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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F
 
(Mark One)
 
o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	 	
OR	
 	 	
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014	
 	 	
OR	
 	 	
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	For the transition period from                       to                        	
 	 	
OR	
 	 	
o	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 . . . . . . . . . . . . . . . . . . .
 
Commission file number: 001-34656
 
China Lodging Group, Limited	
(Exact name of Registrant as specified in its charter)	
 	
Not Applicable	
(Translation of Registrant’s name into English)	
 	
CAYMAN ISLANDS	
(Jurisdiction of incorporation or organization)	
 	
No. 2266 Hongqiao Road
Changning District
Shanghai 200336
People’s Republic of China
(86) 21 6195-2011	
(Address of principal executive offices)	
 	
Min (Jenny) Zhang
Chief Financial Officer
Telephone: +86-21-6076-0606
E-mail: zhangmin@huazhu.com
Facsimile: +86-21-6195-9586
No. 2266 Hongqiao Road
Changning District
Shanghai 200336
People’s Republic of China	
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)	
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class	 	Name of each exchange on which registered	
 	 	 	
American Depositary Shares, each representing four ordinary shares, par value US$0.0001 per share	 	NASDAQ Global Select Market	
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 	250,747,255 Ordinary Shares.	
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes   x 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.
o Yes   x No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filerx	 	Accelerated Filero	 	Non-accelerated Filero	
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAPx	 	International Financial Reporting Standards as issued
by the International Accounting Standards Board o	 	Othero	
 
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.
o Item 17   o 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).
o Yes   x No
 
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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.
 
o Yes   o No

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TABLE OF CONTENTS

 
 	 	Page	
 	 	 	
CERTAIN CONVENTIONS	1	
PART I	 	2	
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	2	
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	2	
ITEM 3.	KEY INFORMATION	2	
3.A. Selected Financial Data	2	
3.B. Capitalization and Indebtedness	4	
3.C. Reason for the Offer and Use of Proceeds	4	
3.D. Risk Factors	4	
ITEM 4.	INFORMATION ON THE COMPANY	26	
4.A. History and Development of the Company	26	
4.B. Business Overview	28	
4.C. Organizational Structure	45	
4.D. Property, Plants and Equipment	46	
ITEM 4A.	UNRESOLVED STAFF COMMENTS	47	
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	47	
5.A. Operating Results	47	
5.B. Liquidity and Capital Resources	64	
5.C. Research and Development, Patents and Licenses, etc.	67	
5.D. Trend Information	67	
5.E. Off-Balance Sheet Arrangements	68	
5.F. Tabular Disclosure of Contractual Obligations	68	
5.G. Safe Harbor	68	
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	69	
6.A. Directors and Senior Management	69	
6.B. Compensation	71	
6.C. Board Practices	74	
6.D. Employees	76	
6.E. Share Ownership	76	
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	78	
7.A. Major Shareholders	78	
7.B. Related Party Transactions	78	
7.C. Interests of Experts and Counsel	79	
ITEM 8.	FINANCIAL INFORMATION	79	
8.A. Consolidated Statements and Other Financial Information	79	
8.B. Significant Changes	80	
ITEM 9.	THE OFFER AND LISTING	80	
9.A. Offering and Listing Details	80	
9.B. Plan of Distribution	81	
9.C. Markets	81	
9.D. Selling Shareholders	81	
9.E. Dilution	81	
9.F. Expenses of the Issue	81	
ITEM 10.	ADDITIONAL INFORMATION	81	
10.A. Share Capital	81	
10.B. Memorandum and Articles of Association	81	
10.C. Material Contracts	81	
10.D. Exchange Controls	82	
10.E. Taxation	82	
10.F. Dividends and Paying Agents	86	
10.G. Statement by Experts	87	
10.H. Documents on Display	87	
10.I. Subsidiary Information	87	
 
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ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	87	
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	88	
12.A. Debt Securities	88	
12.B. Warrants and Rights	88	
12.C. Other Securities	88	
12.D. American Depositary Shares	88	
PART II	 	90	
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	90	
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	90	
ITEM 15.	CONTROLS AND PROCEDURES	90	
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	91	
ITEM 16B.	CODE OF ETHICS	91	
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	91	
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	91	
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	91	
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	92	
ITEM 16G.	CORPORATE GOVERNANCE	92	
ITEM 16H.	MINE SAFETY DISCLOSURE	92	
PART III	 	92	
ITEM 17.	FINANCIAL STATEMENTS	92	
ITEM 18.	FINANCIAL STATEMENTS	92	
ITEM 19.	EXHIBITS	92	

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CERTAIN CONVENTIONS
 
Unless otherwise indicated, all translations from U.S. dollars to RMB in this annual report were made at a rate of US$1.00 to RMB6.2046, the exchange rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board on December 31, 2014. No representation is made that the RMB amounts referred to herein could have been or could be converted into U.S. dollars at any particular rate or at all. On April 10, 2015, the exchange rate was US$1.00 to RMB6.2082. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
 
Unless otherwise indicated, in this annual report,
 
·                 “ADRs” are to the American depositary receipts that may evidence our ADSs;
 
·                 “ADSs” are to our American depositary shares, each representing four ordinary shares;
 
·                 “China” or the “PRC” are to the People’s Republic of China, excluding, for purposes of this annual report, Hong Kong, Macau and Taiwan;
 
·                 “leased hotels” are to leased-and- operated hotels;
 
·                 “manachised hotels” are to franchised-and-managed hotels;
 
·                 “Ordinary shares” are to our ordinary shares, par value US$0.0001 per share;
 
·                 “RMB” and “Renminbi” are to the legal currency of China;
 
·                 “US$” and “U.S. dollars” are to the legal currency of the United States; and
 
·                 “We,” “us,” “our company,” “our,” and “China Lodging ” are to China Lodging Group, Limited, a Cayman Islands company, and its predecessor entities and subsidiaries.
 
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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
 
3.A. Selected Financial Data
 
The selected consolidated statements of comprehensive income data and selected consolidated cash flow data for the years ended December 31, 2012, 2013 and 2014 and the selected consolidated balance sheet data as of December 31, 2013 and 2014 are derived from our audited consolidated financial statements included herein, which were prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The selected consolidated statements of comprehensive income data and selected consolidated cash flow data for the years ended December 31, 2010 and 2011 and the selected consolidated balance sheet data as of December 31, 2010, 2011 and 2012 are derived from our audited consolidated financial statements that have not been included herein and were prepared in accordance with U.S. GAAP. The selected financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and the notes to those statements included herein. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.
 
 	 	Year Ended December 31,	 	
 	 	2010	 	2011	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(In thousands, except per share and per ADS data)	 	
Consolidated Statement of Comprehensive Income Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenues	 	1,738,493	 	2,249,597	 	3,224,527	 	4,168,629	 	4,964,728	 	800,169	 	
Operating costs and expenses(1) 	 	1,486,627	 	2,150,031	 	3,011,517	 	3,815,835	 	4,593,915	 	740,405	 	
Income from operations	 	256,306	 	107,146	 	219,733	 	380,544	 	389,364	 	62,754	 	
Income before income taxes	 	279,056	 	142,954	 	233,673	 	388,515	 	415,496	 	66,966	 	
Net income	 	221,794	 	118,138	 	179,504	 	283,695	 	302,391	 	48,737	 	
Less: net income attributable to noncontrolling interest	 	6,043	 	3,306	 	4,617	 	3,837	 	(4,957	)	(799	)	
Net income attributable toChina Lodging Group, Limited	 	215,751	 	114,832	 	174,887	 	279,858	 	307,348	 	49,536	 	
Earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	1.05	 	0.47	 	0.72	 	1.14	 	1.23	 	0.20	 	
Diluted	 	0.92	 	0.47	 	0.71	 	1.12	 	1.21	 	0.20	 	
Earnings per ADS(2):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	4.19	 	1.90	 	2.88	 	4.57	 	4.94	 	0.80	 	
Diluted	 	3.68	 	1.87	 	2.83	 	4.49	 	4.86	 	0.78	 	
Weighted average number of shares used in computation:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	198,517	 	241,928	 	243,284	 	245,187	 	248,958	 	248,958	 	
Diluted	 	234,481	 	246,181	 	246,981	 	249,486	 	253,004	 	253,004	 	

Note: (1) Includes share-based compensation expenses as follows:
 
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 	 	Year Ended December 31,	 	
 	 	2010	 	2011	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(In thousands)	 	
Share-based compensation expenses	 	13,113	 	15,483	 	20,837	 	30,468	 	31,937	 	5,147	 	
 
(2) Each ADS represents four ordinary shares.
 
The following table presents a summary of our consolidated balance sheet data as of December 31, 2010, 2011, 2012, 2013 and 2014:
 
 	 	As of December 31,	 	
 	 	2010	 	2011	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(In thousands)	 	
Consolidated Balance Sheet Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	1,060,067	 	781,601	 	449,844	 	397,435	 	808,865	 	130,365	 	
Restricted cash	 	1,275	 	1,500	 	1,790	 	3,317	 	—	 	—	 	
Prepaid rent	 	152,267	 	228,087	 	321,305	 	363,581	 	385,158	 	62,076	 	
Property and equipment, net	 	1,422,432	 	2,095,794	 	2,951,509	 	3,634,039	 	3,907,343	 	629,749	 	
Total assets	 	3,044,080	 	3,524,950	 	4,330,187	 	5,185,052	 	6,182,906	 	996,504	 	
Accounts payable	 	283,203	 	417,605	 	624,824	 	677,305	 	640,691	 	103,261	 	
Deferred rent — long-term	 	237,427	 	329,774	 	470,438	 	653,831	 	830,414	 	133,838	 	
Deferred revenue	 	117,044	 	209,846	 	300,315	 	416,102	 	669,663	 	107,931	 	
Total liabilities	 	918,770	 	1,269,066	 	1,839,622	 	2,357,261	 	2,964,193	 	477,741	 	
Total equity	 	2,125,310	 	2,255,884	 	2,490,565	 	2,827,791	 	3,218,713	 	518,763	 	
 
The following table presents a summary of our consolidated statements of cash flow for the years ended December 31, 2010, 2011, 2012, 2013 and 2014:
 
 	 	Year Ended December 31,	 	
 	 	2010	 	2011	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(In thousands)	 	
Consolidated Statement of Cash Flow Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	 	469,126	 	458,740	 	715,720	 	1,070,169	 	1,454,015	 	234,345	 	
Net cash used in investing activities	 	(515,310	)	(734,577	)	(1,068,130	)	(1,152,248	)	(1,063,186	)	(171,355	)	
Net cash provided by financing activities	 	845,837	 	13,834	 	19,895	 	30,646	 	21,683	 	3,495	 	
 
Exchange Rate Information
 
This annual report contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. The exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise indicated, conversions of RMB into U.S. dollars in this annual report are based on the exchange rate on December 31, 2014. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On April 10, 2015, the daily exchange rate reported by the Federal Reserve Board was US$1.00 to RMB6.2082.
 
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.
 
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 	 	Noon Buying Rate	 	
Period	 	Period End	 	Average(1)	 	Low	 	High	 	
 	 	(RMB per US$1.00)	 	
2010	 	6.6000	 	6.7696	 	6.8330	 	6.6000	 	
2011	 	6.2939	 	6.4475	 	6.6364	 	6.2939	 	
2012	 	6.2301	 	6.2990	 	6.3879	 	6.2221	 	
2013	 	6.0537	 	6.1412	 	6.2438	 	6.0537	 	
2014	 	6.2046	 	6.1704	 	6.2591	 	6.0402	 	
October	 	6.1124	 	6.1251	 	6.1385	 	6.1107	 	
November	 	6.1429	 	6.1249	 	6.1429	 	6.1117	 	
December	 	6.2046	 	6.1886	 	6.2256	 	6.1490	 	
2015	 	 	 	 	 	 	 	 	 	
January	 	6.2495	 	6.2181	 	6.2535	 	6.1870	 	
February	 	6.2695	 	6.2518	 	6.2695	 	6.2399	 	
March	 	6.1990	 	6.2386	 	6.2741	 	6.1955	 	
April (through April 10, 2015)	 	6.2082	 	6.1989	 	6.2082	 	6.1930	 	

(1)        Averages for a period are calculated by using the average of the exchange rates at the end of each month during the period. Monthly averages are calculated by using the average of the daily rates during the relevant period.
 
3.B. Capitalization and Indebtedness
 
Not applicable.
 
3.C. Reason for the Offer and Use of Proceeds
 
Not applicable.
 
3.D. Risk Factors
 
Risks Related to Our Business
 
Our operating results are subject to conditions affecting the lodging industry in general.
 
