suspend or revoke a violator’s business license or license for operating advertising business. Complying with the abovementioned requirements requires considerable resources and time, and could significantly affect the operation of our business, while at the same time also exposing us to increased liability under the relevant laws, rules and regulations. The costs associated with complying with these laws, rules and regulations, including any penalties or fines for our failure to so comply if required, could have a material adverse effect on our business, financial condition and results of operations.
If we fail to maintain an effective system of internal control over financial reporting, we may lose investor confidence in the reliability of our financial statements.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on the company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of its internal control over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal control over financial reporting.
Our management has concluded that our internal control over financial reporting was effective as of December 31, 2022. See “Item 15. Controls and Procedures.” Our independent registered public accounting firm has issued an audit report, which has concluded that our internal control over financial reporting was effective in all material aspects as of December 31, 2022. However, if we fail to maintain an effective system of internal control over financial reporting in the future, our management and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in turn result in loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our Class A ordinary shares or the ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchanges on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements for prior periods. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs, management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements.
We may need additional capital, and we may be unable to obtain such capital in a timely manner or on acceptable terms, or at all.
Growing and operating our business will require significant cash investments, capital expenditures and commitments to respond to business challenges, including developing or enhancing new or existing services and technologies and expanding our infrastructure. If cash on hand, cash generated from operations, and the net proceeds from our initial public offering in the United States in August 2020 and our public offering of ADSs in November 2020 are not sufficient to meet our cash and liquidity needs, we may need to seek additional capital, potentially through debt or equity financings. We may not be able to raise required cash on terms acceptable to us, or at all. Such financings may be on terms that are dilutive or potentially dilutive to our shareholders, and the prices at which new investors would be willing to purchase our securities may be lower than the current market price per share of our ordinary shares. The holders of new securities may also have rights, preferences, or privileges that are senior to those of existing stockholders. If new financing sources are required, but are insufficient or unavailable, we may need to modify our growth and operating plans and business strategies based on available funding, if any, which would harm our ability to grow our business.
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The fair value measurements of short-term and long-term investments inherently involves a certain degree of uncertainty, and such investments may incur fair value losses.
From time to time, we purchase short-term investments, which mainly include bank time deposits, investments in wealth management products issued by financial institutions and held-to-maturity investments issued by financial institutions, and long-term investments, which primarily include long-term time deposits, investments accounted for at fair values (such as long-term wealth management products and equity securities in publicly-listed companies) and available-for-sale debt investments. The methodologies that we use to assess the fair value of the short-term and long-term investments involve a significant degree of management judgment and are inherently uncertain. In addition, we are exposed to credit risks in relation to our short-term and long-term investments, which may adversely affect the net changes in their fair value. As of December 31, 2020, 2021 and 2022, we had short-term investments of RMB15.7 billion, RMB29.4 billion and RMB35.5 billion (US$5.1 billion), and long-term investments of RMB3.1 billion, RMB17.0 billion and RMB17.9 billion (US$2.6 billion), respectively. The impairment recorded for equity method investments was RMB26.7 million, RMB2.9 million and nil in 2020, 2021 and 2022, respectively. The impairment recorded for equity investments accounted for using measurement alternative was RMB9.0 million, RMB183.8 million and RMB591.9 million (US$85.8 million) in 2020, 2021 and 2022, respectively.
Impairment loss charged against our goodwill, intangible assets and other long-lived assets could materially and adversely affect us.
We may need to provide impairment losses for our goodwill, intangible assets, and other long-lived assets. Goodwill is not depreciated or amortized but is tested for impairment on an annual basis and between annual tests when an event occurs, or circumstances change that could indicate that the asset might be impaired. In accordance with the FASB, a company first has the option to assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. If we decide, as a result of our qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount of each reporting unit exceeds its fair value, an impairment loss equal to the difference will be recorded. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. We perform goodwill impairment testing at the reporting unit level on December 31 annually, and between annual tests whenever a triggering event occurs. Impairment charges of goodwill, intangible assets and other long-lived assets recognized for the years ended December 31, 2020, 2021 and 2022 were RMB236.1 million, RMB746.7 million and RMB148.1 million (US$21.5 million), respectively. If we incur significant impairment charges of goodwill, intangible assets, and other long-lived assets in the future, our results of operations may be materially and adversely affected.
We are subject to risks associated with contract liabilities.
We had contract liabilities of RMB734 million, RMB1,102 million and RMB3,260 million (US$473 million) as of December 31, 2020, 2021 and 2022, respectively. Contract liabilities are recognized if we receive consideration in advance of performance, which is mainly in relation to the existing home transaction services, new home transaction services, home renovation and furnishing services and emerging and other services. If for any reason we were to become unable to fulfill a large amount of these contract liabilities, we would have to refund the payments we received, which could materially and adversely affect our financial condition and liquidity position, and our brand image, reputation, and relationship with our platform participants might be damaged.
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If we fail to adopt new technologies or adapt our mobile apps, websites and systems to changing user requirements or emerging industry standards, our business may be materially and adversely affected.
We must continue to enhance and improve the functionality, effectiveness and features of our websites, mobile apps and Weixin mini program. The internet and online mobile application industry are characterized by rapid technological evolution, changes in customer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license technologies useful in our business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. In recent years, we invested in the development of many new technologies and business initiatives, such as virtual reality, Smart Hardware and Internet-of-Things and big data. The development of websites, mobile apps and other proprietary technologies entails significant technical and business risks. We cannot assure you that we will be able to successfully develop or effectively use new technologies, recoup the costs of developing new technologies or adapt our websites, mobile apps, proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or user preferences, whether for technical, legal, financial or other reasons, our business may be materially and adversely affected.
Some of our products and services contain open source software, which may pose a particular risk to our proprietary software, products and services in a manner that negatively affects our business.
We use open source software in our software and systems and will use open source software in the future. The licenses applicable to our use of open source software may require the source code that is developed using open source software be made available to the public and that any modifications or derivative works to certain open source software continue to be licensed under open source licenses. From time to time, we may face claims from external parties claiming infringement of their intellectual property rights, or demanding the release or license of the open source software or derivative works that we developed using such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other parties to determine how to breach our website and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.
The successful operation of our business depends on the performance and reliability of the internet infrastructure and telecommunications networks in China. Almost all access to the internet in China is maintained through state-owned telecommunications operators under the administrative control and regulatory supervision of the MIIT. Moreover, we primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity. 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 telecommunications networks provided by telecommunications service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. However, we have no control over the costs of the services provided by telecommunications service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. Further, if internet access fees or other charges to internet users increase, our user traffic may decline, and our business may be harmed.
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If major mobile application distribution channels change their standard terms and conditions in a manner that is detrimental to us, or suspend or terminate their existing relationship with us, our business, financial condition and results of operations may be materially and adversely affected.
We currently cooperate with Apple’s app store and major Android app stores to distribute our mobile applications to users. As such, the promotion, distribution and operation of our applications are subject to such distribution platforms’ standard terms and policies for application developers, which are subject to the interpretation of, and frequent changes by, these distribution channels. If these third-party distribution platforms change their terms and conditions in a manner that is detrimental to us, or refuse to distribute our applications, or if any other major distribution channel with which we would like to seek collaboration refuses to collaborate with us in the future on commercially favorable terms, our business, financial condition and results of operations may be materially and adversely affected.
Our business depends substantially on the continuing efforts of our directors, executive officers and other key persons. If we lose their services, our business operations and growth prospects may be materially and adversely affected.
Our future success depends substantially on the continuing efforts of our directors, executive officers and key persons. In particular, we rely on the leadership, expertise, experience and vision of our directors and senior management team. If one or more of our directors, executive officers or other key persons were unable or unwilling to continue their services with us, whether due to resignation, accident, health condition, family considerations or any other reason, we might not be able to find their successors, in a timely manner, or at all. Since the housing transactions and services industry is characterized by high demand and intense competition for talent, we cannot assure you that we will be able to attract or retain qualified management or other highly skilled employees.
We do not have key man insurance for our directors, executive officers or other key persons. If any of our key persons terminate his or her services or otherwise becomes unable to provide continuous services to us, our business may be severely and adversely affected, our financial condition and results of operations may be materially and adversely affected and we may incur additional expenses to recruit, train and retain qualified personnel. Each of our executive officers and key employees has entered into an employment agreement with a non-compete clause with us. However, these agreements may be breached by the counterparties, and there may not be adequate and timely remedies available to us to compensate our losses arising from the breach. We cannot assure you that we would be able to enforce these non-compete clauses. If any of our executive officers or key persons joins a competitor or forms a competing company, we may lose customers, know-hows and key professionals and staff members.
Pandemics and epidemics, natural disasters, terrorist activities, political unrest and other outbreaks could disrupt our production, delivery, and operations, which could materially and adversely affect our business, financial condition and results of operations.
Global pandemics, epidemics in China or elsewhere in the world, or fear of the spread of contagious diseases, such as COVID-19, Middle East respiratory syndrome (MERS), Ebola virus disease, severe acute respiratory syndrome (SARS), H1N1 flu, H7N9 flu and avian flu, as well as hurricanes, earthquakes, tsunamis, or other natural disasters could disrupt our business operations, reduce or restrict the ability of real estate agents to provide services, or incur significant costs to protect our employees and facilities. Actual or threatened wars, terrorist activities, political unrests, civil strife and other geopolitical uncertainty could have a similar adverse effect on our business, financial condition and results of operations.
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We rely on certain key operating metrics to evaluate the performance of our business, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We rely on certain key operating metrics, such as GTV, and the number of real estate brokerage stores and agents on our platform among other things, to evaluate the performance of our business. Our operating metrics may differ from estimates published by third parties or from similarly titled metrics used by other companies due to differences in methodology and assumptions. We calculate these operating metrics using internal company data. If we discover material inaccuracies in the operating metrics we use, or if they are perceived to be inaccurate, our reputation may be harmed and our evaluation methods and results may be impaired, which could negatively affect our business. If investors make investment decisions based on operating metrics we disclose that are inaccurate, we may also face potential lawsuits or disputes.
We have limited insurance coverage, which could expose us to significant costs and business disruption.
We maintain various insurance policies to safeguard against risks and unexpected events. However, we do not maintain business interruption insurance or key-man insurance. We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.
Our results of operations are subject to seasonal fluctuations.
Our business is subject to seasonal fluctuations, normally with relatively weaker performance in the first quarter and stronger performance in the second quarter, consistent with the residential real estate industry in general. The first quarter of each calendar year generally contributes the smallest portion of our annual revenue, primarily due to a reduced number of housing transactions completed during the Chinese New Year holiday period in the quarter. Although the seasonality of our business has been significantly offset by our rapid growth, especially in the new home transaction services business, the seasonality fluctuation may increase in the future. As a result, our results of operations and the trading price of our ADSs may fluctuate from time to time due to seasonality.
Our use of some leased properties for offices and stores could be challenged by external parties or government authorities, which may cause interruptions to our business operations.
Certain lessors of our leased properties for offices and stores have not provided us with their property ownership certificates or any other documentation proving their right to lease those properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their lessors or permits from the relevant government authorities, our leases could be invalidated. If this occurs, we may have to renegotiate the leases with the owners or the parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. We may not have entered into written contracts with our lessors properly for a few of our leased properties in a timely manner and the lessors of such properties may claim to terminate our leases. We may not be able to find alternative properties to lease in a timely and reliable manner, or at all. Some of the leased properties may also be subject to mortgage at the time the leases were entered into. If no consent had been obtained from the mortgage holder under such circumstances, the lease might not be binding on the transferee of the property in the event that the mortgage holder forecloses on the mortgage and transfers the property to another party. In addition, a portion of our leasehold interests in leased properties have not been registered with the relevant PRC government authorities as required by PRC law, which may expose us to potential fines if we fail to remediate after receiving any notice from the relevant PRC government authorities.
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As of the date of this annual report, we are not aware of any material claims or actions being contemplated or initiated by government authorities, property owners or any other third parties with respect to our leasehold interests in or use of such properties. However, we cannot assure you that our use of such leased properties will not be challenged. In the event that our use of properties is successfully challenged, we may be subject to fines and forced to relocate the affected operations. In addition, we may become involved in disputes with the property owners or parties who otherwise have rights to or interests in our leased properties. We can provide no assurance that we will be able to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from external parties’ challenges on our use of such properties. As a result, our business, financial condition and results of operations may be adversely affected.
Enforcement of stricter labor laws and regulations and increases in labor costs in the PRC may materially and adversely affect our business and our profitability.
China’s overall economy and the average wage have increased in recent years and are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers who pay for our services, our profitability and results of operations may be materially and adversely affected. Further, pursuant to the PRC Labor Contract Law, as amended, or the Labor Contract law, and its implementation rules, employers are subject to various requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to affect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.
In addition, under the PRC Social Insurance Law and the Administrative Measures on Housing Provident Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing provident funds, and employers are required, together with their employees or separately, to pay the contributions to social insurance and housing provident funds for their employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. Certain of our PRC subsidiaries and consolidated affiliated entities have failed to make social insurance and housing fund contributions in full for their employees. In addition, certain of our PRC subsidiaries and consolidated variable interest entities engage third-party human resources agencies to make social insurance and housing fund contributions for some of their employees, and there is no assurance that such third-party agencies make such contributions in full in a timely manner, or at all. If the relevant PRC authorities determine that we shall make up for social insurance and housing fund contributions or that we are subject to fines and legal sanctions in relation to our failure to make social insurance and housing fund contributions in full for our employees, our business, financial condition and results of operations may be adversely affected.
Furthermore, pursuant to the Labor Contract Law, dispatched labor is only intended to be a supplementary form of employment, the number of which shall not exceed 10% of the employer’s total labor force. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Employment and Social Welfare—Labor Dispatch.” We have historically hired dispatched workers from employment agencies from time to time and the number of dispatched workers may have exceeded 10% the total number of our labor force in the past. Although we aim to not assign dispatched workers on significant tasks, there is no assurance that the assignments performed by them are always temporary and ancillary in nature. We have formulated and implemented a plan to contain the number of dispatched workers and stay compliant. As of the date of this annual report, the number of our dispatched workers does not exceed 10% of the total number of our labor force. However, we cannot assure you that the number of dispatched workers we use will not exceed 10% of the total number of our labor force as we continue to develop and expand our business. If the number of our dispatched workers exceeds 10% of the total labor force in the future, we could be ordered to rectify within a specified period of time, and could be subject to fines if we fail to do so, which could have a material adverse effect to our business, financial condition and results of operations.
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We cannot assure you that our employment practices will be deemed to be in compliance with labor-related laws and regulations in China due to interpretation and implementation uncertainties related to the evolving labor laws and regulations, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.
Our online marketing services may constitute internet advertisement, which subjects us to laws, rules and regulations applicable to advertising.
We derive certain amount of our revenues from online marketing services and other related services. In July 2016, the State Administration for Industry and Commerce (currently known as the SAMR) promulgated the Interim Administrative Measures on Internet Advertising, or the Internet Advertising Measures, effective September 2016, pursuant to which internet advertisements are defined as any commercial advertising that directly or indirectly promotes goods or services through internet media in any form including paid-for search results. Under the Internet Advertising Measures, our online marketing services and other related services may constitute internet advertisement, and we may be therefore subject to additional obligations as an adverting distributor. For example, pursuant to Internet Advertising Measures, an adverting distributor must examine, verify and record identity information of its advertisers, such as the advertiser’s name, address and contact information, and maintain an updated verification of such information on a regular basis. Moreover, it must examine the supporting documentation provided by the advertisers and adverting operators. Where a special government review is required for specific categories of advertisements before posting, the adverting distributor must confirm that the review has been performed and approval has been obtained. If the content of the advertisement is inconsistent with the supporting documentation, or the supporting documentation is incomplete, the advertisement cannot be published. In addition, the Internet Advertising Measures require paid-for search results to be distinguished from natural search results so that consumers will not be misled as to the nature of these search results. As such, we are obligated to distinguish from others the listings characterized as paid-for search results and the real estate brokerage brands, stores or agents who purchase online marketing and related services or the relevant listings by these brands, stores or agents.
Violation of these laws, rules or regulations may result in penalties, including fines, confiscation of advertising fees and orders to cease dissemination of the advertisements. In circumstances involving serious violations, the PRC government may suspend or revoke a violator’s business license or license for operating advertising business. Complying with the abovementioned requirements requires considerable resources and time, and could significantly affect the operation of our business, while at the same time also exposing us to increased liability under the relevant laws, rules and regulations. The costs associated with complying with these laws, rules and regulations, including any penalties or fines for our failure to so comply if required, could have a material adverse effect on our business, financial condition and results of operations.
If we fail to implement and maintain an effective system of internal control over financial reporting, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.
In connection with the audits of our consolidated financial statements as of and for the year ended December 31, 2020, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness identified relates to the lack of sufficient competent financial reporting and accounting personnel with appropriate knowledge and experiences to (i) to establish and implement key controls over period end closing and financial reporting and (ii) to properly prepare and review financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements.
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To remediate the identified material weakness, we have developed and implemented a comprehensive set of period-end financial reporting policies and procedures, especially for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are in compliance with U.S. GAAP and SEC reporting requirements. Furthermore, in late 2020, we have hired additional qualified financial and accounting personnel with working experience with U.S. GAAP and SEC reporting requirements and established an internal audit team to enhance internal controls and assess the design and effectiveness of our internal controls. These measures will require validation and testing of the operating effectiveness of internal controls over a sustained period of financial reporting cycles. In addition, we will continue to implement aforementioned remediation measures and implement regular and continuous U.S. GAAP and SEC financial reporting training programs for our accounting and financial personnel, including conducting inhouse training programs and arranging our financial reporting staff to attend external U.S. GAAP training courses.
Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we establish and maintain internal control over financial reporting and disclosure controls and procedures. An effective internal control environment is necessary to enable us to produce reliable financial reports and is an important component of our efforts to prevent and detect financial reporting errors and fraud. Section 404 requires that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2021. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting for the fiscal year ending December 31, 2021. If we fail to remedy the problems identified above, our management and our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. In addition, as we have become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we or our auditor may identify other deficiencies in our internal control over financial reporting that are deemed to be material weaknesses and render our internal control over financial reporting ineffective. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements for prior periods.
We may need additional capital, and we may be unable to obtain such capital in a timely manner or on acceptable terms, or at all.
Growing and operating our business will require significant cash investments, capital expenditures and commitments to respond to business challenges, including developing or enhancing new or existing services and technologies and expanding our infrastructure. If cash on hand, cash generated from operations, and the net proceeds from our initial public offering and our public offering of ADSs in November 2020 are not sufficient to meet our cash and liquidity needs, we may need to seek additional capital, potentially through debt or equity financings. We may not be able to raise required cash on terms acceptable to us, or at all. Such financings may be on terms that are dilutive or potentially dilutive to our shareholders, and the prices at which new investors would be willing to purchase our securities may be lower than the current market price per share of our ordinary shares. The holders of new securities may also have rights, preferences, or privileges that are senior to those of existing stockholders. If new financing sources are required, but are insufficient or unavailable, we may need to modify our growth and operating plans and business strategies based on available funding, if any, which would harm our ability to grow our business.
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Risks Related to Our Corporate Structure
If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign ownership in entities that provide value-added telecommunication services, including online real estate platform services, is subject to restrictions under current PRC laws and regulations, unless certain exceptions are available. Specifically, foreign ownership of a value-added telecommunication service provider may not exceed 50%, except for the investment in the e-commerce operation business, a domestic multi-party communication business, an information storage and re-transmission business and a call center business, and the major foreign investors are required to have a record of good performance and operating experience in managing value-added telecommunications business. In addition, foreign investment in certain financefinancial services in China is still heavily regulated. For example, there are no detailed regulations on the specific requirements and threshold for the change of a domestic online payment institution into a foreign-invested one, and the approval authority retains considerable discretion in granting the approval of such amendment.
We are a Cayman Islands company, and our PRC subsidiaries are considered foreign-invested enterprises. Accordingly, our PRC subsidiaries are not eligible to provide value-added telecommunication services other internet related business and certain financefinancial services subject to foreign ownership restriction under PRC laws.laws or certain qualification requirements for foreign investors under other applicable PRC laws and regulations. To ensure compliance with the PRC laws and regulations, we conduct our foreign investment-restricted business in China through ourthe VIEs and itstheir subsidiaries, which currently hold the value-added telecommunication business license, the license for online payment services, and other licenses necessary for our operation of such restricted business. Our applicable WFOEs have entered into a series of contractual arrangements with ourthe VIEs and their applicable shareholders, respectively, which enable us to (i) exercise effective control over ourdirect activities of the VIEs that most significantly affect the economic performance of the VIEs; (ii) receive substantially all of the economic benefits of ourfrom the VIEs that could be significant to the VIEs; (iii) have the pledge right over the equity interests in ourthe VIEs as the pledgee; and (iv) have an exclusive option to purchase all or part of the equity interests in ourand assets of the VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of ourthe VIEs and hence consolidate their financial results under U.S. GAAP. See “Item 4. Information on the Company—C. Organizational Structure” for further details.
In the opinion of our PRC legal counsel, Han Kun Law Offices, as of the date of this annual report, (i) the ownership structures of our WFOEs and ourthe VIEs in China are not in violation of provisions of applicable PRC laws and regulations currently in effect; and (ii) each of the agreements under the contractual arrangements betweenamong our WFOEs, ourthe VIEs and their applicable shareholders governed by PRC law areis not in violation of provisions of applicable PRC laws or regulations currently in effect, and valid and binding upon each party to such arrangementsagreements and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect. However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Thus, the PRC governmental authorities may take a view contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structure will be adopted or if adopted, what they would provide. For example, pursuant to the Overseas Listing Regulations and its five supporting guidelines issued by the CSRC on February 17, 2023, domestic companies that seek to offer and list their securities in overseas markets, either in direct or indirect means, are required to file with the CSRC and report relevant information to the CSRC under certain circumstances. At the press conference held for the Overseas Listing Regulations on February 17, 2023, officials from the CSRC clarified that, for companies seeking overseas offering and listing with VIEs and applying to file with the CSRC, the CSRC will solicit opinions from relevant PRC regulatory authorities and complete the filing of the overseas listing of such companies if such companies duly meet the compliance requirements. If we fail to complete the filing with the CSRC in a timely manner or at all for our further capital raising activities which are subject to filing requirements under the Overseas Listing Regulations due to the VIEs, we may be required to unwind the VIEs or adjust our business operations to meet the filing requirements and our ability to raise or utilize funds could be materially and adversely affected. However, as the Overseas Listing Regulations was recently promulgated, it remains uncertain as to its interpretation, application, and enforcement, in particular, for companies with VIE structures, and how they will affect our operations in mainland China and our future capital raising activities. In addition, if we or the VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals to operate our business, the relevant PRC governmental authorities would have broad discretion to take action in dealing with such violations or failures, including:
| revoking the business licenses and/or operating licenses of such entities; |
| imposing fines on us; |
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| confiscating any of our income that they deem to be obtained through illegal operations; |
| discontinuing or placing restrictions or onerous conditions on the operations of |
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| placing restrictions on our right to collect revenues; |
| shutting down our servers or blocking our app/websites; or |
| requiring us to restructure our ownership structure or |
Any of these events could cause significant disruption to our business operations and severely damage our reputation, which would in turn have a material adverse effect on our financial condition and results of operations. If occurrences of any of these events results in our inability to direct the activities of ourthe VIEs and their subsidiaries in China that most significantly impact their economic performance and/or our failure to receive the economic benefits and residual returns from ourthe VIEs, and we are unable to restructure our ownership structure and operations in a satisfactory manner, we may not be able to consolidate the financial results of ourthe VIEs in our consolidated financial statements in accordance with U.S. GAAP.
The Baihui Partnership and its relatedIf the PRC government determines that the contractual arrangements may impact your ability to appoint Executive Directors and nominate the chief executive officerconstituting part of the company,VIE structure do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, our Class A ordinary shares and ADSs may decline in value or become worthless if we are unable to direct activities of or receive economic benefits the interests of the Baihui Partnership may conflict with your interests.
Our fourth amended and restated memorandum and articles of association allows the Baihui Partnership to appoint Executive Directors and nominate and recommend the chief executive officerVIEs, which collectively held 22.2% of our company. Any Executive Director candidate duly nominated bygroup’s cash, cash equivalents and restricted cash and 9.9% of our group’s total assets as of December 31, 2022 and contribute to 0.8% of our net revenues in 2022, excluding inter-group transactions. Our holding company in the Baihui Partnership shall be approvedCayman Islands, the VIEs and appointed by our board of directors and serve as an Executive Directorinvestors of our company until expiry of his or her terms, subject to removal or termination in accordance with our fourth amended and restated memorandum and articles of association. The chief executive officer candidate nominatedface uncertainty about potential future actions by the Baihui Partnership shall stand for appointment byPRC government that could affect the nominating and corporate governance committeeenforceability of the board of directors. Incontractual arrangements with the event that such candidate is not appointed byVIEs and, consequently, significantly affect the nominating and corporate governance committee, the Baihui Partnership may nominate a replacement nominee until the nominating and corporate governance committee appoints such nominee as chief executive officer, or until the nominating and corporate governance committee fails to appoint more than three such candidates nominated by the Baihui Partnership consecutively, after which time the board of directors may then nominate and appoint any person to serve as the chief executive officerfinancial performance of the Company. See “Item 6. Directors, Senior ManagementVIEs and Employees—Baihui Partnership.” This governance structure will limit your ability to influence corporate matters, including the matters determined at the board level.
In addition, the interests of the Baihui Partnership may not coincide with your interests. The partnership committee of the Baihui Partnership may make further determinationsour company as to, among other things, the allocation of the bonus pool among all partners after the total amount of the bonus pool is determined each year by the board of directors, subject to approval of the compensation committee if such allocations are to partners who are executive officers or directors. These allocations may not be entirely aligned with the interest of shareholders who are not partners. Because the partners may be largely comprised of members of our management team, the Baihui Partnership and its Executive Director nominees may focus on the managerial strategies and decisions and operational and financial targets that differ from the expectations and desires of shareholders. To the extent that the interests of the Baihui Partnership differ from your interests on certain matters, you may be disadvantaged.a group.
We rely on contractual arrangements with ourthe VIEs and their shareholders to exercise control over a portiondirect activities of our business,the VIEs that most significantly affect the economic performance of the VIEs and receive economic benefits from the VIEs that could be significant to the VIEs, which may not be as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with ourthe VIEs and their shareholders to conduct a portion of our operations in China, mainly value-added telecommunication services other internet related business and certain financefinancial services. These contractual arrangements, however, may not be as effective as direct ownership in providing us with control over ourthe VIEs. For example, ourthe VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct the operations of ourthe VIEs in an acceptable manner or taking other actions that are detrimental to our interests.
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If we had direct ownership of ourthe VIEs in China, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of ourthe VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by ourthe VIEs and their shareholders of their obligations under the contracts to exercise control over ourdirect activities of the VIEs that most significantly affect the economic performance of the VIEs and receive economic benefits from the VIEs that could be significant to the VIEs. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by ourthe VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on part of our business.”
Any failure by ourthe VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on part of our business.
If ourthe VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. For example, if the shareholders of ourthe VIEs were to refuse to transfer their equity interests in ourthe VIEs to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
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All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could materially and adversely affect us.” Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration if legal action becomes necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over ourdirect activities of the VIEs that most significantly affect the economic performance of the VIEs and receive economic benefits from the VIEs that could be significant to the VIEs, and our ability to conduct the business we currently conduct through the contractual arrangements may be negatively affected.
TheCertain shareholders of ourthe VIEs may have potential conflicts of interest with us, which may materially and adversely affect part of our business.
TheCertain shareholders of ourthe VIEs subject to the contractual arrangements may have actual or potential conflicts of interest with us. These shareholders may breach, or cause ourthe VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and ourthe VIEs, which would have a material and adverse effect on our ability to effectively control ourdirect activities of the VIEs that most significantly affect the economic performance of the VIEs and receive economic benefits from the VIEs that could be significant to the VIEs and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with ourthe VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
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Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that weWe may invoke the right under the equity pledge agreements with the shareholders of the VIEs to enforce the equity pledge in the case of any shareholder’s breach of the contractual arrangements. For individuals who are also our directors and officers, we rely on them to abide by the laws of the Cayman Islands, which provide that directors and officers owe a fiduciary duty to the company that requires them to act in good faith and in what they believe to be the best interests of the company and not to use their position for personal gains. TheCertain shareholders of ourthe VIEs have executed powers of attorney to appoint one of our WFOEs or a person designated by one of our WFOEsthe respective WFOE to vote on their behalf and exercise voting rights as shareholders of ourthe VIEs. If we cannot resolve any conflict of interest or dispute between us and the shareholders of ourthe VIEs with these contractual arrangements, we would have to rely on legal proceedings, which could result in disruption of part of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
The shareholders of ourthe VIEs may be involved in personal disputes with third parties or other incidents that may have an adverse effect on their respective equity interests in ourthe VIEs and the validity or enforceability of our contractual arrangements with ourthe VIEs and their shareholders. For example, in the event that any of the individual shareholders of ourthe VIEs divorces his or her spouse, the spouse may claim that the equity interest of the VIEs held by such shareholder is part of their community property and should be divided between such shareholder and the spouse. If such claim is supported by the court, the relevant equity interest may be obtained by the shareholder’s spouse or another third party who is not subject to obligations under our contractual arrangements, which could result in a loss of the effective control overability to direct activities of the VIEs by us.that most significantly affect the economic performance of the VIEs and receive economic benefits from the VIEs that could be significant to the VIEs. Similarly, if any of the equity interests of ourthe VIEs is inherited by a third party with whom the current contractual arrangements are not binding, we could lose our control over the VIEs or have to maintain such control by incurring unpredictable costs, which could cause significant disruption to part of our business and operations and harm our financial condition and results of operations.
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Contractual arrangements we have entered into with ourthe VIEs may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could negatively affect our financial condition and the value of your investment.
Under applicable 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 in relation to ourthe VIEs were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust income of ourthe VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by ourthe VIEs for PRC tax purposes, which could in turn increase their tax liabilities without reducing our PRC subsidiaries’ tax expenses. In addition, the PRC tax authorities may impose late payment fees and other administrative sanctions on ourthe VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if ourthe VIEs’ tax liabilities increase or if they are required to pay late payment fees and other penalties.
We may lose the ability to use and benefit from assets held by ourthe VIEs that are material or supplementary to the operation of our business if either of ourthe VIEs goes bankrupt or becomes subject to dissolution or liquidation proceeding.
As part of our contractual arrangements with ourthe VIEs, these entities may in the future hold certain assets that are material or supplementary to the operation of our business. If either of ourthe VIEs goes bankrupt and all or part of its assets become subject to liens or rights of creditors, we may be unable to continue some or all of our business activities we currently conduct through the contractual arrangement, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, ourthe VIEs may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If either of ourthe VIEs undergoes voluntary or involuntary liquidation proceeding, unrelated creditors may claim rights to some or all of these assets, thereby hindering our ability to operate part of our business, which could materially and adversely affect our business, financial condition and results of operations.
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Substantial uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and operations.
The value-added telecommunications services and certain financial services that we conduct through ourthe VIEs and their subsidiaries are either subject to foreign investment restrictions set forth in the Special Management Measures (Negative List) for the Access of Foreign Investment (2021 Version) issued by the Ministry of Commerce and the NDRC, effective July 2020.
January 1, 2022, or certain qualification requirements for foreign investors under other applicable PRC laws and regulations.
On March 15, 2019, the National People’s Congress promulgated the PRC Foreign Investment Law, or the Foreign Investment Law, (2019), which became effective on January 1, 2020 and replaced the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Owned Enterprise Law to become the legal foundation for foreign investment in the PRC. Since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, (2019), “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangements would not be interpreted as a type of indirect foreign investment activities in the future. In addition, the definition of foreign investment contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws, administrative regulations or provisions of the State Council.Council of the PRC. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council of the PRC to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. If further actions shall be taken under future laws, administrative regulations or provisions of the State Council of the PRC, we may face substantial uncertainties as to whether we can complete such actions. Failure to do so could materially and adversely affect our current corporate structure, corporate governance and operations.
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Risks Related to Doing Business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
We expect that our revenues will be primarily derived in China and most of our operations will continue to be conducted in China. Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures 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 government. The PRC government also exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. While the PRC economy has experienced significant growth over the past decades, that growth has been uneven across different regions and between economic sectors and may not continue, as evidenced by the slowing of the growth of the Chinese economy since 2012.2012 and the recent slowdown of economy growth in 2022 as a result of the resurgences of the COVID-19 pandemic. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, leading to reduction in demand for our services and solutions and adversely affect our competitive position.
The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and results of operations.
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Uncertainties with respect to the PRC legal system could materially and adversely affect us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. The overall effect of legislation over the past threefew decades has significantly enhanced the protections afforded to various forms of foreign or private-sector investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Sincesince these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules may not be uniform and enforcement of these laws, regulations and rules involves uncertainties. These evolvements and uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. Besides, the PRC is geographically large and divided into various provinces and municipalities and, as such, different laws, rules, regulations and policies may have different and varying applications and interpretations in different parts of the PRC. Legislation or regulations, particularly in local applications, may be enacted without sufficient prior notice or announcement to the public. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us. Furthermore, 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, and may have a retroactive effect. Given above, we may be required to take more responsibilities or meet additional requirements in the future than we currently expect, and may not be aware of our violation of any of these policies and rules until sometime after the violation. AgreementsEnforcement of agreements that are governed by PRC laws may be more difficult to enforce by legal or arbitral proceedings in the PRC than that in other countriescould be complex with different legal systems.substantial costs incurred. In addition, any administrative and court proceedings in China may be protracted,time-consuming, resulting in substantial costs and diversion of resources and management attention.
The PRC government’s oversight and discretion over our business operations could result in a material adverse change in our operations and the value of our securities.
We conduct our business primarily through our PRC subsidiaries, the VIEs and their subsidiaries in China. Our operations in China are governed by PRC laws and regulations. The PRC government has significant oversight and discretion over the conduct of our business, and it may influence our operations, which could result in a material adverse change in our operation and/or the value of our Class A ordinary shares or ADSs.