Our operating results are subject to conditions typically affecting the lodging industry, which include:
 
·                 changes and volatility in national, regional and local economic conditions in China;
 
·                 competition from other hotels,the attractiveness of our hotels to customers, and our ability to maintain and increase sales to existing customers and attract new customers;
 
·                 adverse weather conditions, natural disasters or travelers’ fears of exposure to contagious diseases and social unrest;
 
·                 changes in travel patterns or in the desirability of particular locations;
 
·                 increases in operating costs and expenses due to inflation and other factors;
 
·                 local market conditions such as an oversupply of, or a reduction in demand for, hotel rooms;
 
·                 the quality and performance of managers and other employees of our hotels;
 
·                 the availability and cost of capital to fund construction and renovation of, and make other investments in, our hotels;
 
·                 seasonality of the lodging business and national or regionalspecialevents;
 
·                 the possibility that leased properties may be subject to challenges as to their compliance with the relevant government regulations; and
 
·                 maintenance and infringement of our intellectual property.
 
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Changes in any of these conditions could adversely affect our occupancy rates, average daily rates and revenues generated per available room, or RevPAR, or otherwise adversely affect our results of operations and financial condition.
 
Our business is sensitive to Chinese and global economic conditions. A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our revenues and results of operations.
 
Our business and operations are primarily based in China and we depend on domestic business and leisure traveler customers for a significant majority of our revenues. Accordingly, our financial results have been, and we expect will continue to be, affected by developments in the Chinese economy and travel industry. As the travel industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. In 2008, China was affected by the disruptions to financial markets described below, and, although the Chinese economy recovered in 2010 and remained relatively stable in 2011, the growth rate of China’s GDP decreased in 2012, 2013 and 2014, and it is uncertain whether this economic slowdown will continue into 2015 and beyond. A prolonged slowdown in the Chinese economy could erode consumer confidence which could result in changes to consumer spending patterns for travel and lodging-related products and services.
 
There is a possibility that China’s economic growth rate may materially decline in the near future, which may have adverse effects on our financial condition and results of operations. Risk of a material slowdown in China’s economic growth rate is based on several current or emerging factors including: (i) overinvestment by the government and businesses and excessive credit offered by banks; (ii) a rudimentary monetary policy; (iii) excessive privileges to state-owned enterprises at the expense of private enterprises; (iv) the dwindling supply of surplus labor; (v) a decrease in exports due to weaker overseas demand; and (vi) failure to boost domestic consumption.
 
The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including the escalation of the European sovereign debt crisis since 2011 and sanctions against Russia over the Ukraine crisis since 2014. It is unclear whether such challenges will be contained or resolved and what effects they may have. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including China’s. There have also been concerns over unrest in the Middle East and Africa, which have resulted in significant market volatility, and over the possibility of a war involving Iran or North Korea. In addition, there have been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan and the tensions between Japan and its neighbouring countries. Economic conditions in China are sensitive to global economic conditions.
 
Any prolonged slowdown in the Chinese or global 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.
 
The lodging industry in China is competitive, and if we are unable to compete successfully, our financial condition and results of operations may be harmed.
 
The lodging industry in China is highly fragmented. As amulti-brandhotelgroup we believe that we compete primarily based on location, room rates, brand recognition, quality of accommodations, geographic coverage, service quality, range of services, guest amenities and convenience of the central reservation system. We primarily compete with other hotel groups as well as various stand-alone lodging facilities in each of the markets in which we operate. Our HanTing Hotels mainly compete with Home Inns, Jinjiang Inn, 7 Days Inn, various regional hotel groups and stand-alone hotels, and certain international brands such as Super 8. HanTing Hotels also compete with two- and three-star hotels, as they offer rooms with amenities comparable to many of those hotels. Our JI Hotels and Starway Hotels face competition from existing three-star and certain four-star hotels, boutique hotels whose price could be comparable and a few hotel chains such as Vienna Hotels and Holiday Inn Express. Our Hi Inns compete mainly with stand-alone guest houses, low-price hotels and budget hotel chains such as Pod Inns, 99 Inns and 100 Inns. Our Joya Hotels and Manxin Hotels & Resorts compete with existing four-star and five-star hotels. Our Manxin Hotels & Resorts also competes with boutique resort hotels. Our Elan Hotels compete with existing economy hotel chains such as 7 Days Inn, Home Inn or GreenTree Inn. New and existing competitors may offer more competitive rates, greater convenience, services or amenities or superior facilities, which could attract customers away from our hotels and result in a decrease in occupancy and average daily rates for our hotels. Competitors may also outbid us for new leased hotel conversion sites, negotiate better terms for potential manachised or franchised hotels or offer better terms to our existing manachised or franchised hotel owners, thereby slowing our anticipated pace of expansion. Furthermore, our typical guests may change their travel, spending and consumption patterns and choose to stay in other kinds of hotels, especially given the increase in our hotel room rates to keep pace with inflation. Any of these factors may have an adverse effect on our competitive position, results of operations and financial condition.
 
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Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and other catastrophes.
 
Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and other catastrophes, particularly in locations where we operate a large number of hotels.
 
Our business could be materially and adversely affected by the outbreak of swine influenza, avian influenza, severe acute respiratory syndrome or other epidemics. In 2011, 2013 and 2014, there were reports on the occurrences of avian influenza in various parts of China, including dozens of confirmed human cases and deaths. Any prolonged recurrence of such contagious disease or other adverse public health developments in China may have a material and adverse effect on our business operations. For example, if any of our employees or customers is suspected of having contracted any contagious disease while he or she has worked or stayed in our hotels, we may under certain circumstances be required to quarantine our employees that are affected and the affected areas of our premises.
 
Losses caused by epidemics, adverse weather conditions, natural disasters and other catastrophes, including earthquakes or typhoons, are either uninsurable or too expensive to justify insuring against in China. In the event an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenues from the hotel. In that event, we might nevertheless remain obligated for any financial commitments related to the hotel.
 
Similarly, war (including the potential of war), terrorist activity (including threats of terrorist activity), social unrest and heightened travel security measures instituted in response, travel-related accidents, as well as geopolitical uncertainty and international conflict, will affect travel and may in turn have a material adverse effect on our business and results of operations. In addition, we may not be adequately prepared in contingency planning or recovery capability in relation to a major incident or crisis, and as a result, our operational continuity may be adversely and materially affected and our reputation may be harmed.
 
Seasonality of our business andnational or regionalspecial events may cause fluctuations in our revenues, cause our ADS price to decline, and adversely affect our profitability
 
The lodging industry is subject to fluctuations in revenues due to seasonality andnational or regional special events. The seasonality of our business may cause fluctuations in our quarterly operating results. Generally, the first quarter, in which both the New Year and Spring Festival holidays fall, accounts for a lower percentage of our annual revenues than other quarters of the year. We typically have a lower RevPAR in the fourth quarter, as compared to the second and third quarters, due to reduced travel activities in the winter. In addition, national or regional special events that attract large numbers of people to travel may also cause fluctuations in our operating results in particular for the hotel locations where those events are held. For example, Expo 2010 Shanghai China, or the Shanghai Expo, drove strong demand and led to increased occupancy rates and average daily rates for our hotels in Shanghai from May 1 to October 31, 2010 and contributed to our revenue increase from 2009 to 2010. However, after the Shanghai Expo’s closing on October 31, 2010, the demand for our hotels in Shanghai for the period from November 2010 to February 2011 was lower than the comparable periods of prior years. Therefore, you should not rely on our operating or financial results for prior periods as an indication of our results in any future period. As our revenues may vary from quarter to quarter, our business is difficult to predict and our quarterly results could fall below investor expectations, which could cause our ADS price to decline. Furthermore, the ramp-up process of our new hotels can be delayed during the low season, which may negatively affect our revenues and profitability.
 
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Our relatively limited operating history makes it difficult to evaluate our future prospects and results of operations.
 
Our operations commenced, through Powerhill Holdings Limited, or Powerhill, with mid-scale limited service hotels and commercial property development and management in 2005, and we began migrating to our current business of operating and managing a multi-brand hotel group in 2007. See “Item 4. Information on the Company — A. History and Development of the Company.” Accordingly, you should consider our future prospects in light of the risks and challenges encountered by a company with a relatively limited operating history. These risks and challenges include:
 
·                 continuing our growth while trying to achieve and maintain our profitability;
 
·                 preservingand enhancingour competitive position in the lodging industry in China;
 
·                 offering innovative products to attract recurring and new customers;
 
·                 implementing our strategy and modifying it from time to time to respond effectively to competition and changes in customer preferences and needs;
 
·                 increasing awareness of our brands and products and continuing to develop customer loyalty;
 
·                 attracting, training, retaining and motivating qualified personnel; and
 
·                 renewing leases for our leased hotels on commercially viable terms after the initial lease terms expire.
 
If we are unsuccessful in addressing any of these risks or challenges, our business may be materially and adversely affected.
 
Our new leased hotels typically incur significant pre-opening expenses during their development stages and generate relatively low revenues during their ramp-up stages, which may have a significant negative impact on our financial performance.
 
The operation of each of our leased hotel goes through three stages: development, ramp-up and mature operations. During the development stage, leased hotels generally incur pre-opening expenses ranging from approximately RMB0.5 to RMB6.0 million per hotel. During the ramp-up stage, when the occupancy rate is relatively low, revenues generated by these hotels may be insufficient to cover their operating costs, which are relatively fixed in nature. As a result, these newly opened leased hotels may not achieve profitability during the ramp-up stage. As we continue to expand our leased hotel portfolio, the significant pre-opening expenses incurred during the development stage and the relatively low revenues during the ramp-up stage of our newly opened leased hotels may have a significant negative impact on our financial performance.
 
A significant portion of our costs and expenses may remain constantor increaseeven if our revenues decline, which would adversely affect our net margins and results of operations.
 
A significant portion of our operating costs, including rent and depreciation and amortization, is fixed. Accordingly, a decrease in revenues could result in a disproportionately higher decrease in our earnings because our operating costs and expenses are unlikely to decrease proportionately. For example, the New Year and Spring Festival holiday periods generally account for a lower portion of our annual revenues than other periods, but our expenses do not vary as significantly with changes in occupancy and revenues as we need to continue to pay rent and salary and to make regular repairs, maintenance and renovations and invest in other capital improvements throughout the year to maintain the attractiveness of our hotels. Our property development and renovation costs may increase as a result of increasing costs of materials. However, we have a limited ability to pass increased costs to customers through room rate increases. Therefore, our costs and expenses may remain constant or increase even if our revenues decline, which would adversely affect our net margins and results of operations.
 
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We may not be able to manage our planned growth, which could adversely affect our operating results.
 
Our hotelgroup has been growing rapidly since we began migrating to our current business of operating and managing a multi-brand hotel group. In 2007, we launched our economy hotel product, HanTing Express Hotel, which was subsequently rebranded as HanTing Hotel, and our mid-scale limited service hotel product, HanTing Hotel, which was subsequently rebranded first as HanTing Seasons Hotel and then as JI Hotel. In May 2012, we completed the acquisition of a 51% equity interest in Starway Hotels (Hong Kong) Limited, or Starway HK, and in December 2013, we acquired the remaining 49% equity interest of Starway HK from C-Travel. We have retained the Starway brand. In addition, we launched Manxin Hotels & Resorts in October 2013, Joya Hotel, a new hotel brand targeting the upscale market, in December 2013 and Elan Hotel, a new economy hotel brand targeting business travelers, young customers and urban tourists, in September 2014. Through this organic and acquired growth, we increased the number of our hotels in operation in China from 26 hotels as of January 1, 2007 to 1,995 hotels as of December 31, 2014, and we intend to continue to develop and operate additional hotels in different geographic locations in China. This expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. Our planned expansion will also require us to maintain the consistency of our products and the quality of our services to ensure that our business does not suffer as a result of any deviations, whether actual or perceived, in our quality standards. In order to manage and support our growth, we must continue to improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain qualified hotel management personnel as well as other administrative and sales and marketing personnel, particularly as we expand into new markets. We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new hotels into our operations. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our results of operations.
 
Expansion into new geographic markets and addition of new hotel products for which we have limited operating experience and brand recognition may present operating and marketing challenges that are different from those we currently encounter in our existing markets. Our expansion within existing markets may cannibalize our existing hotels in those markets and, as a result, negatively affect our overall results of operations. Our inability to anticipate the changing demands that expanding operations will impose on our management and information and operational systems, or our failure to quickly adapt our systems and procedures to the new markets, could result in declines of revenues and increases in expenses or otherwise harm our results of operations and financial condition. Expansion through the introduction of new hotel products or brands may also present operating and marketing challenges. There can be no assurance that any new hotel products or brands we introduce will be well received by our customers and become profitable, and if it becomes profitable, it will be achieved in a timely fashion. If a new product or brand is not well received by our customers, we may not be able to generate sufficient revenue to offset related costs and expenses, and our overall financial performance and condition may be adversely affected.
 