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In recent years, the PRC government has enhanced its oversight on overseas offerings and listings of China-based companies and foreign investment in China-based companies like us. Considering that a series of rules related to overseas listings by domestic companies are newly published and their interpretation and application remain uncertain, we cannot assure you that we will be able to complete filing with the CSRC or will be required to obtain any specific regulatory approvals from the CAC or any other PRC governmental authorities for our future refinancing activities in a timely manner, if at all, and such approvals and filings may be rescinded even if obtained. Any such circumstance could significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. See “Item 3. Key Information—D. Risk Factors—Filings, approvals or other administration requirements of the CSRC, the CAC or other PRC governmental authorities may be required in connection with our future offshore offerings under PRC law.” Furthermore, the PRC government authorities are continuously strengthening the oversight and law enforcement in recent years, such as enhancing joint supervision of relevant governmental departments, systemically promulgating and implementing new rules, policies, guidelines and interpretations, and taking other comprehensive actions, which may affect our business model, monetization methods, daily operation, acquisition, investment and business development. In addition, implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
Filings, approvals or other administration requirements of the CSRC, the CAC or other PRC governmental authorities may be required in connection with our future offshore offerings under PRC law.
The PRC governmental authorities has strengthened oversight over offerings that are conducted overseas and/or foreign investment in overseas-listed China-based issuers like us. Such actions taken by the PRC government authorities may significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. For instance, the relevant PRC governmental authorities promulgated the Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law, among which, it is mentioned that the administration and supervision of overseas-listed China-based companies will be strengthened, and the special provisions of the State Council of the PRC on overseas issuance and listing of shares by such companies will be revised, clarifying the responsibilities of domestic industry regulators and regulatory authorities.
On February 17, 2023, the CSRC issued the Overseas Listing Regulations, and five supporting guidelines, which became effective on March 31, 2023. Pursuant to the Overseas Listing Regulations, PRC domestic companies that directly or indirectly seek to offer or list their securities on an overseas stock exchange, including a PRC company limited by shares and an offshore company whose main business operations are in mainland China and intends to offer securities or be listed on an overseas stock exchange based on its onshore equities, assets, incomes or other similar interests, are required to file with the CSRC within three business days after submitting their application documents to the regulator in the place of intended listing or offering. Particularly, as for the PRC domestic companies that have directly or indirectly listed securities in overseas markets intend to conduct follow-on offerings in overseas markets, such companies are required to submit the filing with respect to the follow-on offering within three business days after completion of the follow-on offering. Failure to complete the filing under the Overseas Listing Regulations, concealing any material fact or falsifying any major content in its filing documents may subject the company to administrative penalties, such as order to rectify, warnings, fines. Its controlling shareholders, actual controllers, direct officers-in-charge and other direct personnel-in-charge may also be subject to administrative penalties, such as warnings and fines. The Overseas Listing Regulations also provides circumstances under which an overseas offering and listing of a PRC company is prohibited. At the press conference held for the Overseas Listing Regulations, officials from the CSRC confirmed that the companies in mainland China that have been listed overseas before March 31, 2023 are not required to file with the CSRC immediately, but these companies should complete filing with the CSRC for their refinancing activities and future offerings in accordance with the Overseas Listing Regulations. Based on the foregoing, as of the date of this annual report, we are not required to complete filing with the CSRC for our listing on the NYSE and the Hong Kong Stock Exchange, but we may be subject to the filing requirements for our future capital raising activities under the Overseas Listing Regulations. As the Overseas Listing Regulations was newly promulgated, there remain substantial uncertainties about how the Overseas Listing Regulations will be interpreted or implemented and how they will affect our operations and future overseas offerings. We cannot assure you that we will be able to complete such filing in a timely manner and fully comply with such regulations to maintain the listing status of our ADSs and/or other securities, or to conduct any securities offerings in the future.
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On February 24, 2023, the CSRC, jointly with other relevant governmental authorities, issued the Provisions on Strengthening the Confidentiality and Archive Management Work Relating to the Overseas Securities Offering and Listing by Domestic Companies, or the Confidentiality and Archives Management Provisions, which became effective on March 31, 2023. These provisions expanded the applicable scope of the regulation to indirect overseas offerings and listings by companies based in mainland China and emphasized the confidentiality and archive management duties of such companies during the process of overseas offerings and listings.
In addition, pursuant to Cybersecurity Review Measures which was issued on December 28, 2021 and became effective on February 15, 2022, network platform operators holding over one million users’ personal information must apply with the Cybersecurity Review Office for a cybersecurity review before any listing on a foreign stock exchange. The cybersecurity review will evaluate, among others, the risk of critical information infrastructure, core data, important data, or a large amount of personal information being affected, controlled or maliciously used by foreign governments and the cyber information security risk in connection with the listing. There are substantial uncertainties as to the interpretation, application and enforcement of the Cybersecurity Review Measures. There can be no assurance that whether we should apply for cybersecurity review prior to any offshore offering and that we would be able to complete the applicable cybersecurity review procedures in a timely manner, or at all, if we are required to do so. In addition, on November 14, 2021, the CAC published the Draft Regulations on Cyber Data Security, which reiterates the circumstances under which data processors shall apply for cybersecurity review. There is no timetable as to when such draft measures will be enacted. As such, it remains unclear whether the formal version adopted in the future will have any further material changes, it is uncertain how the measures will be enacted, interpreted or implemented and how they will affect our offshore offerings.
As of the date of this annual report, we have not received any formal inquiry, notice, warning, sanction, or any regulatory objection to any offshore offering from the CSRC, the CAC, or any other PRC regulatory agencies that have jurisdiction over our operations. If it is determined in the future that filings or approvals from the CSRC, the CAC, or other governmental requirements are required for our future offshore offerings, it is uncertain whether we can or how long it will take us to complete such filings or obtain such approvals, and any such approval could be rescinded even obtained. Any failure to complete such filings, or failure to obtain or delay in obtaining such approvals for our offshore offerings, or a rescission of any such approval obtained by us, would subject us to sanctions by the CSRC, the CAC, or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China, or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our Class A ordinary shares or ADSs. In addition, if the CSRC, the CAC, or other regulatory agencies later promulgate new rules or explanations requiring filings, approvals, registrations or other kinds of authorizations for offshore offerings, we cannot assure you that we can complete the filings, obtain the approvals, authorizations, or complete required procedures or other requirements in a timely manner, or at all, or obtain any waiver of aforesaid governmental requirements if and when procedures are established to obtain such a waiver. Complying with new laws and regulations could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business. Any uncertainties and/or negative publicity regarding such an approval or other requirements could materially and adversely affect the trading price of our Class A ordinary shares or ADSs.
We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.
We are a Cayman Islands holding company and rely on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated after-tax profits upon satisfaction of relevant statutory conditions and procedures, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. Additionally, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends or make other distributions to us. Furthermore, the PRC tax authorities may require our subsidiaries to adjust their taxable income under the contractual arrangements they currently have in place with ourthe VIEs in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us.
Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
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The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.
Under PRC laws, legal documents for corporate transactions are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant branch of the SAMR. In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are intended to be used, the responsible personnel will submit the application which will then be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, in order to maintain the physical security of our chops, we generally have them stored in secure locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of any of our subsidiaries or VIEs. If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative and acts in good faith.
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies may delay us from using the proceeds of our offshore offerings to make loans or additional capital contributions to our PRC subsidiaries and to make loans to ourthe VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, as well as any loans we provide to ourthe VIEs, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on FIEs in China, capital contributions to our PRC subsidiaries are subject to the registration with SAMR or its local counterpart and registration with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE or its local branches and (ii) none of our PRC subsidiaries may procure loans which exceed the difference between its total investment amount and registered capital. Alternatively, our PRC subsidiaries can only procure loans subject to the calculation approach and limitation as provided by the People’s Bank of China. Additionally, any medium or long-term loans to be provided by us to ourthe VIEs must be registered with the NDRC and SAFE or its local branches. We may not be able to obtain these government approvals or complete such registrations in a timely manner, or at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries or loans by us to ourthe VIEs. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of our offshore offerings to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
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Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive our revenues primarily in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing foreign exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries and VIEs to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our Class A ordinary shares or ADSs.
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Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. We selectively use financial instruments to manage the market risks associated with exposure to fluctuations in interest rates and foreign currency rates. While we may decide to enter into further 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. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
China’s M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of PRC companies, which could make it more difficult for us to pursue growth through acquisitions in China.
A number of PRC laws and regulations have established procedures and requirements that could make merger and acquisition activities in China by foreign investors more time consuming and complex. In addition to the Anti-monopoly Law itself and ancillary regulations, these include the Regulations on Mergers and Acquisitions of Domestic EnterprisesCompanies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, the Rules of the Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Security Review Rules on M&A, promulgated in 2011. These laws and regulations impose requirements in some instances that the PRC Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In addition, pursuant to the Measures for the Security Review of Foreign Investment, which became effective on January 18, 2021, foreign investment in certain key areas with bearing on national security, such as important cultural products and services, important information technology and internet services and products, key technologies and other important areas with bearing on national security which results in the acquisition of de facto control of investee companies, shall be filed with a working mechanism office jointly established by NDRC and the PRC Ministry of Commerce before such investment is carried out. In addition, pursuant to relevant anti-monopoly laws and regulations, the SAMR should be notified in advance of any concentration of undertaking if certain thresholds are triggered. In light of the uncertainties relating to the interpretation, implementation and enforcement of the anti-monopoly laws and regulations of the PRC, we cannot assure you that the anti-monopoly law enforcement agency will not deem our future acquisitions or investments to have triggered filing requirement for anti-monopoly review. Moreover, the Security Review Rules on M&A 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 PRC Ministry of Commerce, and prohibit any attempt to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. Furthermore, if an overseas-listed China-based issuer like us conducts a follow-on offering for the purpose of purchasing assets in mainland China, the issuer shall also complete filing with the CSRC in accordance with the Overseas Listing Regulations. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval and filing processes, including clearance from the SAMR, and approval from the PRC Ministry of Commerce and filing with the CSRC, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, which requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future. In addition, such PRC residents must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. According to the Circular on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, which became effective on June 1, 2015, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The term “control” under SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by PRC residents in the offshore special purpose vehicles, or SPVs, by means of acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. If any PRC shareholder of such SPVs fails to make the required registration or to update the previously filed registration, the subsidiary of such SPVs in China may be prohibited from distributing theirs profits or the proceeds from any capital reduction, share transfer or liquidation to the SPVs, and the SPVs may also be prohibited from making additional capital contributions into their subsidiary in China.
We have notified all individuals or entities who directly or indirectly hold shares in our Cayman Islands holding company and are known to us as PRC residents to complete the foreign exchange registrations. However, we may not be informed of the identities of all the PRC individuals or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents have complied with, and will in the future make, obtain or update any applicable registrations or approvals required by SAFE regulations. In addition, concerning the uncertainty of the application of SAFE Circular 37, some of our current beneficial owners who are PRC residents failed to complete or update their SAFE registrations to address the changes of their offshore interest. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. See “Item 4. Information on the Company—B. Business Overview—Regulation— RegulationRegulations Related to Foreign Exchange and Dividend Distribution— Regulations Related to Stock Incentive Plans.” We and our directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been or will be granted incentive shares or options are subject to these regulations. Failure to complete SAFE registrations may subject us or them to fines and legal sanctions. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.
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If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or the SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and minutes of board and shareholder resolutionsmeetings are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC enterprise income on our worldwide income at the rate of 25% and we will be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our Class A ordinary shares and ADSs. In addition, gains realized on the sale or other disposition of our ADSs or classClass A ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the clauses of any applicable tax treaty), if such gains are deemed to be from the PRC. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in theour Class A ordinary shares or ADSs.
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies, which may have a material adverse effect on our financial condition and results of operations.
On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 provides certain criteria on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.
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Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
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We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37, or to establish that we and our non-PRC resident investors should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our managementdirectors and officers named in the annual report based on foreign laws.
We are a company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, allA majority of our seniordirectors and executive officers reside within Chinaare nationals or residents of jurisdictions other than the United States and most of their assets are located outside the United States. As a result, it may be difficult for a significant portionshareholder to effect service of process within the United States upon these individuals, to bring an action against us or these individuals in the United States, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the timesecurities laws of the United States or any state in the United States.
The Cayman Islands Grand Court will at common law enforce final and mostconclusive in personam judgments of state and/or federal courts of the United States of America (the “Foreign Court”) of a debt or definite sum of money against us (other than a sum of money payable in respect of taxes or other charges of a like nature, or in respect of a fine or other penalty (which may include a multiple damages judgment in an anti-trust action)). The Grand Court of the Cayman Islands will also at common law enforce final and conclusive in personam judgments of the Foreign Court that are non-monetary against us, for example, declaratory judgments ruling upon the true legal owner of shares in a Cayman Islands company. The Grand Court will exercise its discretion in the enforcement of non-money judgments by applying the law of equity and determining whether the principle of comity requires recognition. To be treated as final and conclusive, any relevant judgment must be regarded as res judicata by the Foreign Court. A debt claim on a foreign judgment must be brought within 12 years of the judgment becoming enforceable, and arrears of interest on a judgment debt cannot be recovered after six years from the date on which the interest was due. The Cayman Islands courts are unlikely to enforce a judgment obtained from the Foreign Court under civil liability provisions of U.S. federal securities law if such a judgment is found by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Such a determination has not yet been made by the Grand Court of the Cayman Islands, and it is therefore uncertain whether such civil liability judgments from the Foreign Court would be enforceable in the Cayman Islands. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere. A judgment entered in default of appearance by a defendant who has had notice of the Foreign Court’s intention to proceed may be final and conclusive notwithstanding that the Foreign Court has power to set aside its own judgment and despite the fact that it may be subject to an appeal the time-limit for which has not yet expired. The Grand Court may safeguard the defendant’s rights by granting a stay of execution pending any such appeal and may also grant interim injunctive relief as appropriate for the purpose of enforcement.
Substantially all of our officers and directors are located in China, and it will be more difficult to enforce liabilities and enforce judgments on those individuals. The recognition and enforcement of foreign judgments are provided for under the PRC nationals. In addition,Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties providingor other written forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of judgmentsforeign judgments. As such, the PRC courts will review and determine the applicability of the reciprocity principle on a case-by-case basis and the length of the procedure is uncertain. In addition, according to the PRC Civil Procedures Law, the PRC courts withwill not enforce a foreign judgment against us or our directors and officers if they decide that the Cayman Islands and many other countries and regions. Even if you are successful in bringing an actionjudgment violates the basic principles of this kind, PRC laws may render you unable toor national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States. In addition to the aforesaid substantial uncertainties, the foreign shareholders seeking the enforcement of a foreign judgement in the PRC courts could incur substantial legal and other costs that may be material to the shareholders. Shareholders could potentially spend a considerable amount of time and other resources to go through the recognition and enforcement procedure, which may be a significant burden for the shareholders, but with no assurance of ultimate success.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our assetsmanagement, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the assetsUnited States.
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It may be difficult for overseas regulators to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretationThe Confidentiality and Archives Management Provisions, which became effective on March 31, 2023, provides that the investigation and evidence collection in relation to the oversea securities offering and listing of the PRC domestic companies by the overseas securities regulatory authorities and relevant authorities shall be conducted through the cross-border cooperation mechanism for supervision and administration and the domestic companies in mainland China shall obtain the prior consent from the CSRC or implementation rules under Article 177 have yetrelevant authorities before cooperating with such overseas securities regulatory authorities or relevant authorities in connection with relevant inspections or investigations or providing relevant documents to be promulgated, thesuch overseas securities regulatory authorities or relevant authorities. The inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests. See also “—Risks Related to Our Shares and ADSs—You may face difficulties in protecting your interests, and your ability to protect your rights through Hong Kong or U.S. courts may be limited, because we are incorporated under Cayman Islands law.” for risks associated with investing in us as a Cayman Islands company.
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Discontinuation of any of the preferential tax treatments and government subsidies or imposition of any additional taxes and surcharges could adversely affect our financial condition and results of operations.
Under the PRC Enterprise Income Tax Law and its implementation rules, the statutory enterprise income tax rate is 25%, but certain “software enterprise” and “high and new technology enterprises,” are qualified for a preferential enterprise income tax rates subject to certain qualification criteria. A “software enterprise,” which is reassessed annually, is entitled to favorable income tax rate of 0% for the first two years after qualification, and 12.5% for the subsequent three years. In addition, a “high and new technology enterprise,” which is reassessed every three years, is entitled to favorable income tax rate of 15%. Currently certain PRC subsidiaries and a consolidated variable interest entity of ours are enjoying favorable tax rates as software enterprise or high and new technology enterprise. If any of these entities fails to maintain its qualified status, the income tax rate could increase and our business, financial condition and results of operations would be materially and adversely affected.
Further, in the ordinary course of our business, we are subject to complex income tax and other tax regulations, and significant judgment is required in the determination of a provision for income taxes. Although we believe our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest and penalties in excess of our tax provisions, our financial condition and results of operations would be materially and adversely affected.
Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if theThe PCAOB ishad historically been unable to inspect auditors who are locatedour auditor in China. The delisting ofrelation to their audit work performed for our ADSs, or the threat of their being delisted, may materiallyfinancial statements and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprivesover our auditor in the past has deprived our investors with the benefits of such inspections.
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the U.S.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since ourThe auditor is located in mainland China, a jurisdiction where the PCAOB has beenwas historically unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB.
The SEC has announced interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA. The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection for three consecutive years. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCAA. However, some of the recommendations were more stringent than the HFCAA. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition periodinvestigations completely before a company would be delisted would end on January 1, 2022.
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The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCAA and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the HFCAA are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCAA. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.
The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares arethe ADSs were deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makesin the past has made it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. However, if the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong, and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we and investors in our ADSs would be deprived of the benefits of such PCAOB inspections again, which could cause investors and potential investors in our stockthe ADSs to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
Proceedings instituted by the SEC against certain PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.
In December 2012, the SEC instituted administrative proceedings against the Big Four PRC-based accounting firms in China, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain other PRC-based companies that are publicly traded in the United States.
On January 22, 2014, the initial administrative law judge presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit papers and other documents to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months.
On February 6, 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and to audit US-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict if the SEC will further challenge the four PRC-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to our delisting from the New York Stock Exchange or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
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In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companiesOur ADSs may be prohibited from trading in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operationsunder the HFCAA in the PRC, which could result in financial statements being determined not to be in compliance withfuture if the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we werePCAOB is unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to be notinspect or investigate completely auditors located in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to theChina. The delisting of the ADSs, or deregistration fromthe threat of their being delisted, may materially and adversely affect the value of your investment.
Pursuant to the HFCAA, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspections by the PCAOB for two consecutive years, the SEC will prohibit our shares or both, which would substantially reduceADSs from being traded on a national securities exchange or effectively terminatein the over-the-counter trading of the ADSsmarket in the United States.
On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong and our auditor was subject to that determination. In May 2022, the SEC conclusively listed us as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on Form 20-F for the fiscal year ended December 31, 2021. On December 15, 2022, the PCAOB removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. For this reason, we do not expect to be identified as a Commission-Identified Issuer under the HFCAA after we file this annual report on Form 20-F for the fiscal year ended December 31, 2022.
Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. In accordance with the HFCAA, our securities would be prohibited from being traded on a national securities exchange or in the over-the-counter trading market in the United States if we are identified as a Commission-Identified Issuer for two consecutive years in the future. Although our Class A ordinary shares have been listed on the Hong Kong Stock Exchange and the ADSs and Class A ordinary shares are fully fungible, we cannot assure your that an active trading market for our Class A ordinary shares on the Hong Kong Stock Exchange will be sustained or that the ADSs can be converted and traded with sufficient market recognition and liquidity, if our shares and ADSs are prohibited from trading in the United States. A prohibition of being able to trade in the United States would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.
The currentRising international political tensions, including changes in the U.S. and international trade and rising political tensions,policies, particularly between U.S. andwith regard to China, may adversely impact our business, financial condition, and results of operations.
Although cross-border business may not be an area of our focus, if we plan to expand our business internationally in the future, any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for our products and services, impact our competitive position, or prevent us from being able to conduct business in certain countries. If any new tariffs, legislation, or regulations are implemented, or if existing trade agreements are renegotiated, such changes could adversely affect our business, financial condition, and results of operations. Recently, thereThere have been heightened tensions in international economic relations, such as the one between the United States and China. The U.S. government has recently imposed, and has recently proposed to impose additional, new, or higher tariffs on certain products imported from China to penalize China for what it characterizes as unfair trade practices. China has responded by imposing, and proposing to impose additional, new, or higher tariffs on certain products imported from the United States. Following mutual retaliatory actions for months, on January 15, 2020, the United States and China entered into the Economic and Trade Agreement Between the United States of America and the People’s Republic of China as a phase one trade deal, effective on February 14, 2020.
In addition, political tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the PRC central government and the executive orders issued by the U.S. government in August 2020 that prohibit certain transactions with certain selected leading Chinese internet companies as well as their products. Rising political tensions could reduce levels of trades, investments, technological exchanges, and other economic activities between the two major economies. Besides, China is also facing the challenges of technological blockade and the economic decoupling between the U.S. and China. Any of these factors could have a material adverse effect on our business, prospects, financial condition and results of operations. Such tensions between the United States and China, and any escalation thereof, may have a negative impact on the general, economic, political, and social conditions in China.
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Although the direct impact of the current international trade tensions and political tensions between the United States and China, and any escalation of such tensions, on the housing transaction and services industry in China is uncertain, the negative impact on general, economic, political and social conditions may adversely impact our business, financial condition and results of operations.
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Risks Related to Our Shares and ADSs
The trading price of the ADSs is likely toand Class A ordinary shares may be volatile, which could result in substantial losses to investors.
The trading price of our ADSs has been volatile since our ADSs started to trade on the New York Stock Exchange on August 13, 2020. The trading price of our ADSs could fluctuate widely due to factors beyond our control. The trading price of our Class A ordinary shares, likewise, can be volatile for similar or different reasons. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States.States or Hong Kong. In addition to market and industry factors, the price and trading volume for the Class A ordinary shares or ADSs may be highly volatile for factors specific to our own operations, including the following:
| variations in our revenues, earnings, or cash flow; |
| fluctuations in operating metrics; |
| announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors; |
| announcements of new |
| changes in financial estimates by securities analysts; |
| detrimental negative publicity about us, our competitors or our industry; |
| additions or departures of key personnel; |
| release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; |
| regulatory developments affecting us or our |
| potential litigation or regulatory |
● | trends of global and China’s economies; |
● | rising international geopolitical tensions; and |
● | short selling of securities of China-based companies listed in the United States. |
Any of these factors may result in large and sudden changes in the volume and price at which the Class A ordinary shares or ADSs will trade. Furthermore, the stock market in general experiences price and volume fluctuations that are often unrelated or disproportionate to the operating performance of companies like us. These broad market and industry fluctuations may adversely affect the market price of our Class A ordinary shares or ADSs. Volatility or a lack of positive performance in our Class A ordinary shares or ADS price may also adversely affect our ability to retain key employees, most of whom have been granted equity incentives.
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In the past, shareholders of public companies have often brought securities class action suits against companies following periods of instability in the market price of their securities. IfBased on public records, our company and certain of our directors and officers were named as defendants in a putative securities class action filed in the United States. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for more information. When and if we wereare involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether successful or not, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
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Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our classClass A ordinary shares and ADSs may view as beneficial.
Our authorized and issued ordinary shares are divided into classClass A ordinary shares and classClass B ordinary shares. In respect of matters requiring the votes of shareholders, holders of classClass A ordinary shares and classClass B ordinary shares vote together as a single class except as may otherwise be required by law, and holders of classClass A ordinary shares are entitled to one vote per share while holders of classClass B ordinary shares are entitled to ten votes per share.share, subject to Rule 8A.24 of the Hong Kong Listing Rules that requires the reserved matters to be voted on a one vote per share basis. Each classClass B ordinary share is convertible into one classClass A ordinary share at any time by the holder thereof, while classClass A ordinary shares are not convertible into classClass B ordinary shares under any circumstances. Upon any transfer of classSubject to the Hong Kong Listing Rules or other applicable laws or regulations, each Class B ordinary shares by a holder thereof toshare shall be automatically converted into one Class A ordinary share upon the occurrence of any person or entity that is not an affiliate of the holder, such class B ordinary shares are automaticallyevents as specified in paragraph 18 of our currently effective memorandum and immediately converted into an equal numberarticles of class A ordinary shares.association. For details, see “Item 10. Additional Information—B. Memorandum and Articles of Association.”
As of February 28, 2021, Mr. ZUO Hui,2023, holders of our chairman of the board, beneficially owns 1,378,907,019Class B ordinary shares (comprising 493,605,739 class Ahold 156,122,226 Class B ordinary shares, and 885,301,280 class B ordinary shares), representing 81.1%4.2% of the aggregate voting power of our total issued and outstanding ordinary shares (excluding the Class A ordinary shares issued to the depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise or vesting of awards granted under our share incentive plans) due to the disparate voting powers associated with our dual-class voting structure. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.” Mr. ZUO hasHolders of our Class B ordinary shares or their proxy have considerable influence over matters requiring shareholder approval, such as electing directors and approving material mergers, acquisitions, or other business combination transactions. This concentration of ownership may discourage, delay, or prevent a change of control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our Class A ordinary shares or ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover, or other change of control transactions that holders of classClass A ordinary shares and ADSs may view as beneficial.
Our dual-class voting structure may render the ADSs representing our class A ordinary sharessecurities ineligible for inclusion in certain stock market indices, and thus adversely affect the trading price and liquidity of theour Class A ordinary shares or ADSs.
We cannot predict whether our dual-class share structure with different voting rights will result in a lower or more volatile market price of theour Class A ordinary shares or ADSs, in adverse publicity, or other adverse consequences. Certain index providers have announced restrictions on including companies with multi-class share structures in certain of their indices. For example, S&P Dow Jones and FTSE Russell have changed their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. As a result, our dual-class voting structure may prevent the inclusion of the ADSs representing our class A ordinary sharessecurities in such indices, which could adversely affect the trading price and liquidity of the ADSs representing our class A ordinary shares.securities. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structure and our dual-class structure may cause shareholder advisory firms to publish negative commentary about our corporate governance, in which case the market price and liquidity of theour Class A ordinary shares or ADSs could be adversely affected.
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If securities or industry analysts cease to publish research or reports about our business, or if they adversely change their recommendations regarding the Class A ordinary shares or the ADSs, the market price for the Class A ordinary shares or the ADSs and trading volume could decline.
The trading market for the Class A ordinary shares or the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the Class A ordinary shares or the ADSs, the market price for the Class A ordinary shares or the ADSs would likely decline. If one or more of these analysts cease to cover 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 for the Class A ordinary shares or the ADSs to decline.
Techniques employed by short sellers may drive down the market price of our Class A ordinary shares or the ADSs.
Short selling is the practice of selling securities that a seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding relevant issuers and their business prospects in order to create negative market momentum and generate profits for themselves after selling securities short.
Public companies listed in the United States that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits or SEC enforcement actions.
On December 16, 2021, Muddy Waters Capital LLC issued a short seller report with allegations against us, or the Muddy Waters Report. On December 17, 2021, we announced that the audit committee of our board of directors commenced an internal review into the key allegations raised in the Muddy Waters Report, or the Internal Review, with the assistance of third-party professional advisors including an international law firm and forensic accounting experts from a Big-Four accounting firm that is not our auditor. On January 28, 2022, we announced that the Internal Review was substantially complete and that based on such Internal Review, the audit committee has concluded that the allegations in the Muddy Waters Report were not substantiated. Any such allegations may be followed by periods of instability in the market price of our Class A ordinary shares or ADSs and the corresponding negative publicity. If and when become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could be forced to expend a significant amount of resources to investigate such allegations or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law, or issues of commercial confidentiality. Such a situation could be costly and time-consuming and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations and shareholders’ equity, and any investment in our Class A ordinary shares or the ADSs could be greatly reduced or rendered worthless.
We are subject to risks associated with class action suits, which may be expensive and could divert management attention.
Shareholders of public companies have often brought securities class action suits against companies following periods of instability in the market price of their securities. For example, based on public records, our company and certain of our directors and officers were named as defendants in a putative securities class action filed in the United States following the issuance of the Muddy Waters Report. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for more information. We cannot predict the timing, outcome or consequences of such class action, and there is no basis to conclude at this point whether our defenses will be successful or whether we will be subject to any damages, let alone how much. In the event we do not prevail or we enter into settlement arrangements in the proceeding, we may incur significant expenses, which may materially and adversely affect our financial condition and results of operations. We may continue to be the target of securities litigation in the future.
Regardless of the outcome, any securities litigation against us, such as a class action lawsuit, could result in substantial costs and divert our management’s attention from other business concerns, and, if adversely determined, could have a material adverse effect on our business, financial condition and results of operations.
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We currently dodid not expect to pay dividends in the foreseeable futurepast three years and you mustmay rely on price appreciation of our Class A ordinary shares or the ADSs for return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we dodid not expect to pay any cash dividends in the foreseeable future.past three years. Therefore, you should notmay have to rely on anprice appreciation of our Class A ordinary shares or ADSs for investment in our ADSs as a source for any future dividend income.return.
Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even ifIf our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our Class A ordinary shares or ADSs will likely depend entirelylargely upon any future price appreciation of our Class A ordinary shares or ADSs. There is no guarantee that our Class A ordinary shares or ADSs will appreciate in value or even maintain the price at which you purchased the ADSs.securities. You may not realize a return on your investment in our ADSssecurities and you may even lose your entire investment in our ADSs.investment.
Substantial future sales or perceived potential sales of our Class A ordinary shares or the ADSs in the public market could cause the price of our Class A ordinary shares or the ADSs to decline.
Sales of our Class A ordinary shares or the ADSs in the public market, or the perception that these sales could occur, could cause the market price of our Class A ordinary shares or the ADSs to decline. In connection with our equity public offering of ADSs in November 2020, our directors and executive officers have agreed with the underwriters not to sell, transfer, encumber or dispose of any ADSs, ordinary shares or any of our other securities or any economic consequences of ownership of our securities for a period of 180 days after November 18, 2020, subject to certain exceptions. Additionally, in connection with our initial public offering, our existing shareholders, Tencent, Hillhouse and Sequoia Capital and their respective affiliates agreed to substantially the same set of lock-up restrictions for 365 days after August 12, 2020. All ADSs sold in our initial public offering and our public offering of ADSs in November 2020 will become freely transferable without restriction or additional registration under the Securities Act when these respective lock-up periods expire. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline. The ordinary sharesShares held by our existing shareholders may be available for sale, upon the expiration of the applicable lock-up period subject to volume and other restrictions as applicable provided in Rules 144 and 701 under the Securities Act of 1933, or the Securities Act. AnyWe cannot predict what effect, if any, market sales of securities held by our significant shareholders or allany other shareholder or the availability of these shares may be released prior to the expiration of the lock-up period at the discretion of the representatives of the underwriters of our equity public offering in November 2020. To the extent shares are released before the expiration of the lock-up period and sold into the market,securities for future sale will have on the market price of our ADSs could decline.Class A ordinary shares or the ADSs.
Our fourth amended and restatedcurrently effective memorandum and articles of association contain anti-takeover provisionsgive us power to take certain actions that could havediscourage a material adverse effect on the rights of holders ofthird party from acquiring us, which could limit our classshareholders’ opportunity to sell their shares, including Class A ordinary shares and the ADSs.ADS, at a premium.
Our fourth amended and restatedcurrently effective memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our boardSubject to the conditions that: (i) it is in compliance with the Hong Kong Listing Rules and the Codes on Takeovers and Mergers and Share Buy-backs; (ii) no new class of shares with voting rights superior to our Class A ordinary shares will be created; and (iii) any variations in the relative rights as between the different classes of our shares will not result in creating a new class of shares with voting rights superior to our Class A ordinary shares, our directors hasmay issue from time to time, out of the authority, without further action by our shareholders, to issueauthorised share capital of the Company (other than the authorised but unissued ordinary shares), series of preferred shares in one or moretheir absolute discretion and without approval of our shareholders; provided, however, before any preferred shares of any such series are issued, our directors shall by resolution of directors determine, with respect to any series of preferred shares, the terms and to fix their designations, powers, preferences, privileges and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our class A ordinary shares, including class A ordinary shares represented by ADSs.that series. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. Our board of directors may also issue Class A ordinary shares out of the authorised but unissued Class A ordinary shares in their absolute discretion and without approval of our shareholders, subject to the grant of a general mandate for such issuance by our shareholders from time to time. If our board of directors decides to issue preferred shares or additional Class A ordinary shares, the price of theour Class A ordinary shares or ADSs may fall and the voting and other rights of the holders of our classClass A ordinary shares and the ADSs may be materially and adversely affected.
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The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of the underlying ordinary shares represented by your ADSs.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights attached to the classClass A ordinary shares underlying your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Where any matter is to be put to a vote at a general meeting, then upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying classClass A ordinary shares represented by your ADSs in accordance with your instructions. You will not be able to directly exercise your right to vote with respect to the underlying classClass A ordinary shares unless you cancel and withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting.
When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the classClass A ordinary shares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our fourth amended and restatedcurrently effective memorandum and articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying classClass A ordinary shares represented by your ADSs and from becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, upon our instruction the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying classClass A ordinary shares represented by your ADSs.
In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the underlying classClass A ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying classClass A ordinary shares represented by your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.
Under the deposit agreement, if no voting instruction from you do not vote,is received, the depositary may give us a discretionary proxy to vote the classClass A ordinary shares underlying the ADSs at shareholders’ meetings if we have timely provided the depositary with notice of meeting and related voting materials and (i) we have instructed the depositary that we wish a discretionary proxy to be given, (ii) we have informed the depositary that there is no substantial opposition as to a matter to be voted on at the meeting, and (iii) a matter to be voted on at the meeting would not have a material adverse impact on shareholders.
The effect of this discretionary proxy is that you cannot prevent our classClass A ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may adversely affect your interests and make it more difficult for ADS holders to influence the management of our company. Holders of our classClass A ordinary shares are not subject to this discretionary proxy.
You may beTransfer of our ADSs is subject to limitations on transfer of your ADSs.limitations.
YourOur ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time, including without limitation in connection with corporate action events, in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of the ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
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You may experience dilution of your holdings due to inability to participate in rights offerings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
You may face difficulties in protecting your interests, and your ability to protect your rights through Hong Kong or U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our fourth amended and restatedcurrently effective memorandum and articles of association, the Companies Act (As Revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in Hong Kong or some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than Hong Kong or the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have the standing to initiate a shareholder derivative action in a Hong Kong court or a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (except for our memorandum and articles of association and our register of mortgages and charges) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our fourth amended and restatedcurrently effective memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of our board of directors or controlling shareholders than they would as public shareholders of a company incorporated in Hong Kong and/or the United States. For a discussion of significant differences between the provisions of the Companies Act of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Item 10. Additional Information—B. Memorandum and Articles of Association —Differences in Corporate Law.”
Certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, many of our current directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
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Your rights to pursue claims arising under the deposit agreement are limited by the terms of the deposit agreement.
The deposit agreement governing the ADSs representing our classClass A ordinary shares provides that, subject to the right to require a claim to be settled by arbitration, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws, to the fullest extent permitted by law.
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If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waive the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.
If you or any other owners or holders of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other owners or holders may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any owner or holder of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
The deposit agreement also provides that ADS holders and the depositary have the right to elect to have any claim against us arising out of or relating to our classClass A ordinary shares, ADSs, ADRs or the deposit agreement settled by arbitration in New York, New York rather than in a court of law, and to have any judgment rendered by the arbitrators entered in any court having jurisdiction. The arbitral tribunal in any such arbitration would not have the authority to award any consequential, special, or punitive damages or other damages not measured by the prevailing party’s actual damages and may not make any ruling, finding or award that does not conform to the provisions of the deposit agreement. The deposit agreement does not give us the right to require that any claim, whether brought by us or against us, be arbitrated. The optional arbitration provision does not apply to claims under federal securities laws or claims other than in connection with our initial public offering or public offering of ADSs in November 2020.
We are a “controlled company” within the meaning of the New York Stock Exchange’s corporate governance rules and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
We are a “controlled company” as defined under the New York Stock Exchange’s corporate governance rules because Mr. ZUO Hui, our founder and chairman of the board of directors, beneficially owns more than 50% of our total voting power. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors or that we have to establish a nominating committee and a compensation committee composed entirely of independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
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As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE listing standards.
As a Cayman Islands company listed on the NYSE, we are subject to the NYSE listing standards, which require listed companies to have, among other things, a majority of their board members to be independent and independent director oversight of executive compensation and nomination of directors. However, NYSE rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE listing standards.
We are permitted to elect to rely on home country practice to be exempted from the corporate governance requirements. Pursuant to the NYSE Listed Company Manual, a company listed on the NYSE must have a majority of independent directors, and a nominating/corporate governance committee composed entirely of independent directors. We currently follow our home country practice in lieu of those requirements. In January 2022, our board of directors approved the 2022 Share Incentive Plan, which became effective in May 2022. We followed our home country practice and did not convene a shareholder meeting to approve the 2022 Share Incentive Plan as required by the NYSE Listed Company Manual. In addition, we followed our home country practice and did not convene a shareholder meeting to approve the issuance of the restricted shares granted to Mr. PENG Yongdong and Mr. SHAN Yigang pursuant to the 2022 Share Incentive Plan as required by the NYSE Listed Company Manual. If we choose to follow home country practice in the future, our shareholders may be afforded less protection than they would otherwise enjoy if we complied fully with the NYSE listing standards.
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We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Securities Exchange Act of 1934, or the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
| the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; |
| the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; |
| the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and |
| the selective disclosure rules by issuers of material |
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to continue to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
We mayThere can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. investors owningholders of the ADSs or our classClass A ordinary shares.
A non-U.S. corporation, such as our company will be considered a passive foreign investment company, or “PFIC,” for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets (generally based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. Although the law in this regard is not entirely clear, we treat ourthe consolidated VIEs and their subsidiaries as being owned by us for U.S. federal income tax purposes because we control their management decisions and are entitled to substantially all of the economic benefits associated with them. As a result, we consolidate their results of operations in ourthe consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of ourthe consolidated VIEs and their subsidiaries for U.S. federal income tax purposes, we would likely be treated as a PFIC for the current taxable year and any subsequent taxable year.
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Assuming that we are the owner of ourthe consolidated VIEs and their subsidiaries for U.S. federal income tax purposes and based on the current and anticipated value of our assets and the composition of our income and assets, including goodwill and unbooked intangibles, we do not believe we were a PFIC for theour taxable year ended December 31, 2020, and we do not presently expect to be a PFIC for the current taxable year or the foreseeable future.2022. However, no assurance can be given in this regard because the determination of whether we will be or become a PFIC is a factual determination made annually that will depend, in part, upon the composition of our income and assets and the value of our assets.
Fluctuations in the market price of the Class A ordinary shares or the ADSs may cause us to be or become a PFIC for the current or future taxable years because the value of our assets for purposes of the asset test, including the value of our goodwill and unbooked intangibles, may be determined by reference to the market price of the Class A ordinary shares or the ADSs from time to time (which may be volatile). IfIn particular, declines in the market price of our Class A ordinary shares or the ADSs increased our risk of becoming a PFIC. The market capitalization subsequently declines,price of our Class A ordinary shares or the ADSs may continue to fluctuate considerably and, consequently, we cannot assure you of our PFIC status for any taxable year. Furthermore, the composition of our income and assets may also be or become a PFIC for the current taxable year or future taxable years.affected by how, and how quickly, we use our liquid assets. Under circumstances where our revenue from activities that produce passive income significantly increases relative to our revenue from activities that produce non-passive income, or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming a PFIC may substantially increase. Additionally, it is possible that the Internal Revenue Service (the “IRS”) may challenge our classification of certain items of income, assets and liabilities, which may result in our company being or becoming a PFIC.
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If we are treated as a PFIC for any taxable year during which a U.S. investor held an ADS or a classClass A ordinary share, certain adverse U.S. federal income tax consequences could apply to the U.S. Holder. See “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations” and “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”
We incur increased costs as a result of being a public company.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002 as well asand the rules subsequently implemented by the SEC and NYSE, as well as the Hong Kong Listing Rules and the relevant rules imposed by the Securities and Futures Commission of Hong Kong, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a public company may place a strain on our management, operational and financial resources and systems for the foreseeable future.
Item 4. | Information on the Company |
A. |
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We commenced operations in 2001 through Beijing Lianjia, which was founded in September 2001 by Mr. ZUO Hui, our founder and permanent chairman emeritus. Beijing Lianjia and its subsidiaries developed various businesses over time and expanded nationwide in China. From November 2016 to January 2017, we restructured Beijing Yiju Taihe Technology Co., Ltd., or Yiju Taihe, which was originally a subsidiary of Beijing Lianjia and operated the financial service business, to mirror the holding structure substantially identical to that of Beijing Lianjia. In November 2017, we incorporated Tianjin Xiaowu Information & Technology Co., Ltd., or Tianjin Xiaowu to conduct operations related to value-added telecommunication services.
Along with the launch of our Beike platform, we incorporated KE Holdings Inc. in the Cayman Islands in July 2018 as our holding company. From July 2018 to June 2019, KE Holdings Inc. established a series of intermediary holding entities which directly or indirectly hold the equity interests in Beike Tianjin, Jinbei Technology, Beike Jinke, and Beike (China) Investment Holdings Limited, all of which are our wholly-owned PRC subsidiaries. Through a series of transactions, most of the original subsidiaries and all of operating branches of Beijing Lianjia have become wholly-owned by the applicable WFOEs and our other PRC subsidiaries.
As part of the reorganization, most of the shareholders of Beijing Lianjia and Yiju Taihe or such shareholders’ affiliates subscribed for ordinary shares, Series B and C convertible redeemable preferred shares of KE Holdings Inc., as applicable, substantially in proportion to their respective equity interests in Beijing Lianjia and Yiju Taihe prior to the reorganization. Further, through a series of reorganization transactions and contractual arrangements, KE Holdings Inc. directs activities of Beijing Lianjia, Yiju Taihe and Tianjin Xiaowu that most significantly affect their economic performance, and receive economic benefits from them that could be significant to them.
In July 2020, we effected a 5-for-1 share subdivision, following which each of our issued and unissued ordinary shares and preferred shares was subdivided into five ordinary shares and preferred shares, respectively.
On August 13, 2020, our ADSs commenced trading on the NYSE under the symbol “BEKE.” We raised, from our initial public offering and from the underwriters’ full exercise of option to purchase additional ADSs, approximately US$2,359 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us.
In November 2020. we completed a registered follow-on public offering of our ADSs, raising approximately US$2,323 million in net proceeds after deducting underwriting commissions and discounts and the offering expenses payable by us, upon the underwriters’ full exercise of option to purchase additional ADSs.
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In July 2021, we entered into a definitive agreement with Shengdu and all of its existing shareholders and subsidiaries, pursuant to which we agreed to acquire 100% equity interest in Shengdu, subject to a staggered acquisition arrangement and customary closing conditions, including regulatory approvals. In April 2022, we entered into an amended the restated framework purchase agreement with Shengdu and its shareholders, pursuant to which the aggregate consideration for the acquisition is RMB3.92 billion in cash and 44,315,854 of our Class A ordinary shares in equity. The acquisition was closed on April 20, 2022.
On May 11, 2022, our Class A ordinary shares commenced trading, by way of introduction, on the Main Board of the Hong Kong Stock Exchange under the stock code “2423.” The Class A ordinary shares listed on the Main Board of the Hong Kong Stock Exchange are fully fungible with the ADSs listed on the NYSE.
Due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services and certain financial businesses, our WFOEs entered into a series of contractual arrangements, as amended and restated, with the VIEs, through which we direct activities of the VIEs that most significantly affect the economic performance of the VIEs and receive economic benefits from the VIEs that could be significant to the VIEs. As a result, we are regarded as the primary beneficiary of the VIEs and their subsidiaries for accounting purposes, and we have consolidated the financial results of the VIEs and their subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. For more details and risks related to the variable interest entity structure, please see “—C. Organizational Structure—Contractual Arrangements with the launch of our Beike platform, we incorporated KE Holdings Inc. in the Cayman Islands in July 2018 as our holding company. From July 2018 to June 2019, KE Holdings Inc. established a series of intermediary holding entities which directly or indirectly hold the equity interests in Beike (Tianjin) Investment Co., Ltd., or Beike Tianjin, Jinbei (Tianjin) Technology Co., Ltd., or Jinbei Technology, Beike Jinke (Tianjin) Technology Co., Ltd., or Beike Jinke, and Beike (China) Investment Holdings Limited, or Beike Investment, all of which are our wholly-owned PRC subsidiaries (collectively, “WFOEs”). Through a series of transactions, most of the original subsidiaries and all of operating branches of Beijing Lianjia have become wholly-owned by the applicable WFOEs and our other PRC subsidiaries.
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As part of the reorganization, most of the shareholders of Beijing Lianjia and Yiju Taihe or such shareholders’ affiliates subscribed for ordinary shares, Series B and C convertible redeemable preferred shares of KE Holdings Inc., as applicable, substantially in proportion to their respective equity interests in Beijing Lianjia and Yiju Taihe prior to the reorganization. Further, through a series of reorganization transactions, KE Holdings Inc. obtained control over Beijing Lianjia, Yiju Taihe and Tianjin Xiaowu through contractual arrangements.
In July 2020, we effected a 5-for-1 share subdivision, following which each of our issued and unissued ordinary shares and preferred shares was subdivided into five ordinary shares and preferred shares, respectively.
On August 13, 2020, our ADSs commenced trading on the NYSE under the symbol “BEKE.” We raised, from our initial public offering and from the underwriters’ full exercise of option to purchase additional ADSs, approximately US$2,359 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us.
In November 2020. we completed a registered follow-on public offering of our ADSs, raising approximately US$2,323 million in net proceeds after deducting underwriting commissions and discounts and the offering expenses payable by us, upon the underwriters’ full exercise of option to purchase additional ADSs.
Due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services, finance business and certain other businesses, our WFOEs entered into a series of contractual arrangements, as amended and restated, with Beijing Lianjia, Tianjin Xiaowu and Yiju Taihe (collectively, “VIEs”), respectively, through which we obtained control over the VIEs. As a result, we are regarded as the primary beneficiary of the VIEs and their subsidiaries. We treat them as our consolidated affiliated entities under U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP. For more details and risks related to our variable interest entity structure, please see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with our VIEs and their Shareholders” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
Our principal executive offices are located at Oriental Electronic Technology Building, No. 2 Chuangye Road, Haidian District, Beijing 100086, People’s Republic of China. Our telephone number at this address is +86 10 5810 4689. Our registered office in the Cayman Islands is located at Harneys Fiduciary (Cayman) Limited, 4th Floor, Harbour Place, 103 South Church Street, PO Box 10240, Grand Cayman KY1-1002, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.
SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on www.sec.gov. You can also find information on investors.ke.com. The information contained on our website is not a part of this annual report.
B. | Business Overview |
Beike is the leading integrated online and offline platform for housing transactions and services. We are a pioneer in building the industry infrastructure and standards in China to reinvent how service providers and customers efficiently navigate and complete housing transactions and services, ranging from existing and new home sales, home rentals, to home renovation and furnishing, and other services. We believe our proactive engagement with platform participants both online and offline enables us to know them better and serve them better. In 2022, we facilitated approximately 3.8 million housing transactions on our platform with an aggregate GTV of RMB2,609.6 billion.
We own and operate Lianjia, China’s leading real estate brokerage brand and an integral part of our Beike platform. We believe the success and proven track record of Lianjia pave the way for us to build the industry infrastructure and standards and drive the rapid and sustainable growth of Beike. We have over 21 years of operating experience through Lianjia since our inception in 2001. Such extensive industry experience has provided us with distinct insights into markets, business conditions and customer needs, which we believe are critical for us to offer effective solutions, expand market footprint and capture adjacent opportunities.
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Our Platform
We launched our Beike platform in 2018. Today, Beike is the leading integrated online and offline platform for housing transactions and services. We are a pioneer in building the industry infrastructure and standards in China to reinvent how service providers and customers efficiently navigate and complete housing transactions and services, ranging from existing and new home sales, home rentals, to home renovation and furnishing, and other services. We believe the success of Lianjia, China’s leading real estate brokerage brand which we own and operate on our platform, paves the way for us to build the industry infrastructure and standard, and support the rapid growth of Beike. We implemented through Lianjia’s large network of stores a series of industry “firsts” over the years, including fostering agent collaborations for shared success through our ACN, building a “Housing Dictionary,” promoting authentic property listings, and leveraging technology to digitalize and standardize processes. These efforts have ultimately resulted in Lianjia’s market leadership as well as industry-leading service quality and efficiency, making it a trusted household name. More importantly, Lianjia has laid the foundation for our infrastructure with ACN, operational know-hows, and technology systems that seamlessly integrate our online and offline network that has proven to work at a large scale. We further horizontally extended the core competencies of Lianjia to the Beike platform in 2018 so that we can help hundreds of real estate brokerage brands, including Lianjia, and their affiliated stores and agents to succeed. Meanwhile, we created an even more scalable infrastructure by a series of efforts, including digitalizing and standardizing three key components, namely, technology, transaction process and service quality to specifically address the challenges facing our industry.
Below is a diagram illustrating the composition and structure of our platform:
Our Beike platform is an open platform for participants in the housing related industry and ecosystem. It enables housing customers, including home buyers, home sellers, landlords and tenants, to enjoy smooth housing transactions and services with high-quality real estate brokerage brands, stores, agents, and home renovation and other service providers. Our platform serves as an innovative sales channel for real estate developers and also enables other ecosystem participants such as home renovation service providers to benefit from our technology and extensive customer and agent base. The foundation of our platform is ACN, through which we streamline the entire housing transaction process by promoting collaborations among brokerage brands, stores and agents, standardizing authentic property listings and applying a series of cooperation rules. We also offer various service modules to our ecosystem participants, which, along with ACN, form the scalable infrastructure applicable and beneficial to the whole industry. These modules include SaaS systems, customer front end, community-centric network, technology applications, training and recruiting programs and transaction service centers.
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Our service offerings to ecosystem participants mainly include:
● | To housing customers: As the leading housing transactions and
(i)The Company has 30% direct shareholding in Beijing Lianjia through one of its wholly owned PRC subsidiaries. The Company depends on a series of contractual arrangements to provide its subsidiary with a “controlling financial interest” in the VIEs, as defined in FASB ASC 810. F-14 1. ORGANIZATION (CONTINUED) (b) History and reorganization of the Group The Group commenced operations in the PRC in 2001 through Beijing Lianjia, which was established in September 2001 by Mr. Zuo Hui (the “Founder” and permanent chairman emeritus of the Company). Beijing Lianjia and its subsidiaries developed various businesses over time and expanded nationwide in China. During January 2017, the Group restructured Yiju Taihe, which was originally a subsidiary of Beijing Lianjia and operated financial service businesses, to mirror the holding structure substantially identical to that of Beijing Lianjia. In November 2017, the Group incorporated Tianjin Xiaowu, to conduct operations related to value-added telecommunication services. The Founder is the ultimate controlling party of the Group as he has held majority voting power over the Group throughout the Group’s history. Along with the launch of the Group’s Beike platform, the Company was incorporated in the Cayman Islands in July 2018 as the Group’s holding company to facilitate offshore financing. During July to December 2018, the Company established a series of intermediary holding entities which directly or indirectly hold the equity interests in Beike Tianjin, Jinbei Technology, and Beike Jinke, all of which are the Company’s wholly-owned PRC subsidiaries (collectively, “WFOEs”). Through a series of transactions, most of the original subsidiaries of Beijing Lianjia have become the subsidiaries of the applicable WFOEs and the Group’s other PRC subsidiaries. For example, most of Beijing Lianjia’s operating entities are transferred to Lianjia Zhidi and Lianjia Enterprise Management, both of which are wholly-owned subsidiaries of Beike Tianjin. Then, through a series of reorganization transactions (the “Reorganization”), the Company became the primary beneficiary of Beijing Lianjia, Yiju Taihe and Tianjin Xiaowu through contractual arrangements. In connection with the Reorganization, most of the shareholders of Beijing Lianjia and Yiju Taihe or such shareholders’ affiliates subscribed for ordinary shares, Series B and C convertible redeemable preferred shares of the Company as applicable, substantially in proportion to their previous respective equity interests in Beijing Lianjia and Yiju Taihe prior to the Reorganization. To effect the Reorganization, the Group returned onshore capital of RMB3,000 million and RMB6,931 million to preferred shareholder in 2018 and 2019, respectively. Such capital was reinjected to the Group offshore in 2019. The Reorganization was completed on December 28, 2018. During the second quarter of 2020, certain subsidiaries of Yiju Taihe operating businesses that do not restrict foreign ownership became the subsidiaries of the WFOEs. On July 22, 2020, the Company effected a 5-for-1 share subdivision, following which each of the Company’s issued ordinary shares and preferred shares was subdivided into five ordinary shares and preferred shares, respectively. Upon the subdivision, the number of shares reserved for issuance under the Company’s existing share incentive plans and the number of shares to be issued under the options and other awards granted by the Company pursuant to the existing share incentive plans were adjusted to reflect the subdivision. All applicable share data, per share amounts and related information in the consolidated financial statements and notes thereto have been adjusted retroactively to give effect to the 5-for-1 share subdivision. The Company has completed its initial public offering and been listed on the New York Stock Exchange since August 2020. The Company has completed its listing on the Hong Kong Stock Exchange by way of introduction in May 2022. F-15 1. ORGANIZATION (CONTINUED) (c)VIE Companies Due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services, finance businesses and certain other businesses, the Group operates its platforms and other restricted businesses in the PRC through certain PRC domestic companies, whose equity interests are held by certain management members of the Group and several other individuals and entities affiliated with the Group (“Nominee Shareholders”). The Group depends on a series of contractual arrangements with these PRC domestic companies and their respective Nominee Shareholders to provide its subsidiary with a “controlling financial interest” in the VIEs, as defined in FASB ASC 810, making it the primary beneficiary of the VIEs. These contractual agreements include powers of attorney, exclusive business cooperation agreements, exclusive option agreements, equity pledge agreements and spousal consent letters. These contractual agreements can be extended at the Group’s relevant PRC subsidiaries’ options prior to the expiration dates. Management concludes that these PRC domestic companies are VIEs of the Group, of which the Group is the ultimate primary beneficiary. As such, the Group consolidated the financial results of these PRC domestic companies and their subsidiaries in the Group’s consolidated financial statements. The following is a summary of the contractual agreements (collectively, “Contractual Agreements”) that the Group, through its subsidiaries, entered into with the VIEs and their Nominee Shareholders: i)Contractual Agreements with VIEs Power of Attorney Pursuant to the power of attorney agreements among the WFOEs, the VIEs and their respective Nominee Shareholders, each Nominee Shareholder of the VIEs irrevocably undertakes to appoint the WFOE, or a PRC citizen designated by the WFOE as the attorney-in-fact to exercise all of the rights as a shareholder of the VIEs, including, but not limited to, the right to convene and attend shareholders’ meeting, vote on any resolution that requires a shareholder vote, such as appoint or remove directors and other senior management, and other voting rights pursuant to the articles of association (subject to the amendments) of the VIEs. Each power of attorney agreement is irrevocable and remains in effect as long as the Nominee Shareholder continues to be a shareholder of the VIEs. Exclusive Business Cooperation Agreements Pursuant to the exclusive business cooperation agreements among the WFOEs and the VIEs, respectively, the WFOEs have the exclusive right to provide the VIEs with services related to, among other things, comprehensive technical support, professional training, consulting services and marketing and promotional services. Without prior written consent of the WFOEs, the VIEs agree not to directly or indirectly accept the same or any similar services provided by any others regarding the matters ascribed by the exclusive business cooperation agreements. The VIEs agree to pay the WFOEs services fees, which will be determined by the WFOEs. The WFOEs have the exclusive ownership of intellectual property rights created as a result of the performance of the agreements. The agreements will remain effective except that the WFOEs are entitled to terminate the agreements in writing. F-16 1.ORGANIZATION (CONTINUED) Exclusive Option Agreements Pursuant to the exclusive option agreements among the WFOEs, the VIEs and their respective Nominee Shareholders, the Nominee Shareholders of the VIEs irrevocably grant the respective WFOEs an exclusive option to purchase, or have its designated person to purchase, at its discretion, to the extent permitted under PRC law, all or part of their equity interests in the VIEs (except for 3.03% of Beijing Lianjia’s equity interests pledged to a third party as of December 31, 2018, while the pledge was removed in December 2019 and all equity interests were subject to the exclusive option agreements).The purchase price with respect to the equity interests in Tianjin Xiaowu shall be the amount of paid-in capital or the lowest price permitted by applicable PRC law, and the purchase price with respect to the equity interests in other VIEs shall be the higher of RMB1 or the lowest price permitted by applicable PRC law. The shareholders of the VIEs further undertake to pay to the WFOEs any dividends and other distributions they receive in relation to the equity interests they held in the VIEs, to the extent permitted by PRC law. The shareholders of the VIEs undertake that, without prior written consent of the WFOEs, they will not create any pledge or encumbrance on their equity interests in the VIEs, approve any transfer or in any manner disposal of their equity interests, or any disposition of any assets of the VIEs (other than limited exceptions). The shareholders of each of the VIEs agree, among other things, without prior written consent of the WFOEs, not to cause the relevant VIEs to merge with any other entities, increase or decrease its registered capital, declare or distribute dividends, amend its articles of association, enter into any material contract (other than those occurring in the ordinary course of business), appoint or remove its directors, supervisors or other management, be liquidated or dissolved (unless mandated by PRC laws), lend or borrow money (except for payables incurred in the ordinary course of business other than through loans) or undertake any actions that may adversely affect the VIEs’ operating status and asset value. These agreements will remain effective until all of the equity interests of the relevant VIEs have been transferred to the WFOEs and/or its designated person. Jinbei Technology has the unilateral right to terminate the agreement with Tianjin Xiaowu. Equity Pledge Agreements Pursuant to the equity pledge agreements among the WFOEs, the VIEs and their respective Nominee Shareholders, the Nominee Shareholders of the VIEs pledged all of their respective equity interests in the VIEs to the WFOEs as security for performance of the obligations of the VIEs and their Nominee Shareholders under the exclusive business cooperation agreements, the power of attorney agreements, the exclusive option agreements and the equity pledge agreements, except for 3.03% of Beijing Lianjia’s equity interests pledged to a third party as of December 31, 2018. The pledge was removed in December 2019 and all equity interests became subject to the equity pledge agreements. The Nominee Shareholders of the VIEs also undertake that, during the term of the equity pledge agreements, unless otherwise approved by the WFOEs in writing, they will not transfer the pledged equity interests or create or allow any new pledge or other encumbrance on the pledged equity interests. As of the date of this report, the Group has registered all such equity pledges with the local branch of the State Administration for Market Regulation in accordance with PRC laws to perfect the respective equity pledges. After the completion of the equity pledge registrations, in the event of a breach by the VIEs or its shareholders of contractual obligations under these agreements, the WFOEs will have the right to dispose of the pledged equity interests in the VIEs. Spousal Consent Letters Pursuant to the spousal consent letters, each of the spouses of the applicable individual Nominee Shareholders of the VIEs unconditionally and irrevocably agrees that the equity interest in the VIEs held by and registered in the name of his or her respective spouse will be disposed of pursuant to the relevant exclusive business cooperation agreements, equity pledge agreements, the exclusive option agreements and the power of attorney agreements, without his or her consent. In addition, each of them agrees not to assert any rights over the equity interest in the VIEs held by her respective spouses. In addition, in the event that any of them obtains any equity interest in the VIEs held by their respective spouses for any reason, such spouses agree to be bound by similar obligations and agreed to enter into similar contractual arrangements. F-17 1. ORGANIZATION (CONTINUED) ii)Risks in relation to VIE structure Part of the Group’s business is conducted through the VIEs of the Group, of which the Company is the ultimate primary beneficiary. The Company has concluded that (i) the ownership structure of the VIEs is not in violation of any existing PRC law or regulation in any material respect; and (ii) each of the VIE Contractual Agreements is valid, legally binding and enforceable to each party of such agreements and will not result in any violation of PRC laws or regulations currently in effect. However, uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current VIE Contractual Agreements and businesses to be in violation of any existing or future PRC laws or regulations. On March 15, 2019, the National People’s Congress adopted the Foreign Investment Law of the PRC, which became effective on January 1, 2020, together with their implementation rules and ancillary regulations. The Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, but it contains a catch-all provision under the definition of “foreign investment”, which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. It is unclear that whether the Group’s corporate structure will be seen as violating the foreign investment rules as the Group are currently leveraging the contractual arrangements to operate certain businesses in which foreign investors are prohibited from or restricted to investing. If variable interest entities fall within the definition of foreign investment entities, the Group’s ability to use the contractual arrangements with the VIE and the Group’s ability to conduct business through the VIEs could be severely limited. In addition, if the Group’s corporate structure and the contractual arrangements with the VIEs through which the Group conducts its business in the PRC were found to be in violation of any existing or future PRC laws and regulations, the Group’s relevant PRC regulatory authorities could:
F-18 1. ORGANIZATION (CONTINUED) The imposition of any of these penalties may result in a material and adverse effect on the Group’s ability to conduct the Group’s businesses. In addition, if the imposition of any of these penalties causes the Group to lose the rights to direct the activities of the VIEs or the right to receive its economic benefits, the Group would no longer be able to consolidate the VIEs. The management believes that the likelihood for the Group to lose such ability is remote based on current facts and circumstances. However, the interpretation and implementation of the laws and regulations in the PRC and their application to an effect on the legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position as the Group herein in respect of the legality, binding effect and enforceability of each of the contractual arrangements. Meanwhile, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to the Group to enforce the contractual arrangements should the VIEs or the Nominee Shareholders of the VIEs fail to perform their obligations under those arrangements. Summary of Financial Information of the VIEs In accordance with VIE Contractual Agreements, the Company (1) could exercise all shareholder’s rights of the VIEs and has power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered as ultimate primary beneficiary of the VIEs and has consolidated the VIEs’ financial results of operations, assets and liabilities in the Company’s consolidated financial statements. Therefore, the Company considers that there are no assets in the VIEs that can be used only to settle obligations of the VIEs, except for the registered capital of the VIEs amounting to approximately RMB2.8 billion and RMB2.5 billion as of December 31, 2021 and 2022, as well as certain non-distributable statutory reserves amounting to approximately RMB74.0 million and RMB109.3 million as of December 31, 2021 and 2022. As the VIEs are incorporated as limited liability companies under the PRC Company Law, creditors do not have recourse to the general credit of the Company for the liabilities of the VIEs. There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs. As the Group is conducting certain businesses in the PRC through the VIEs, the Group may provide additional financial support on a discretionary basis in the future, which could expose the Group to a loss. F-19 1. ORGANIZATION (CONTINUED) Summary of Financial Information of the VIEs (Continued) The following table sets forth the assets, liabilities, results of operations and changes in cash, cash equivalents and restricted cash of the consolidated VIEs (inclusive of the VIEs’ subsidiaries, and the consolidated trusts as discussed in Note 2.12) taken as a whole, which were included in the Group’s consolidated financial statements with intercompany transactions eliminated. The following disclosures present the financial positions of the businesses that currently constitute the VIE entities as of December 31, 2021 and 2022 and the operation results for the years ended December 31, 2020, 2021 and 2022.