Our multi-brand business strategy exposes us to potential risks and its execution may divert management attention and resources from our established brand, and if any of the new hotel brands are not well received by the market, we may not be able to generate sufficient revenue to offset related costs and expenses, and our overall financial performance and condition may be adversely affected.
 
We rebranded our HanTing Express Hotel as HanTing Hotel, our HanTing Seasons Hotel as JI Hotel and our HanTing Hi Inn as  Hi Inn  in 2012. In the same year we also acquired the Starway Hotel brand. In addition, we launched Manxin Hotels & Resorts in October 2013, Joya Hotel, a new hotel brand targeting the upscale market, in December 2013 and Elan Hotel, a new economy hotel brand targeting business travelers, young customers and urban tourists, in September 2014. We are still in the process of developing the Elan Hotel, Joya Hotel, Manxin Hotels & Resorts, JI Hotel, Starway Hotel and Hi Inn brands on top of our established brand of HanTing Hotel:
 
·                 Elan Hotel is our economy hotel brand concept targeting business travelers, young customers and urban tourists. Elan Hotel is committed to provide a unique business and leisure life experience for the hotel guests. The hotels’ modern and nature design elements create a fresh and refreshing atmosphere for the hotel guests. Elan Hotel brand conveys the concept of enjoyment of life and nature. We plan to further expand the Elan Hotel network primarily through manachise and franchise models. The introduction of the Elan Hotel brand exposes us to potential risks, including risks in developing the brand network.
 
·                 Joya Hotel is our upscale brand concept targeting affluent travelers and corporate events. Joya hotels are typically located in central business districts. We have limited operating experience in developing and operating hotels in the upscale market. The introduction of the Joya Hotel brand exposes us to potential risks, including risks associated with high capital expenditure level and with entering a highly competitive new market.
 
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·                 Manxin Hotels & Resorts is our mid-to-upscale brand concept targeting leisure travelers, families and small-scale corporate events. Manxin Hotels & Resorts targets popular vacation destinations. We have limited operating experience in developing and operating hotels in the midscale and upscale market. The introduction of the Manxin Hotels & Resorts brand exposes us to potential risks, including risks associated with high capital expenditure level and with entering a highly competitive new market.
 
·                 JI Hotel is our organically developed mid-scale brand. As of December 31, 2014, we had 117 JI Hotels in operation and an additional 76 JI Hotels under development. We plan to further expand the JI Hotel network through both the lease model and the manachise model. However, we may not be able to successfully identify, secure and develop in a timely fashion additional JI Hotels under the lease model or to successfully compete for franchise agreements for additional JI Hotels. The accelerated development of JI Hotels exposes us to potential risks, including risks associated with high capital expenditures and uncertain financial outcome.
 
·                 Before our acquisition, Starway operated under the franchise model, without direct management involvement in the franchised hotels. After the acquisition of Starway, we introduced the lease and manachise models to the Starway Hotels brand and gradually converted the franchised hotels Starway had before our acquisition to manachised or leased hotels where appropriate. We also selectively terminated the franchise arrangements with certain Starway Hotels that did not meet the new Starway brand standards or did not accept certain changes we made to the franchise agreements. We integrated most of Starway Hotels’ support functions into our existing corporate platform and significantly reduced the personnel and other operating costs for Starway. The acquisition of Starway exposes us to potential risks, including risks associated with unsuccessful transformation of business models and failure in growing the brand network.
 
·                 Hi Inns target practical and price-conscious travelers. We plan to strengthen the cost control over our Hi Inns to remain competitive in their target market and improve the RevPAR of Hi Inns through effective site selection. However, we may not be able to successfully execute our growth strategy and achieve the desired profitability level for Hi Inns.
 
In addition, we cannot guarantee the size and profitability of the various market segments that each new brand is targeting. The business models of these six new brands are not proven and we cannot guarantee that they can generate return comparable to the established HanTing Hotel brand. The process of developing new brands may divert management attention and resources from our established HanTing Hotel brand. We may not be able to find competent management staff to lead and manage the execution of the multi-brand business strategy. If we are unable to successfully execute our multi-brand strategy to target various market segments, we may be unable to generate revenues from these market segments in the amounts and by the times we anticipate, or at all, and our business, competitive position, financial condition and prospects may be adversely affected.
 
Our operations may suffer from effect of business uncertainties resulting from announcement of the proposed strategic alliance with Accor S.A.
 
In December 2014, we entered into agreements with Accor S.A. (“Accor”) to join forces in the Pan-China region to develop Accor brands and to form an extensive and long-term alliance with Accor, and announced the strategic alliance on the same date. We entered into a master purchase agreement pursuant to which we agreed to acquire and Accor agreed to sell, all of the issued and outstanding shares of certain wholly-owned subsidiaries of Accor engaged in the business of owning, leasing, franchising, operating and managing hotels under Accor brands in the midscale and economy market in the PRC, Taiwan and Mongolia. On the same date, we also entered into a securities purchase agreement, pursuant to which we agreed to issue ordinary shares to Accor which will represent up to 10% of our ordinary shares outstanding after the issuance and to grant to Accor a right to nominate a member of our board of directors. The precise number of ordinary shares to be issued to Accor will be determined based on the adjusted valuation of the hotel business that we are to acquire and a number of shares that Accor elects to purchase for cash consideration. Closings under the two agreements are conditional upon each other, as well as upon the completion of certain corporate restructure, receipt of antitrust approval which we have obtained in March 2015 and other closing conditions. In connection with the two agreements, we and Accor also entered into or will enter into at closing a number of additional documents, including, among others, brand franchise agreements granting us exclusive franchise rights in respect of certain Accor brands. Uncertainty about the effect of the proposed transactions with Accor may have an adverse effect on our business. Such uncertainty may impair our ability to attract, retain and motivate key personnel, including our executive leadership and could cause suppliers, financial counterparties and others to seek to change existing business relationship with us. We have incurred, and will continue to incur, costs, expenses, and fees for professional services and other transaction costs in connection with the proposed transactions, which may not be recoverable if the transactions are not completed.
 
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The market price for our ADSs has been volatile due to our announcement of the proposed strategic alliance with Accor and may continue to be volatile as a result of further development of the proposed transactions. If the proposed transactions do not close or the signed agreements are terminated for some reason, the market price for our ADSs may drop.
 
We may not be able to successfully identify, secure and develop in a timely fashion additional hotel properties under the lease model.
 
We plan to open more hotels to further grow our business. Under our lease model, we may not be successful in identifying and leasing additional hotel properties at desirable locations and on commercially reasonable terms or at all. Even if we are able to successfully identify and acquire new hotel properties, new hotels may not generate the returns we expect. We may also incur costs in connection with evaluating hotel properties and negotiating with property owners, including properties that we are subsequently unable to lease. In addition, we may not be able to develop additional hotel properties in a timely fashion due to construction or regulatory delays. If we fail to successfully identify, secure or develop in a timely fashion additional hotel properties, our ability to execute our growth strategy could be impaired and our business and prospects may be materially and adversely affected.
 
We may not be able to successfully compete forfranchise agreements and, as a result, we may not be able to achieve our planned growth.
 
Our growth strategy includes expanding throughmanachising andfranchising, both through entering into franchise agreements with our franchisees. We believe that our ability to compete for franchise agreements primarily depends on our brand recognition and reputation, the results of our overall operations in general and the success of the hotels that we currently manachise and franchise. Other competitive factors for franchise agreements include marketing support, capacity of the central reservation channel and the ability to operate hotels cost-effectively. The terms of any new franchise agreements that we obtain also depend on the terms that our competitors offer for those agreements. In addition, if the availability of suitable locations for new properties decreases, or governmental planning or other local regulations change, the supply of suitable properties for our manachise and franchise models could be diminished. If the hotels that we manachise or franchise perform less successfully than those of our competitors or if we are unable to offer terms as favorable as those offered by our competitors, we may not be able to compete effectively for new franchise agreements. As a result, we may not be able to achieve our planned growth and our business and results of operations may be materially and adversely affected.
 
Acquisitions, financial investment or strategic investment may have an adverse effect on our ability to manage our business and harm our results of operations and financial condition.
 
If we are presented with appropriate opportunities, we may acquire or invest in businesses or assets. For example, we invested in UBOX International Holdings Co Limited (“UBOX”) in 2012 and in China Quanjude (Group) Co., Ltd. (“Quanjude”) and Beijing GOOAGOO Technology Service Co., Ltd. (“GOOAGOO”) in 2014. The existing and future acquisitions or investments may expose us to potential risks, including risks associated with unforeseen or hidden liabilities, risks that acquired or invested companies will not achieve anticipated performance levels, diversion of management attention and resources from our existing business, difficulty in integrating the acquired businesses with our existing operational infrastructure, and inability to generate sufficient revenues to offset the costs and expenses of acquisitions or investments. In addition, following completion of an acquisition or investment, our management and resources may be diverted from their core business activities due to the integration process, which diversion may harm the effective management of our business. Furthermore, it may not be possible to achieve the expected level of benefits after integration and the actual cost of delivering such benefits may exceed the anticipated cost. Any difficulties encountered in the acquisition or investment and integration process may have an adverse effect on our ability to manage our business and harm our results of operations and financial condition. If a financial or strategic investment is unsuccessful, then in addition to the diversion of management attention and resources from our existing business we may lose the value of our investment, which could have a material adverse effect on our financial condition and results of operations.
 
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Our legal right to lease certain properties could be challenged by property owners or other third parties or subject to government regulation.
 
We do not hold any land use rights with respect to the land on which our hotels are located nor do we own any of the hotel properties we operate. Instead, a substantial part of our business model relies on leases with third parties who either own or lease the properties from the ultimate property owners. We also grant franchises to hotel operators who may or may not own their hotel properties. We cannot assure you that the land use rights and other property rights with respect to properties we currently lease, manachise or franchise for our existing hotels will not be challenged. For example, as of December 31, 2014, our lessors failed to provide the property ownership certificates and/or the land use rights certificates for 64 properties that we lease for our hotel operations. While we have performed our due diligence to verify the rights of our lessors to lease such properties, including inspecting documentation issued by competent government authorities evidencing these lessors’ land use rights and other property rights with respect to these properties that these lessors provided us with, we cannot assure you that our rights under those leases will not be challenged by other parties including government authorities.
 
Under PRC law, all lease agreements are required to be registered with the local housing bureau. While the majority of our standard lease agreements require the lessors to make such registration, some of our leases have not been registered as required, which may expose both our lessors and us to potential monetary fines. Some of our rights under the unregistered leases may also be subordinated to the rights of other interested third parties. In addition, in several instances where our immediate lessors are not the ultimate owners of hotel properties, no consents or permits were obtained from the owners, the primary lease holders or competent government authorities, as applicable, for the subleases of the hotel properties to us, which could potentially invalidate our leases or result in the renegotiation of such leases that leads to terms less favorable to us. Some of the properties we lease from third parties were also subject to mortgages at the time the leases were signed. Where consent to the lease was not obtained from the mortgage holder in such circumstances, the lease may not be binding on the transferee of the property if the mortgage holder forecloses on the mortgage and transfers the property. Moreover, we cannot assure you that the property ownership or leasehold in connection with our manachised and franchised hotels will not be subject to similar third-party challenges.
 
Any challenge to our legal rights to the properties used for our hotel operations, if successful, could impair the development or operations of our hotels in such properties. We are also subject to the risk of potential disputes with property owners or third parties who otherwise have rights to or interests in our hotel properties. Such disputes, whether resolved in our favor or not, may divert management’s attention, harm our reputation or otherwise disrupt our business.
 
Any failure to comply with land- and property-related PRC laws and regulations may negatively affect our ability to operate our hotels and we may suffer significant losses as a result.
 
Our lessors are required to comply with various land- and property-related laws and regulations to enable them to lease effective titles of their properties for our hotel use. For example, properties used for hotel operations and the underlying land should be approved for commercial use purposes by competent government authorities. In addition, before any properties located on state-owned land with allocated or leased land use rights or on land owned by collective organizations may be leased to third parties, lessors should obtain appropriate approvals from the competent government authorities. As of December 31, 2014, the lessors of approximately a quarter of our executed lease agreements subject to this approval requirement did not obtain the required governmental approvals. Such failure may subject the lessors or us to monetary fines or other penalties and may lead to the invalidation or termination of our leases by competent government authorities, and therefore may adversely affect our ability to operate our leased hotels. While many of our lessors have agreed to indemnify us against our losses resulting from their failure to obtain the required approvals, we cannot assure you that we will be able to successfully enforce such indemnification obligations against our lessors. As a result, we may suffer significant losses resulting from our lessors’ failure to obtain required approvals to the extent that we could not be fully indemnified by our lessors.
 
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Our success could be adversely affected by the performance of ourmanachisedand franchisedhotels and defaults or wrongdoings of our franchisees may affect our reputation, which would adversely affect the results of our operations.
 
Our success could be adversely affected by the performance of ourmanachisedand franchisedhotels, over which we have less control compared to our leased hotels. As of December 31, 2014, we manachised and franchised approximately 69.4% of our hotels, and we plan to further increase the number of manachised and franchised hotels to increase our national presence in China. Our franchisees for both our manachised and franchised hotels may not be able to develop hotel properties on a timely basis, which could adversely affect our growth strategy and may impact our ability to collect fees from them on a timely basis. Furthermore, given that our franchisees are typically responsible for the costs of developing and operating the hotels, including renovating the hotels to our standards, and all of the operating expenses, the quality of our manachised and franchised hotel operations may be diminished by factors beyond our control and our franchisees may not successfully operate hotels in a manner consistent with our standards and requirements. Our manachised and franchised hotels are also operated under our brand names. If our brands are misused by any of our franchisees, there may be an adverse impact on our business reputation and brand image. In addition, like any operators in service-oriented industries, we are subject to customer complaints and we may face complaints from unsatisfied customers who are unhappy with the standard of service offered by our franchisees. Any complaints, regardless of their nature and validity, may affect our reputation, thereby adversely affecting the results of our operations. We may also have to incur additional costs in placating any customers or salvaging our reputation. If any of our franchisees defaults or commits wrongdoings, there could be situations where the franchisee is not in a position to sufficiently compensate us for losses which we may have suffered as a result of such defaults or wrongdoings. While we ultimately can take action to terminate our franchisees that do not comply with the terms of our franchise agreements or commit wrongdoings, we may not be able to identify problems and make timely responses and, as a result, our image and reputation may suffer, which may have a material adverse effect on our results of operations.
 
If we are unable to access funds to maintain our hotels’ condition and appearance, or if our franchisees fail to make investments necessary to maintain or improve their properties, the attractiveness of our hotels and our reputation could suffer and our hotel occupancy rates may decline.
 
In order to maintain our hotels’ condition and appearance, ongoing renovations and other leasehold improvements, including periodic replacement of furniture, fixtures and equipment, are required. In particular, we manachise and franchise properties leased or owned by franchisees under the terms of franchise agreements, substantially all of which require our franchisees to comply with standards that are essential to maintaining the relevant product integrity and our reputation. We depend on our franchisees to comply with these requirements by maintaining and improving properties through investments, including investments in furniture, fixtures, amenities and personnel.
 
Such investments and expenditures require ongoing funding and, to the extent we or our franchisees cannot fund these expenditures from existing cash or cash flow generated from operations, we or our franchisees must borrow or raise capital through financing. We or our franchisees may not be able to access capital and our franchisees may be unwilling to spend available capital when necessary, even if required by the terms of our franchise agreements. If we or our franchisees fail to make investments necessary to maintain or improve the properties, our hotel’s attractiveness and reputation could suffer, we could lose market share to our competitors and our hotel occupancy rates and RevPAR may decline.
 
We have incurred losses in the past and may incur losses in the future.
 
We incurred net losses attributable to our company ofRMB111.6 million andRMB136.2 millionin 2007 and2008, respectively. Although we had net income attributable to our company of RMB42.5 million, RMB215.8, RMB114.8 million, RMB174.9 million, RMB279.9 million and RMB307.3 million (US$49.5 million) in 2009, 2010, 2011, 2012, 2013 and 2014 respectively, as we expect our costs to increase as we continue to expand our business and operations, we may incur losses in the future. We cannot assure you that we will achieve or sustain profitability in the future.
 
Our leases could be terminated early, we may not be able to renew our existing leases on commercially reasonable terms and our rents could increase substantially in the future, which could materially and adversely affect our operations.
 
The lease agreements between our lessors and us typically provide, among other things, that the leases could be terminated under certain legal or factual conditions. If our leases were terminated early, our operation of such properties may be interrupted or discontinued and we may incur costs in relocating our operations to other locations. Furthermore, we may have to pay losses and damages and incur other liabilities to our customers and other vendors due to our default under our contracts. As a result, our business, results of operations and financial condition could be materially and adversely affected.
 
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We plan to retain the operation of our leased hotels upon lease expiration through (i) renewal of existing lease or (ii) execution of a franchise agreement with the lessor. We cannot assure you, however, that we will be able to retain our hotel operation on satisfactory terms, or at all. In particular, we may experience an increase in our rent payments and cost of revenues in connection with renegotiating our leases. If we fail to retain our hotel operation on satisfactory terms upon lease expiration, our costs may increase and our profit generated from the hotel operation may decrease in the future. If we are unable to pass the increased costs on to our customers through room rate increases, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.
 
Interruption or failure of our information systems could impair our ability to effectively provide our services, which could damage our reputation.
 
Our ability to provide consistent and high-quality services and to monitor our operations on a real-time basis throughout our hotel group depends on the continued operation of our information technology systems, including our web property management, central reservation and customer relationship management systems. Certain damage to or failure of our systems could interrupt our inventory management, affect the manner of our services in terms of efficiency, consistency and quality, and reduce our customer satisfaction.
 
Our technology platform plays a central role in our management of inventory, revenues, loyalty program and franchisees. We also rely on our website, call center and mobile application to facilitate customer reservations. Our systems remain vulnerable to damage or interruption as a result of power loss, telecommunications failures, computer viruses, fires, floods, earthquakes, interruptions in access to our toll-free numbers, hacking or other attempts to harm our systems, and other similar events. Our servers, which are maintained in Shanghai, may also be vulnerable to break-ins, sabotage and vandalism. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all possible scenarios. Furthermore, our systems and technologies, including our website and database, could contain undetected errors or “bugs” that could adversely affect their performance, or could become outdated and we may not be able to replace or introduce upgraded systems as quickly as our competitors or within budgeted costs for such upgrades. If we experience frequent, prolonged or persistent system failures, our quality of services, customer satisfaction, and operational efficiency could be severely harmed, which could also adversely affect our reputation. Steps we take to increase the reliability and redundancy of our systems may be costly, which could reduce our operating margin, and there can be no assurance that whatever increased reliability may be achievable in practice or would justify the costs incurred.
 
Failure to maintain the integrity of internal or customer data could result in harm to our reputation or subject us to costs, liabilities, fines or lawsuits.
 
Our business involves collecting and retaining large volumes of internal and customer data, including credit card numbers and other personal information as our various information technology systems enter, process, summarize and report such data. We also maintain information about various aspects of our business operations as well as our employees. The integrity and protection of our customer, employee and company data is critical to our business. Our customers and employees expect that we will adequately protect their personal information.  We are required by applicable laws to keep strictly confidential of the personal information that we collect, and to take adequate security measures to safeguard such information. Our current security measures and those of our third-party service providers may not be adequate for the protection of our customer, employee or company data. For instance, we have been involved in a law suit where a customer alleged that we disclosed his personal information. We may face similar litigations in the future. In addition, computer hackers, foreign governments or cyber terrorists may attempt to penetrate our network security and our website. Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the security of the networks of our third-party service providers, or other misconduct. Because the techniques used by computer programmers who may attempt to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. It is also possible that unauthorized access to our proprietary internal and customer data may be obtained through inadequate use of security controls. The laws and regulations applicable to security and privacy are becoming increasingly important in China. Any theft, loss, fraudulent, unlawful use or disclosure of customer, employee or company data could harm our reputation or result in remedial and other costs, liabilities, fines or lawsuits.
 
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If the value of our brand or image diminishes, it could have a material and adverse effect on our business and results of operations.
 
We offer multiple hotel products that are designed to target distinct segments of customers. Our continued success in maintaining and enhancing our brands and image depends, to a large extent, on our ability to satisfy customer needs by further developing and maintaining our innovative and distinctive products and maintaining consistent quality of services across our hotel group, as well as our ability to respond to competitive pressures. If we are unable to do so, our occupancy rates may decline, which could in turn adversely affect our results of operations. Our business may also be adversely affected if our public image or reputation were to be diminished by the operations of any of our hotels, whether due to unsatisfactory service, accidents or otherwise. If the value of our products or image is diminished or if our products do not continue to be attractive to customers, our business and results of operations may be materially and adversely affected.
 
Failure to protect our trademarks and other intellectual property rights could have a negative impact on our brands and adversely affect our business.
 
The success of our business depends in part upon our continued ability to use our brands, trade names and trademarks to increase brand awareness and to further develop our products. The unauthorized reproduction of our trademarks could diminish the value of our brands and their market acceptance, competitive advantages or goodwill. In addition, we consider our proprietary information systems and operational system to be key components of our competitive advantage and our growth strategy. We have received copyright registration certificates for 13 of our major proprietary information systems and for our operational system. However, none of our other proprietary information system have been patented, copyrighted or otherwise registered as our intellectual property.
 
Monitoring and preventing the unauthorized use of our intellectual property is difficult. The measures we take to protect our brands, trade names, trademarks and other intellectual property rights may not be adequate to prevent their unauthorized use by third parties. Furthermore, the application of laws governing intellectual property rights in China and abroad is evolving and could involve substantial risks to us. In particular, the laws and enforcement procedures in the PRC are uncertain and do not protect intellectual property rights to the same extent as do the laws and enforcement procedures in the United States and other developed countries. If we are unable to adequately protect our brands, trade names, trademarks and other intellectual property rights, we may lose these rights and our business may suffer materially.
 
We may also be subject to claims for infringement, invalidity, or indemnification relating to third parties’ intellectual property rights. Such claims may be time-consuming and costly to defend, divert management attention and resources, or require us to enter into licensing agreements, which may not be available on commercially reasonable terms, or at all.
 
If we are not able to retain, hire and train qualified managerial and other employees, our business may be materially and adversely affected.
 
Our managerial and other employees manage our hotels and interact with our customers on a daily basis. They are critical to maintaining the quality and consistency of our services as well as our established brands and reputation. In general, employee turnover, especially those in lower-level positions, is relatively high in the lodging industry. As a result, it is important for us to retain as well as attract qualified managerial and other employees who are experienced in lodging or other consumer-service industries. There is a limited supply of such qualified individuals in some of the cities in China where we have operations and other cities into which we intend to expand. In addition, we need to hire qualified managerial and other employees on a timely basis to keep pace with our rapid growth while maintaining consistent quality of services across our hotels in various geographic locations. We must also provide continuous training to our managerial and other employees so that they have up-to-date knowledge of various aspects of our hotel operations and can meet our demand for high-quality services. If we fail to do so, the quality of our services may decrease, which in turn, may have a material and adverse effect on our business.
 
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Our current employment practices may be adversely impacted under the labor contract law of the PRC.
 
ThePRC National People’s Congresspromulgated the laborcontractlaw in 2008, and amended it on December 28, 2012. The labor contract law imposes requirements concerning, among others, the execution of written contracts between employers and employees, the time limits for probationary periods, and the length of fixed-term employment contracts.  Considering the PRC governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the labor contract law, and the interpretation and implementation of these regulations are still evolving, we cannot assure you that our employment practices do not, or will not, violate the labor contract law and related regulations or that we will not be subject to related penalties, fines or legal fees. If we are subject to severe penalties or incur significant legal fees in connection with labor law disputes or investigations, our business, financial condition and results of operations may be adversely affected. In addition, a significant number of our employees are dispatched from third-party human resources companies, which are responsible for managing, among others, payrolls, social insurance contributions and local residency permits of these employees.  According to a new regulation on labor dispatch, which was promulgated in December 2013 to implement the provisions of the labor contract law in this regard, a company is permitted to use dispatched employees for up to 10% of its labor force and the companies currently using dispatched employees are given a two-year grace period after March 1, 2014 to comply with this limit. We may not be able to continue our current practice under the labor contract law and the new regulation, which would increase our human resources administration expenses. Even if we continue this practice within the limit, we may be held jointly liable under the labor contract law for any damages to such employees caused by these human resources companies including lost wages, if the human resources company fails to pay such employees their wages and other benefits. If we are subject to large penalties or fees related to the labor contract law, our business, financial condition and results of operations may be materially and adversely affected. To comply with the labor dispatch regulation, we are in the process of reducing the percentage of dispatched employees by using service outsourcing arrangement.  Under the service outsourcing arrangement, we will enter into a service outsourcing agreement with a service outsourcing firm and relevant employees will be deemed as employees of this service outsourcing firm.  However, since the current labor dispatch regulation does not clearly define the distinction of labor dispatch and service outsourcing, we cannot rule out the possibility that our service outsourcing arrangement may be considered as labor dispatch by the relevant PRC government.
 
In addition, according to the Labor Contract Law and its implementing rules, if we intend to enforce the non-compete provision with our employees in the employment contracts or confidentiality agreements, we have to compensate our employees on a monthly basis during the term of the restriction period after the termination or ending of the employment contract, which may cause extra expenses to us.
 
Failure to retain our management team could harm our business.
 