F-20 1. ORGANIZATION (CONTINUED) Summary of Financial Information of the VIEs (Continued)
(d)Impact of COVID-19 In 2020, as part of Chinese government’s effort to ease the burden of businesses affected by COVID-19, the Ministry of Human Resources and Social Security, the Ministry of Finance and the State Taxation Administration temporarily reduced or exempted certain payments to the government-mandated employee welfare benefit plans. For the year ended December 31, 2020, the Group recognized government grants related to the above support program of approximately RMB916.6 million, which reduced the costs of employee benefits in the consolidated statements of comprehensive income (loss). There was no such program in the year ended December 31, 2021 and 2022. 2. SIGNIFICANT ACCOUNTING POLICIES 2.1 (a) Impact of newly adopted accounting pronouncement In 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which replaces the existing incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Company adopted Topic 326 using a modified retrospective method for all financial assets measured at amortized cost and liabilities for guarantee arrangements. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a decrease to retained earnings, net of tax, of RMB91 million as of January 1, 2020 for the cumulative effect of adopting Topic 326. F-21 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In August 2020, the FASB issued ASU No. 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”. The amendments in this update affect entities that issue convertible instruments and/or contracts indexed to and potentially settled in an entity’s own equity. The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted the standard effective January 1, 2022 on a prospective basis. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements. In November 2021, the FASB issued ASU No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance,” which requires disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The standard is effective for public companies for fiscal years beginning after December 15, 2021. The Company adopted the standard effective January 1, 2022 on a prospective basis. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements. 2.1 (b) Recently issued accounting pronouncements not yet adopted In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination as if it had originated the contracts. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements. In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”, which clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The standard also requires certain disclosures for equity securities subject to contractual sale restrictions. The standard is effective for public companies for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements. 2.2 Basis of preparation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Significant accounting policies followed by the Group in the preparation of its accompanying consolidated financial statements are summarized below. Change in segment Subsequent to the acquisition of Shengdu Home Renovation Co., Ltd (“Shengdu”) (Note 23), the Group changed its organizational structure, resulting in four reportable segments: existing home transaction services, new home transaction services, home renovation and furnishing, and emerging and other services. Prior period segment results have been recast to conform to the current presentation. See Note 24. “Segment Information” for additional information. F-22 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Change in method of accounting for capitalization of costs to obtain a contract as incurred On January 1, 2022, the Group elected to change its method of accounting for contract cost capitalization. In prior years, the Group used the practical expedient under ASC 606 to expense the costs to obtain a contract as incurred when the expected amortization period is one year or less. Starting in this year, the group recognizes as an asset the incremental costs of obtaining a contract with customer if the Group expects to recover those costs. An asset related to an obligation satisfied over time is amortized using a method consistent with the method used to measure progress and recognize revenue over the contract term. An asset related to an obligation satisfied at point in time is expensed upon the transfer of control of the goods or services to which the asset relates. The new method of accounting is considered preferable as the amortization of the contract cost is consistent with the pattern of the newly acquired home renovation services’ revenue recognition. The prior period financial statements have not been adjusted as the accumulated effect of the change to the accounting principal on periods prior to those presented is immaterial. The following financial statement line items for fiscal years 2022 were affected by the change in accounting principle. The consolidated balance sheet as of December 31, 2022 was as followed:
The consolidated statement of comprehensive income (loss) for the year ended December 31, 2022 was as followed:
F-23 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.3 Basis of consolidation The consolidated financial statements include the financial statements of the Company, its subsidiaries, the consolidated VIEs (inclusive of the VIEs’ subsidiaries) for which the Company is the ultimate primary beneficiary. A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power, has the power to appoint or remove the majority of the members of the Board of directors, to cast a majority of votes at the meeting of the Board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders. A consolidated VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, has the power to direct the activities that most significantly impact the entity’s economic performance, bears the risks of and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiaries is the primary beneficiary of the entity. All transactions and balances between the Company, its subsidiaries, consolidated VIEs (inclusive of VIEs’ subsidiaries) have been eliminated upon consolidation. The results of subsidiaries and VIEs acquired or disposed of during the year are recorded in the consolidated statements of comprehensive income (loss) from the effective dates of acquisition or up to the effective dates of disposal, as appropriate. 2.4 Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the balance sheet date, and the reported revenues and expenses during the reporting periods in the consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s consolidated financial statements include, but are not limited to (i) revenue recognition, (ii) provision for credit losses of accounts receivable, financing receivables and other receivables, (iii) assessment for impairment of long-lived assets, intangible assets and goodwill, (iv) valuation and recognition of share-based compensation expenses, (v) useful lives of property, plant and equipment and intangible assets, (vi) fair value of short-term and long-term investments, and derivative instruments, (vii) incremental borrowing rate used to account for leases, (viii) valuation of intangible asset arising from business combination transaction, (ix) provision for income tax and valuation allowance for deferred tax assets, and (x) liabilities related to employee welfare benefits. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial statements. 2.5 Foreign currencies and foreign currency translation The Group’s reporting currency is Renminbi (“RMB”). The functional currency of the Company and its subsidiaries incorporated in the Cayman Islands, BVI and Hong Kong is United States dollars (“US$”) and the functional currency of the PRC entities in the Group is RMB. The Company’s subsidiaries with operations in other jurisdictions generally use their respective local currencies as their functional currencies. Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at the balance sheet dates. Net gains and losses resulting from foreign exchange transactions are included in foreign currency exchange gain (loss) in the consolidated statements of comprehensive income (loss). F-24 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The financial statements of the Group are translated from the functional currencies into RMB. Assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates at the balance sheet date. Equity accounts other than earnings generated in current period are translated into RMB at the appropriate historical rates. Revenues, expenses, gain and loss are translated into RMB using the periodic average exchange rates. Translation differences are recorded currency translation adjustments as a component of other comprehensive income (loss) in the consolidated statements of comprehensive income (loss). 2.6 Convenience translation Translations of the consolidated balance sheets, the consolidated statements of comprehensive income (loss) and the consolidated statements of cash flows from RMB into US$ as of and for the year ended December 31, 2022 are solely for the convenience of the readers and were calculated at the rate of US$1.00=RMB6.8972, representing the index rates stipulated by the Federal Reserve Board using the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on December 30, 2022. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2022, or at any other rate. 2.7 Fair value measurements Accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurement for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure fair value: Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2—Other inputs that are directly or indirectly observable in the marketplace. Level 3—Unobservable inputs which are supported by little or no market activity. Accounting guidance also describes three main approaches to measure the fair value of assets and liabilities: 1) market approach; 2) income approach and 3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. 2.8 Cash and cash equivalents Cash and cash equivalents consist of cash on hand, demand deposits and highly liquid investments placed with banks or other financial institutions, which are unrestricted as to withdrawal or use, and which have original maturities less than three months and are readily convertible to known amount of cash. F-25 2.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.9 Restricted cash Cash that is legally or contractually restricted as to withdrawal or for use or pledged as security is reported separately on the face of the consolidated balance sheets. In accordance with Accounting Standards Codification (“ASC”) 230, the amounts generally described as restricted cash and restricted cash equivalents are included in the total cash, cash equivalents and restricted cash balances in the consolidated statements of cash flows. The Group’s restricted cash is mainly comprised of 1) cash received from the property buyers but not yet paid to the sellers through the Group’s online payment platform, which is placed with banks in escrow accounts; 2) security deposits for the Group’s guarantee and financing services; and 3) borrowings from commercial banks for limited purpose; and 4) other miscellaneous restricted cash. 2.10 Short-term investments Short-term investments include investments in financial instruments with a variable interest rate indexed to performance of underlying assets. For equity classified securities, in accordance with ASC 825 — “Financial Instruments”, the Group elected the fair value option at the date of initial recognition and carried these investments at fair value. Changes in the fair value are reflected in the consolidated statements of comprehensive income (loss). The Group also holds debt classified securities, and accounts for such investments in accordance with ASC Topic 320, Investments—Debt Securities (“ASC 320”). The Group classifies the short-term investments in debt as held-to-maturity, trading or available-for-sale, whose classification determines the respective accounting methods stipulated by ASC 320. Dividend and interest income, including amortization of the premium and discount arising at acquisition, for all categories of investments in securities are included in earnings. Any realized gains or losses on the sale of the short-term investments are determined on a specific identification method, and such gains and losses are reflected in earnings during the period in which gains or losses are realized. Held-to-maturity investments include debt instruments issued by private companies for which the Group has the positive intent and ability to hold those securities to maturity, and time deposits represent time deposits placed with banks with maturities more than three months. The Group account for the held-to-maturity debt securities at amortized cost less allowance for credit losses. The allowance for credit losses of the held-to-maturity debt securities reflects the Group’s estimated expected losses over the contractual lives of the held-to-maturity debt securities and is charged to “Other income, net” in the consolidated statements of comprehensive income (loss). Estimated allowances for credit losses are determined by considering reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. As of December 31, 2021 and 2022, the allowance for credit losses provided for the held-to-maturity debt securities held by the Group was insignificant. Debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities, in accordance with ASC 320. Unrealized holding gains and losses for trading securities are included in earnings. Debt investments not classified as trading or as held-to-maturity are classified as available-for-sale debt investments, which are reported at fair value, with unrealized gains and losses recorded in “Accumulated other comprehensive income (loss)” on the consolidated balance sheets. Investments with expected maturity of over a year are classified as long-term investments. Investments with maturity date within one year will be reclassified to short-term investments. F-26 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.11 Accounts receivable Accounts receivable represents those receivables derived in the ordinary course of business, net of allowance for credit losses, including receivable from real estate property sellers, buyers and agents from the platform. Starting from January 1, 2020, the Group adopted ASC 326 and assesses the accounts receivable and establishes a reserve to reflect the net amount expected to be collected. The allowance is management’s estimate of expected credit losses after considering historical collection activity, the nature of the receivable, the current business environment and forecasts that may affect the customers’ ability to pay. Management estimated the allowance by segmenting accounts receivable based on certain credit risk characteristics and determining an expected loss rate for each segmentation based on historical loss experience adjusted for judgments about the effects of relevant observable data including current and future economic conditions. The allowance for credit losses and corresponding receivables were written off when they are determined to be uncollectible. 2.12 Financing receivables The Group generates financing receivables by providing personal credit loans to property buyers, tenants and other individual borrowers. The Group has the intent and the ability to hold such financing receivables for the foreseeable future or until maturity or payoff. Financing receivables from consolidated Trusts The Group has entered into arrangements with consolidated trusts (“Trusts”), pursuant to which the Group invested in the financing receivables using funds from the consolidated Trusts. The Trusts are administered by third-party trust companies, which act as the trustees, with funds contributed by the Group and/or other third-party investors for the purposes of providing returns to the beneficiary of the Trusts. The Group has power to direct the activities of the Trusts and has the obligation to absorb losses or the right to receive benefits from the Trusts that could potentially be significant to the Trusts. As a result, the Trusts are considered consolidated VIEs of the Group under ASC 810—“Consolidation”. Therefore the loans funded by the consolidated Trusts are recorded as the Group’s financing receivables. The proceeds received from the third-party investors are recognized as funding debts. Cash received via consolidated Trusts that has not yet been distributed is recorded as restricted cash. Financing receivables from micro-loan platforms The Group also offers micro loans to borrowers via micro-loan platforms. The loans offered mainly include: 1) installment loans for home renovation and furnishing to property owners; 2) loans provided to external small property agents; 3) loans provided to other individuals. As the Group undertakes substantially all the risks and rewards, the micro loans are recognized as financing receivables on the consolidated balance sheets. Measurement of financing receivables Financing receivables are measured at amortized cost and reported on the consolidated balance sheets at outstanding principal adjusted for any write-offs and the allowance for credit losses. F-27 2.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Allowance for credit losses Starting from January 1, 2020, the Group adopted ASU No. 2016-13 and estimated the allowance for credit losses to reflect the Group’s estimated expected losses. The Group assesses the allowance for credit losses, mainly based on the past collection experience as well as consideration of current and future economic conditions and changes in the Group’s customer collection trends. The provision for credit losses represents an estimate of the losses expected to be incurred from the Group’s finance receivable portfolio. The Group uses projected risk parameters (e.g. probability of default and loss given default (severity)) to estimate the allowance of different segmentations, driven primarily by business type, on a collective basis. This projected risk parameters are primarily based upon historical loss experience adjusted for judgments about the effects of relevant observable data including current and future economic conditions as well as external historical loan performance trends, recovery rates, credit quality indicators. The allowance for credit losses and corresponding receivables were written off when they are determined to be uncollectible. The Group considers available information in quarterly assessments of the adequacy of the allowance. The Group believes the estimates, including any qualitative adjustments, are reasonable and have considered reasonably available information about past events, current conditions, and reasonable and supportable forecasts of future events and economic conditions. Accrued interest receivable Accrued interest income on financing receivables is calculated based on the effective interest rate of the loan and recorded as interest income as earned. The outstanding principal balance of loans which has not been collected prior to the contractual maturity date is considered to be past due. When a financing receivable reaches 1 day past due, it is placed on non-accrual status, and the Group stops accruing interest of the financing receivables as of such date. The accrued but unpaid interest as of such date is not reversed. The Group assesses the collectability of accrued interest together with the unpaid principal amount and provides reserves if warranted interest income for non-accrual financing receivables is recognized on a cash basis. Cash receipt of non-accrual financing receivables would be first applied to any unpaid principal, late payment fees, if any, before recognizing interest income. The Group does not resume accrual of interest after a loan has been placed on non-accrual basis. For the years ended December 31, 2020, 2021 and 2022, the amount of interest income recognized on non-accrual financial assets was insignificant. 2.13 Derivative instruments Derivative instruments are measured at fair value and recognized as either assets or liabilities on the consolidated balance sheets in either current or non-current other assets or accrued expenses and other current liabilities or other long-term liabilities depending upon maturity and commitment. Changes in the fair value of derivatives are either recognized periodically in the consolidated income (loss) statements or in other comprehensive income (loss) depending on the use of the derivatives and whether they qualify for hedge accounting. The Group selectively uses financial instruments to manage market risk associated with exposure to fluctuations in interest rates and foreign currency rates. These financial exposures are monitored and managed by the Group as an integral part of its risk management program. The Group does not engage in derivative instruments for speculative or trading purposes. The Group’s derivative instruments are not qualified for hedge accounting, thus changes in fair value are recognized in fair value changes in investments, net in the consolidated statements of comprehensive income (loss). The cash flows of derivative financial instruments are classified in the same category as the cash flows from the items subject to the economic hedging relationships. The estimated fair value of the derivatives is determined based on relevant market information. These estimates are calculated with reference to the market rates using industry standard valuation techniques. 2.14 Inventories Inventories, which mainly consist of materials for home renovation business and furniture, electronic and home appliances products available for sale, are valued at the lower of moving weighted average cost or net realizable value. As of December 31, 2022, no adjustment is deemed necessary to reduce inventory to net realizable value due to the rapid turnover and high utilization of inventory. Inventory is included in the prepayments, receivables and other assets line item in the Balance Sheets. F-28 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.15 Property, plant and equipment, net Property, plant and equipment are stated at cost less accumulated depreciation and impairment, if any. Depreciation is computed based upon the usage of the asset, which is approximated using a straight-line method over the estimated useful lives of the assets, which range as follows:
Expenditures for maintenance and repairs are expensed as incurred. The gain or loss on the disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of comprehensive income (loss). 2.16 Intangible assets, net Intangible assets mainly include those acquired through business combinations and purchased intangible assets. Intangible assets acquired through business combinations are recognized as assets separate from goodwill if they satisfy either the “contractual-legal” or “separability” criterion. Intangible assets arising from business combinations are recognized and measured at fair value upon acquisition. Purchased intangible assets are initially recognized and measured at cost upon acquisition. Separately identifiable intangible assets that have determinable lives continue to be amortized over their estimated useful lives based upon the usage of the asset, which is approximated using a straight-line method as follows:
The Group considers the factors listed in ASC 350-30-35-3 when determining the useful life of an intangible asset, such as the expected use of the asset by the entity, and any legal, regulatory, or contractual provisions that may limit the useful life. The useful life of software is mainly determined based on its expected use and contractual provisions. The useful life of trademarks and domain names is determined based on the expected use and legal provisions. The useful life of licenses, which are mainly licenses for franchise business, is determined on the expected cooperation period with franchisees. Separately identifiable intangible assets and other long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for identifiable intangible assets is based on the amounts by which the carrying amounts of the assets exceed the fair values of the assets. F-29 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.17 Goodwill Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired in a business combination. Goodwill is not depreciated or amortized but is tested for impairment on an annual basis, and between annual tests if events or circumstances indicate that the goodwill may be impaired. The Group early adopted ASU No. 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” in 2019. In accordance with the FASB, a company first has the option to assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. In the qualitative assessment, the Group considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. If the Group decides, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss equal to the difference between the fair value and the carrying value is recognized. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. 2.18 Long-term investments (i)Equity investments accounted for using the equity method In accordance with ASC 323 — “Investment — Equity Method and Joint Ventures”, the Group applies the equity method of accounting to equity investments, in common stock or in-substance common stock, over which it has significant influence but does not own a majority equity interests or otherwise control. An investment in in-substance common stock is an investment that has risk and reward characteristics that are substantially similar to that entity’s common stock. The Group considers subordination, risks and rewards of ownership and obligation to transfer value when determining whether an investment in an entity is substantially similar to one in that entity’s common stock. Under the equity method, the Group initially records its investment at cost. The difference between the cost of the equity investment and the amount of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill or as an intangible asset as appropriate. The Group subsequently adjusts the carrying amount of the investment to recognize the Group’s proportionate share of each equity investee’s net income or loss into the consolidated statements of comprehensive income (loss) after the date of acquisition. When the Group’s share of losses in the equity investee equals or exceeds its interest in the equity investee, the Group does not recognize further losses, unless the Group has incurred obligations or made payments or guarantees on behalf of the equity investee, or the Group holds other investments in the equity investee. The Group continually reviews its investment in equity investees under the equity method to determine whether a decline in fair value to below the carrying value is other-than-temporary. The primary factors the Group considers in its determination are the duration and severity of the decline in fair value, the financial condition, operating performance and the prospects of the equity investee, and other company specific information such as recent financing rounds. The fair value determination, particularly for investments in early stage privately-held companies, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments and the determination of whether any identified impairment is other-than-temporary. If any impairment is considered other-than-temporary, the Group writes down the asset to its fair value and takes the corresponding charge to the consolidated statements of comprehensive income (loss). F-30 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (ii)Investments accounted for at fair values The Group adopted ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”) for all periods presented. Securities with readily determinable fair values are measured at fair value. Equity securities accounted for at fair values include investments in i) marketable equity securities, which are publicly traded stock and ii) unlisted companies, for which the Group measures at fair value on a recurring basis. Pursuant to ASC 321, for equity investments measured at fair value with changes in fair value recorded in earnings, the Group does not assess whether those securities are impaired. For investments in convertible notes and loans receivable with maturities of over one year, the Group elected the fair value option. The fair value option permits the irrevocable election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The investments accounted for under the fair value option are carried at fair value with realized or unrealized gains and losses recorded in the consolidated statements of comprehensive income (loss). For wealth management products with variable interest rates referenced to performance of underlying assets and with original maturities greater than one year, the Group elected the fair value method at the date of initial recognition and carries these investments at fair value in accordance with ASC 825 — “Financial Instruments”. Changes in the fair value of these investments are reflected on the consolidated statements of comprehensive income (loss) as fair value changes in investments, net. Fair value is estimated based on quoted prices of similar products provided by financial institutions at the end of each reporting period. The Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurements. (iii)Equity investments measured at measurement alternative and NAV practical expedient Private equity funds pursue various investment strategies. Investments in private equity funds generally are not redeemable due to the closed-ended nature of these funds. These private equity funds, over which the Group does not have the ability to exercise significant influence, are accounted for under the existing practical expedient in ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) to estimate fair value using the net asset value per share (or its equivalent) of the investment (“NAV practical expedient”). The Group measures investments in equity securities, other than equity method investments, at fair value through earnings. For those investments without readily determinable fair value and do not qualify for NAV practical expedient, the Group may elect to record these investments at cost, less impairment, and plus or minus subsequent adjustments for observable price changes, in accordance with ASU No. 2016-01. Under this measurement alternative, changes in the carrying value of the equity investment will be required to be made whenever there are observable price changes in orderly transactions for the identical or similar investment of the same issuer. For those equity investments that the Group elects to use the measurement alternative, the Group makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Group has to estimate the investment’s fair value in accordance with the principles of ASC 820. If the fair value is less than the investment’s carrying value, the Group recognizes an impairment loss in net income (loss) equal to the difference between the carrying value and fair value. (iv)Long-term time deposits Long-term time deposits represent time deposits placed with banks with maturities more than one year. The Group account for the long-term time deposits at amortized cost less allowance for credit losses. (v)Held-to-maturity debt investments Long-term held-to-maturity debt investments include debt instruments issued by private companies with maturities of greater than one year and for which the Group has the positive intent and ability to hold those securities to maturity. The Group account for the held-to-maturity debt securities at amortized cost less allowance for credit losses. F-31 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The allowance for credit losses of the held-to-maturity debt securities reflects the Group’s estimated expected losses over the contractual lives of the held-to-maturity debt securities and is charged to “Other income, net” in the consolidated statements of comprehensive income (loss). Estimated allowances for credit losses are determined by considering reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. As of December 31, 2021 and 2022, the allowance for credit losses provided for the held-to-maturity debt securities held by the Group was insignificant. (vi)Available-for-sale debt investments Available-for-sale debt investments are debt instruments or preferred shares issued by banks and other financial institutions that are redeemable at the issuer’s option, which are measured at fair value. Available-for-sale debt investments that are redeemable at the issuer’s option have no contractual maturity date. Interest income is recognized in earnings. All other changes in the carrying amount of these debt investments are recognized in other comprehensive income (loss). The allowance for credit losses of on available-for-sale debt securities is accounted for in accordance with ASC 326, Financial Instruments - Credit Losses (“ASC 326”). The Group adopted ASC 326 on January 1, 2020, on a modified retrospective basis. Under ASC 326, at each reporting period, available-for-sale debt securities are evaluated at the individual security level to determine whether there is a decline in the fair value below its amortized cost basis (an impairment). In circumstances where the Group intend to sell, or are more likely than not required to sell, the security before it recovers its amortized cost basis, the difference between fair value and amortized cost is recognized as a loss in the consolidated statements of operations, with a corresponding write-down of the security’s amortized cost. In circumstances where neither condition exists, we then evaluate whether a decline is due to credit-related factors. The factors considered in determining whether a credit loss exists can include the extent to which fair value is less than the amortized cost basis, changes in the credit quality of the underlying loan obligors, credit ratings actions, as well as other factors. To determine the portion of a decline in fair value that is credit-related, we compare the present value of the expected cash flows of the security discounted at the security’s effective interest rate to the amortized cost basis of the security. A credit-related impairment is limited to the difference between fair value and amortized cost, and recognized as an allowance for credit loss on the consolidated balance sheet with a corresponding adjustment to net income (loss). Any remaining decline in fair value that is non-credit related is recognized in other comprehensive income (loss), net of tax. Improvements in expected cash flows due to improvements in credit are recognized through reversal of the credit loss and corresponding reduction in the allowance for credit loss. 2.19 Leases (a)Definition of a lease A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For contracts entered into or modified on or after the date of initial application of ASC 842 or arising from business combinations, the Group assesses whether a contract is or contains a lease based on the definition under ASC 842 at inception, modification date or acquisition date, as appropriate. Such contract will not be reassessed unless the terms and conditions of the contract are subsequently changed. (b)The Group as a lessee The Group mainly leases sales stores (including brokerage sales stores, transaction closing service centers and home renovation and furnishing service stores), administrative offices, entrusted houses and land use rights from property owners. These are all classified as operating leases. F-32 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Rental contracts for the sales stores and offices are typically made for fixed periods ranging generally from few months to ten years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Land use rights are amortized on a straight-line basis over the shorter of the estimated useful life, generally from 44 to 47 years, or the estimated usage periods or the terms of the agreements. For leases existing as of January 1, 2019, the Group elected the practical expedient which allows use of hindsight in determining the lease term. The Group’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Group will exercise that option. The determination of whether an arrangement is or contains a lease is made at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Group obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. The Group elected not to separate non-lease components from lease components. Therefore, it will account for lease and non-lease components as a single lease component when there is only one vendor in the lease contract. The majority of the Group’s leases have fixed payments schedules, with certain leases including additional payments based on future contract performance. For leases with additional payments based on future contract performance, no amount is included in the calculation of the lease liability or corresponding asset because of the uncertainty for future contract performance and payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Under a lease, the lessees are required to recognize right-of-use assets and lease liabilities. Right-of-use assets represent the Group’s right to use an underlying asset for the lease term and are recognized as the amount of the lease liabilities, adjusted for lease incentives received. Lease liabilities represent the Group’s obligation to make lease payments arising from the lease and are recognized at the present value of the future lease payments at the lease commencement date. As the interest rate implicit in most of the Group’s leases is not readily determinable, the Group uses the incremental borrowing rate (“IBR”) to determine the present value of the future lease payments. The IBR is a hypothetical rate based on the Group’s understanding of what its credit rating would be to borrow and resulting interest the Group would pay to borrow an amount equal to the lease payments in a similar economic environment over the lease term with a similar security. Any lease with a term of 12 months or less is considered short-term. As permitted by ASC 842, short-term leases are excluded from the right-of-use asset and lease liabilities accounts on the consolidated balance sheets. Consistent with all other operating leases, short-term lease expense is recorded on a straight-line basis over the lease term. (c)The Group as a lessor The Group generates revenues from rental property management services as a lessor. The Group sources houses from homeowners, subleases the houses or separate rooms to tenants, and provides operational management services such as maintenance. Leases for which the Group is a lessor are classified as operating leases. The terms of the agreements with tenants are generally one year, and rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of the relevant lease. When the Group serves as an intermediate lessor, it accounts for the head lease and the sublease as two separate contracts. The sublease is classified by reference to the underlying asset arising from the head lease. 2.20 Borrowings Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in profit or loss over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. F-33 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.21 Treasury shares The Company accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in “Treasury shares” on the consolidated balance sheets. At retirement of the treasury share, the ordinary shares account is charged only for the aggregate par value of the shares. The excess of the acquisition cost of treasury share over the aggregate par value is allocated between additional paid-in capital and retained earnings. 2.22 Statutory reserves In accordance with the laws applicable to the Foreign Investment Enterprises (“FIEs”) established in the PRC, the Group’s subsidiaries registered as WFOEs have to make appropriations from their annual after-tax profits as determined under generally accepted accounting principles in the PRC (“PRC GAAP”) to reserve funds including the general reserve fund, enterprise expansion fund and staff bonus and welfare fund. The appropriation to the general reserve fund must be at least 10% of the annual after-tax profits calculated in accordance with PRC GAAP. Appropriation is not required if the general reserve fund has reached 50% of the registered capital of the company. Appropriations to the enterprise expansion fund and staff bonus and welfare fund are made at the respective company’s discretion. In addition, in accordance with the PRC Company Laws, the consolidated VIEs (inclusive of VIEs’ subsidiaries) incorporated in PRC are required to make appropriations on annual basis from their after-tax profits to non-distributable reserve funds including statutory surplus fund and discretionary surplus fund. The appropriation to the statutory surplus fund must be 10% of the after-tax profits as determined under PRC GAAP. Appropriation is not required if the statutory surplus fund has reached 50% of the registered capital of the company. Appropriation to the discretionary surplus fund is made at the discretion of the respective company. The use of the general reserve fund, enterprise expansion fund, statutory surplus fund and discretionary surplus fund is restricted to offsetting of losses or increasing of the registered capital of the respective company. The staff bonus and welfare fund is a liability in nature and is restricted to fund payments of special bonus to employees and for the collective welfare of all employees. None of these reserves is allowed to be transferred to the company in terms of cash dividends, loans or advances, nor can they be distributed except under liquidation. For the years ended December 31, 2020, 2021 and 2022, profit appropriation to general reserve fund and statutory surplus fund for the Group’s entities incorporated in the PRC was approximately RMB139.1 million, RMB91.1 million and RMB176.9 million, respectively. No appropriation to other reserve funds was made for any of the periods presented. 2.23 Revenue recognition The Group applied ASC 606 - “Revenue from Contracts with Customers” for all periods presented. According to ASC 606, revenues from contracts with customers are recognized when control of the promised goods or services is transferred to the Group’s customers in an amount that reflects the consideration the Group expects to be entitled to in exchange for those goods or services, after considering reductions by estimates for refund allowances, price concession, discount and Value Added Tax (“VAT”). F-34 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Existing home transaction services The Group generates revenue from existing home transaction services primarily by earning commissions from housing customers for sales or leases transactions facilitated by the Group’s own Lianjia brand where the Group acts as the principal agent, or splits of commissions with other brokerage firms acting as the principal agents in cooperation with the Group to complete transactions. In these transactions, the principal agent signs a housing agency service contract with housing customers and is responsible for fulfilling the obligations to provide the agency services under the contract. The Beike platform requires platform agreements to be signed by all brokerage firms registered with the platform. The platform agreements establish a cooperative relationship between the principal agent and all participating brokerage firms, which allows the principal agent to combine and control services provided by the participating agent. The platform agreements also set the principal agent’s role and responsibility for overall agency services and a fee allocation structure for various standard cooperating roles of agency services. For each successful transaction completed through the platform, the platform will calculate commissions for each participating agent in accordance with the platform agreements and settle them through the platform’s payment system. When the Group signs the housing agency service contracts with housing customers and splits commissions with other brokerage firms who cooperate with the Group to complete the housing transactions in accordance with the platform agreement, the Group is considered to be the principal agent as it has the right to determine the service price and to define the service performance obligations, it has control over services provided and it is fully responsible for fulfilling the agency services pursuant to the housing agency service contracts it signed with the housing customers. Accordingly, the Group accounts for the commissions from these agency service contracts on a gross basis, with any commissions paid to other brokerage firms recorded as a cost of revenue. Brokerage services and transaction closing services identified in the housing sales agency services contracts are considered to be seperate performance obligations. Therefore the consideration is allocated to brokerage services and transaction closing services based on the relative stand-alone selling prices. The Group recognizes them as revenues when the services are provided. When other brokerage firms on Beike platform sign the housing agency service contracts with housing customers and split commissions with the Group in accordance with platform agreement for cooperation services by the Group to complete the housing transactions, the Group is considered as a participating agent who provides services to the principal agents as the Group is not the primary obligor for the agency service contract and does not have the right to determine the service price. Accordingly, the Group accounts for the commissions from these agency service contracts on a net basis. For agency commissions earned by the Group, either as the principal agent or participating agent, the Group recognizes commissions as revenues when the performance obligations are satisfied at the time the housing customers sign the housing sale and purchase agreements or the lease agreements, after deducting estimated potential refunds due to a terminated transaction. The Group also generates revenue from existing home transaction services by earning (i) platform service fees from real estate brokerage firms on the Beike platform as a percentage of the transaction commissions earned on the platform for using the Group’s ACN and SaaS systems; (ii) franchise fees from brokerage firms as a percentage of the transaction commissions earned under the Group’s franchise brands such as the Deyou brand; and (iii) other service fees for various services offered by Beike platform, such as transaction closing service through the Group’s transaction center. For platform service and franchise fees, the Group recognizes the estimated fees that it expects to receive as revenues when the Group obtains the right to payment at the time the housing customers sign the housing sale and purchase agreements or the lease agreements. For other service fees, the Group recognizes them as revenues when the services are provided. F-35 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New home transaction services The Group generates revenues from new home transaction services principally by earning sales commissions from real estate developers for new home sales facilitated by the Group. The Group signs new home agency service contracts with real estate developers in where the terms and conditions for sales commission earned are defined. The Group recognizes sales commissions as revenues when the confirmations are received from real estate developers that terms and conditions for commissions earned are met or upon cash receipts of service fees if collection of the commissions are not considered probable. The Group subcontracts with other brokerage firms to fulfil its agency services contracts with the real estate developers and splits commissions with these brokerage firms. The Group is considered as the principal agent for the agency service contracts signed with the developers as it has the right to determine the service price and to define the service performance obligations, it has control over the services provided by the other brokerage firms and it is fully responsible for fulfilling agency services pursuant to the new home agency service contracts signed with the real estate developers. Accordingly, the Group accounts for such agency service contracts on a gross basis and recognizes split commissions to collaborating brokerage firms as cost of revenues. Home renovation and furnishing The Group provides interior renovation services to its customers. Such services are recognized as a performance obligation satisfied over time as the customer controls the house that is being enhanced by the renovation services provided by the Group. Revenue is recognized over time by reference to the progress towards complete satisfaction of the relevant performance obligation using input method, measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs. For sale of furniture, electronic and home appliances products, revenue is recognized when delivery and acceptance occurs, which is defined as receipt by the Company of either a delivery note when delivery has been completed or a customer confirmation that the installation process is complete. Emerging and other services The Group generates revenues from emerging and other services such as rental property management services, financial services and other newly developed businesses. Rental property management services revenues are primarily derived from the leasing operation services for homeowners and tenants. The Group sources houses from homeowners, subleases the rooms to tenants, and provides operational management services such as maintenance. The terms of the agreements with tenants are generally one year. See the details of rental income recognition policy in Note 2.19 Leases - (c) The Group as a lessor. Service fees for financial services and other newly developed businesses are generally recognized as revenues when services are provided. Contract Balances Timing of revenue recognition may differ from the timing of invoicing to customers. For certain services, customers are required to pay before the services are delivered. The Group recognizes a contract asset or a contract liability in the consolidated balance sheets, depending on the relationship between the Group’s performance and the customer’s payment. F-36 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Group classifies its right to consideration in exchange for services transferred to a customer as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to consideration that is conditional upon factors other than the passage of time. The Group recognizes an accounts receivable in its consolidated balance sheets when it performs a service in advance of receiving consideration and if it has the unconditional right to receive consideration, and a contract asset if not yet has the unconditional right to receive consideration. Contract liabilities are recognized if the Group receives consideration in advance of performance, which is mainly in relation to the existing home transaction services, new home transaction services, home renovation and furnishing services and emerging and other services. The Group expects to recognize a significant majority of this balance as revenue over the next 12 months, and the remainder thereafter. RMB886.0 million of revenues recognized in the year ended December 31, 2022 was included in the contract liability balance as of January 1, 2022. The contract liabilities of the Group as of December 31, 2021 and 2022 are listed in the table below.