We place substantial reliance on the experience and the institutional knowledge of members of our current management team. Mr. Qi Ji, our founder, executive chairman and chief executive officer, and other members of the management team are particularly important to our future success due to their substantial experiences in lodging and other consumer-service industries. Finding suitable replacements for Mr. Qi Ji and other members of our management team could be difficult, and competition for such personnel of similar experience is intense. The loss of the services of one or more members of our management team due to their departures or otherwise could hinder our ability to effectively manage our business and implement our growth strategies.
 
We are subject to various franchise, hotel industry, construction, hygiene,health andsafety and environmental laws and regulations that may subject us to liability.
 
Our business is subject to various compliance and operational requirements under PRC laws. For example, we are required to obtain the approval from, and file initial and annual reports with, the PRC Ministry of Commerce, or the MOC, to engage in the hotel franchising business. In addition, each of our hotels is required to obtain a special industry license and a fire control approval issued by the local public security bureau, to have hotel operations included in the business scope of its business license, to obtain hygiene permits and environmental impact assessment approvals, and to comply with license requirements and laws and regulations with respect to construction permit, zoning, fire prevention, public area hygiene, food safety, public safety and environmental protection. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Hotel Operation.” If we fail to comply with any applicable construction, hygiene, health and safety, and environmental laws and regulations related to our business, we may be subject to potentially significant monetary damages and fines or the suspension of our operations or development activities. Furthermore, new regulations could also require us to retrofit or modify our hotels or incur other significant expenses. It is also possible that new zoning plans or regulations applicable to a specific location may cause us to relocate our hotel(s) in that location, or require additional approvals and licenses that may not be granted to us promptly or at all, which may adversely affect our operating results. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances in our development activities, or to otherwise operate in compliance with environmental laws could also subject us to potentially significant monetary damages and fines or the suspension of our hotel development activities or hotel operations, which could materially adversely affect our financial condition and results of operations. Some of our hotels are not in full compliance with all of the applicable requirements. Such failure to comply with applicable construction permit, environmental, health and safety laws and regulations related to our business and hotel operation may subject us to potentially significant monetary damages and fines or the suspension of operations and development activities of our company or related hotels. We cannot guarantee that we will not be subject to any challenges or other actions with respect to such noncompliance.
 
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Owners of our manachised and franchised hotels are subject to these same permit and safety requirements. Although our franchise agreements require these owners to obtain and maintain all required permits or licenses, we have limited control over these owners. Any failure to obtain and maintain the required permits or licenses by any owner of a manachised or franchised hotel may require us to delay opening of the manachised or franchised hotel or to forgo or terminate our franchise agreement, which could harm our brand, result in lost revenues and subject us to potential indirect liability.
 
Our limited insurance coverage may expose us to losses, which may have a material adverse effect on our reputation, business, financial condition and results of operations.
 
We carry all mandatory and certain optional commercial insurance, including property,business interruption, money, fidelity guarantee, construction, third- party liability, public liability, product’s liability and employer’s liability insurance for our leased hotel operations. We also require our lessors and franchisees to purchase customary insurance policies. Although we are able to require our franchisees to obtain the requisite insurance coverage through our franchisees management, we cannot guarantee that our lessors will adhere to such requirements. In particular, there are inherent risks of accidents or injuries in hotels. One or more accidents or injuries at any of our hotels could adversely affect our safety reputation among customers and potential customers, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective. In the future, we may be unable to renew our insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels. We may also encounter disputes with insurance providers regarding payments of claims that we believe are covered under our policies. Furthermore, if we are held liable for amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our reputation, business, financial condition and results of operations may be materially and adversely affected.
 
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
 
We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include in its annual report a management report on such company’s internal control over financial reporting containing 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 such company’s internal control over financial reporting except where the company is a non-accelerated filer. We currently are a large accelerated filer.
 
Our management has concluded that our internal control over financial reporting was effective as of December 31, 2014. See “Item 15. Controls and Procedures.” Our independent registered public accounting firm has issued an attestation report as of December 31, 2014. See “Item 15. Controls and Procedures—Attestation Report of the Registered Public Accounting Firm.” However, if we fail to maintain effective 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. This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs, management time and other resources in an effort to continue to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
 
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We may not be able to develop hotel properties on a timely or cost-efficient basis, which may adversely affect our growth strategy and business.
 
We develop all of our leased hotels directly. Our involvement in the development of properties presents a number of risks, including construction delays or cost overruns, which may result in increased project costs or forgone revenue. We may be unable to recover development costs we incur for projects that do not reach completion. Properties that we develop could become less attractive due to market saturation or oversupply, and as a result we may not be able to recover development costs at the expected rate, or at all. Furthermore, we may not have available cash to complete projects that we have commenced, or we may be unable to obtain financing for the development of future properties on favorable terms, or at all. If we are unable to successfully manage our hotel development to minimize these risks, our growth strategy and business prospects may be adversely affected.
 
We, our directors, management and employees may be subject to certain risks related to legal proceedings filed by or against us, and adverse results may harm our business.
 
We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other proceedings filed by or against us, our directors, management or employees, including remedies or damage awards, and adverse results in such litigation and other proceedings may harm our business or reputation. Such litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, employment, non-competition and labor law, fiduciary duties, personal injury, death, property damage or other harm resulting from acts or omissions by individuals or entities outside of our control, including franchisees and third-party property owners. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that is subject to third- party patents or other third-party intellectual property rights.
 
We generally are not liable for the willful actions of our franchisees and property owners; however, there is no assurance that we would be insulated from liability in all cases.
 
Risks Related to Doing Business in China
 
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
 
We conduct substantially all of our business operations in China. As the lodging industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount and degree of government involvement and influence on the level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past over 30 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also have a negative effect on us. For example, our results of operations and financial condition may be adversely affected by government control over capital investments or changes in environmental, health, labor or tax regulations that are applicable to us.
 
As the PRC economy is increasingly intricately linked to the global economy, it is affected in various respects by downturns and recessions of major economies around the world, such as the global financial crisis and sovereign debt crisis in Europe. Stimulus measures designed to help China weather the global financial crisis may contribute to higher inflation, which could adversely affect our results of operations and financial condition. For example, certain operating costs and expenses, such as employee compensation and hotel operating expenses, may increase as a result of higher inflation. Measures to control the pace of economic growth may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition. The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies.
 
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The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Certain measures adopted by the PRC government, such as changes of the People’s Bank of China’s statutory deposit reserve ratio and lending guideline imposed on commercial banks, may restrict loans to certain industries. These actions, as well as future actions and policies of the PRC government, could materially affect our liquidity and access to capital and our ability to operate our business.
 
Inflation in China may disrupt our business and have an adverse effect on our financial condition and results of operations.
 
The Chinese economy has experienced rapid expansion together with rising rates of inflation and increasing salary. The salary increase could potentially increase discretionary spending on travel, but general inflation may also erode disposable incomes and consumer spending. Furthermore, certain components of our operating costs, including personnel, food, laundry, consumables and property development and renovation costs, may increase as a result of an increase in the cost of materials and labor resulting from general inflation. However, we cannot guarantee that we can pass increased costs to customers through room rate increases. This could adversely impact our business, financial condition and results of operations.
 
Uncertainties with respect to the Chinese legal system could limit the legal protections available to us and our investors and have a material adverse effect on our business and results of operations.
 
The PRC legal system is a civil law system based on written statutes. Unlike in common law systems, prior court decisions may be cited for reference but have limited precedential value. 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 involves uncertainties, which may limit legal protections available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult than in more developed legal systems to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may impede our ability to enforce the contracts we have entered into. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operations. Accordingly, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.
 
Rapid urbanization and changes in zoning and urban planning in China may cause our leased hotels to be demolished, removed or otherwise affected and our franchise agreements to terminate.
 
China is undergoing a rapid urbanization process, and zoning requirements and other governmental mandates with respect to urban planning of a particular area may change from time to time. When there is a change in zoning requirements or other governmental mandates with respect to the areas where our hotels are located, the affected hotels may need to be demolished or removed. We have experienced such demolition and relocation in the past and we may encounter additional demolition and relocation cases in the future. For example, in 2014, we were obligated to demolish one leased hotel due to local government zoning requirements. As a result, we wrote off property and equipment of RMB4.0 million associated with this hotel and received cash compensation of RMB4.0 million. In addition, as of December 31, 2014, we were notified by local government authorities that we may have to demolish two additional leased hotels due to local zoning requirements. Our franchise agreements typically provide that if the manachised or franchised hotels are demolished, the franchise agreements will terminate.  In 2014, we were obligated to demolish three manachised hotels due to local government zoning requirements. We cannot assure you that similar demolitions, termination of franchise agreements or interruptions of our hotel operations due to zoning or other local regulations will not occur in the future. Any such further demolition and relocation could cause us to lose primary locations for our hotels and we may not be able to achieve comparable operation results following the relocations. While we may be reimbursed for such demolition and relocation, we cannot assure you that the reimbursement, as determined by the relevant government authorities, will be sufficient to cover our direct and indirect losses. Accordingly, our business, results of operations and financial condition could be adversely affected.
 
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Governmental control of currency conversion may limit our ability to pay dividends in foreign currencies to our shareholders and therefore adversely affect the value of your investment.
 
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Foreign Currency Exchange” for discussions of the principal regulations and rules governing foreign currency exchange in China. We receive substantially all of our revenues in RMB. For most capital account items, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs, which would adversely affect the value of your investment.
 
Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
 
The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies.
 
Our revenues and costs are mostly denominated in the Renminbi, and a significant portion of our financial assets are also denominated in the Renminbi. We rely substantially on dividends paid to us by our operating subsidiaries in China. Any significant depreciation of the Renminbi against the U.S. dollar may have a material adverse effect on our revenues, and the value of, and any dividends payable on, our ADSs and ordinary shares. If we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, depreciation of the Renminbi against the U.S. dollar would reduce the U.S. dollar amount available to us. On the other hand, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk — Foreign Exchange Risk” for discussions of our exposure to foreign currency risks. In summary, fluctuation in the value of the Renminbi in either direction could have a material adverse effect on the value of our company and the value of your investment.
 
Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the CSRC, for our initial public offering and the listing and trading of our ADSs of the NASDAQ Global Select Market could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs; recent regulations also establish more complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through acquisitions.
 
On August 8, 2006, six PRC regulatory agencies jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors , or the New M&A Rule, which became effective on September 8, 2006 and amended on June 22, 2009. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Overseas Listing.” While the application of the New M&A Rule remains unclear, we believe, based on the advice of our PRC counsel, that CSRC approval is not required in the context of our initial public offering because we established our PRC subsidiaries by means of direct investment other than by merger or acquisition of domestic companies, and we started to operate our business in the PRC through foreign invested enterprises before September 8, 2006, the effective date of the New M&A Rule. However, we cannot assure you that the relevant PRC government agency, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines that CSRC’s approval was required for our initial public offering, we may face sanctions by the CSRC or other PRC regulatory agencies, which could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.
 
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Certain recently enacted PRC laws and regulations, such as the New M&A Rule and the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors , or the MOC Security Review Rule, which was promulgated by the MOC in August 2011 and became effective on September 1, 2011, also established additional procedures and requirements that could make mergers and acquisitions by foreign investors more time-consuming and complex.
 
The New M&A Rule requires, among other things, that the MOC be notified prior to any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the  Provisions on Thresholds for Prior Notification of Concentrations of Undertakings , issued by the State Council on August 3, 2008, were triggered. The MOC Security Review Rule requires, among other things, that any acquisition by foreign investors of PRC companies engaging in military related or certain other industries that are crucial to national security be subject to security review before consummation of such acquisition.
 
In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOC, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
 
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.
 
On July 4, 2014,the State Administration of Foreign Exchange, or the SAFE,issued the Notice on Issues Relating to the Administration of Foreign Exchange for Overseas Investment and Financing and Reverse Investment by Domestic Residents via Special Purpose Vehicles , or Circular 37, which replaced the Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles issued by SAFE in October 2005, or Circular 75. Pursuant to Circular 37, any PRC residents, including both PRC institutions and individual residents, are required to register with the local SAFE branch before making contribution to a company set up or controlled by the PRC residents outside of the PRC for the purpose of overseas investment or financing with their legally owned domestic or offshore assets or interests, referred to in this circular as a ‘‘special purpose vehicle.’’ See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Offshore Financing” for discussions of the registration requirements and the relevant penalties.
 
We attempt to comply, and attempt to ensure that our shareholders and beneficial owners of our shares who are subject to these rules comply, with the relevant requirements. We cannot provide any assurance that our shareholders and beneficial owners of our shares who are PRC residents have complied or will comply with the requirements imposed by Circular 37 or other related rules either. Any failure by any of our shareholders and beneficial owners of our shares who are PRC residents to comply with relevant requirements under this regulation could subject such shareholders, beneficial owners and us to fines or sanctions imposed by the PRC government, including limitations on our relevant subsidiary’s ability to pay dividends or make distributions to us and our ability to increase our investment in China, or other penalties that may adversely affect our business operations.
 