Incremental Costs of Obtaining a Contract Incremental costs of obtaining a contract with a customer is recognized as an asset in “Prepaid expenses and other current assets” if the Group expects to recover those costs. Incremental costs of obtaining a contract include only those costs the Group incurs to obtain a contract that it would not have incurred if the contract had not been obtained. Incremental costs of obtaining a contract mainly include sales commissions to sales personnel under interior renovation services. Contract cost assets are amortized on the basis consistent with the pattern of the transfer of services to which the assets relate. As of December 31, 2022, the balance of capitalized costs of obtaining contracts with customers was RMB155.6 million. For the years ended December 31, 2020, 2021 and 2022, the Group recognized amortization of nil, nil and RMB258.5 million respectively as “Sales and marketing expenses”. Capitalized costs of obtaining contracts are periodically analyzed for impairment. There were no impairment losses relating to the capitalized costs of obtaining contracts for all periods presented. Practical Expedients The Group has used the following practical expedients as allowed under ASC 606: The effect of a significant financing component has not been adjusted for contracts when the Group expects, at contract inception, that the period between when the Group transfers a promised good or service to the customer will be one year or less. F-37 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.24 Advertising expenses Advertising expenses are generally paid to the third parties for online traffic acquisition and offline advertising services such as television, outdoor and inner-building channels. Advertising expenses are expensed as sales and marketing expenses when the services are received. For the years ended December 31, 2020, 2021 and 2022, advertising expenses recognized in the consolidated statements of comprehensive income (loss) were RMB1,974.4 million, RMB2,038.4 million and RMB1,340.2 million, respectively. 2.25 Share-based compensation The Group grants share options, restricted shares and restricted share units (“RSUs”) to its employees, directors and consultants with performance conditions and service conditions, and accounts for these share-based awards in accordance with ASC 718-“Compensation-Stock Compensation”. Employees’ share-based awards are classified as equity awards and are measured at the grant date fair value of the awards and recognized as expenses a) immediately at grant date if no vesting conditions are required, or b) using a straight-line method over the requisite service period, which is the vesting period. Share options granted contained both a service condition and required completion of an IPO. The IPO was completed on August 17, 2020 and options for which the service condition had been met became vested. The remaining options will vest as the service conditions are met. All transactions in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The Group uses the binomial option pricing model to determine the fair value of stock options. The determination of the fair value of stock options is affected by the fair value of ordinary shares as well as assumptions regarding a number of complex and subjective variables, including the expected share price volatility, actual and projected employee share option exercise behavior, risk free interest rates and expected dividends. Upon the completion of the IPO, the estimated fair value of ordinary shares was based on the Company’s share price. The fair value of the restricted shares and RSUs granted subsequent to IPO are determined with reference to the fair value of the underlying shares. In accordance with ASU No. 2016-09, the Group has chosen to account for forfeitures when they occur. F-38 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.26 Income taxes Income tax Current income tax is recorded in accordance with the laws of the relevant tax jurisdictions. The Group applies the assets and liabilities method of income taxes in accordance of ASC 740—“Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are provided based on temporary differences arising between the tax bases of assets and liabilities and financial statements, using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. Deferred tax assets are recognized to the extent that such assets are more-likely-than-not to be realized. In making such a determination, the Group considers all positive and negative evidence, including results of recent operations and expected reversals of taxable income. Valuation allowances are established to offset deferred tax assets if it is considered more-likely-than-not that the amount of the deferred tax assets will not be realized. Uncertain tax positions The Group accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying the two-step approach to determine the amount of the benefit to be recorded. Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more-likely-than-not that the position will be sustained, including resolution of related appeals or litigation processes. If the tax positions meet the “more-likely-than-not” recognition threshold, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. The Group classifies interest and penalties related to income tax matters, if any, as income tax expense. The Group did not have any significant interest or penalties associated with tax positions for the years ended December 31, 2020, 2021 and 2022. The Group did not have any significant unrecognized uncertain tax positions for the years ended December 31, 2020, 2021 and 2022. 2.27 Employee benefits Full-time employees of the Group in mainland China are entitled to staff welfare benefits including pension, work-related injury benefits, maternity insurances, medical insurances, unemployment benefits and housing fund plans through a PRC government-mandated defined contribution plan. Chinese labor regulations require that the Group makes payments to the government for these benefits based on a certain percentage of the employees’ salaries, up to a maximum amount specified by the local government. The Group has no legal obligation for the benefits beyond making the required contributions. Historically, the contributions made by the Group for employees might have been insufficient under the PRC laws and regulations, for which the Group made provisions based on its best estimates considering general administrative practice, historical precedent cases, legal advice and other factors. The provisions made are to be reversed if a) the potential exposures that the provisions were made for do not occur for a period of time and b) the Group believes that the probability that such exposures would materialize in the future is remote based on most recent developments. The balances of the provisions are included in employee compensation and welfare payable. The net impact of additions and reversals of the provisions was an increase /(decrease) in employee welfare benefit expenses of (RMB257.8 million), RMB805.0 million and RMB621.0 million for the years ended December 31, 2020, 2021 and 2022, respectively. Currently, the Group is implementing a remediation plan to reduce the exposure of non-compliance of relevant law and regulations for employee welfare benefits. The total amounts of such employee welfare benefit expenses, including the provision’s net impact, were approximately RMB1.29 billion, RMB3.44 billion and RMB3.04 billion for the years ended December 31, 2020, 2021 and 2022, respectively. F-39 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.28 Research and development expenses Research and development expenses consist primarily of personnel-related compensation expenses, including share-based compensation for employees in engineering, design, product and platform development, depreciation of property, plant and equipment utilized by research and development functions, and bandwidth and server related costs incurred by research and development functions. The Group expenses all research and development expenses as incurred. 2.29 Net income (loss) per share Basic net income (loss) per share is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) attributable to ordinary shareholders as adjusted for the effect of income allocation to holders of participating preferred shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of deemed issued shares, the conversion of the convertible preferred shares (using the if-converted method) and options to purchase ordinary shares (using the treasury stock method). Ordinary equivalent shares are not included in the denominator of the diluted net income (loss) per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded. 2.30 Comprehensive income (loss) Comprehensive income (loss) is defined to include all changes in equity (deficit) of the Group during a period arising from transactions and other events and circumstances excluding transactions resulting from investments by shareholders and distributions to shareholders. Comprehensive income (loss) includes net income (loss), currency translation adjustments and unrealized gains(losses) on available-for-sale investments, net of reclassification. 2.31 Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influence, such as a family member or relative, shareholder, or a related corporation. 2.32 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (“CODM”). The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as a management committee including chief executive officer, chief financial officer and two chief operational officers. The Group operates in four operating segments: (i) Existing home transaction services; (ii) New home transaction services; (iii) Home renovation and furnishing and (iv) Emerging and other services, and the segment information is set out in Note 24. 2.33 Commitments and contingencies In the normal course of business, the Group is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters. An accrual for a loss contingency is recognized if it is probable that a liability has been incurred and the amount of liability can be reasonably estimated. If a potential loss is not probable, but reasonably possible, or is probable but the amount of liability cannot be reasonably estimated, then the nature of contingent liability, together with an estimate of the range of the reasonably possible loss, if determinable and material, is disclosed. F-40 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of guarantee would be disclosed. 2.34 Government grants Government grants are recognized as income in other income, net or as a reduction of specific costs and expenses for which the grants are intended to compensate. Such amounts are recognized in the consolidated statements of the comprehensive income (loss) upon receipt when all conditions attached to the grants have been fulfilled. For the years ended December 31, 2020, 2021 and 2022, the Group recognized government grants of approximately RMB876 million, RMB1,060 million and RMB668 million, respectively, in the consolidated statements of comprehensive income (loss). 2.35 Business combinations and non-controlling interests The Group accounts for its business combinations using the acquisition method of accounting in accordance with ASC 805 — “Business Combinations”. The cost of an acquisition is measured as the aggregate of the acquisition date fair value of the assets transferred to the sellers, liabilities incurred by the Group and equity instruments issued by the Group. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets acquired and liabilities assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of comprehensive income (loss). During the measurement period, which can be up to one year from the acquisition date, the Group may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Subsequent to the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any further adjustments are recorded in the consolidated statements of comprehensive income (loss). In a business combination achieved in stages, the Group re-measures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated statements of comprehensive income (loss). 2.36 Concentration and risks Concentration of customers and suppliers There are no customers or suppliers from whom revenues or purchases individually represent greater than 10% of the total net revenues or the total purchases of the Group for the years ended December 31, 2020, 2021 and 2022. Concentration of credit risk Assets that potentially subject the Group to significant concentrations of credit risk primarily consist of cash and cash equivalents, restricted cash, accounts receivable, other receivables, short-term investments, long-term investments and financing receivables. as of December 31, 2021 and 2022, all of the Group’s cash and cash equivalents, restricted cash and short-term investments were held by major financial institutions located in the PRC, Hong Kong, the USA, Japan and Australia, which the management believes are of high credit quality. On May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency placed with them. This Deposit Insurance Regulation would not be effective in providing complete protection for the Group’s accounts, as its aggregate deposits are much higher than the compensation limit. However, the Group believes that the risk of failure of any of these PRC banks is remote. Bank failure is uncommon in China and the Group believes that those Chinese banks that hold the Group’s cash and cash equivalents, restricted cash and short-term investments are financially sound based on public available information. F-41 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Accounts receivable and other receivables are typically unsecured and are mainly derived from the ordinary course of business in the PRC. The risk with respect to these financial instruments is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring processes of outstanding balances. The risk with respect to the financing receivables and off-balance sheet guarantees is mitigated by credit evaluations the Group performs on its borrowers and the Group’s ongoing monitoring controls for the outstanding balances. As of December 31, 2021 and 2022, only one customer’s total receivable amounting to RMB1,266 and RMB788 million is considered to subject to concentration credit risk. Individually assessed accounts receivable are measured for credit loss based on present value of future expected the fair value of the collateral, less estimated transaction costs, if the accounts receivable is collateral-dependent. A portion of accounts receivable due from real estate developers is secured by a commercial properties as collateral. Repayment of accounts receivable secured by properties may depends on the successful auction of the collateralized properties. Consequently, repayment of such accounts receivable may be affected by adverse conditions in the real estate market or economy. The expected credit loss rates for accounts receivable and contract assets are 18.75% and 33.41% as of December 31, 2021 and 2022, respectively. The expected credit loss rates for financing receivables are 15.61% and 17.28% as of December 31, 2021 and 2022, respectively. The expected credit loss rates for other receivables (included in prepayments, receivables and other assets) are 12.76% and 8.24% as of December 31, 2021 and 2022, respectively. The expected credit loss of other financial assets subject to the impairment requirements of ASC 326 was immaterial. Currency convertibility risk The PRC government imposes controls on the convertibility of RMB into foreign currencies. The Group’s cash and cash equivalents, restricted cash and short-term investments denominated in RMB that are subject to such government controls amounted to RMB37.3 billion and RMB47.0 billion as of December 31, 2021 and 2022, respectively. The value of RMB is subject to changes in the central government policies and to international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (the “PBOC”). Remittances in currencies other than RMB by the Group in the PRC must be processed through PBOC or other Chinese foreign exchange regulatory bodies which require certain supporting documentation in order to process the remittance. Foreign currency exchange rate risk In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the US$, and the RMB appreciated more than 20% against the US$ over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the US$ remained within a narrow band. Since June 2010, the RMB has fluctuated against the US$, at times significantly and unpredictably. The depreciation of the RMB against the US$ was approximately 8.2% for the year ended December 31, 2022. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the US$ in the future. F-42 3. CASH, CASH EQUIVALENTS, RESTRICTED CASH Cash, cash equivalents and restricted cash consisted of the following:
F-43 4. SHORT-TERM INVESTMENTS
Bank time deposits are time deposits with original maturities of longer than three months but less than one year or long-term bank deposits with a maturity date within one year. The Group’s wealth management products mainly consist of various financial instruments issued by multiple financial institutions with variable interest rates indexed to performance of underlying asset. The Group elects to measure the investment in wealth management products at fair value with the fair value changes mainly recorded in other income, net and fair value changes in investments, net in the consolidated statements of comprehensive income (loss). Held-to-maturity debt investments include debt instruments issued by financial institutions with maturities of less than one year for which the Group has the positive intent and ability to hold those securities to maturity. Available-for-sale debt investments in short-term investments mainly include investments in debt securities issued by banks and other financial institutions that are redeemable at the issuer’s option, which the group intents to sell in the near term. Listed equity securities in short-term investments are equity securities the group intents to sell in the near term. Held-to-maturity debt investments as of December 31, 2022 are shown as below:
Available-for-sale debt investments as of December 31, 2022 are shown as below:
F-44 5. PREPAYMENTS, RECEIVABLES AND OTHER ASSETS
Deposits paid to real estate developers refer to the earnest deposits paid by the Group to developers for new home transaction service contracts. 6. ACCOUNTS RECEIVABLE AND CONTRACT ASSETS, NET Accounts receivable, net consists of the following:
The contract assets are mainly related to the Group’s home renovation business. The Group’s timing of revenue recognition may differ from the timing of invoicing to customers. The Group’s contract assets represent the amount of contract revenue recognized but not yet billed pursuant to contract terms. F-45 6. ACCOUNTS RECEIVABLE AND CONTRACT ASSETS, NET (CONTINUED) Contract assets, net consists of the following:
The movements in the allowance for credit losses of accounts receivable were as follows:
F-46 7. FINANCING RECEIVABLES, NET Financing receivables, net as of December 31, 2021 and 2022 consisted of the following:
These balances represent short-term and long-term financing receivables that are personal credit loans to home buyers and tenants, and to other individual borrowers. The following table summarizes the balances of financing receivables by due date as of December 31, 2021 and 2022:
Finance Receivables – Allowance for Credit Losses and Credit Quality Consistent with the adoption of ASU No. 2016-13 effective January 1, 2020 (refer to note 2.1 (a) Impact of newly adopted accounting pronouncement), the allowance for credit losses is determined principally based on the past collection experience as well as consideration of current and future economic conditions and changes in the Group’s customer collection trends. All forward-looking statements are, by their nature, subject to risks and uncertainties, many of which are beyond the Group’s control. Primarily as a result of the uncertainty of macroeconomic and real estate agency business in 2022, the management updated the CECL model taking the latest available information into consideration. The major assumption (i.e. forward-looking information) and CECL model parameters (i.e. the one-year probability of default) were updated accordingly. The allowance for credit losses increased to 17.28% of gross finance receivables (net of unearned income) at December 31, 2022 from 15.61% at December 31, 2021, which were mainly attributable to continuous socio-economic impact of Covid-19 on individuals in 2022. F-47 7. FINANCING RECEIVABLES, NET (CONTINUED) The activities in the provision for credit losses for the years ended December 31, 2020, 2021 and 2022, respectively, consisted of the following:
The Group evaluates expected credit losses of financial receivables on a collective basis based on the type of borrowers and delinquency pattern: Type of borrowers: Property transaction related business: This segmentation includes financing receivables generated by property transaction business. The average loss rate in this category is 15.50% as of December 31, 2022. Non-property transaction related business: This segmentation mainly includes consumer loans. The average loss rate in this category is 42.95% as of December 31, 2022. Delinquency: Based on the past due days, the Group separates the contracts into 5 groups including current, 1-29 days past due, 30-89 days past due, 90-179 days past due and over 180 days past due. The delinquency rate was 24.2% and 22.52% as at December 31, 2021 and 2022, respectively. Credit quality indicators are updated quarterly, and the credit quality of any given customer can change during the life of the portfolio. F-48 7. FINANCING RECEIVABLES, NET (CONTINUED) Financing receivables portfolio based on customer type, origination year and delinquency are as follows:
F-49 8. PROPERTY, PLANT AND EQUIPMENT, NET
Depreciation expenses recognized for the years ended December 31, 2020, 2021 and 2022 amounted to RMB552.8 million, RMB879.7 million and RMB918.3 million, respectively. 9. INTANGIBLE ASSETS, NET
Amortization expenses recognized for the years ended December 31, 2020, 2021 and 2022 amounted to RMB621.2 million, RMB491.0 million and RMB584.5 million, respectively. On April 20, 2022, the Group completed the acquisition of Shengdu. Intangible assets arising from the acquisition of RMB1,051 million was recognized by the Group, which consisted of RMB1,050 million of trademark and RMB1 million of software (Note 23). F-50 9. INTANGIBLE ASSETS, NET (CONTINUED) Estimated amortization expenses relating to the existing intangible assets with finite lives for future periods is as follows:
10. LEASES (a) The Group as a lessee The Group has operating leases for sales stores (including brokerage sales stores, transaction closing service centers and home renovation and furnishing service stores), administrative offices, entrusted houses and land use rights in China. The recognition of whether a contract arrangement contains a lease is made by evaluating whether the arrangement conveys the right to use an identified asset and whether the Group obtains substantially all the economic benefits from and has the ability to direct the use of the asset. Operating lease assets and liabilities are included in the items of “Right-of-use assets”, “Lease liabilities current portion”, and “Lease liabilities non-current portion” on consolidated balance sheets. The components of lease cost for the years ended December 31, 2020, 2021 and 2022 were listed as follows:
Supplemental cash flows information related to leases was as follows:
F-51 10. LEASES (CONTINUED) Supplemental balance sheet information related to leases was as follows:
Maturities of lease liabilities were as follows:
The Group’s lease agreements generally do not contain an option for the Group to renew a lease for a term agreed by the Group. The Group’s lease agreements generally do not contain any residual value guarantees or material restrictive covenants. Payments under the lease arrangements are primarily fixed. F-52 10. LEASES (CONTINUED) (b) The Group as a lessor Maturities of undiscounted lease payments to be received were as follows:
F-53 11. LONG-TERM INVESTMENTS, NET The following table sets forth a breakdown of the categories of long-term investments held by the Group as of the dates indicated:
Investments in equity method investees
The Group applies the equity method of accounting to account for its equity investments in common stock or in-substance common stock, over which it has significant influence but does not own a majority equity interest or otherwise control. For the year ended December 31, 2020, the Group made RMB339.6 million new investments under the equity method, mainly including RMB280.0 million equity investment in a company which is primarily engaged in providing residential property rental agency and management services in the PRC. For the year ended December 31, 2021, the Group made RMB259.0 million new investments under the equity method, mainly including RMB198.0 million equity investment in certain newly founded entities which are primarily engaged in real estate development projects investment. In April 2021, the Group disposed investments in certain equity method investees at approximately RMB495.0 million, which approximated their carrying value. F-54 11. LONG-TERM INVESTMENTS, NET (CONTINUED) For the year ended December 31, 2022, the Group made RMB12.2 million new investments under the equity method and the Group disposed investments in certain equity method investees at approximately RMB134.4 million, which approximated their carrying value. Impairment recorded for equity method investments for the years ended December 31, 2020, 2021 and 2022 was RMB26.7 million, RMB2.9 million and nil. Investments accounted for at fair values Investments accounted for at fair values include (i) marketable equity securities, which are publicly traded stocks or funds measured at fair value, (ii) unlisted equity securities or debt securities which use significant unobservable inputs to measure the fair value on recurring basis, (iii) long-term loan receivables accounted for under the fair value option method of accounting, and (iv) investments in wealth management products with maturity date in over one year, which are financial instruments with variable interest rates or principal not-guaranteed with certain financial institutions and are measured at fair value in accordance with ASC 825-“Financial Instruments”. The following table shows the carrying amount and fair value of investments accounted for at fair value:
Marketable securities represent investments in the equity securities of publicly listed companies, for which the Group does not have significant influence. The marketable securities are valued using the market approach based on the quoted prices in active markets at the reporting date. The Group classifies the valuation techniques that use these inputs as Level 1 of fair value measurements. F-55 11. LONG-TERM INVESTMENTS, NET (CONTINUED)
Investment in IFM Investments Limited (“IFM”) In October 2017, the Group purchased 10% ownership in IFM, a company focusing on real estate agency business in the PRC, through subscription of 308,084,916 convertible redeemable preferred shares newly issued by IFM at an aggregated subscription price of RMB60 million. Concurrent with the preferred share investment, the Group entered into a convertible note purchase agreement on August 14, 2017 to purchase convertible notes issued by IFM in the principal amount of US$ equivalent of RMB40 million with maturity period of 30 months and interest rate per annum of 12%. The convertible notes were convertible into IFM’s preferred shares at a discounted price. The Group elected the fair value option to measure the preferred share investments and the entire convertible note with the assistance of an independent valuation firm. In 2019, the Group launched many incentive programs to incentivize real estate brokerage firms to join the Group’s platform. IFM is one of the leading firms in the real estate agency business industry. In May 2019, to incentivize IFM to join the Group’s platform, the Group made additional investment of RMB308 million to acquire certain percentage of IFM’s preferred and ordinary shares, converted the convertible note into preferred shares and provided RMB130 million loan to IFM’s controlling shareholder, which is secured by 17.5% ownership of IFM. Total consideration of the additional investment in IFM and the loan to IFM’s controlling shareholder was RMB438 million. The fair value of the additional investment in IFM and the loan to IFM’s controlling shareholder was RMB120.1 million on the transaction date. The difference of RMB317.9 million between the consideration paid and the fair value received was considered and recognized as deemed marketing expenses. As the investment in IFM is not in-substance common stock, it does not qualify for equity method accounting, and according to ASC 321, the Group elected to account for this investment at fair value with realized or unrealized gains and losses recorded in the consolidated statements of comprehensive income (loss). As of December 31, 2021 and 2022, the Group held 37.6% in IFM and account for the investment in IFM amounted to RMB218.6 million and RMB58.8 million, and loan to IFM’s controlling shareholder at fair value amounting to RMB32.6 million and RMB1.2 million, respectively. The Group classifies the valuation techniques that use these inputs as Level 3 of fair value measurements. Other than the equity investment in IFM, the investment in unlisted equity securities was primarily equity investments in one private company focusing on home renovation business in the PRC and other private investment companies.
As part of the Group’s cash management program, the Group invested in certain wealth management products with variable interest rates and principal not guaranteed issued by financial institutions in the PRC. These wealth management products were with maturity of over one year, or can be redeemed through advance notice and the Group intended to hold the investments over one year, thus were classified as long-term investments. Equity investments measured under measurement alternative and NAV practical expedient Equity investments without readily determinable fair values include investments in private equity funds accounted for under NAV practical expedient, and investments in private companies accounted for under measurement alternative. Investments in private equity generally are not redeemable due to the closed-ended nature of these funds. Investment in private equity funds over which the Group does not have the ability to exercise significant influence are accounted for under the NAV practical expedient. As of December 31, 2021 and 2022, the carrying amount of the Group’s investment in private equity fund was approximately RMB126.4 million and RMB91.0 million, respectively. During the years ended December 31, 2020, 2021 and 2022, fair value changes recognized for this equity investment were RMB20.4 million, RMB51.6 million, RMB(32.9) million respectively. Investments in the private equity fund is subject to a lock-up period of 8 years which restricts investor from withdrawing from the fund during the investment period. F-56 11. LONG-TERM INVESTMENTS, NET (CONTINUED) The following table shows the details of investments in private companies accounted for under measurement alternative:
On May 31, 2021, the Group acquired 29.16% equity interest in Yuanjing Mingchuang, a private company and a related party of the Group, which engaged in long-term apartment rental business in Shenzhen under the brand “V-town”. The investment was made in form of preferred shares with a total cash consideration of RMB700 million. The Group elected to use measurement alternative to account for the investment. Due to the unsatisfied financial performance of Yuanjing Mingchuang, management determined that impairment indicator existed as of December 31, 2021 and the Group recorded an impairment loss of RMB168.0 million for the year ended December 31, 2021 based on the investment’s fair value estimated with the assistance of an independent valuation firm. Due to the change of original operating plan, persistent sluggish performance, considering the uncertainty of the investee’s future financing program and operating plan, the Group recorded an impairment loss of RMB517.1 million for the years ended December 31, 2022 based on the investment’s fair value estimated with the assistance of an independent valuation firm in accordance with the principles of ASC 820. The fair value of Yuanjing Mingchuang was measured using significant unobservable inputs (Level 3) based on the discounted cash flow method. Significant assumptions used in the valuation include future revenues and the discount rate.
On July 5, 2021, the Group announced to enter into a definitive agreement with Shengdu, a home renovation service provider headquartered in Hangzhou, pursuant to which the Group agreed to acquire 100% equity interests in Shengdu from its existing shareholders, for a total consideration capped at RMB8 billion consisting of cash and restricted shares, subject to a staggered acquisition arrangement and customary closing conditions, including regulatory approvals. The Group has purchased 6% of Shengdu’s equity interests with preference rights in December 2021 with consideration amount to RMB480 million in cash, among which RMB120 million had been paid in December 2021. The Group elected to use measurement alternative to account for the investment. The Group accounted for its obligation to purchase the remaining 94% equity interest of Shengdu when and if certain customary closing conditions are satisfied as a forward contract, which is classified as an asset or liability and measured at fair value, with changes in fair value reported in earnings. The fair value of the forward is immaterial at contract inception and as of December 31, 2021. On January 6, 2022, the Group has acquired additional 43% of Shengdu’ s equity interests with preference rights with consideration amounted to RMB3,440 million in cash. The Group elected to use measurement alternative to account for the investment. On April 20, 2022, the Group completed the acquisition of Shengdu. Please refer to Note 23. Business Combinations for more details. F-57 11. LONG-TERM INVESTMENTS, NET (CONTINUED) As of December 31, 2021 and 2022, investments accounted for under measurement alternative were RMB1,106.4 million and RMB61.6 million, respectively. There was no upward adjustment identified by the management for the years ended December 31, 2021 and 2022. The total carrying value of investment in private companies accounted for under measurement alternative held as of December 31, 2021 and 2022 were as follows:
For the years ended December 31, 2020, 2021 and 2022, RMB9.0 million, RMB183.8 million and RMB591.9 million impairment was recorded for investments in private companies accounted for under measurement alternative. The impairment was recorded in “Impairment loss for equity investments accounted for using measurement alternative” in the Group’s consolidated statements of comprehensive income (loss). Also, the Group classifies the valuation techniques on those investments that use similar identifiable transaction prices as Level 2 of fair value measurements and those investments that measured using significant unobservable inputs as Level 3 of fair value measurements. Long-term time deposits The Group’s long-term time deposits are time deposits placed with banks with original maturities more than one year, and those matured date within one year will be reclassified to short-term investments. As of December 31, 2021, deposits were denominated in RMB amounting to approximately RMB946.1 million, among which RMB514.9 million will be matured in March 2024, RMB200.6 million will be matured in December 2024 with the remaining will be matured in May 2024. As of December 31, 2022, deposits were denominated in RMB amounting to approximately RMB11.1 billion, among which RMB1,737.6 million will be matured in 2024.The remaining RMB9,326.9 million will be matured in 2025. Held-to-maturity debt investments During the year ended December 31, 2022, the Group recorded interest income from its held-to-maturity debt investments of RMB3.5 million in the consolidated statements of comprehensive income (loss). Held-to-maturity debt investments as of December 31, 2022 are shown as below, which would be due in 1 to 2 years:
F-58 11. LONG-TERM INVESTMENTS, NET (CONTINUED) The following table summarizes the amortized cost of held-to-maturity debt investments with stated contractual dates, classified by the contractual maturity date of the investments:
Available-for-sale debt investments The Group’s available-for-sale debt investments mainly include investments in debt securities issued by banks and other financial institutions that are redeemable at the issuer’s option, which have no contractual maturity date. As of December 31, 2022, RMB5,126.3 million available-for-sale debt investments were held by the Company. Available-for-sale debt investments as of December 31, 2022 are shown as below:
The proceeds received at bank redemption date of available-for-sale debt investments is RMB3,060.5 million. The following table summarizes the Group’s gross unrealized losses and fair values for available-for-sale debt investments in an unrealized loss position as of December 31, 2022:
Estimated allowances for credit losses of available-for sales are determined by considering reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. Based on this evaluation, no allowance for credit losses on debt securities was recorded as of December 31, 2022. The following table summarizes the estimated fair value of available-for-sale debt investments with stated contractual dates, classified by the contractual maturity date of the investments:
F-59 12. GOODWILL For the years ended December 31, 2020, 2021 and 2022, the changes in the carrying value of goodwill by segment are as follows:
During the year ended December 31, 2020, the
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(ii) | Zhonghuan was defined as one reporting unit after its acquisition. Considering the performance and operating profit did not meet expectations, the
|
(iii) | At the end of 2020, to further streamline the Group’s home renovation business, management decided to terminate the home renovation business it acquired in 2019. Goodwill of RMB16.2 million associated with this reporting unit was determined to be fully impaired. |
Other impairments in goodwill were related to cities where the management decided not to operate any Beike platform business, and goodwill was fully impaired in these reporting units.
For other reporting units, as of December 31, 2020, management performed a qualitative analysis by taking into consideration the macroeconomics, overall financial performance, industry and market conditions, and no impairment was identified.
(iv) | During the year ended December 31, 2021, the Group acquired several real estate agency companies in several cities which primarily operated existing home transaction services and new home transaction services in the PRC. |
F-60
12. GOODWILL (CONTINUED)
(v) | During the year ended December 31, 2021, revenue and profit generated by certain reporting units decreased significantly due to market downturn. Management determined that the significant decline in revenue and profit was a triggering event. Based on the impairment assessment during the year ended December 31, 2021, management concluded that the goodwill attributable to certain reporting units, was impaired and accordingly, recorded goodwill impairment loss of RMB732.4 million, including RMB433.0 million related to reporting units within the existing home transaction services segment and RMB299.3 million related to reporting units within new home transaction services segment. |
(vi) | On April 20, 2022, the Company completed the acquisition of Shengdu that was added to the home renovation and furnishing segment. The acquisition has been accounted for as a business combination and has resulted in the recognition of RMB3,060.8 million of goodwill. Please refer to Note 23 Business Combinations for details. |
(vii) | During the year ended December 31, 2022, the Group tested goodwill for impairment at reporting unit level. Management performed impairment testing using the quantitative impairment methods and recorded goodwill impairment loss of RMB141.8 million, including RMB59.0 million related to reporting units within the existing home transaction services segment and RMB82.7 million related to reporting units within new home transaction services segment. |
Key assumptions used in quantitative impairment test
The quantitative impairment test consists of a comparison of the fair value of each reporting unit with its carrying amount, including goodwill. The Group used a discounted cash flow model (“DCF model”) to estimate the fair value of the reporting units, as management believes forecasted operating cash flows were the best indicator of fair value. A number of significant assumptions were involved in the preparation of the DCF models including future revenues and discount rates. The financial projection covering a five-year period of each reporting unit adopted in DCF models for impairment test purpose is based on the financial budgets approved by the management of the Group, which considering the historical performance and its expectation for future market development. Cash flows beyond the five-year period are extrapolated using a long-term growth rate. Post-tax discount rates reflect market assessment of the weighted average cost of capital in the industry the Group operates and the specific risks relating to the Group.
Impairment loss of goodwill recognized for the years ended December 31, 2020, 2021 and 2022 were RMB22.7 million, RMB732.4 million and RMB141.8 million, respectively. As of December 31, 2020, 2021 and 2022, the original gross amounts of goodwill were RMB3,122.0 million, RMB3,192.5 million and RMB6,462.8, respectively, and accumulated impairment losses were RMB654.5 million, RMB1,386.9 million and RMB1,528.6 million, respectively.
F-61
13. BORROWINGS
As of December 31, 2021 and 2022, the contractual maturities of the borrowings are all within one year.
| | | | |
| | As of December 31, | ||
| | 2021 | | 2022 |
|
| RMB |
| RMB |
| | (in thousands) | ||
| | | | |
Short‑term borrowings |
| 260,000 |
| 619,000 |
Total |
| 260,000 |
| 619,000 |
In August 2021, Beike Technology Co., Ltd entered into a RMB260.0 million 359-day short-term borrowing contract with a bank at a fixed borrowing rate of 3.9%. RMB43.3 million and RMB216.7 million were scheduled to be paid off on February 28, 2022 and August 24, 2022 respectively according to the borrowing contract.
In September 2022, Beike Technology Co., Ltd entered into a RMB460.0 million 356-day short-term borrowing contract with a bank at a fixed borrowing rate of 3.58%. RMB76.7 million and RMB383.3 million are scheduled to be paid off on March 21, 2023 and September 21, 2023 respectively according to the borrowing contract. On January 4, 2023, Beike Technology Co., Ltd entered into a supplementary agreement with bank and pursuant to which, the repayment schedule was amended. According to amended repayment schedule, RMB 43.3 million, RMB47.8 million, RMB43.3 million and RMB325.6 million are rescheduled to be paid off on February 28, 2023, March 21, 2023, August 31, 2023 and September 21, 2023, respectively. On February 28, 2023 and March 21, 2023, RMB 43.3 million and RMB47.8 million was paid off respectively upon maturity.
In December 2022, Beike Technology Co., Ltd entered into a RMB140.0 million 360-day short-term borrowing contract with a bank at a fixed borrowing rate of 3.58%. RMB23.3 million, RMB3.9 million, RMB23.3 million and RMB89.5 million are scheduled to be paid off on March 31, 2023, June 30, 2023, September 30, 2023 and December 25, 2023 respectively according to the borrowing contract. On March 31, 2023, RMB23.3 million was paid off upon maturity.
In December 2022, Tianjin Lianjia Baoye Real Estate Brokerage Co., Ltd entered into a RMB19.0 million 360-day short-term borrowing contract with a bank at a fixed borrowing rate of 3.58%. RMB3.2 million and RMB15.8 million are scheduled to be paid off on June 30, 2023 and December 25, 2023 respectively according to the borrowing contract.
14. ACCOUNTS PAYABLE
| | | | |
| | As of December 31, | ||
| | 2021 | | 2022 |
|
| RMB |
| RMB |
| | (in thousands) | ||
| | | | |
Payable related to new home transaction business |
| 5,248,897 | | 4,333,474 |
Payable for home renovation materials and construction costs |
| — | | 867,045 |
Payable for advertising fees |
| 194,546 | | 186,604 |
Payable for internet service fees | | 111,694 | | 104,603 |
Payable for leasehold improvements |
| 183,997 | | 90,271 |
Others |
| 269,631 | | 261,324 |
Total |
| 6,008,765 | | 5,843,321 |
F-62
15. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| | | | |
|
| As of December 31, | ||
|
| 2021 | | 2022 |
| | RMB |
| RMB |
| | (in thousands) | ||
Deposit related to new home transaction services | | 648,443 | | 1,267,752 |
Deposit related to franchise services | | 1,078,395 | | 956,121 |
Deposit related to home renovation and furnishing service | | — | | 292,361 |
Other tax payables | | 362,819 | | 272,610 |
Payable related to escrow accounts services (i) | | 187,605 | | 116,025 |
Deferred guarantee revenue | | 31,246 | | 32,618 |
Payable related to business combination (ii) | | 360,080 | | — |
Others | | 782,609 | | 1,180,581 |
Total | | 3,451,197 | | 4,118,068 |
(i) | Payable related to escrow accounts services refers to escrow payments such as deposits, down payments and other payments collected from the property buyers on behalf of and payable to the property sellers. The escrow payments will be paid to property sellers according to the payment schedule of the property purchase agreement agreed by both parties. |
(ii) | As of December 31, 2021, payable related to business combination mainly consisted of cash consideration payable in relation to the purchase of equity investment in Shengdu in December 2021 (Note 23). As of December 31, 2022, considerations for the Shengdu acquisition has been settled. |
16. OTHER INCOME, NET
| | | | | | |
|
| For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Investment income, net |
| 185,604 | | 487,724 | | 795,804 |
Government grants |
| 876,255 | | 1,059,907 | | 668,372 |
Net gain (loss) on disposal of property, plant and equipment and intangible assets |
| 3,548 | | (467) | | 653 |
Others |
| (9,753) | | 155,250 | | 103,758 |
Total |
| 1,055,654 | | 1,702,414 | | 1,568,587 |
17. INTEREST INCOME, NET
| | | | | | |
|
| For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Interest income |
| 383,116 | | 385,375 | | 769,094 |
Interest expense |
| (188,364) | | (6,105) | | (14,053) |
Bank charges |
| (30,963) | | (18,952) | | (11,124) |
Others |
| (189) | | (5,751) | | (433) |
Total |
| 163,600 | | 354,567 | | 743,484 |
F-63
18. TAXATION
Income tax
Current income tax is recorded in accordance with the laws of the relevant tax jurisdictions.
The Group applies the assets and liabilities method of income taxes in accordance of ASC 740-“Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are provided based on temporary differences arising between the tax bases of assets and liabilities and financial statements, using enacted tax rates that will be in effect in the period in which the differences are expected to reverse.
Deferred tax assets are recognized to the extent that such assets are more-likely-than-not to be realized. In making such a determination, the Group considers all positive and negative evidence, including results of recent operations and expected reversals of taxable income. Valuation allowances are established to offset deferred tax assets if it is considered more-likely-than-not that amount of the deferred tax assets will not be realized.
Uncertain tax positions
The Group accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying the two-step approach to determine the amount of the benefit to be recorded. Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more-likely-than-not that the position will be sustained, including resolution of related appeals or litigation processes. If the tax positions meet the “more-likely-than-not” recognition threshold, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. The Group classifies interest and penalties related to income tax matters, if any, as income tax expense.
The Group did not have any significant interest or penalties associated with tax positions for the years ended December 31, 2020, 2021 and 2022. The Group did not have any significant unrecognized uncertain tax positions for the years ended December 31, 2020, 2021 and 2022.
Cayman Islands
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance or estate duty. There are no other taxes likely to be material to the Group levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in or brought within the jurisdiction of the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.
British Virgin Islands
The Group’s subsidiaries incorporated in the British Virgin Islands are not subject to income or capital gains tax under the current laws of the British Virgin Islands. In addition, payment of dividends by the British Virgin Islands subsidiaries to their respective shareholders who are not resident in the British Virgin Islands, if any, is not subject to withholding tax in the British Virgin Islands.
Hong Kong
Hong Kong income tax rate is two-tiered profits tax regime, under which the tax rate is 8.25% or assessable profits on the first HK dollar 2 million and 16.5% or any assessable profits in excess of HK dollar 2 million. Hong Kong profits tax was provided for the assessable profit that was subject to Hong Kong profits tax during the years ended December 31, 2020, 2021 and 2022. Additionally, payments of dividends by the subsidiaries incorporated in Hong Kong to the Group are not subject to any Hong Kong withholding tax.