We rely principally on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
 
We are a holding company, and we rely principally on dividends from our subsidiaries in China for our cash requirements, including any debt we may incur. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our subsidiaries in China are required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. As of December 31, 2014, a total of RMB105.6 million (US$17.0 million) was not distributable in the form of dividends to us due to these PRC regulations. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. The inability of our subsidiaries to distribute dividends or other payments to us 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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We may be subject to fines and legal sanctions imposed by SAFE or other Chinese government authorities and our ability to further grant shares or share options to, and to adopt additional share incentive plans for, our directors and employees may be restricted if we or the participants of our share incentive plans fail to comply with PRC regulations relating to employee shares or share options granted by offshore special purpose companies or offshore listed companies to PRC participants.
 
In February 2012, the SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Individuals Participating in the Stock Incentive Plan of An Overseas Listed Company , or Circular 7, which requires PRC individual participants of stock incentive plans to register with the SAFE and to comply with a series of other requirements. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Foreign Currency Exchange.” We are an offshore listed company and as a result we and the participants of our share incentive plans who are PRC citizens or foreigners having lived within the territory of the PRC successively for at least one year, or, collectively, the PRC participants, are subject to Circular 7. While we completed the foreign exchange registration procedures and complied with other requirements according to Circular 7 in June 2012, we cannot provide any assurance that we or the PRC individual participants of our share incentive plans have complied or will comply with the requirements imposed by Circular 7. If we or the PRC participants of our share incentive plans fail to comply with Circular 7, we or the PRC participants of our share incentive plans may be subject to fines or other legal sanctions imposed by SAFE or other PRC government authorities and our ability to further grant shares or share options under our share incentive plans to, and to adopt additional share incentive plans for, our directors and employees may be restricted. Such events could adversely affect our business operations.
 
It is unclear whether we will be considered as a PRC “resident enterprise” under the EIT law, and depending on the determination of our PRC “resident enterprise” status, dividends paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide income, and holders of our ADSs or ordinary shares may be subject to PRC withholding tax on dividends paid by us and gains realized on their transfer of our ADSs or ordinary shares.
 
In 2007, the PRC National People’s Congress passed the Enterprise Income Tax Law, and the PRC State Council subsequently issued the  Implementation Regulations of the Enterprise Income Tax Law . The Enterprise Income Tax Law and its Implementation Regulations, or the EIT Law, provides that enterprises established outside of China whose “ de facto management bodies” are located in China are considered “resident enterprises.” Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining “ de facto  management body” and it is still unclear if the PRC tax authorities would determine that we should be classified as a PRC “resident enterprise.”
 
Under the EIT Law, dividends paid to us by our subsidiaries in China may be subject to a 10% withholding tax if we are considered a “non-resident enterprise.” If we are treated as a PRC “resident enterprise,” we will be subject to PRC income tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations, although dividends distributed from our PRC subsidiaries to us could be exempt from the PRC dividend withholding tax, since such income is exempted under the EIT Law to a PRC resident recipient. If we are required under the EIT Law to pay income tax on any dividends we receive from our subsidiaries, our income tax expenses will increase and the amount of dividends, if any, we may pay to our shareholders and ADS holders may be materially and adversely affected. In addition, dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares may be considered as income derived from sources within the PRC and be subject to PRC withholding tax. See “Item 10. Additional Information — E. Taxation — PRC Taxation.”
 
We face uncertainty from PRC value-added tax reform, which could result in unfavorable tax consequences to us.
 
On October 26, 2011 the State Council of China approved a new tax rule to launch the value-added tax reform pilot program in Shanghai on January 1, 2012. On November 16, 2011, the Ministry of Finance of China and the State Administration of Taxation of China jointly issued the  Circular on the Pilot Program for the Collection of Value Added-Tax Instead of Business Tax , or Circular 110, and the  Circular on the Pilot Program for the Collection of Value Added-Tax Instead of Business Tax in Transportation and Certain Modern Service Sectors in Shanghai , or Circular 111, to provide specific implementation rules for the pilot program, which became effective on January 1, 2012. As part of a tax replacement policy, Circular 110 and Circular 111 allow companies in the traffic and transport sector and certain modern service sectors in Shanghai to switch from being a business tax payer to being a value-added tax payer. Starting from January 1, 2012, a 17% value-added tax rate will apply to the movable property leasing sector, an 11% rate to the traffic and transport sector and a 6% rate to sectors related to research and development, technological services, culture, logistics and consultation. Value-added tax payers can deduct expenses incurred in providing the relevant services from the taxable income. On August 1, 2012, the pilot program started to extend to another eight provinces and cities, including Jiangsu Province. HanTing Technology (Suzhou) Co., Ltd., one of our major subsidiaries located in Jiangsu Province, has been subject to this new value-added tax reform pilot program since October 2012. Commencing August 1, 2013, the pilot program expanded to all regions in the PRC. Our other subsidiaries may also be subject to the pilot program as a result.  As the pilot program is still in a trial phase, its impact on our future operation is uncertain.
 
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The audit report included in this annual report was prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.
 
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the United States Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws and professional standards of the United States. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.
 
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
 
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures and quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
 
If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934.
 
Starting in 2011 the Chinese affiliates of the ‘‘big four’’ accounting firms, (including our independent registered public accounting firm) were affected by a conflict between US law and Chinese law.  Specifically, for certain US listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents.  The firms were, however, advised and directed that under China law they could not respond directly to the US regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission (“CSRC”).
 
In late 2012 this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, (including our independent registered public accounting firm).  A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms.  The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC.  On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC.  Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC.   The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC.  If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure.  Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.
 
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In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with 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, United States-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 were 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 not to be in compliance with the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead to the delisting of our ordinary shares from the Nasdaq Global Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
 
Risks Relating to Our ADSs and Our Trading Market
 
The market price for our ADSs has been and may continue to be volatile.
 
The market price for our ADSs has been volatile and has ranged from a low of US$19.99 to a high of US$31.25on the NASDAQ Global Select Market in 2014. The market price is subject to wide fluctuations in response to various factors, including the following:
 
·                 actual or anticipated fluctuations in our quarterly operating results;
 
·                 changes in financial estimates by securities research analysts;
 
·                 conditions in the travel and lodging industries;
 
·                 changes in the economic performance or market valuations of other lodging companies;
 
·                 announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
·                 addition or departure of key personnel;
 
·                 fluctuations of exchange rates between the RMB and U.S. dollar or other foreign currencies;
 
·                 potential litigation or administrative investigations;
 
·                 release of lock-up or other transfer restrictions on our outstanding ADSs or ordinary shares or sales of additional ADSs; and
 
·                 general economic or political conditions in China.
 
In addition, the market prices for companies with operations in China in particular have experienced volatility that might have been unrelated to the operating performance of such companies. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings, including, in some cases, substantial declines in the market prices of their securities. The performance of the securities of these China-based companies after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other China-based companies may also negatively affect the attitudes of investors towards China-based companies in general, including us, regardless of whether we have engaged in any inappropriate activities.
 
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The global financial crisis and the ensuing economic recessions in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets, such as the large declines in share prices in the United States, China and other jurisdictions at various times since 2008. These broad market and industry fluctuations may adversely affect the price of our ADSs, regardless of our operating performance.
 
We may need additional capital, and the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders and the incurrence of additional indebtedness could increase our debt service obligations.
 
We believe that our current cash and cash equivalents, anticipated cash flow from operations and the proceeds from our past capital markets fundraising activities, and from undrawn bank credit facilities available to us will be sufficient to meet our anticipated cash needs for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions, strategic acquisitions or other future developments, including expansion through leased hotels and any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity and equity-linked securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
 
Future sales or issuances, or perceived future sales or issuances, of substantial amounts of our ordinary shares or ADSs could adversely affect the price of our ADSs.
 
If our existing shareholders sell, or are perceived as intending to sell, substantial amounts of our ordinary shares or ADSs, including those issued upon the exercise of our outstanding stock options, the market price of our ADSs could fall. Such sales, or perceived potential sales, by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we deem appropriate. Shares held by our existing shareholders may be sold in the public market in the future subject to the restrictions contained in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. If any existing shareholder or shareholders sell a substantial amount of ordinary shares after the expiration of the lock-up period, the prevailing market price for our ADSs could be adversely affected.
 
In addition, certain of our shareholders or their transferees and assignees will have the right to cause us to register the sale of their shares under the Securities Act upon the occurrence of certain circumstances. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.
 
As our founder and co-founders collectively hold a controlling interest in us, they have significant influence over our management and their interests may not be aligned with our interests or the interests of our other shareholders.
 
As ofMarch 31, 2015, our founder, Mr. Qi Ji, who is also our executive chairman and chief executive officer, and our co-founders, Ms. Tong Tong Zhao and Mr. John Jiong Wu, in total beneficially own approximately 46.4% of our outstanding ordinary shares on an as-converted basis. See “Item 7. Major Shareholders.” The interests of these shareholders may conflict with the interests of our other shareholders. Our founder and co-founders have significant influence over us, including on matters relating to mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of us, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of us or of our assets and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including holders of our ADSs.
 
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ADS holders may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise their right to vote.
 
Except as described in the deposit agreement, holders of our ADSs may not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. ADS holders may not receive voting materials in time to instruct the depositary to vote, and it is possible that they may not have the opportunity to exercise a right to vote.
 
ADS holders may not be able to participate in rights offerings and may experience dilution of his, her or its holdings as a result.
 
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.
 
ADS holders may be subject to limitations on transfer of their ADSs.
 
Our ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
 
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NASDAQ corporate governance standards applicable to U.S. issuers, including the requirement regarding the implementation of a nominations committee. This may afford less protection to holders of our ordinary shares and ADSs.
 
The NASDAQ Marketplace Rules in general require listed companies to have, among other things, a nominations committee consisting solely of independent directors. As a foreign private issuer, we are permitted to, and we will, follow home country corporate governance practices instead of certain requirements of the NASDAQ Marketplace Rules, including, among others, the implementation of a nominations committee. The corporate governance practice in our home country, the Cayman Islands, does not require the implementation of a nominations committee. We currently intend to rely upon the relevant home country exemption in lieu of the nominations committee. As a result, the level of independent oversight over management of our company may afford less protection to holders of our ordinary shares and ADSs.
 
Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.
 
Our amended and restated articles of association contain provisions limiting the ability of others to acquire control of our company or cause us to enter into change-of-control transactions. These provisions could have the effect of depriving our shareholders of opportunities 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.
 
For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series 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 ordinary shares, in the form of ADSs or otherwise. 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. If our board of directors decides to issue preferred shares, the price of our ADSs may decline and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
 
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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and the majority of our officers reside outside the United States.
 
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our subsidiaries in China. Most of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind outside the Cayman Islands or China, the laws of the Cayman Islands and of China may render you unable to effect service of process upon, or to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. A judgment of a court of another jurisdiction may be reciprocally recognized or enforced if the jurisdiction has a treaty with China or if judgments of the PRC courts have been recognized before in that jurisdiction, subject to the satisfaction of other requirements. However, China does not have treaties providing for the reciprocal enforcement of judgments of courts with Japan, the United Kingdom, the United States and most other Western countries.
 
Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2013 Revision) and the common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.
 
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
 
ITEM 4.        INFORMATION ON THE COMPANY
 
4.A. History and Development of the Company
 
Powerhill was incorporated in accordance with the laws of the British Virgin Islands in December 2003, and commenced operation with mid-scale limited service hotels and commercial property development and management in 2005. Limited service hotels do not contain restaurants and all amenities are provided by the staff at the front desk or housekeeping. Powerhill conducted its operations through three wholly owned subsidiaries in the PRC, namely Shanghai HanTing Hotel Management Group, Ltd., or Shanghai HanTing, HanTing Xingkong (Shanghai) Hotel Management Co., Ltd., or HanTing Xingkong, and Lishan Property (Suzhou) Co., Ltd., or Suzhou Property. In August 2006, Suzhou Property transferred its equity interests in three leased hotels to Shanghai HanTing in exchange for Shanghai HanTing’s equity interest in Shanghai Shuyu Co., Ltd., which was primarily engaged in the business of sub-leasing and managing real estate properties in technology parks.
 
China Lodging Group, Limited, or China Lodging, was incorporated in the Cayman Islands in January 2007. In February 2007, Powerhill transferred all of its ownership interests in HanTing Xingkong and Shanghai HanTing to China Lodging in exchange for preferred shares of China Lodging. After such exchange, each of HanTing Xingkong and Shanghai HanTing became a wholly owned subsidiary of China Lodging. In addition, in February 2007, Powerhill and its subsidiary, Suzhou Property, were spun off in the form of a dividend distribution to the shareholders.
 