F-64
18. TAXATION (CONTINUED)
China
On March 16, 2007, the National People’s Congress of PRC enacted a new Corporate Income Tax Law (“new CIT law”), under which Foreign Investment Enterprises (“FIEs”) and domestic companies would be subject to corporate income tax at a uniform rate of 25%. The new CIT law became effective on January 1, 2008. Under the new CIT law, preferential tax treatments will continue to be granted to entities which conduct businesses in certain encouraged sectors and to entities otherwise classified as “high and new technology enterprises” or “small and micro businesses”.
Beike Zhaofang has been entitled to an exemption from income tax for the first two years and 50% reduction for the next three years from its first profitable year as a “software enterprise.” It also qualified as a “high and new technology enterprise” and had a preferential income tax rate of 15% from 2016 to 2018 and 2020 to 2022. The privileges cannot be applied simultaneously. Beike Zhaofang applied the privilege of “software enterprise” and was exempted from income tax in 2016 and 2017, and had a preferential income tax rate of 12.5% from 2018 to 2020. Beike Zhaofang applied the privilege of “high and new technology enterprise” and had a preferential income tax rate of 15% from 2021 to 2022.
Beijing Beikeshidai Network Technology Co., Ltd. (“Beikeshidai”) has been entitled to an exemption from income tax for the first two years and 50% reduction for the next three years from its first profitable year as a “software enterprise.” It also qualified as a “high and new technology enterprise” and had a preferential income tax rate of 15% from 2019 to 2021. The privileges cannot be applied simultaneously. Beikeshidai applied the privilege of “high and new technology enterprise” and had a preferential income tax rate of 15% from 2019 to 2020. Beikeshidai applied the privilege of “software enterprise” and was exempted from income tax from 2021 to 2022, and is entitled to a preferential income tax rate of 12.5% from 2023 to 2025.
Certain enterprises benefit from a preferential tax rate of 15% under the EIT Law if they are located in applicable PRC regions as specified in the Catalogue of Encouraged Industries in Western Regions (initially effective through the end of 2010 and further extended to 2030), or the Western Regions Catalogue, subject to certain general restrictions described in the EIT Law and the related regulations. Six, six and six entities in the Group for the years ended December 31, 2020, 2021 and 2022, respectively, were qualified as the enterprises within the Catalogue of Encouraged Industry in the Western Region and had a 15% preferential income tax rate.
The Group’s other PRC subsidiaries, consolidated VIEs (inclusive of VIEs’ subsidiaries) are subject to the statutory income tax rate of 25%.
F-65
18. TAXATION (CONTINUED)
According to the relevant laws and regulations in the PRC, enterprises engaging in research and development activities were entitled to claim 150% of their research and development expenses so incurred as tax deductible expenses when determining their assessable profits for that year (the “R&D Deduction”). The State Taxation Administration of the PRC announced in September 2018 that enterprises engaging in research and development activities would be entitled to claim 175% of their research and development expenses as R&D Deduction from January 1, 2018 to December 31, 2023.
The components of income (loss) before tax for the years ended December 31, 2020, 2021 and 2022, are as follows:
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Income (loss) before income tax expense |
|
|
|
|
|
|
Income from China operations |
| 6,302,358 | | 2,484,608 | | 2,936,269 |
Loss from non‑China operations |
| (1,915,239) | | (1,343,882) | | (2,643,979) |
Total income before income tax expense |
| 4,387,119 | | 1,140,726 | | 292,290 |
| | | | | | |
Income tax expense from China operations |
| | | | | |
Current income tax expense |
| 1,891,723 | | 1,759,725 | | 1,275,779 |
Deferred tax (benefit)/expense |
| (359,429) | | (169,673) | | 237,615 |
Income tax expense from China operations |
| 1,532,294 | | 1,590,052 | | 1,513,394 |
Income tax expense from non‑China operations |
| 76,502 | | 75,440 | | 176,180 |
Total income tax expense |
| 1,608,796 | | 1,665,492 | | 1,689,574 |
For the years ended December 31, 2020, 2021 and 2022, loss from non-China operations are resulted from (i) share-based compensation expenses amounting to RMB2,252.6 million, RMB1,538.3 million and RMB2,425.2 million, respectively; (ii) amortization of the advertising and traffic resources and consumption of other marketing and cloud services provided by Tencent amounting to RMB175.7 million, RMB10.4 million and nil, respectively; and (iii) gains from investment in wealth management products amounting to RMB226.9 million, RMB502.4 million and RMB192.4 million, respectively.
F-66
18. TAXATION (CONTINUED)
The income tax expense (benefit) applicable to the Group’s operations for the years ended December 31, 2020, 2021 and 2022, differs from the amount computed by applying the PRC statutory income tax rate of 25% to income before tax due to the following:
| | | | | | | |
| | For the Year Ended December 31, | | ||||
|
| 2020 | | 2021 | | 2022 | |
Statutory income tax rate | | 25.0 | % | 25.0 | % | 25.0 | % |
Tax effect of preferential treatments | | (2.5) | % | (12.4) | % | (39.5) | % |
Tax effect of tax-exempt entities | | 11.6 | % | 34.0 | % | 253.4 | % |
Effect on tax rates in different tax jurisdiction | | 1.2 | % | 2.1 | % | 33.0 | % |
Tax effect of permanent difference | | (3.5) | % | 49.7 | % | 151.9 | % |
Tax effect of R&D deduction and others | | (4.0) | % | (21.2) | % | (58.0) | % |
Change in valuation allowance | | 8.9 | % | 68.8 | % | 212.2 | % |
Effect tax rates | | 36.7 | % | 146.0 | % | 578.0 | % |
The changes of effective tax rate for the years ended December 31, 2020, 2021 and 2022 are primarily driven by the losses incurred by tax-exempt non-China operations, tax effect of permanent differences resulted from impairments of long-term equity investments, and increased valuation allowances established to offset deferred tax assets as it was considered more-likely-than-not that the amount of the deferred tax assets will not be realized.
The following table sets forth the effect of tax holiday related to China operations:
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands, except for per share data) | ||||
| | | | | | |
Tax holiday effect |
| 108,213 | | 141,554 | | 115,521 |
Basic net income per share effect |
| 0.05 | | 0.04 | | 0.03 |
Diluted net income per share effect | | 0.05 | | 0.04 | | 0.03 |
Denominator for basic net income (loss) per share-weighted average ordinary shares outstanding | | 2,226,265 | | 3,549,122 | | 3,569,179 |
Denominator for diluted net income (loss) per share-weighted average ordinary shares outstanding |
| 2,267,331 | | 3,549,122 | | 3,569,179 |
F-67
18. TAXATION (CONTINUED)
Deferred tax assets and liabilities
The tax effects of temporary differences that give rise to the deferred income tax assets and liabilities as of December 31, 2021 and 2022 are as follows:
| | | | |
| | As of December 31, | ||
| | 2021 | | 2022 |
|
| RMB |
| RMB |
| | (in thousands) | ||
| | | | |
Deferred tax assets |
|
|
|
|
Net operating loss carrying forward |
| 2,210,114 | | 2,788,131 |
Asset impairment |
| 730,959 | | 688,855 |
Deferred rental cost |
| 116,862 | | 48,290 |
Unrealized profits |
| 330,808 | | 184,837 |
Accrual expense |
| 556,900 | | 417,462 |
Others |
| 42,186 | | 81,420 |
Less: Valuation Allowance |
| (2,892,268) | | (3,310,975) |
Deferred tax assets, net of valuation allowance |
| 1,095,561 | | 898,020 |
| | | | |
Deferred tax liability |
| | | |
Fair value change of certain investments |
| (40,556) | | (45,559) |
Intangible assets |
| (14,419) | | (343,200) |
Deferred revenue |
| (3,767) | | (3,489) |
Total deferred tax liability |
| (58,742) | | (392,248) |
The movements of the valuation allowance for the years ended December 31, 2020, 2021 and 2022 are as follows:
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
| | | | | | |
Balance at the beginning of the year | | (1,797,234) | | (2,178,650) | | (2,892,268) |
Change of valuation allowance | | (381,416) | | (713,618) | | (418,707) |
Balance at the end of the year |
| (2,178,650) | | (2,892,268) | | (3,310,975) |
A valuation allowance is provided against deferred tax assets when the Group determines that it is more-likely-than-not that the deferred tax assets will not be utilized in the future. The Group considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will be more-likely-than-not realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses and forecasts of future profitability. These assumptions require significant judgment and the forecasts of future taxable income are consistent with the plans and estimates the Group is using to manage the underlying businesses. The statutory income tax rate of 25% or applicable preferential income tax rates were applied when calculating deferred tax assets.
F-68
18. TAXATION (CONTINUED)
As of December 31, 2020, 2021 and 2022, the Group had net operating loss carryforwards of approximately RMB6,347.1 million, RMB8,925.6 million and RMB11,545.8 million, respectively, which arose from the Group’s certain subsidiaries, VIEs and the VIEs’ subsidiaries established in the PRC. As of December 31, 2020, 2021 and 2022, deferred tax assets arose from net operating loss carryforwards amounted to RMB1,483.9 million, RMB2,210.1 million and RMB2,788.1 million respectively, out of which, RMB1,483.9 million, RMB2,153.5 million and RMB2,702.6 million deferred tax assets were offset by valuation allowance, respectively, as it was considered more-likely-than-not that the amount of the deferred tax assets will not be realized. The remaining deferred tax assets, net of valuation allowance arose from net operating loss carryforwards as of December 31, 2020, 2021 and 2022 amounted to nil, RMB56.6 million and RMB85.5 million, respectively, is expected to be utilized prior to expiration considering future taxable income for respective entities. As of December 31, 2022, the net operating loss carryforwards of RMB11,545.8 million will expire in the years ending December 31, 2023 through 2027, respectively, if not utilized.
The Group intends to indefinitely reinvest all the undistributed earnings of the VIEs and subsidiaries of the VIEs in China, and does not plan to have any of its PRC subsidiaries to distribute any dividend; therefore no withholding tax is expected to be incurred in the foreseeable future. Accordingly, no income tax is accrued on the undistributed earnings of the VIEs and subsidiaries of the VIEs as of December 31, 2020, 2021 and 2022. Although the Group’s certain PRC subsidiaries have generated accumulated earnings as of December 31, 2022, they have not paid any dividends in the past and currently have no plans to pay any dividends. These PRC subsidiaries plan to reinvest their profits into the PRC operations.
The Group does not intend to have any of its PRC subsidiaries or VIEs distribute any undistributed profit of such subsidiaries or VIEs to their direct overseas parent companies, but rather intends that such profits will be permanently reinvested by such subsidiaries and VIEs for their PRC operations. As of December 31, 2022, the total number of undistributed profits from the PRC subsidiaries and VIEs for which no withholding tax had been accrued was RMB22,400 million, and the unrecognized tax liabilities were RMB2,240 million.
Withholding tax on undistributed dividends
The new CIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The Implementing Rules of the EIT Law merely define the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, property, etc., of a non-PRC company is located”. Based on a review of surrounding facts and circumstances, the Group does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes.
The new CIT law also imposes a withholding income tax of 10% on dividends distributed by an VIE to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. According to the arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by an VIE in China to its immediate holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the VIE). The Group did not record any dividend withholding tax on the retained earnings of its FIEs in the PRC, as the Group intends to reinvest all earnings in China to further expand its business in China, and the VIEs do not intend to declare dividends on the retained earnings to their immediate foreign holding companies.
F-69
19. SHARE-BASED COMPENSATION
Compensation expenses recognized for share-based awards granted by the Company were as follows:
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Included in: | | | | | | |
Cost of revenues | | 511,637 | | 406,131 | | 356,844 |
Sales and marketing expenses | | 77,574 | | 110,446 | | 121,396 |
General and administrative expenses | | 1,131,335 | | 595,732 | | 1,659,755 |
Research and development expenses | | 532,043 | | 425,978 | | 287,254 |
Total |
| 2,252,589 | | 1,538,287 | | 2,425,249 |
Share‑based compensation related to share options (a) |
| 2,252,589 | | 1,504,025 | | 970,551 |
Share‑based compensation related to restricted share units (b) |
| — | | 34,262 | | 361,071 |
Share-based compensation related to restricted shares (c) | | — | | — | | 1,093,627 |
Total |
| 2,252,589 | | 1,538,287 | | 2,425,249 |
There was no income tax benefit recognized in the consolidated statements of comprehensive income (loss) for share-based compensation expenses and the Group did not capitalize any of the share-based compensation expenses as part of the cost of any assets during the years ended December 31, 2020, 2021 and 2022.
(a) Share-based compensations related to share options
2018 Share Option Plan
On August 20, 2018, the Company adopted the “Pre-IPO Share Option Scheme” (the “2018 Share Option Plan”), an equity-settled share-based compensation plan with the purpose of providing incentives and rewards to its employees, directors and consultants of the Group who have contributed or will contribute to the Group. The maximum number of shares that may be issued under the 2018 Share Option Plan shall be 350,225,435 Class A Ordinary Shares of the Company on December 28, 2018. Share options granted under 2018 Share Option Plan have a contractual term of ten years from the stated vesting commencement date, and are generally scheduled to be vested over continuous service period of one to five years.
Under the 2018 Share Option Plan, share options granted to employees of the Group are only exercisable upon the occurrence of an initial public offering of the Company.
For the year ended December 31, 2022, pursuant to 2018 Share Option Plan, the Company further granted 4,073,400 share options with exercise price of US $0.00002 per share which have a contractual term of ten years from the stated vesting commencement date, and are generally scheduled to be vested over one to five years of continuous service according to each option agreement.
F-70
19. SHARE-BASED COMPENSATION (CONTINUED)
The following table summarizes activities of the Company’s share options under 2018 Share Option Plan as converted to the number of ordinary shares of the Company:
| | | | | | | | |
| | | | | | Weighted | | |
| | | | Weighted | | average | | |
| | Number of | | average | | remaining | | Aggregate |
| | options | | exercise | | contractual | | intrinsic |
|
| outstanding |
| price |
| life |
| value |
|
|
|
| US$ |
| In Years |
| US$ (in thousands) |
Outstanding as of December 31, 2019 |
| 38,423,170 | | 0.00002 | | 8.12 | | 144,869 |
Granted* | | 107,975,010 | | 0.00002 | | | | |
Exercised | | — | | 0.00002 | | | | |
Forfeited | | (8,016,790) | | 0.00002 | | | | |
Outstanding as of December 31, 2020 |
| 138,381,390 | | 0.00002 | | 8.29 | | 2,838,661 |
| | | | | | | | |
Outstanding as of December 31, 2020 |
| 138,381,390 | | 0.00002 | | 8.29 | | 2,838,661 |
Granted |
| 20,341,532 | | 0.00002 | | | | |
Exercised |
| (57,076,970) | | 0.00002 | | | | |
Forfeited |
| (8,913,268) | | 0.00002 | | | | |
Outstanding as of December 31, 2021 |
| 92,732,684 | | 0.00002 | | 8.11 | | 621,926 |
| | | | | | | | |
Outstanding as of December 31, 2021 |
| 92,732,684 | | 0.00002 | | 8.11 | | 621,926 |
Granted |
| 4,073,400 | | 0.00002 | | | | |
Exercised |
| (24,383,373) | | 0.00002 | | | | |
Forfeited or Cancelled or Lapsed |
| (12,600,293) | | 0.00002 | | | | |
Outstanding as of December 31, 2022 |
| 59,822,418 | | 0.00002 | | 7.30 | | 278,373 |
Vested and exercisable as of December 31, 2020 |
| 42,486,004 | | 0.00002 | | 8.29 | | 871,529 |
Vested and exercisable as of December 31, 2021 |
| 10,816,028 | | 0.00002 | | 6.96 | | 72,539 |
Vested and exercisable as of December 31, 2022 |
| 8,393,147 | | 0.00002 | | 6.56 | | 39,056 |
*165,070 options were granted to non-employee consultants in the year ended December 31, 2020.
The weighted-average grant date fair value for options granted under the 2018 Beijing Lianjia Plan and 2018 Share Option Plan for the years ended December 31, 2020, 2021 and 2022 was US$6.63, US$15.65 and US$5.77, respectively, computed using the binomial option pricing model. During the years ended December 31, 2020, 2021 and 2022, the aggregate intrinsic value of share options exercised was nil, US$788 million and US$129 million, respectively. The total share-based compensation expenses recognized for share options during the years ended December 31, 2020, 2021 and 2022 was RMB2,252.6 million, RMB1,504.0 million and RMB970.6 million.
F-71
19. SHARE-BASED COMPENSATION (CONTINUED)
The fair value of each option granted under the Company’s Share Awards in 2018 Share Option Plan for the years ended December 31, 2020, 2021 and 2022 was estimated on the date of each grant using the binomial option pricing model with the assumptions (or ranges thereof) in the following table:
| | | | | | | |
| | For the year ended December 31, |
| ||||
|
| 2020 |
| 2021 |
| 2022 |
|
Exercise price (US$) |
| US$ 0.00002 | | US$ 0.00002 |
| US$ 0.00002 | |
Fair value of ordinary shares (US$) |
| 3.77 ~ 20.67 | | 5.51 ~ 22.33 |
| 3.72 ~ 6.31 | |
Expected volatility |
| 51.6% ~ 52.1 | % | 51.0% ~ 52.2 | % | 48.8% ~ 52.6 | % |
Excepted term (in years) |
| 10 |
| 10 |
| 10 | |
Expected dividend yield |
| 0 | % | 0 | % | 0 | % |
Risk‑free interest rate |
| 1.1% ~ 1.6 | % | 1.9% ~ 2.3 | % | 2.3% ~ 4.2 | % |
Risk-free interest rate is estimated based on the yield curve of US Sovereign Bond as of the option valuation date. The expected volatility at the grant date and each option valuation date is estimated based on annualized standard deviation of daily stock price return of comparable companies with a time horizon close to the expected expiry of the term of the options. The Group does not anticipate any dividend payments in the foreseeable future. Expected term is the contract life of the options.
As of December 31, 2022, there was RMB1,604.1 million of unrecognized compensation expense related to the share options granted to the Group’s employees, which are expected to be recognized over a weighted-average period of 2.1 years and may be adjusted for future changes in forfeitures.
(b) Share-based compensations related to restricted share units
2020 Share Incentive Plan
In July 2020, the Company adopted a 2020 Global Share Incentive Plan (the “2020 Share Incentive Plan”), pursuant to which the maximum number of shares of the Company available for issuance pursuant to all awards under the 2020 Share Incentive Plan (the “Award Pool”) shall initially be 80,000,000 shares, plus an annual increase on the first day of each fiscal year of the Company during the ten-year term of this plan commencing with the fiscal year beginning January 1, 2021, by an amount equal to the lesser of (i) 1.0% of the total number of shares issued and outstanding on the last day of the immediately preceding fiscal year, and (ii) such number of shares as may be determined by the Board. The size of the Award Pool to be equitably adjusted in the event of any share dividend, subdivision, reclassification, recapitalization, split, reverse split, combination, consolidation or similar transactions.
In April 2022, the Company adopted the amended 2020 Global Share Incentive Plan (the “Amended 2020 Share Incentive Plan”), under which the maximum aggregate number of Class A Ordinary Shares, per value of US$0.00002 each, may be issued pursuant to all awards under the Amended 2020 Plan is 253,246,913 upon the Listing.
Pursuant to the Amended 2020 Share Incentive Plan, 44,012,712 restricted share units have been granted to employees of the Group during the year ended December 31, 2022, which are generally scheduled to be vested over continuous service period of one to five years.
F-72
19. SHARE-BASED COMPENSATION (CONTINUED)
The following table summarizes activities of the Company’s restricted share units under 2020 Share Incentive Plan:
| | | | |
|
| Number of RSU |
| Weighted average grant-date |
| | outstanding | | fair value |
| | | | US$ |
Outstanding as of December 31, 2020 | | — | | — |
Granted |
| 2,525,730 |
| 11.85 |
Vested |
| — |
| — |
Forfeited |
| (83,607) |
| 15.89 |
Outstanding as of December 31, 2021 | | 2,442,123 | | 11.72 |
| | | | |
Outstanding as of December 31, 2021 | | 2,442,123 | | 11.72 |
Granted | | 44,012,712 | | 5.90 |
Vested | | (576,720) | | 7.89 |
Forfeited or Cancelled | | (4,375,617) | | 7.05 |
Outstanding as of December 31, 2022 |
| 41,502,498 |
| 6.08 |
The total share-based compensation expenses recognized for restricted share units for the year ended December 31, 2021 and 2022 was RMB34.3 million and RMB361.1 million.
As of December 31, 2022, there was RMB1,249.6 million of unrecognized compensation expense related to restricted share units granted to the Group’s employees, which are expected to be recognized over a weighted-average period of 3.3 years and may be adjusted for future changes in forfeitures.
The total fair value of shares vested for restricted share units for the year ended December 31, 2021 and 2022 was nil and RMB29.6 million.
(c) Share-based compensation related to restricted shares
2022 Share Incentive Plan
InMay 2022, the Company adopted a 2022 Global Share Incentive Plan (the “2022 Share Incentive Plan”), pursuant towhich themaximum number of shares of the Company available for issuance pursuant to all awards under the 2022 Share Incentive Plan (the “Award Pool”) shall be 125,692,439.
Pursuant to the 2022 Share Incentive Plan, 71,824,250 and 53,868,189 restricted Class A ordinary shares have been issued to Mr. PENG Yongdong, chairman and chief executive officer of the Company, and Mr. SHAN Yigang, an executive director of the Company, on May 5, 2022. Such restricted shares are not transferable and may not be sold, pledged or otherwise disposed of and are not entitled to receive dividends paid. Such restrictions will be removed in whole in five years from May 5, 2022 with restriction on certain portion being removed in each year, subject to the approval by a resolution of the compensation committee of the Board. The restricted shares are granted in two agreements and the vesting schedule according to each restricted share agreement is as below:
—One-third of the restrictionson transfer and dividend rights of the restricted shares are removed on the third,fourth and fifth anniversary of the stated vesting commencement date respectively.
F-73
19. SHARE-BASED COMPENSATION (CONTINUED)
Shengdu Acquisition
According to the amended acquisition agreement signed between the Group, Shengdu and Shengdu’s original shareholders, the Company issued 44,315,854 restricted Class A Ordinary Shares to the Shengdu’s original shareholders to acquired Shengdu’s 51% equityinterest on April 20, 2022. Such restricted shares are restricted from the transfer, sale, pledge or any other form of disposal. 30%, 30% and 40% of the restrictions on the restricted shares are removed on the first, second and third anniversary of the stated vesting commencement date respectively.
The following table summarizes activities of the Company’s restricted shares under 2022 Share Incentive Plan and Shengdu Acquisition:
| | | | |
|
| Number of |
| |
| | restricted shares | | Weighted average grant-date |
| | outstanding | | fair value |
|
| | | US$ |
Outstanding as of December 31, 2021 |
| — |
| — |
Granted |
| 170,008,293 |
| 4.38 |
Vested |
| — |
| — |
Forfeited |
| — |
| — |
Outstanding as of December 31, 2022 |
| 170,008,293 |
| 4.38 |
The total share-based compensation expenses recognized for restricted shares for the year ended December 31, 2022 was RMB1,093.6 million.
As of December 31, 2022, there was RMB3,763.3 million of unrecognized compensation expense related to restricted shares granted to the Group’s employees, which are expected to be recognized over a weighted-average period of 3.0 years and may be adjusted for future changes in forfeitures.
20. ORDINARY SHARES
In August 2020, the Company completed its IPO on the New York Stock Exchange (“NYSE”). The Company received total net proceeds of approximately US$2,358.8 million after deducting US$79.2 million of underwriter commissions and relevant offering expenses.
In November 2020, the Company completed a follow-on public offering on the NYSE. The Company received total net proceeds of approximately US$2,322.6 million after deducting US$38.5 million of underwriter commissions and relevant offering expenses.
On November 8, 2021, an extraordinary general meeting of shareholders of the Company was held. The Memorandum and Articles of Association was amended that the Class B ordinary shares shall only be held by the Founder and Mr. PENG Yongdong and Mr. SHAN Yigang (“Co-founders”), and the immediate family members, any trust for the benefit of the Co-Founder and/or any of the immediate family members, and any corporation, partnership or any other entity ultimately controlled by the Co-Founder and/or any of the immediate family members (together, the “Co-Founder Affiliates”). And the shareholders approved that 110,116,275 Class A ordinary shares that were held by Ever Orient International Limited and beneficially owned by Mr. PENG Yongdong, chairman and chief executive officer of the Company, and 47,777,775 Class A ordinary shares that were held by Clover Rich Limited and beneficially owned by Mr. SHAN Yigang, an executive director of the Company, were re-designated and re-classified as Class B Ordinary Shares on a 1:1 basis, such Class B Ordinary Shares to rank pari passu in all respects with all other existing Class B Ordinary Shares in the authorized share capital of the Company, and that the rights, preferences, privileges and restrictions attaching to such re-designated shares shall be varied accordingly (the “Share Re-designation”). Immediately prior to the resolutions above become effective, Propitious Global Holdings Limited converted 157,894,050 of its Class B ordinary shares into Class A ordinary shares on a 1:1 basis. Propitious Global Holdings Limited, the Company’s principal shareholder, is ultimately controlled by Z&Z Trust, the beneficiaries of which are the immediate family members of Mr. ZUO Hui, who has passed away in May 2021.
F-74
20. ORDINARY SHARES (CONTINUED)
On March 31, 2022, the management of the Group, Shengdu and Shengdu’s selling shareholders agreed to enter into an amended share purchase agreement, pursuant to which the Group agreed to issue 44,315,854 restricted Class A ordinary Shares to the selling shareholders of Shengdu as a part of consideration for acquisition of Shengdu. The restricted shares were issued on April 20, 2022 subject to three years’ restriction. As of December 31, 2022, there was no shares’ restriction removed.
On May 5, 2022, the Group issued 71,824,250 and 53,868,189 restricted Class A ordinary shares under the Company’s 2022 Global Share Incentive Plan to Mr. PENG Yongdong and Mr. SHAN Yigang. Such restrictions will be removed in whole in five years from May 5, 2022 with restriction on certain portion being removed in each year, subject to the approval by a resolution of the compensation committee of the Board. As of December 31, 2022, there was no shares’ restriction removed.
On May 11, 2022, Propitious Global Holdings Limited converted 727,407,230 of its Class B ordinary shares into Class A ordinary shares on a 1:1 basis. Propitious Global Holdings Limited, the Company’s principal shareholder, is ultimately controlled by Z&Z Trust.
In May 2022, the Board of directors of the Company authorized a share repurchase program under which the Company may repurchase up to US$1 billion of its ADSs and/or Class A ordinary shares in the open market at prevailing market prices, through privately negotiated transactions, in block trades and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations, over a 12-month period, subject to obtaining general mandate from shareholders. On August 12, 2022, general mandate was obtained from the shareholders during Annual General Meeting. As of and for the year ended December 31, 2022, the Company repurchased 41,707,914 Class A ordinary shares in the open market at prevailing market prices, which was classified to treasury shares. Total consideration paid for the purchases was US$187.3 million (RMB1,319.8 million). On December 8, 2022, the Company cancelled 35,246,628 Class A ordinary shares with a par value of US$0.00002 per share, which were repurchased during September and October 2022.
On August 12, 2022, an amendment to the Memorandum and Articles of Association was approved by the shareholders during an annual general meeting, according to which, the authorised share capital of the Company is US$500,000 divided into 25,000,000,000 shares, comprising (i) 24,114,698,720 Class A ordinary shares with a par value of US$0.00002 each and (ii) 885,301,280 Class B ordinary shares with a par value of US$0.00002 each.
On December 8, 2022, 1,023,202 Class B ordinary shares that were held by Ever Orient International Limited and beneficially owned by Mr. PENG Yongdong, chairman and chief executive officer of the Company, and 443,952 Class A ordinary shares that were held by Clover Rich Limited and beneficially owned by Mr. SHAN Yigang, an executive director of the Company, were converted to Class A Ordinary Shares.
During the year ended December 31, 2020, the Company issued 60,852,775 Class A Ordinary Shares to employee trust controlled by the Company upon early exercise of options, of which 43,687,673 shares have been exercised by employees as of December 31, 2022.
During the year ended December 31, 2021 and 2022, the Company issued 38,944,380 and 31,999,998 Class A Ordinary Shares to the depositary bank for future exercise of employees’ share options, of which 38,349,390 shares have been exercised by employees as of December 31, 2022.
F-75
20. ORDINARY SHARES (CONTINUED)
Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for conversion and voting rights. Class B Ordinary Shares shall only be held by Mr. PENG Yongdong and Mr. SHAN Yigang (each of whom, a “Co-Founder”) a Director Holding Vehicle wholly-owned and wholly-controlled by a Co-Founder, as defined in the currently effective memorandum and articles of association. Class B ordinary shares may be converted into the same number of Class A ordinary shares by the holders thereof at any time, while Class A ordinary shares cannot be converted into Class B ordinary shares under any circumstances. Subject to the Hong Kong Listing Rules or other applicable laws or regulations, each Class B ordinary share shall be automatically converted into one Class A ordinary share upon the occurrence of any of the following events: (i) the holder of such Class B ordinary shares dies, ceases to be a director or a Director Holding Vehicle wholly-owned and wholly-controlled by a Co-Founder, or is deemed by the Hong Kong Stock Exchange to be incapacitated for the purpose of performing his or her duties as a director or no longer meet the requirements of a director as set out in the Hong Kong Listing Rules; (ii) the transfer to another person of the beneficial ownership of, or economic interest in, such Class B ordinary share or the control over the voting rights attached to such Class B ordinary share other than (a) the grant of any lien, pledge, charge or other encumbrance over such share which does not result in the transfer of the legal title or beneficial ownership of, or the voting rights attached to, such share, until the same is transferred upon the enforcement of such lien, pledge, charge or other encumbrance and (b) a transfer of the legal title to such share by a Co-Founder to a Director Holding Vehicle wholly-owned and wholly-controlled by him, or by a Director Holding Vehicle wholly-owned and wholly-controlled by a Co-Founder to the Co-Founder holding and controlling it or another Director Holding Vehicle wholly-owned and wholly-controlled by such Co-Founder; and (iii) a Director Holding Vehicle holding such Class B Ordinary Shares no longer complies with the principle that the weighted voting rights attached to a beneficiary’s shares must cease upon transfer to another person of the beneficial ownership of, or economic interest in, those shares or the control over the voting rights attached to them. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by a holder thereof to any person other than the Co-Founders or Co-Founder affiliates, or upon a change of control of the ultimate beneficial ownership of any Class B ordinary share to any person other than the Co-Founders or Co-Founder Affiliates, such Class B ordinary share shall be automatically and immediately converted into one Class A ordinary share. Holders of Class A ordinary shares and Class B ordinary shares shall, at all times, vote together as one class on all matters submitted to a vote by the members at any general meeting of our company. Each Class A ordinary share shall be entitled to one vote on all matters subject to the vote at general meetings of our company, and each Class B ordinary share shall be entitled to ten votes on all matters subject to the vote at general meetings of our company.
F-76
21. PREFERRED SHARES
The following table summarizes the issuances of convertible redeemable preferred shares:
| | | | | | |
| | | | Issuance price | | Number of |
Name |
| Issuance date |
| per share |
| shares |
| | | | US$ | | |
Series B Preferred Shares |
| February to December 2016 |
| 2.48 |
| 402,891,265 |
Series C Preferred Shares |
| May to October 2017, and October 2018 |
| 3.13 |
| 477,780,220 |
Series D Preferred Shares |
| December 2018 to April 2019, August and November 2019 |
| 3.80 |
| 430,835,530 |
Series D+ Preferred Shares |
| November to December 2019 |
| 4.56 |
| 310,879,155 |
The Company’s preferred shares activities for the years ended December 31, 2020, 2021 and 2022 are summarized as below:
| | | | | | | | | | | | | | | | | | | | |
| | Series B Shares | | Series C Shares | | Series D Shares | | Series D+ Shares | | Total | ||||||||||
| | Number of | | | | Number of | | | | Number of | | | | Number of | | | | Number of | | |
|
| shares |
| RMB |
| shares |
| RMB |
| shares |
| RMB |
| shares |
| RMB |
| shares |
| RMB |
| | (in thousands, except for shares) | ||||||||||||||||||
Balance as of January 1, 2020 |
| 298,483,760 | | 6,406,056 | | 470,568,175 | | 12,118,251 | | 430,835,530 | | 11,831,223 | | 310,879,155 | | 10,017,365 | | 1,510,766,620 | | 40,372,895 |
Accretion on convertible redeemable preferred shares to redemption value | | — | | 242,270 | | — | | 554,415 | | — | | 519,201 | | — | | 439,342 | | — | | 1,755,228 |
Automatic conversion of preferred shares into ordinary shares upon IPO | | (298,483,760) | | (6,648,326) | | (470,568,175) | | (12,672,666) | | (430,835,530) | | (12,350,424) | | (310,879,155) | | (10,456,707) | | (1,510,766,620) | | (42,128,123) |
Balance as of December 31, 2020 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
All of the preferred shares were converted to Class A Ordinary Shares upon the completion of the Company’s IPO in August 2020.
F-77
22. FAIR VALUE MEASUREMENT
The following table sets forth the financial instruments, measured at fair value, by level within the fair value hierarchy on recurring basis as of December 31, 2021 and 2022:
| | | | | | | | |
| | |
| Fair value measurement at | ||||
| | | | reporting date using | ||||
| | | | Quoted | | | | |
| | | | prices in | | | | |
| | | | active | | Significant | | Significant |
| | | | markets for | | other | | other |
| | | | identical | | observable | | unobservable |
| | December 31, | | assets | | inputs | | inputs |
|
| 2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
|
| RMB |
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||||
Assets | | | | | | | | |
Fair value disclosure | | | | | | | | |
Bank time deposits (maturing within 3 months) (i) | | 592,752 | | — | | 592,752 | | — |
Short-term investments (iii) | | | | | | | | |
Short-term time deposits | | 9,938,676 | | — | | 9,938,676 | | — |
Long-term investments (ii) | | | | | | | | |
Long-term time deposits | | 946,096 | | — | | 946,096 | | — |
Held-to-maturity debt investments |
| 134,120 | | — | | 134,120 | | — |
Fair value measurements on a recurring basis |
| | | | | | | |
Short-term investments (iii) |
| | | | | | | |
Wealth management products |
| 19,331,959 | | — | | 17,042,313 | | 2,289,646 |
Derivative instruments | | 132,026 | | — | | 132,026 | | — |
Long-term investments (ii) | | | | | | | | |
Equity investments without readily determinable fair value using NAV practical expedient (iv) | | 126,380 | | | | | | |
Listed equity securities | | 153,779 | | 153,779 | | — | | — |
Unlisted equity securities | | 246,007 | | — | | — | | 246,007 |
Wealth management products | | 6,012,346 | | — | | 2,742,645 | | 3,269,701 |
Loan receivables under fair value option | | 68,190 | | — | | — | | 68,190 |
Available-for-sale debt investments |
| 7,813,655 | | — | | 7,813,655 | | — |
Total |
| 45,495,986 | | 153,779 | | 39,342,283 | | 5,873,544 |
F-78
22. FAIR VALUE MEASUREMENT (CONTINUED)
| | | | | | | | |
|
| |
| Fair value measurement at reporting date using | ||||
| | | | Quoted prices | | | | |
| | | | in active | | Significant | | Significant |
| | | | markets for | | other | | other |
| | | | identical | | observable | | unobservable |
| | December | | assets | | inputs | | inputs |
|
| 31, 2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| | RMB | | RMB | | RMB | | RMB |
| | (in thousands) | ||||||
Assets | |
| |
| |
| |
|
Fair value disclosure | | | | | | | | |
Short-term investments (iii) | | | | | | | | |
Short-term time deposits | | 3,911,410 | | — | | 3,911,410 | | — |
Held-to-maturity debt investments | | 3,571,060 | | — | | 3,571,060 | | — |
Long-term investments (ii) | | | | | | | | |
Long-term time deposits | | 11,064,516 | | — | | 11,064,516 | | — |
Held-to-maturity debt investments |
| 138,485 | | — | | 138,485 | | — |
Fair value measurements on a recurring basis |
| | | | | | | |
Short-term investments (iii) |
| | | | | | | |
Listed equity securities |
| 70,415 | | 70,415 | | — | | — |
Wealth management products |
| 26,491,683 | | — | | 23,492,290 | | 2,999,393 |
Available-for-sale debt investments |
| 1,380,668 | | — | | 1,380,668 | | — |
Long-term investments (ii) | | | | | | | | |
Equity investments without readily determinable fair value using NAV practical expedient (iv) | | 91,005 | | | | | | |
Listed equity securities | | 37,134 | | 37,134 | | — | | — |
Unlisted equity securities | | 84,672 | | — | | — | | 84,672 |
Wealth management products | | 938,000 | | — | | 900,500 | | 37,500 |
Loan receivables under fair value option | | 3,883 | | — | | — | | 3,883 |
Available-for-sale debt investments | | 5,126,289 | | — | | 5,126,289 | | — |
Total |
| 52,909,220 | | 107,549 | | 49,585,218 | | 3,125,448 |
(i) | Included in cash and cash equivalents on the Company’s consolidated balance sheets; |
(ii) | Included in long-term investments on the Company’s consolidated balance sheets; |
(iii) | Included in short-term investments on the Company’s consolidated balance sheets; |
(iv) | Investments are measured at fair value using NAV as a practical expedient. These investments have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. |
F-79
22. FAIR VALUE MEASUREMENT (CONTINUED)
The following table summarizes the activities related to fair value of the short-term wealth management products:
| | | | | | | | |
| | |
| Fair value measurement at | ||||
| | | | reporting date using | ||||
| | | | Quoted | | | | |
| | | | prices in | | | | |
| | | | active | | Significant | | Significant |
| | | | markets for | | other | | other |
| | | | identical | | observable | | unobservable |
| | December 31, | | assets | | inputs | | inputs |
| | 2019 | | (Level 1) | | (Level 2) | | (Level 3) |
|
| RMB |
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||||
Bank time deposits (maturing within 3 months) (i) | | 1,328,231 | | 0 | | 1,328,231 | | 0 |
Long-term time deposits (ii) | | 215,000 | | 0 | | 215,000 | | 0 |
Restricted cash, current | | 7,380,341 | | 0 | | 7,380,341 | | 0 |
Non-current restricted cash | | 230,903 | | 0 | | 230,903 | | 0 |
Short-term investments | | 1,844,595 | | 0 | | 1,844,595 | | 0 |
Contingently returnable consideration in relation to an acquisition (iii) | | 53,349 | | 0 | | 0 | | 53,349 |
Long-term investments accounted for at fair values (ii) | |
| | | | | | |
Listed equity securities | | 93,377 | | 93,377 | | 0 | | 0 |
Unlisted equity securities |
| 208,955 |
| 0 |
| 0 |
| 208,955 |
Wealth management products | | 1,246,430 | | 0 | | 1,246,430 | | 0 |
Loan receivables under fair value option | | 29,834 | | 0 | | 0 | | 29,834 |
Total |
| 12,631,015 |
| 93,377 |
| 12,245,500 |
| 292,138 |
Liabilities |
| |
| |
| |
| |
Mandatorily redeemable non-controlling interests in relation to an acquisition (iv) | | 780,937 | | 0 | | 0 | | 780,937 |
Contingent consideration in relation to an acquisition (iii) | | 88,138 | | 0 | | 0 | | 88,138 |
Foreign exchange options (v) | | 9,691 | | 0 | | 9,691 | | 0 |
Total | | 878,766 | | 0 | | 9,691 | | 869,075 |
|
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| | (in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 2,289,646 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer from long-term investment | 3,317,493 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value (i) | (1,077) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange adjustment | 197,924 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposal | (2,804,593) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of short-term wealth management products as of December 31, 2022 (Level 3) | 2,999,393 |
(i) | Recognized as “Fair value changes in investments, net” on the |
The following table summarizes the activities related to fair value of the unlisted equity securities:
| | |
| | Amounts |
| | RMB |
| | (in thousands) |
Fair value of | |
|
Change in fair value (i) | | (10,828) |
Investment Made | | 18,541 |
Fair value of unlisted equity securities as of December 31, 2021 (Level 3) | 246,007 | |
Change in fair value (i) | (159,264) | |
Dividend Received | (412) | |
Investment Made | 9,472 | |
Disposal | (11,131) | |
Fair value of unlisted equity securities as of December 31, 2022 (Level 3) | 84,672 |
(i) | Recognized as “Fair value changes in investments, net” on the consolidated statements of comprehensive income (loss). |
The following table summarizes the activities related to fair value of the long-term wealth management products:
| | |
| |
|
| |
|
| | (in thousands) |
Fair |
| 657,550 |
Fair value at inception of purchased | | 4,931,964 |
Change in fair value (i) | | 147,422 |
Dividend Received | | (52,059) |
Exchange adjustment | | (125,530) |
Transfer to short-term investment | | (2,289,646) |
Fair value of long-term wealth management products as of December 31, 2021 (Level 3) | 3,269,701 | |
Fair value at inception of purchased | 37,500 | |
Change in fair value (i) | (84,512) | |
Exchange adjustment | 132,304 | |
Transfer to short-term investment | (3,317,493) | |
Fair value of long-term wealth management products as of December 31, 2022 (Level 3) | 37,500 |
(i) | Recognized as “Fair value changes in investments, net” on the consolidated |
F-80
22. FAIR VALUE MEASUREMENT (CONTINUED)
The following table summarizes the activities related to fair value of the loan receivables under fair value option:
| | |
| | Amounts |
| | RMB |
| | (in thousands) |
Fair value of loan receivables under fair value |
| 41,519 |
Fair value at inception of purchased | | 35,534 |
Change in fair value | | (8,863) |
Fair value of loan receivables under fair value | 68,190 | |
Cash collection | (24,869) | |
Change in fair value |
| (39,438) |
Fair value of loan receivables under | 3,883 |
(i) | Recognized as “Fair value changes in investments, net” on the |
Assets Measured at Fair Value on a Recurring Basis
When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. Following is a description of the valuation techniques that the Group uses to measure the fair value of assets that the Group reports in its consolidated balance sheets at fair value on a recurring basis.
Bank time deposits. Bank time deposits are valued based on the prevailing interest rates in the market, and accordingly, the Group classifies the valuation techniques that use these inputs as Level 2.
Loan receivables accounted for under the fair value option. The fair value of the loan receivables was estimated by using valuation models such as the binomial model with unobservable inputs including risk-free interest rate and expected volatility (Level 3).
Listed equity securities. The Group values its listed equity securities using quoted prices for the underlying securities in active markets, and accordingly, the Group classifies the valuation techniques that use these inputs as Level 1.
Unlisted equity securities. The fair value of the investee is estimated by applying the discounted cash flow approach and the guideline public company approach. For discounted cash flow approach, major factors considered include historical financial results and assumptions including future growth rates, an estimate of weighted average cost of capital, effective tax rates. The guideline public company approach relies on publicly available market data of comparable companies and uses comparative valuation multiples of the investee’s revenue. The Group classifies the valuation techniques that use these inputs as Level 3.
Wealth management products. Wealth management products are financial products issued by commercial bank or asset management company. For investment issued by commercial bank with a variable interest rate, the Group uses alternative pricing sources and models utilizing market observable inputs to estimate the fair value, and the Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurement. For financial product issued by asset management company, whose fair value is determined based on the expected cash flows and discounted by using the unobservable expected return, such as dealer quotes for similar instruments, the Group classifies the valuation techniques that use these inputs as Level 3.
F-81
22. FAIR VALUE MEASUREMENT (CONTINUED)
Available-for-sale debt investments.Available-for-sale debt investments are debt instruments or preferred shares issued by banks and other financial institutions that are redeemable at the issuer’s option, which are measured at fair value. Available-for-sale debt investments that are redeemable at the issuer’s option have no contractual maturity date. The Group classifies the valuation techniques that use these inputs as Level 2 fair value measurement.
Held-to-maturity debt investments. Held-to-maturity debt investments were mainly debt instruments issued by financial institutions and private companies with maturities of greater than one year and for which the Group has the positive intent and ability to hold those securities to maturity. The Group account for the held-to-maturity debt securities at amortized cost less allowance for credit losses. The Group determines the fair value of the debt securities using quoted prices in less active markets, and accordingly the Group categorizes the unsecured senior notes as Level 2 in the fair value hierarchy.
Derivative instruments. Derivative instruments are mainlyfinancial products issued by commercial bank linked to the forward exchange rate. Fair value is provided by the commercial bank using alternative pricing sources and models utilizing market observable inputs, and accordingly the Group classifies the valuation techniques that use these inputs as Level 2.
For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, a change in those significant unobservable inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date.
Non-current receivables and payables. Non-current assets including financing receivables and rental deposits are financial assets with carrying value that approximate fair value due to the impact of discounting is immaterial. Non-current funding debt and other non-current liabilities are financial liabilities with carrying value that approximate fair value due to the impact of discounting is immaterial.
Assets Measured at Fair Value on a Non-Recurring Basis
Investments without readily determinable fair value. For those investments without readily determinable fair value, the CompanyGroup measures them at fair value when observable price changes are identified or impairment charge were recognized. The fair values of the Company’sGroup’s privately held investments as disclosed are determined based on the discounted cash flow model using the discount curve of market interest rates or based on the similar transaction price in the market directly. The CompanyGroup classifies the valuation techniques on those investments that use similar identifiable transaction prices as Level 2 of fair value measurements.
The CompanyGroup also measures equity investments without readily determinable fair values at fair value on a non-recurring basis when an impairment charge is to be recognized. As of December 31, 20192021 and 2020,2022 certain investments were measured using significant unobservable inputs (Level 3) and written down from their respective carrying values to fair values, considering the stage of development, the business plan, the financial condition, the sufficiency of funding and the operating performance of the investee companies, with impairment charges incurred and recorded in earnings for the years then ended. The fair value of the privately held investments is valued based on the discounted cash flow model with unobservable inputs including the discount curve of market interest rates, or valued based on market approach with unobservable inputs including selection of comparable companies and multiples and estimated discount for lack of marketability. Impairment recorded for equity method investments for the years ended December 31, 2018, 20192020, 2021 and 20202022 was NaN, RMB1.5RMB26.7 million, RMB2.9 million and RMB26.7 million,nil, respectively. Impairment recorded for investments without readily determinable fair value for the years ended December 31, 2018, 20192020, 2021 and 20202022 was NaN, NaNRMB9.0 million, RMB183.8 million and RMB9.0RMB591.9 million, respectively.
Non-financial assets. The Company’sGroup’s non-financial assets, such as intangible assets, goodwill and property, plant and equipment, would be measured at fair value only if they were determined to be impaired.
F-74
23. Fair Value measurement (Continued)
The CompanyGroup reviews the long-lived assets and certain identifiable intangible assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Impairment loss for those assets were recognized based on the impairment test using discounted cash flow method. The impairment recognized on the acquired intangible assets and long-lived assets based on management’s assessment amount to NaN, NaNRMB213.4 million, RMB14.3 million and RMB213.4RMB6.3 million, for the years ended December 31, 2018, 20192020, 2021 and 2020,2022, respectively.
F-82
22. FAIR VALUE MEASUREMENT (CONTINUED)
The CompanyGroup has a policy to perform goodwill impairment testing at the reporting unit level on December 31 annually, and between annual tests whenever a triggering event occurs. When performing the quantitative impairment test at reporting unit level, the CompanyGroup considers a number of factors including but not limited to expected future cash flows, growth rates, discount rates, and comparable multiples from publicly traded companies in the industry. The impairment recognized on goodwill based on management'smanagement’s assessment amount to NaN, NaNRMB22.7 million, RMB732.4 million and RMB22.7RMB141.8 million for the years ended December 31, 2018, 20192020, 2021 and 2020, respectively and the remaining carrying values were zero after the impairment for the respective reporting units.2022, respectively. The fair value of reporting units was determined using Level 3 inputs.
24. Business Combinations23. BUSINESS COMBINATIONS
The Group accounts for business combinations using the acquisition method of accounting, which requires the acquisition cost be allocated to the assets and liabilities of the CompanyGroup acquired, including separately identifiable intangible assets, based on their estimated fair values. The Group made estimates and judgments in determining the fair value of acquired assets and liabilities, with the assistance of an independent valuation firm and management’s experience with similar assets and liabilities. In performing the purchase price allocation, the Group considered the analyses of historical financial performance and estimates of future performance of these companies acquired. Other than these acquisitions mentioned, other acquisition is immaterial for the years ended December 31, 2018, 20192020, 2021 and 2020.2022.
Acquisition of EallShengdu
On April 20, 2018,Founded in 2002 and headquartered in Hangzhou, Shengdu is a full-service home renovation service provider in China.
As discussed in Note 11 (ii), the Group acquiredentered into a definitive agreement with Shengdu, pursuant to which the Group agreed to acquire 100% equity interests in Shengdu from its existing shareholders, for a total consideration capped at RMB8 billion consisting of Eall,cash and restricted shares, subject to a private company that is a SaaS cloud service providerstaggered acquisition arrangement and customary closing conditions, including regulatory approvals. The Group has purchased 6% and 43% of Shengdu’s equity interests with preference rights in December 2021 and January 2022 with consideration amount to RMB480 million and RMB3,440 million in cash, respectively. The Group used measurement alternative to account for the real estate agency service industry. Total considerationinvestments. The Group accounted for this acquisition consistedits obligation to purchase the remaining equity interest of deemed issued shares,Shengdu when and if certain customary closing conditions are satisfied as a forward contract, which is a rightclassified as an asset or liability and measured at fair value, with changes in fair value reported in earnings.
Pursuant to receive 4,933,010 ordinary sharesthe original term of the Company valueddefinitive agreement signed on July 4, 2021, the group agreed to acquire the remaining 51% equity interest in Shengdu for a total consideration at RMB76.8 million upon completion of certain events and RMB401.0RMB4,080 million in cash.form of restricted shares, from Shengdu’s selling shareholders. The restricted shares would be settled at an issuance price based on the weighted average closing prices of the Company’s ADSs for 30 consecutive trading days before the closing of the Shengdu acquisition. Due to decline of the Company’s share price during the three months period ended March 31, 2022, the management of the Group renegotiated the consideration with Shengdu. On August 12, 2019,March 31, 2022, the rightmanagement of the Group, Shengdu and Shengdu’s selling shareholders agreed to receiveenter into an amended share purchase agreement, in which the Group would acquire Shengdu’s remaining 51% equity interest by issuing 44,315,854 restricted Class A Ordinary Shares to the selling shareholders of Shengdu as the consideration. Before and after the amendment, the restricted shares was replacedissued to the selling shareholders who are key employee of Shengdu are subject to a 3 years’ service period. That is, if the selling shareholders left the Company within 3 years after the closing of the acquisition, the Group has the option to purchase the unvested restricted shares held by a cash payment agreement with a cash consideration of RMB140.0 million. The difference between the cash consideration andselling shareholder without consideration. As such, the restrict shares issued are accounted for as post-combination compensation cost but not included in the purchase price. Total fair value of deemed issuerestricted shares granted was RMB1,217 million, out of which amounted to RMB63.2RMB284 million was recordedrecognized as share-based compensation expenses asduring the ordinary shareholders of Eall were employees of the Group.year ended December 31, 2022. Please refer to Note 19 for details.
F-75F-83
24. Business Combinations (Continued)23. BUSINESS COMBINATIONS (CONTINUED)
On April 20, 2022, the Group issued 44,315,854 restricted Class A Ordinary Shares to the Shengdu’s selling shareholders and acquired Shengdu’s remaining 51% equity interest on April 20, 2022. As a result, the 100% equity interest of Shengdu was acquired by the Group. The Group began to consolidate its financial statements following the completion of the transaction. At the acquisition date, the Group remeasured the investment on the acquired 49% equity interest of Shengdu to the fair value of RMB2,489.2 million and the forward to the fair value of RMB1,374.1 million, which were determined based on a discounted cash flow analysis. Significant assumptions used in the discounted cash flows include revenue growth rates and discount rate. During the year ended December 31, 2022, RMB57 million loss was recorded in “Fair value changes in investments, net” in the consolidated statements of comprehensive income (loss).
The acquisition was accounted forstructured as a business combination andmerger in which Shengdu became a wholly owned subsidiary of the operation results of Eall and its subsidiaries from the acquisition dateCompany. Shengdu’s businesses have been included inadded to the home renovation and furnishing segment. The acquisition enables the Group to realize the strategic synergies across the industry chain, and further strengthen the Group’s consolidated financial statements. capabilities in providing better home renovation and furnishing services to satisfy the evolving needs of housing customers. Acquisition related costs incurred were not material.
Acquisition of Shengdu (Continued)
The Group estimatedfollowing table presents the determination of the fair value of acquired assets and liabilities with the assistance of an independent valuation firm. Consideration for Eall was allocated on the acquisition date based on the fair value of theidentifiable assets acquired and liabilities assumed from the Group’s acquisition of Shengdu. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as follows:well as asset lives, can materially impact the Company’s results of operations.
| | |
|
| Amounts |
| | RMB |
| | (in thousands) |
|
|
|
| 2,106 | |
Short term investments | 1,004,314 | |
Accounts receivable and contract assets, net | 179,804 | |
Prepayments, receivables and other assets |
| 404,196 |
|
|
|
|
|
|
|
|
|
Intangible assets | 1,050,523 | |
Deferred tax assets | 40,592 | |
Goodwill |
|
|
Accounts payable | (551,299) | |
Salary and welfare payable | | (487,205) |
Income taxes payable | | (16,388) |
Lease liabilities current portion | | (83,115) |
Contract liability | | (1,126,951) |
Accrued expenses and other current liabilities | | (330,900) |
Lease liabilities non-current portion | | (359,763) |
Deferred tax liabilities | |
|
Total | |
|
Total purchase price is comprised of: | | |
Cash consideration | |
|
|
|
|
Total |
|
The total cash consideration of RMB401.0 million less cash acquired of RMB42.2 million resulted in a net cash outlay of RMB358.8 million at the acquisition date. The excess of purchase price over net tangible assets and identifiable intangible assets acquired were recorded as goodwill. Goodwill primarily represents the expected synergies expected from the combined operations of Eall and the Group, the assembled workforce and their knowledge and experience in the real estate industry of SaaS cloud service business in the PRC. The goodwill is not expected to be deductible for tax purposes. The fair value of deemed issue shares was classified as equity and recorded in additional paid-in capital. NaN subsequent purchase price adjustment has been made. Total identifiable intangible assets included SaaS system of RMB12.7 million with estimated useful life of 4 years, customer relationships of RMB3.0 million with estimated useful life of 3 years and non-competition agreement of RMB2.7 million with estimated useful life of 2.8 years.
The acquisitions above did not have a material impact on the Group’s consolidated financial statements, and, therefore, pro forma disclosures have not been presented.
F-76F-84
24. Business Combinations (Continued)23. BUSINESS COMBINATIONS (CONTINUED)
AcquisitionRMB3,362.3 million cash consideration was paid during the year ended December 31, 2022, net of Zhonghuan
On July 12, 2019,cash acquired, which is included in the Group acquired 62% of the ordinary shares (the “Phase I Transaction”) issued by Zhonghuan, a real estate agency company in central China. Pursuant to the acquisition agreement, the Group was obligated to purchase, and the selling shareholders were also obligated to sell the remaining 38% ordinary shares (the “Phase II Transaction”) of Zhonghuan after certain administrative procedures. The acquisition of Phase I and Phase II Shares was considered bundled transactions negotiated and entered into together as a package. Total considerationcash used for the acquisition of Phase I shares consistedbusinesses, net of RMB931.0cash acquired line item in the Consolidated Statement of Cash Flows. RMB120.0 million cash consideration was paid in cash,the year ended December 31, 2021 relating to this staggered acquisition.
In connection with the Shengdu transaction, the Company recorded goodwill of RMB3,060.8 million, which is attributable primarily to expected synergies, expanded market opportunities, and other expected benefits that the Company believes it will result from combining its operations with the operations of Shengdu. The incremental goodwill created as a result of the acquisition of Phase II shares consisted of RMB194.0 million in cash and an obligation to issue Class A Ordinary Sharesis not deductible for tax purposes. Goodwill has been allocated to the selling shareholders of Zhonghuan with value equal to RMB716.4 millionhome renovation and the per share price used to calculate the number of shares was i) the Series D+ Preferred Shares issuance price if the Company has initiated Series D+ Preferred Shares financing before the end of December 31, 2019, or ii) otherwise, the Series D Preferred Share issuance price which was US$3.8. Therefore, the obligation to issue variable number of shares with a value equal to a fixed amount is considered a mandatorily redeemable non-controlling interest and classified as a liability measured at fair value, and changes in fair value were reflected in earnings. As of December 31, 2019, the Series D+ Preferred Shares financing was completed, thus the number of shares to be issued was determined based on a per share price of US$4.56 and the Company issued 22,315,135 Class A Ordinary Shares to the selling shareholders of Zhonghuan.furnishing segment.
The acquisition had been accounted for as a business combinationtotal revenue and the results of operations of Zhonghuan and its subsidiariesnet loss from the acquisition date have beenShengdu that are included in the Group’s consolidated financial statements from August 1, 2019. statement of comprehensive income (loss) for the year ended December 31, 2022 were RMB4,311.3 million and RMB189.3 million, respectively.
Acquisition of Shengdu (Continued)
The Group estimated thepurchase price allocation to identifiable intangible asset acquired is as follows:
| | | | |
|
| Estimated |
| Estimated |
| | fair value | | useful life |
| | RMB | |
|
| | (in thousands) | | (in years) |
Trademark |
| 1,049,500 |
| 10 |
The fair value of acquired assets and liabilities with the assistance of an independent valuation firm.
Consideration for Zhonghuantrademark was allocated onestimated using the acquisition date based onmulti-period excess earnings method. Significant judgment was exercised in determining the fair value of the trademark intangible asset acquired, which involved the use of assumptions related to revenue growth rates and discount rate of the acquired business. The discount rate was determined by considering the cost of capital of comparable businesses and other industry factors. Trademark acquired is amortized using a straight-line method that reflects the pattern in which economic benefits of the intangible assets acquiredare consumed.
The following unaudited pro forma consolidated financial information reflects the combined results of operations of the Group and Shengdu for the liabilities assumedyear ended December 31, 2022, as follows:if the acquisition of Shengdu had occurred on January 1, 2021, and after giving effect to purchase accounting adjustments. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place as of the beginning of the years presented and may not be indicative of future operating results.
The unaudited pro forma net loss for the years presented includes RMB78.7 million for the amortization of identifiable intangible asset net of tax for each year. The relevant tax impact was determined using the actual effective income tax rate of Shengdu for each presented year. Other acquisitions During the year ended December 31, 2022, the Group also acquired several small real estate agency companies in several cities which primarily operated existing home transaction services and new home transaction services in the PRC, and one home renovation company. All these acquisitions individually and in aggregate were not material. |
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F-77F-85
24. Business Combinations (Continued)
All the cash consideration for acquisition of Phase I Shares has been settled as of December 31, 2019. No subsequent purchase price adjustment has been made. The acquisitions above did not have a material impact on the Group’s consolidated financial statements, and, therefore, pro forma disclosures have not been presented.
25. Segment informationSEGMENT INFORMATION
(a) | Description of segments |
The Group’s organizational structure is based on a number of factors that the CODM uses to evaluate, view and run its business operations which include, but are not limited to, customer base, homogeneity of services and technology. The Group’s operating segments are based on this organizational structure and information reviewed by the Group’s CODM to evaluate the operating segment results.
Prior to the Reorganization, the Group had one reportable segment. Concurrent with the Reorganization, effective from 2019, the Group changed its internal organizational structure and separated its businesses into three segments, which were existing home transaction services, new home transaction services and emerging and other services, in light of the significant growth in new home transaction services business and emerging and other services business. Later in the first quarter of 2020, the Group further updated the financial measures provided to the CODM. This change
As a result of the acquisition of Shengdu, which was closed on April 20, 2022, the Group updated its internal organizational structure resulting in four segments, which were existing home transaction services, new home transaction services, home renovation and furnishing, and emerging and other services. In the second quarter of 2022, the Group updated the financial measures provided to the CODM.
These changes in segment reporting alignsalign with the manner in which the Group’s CODM currently receives and uses financial information to allocate resources and evaluate the performance of reporting segments. This changeThese changes in segment presentation doesdo not affect consolidated balance sheets, consolidated statements of comprehensive income (loss) or consolidated statements of cash flows. The Group retrospectively revised prior period segment information, to conform to current period presentation.
F-78
25. Segment information (Continued)
The Group now operates its businesses in 3four segments: existing home transaction services, new home transaction services, home renovation and furnishing, and emerging and other services. The following summary describes the operations in each of the Group’s reportable segment:
(1) | Existing home transaction services: The existing home transaction segment provides services in existing home market include i) agency services to sales or leases of existing homes, either through acting as the principal agent or a participating agent in collaboration with the principal agents; ii) platform and franchise services to brokerage firms on Beike platform who provide agency services in existing home market; iii) Other transaction services, such as transaction closing service through the Group’s transaction center. |
(2) | New home transaction services: The new home transaction business segment provides new home transaction services in new home market. New home transaction services refer to agency services provided to real estate developers to facilitate sales of new properties developed by the real estate developers to property buyers. The Group signs the new home transaction services contracts with the sales companies of the developers and then mobilizes all agents registered with the platform to fulfil such contracts. |
(3) | Home renovation and furnishing: The home renovation and furnishing business segment provides a one-stop solution to give housing customers access to a comprehensive range of home renovation and furnishing, ranging from interior design, renovation, re-modeling, furnishing, supplies, to after-sales maintenance and repair. |
(4) | Emerging and other services: Emerging and other services include rental property management service business, financial service business and other newly developed businesses. |
CommissionMaterial costs, commission and compensation costs include material costs related to home renovation and furnishing services and compensation to agents and sales professionals or renovation workers who are the Group’s employees or contractors andas well as split commission to brokerage firms who signs channel sale agency service agreements with the Group. Commission and compensation in existing home market are mainly to those who are the Group’s employees or contractors. Commissions and compensation in new home market are mainly to brokerage firms who sign channel sale agency service agreements with the Group.
F-79F-86
25. Segment information (Continued)24. SEGMENT INFORMATION (CONTINUED)
Commission and compensation costs in existing home market are mainly to those who are the Group’s employees or contractors. Commissions and compensation costs in new home market are mainly to brokerage firms who sign channel sale agency service agreements with the Group. Commission and compensation costs in home renovation and furnishing market are mainly to renovation workers who are the Group’s employees or contractors. Material costs in home renovation and furnishing market are mainly to suppliers according to corresponding contracts.
(b) | Segments data |
The following tables present summary information by segment:
| | | | | | |
|
| For the Year Ended December 31, | ||||
| | 2018 | | 2019 | | 2020 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Net revenues: |
|
|
|
|
|
|
Existing home transaction services |
| 20,154,642 |
| 24,568,508 |
| 30,564,584 |
New home transaction services |
| 7,471,924 |
| 20,273,860 |
| 37,937,886 |
Emerging and other services |
| 1,019,933 |
| 1,172,538 |
| 1,978,508 |
Total |
| 28,646,499 |
| 46,014,906 |
| 70,480,978 |
Commission and compensation: |
|
|
|
|
|
|
Existing home transaction services |
| (12,422,796) |
| (15,014,264) |
| (18,065,451) |
New home transaction services |
| (4,444,102) |
| (15,355,160) |
| (29,787,961) |
Emerging and other services |
| (293,851) |
| (229,401) |
| (317,756) |
Total |
| (17,160,749) |
| (30,598,825) |
| (48,171,168) |
Contribution: |
|
|
|
|
|
|
Existing home transaction services |
| 7,731,846 |
| 9,554,244 |
| 12,499,133 |
New home transaction services |
| 3,027,822 |
| 4,918,700 |
| 8,149,925 |
Emerging and other services |
| 726,082 |
| 943,137 |
| 1,660,752 |
Total |
| 11,485,750 |
| 15,416,081 |
| 22,309,810 |
Unallocated cost and expenses: |
|
|
|
|
|
|
Cost related to stores (i) |
| (3,400,545) |
| (3,078,672) |
| (3,206,601) |
Other operating costs (ii) |
| (1,215,229) |
| (1,069,365) |
| (2,243,352) |
Sales and marketing expenses |
| (2,489,692) |
| (3,105,899) |
| (3,715,278) |
General and administrative expenses |
| (4,927,367) |
| (8,376,531) |
| (7,588,809) |
Research and development expenses |
| (670,922) |
| (1,571,154) |
| (2,477,911) |
Impairment of goodwill and intangible assets | | 0 | | 0 | | (236,050) |
Total unallocated cost and expenses |
| (12,703,755) |
| (17,201,621) |
| (19,468,001) |
Contribution less unallocated cost and expenses |
| (1,218,005) |
| (1,785,540) |
| 2,841,809 |
Total other income, net (iii) |
| 718,940 |
| 509,776 |
| 1,545,310 |
Income (loss) before income tax benefit (expense) |
| (499,065) |
| (1,275,764) |
| 4,387,119 |
| | | | | | |
|
| For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Net revenues: |
|
|
|
|
|
|
Existing home transaction services |
| 30,564,584 | | 31,947,953 | | 24,123,703 |
New home transaction services |
| 37,937,886 | | 46,472,378 | | 28,650,374 |
Home renovation and furnishing |
| 108,960 | | 197,452 | | 5,046,627 |
Emerging and other services |
| 1,869,548 | | 2,134,656 | | 2,848,075 |
Total | | 70,480,978 | | 80,752,439 | | 60,668,779 |
|
| | | | | |
Material costs, Commission and compensation costs: |
| | | | | |
Existing home transaction services |
| (18,065,451) | | (20,123,501) | | (14,510,838) |
New home transaction services |
| (29,787,961) | | (37,525,240) | | (21,886,020) |
Home renovation and furnishing |
| (127,901) | | (195,869) | | (3,562,068) |
Emerging and other services | | (189,855) | | (288,593) | | (1,956,468) |
Total |
| (48,171,168) | | (58,133,203) | | (41,915,394) |
|
| | | | | |
Contribution: |
| | | | | |
Existing home transaction services | | 12,499,133 | | 11,824,452 | | 9,612,865 |
New home transaction services | | 8,149,925 | | 8,947,138 | | 6,764,354 |
Home renovation and furnishing | | (18,941) | | 1,583 | | 1,484,559 |
Emerging and other services |
| 1,679,693 | | 1,846,063 | | 891,607 |
Total |
| 22,309,810 | | 22,619,236 | | 18,753,385 |
As substantially all of the Group’s long-lived assets are located in the PRC and substantially all of the Group’s revenue of reportable segments are derived from China based on the geographical locations where services and products are provided to customers, no geographical information is presented.
F-80F-87
26. Net income (loss) per share25. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is the amount of net income (loss) attributable to each share of ordinary shares outstanding during the reporting period. Diluted net income (loss) per share is the amount of net income (loss) attributable to each share of ordinary shares outstanding during the reporting period adjusted to include the effect of potentially dilutive ordinary shares. 855,287,934, 1,098,514,498 and 932,877,749 preferred shares on a weighted average basis were excluded from the computation of diluted net income (loss) per share for the years ended December 31, 2018, 2019 and 2020 because of their anti-dilutive effect. The obligation to issue ordinary shares in relation to41,217,159 non-vested share options and 31,140 non-vested RSUs on a weighted average basis were excluded from the acquisitioncalculation of Zhonghuan which was 10,515,625diluted net loss per share for the year ended December 31, 2021 because of their anti-dilutive effect. 4,437,739 non-vested RSUs and 24,445,441 non-vested restricted shares on a weighted average basis were excluded from the calculation of diluted net income (loss)loss per share for the year ended December 31, 2019, due to the2022 because of their anti-dilutive effect.