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In 2007, China Lodging began our current business of operating and managing amulti-brandhotelgroup. In 2007, we first launched our economy hotel product,  HanTing Express Hotel , which was subsequently rebranded as HanTing Hotel , targeting knowledge workers and value- and quality-conscious travelers. In the same year, we introduced our mid-scale limited service hotel product,  HanTing Hotel , which was subsequently rebranded first as  HanTing Seasons Hotel  and then as JI Hotel . In 2008, we launched our budget hotel product,  HanTing Hi Inn,  which was subsequently rebranded as  Hi Inn . In April 2007, China Lodging acquired Yiju (Shanghai) Hotel Management Co., Ltd. from Crystal Water Investment Holdings Limited, a British Virgin Islands company wholly owned by Mr. John Jiong Wu, a co-founder of our company. In January 2008, China Lodging incorporated HanTing (Tianjin) Investment Consulting Co., Ltd. in China and in October 2008, established China Lodging Holdings (HK) Limited, or China Lodging HK, in Hong Kong, under which HanTing Technology (Suzhou) Co., Ltd. was subsequently established in China in December 2008.
 
In March 2010, we completed our initial public offering. We issued and sold 10,350,000 ADSs, representing 41,400,000 of our ordinary shares at a public offering price of US$12.25 per ADS. Our ADSs have been listed on the NASDAQ Global Select Market since March 26, 2010. Our ordinary shares are not listed or publicly traded on any trading markets.
 
In May 2012,we acquired a 51% equity interest inStarway HK, a mid-scale hotel chain and increased our hotel brands to four brands. In December 2013, we acquired the remaining 49% equity interest of Starway HK from C-Travel. In addition, we launched Manxin Hotels & Resorts in October 2013, Joya Hotel, a new hotel brand targeting the upscale market, in December 2013, and Elan Hotel, a new economy hotel brand targeting business travelers, young customers and urban tourists, in September 2014.  In November 2012, we changed the Chinese trade name of our Company from “HanTing Hotel Group” to “HuaZhu Hotel Group”.
 
In December 2014, we entered into agreements with Accor to join forces in the Pan-China region to develop Accor brands and to form an extensive and long-term alliance with Accor. We entered into a master purchase agreement with Accor, pursuant to which we agreed to acquire and Accor agreed to sell, all of the issued and outstanding shares of certain wholly-owned subsidiaries of Accor engaged in the business of owning, leasing, franchising, operating and managing hotels under Accor brands in the midscale and economy market in the PRC, Taiwan and Mongolia. On the same date, we also entered into a securities purchase agreement, pursuant to which we agreed to issue ordinary shares to Accor which will represent up to 10% of our ordinary shares outstanding after issuance and to grant to Accor a right to nominate a member of our board of directors. The precise number of ordinary shares to be issued to Accor will be determined based on adjusted valuation of the hotel business that we are to acquire and a number of shares that Accor elects to purchase for cash consideration. Closings under the two agreements are conditional upon each other, as well as upon the completion of certain corporation restructure, receipt of antitrust approvals which we have obtained in March 2015 and other customary closing conditions.
 
In connection with the master purchase agreement and securities purchase agreement, we and Accor also entered into, or will enter into at closing, a number of additional agreements, including, among others, (i) brand franchise agreements pursuant to which Accor will grant to us exclusive franchise rights in respect of certain Accor brands in the midscale and economy market in the PRC, Taiwan and Mongolia including Grand Mercure, Novotel, Mercure, Ibis and Ibis Styles; all hotels under these brands will continue to be managed under Accor’s brand standards and have all benefits of all of Accor’s international distribution and loyalty platforms, and will participate in our loyalty and distribution platforms and benefit from our on-the-group support; (ii) a subscription agreement pursuant to which we will acquire a 10% equity interest in an Accor controlled entity engaged in the business of owning, leasing, franchising, operating and managing hotels under Accor brands in the luxury and upscale market in Hong Kong, Macau, Taiwan, the PRC and Mongolia and midscale and economy market in Hong Kong and Macau; and (iii) a registration rights agreement in favor of Accor in respect of our ordinary shares it will acquire pursuant to the securities purchase agreement.
 
Our principal executive offices are located at No. 2266 Hongqiao Road, Changning District, Shanghai 200336, People’s Republic of China. Our telephone number at this address is +86 (21) 6195-2011. Our registered office in the Cayman Islands is located at the offices of Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, 13th Floor, New York, New York 10011.
 
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Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is http://www.huazhu.com. The information contained on our website is not a part of this annual report.
 
4.B. Business Overview
 
Weare a leading and fast-growingmulti-brandhotelgroup in China with leased, manachisedand franchisedmodels. Under the lease model, we directly operate hotels typically located on leased properties. Under the manachise model, we manage manachised hotels through the on-site hotel managers we appoint and collect fees from franchisees. Under the franchise model, we provide training, reservation and support services to the franchised hotels and collect fees from franchisees but do not appoint on-site hotel managers. We apply a consistent standard and platform across all of our hotels. As of December 31, 2014, we had 611 leased hotels, 1,376 manachised hotels and 8 franchised hotels in operation and 29 leased hotels and 644 manachised hotels under development.
 
As of the date of this annual report, we offerseven hotelbrands that are designed to target distinctsegments of customers:
 
·                 Joya Hotel,our upscale brand concept targeting affluent travelers and corporate events. Joya hotels are typically located in central business districts;
 
·                 Manxin Hotels & Resorts, our mid-to-upscale brand concept targeting leisure travelers, families and small-scale corporate events. Manxin Hotels & Resorts targets popular vacation destinations;
 
·                 JI Hotel,our standardized mid-scale limited service hotel product which targets mature and experienced travelers who seek a quality experience in hotel stays, previously marketed first under the name of HanTing Hotel and then HanTing Seasons Hotel;
 
·                 Starway Hotel, our mid-scale limited service hotel product with variety in design and consistency in quality which targets middle class travelers who seek a spacious room, reasonable price and guaranteed quality;
 
·                 Elan Hotel,our economy hotel product which targets business travelers, young customers andurban tourists. Elan Hotel is committed to provide a unique business and travel life experience for its guests;
 
·                 HanTing Hotel,our economy hotel product which targets knowledge workers and value- and quality-conscious travelers, originally marketed under the name of HanTing Express Hotel; and
 
·                 Hi Inn,our budget hotel product which targets practical and price-conscious travelers,originally marketed under the name of HanTing Hi Inn.
 
As a result of our customer-oriented approach, we believe that we have developed strong brand recognition and a loyal customer base. In 2014, more than 85% of our room nights were sold to individual and corporate members of HuaZhu Club, our loyalty program.
 
Our operations commenced with mid-scale limited service hotels and commercial property development and management in 2005. We began our current business of operating and managing a multi-brand hotel group in 2007. Our total revenues grew from RMB3,419.3 million in 2012 to RMB5,265.2 million (US$848.6 million) in 2014. We had net income attributable to our company of RMB174.9 million, RMB279.9 million and RMB307.3 million (US$49.5 million) in 2012, 2013 and 2014, respectively. We had net cash provided by operating activities of RMB715.7 million, RMB1,070.2 million and RMB1,454.0 million (US$234.3 million) in 2012, 2013 and 2014, respectively.
 
We have received many awards for our business performance, includingthe“Top 60 China’s Hotel Group in 2013” award from  China Tourist Hotels Association  in 2014,  the “Industry’s Most Influential Brand” award from the Third China Finance Summit in 2014, the “China’s Outstanding Mid-Scale Hotel brand of 2013” award for our JI Hotel from  Hotel Modernization  magazine in 2013, the “Chinese Hotel Industry’s Influential Brand” award from China Brand Leaders Alliance, the “Hotel Chain Brand with the Most Value of Investment and Development in 2013” and the “Hotel Chain Brand with the Highest Consumer Satisfaction in 2013” awards from  the Global Times , the “Top One Enterprise in the Sixth High Growth Enterprises Selection” organized by  the Entrepreneur  Magazine in 2013, the “Brand with the Most Space to Grow” award from Shanghai Morning Post in 2012, the “Best Budget Hotel” award from China Tourism Gold List by Traveler magazine in 2011, the “Best Economy Hotel Brand of China” award at the sixth China Hotel Starlight Awards in 2011, the “Most Competitive Franchisor Brand in China in 2011 Award” from the Twelfth China Commercial Real Estate Investment Promotion Conference in 2011.
 
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Our Hotel Network
 
As of December 31, 2014, we operated 1,995 hotels in China. We have adopted a disciplined return-driven development model aimed at achieving high growth and profitability. As of December 31, 2014, our hotel network covers 300 cities in 31 provinces and municipalities across China. As of December 31, 2014, we had an additional 673 leased and manachised hotels under development.
 
The following table sets forth a summary of all of our hotels as of December 31, 2014.
 
 	 	Leased Hotels	 	Manachised
Hotels	 	Franchised
Hotels	 	Leased Hotels
Under
Development(1)	 	Manachised
Hotels Under
Development(1)	 	
Shanghai, Beijing, Guangzhou, Shenzhen and Hangzhou	 	180	 	366	 	1	 	19	 	153	 	
Other cities	 	431	 	1,010	 	7	 	10	 	491	 	
Total	 	611	 	1,376	 	8	 	29	 	644	 	

(1)        Include hotels for which we have entered into binding leasesor franchise agreementsbut that have not yet commenced operations.  The inactive projects are excluded from this list according to management judgment.
 
The following table sets forth the status of our hotels under development as of December 31, 2014.
 
 	 	Pre-conversion
Period(1)	 	Conversion
Period(2)	 	Total	 	
Leased hotels	 	11	 	18	 	29	 	
Manachised hotels	 	322	 	322	 	644	 	
Total	 	333	 	340	 	673	 	

(1)        Includes hotels for which we have entered into binding leasesor franchise agreementsbut of which the property has not been delivered by the respective lessors or property owners, as the case may be. The inactive projects are excluded from this list according to management judgment.
 
(2)        Includes hotels for which we have commenced conversion activities but that have not yet commenced operations. The inactive projects are excluded from this list according to management judgment.
 
Among 29 leased hotels under development as of December 31, 2014, we had11 leased hotels during pre-conversion period, for which we have entered into binding leases but of which the property has not been delivered by the respective lessors, and had 18 leased hotels during conversion period, for which we have commenced conversion activities but that have not yet commenced operations. The anticipated completion dates for these leased hotels during conversion period range from February of 2015 to June of 2015. Total budgeted development costs for these leased hotels during conversion period, which primarily include construction costs for leasehold improvement and the furniture and equipment for hotel operation, were RMB300.5 million (US$48.4 million), of which RMB132.6 million (US$21.4 million) was incurred as of December 31, 2014. The average development costs per square meter for completed leased hotels in 2014 were RMB1,909 (US$307.7). The franchisees are responsible for development costs for our manachised hotels and franchised hotels.
 
Leased hotels
 
As of December 31, 2014, we had 611 leased hotels, accounting for approximately 30.6% of our hotels in operation.We manage and operate each aspect of these hotels and bear all of the accompanying expenses. We are responsible for recruiting, training and supervising the hotel managers and employees, paying for leases and costs associated with construction and renovation of these hotels, and purchasing all supplies and other required equipment.
 
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Our leased hotels are located on leased properties. The terms of our leases typically range fromten to20years. We generally enjoy an initial two- to six-month rent-free period. We generally pay fixed rent on a quarterly or biannual basis for the first three to five years of the lease term, after which we are generally subject to a 3% to 5% increase every three to five years. Our leases usually allow for extensions by mutual agreement. In addition, our lessors are typically required to notify us in advance if they intend to sell or dispose of their properties, in which case we have a right of first refusal to purchase the properties on equivalent terms and conditions. Four of our leases expired in 2014 and three were renewed prior to their expiration and one hotel closed. As of December 31, 2014, 16 of our leases were expected to expire in 2015. All of these 16 leases are subject to negotiation as of the date of this annual report.
 
The following table sets forth the number of our leases for hotels in operation and under development due to expire in the periods indicated as of December 31, 2014.
 
 	 	Number of
Leases	 	
2015	 	16	 	
2016	 	12	 	
2017	 	24	 	
2018	 	22	 	
2019	 	28	 	
2020-2022	 	160	 	
2023-2025	 	169	 	
2026 and onward	 	209	 	
Total	 	640	 	
 
Manachised hotels
 
As of December 31, 2014, we had 1,376 manachised hotels, accounting for approximately 69.0% of our hotels in operation. The franchisees of our manachised hotels either lease or own their hotel properties and are required to invest in the renovation of their properties according to our product standards. We manage our manachised hotels and impose the same standards on all manachised hotels to ensure product quality and consistency across our hotel network. We appoint and train hotel managers who are responsible for hiring hotel staff and managing daily operation. We also provide our franchisees with services such as central reservation, sales and marketing support, quality assurance inspections and other operational support and information. Our franchisees are responsible for the costs of developing and operating the hotels, including renovating the hotels to our standards, and all of the operating expenses. We believe the manachise model has enabled us to quickly and effectively expand our geographical coverage and market share in a less capital-intensive manner through leveraging the local knowledge and relationships of our franchisees.
 