The following table sets forth the computation of basic and diluted net income (loss) per share for the years and periods indicated:
| | | | | | | | | | | | |
| | For the Year Ended December 31, | | For the Year Ended December 31, | ||||||||
|
| 2018 | | 2019 | | 2020 |
| 2020 |
| 2021 |
| 2022 |
| | (RMB in thousands, except for share and per share data) | | (RMB in thousands, except for share and per share data) | ||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to KE Holdings Inc. |
| (467,824) |
| (2,183,546) |
| 2,777,592 |
| 2,777,592 | | (524,129) | | (1,386,074) |
Accretion on Series B Preferred Shares to redemption value |
| (521,255) |
| (366,440) |
| (242,270) |
| (242,270) | | — | | — |
Accretion on Series C Preferred Shares to redemption value |
| (711,853) |
| (829,746) |
| (554,415) |
| (554,415) | | — | | — |
Accretion on Series D Preferred Shares to redemption value |
| (4,001) |
| (587,753) |
| (519,201) |
| (519,201) | | — | | — |
Accretion on Series D+ Preferred Shares to redemption value |
| 0 |
| (82,589) |
| (439,342) |
| (439,342) | | — | | — |
Deemed dividends to Series B preferred shareholders |
| (562,138) |
| 0 |
| 0 | ||||||
Deemed dividends to Series C preferred shareholders |
| (118,934) |
| 0 |
| 0 | ||||||
Income allocation to participating preferred shares | | 0 | | 0 | | (301,898) | | (301,898) | | — | | — |
Net income (loss) attributable to KE Holdings Inc.'s ordinary shareholders |
| (2,386,005) |
| (4,050,074) |
| 720,466 | ||||||
Net income (loss) attributable to KE Holdings Inc.’s ordinary shareholders |
| 720,466 | | (524,129) | | (1,386,074) | ||||||
| | | | | | | ||||||
Denominator: |
|
|
|
|
|
|
| | | | | |
Denominator for basic net income (loss) per share-weighted average ordinary shares outstanding | | 1,362,565,880 | | 1,378,235,522 | | 2,226,264,859 | | 2,226,264,859 | | 3,549,121,628 | | 3,569,179,079 |
Dilutive effect of the obligation to issue ordinary shares in relation to the acquisition of Zhonghuan | | 0 | | 0 | | 6,375,753 | | 6,375,753 | | — | | — |
Adjustments for dilutive share options | | 0 | | 0 | | 34,690,279 | | 34,690,279 | | — | | — |
Denominator for diluted net income (loss) per share-weighted average ordinary shares outstanding | | 1,362,565,880 | | 1,378,235,522 | | 2,267,330,891 | | 2,267,330,891 | | 3,549,121,628 | | 3,569,179,079 |
Net income (loss) per share attributable to ordinary shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
—Basic |
| (1.75) |
| (2.94) |
| 0.32 |
| 0.32 | | (0.15) | | (0.39) |
—Diluted |
| (1.75) |
| (2.94) |
| 0.32 |
| 0.32 | | (0.15) | | (0.39) |
F-81F-88
27. Related party transactions26. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities.
During the years ended December 31, 2018, 20192020, 2021 and 2020,2022, other than disclosed elsewhere, the Group had the following material related party transactions:transactions.
| | |
Related Party |
| Relationship with the Group |
Ziroom Inc. and its subsidiaries (“Ziroom”) | | A group |
Yuanjing Mingde | | A group |
Vanlian (Beijing) Decoration Co., Ltd. (“Vanlian”) | | An affiliate company of the Group |
IFM Investments Limited (“IFM”) | | An affiliate company of the Group |
| |
|
Shanghai Xinhewan Industrial Development Co., Ltd (“Xinhewan”) | | An affiliate company of the Group |
Brokerage firms | | Firms that the Group has significant influence in |
Tencent | | Principal owner of the Group |
Tencent has beenShengdu was considered as a related party of the Group from July 22, 2020.December 10, 2021. On April 20, 2022, the Group completed the acquisition of Shengdu and Shengdu became a consolidated subsidiary of the Group (Note 23). Transactions between the Group and Shengdu from the period of December 10, 2021 to April 19, 2022 are disclosed as related party transactions.
Vanlian was an affiliate company of the Group. On January 4, 2022, the Group completed the acquisition of Vanlian and Vanlian became a wholly owned subsidiary of the Group. Transactions between the Group and Vanlian before January 3, 2022 are disclosed as related party transactions.
| | | | | | | | | | | | |
|
| For the Year Ended December 31, |
| For the Year Ended December 31, | ||||||||
| | 2018 | | 2019 | | 2020 | | 2020 | | 2021 | | 2022 |
| | RMB | | RMB | | RMB | | RMB |
| RMB |
| RMB |
| | (in thousands) | | (in thousands) | ||||||||
Revenues from related parties |
|
|
|
|
|
|
|
|
|
|
|
|
Online marketing services provided to Ziroom |
| 72,309 | | 104,888 | | 90,262 | ||||||
Platform services provided to IFM |
| 41,704 | | 69,717 | | 65,258 | ||||||
Agency services provided to Ziroom |
| 354,247 |
| 281,769 |
| 55,447 |
| 55,447 | | 53,150 | | 34,197 |
Online marketing services provided to Ziroom |
| 628 |
| 19,269 |
| 72,309 | ||||||
Agency services and other services provided to Shengdu |
| — | | 7,565 | | 8,700 | ||||||
Agency services provided to Yuanjing Mingde |
| 2,105 |
| 11,365 |
| 35,154 |
| 35,154 | | 4,491 | | 5,183 |
Agency services provided to Vanlian |
| 4,731 |
| 2,610 |
| 14,661 | ||||||
Online marketing services provided to Vanlian |
| 276 |
| 913 |
| 45 | ||||||
Platform services provided to IFM |
| 0 |
| 6,942 |
| 41,704 | ||||||
Technical services provided to Tencent |
| — | | 1,608 | | 745 | ||||||
Agency services, online marketing services and home renovation services provided to Vanlian | | 14,706 | | 174,511 | | — | ||||||
Commission support services provided to brokerage firms |
| 0 |
| 58,194 |
| 201,385 |
| 201,385 | | 423,448 | | 441,471 |
Platform and franchise services provided to brokerage firms |
| 80 |
| 4,541 |
| 1,870 | | 1,870 | | 8,512 | | 13,011 |
Others | | — | | — | | 5,376 | ||||||
Total |
| 362,067 |
| 385,603 |
| 422,575 |
| 422,575 | | 847,890 | | 664,203 |
Agency services refer to services to facilitate home sales or leases. A certain percentage of commission was recognised upon the completion of contracts between referred customers and the related parties stated above.
F-89
26. RELATED PARTY TRANSACTIONS (CONTINUED)
Online marketing services mainly refer to the technical support, marketing and promotion services provided to the above related parties to promote their own services and products.
Platform services refer to the fees the Group charged for using the Group’s ACN and SaaS system. Franchise services refer to the fees the Group charges for using the Group’s Deyou brand.
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Services provided by related parties |
| | |
|
|
|
Online marketing and technical services from Tencent |
| 38,943 | | 193,866 | | 159,564 |
Rental and property management services from Yuanjing Mingde |
| 8,753 | | 30,609 | | 27,379 |
Services from Ziroom |
| 1,025 | | 7,942 | | 8,131 |
Referral services from IFM | | 8,656 | | 10,672 | | 5,590 |
Referral services from brokerage firms |
| 426,233 | | 831,591 | | 673,972 |
Others |
| 16,343 | | 1,322 | | 2,717 |
Total |
| 499,953 | | 1,076,002 | | 877,353 |
Online marketing services mainly refer to the cloud, marketing and promotion services provided by Tencent.
Rental services mainly include the office rental from Yuanjing Mingde, which was charged based on fair market price.
Referral services provided by related parties mainly refer to customer referrals from related parties.
Services from Ziroom including referral, cleaning, maintenance, sales and marketing services provided by Ziroom.
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Other income | |
| |
| |
|
Interest income from loans provided to Xinhewan |
| — | | — | | 4,301 |
Interest income from loans provided to IFM |
| 2,289 | | 2,209 | | (753) |
Interest income from loans provided to Yuanjing Mingde |
| 92,013 | | — | | — |
Interest income from loans provided to executive directors | | 1,800 | | — | | — |
Interest income from loans provided to others |
| 1,949 | | 1,450 | | 2,406 |
Total |
| 98,051 | | 3,659 | | 5,954 |
F-82F-90
26. RELATED PARTY TRANSACTIONS (CONTINUED)
| | | | |
| | As of December 31, | ||
| | 2021 | | 2022 |
|
| RMB |
| RMB |
| | (in thousands) | ||
Operating Leases | |
|
|
|
Store leases from Yuanjing Mingde | | 136,164 | | 77,625 |
Administrative office leases from Ziroom | | 51 | | 72 |
Total operating lease assets | | 136,215 | | 77,697 |
Operating lease liabilities, current from Yuanjing Mingde | | 8,213 | | 4,284 |
Operating lease liabilities, current from Ziroom | | 51 | | 26 |
Operating lease liabilities, non-current from Yuanjing Mingde | | 125,075 | | 75,449 |
Total operating lease liabilities | | 133,339 | | 79,759 |
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Operating lease cost from related parties |
|
|
|
|
|
|
Operating lease cost from Yuanjing Mingde |
| 1,529 | | 18,358 | | 18,092 |
Operating lease cost from Ziroom |
| 49 | | 100 | | 175 |
Operating lease cost from brokerage firms | | — | | 49 | | — |
Total |
| 1,578 | | 18,507 | | 18,267 |
F-91
27. Related party transactions (Continued)26. RELATED PARTY TRANSACTIONS (CONTINUED)
Platform services refer to the fees the Group charged for using the Group’s ACN and SaaS system. Franchise services refer to the fees the Group charges for using the Group’s Deyou brand.
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2018 | | 2019 | | 2020 |
|
| RMB | | RMB |
| RMB |
| | (in thousands) | ||||
Services provided by related parties |
| | |
|
|
|
Referral services from Ziroom |
| 4,604 | | 482 |
| 1,025 |
Rental and property management services from Yuanjing Mingde |
| 0 | | 850 |
| 8,753 |
Referral services from IFM |
| 0 | | 2,776 |
| 8,656 |
Online marketing services from Tencent | | 0 | | 0 | | 38,943 |
Referral services from brokerage firms |
| 515 | | 101,312 |
| 426,233 |
Others |
| 43 | | 2,970 |
| 16,343 |
Total |
| 5,162 | | 108,390 |
| 499,953 |
Referral services provided by related parties mainly refer to customer referrals from related parties.
Rental services mainly include the office rental from Yuanjing Mingde, which was charged based on fair market price.
Online marketing services mainly refer to the cloud, marketing and promotion services provided by Tencent.
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2018 | | 2019 | | 2020 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Other income | |
| |
| |
|
Interest income from loans provided to Ziroom |
| 1,822 |
| 7,825 |
| 0 |
Interest income from loans provided to Yuanjing Mingde |
| 58,709 |
| 215,158 |
| 92,013 |
Interest income from loans provided to IFM |
| 1,227 |
| 3,993 |
| 2,289 |
Interest income from loans provided to executive directors | | 0 | | 0 | | 1,800 |
Interest income from loans provided to others |
| 20 |
| 0 |
| 1,949 |
Total |
| 61,778 |
| 226,976 |
| 98,051 |
| | | | |
| | As of December 31, | ||
| | 2019 | | 2020 |
|
| RMB |
| RMB |
| | (in thousands) | ||
Operating Leases |
|
|
|
|
Administrative office leases from Ziroom |
| 0 |
| 48 |
Administrative office leases from Yuanjing Mingde |
| 0 |
| 94,130 |
Total operating lease assets |
| 0 |
| 94,178 |
Operating lease liabilities, current from Ziroom |
| 0 |
| 49 |
Operating lease liabilities, current from Yuanjing Mingde |
| 0 |
| 9,619 |
Operating lease liabilities, non-current from Yuanjing Mingde |
| 0 |
| 84,080 |
Total operating lease liabilities |
| 0 |
| 93,748 |
F-83
27. Related party transactions (Continued)
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2018 | | 2019 | | 2020 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
Operating lease cost from related parties |
|
|
|
|
|
|
Operating lease cost form Ziroom |
| 0 |
| 0 |
| 49 |
Operating lease cost from Yuanjing Mingde |
| 0 |
| 0 |
| 1,529 |
Total |
| 0 |
| 0 |
| 1,578 |
| | | | | | | | |
| | As of December 31, | | As of December 31, | ||||
| | 2019 | | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| RMB |
| | (in thousands) | | (in thousands) | ||||
Amounts due from and prepayments to related parties | |
| |
| |
| |
|
Ziroom |
| 609,742 |
| 335,521 |
| 349,375 |
| 345,212 |
IFM |
| 7,799 |
| 7,400 | ||||
Yuanjing Mingde |
| 140,614 |
| 16,433 | | 7,471 | | 6,806 |
Tencent | | 175 | | 2,258 | ||||
Vanlian |
| 6,289 |
| 21,618 | | 209,087 | | — |
IFM |
| 5,277 |
| 6,505 | ||||
Brokerage firms |
| 5,574 |
| 11,060 | ||||
Executive directors | | 93,338 | | 0 | ||||
Tencent (a) | | 0 | | 35,078 | ||||
Others |
| 66,472 |
| 58,134 | ||||
Total |
| 927,306 |
| 484,349 | ||||
Amounts due to related parties |
|
|
|
| ||||
Ziroom |
| 123,149 |
| 20,615 | ||||
Yuanjing Mingde |
| 5,384 |
| 2,822 | ||||
Vanlian |
| 100 |
| 879 | ||||
IFM |
| 46,280 |
| 15,111 | ||||
Mr. Zuo Hui |
| 1,094 |
| 0 | ||||
Shengdu | | 6,431 | | — | ||||
Brokerage firms |
| 86,867 |
| 214,335 |
| 10,485 |
| 19,551 |
Others |
| 785 |
| 493 |
| 519 |
| 24,729 |
Total |
| 263,659 |
| 254,255 |
| 591,342 |
| 405,956 |
| | | | | ||||
Amounts due to related parties |
|
|
|
| ||||
Tencent | | 35,269 | | 34,723 | ||||
Ziroom |
| 30,872 | | 33,530 | ||||
IFM |
| 22,893 | | 27,091 | ||||
Yuanjing Mingde |
| 8,569 | | 6,983 | ||||
Vanlian | | 143,804 | | — | ||||
Shengdu |
| 1,498 | | — | ||||
Brokerage firms |
| 339,911 |
| 315,977 | ||||
Others |
| 1,262 |
| 7,381 | ||||
Total |
| 584,078 |
| 425,685 |
As of December 31, 2022, all amounts due from and prepayments to related parties and amounts due to related parties were trade in nature.
| | | | |
| | As of December 31, | ||
| | 2021 | | 2022 |
|
| RMB |
| RMB |
| | (in thousands) | ||
Loan receivables from related parties | |
| |
|
Short‑term loans to IFM |
| 20,000 | | 20,000 |
Short-term loans to others (a) |
| 22,788 | | 15,846 |
Current portion of long-term loans to Xinhewan (b) | | — | | 14,617 |
Long-term loans to Xinhewan (b) |
| — | | 17,934 |
Long-term loans to others (a) |
| — | | 5,000 |
Total |
| 42,788 | | 73,397 |
(a) |
F-84
27. Related party transactions (Continued)
| | | | |
| | As of December 31, | ||
| | 2019 | | 2020 |
|
| RMB |
| RMB |
| | (in thousands) | ||
Loan receivables from related parties | |
| |
|
Short-term loans to Yuanjing Mingde (b) |
| 1,900,000 |
| 0 |
Short‑term loans to IFM |
| 20,000 |
| 20,000 |
Short-term loans to others (c) |
| 4,576 |
| 13,019 |
Short-term loans to executive directors | | 4,500 | | 0 |
Long‑term loans to others |
| 0 |
| 3,359 |
Total |
| 1,929,076 |
| 36,378 |
The balance of loans to others included the loans provided to entities that the Group invested and has significant influence in for operating of business of these entities, net of allowance for credit losses. |
F-92
26. RELATED PARTY TRANSACTIONS (CONTINUED)
(b) | In |
As of December 31, 2022, all loan receivables from related parties were non-trade in nature. In relation to the loans provided to the related parties stated above, the Group charged the related parties based on fair market interest rate, and cash flows resulted from the loans were presented within investing activities in the consolidated statements of cash flows.
(v)On September 5, 2022, Beike Zhaofang (Beijing) Technology Co., Ltd., a wholly owned subsidiary of the Company, entered into a donation agreement, or the Donation Agreement, with one of our principal shareholder, or the Donator. According to the Donation Agreement, the Donator agreed to donate RMB30 million free of charge during a three-year period to set up a scholarship for Huaqiao Academy run by the Group, or the Huaqiao Scholarship. The Group agreed to manage the Huaqiao Scholarship on behalf of the Donator by solely acting on its instructions. The Huaqiao Scholarship shall only be used to subsidize outstanding students of Huaqiao Academy, who will use the Huaqiao Scholarship to pay the tuition payable to Huaqiao Academy. The Huaqiao Scholarship shall be managed and accounted independently, and shall not be used for any other purpose unless instructed by the Donator, who is responsible for overseeing the use of the donated fund. During the year ended December 31, 2022, donation payment of RMB10 million was made by the Donator to a bank account designated by the Group.
28.27. COMMITMENTS AND CONTINGENCIES
(a) Commitments and contingencies
| | |
|
| As of |
| | December 31, |
| | RMB |
| | (in thousands) |
|
|
|
Investment commitments(ii) | 141,765 | |
Purchase of property and equipment | | 4,512 |
Purchase of services | |
|
|
| |
|
| |
Total |
|
| | |
|
| Amounts |
| | RMB |
| | (in thousands) |
2023 |
| 281,049 |
2024 |
| 118,115 |
2025 |
| 83,711 |
2026 | | 25,413 |
Thereafter | | 26,380 |
Total |
| 534,668 |
(i) | Operating leases commitments represent the Group’s obligations for leasing premises. |
(ii) | Investment commitments obligations primarily relate to capital contributions obligation under certain arrangements. |
F-85F-93
27. COMMITMENTS AND CONTINGENCIES (CONTINUED)
28. Commitments and contingencies (Continued)(b) Contingencies
| | |
|
| Amounts |
| | RMB |
| | (in thousands) |
2021 |
| 238,021 |
2022 |
| 232,228 |
2023 |
| 194,203 |
2024 |
| 135,200 |
Thereafter | | 130,447 |
Total |
| 930,099 |
Funding Debt Obligations
The expected repayment amountsFrom time to time, the Group is involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of the funding debt obligationsunresolved matters, individually and in the aggregate, are as follows:likely to have a material adverse effect on the Group’s financial position, results of operations or cash flows. However, litigations are subject to inherent uncertainties and the Group’s view of these matters may change in the future.
| | | | | | | | | | |
| | Less than | | 1 - 2 | | 2 - 3 | | More than | | |
| | 1 year | | years | | years | | 3 years | | Total |
|
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||||||
Funding debt obligations | |
| |
| |
| |
| |
|
Consolidated trusts |
| 1,512,510 |
| 15,000 |
| 0 |
| 0 |
| 1,527,510 |
Interest payments |
| 38,369 |
| 2,396 |
| 0 |
| 0 |
| 40,765 |
Total funding debt obligations |
| 1,550,879 |
| 17,396 |
| 0 |
| 0 |
| 1,568,275 |
29. Statutory reserves and restricted net assets28. STATUTORY RESERVES AND RESTRICTED NET ASSETS
Pursuant to laws applicable to entities incorporated in the PRC, the Group’s subsidiaries in the PRC must make appropriations from after-tax profit to non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires an annual appropriation of 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) until the accumulative amount of such reserve fund reaches 50% of a company’s registered capital, the other fund appropriations are at the subsidiaries’ discretion. These reserve funds can only be used for specific purposes of enterprise expansion and staff bonus and welfare and are not distributable as cash dividends. During the years ended December 31, 2018, 20192020, 2021 and 2020,2022, appropriations to the statutory reserve have been made by the Group, which was RMB30.2RMB139.1 million, RMB79.1RMB91.1 million and RMB139.1RMB176.9 million, respectively.
In addition, due to restrictions on the distribution of share capital from the Group’s PRC subsidiaries and also as a result of these entities’ unreserved accumulated losses, total restrictions placed on the distribution of the Group’s PRC subsidiaries’ net assets was RMB22.9RMB20.1 billion as of December 31, 2020.2022.
Cash transfers from the Company’s PRC subsidiaries to their parent companies outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may temporarily restrict the ability of the PRC subsidiaries and consolidated affiliated entities to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency denominated obligations.
The Company performed a test on the restricted net assets of consolidated subsidiaries in accordance with Securities and Exchange Commission Regulation S-X Rule 4-08 (e) (3), “General Notes to Financial Statements” and concluded that it was applicable for the Company to disclose the financial statements for the parent company.
F-86
29. Statutory reserves and restricted net assets (Continued)
For the purpose of presenting parent only financial information, the Company records its investments in its subsidiaries under the equity method of accounting. Such investments are presented on the separate condensed balance sheets of the Company as “Investment in subsidiariessubsidiaries” and “Net assets of VIEs” and the income (loss) of the subsidiaries is presented as “share“Share of income (loss) of subsidiariessubsidiaries” and VIEs.”“Income (loss) of the VIEs”. Certain information and footnote disclosures generally included in financial statements prepared in accordance with U.S. GAAP have been condensed and omitted.
The Company became parent company of the Group upon the completion of the Reorganization on December 28, 2018. The statements of comprehensive income (loss) of the parent company from December 28, 2018 to December 31, 2018 were not material. The following disclosures present the financial positions of the parent company as of December 31, 20192021 and 2020,2022, the operation results for the yearyears ended December 31, 2020, 2021 and 2022, and the statements of cash flows for the years ended December 31, 20192020, 2021 and 2020.2022. The Company did not have significant capital and other commitments, long-term obligations, or guarantees as of December 31, 20192021 and 2020.2022.
F-87F-94
29. Statutory reserves and restricted net assets (Continued)28. STATUTORY RESERVES AND RESTRICTED NET ASSETS (CONTINUED)
Condensed balance sheets of the parent company
| | | | | | | | |
| | As of December 31, | | As of December 31, | ||||
| | 2019 | | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| RMB |
| | (in thousands, except for | | (in thousands, except for | ||||
| | share and per share data) | | share and per share data) | ||||
ASSETS | |
| |
| |
| |
|
Current assets |
|
|
|
| ||||
Current assets: |
|
|
|
| ||||
Cash and cash equivalents |
| 12,525,274 |
| 3,261,585 |
| 55,235 |
| 12,818 |
Short-term investments | | 0 | | 3,903,368 | | 81,906 | | 7,372,995 |
Amounts due from related parties | | 0 | | 34,414 | ||||
Amounts due from subsidiaries and VIEs |
| 69,763 |
| 2,618,824 | | 1,997,867 | | 1,226,906 |
Prepayments, receivables and other assets |
| 25,679 |
| 20,468 |
| 55,320 |
| 13,927 |
Non‑current assets |
| |
| | ||||
Investment in subsidiaries and VIEs |
| 16,630,877 |
| 57,035,601 | ||||
Intangible assets, net |
| 2,075,420 |
| 0 | ||||
Other non‑current assets |
| 145,806 |
| 0 | ||||
Non‑current assets: |
| |
| | ||||
Investment in subsidiaries |
| 58,670,038 |
| 56,064,739 | ||||
Net assets of the VIEs |
| 3,619,026 |
| 3,716,231 | ||||
Long-term investments, net | | 2,527,253 | | 516,873 | ||||
TOTAL ASSETS |
| 31,472,819 |
| 66,874,260 |
| 67,006,645 |
| 68,924,489 |
| | | | | ||||
LIABILITIES |
|
|
|
|
| |
| |
Current liabilities |
|
|
|
|
| |
|
|
Accrued expenses and other current liabilities |
| 24,430 |
| 108,813 |
| 32,669 |
| 4,129 |
TOTAL LIABILITIES |
| 24,430 |
| 108,813 |
| 32,669 |
| 4,129 |
MEZZANINE EQUITY |
|
|
|
| ||||
Series B convertible redeemable preferred shares (US$0.00002 par value; 750,000,000 shares authorized, 298,483,760 issued and outstanding with redemption value of RMB6,406,056 as of December 31, 2019; NaN authorized, issued and outstanding as of December 31, 2020) |
| 6,406,056 |
| 0 | ||||
Series C convertible redeemable preferred shares (US$0.00002 par value; 750,000,000 shares authorized, 470,568,175 issued and outstanding with redemption value of RMB12,118,251 as of December 31, 2019; NaN authorized, issued and outstanding as of December 31, 2020) |
| 12,118,251 |
| 0 | ||||
Series D convertible redeemable preferred shares (US$0.00002 par value; 1,000,000,000 shares authorized, 430,835,530 issued and outstanding with redemption value of RMB11,831,223 as of December 31, 2019; NaN authorized, issued and outstanding as of December 31, 2020) |
| 11,831,223 |
| 0 | ||||
Series D+ convertible redeemable preferred shares (US$0.00002 par value; 750,000,000 shares authorized, 310,879,155 issued and outstanding with redemption value of RMB10,017,365 as of December 31, 2019; NaN authorized, issued and outstanding as of December 31, 2020) |
| 10,017,365 |
| 0 | ||||
TOTAL MEZZANINE EQUITY |
| 40,372,895 |
| 0 | ||||
SHAREHOLDERS' EQUITY (DEFICIT) |
|
|
|
| ||||
Ordinary Shares (US$0.00002 par value; 25,000,000,000 ordinary shares authorized, comprising of 23,614,698,720 Class A ordinary shares, 885,301,280 Class B ordinary shares and 500,000,000 shares each of such classes to be designated, 584,865,410 and 2,666,966,855 Class A ordinary shares issued and outstanding as of December 31, 2019 and 2020; 885,301,280 Class B ordinary shares issued and outstanding as of December 31, 2019 and 2020) |
| 202 |
| 482 | ||||
| | | | | ||||
SHAREHOLDERS’ EQUITY |
|
|
|
| ||||
Ordinary shares (US$0.00002 par value; 25,000,000,000 ordinary shares authorized, comprising of 24,114,698,720 Class A ordinary shares, 885,301,280 Class B ordinary shares. 2,705,911,235 and 3,601,547,279 Class A ordinary shares issued and outstanding as of December 31, 2021 and 2022, respectively; 885,301,280 and 156,426,896 Class B ordinary shares issued and outstanding as of December 31, 2021 and 2022, respectively) |
| 489 |
| 487 | ||||
Treasury shares |
| — |
| (225,329) | ||||
Additional paid‑in capital |
| 2,533,889 |
| 77,433,882 |
| 78,972,169 |
| 80,302,956 |
Accumulated other comprehensive income (loss) |
| 63,308 |
| (1,834,087) | ||||
Accumulated other comprehensive loss |
| (2,639,723) |
| (412,721) | ||||
Accumulated deficit |
| (11,521,905) |
| (8,834,830) |
| (9,358,959) |
| (10,745,033) |
Total shareholders’ equity (deficit) |
| (8,924,506) |
| 66,765,447 | ||||
TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY (DEFICIT) |
| 31,472,819 |
| 66,874,260 | ||||
Total shareholders’ equity |
| 66,973,976 |
| 68,920,360 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | 67,006,645 | | 68,924,489 |
F-88F-95
29. Statutory reserves and restricted net assets (Continued)28. STATUTORY RESERVES AND RESTRICTED NET ASSETS (CONTINUED)
Condensed statements of comprehensive income (loss)
| | | | |
|
| For the Year Ended December 31, | ||
| | 2019 | | 2020 |
| | RMB | | RMB |
| | (in thousands) | ||
Sales and marketing expenses |
| (500,040) | | (96,023) |
General and administrative expenses |
| (18,981) | | (28,640) |
Research and development expenses |
| (65,927) | | (79,023) |
Interest income, net |
| 36,063 | | 40,611 |
Share of income (loss) of subsidiaries and VIEs |
| (1,588,194) | | 2,062,889 |
Fair value changes through earnings on investments, net | | — | | 144,361 |
Foreign currency exchange loss |
| (46,467) | | (33,395) |
Other income, net | | — | | 766,812 |
Income (loss) before income tax expense |
| (2,183,546) | | 2,777,592 |
Income tax expenses |
| 0 | | 0 |
Net income (loss) |
| (2,183,546) | | 2,777,592 |
Accretion on convertible redeemable preferred shares to redemption value |
| (1,866,528) | | (1,755,228) |
Income allocation to participating preferred shares | | — | | (301,898) |
Net income (loss) attributable to KE Holdings Inc.'s ordinary shareholders |
| (4,050,074) | | 720,466 |
Net income (loss) |
| (2,183,546) | | 2,777,592 |
Other comprehensive income (loss) |
| | | |
Currency translation adjustments |
| 63,442 | | (1,897,395) |
Total comprehensive income (loss) |
| (2,120,104) | | 880,197 |
Accretion on convertible redeemable preferred shares to redemption value |
| (1,866,528) | | (1,755,228) |
Income allocation to participating preferred shares | | — | | (301,898) |
Total comprehensive loss attributable to KE Holdings Inc.'s ordinary shareholders |
| (3,986,632) | | (1,176,929) |
Condensed statements of cash flows
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2018 | | 2019 | | 2020 |
|
| RMB | | RMB |
| RMB |
| | (in thousands) | ||||
Net cash provided by (used in) operating activities | | 15 | | 9,224 | | (72,175) |
Net cash used in investing activities |
| (68,895) | | (15,719,863) |
| (42,674,498) |
Net cash generated from financing activities |
| 2,584,907 | | 25,763,789 |
| 34,151,607 |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| (650) | | (43,253) |
| (668,623) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
| 2,515,377 | | 10,009,897 |
| (9,263,689) |
Cash, cash equivalents and restricted cash at beginning of the year |
| — | | 2,515,377 |
| 12,525,274 |
Cash, cash equivalents and restricted cash at end of the year |
| 2,515,377 | | 12,525,274 |
| 3,261,585 |
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
| | | | | | |
Sales and marketing expenses | | (96,023) | | (10,227) | | — |
General and administrative expenses | | (28,640) | | (82,109) | | (140,148) |
Research and development expenses | | (79,023) | | (57) | | — |
Interest income, net | | 40,611 | | 3,035 | | 745 |
Share of income (loss) of subsidiaries | | 1,448,649 | | (696,144) | | (1,436,950) |
Income (loss) of the VIEs | | 614,240 | | (52,436) | | 97,036 |
Fair value changes through earnings on investments, net | | 144,361 | | 183,991 | | 4,770 |
Foreign currency exchange loss | | (33,395) | | (3,968) | | (61,317) |
Other income, net | | 766,812 | | 133,786 | | 149,790 |
Income (loss) before income tax expense |
| 2,777,592 | | (524,129) | | (1,386,074) |
Income tax expense |
| — | | — | | — |
Net income (loss) |
| 2,777,592 | | (524,129) | | (1,386,074) |
Accretion on convertible redeemable preferred shares to redemption value | | (1,755,228) | | — | | — |
Income allocation to participating preferred shares |
| (301,898) | | — | | — |
Net income (loss) attributable to KE Holdings Inc.’s ordinary shareholders | | 720,466 | | (524,129) | | (1,386,074) |
|
| | | | | |
Net income (loss) |
| 2,777,592 | | (524,129) | | (1,386,074) |
Other comprehensive income (loss) |
| | | | | |
Currency translation adjustments | | (1,897,395) | | (841,214) | | 2,602,071 |
Unrealized gains (losses) on available-for-sale investments, net of reclassification |
| — | | 35,578 | | (375,069) |
Total comprehensive income (loss) |
| 880,197 | | (1,329,765) | | 840,928 |
Accretion on convertible redeemable preferred shares to redemption value | | (1,755,228) | | — | | — |
Income allocation to participating preferred shares |
| (301,898) | | — | | — |
Total comprehensive income (loss) attributable to KE Holdings Inc.’s ordinary shareholders | | (1,176,929) | | (1,329,765) | | 840,928 |
F-89F-96
Condensed statements of cash flows
| | | | | | |
| | For the Year Ended December 31, | ||||
| | 2020 | | 2021 | | 2022 |
|
| RMB |
| RMB |
| RMB |
| | (in thousands) | ||||
| | | | | | |
Net cash used in operating activities | | (72,175) | | (10,302) | | (58,875) |
Net cash provided by (used in) investing activities |
| (42,674,498) | | (3,183,233) |
| 1,348,740 |
Net cash provided by (used in) financing activities |
| 34,151,607 | | 7 |
| (1,319,793) |
Effect of exchange rate changes on cash and cash equivalents |
| (668,623) | | (12,822) |
| (12,489) |
Net decrease in cash and cash equivalents |
| (9,263,689) | | (3,206,350) |
| (42,417) |
Cash and cash equivalents at beginning of the year |
| 12,525,274 | | 3,261,585 |
| 55,235 |
Cash and cash equivalents at end of the year |
| 3,261,585 | | 55,235 |
| 12,818 |
F-97
30. Subsequent events29. SUBSEQUENT EVENTS
The Group has evaluated subsequent events through the date the consolidated financial statements are issued, and concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements other than as discussed below.
In March 2021,During the period from January 1, 2023 to April 27, 2023, the Company granted 12,491,760 share options to employees pursuant torepurchased a total of 2,338,572 ADSs (representing 7,015,716 Class A ordinary shares) on the 2018 Share Option PlanNYSE at an exercise priceaggregate consideration of approximately US$0.00002 per share.
In41.5 million. During the period from January 1, 2023 to April 2021,27, 2023, a total of 2,439,786 ADSs (representing 7,319,358 Class A ordinary shares) have been cancelled, which were repurchased by the Company disposed investments in certain equity method investees at approximately RMB495.0 million,December 2022 and January 2023. Concurrent with the share cancellation, a total of 304,670 Class B ordinary shares has been converted into Class A ordinary shares on a one-to-one ratio, of which approximated their carrying value.Mr. PENG Yongdong, through Ever Orient International Limited, a corporation wholly-controlled by him, converted 212,479 Class B ordinary shares and Mr. SHAN Yigang, through De Chang Trust, a discretionary trust established by him (as the settlor), converted 92,191 Class B ordinary shares.
F-90F-98