We collect fees from the franchisees of our manachised hotels and do not bear any loss or share any profit incurred or realized by our franchisees. They are also responsible for all costs and expenses related to hotel construction and refurbishing. Our franchise and management agreements for our manachised hotels typically run for an initial term of eight to ten years.
 
Our franchisees are generally required to pay us a one-time franchise fee typically ranging between RMB100,000 and RMB300,000. In general, we charge a monthly franchise fee of approximately 5% of the gross revenues generated by each manachised hotel. We also collect from franchisees a reservation fee for using our central reservation system and a membership registration fee to service customers who join our HuaZhu Club loyalty program at the manachised hotels. Furthermore, we employ, appoint and train hotel managers for our manachised hotels and charge the franchisees a monthly fee for services we provide.
 
Franchised hotels
 
As of December 31, 2014, we had 8 franchised hotels, accounting for approximately 0.4% of our hotels in operation. We collect fees from the franchisees of our franchised hotels and do not bear any loss or share any profit incurred or realized by our franchisees. Services we provide to our franchised hotels generally include training, central reservation, sales and marketing support, quality assurance inspections and other operational support and information. We do not appoint hotel managers for our franchised hotels.
 
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Our hotel chain has grown rapidly since we began migrating to our current business of operating and managinga multi-brand hotel group in 2007. The following table sets forth the number of hotels we operated as of the dates indicated.
 
 	 	As of December 31,	 	
 	 	2005	 	2006	 	2007	 	2008	 	2009	 	2010	 	2011	 	2012	 	2013	 	2014	 	
Leased hotels	 	5	 	24	 	62	 	145	 	173	 	243	 	344	 	465	 	565	 	611	 	
Manachised hotels	 	—	 	2	 	5	 	22	 	63	 	195	 	295	 	516	 	835	 	1,376	 	
Franchised hotels	 	—	 	—	 	—	 	—	 	—	 	—	 	—	 	54	 	25	 	8	 	
Total	 	5	 	26	 	67	 	167	 	236	 	438	 	639	 	1,035	 	1,425	 	1,995	 	
 
Our Products
 
We began our current business of operating and managing a multi-brand hotelgroup in 2007. As of the date of this annual report, we offer seven hotel brands that are designed to target distinct segments of customers:
 
·                 Joya Hotel,our upscale brand concept targeting affluent travelers and corporate events. Joya hotels are typically located in central business districts;
 
·                 Manxin Hotels & Resorts, our mid-to-upscale brand concept targeting leisure travelers, families and small-scale corporate events. Manxin Hotels & Resorts targets popular vacation destinations;
 
·                 JI Hotel,ourstandardizedmid-scale limited service hotel product which targets mature and experienced travelers who seek a quality experience in hotel stays, previously marketed first under the name of HanTing Hotel and then HanTing Seasons Hotel;
 
·                 Starway Hotel, our mid-scale limited service hotel product with variety in design and consistency in quality which targets middle class travelers who seek a spacious room, reasonable price and guaranteed quality;
 
·                 Elan Hotel,our economy hotel product which targets business travelers, young customers andurban tourists. Elan Hotel is committed to provide a unique business and travel life experience for its guests;
 
·                 HanTing Hotel,our economy hotel product which targets knowledge workers and value- and quality-conscious travelers, originally marketed under the name of HanTing Express Hotel; and
 
·                 Hi Inn,our budget hotel product which targets practical and price-conscious travelers,originally marketed under the name of HanTing Hi Inn.
 
We believe that our multi-brand strategy provides us with a competitive advantage by (i) enabling us to open a larger number of hotels in attractive markets, (ii) capturing a greater share of the spending of customers whose lodging needs may change from occasion to occasion or evolve over time, and (iii) providing us a greater benefit of economy of scale through shared platforms.
 
Joya Hotel
 
InDecember 2013, we launched Joya Hotel. These hotels are typically located in areas close to major business and commercial districts in first and second tier cities, and typically have a rack price between RMB500 and RMB1,000 per room night. The Joya Hotel targets affluent travelers and corporate events. Joya Hotel is designed for guests to enjoy an all-inclusive service, including complimentary breakfast, afternoon tea, healthy snack, mini bar free drinks, gym, automatic massage cabins and other premium services. The rooms are equipped with high-speed fiber access, full wireless coverage and Bluetooth speakers. As of December 31, 2014, we had three Joya Hotel  in operation and an additional two  Joya Hotel  under development.
 
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Manxin Hotels & Resorts
 
In October 2013, we launchedManxin Hotels & Resorts. These hotels are typically located in holiday resort areas, and typically have a rack price between RMB400 and RMB1,000 per room night. The Manxin Hotels & Resorts  is our mid-to-upscale brand concept targeting leisure travelers, families and small-scale corporate events.  Manxin Hotels & Resorts targets popular vacation destinations. Manxin Hotels & Resorts  offers high quality rooms, rich breakfast buffet, lunch, afternoon tea, dinner and Chinese style housekeeping services. As of December 31, 2014, we had one  Manxin Hotels & Resorts  in operation and additional two  Manxin Hotels & Resorts  under development.
 
JI Hotel
 
JI Hotel, which was previously marketedfirstunder the name of HanTing Hotel and then HanTing Seasons Hotels, is typically located in city centers or central business districts. Typically priced between RMB250 and RMB500 per room night, these hotels target travelers who seek a quality experience in hotel stays. JI Hotels  offer rooms with a quality comparable to three- to four-star hotels, but are priced at competitive rates. In addition, these hotels offer complimentary wireless Internet access throughout the premises, spacious lobbies with laser printers, computers, free drinks, and a cafe serving breakfast and simple meals. As of December 31, 2014, we had 117  JI Hotels  in operation and an additional 76  JI Hotels  under development.
 
Starway Hotel
 
Typically priced between RMB250 and RMB600 per room night, Starway Hotels vary in their designs and target middle class travelers who seek a spacious room, reasonable price and guaranteed quality.  Starway Hotels  offer rooms with a quality comparable to three- to four-star hotels, but are priced at competitive rates. In addition, these hotels typically offer complimentary Internet access throughout the premises, spacious lobbies and meeting areas with complimentary tea and coffee. As of December 31, 2014, we had 55  Starway Hotels  in operation and an additional 45 leased and manachised  Starway Hotels under development.
 
Elan Hotel
 
In September 2014, we launched Elan Hotels. Elan Hotel is our economy hotel product which targets business travelers, young customers and urban tourists, and is committed to provide a unique business and leisure life experience for the hotel guests. The hotels’ modern and nature design elements create a fresh and refreshing atmosphere for the hotel guests.  Elan Hotel  brand conveys the concept of enjoyment of life and nature. These hotels are typically priced between RMB 150 and RMB350 per room night. As of December 31, 2014, we had 13  Elan Hotels  in operation and additional 65  Elan Hotels  under development.
 
HanTing Hotel
 
Launched in 2007 and originally marketed under the name of HanTing Express Hotel, HanTing Hotel is our economy hotel product with the value proposition of “Quality, Convenience and Value.” These hotels are typically located in areas close to major business and commercial districts, and are priced between RMB150 and RMB350 per room night. The  HanTing Hotel  targets knowledge workers and value- and quality-conscious travelers. These hotels have lobbies with complimentary wireless Internet access and laser printers, and a cafe serving breakfast and simple meals. Rooms are equipped with a comfortable mattress, plush buckwheat and cotton pillows, shower facilities, an outlet for free broadband Internet access, a working desk and chair, and universal and uninterruptable power sockets. As of December 31, 2014, we had 1,648  HanTing Hotels  in operation and an additional 374  HanTing Hotels  under development.
 
Hi Inn
 
Launched in late 2008and originally marketed under the name of HanTing Hi Inn, Hi Inns are typically priced between RMB100 and RMB250 per room night and target rational and price-conscious travelers. These hotels offer compact rooms with comfortable beds and shower facilities and complimentary wireless Internet access throughout the premises. These hotels provide basic and clean accommodations. As of December 31, 2014, we had 158  Hi Inns  in operation and an additional 109  Hi Inns under development.
 
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Hotel Development
 
We mainly use themanachise and franchisemodels to expand our network in a less capital-intensive manner. We also lease the properties of the hotels we operate. We typically do not acquire properties ourselves, as owning properties is generally much more capital intensive. We have adopted a systematic process with respect to the planning and execution of new development projects. Our development department analyzes economic data by city, field visit reports and market intelligence information to identify target locations in each city and develop a three-year development plan for new hotels on a regular basis. The plan is subsequently reviewed and approved by our investment committee. Once a property is identified in the targeted location, staff in our development department analyzes the business terms and formulates a proposal for the project. In the case of a lease opportunity, the investment committee evaluates each proposed project based on several factors, including the length of the investment payback period, the rate of return on the investment, the amount of net cash flow projected during the operating period and the impact on our existing hotels in the vicinity. When evaluating potential manachising and franchising opportunities, the investment committee considers the attractiveness of the location as well as additional factors such as quality of the prospective franchisee and product consistency with our standards. Our investment committee weighs each investment proposal carefully to ensure that we can effectively expand our coverage while concurrently improving our profitability.
 
The following is a description of our hotel development process.
 
Manachised and franchised hotels
 
We openmanachised and franchisedhotels to expand our geographical coverage or to deepen penetration of existing markets. Manachised and franchised hotels provide us valuable operating information in assessing the attractiveness of new markets, and supplement our coverage in areas where the potential franchisees can have access to attractive locations by leveraging their own assets and local network. As is the case with leased hotels, we generally look to establish manachised and franchised hotels near popular commercial and office districts that tend to generate stronger demand for hotel accommodations. Manachised and franchised hotels must also meet certain specified criteria in connection with the infrastructure of the building, such as adequate water, electricity and sewage systems.
 
We typically source potential franchisees through word-of-mouth referrals, applications submitted via our website and industry conferences. Some of our franchisees operate several of our manachised and franchised hotels. In general, we seek franchisees who share our values and management philosophies.
 
We typically supervise thefranchisees in designing and renovating their properties pursuant to the same standards required for our leased hotels, and provide assistance as required. We also provide technical expertise and require the franchisees to follow a pre-selected list of qualified suppliers. In addition, we appoint or train hotel managers and help train other hotel staff for our manachised hotels to ensure that high quality and consistent service is provided throughout all our hotels.
 
Leased hotels
 
We seek properties that are in central or highly accessible locations in economically more developed cities in order to maximize the room rates that we can charge. In addition, we typically seek properties that will accommodate hotels of 80 to 180 rooms.
 
After identifying a proposed site, we conduct thorough due diligence and typically negotiate leases concurrently with the lessors. All leases and development plans are subject to the final approval of our investment committee. Once a lease agreement has been executed, we then engage independent design firms and construction companies to begin work on leasehold improvement. Our construction management team works closely with these firms on planning and architectural design. Our contracts with construction companies typically contain warranties for quality and requirements for timely completion of construction. Contractors or suppliers are typically required to compensate us in the event of delays or poor work quality. A majority of the construction materials and supplies used in the construction of our new hotels are purchased by us through a centralized procurement system.
 
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Hotel Management
 
Our management team has accumulated significant experience with respect to the operation of hotels. Building on this experience, our management team has developed a robust operational platform for our nationwide operations, implemented a rigorous budgeting process, and utilized our information systems to monitor our hotel performance. We believe the system is critical in maximizing our revenues and profitability. The following are some of the key components of our hotel management system:
 
Budgeting. Our budget and analysis team prepares a detailed annual cost and revenue budget for each of our leased hotels, and an annual revenue budget for each of our manachised and franchised hotels. The hotel budget is prepared based on, among other things, the historical operating performance of each hotel, the performance of comparable hotels and local market conditions. We may adjust the budget upon the occurrence of unexpected events that significantly affect a specific hotel’s operating performance. In addition, our compensation scheme for managers in each hotel is directly linked to its performance against the annual budget.
 
Pricing. Our room rates are determined using a centralized system and are based on the historical operating performance of each of our leased and manachised hotels, our competitors’ room rates and local market conditions. We adjust room rates regularly based on seasonality and market demand. We also adjust room rates for certain events, such as the China Import and Export Fair held twice a year in Guangzhou and the World Expo in Shanghai in 2010. We believe our centralized pricing system enhances our ability to adjust room rates in a timely fashion with a goal of optimizing average daily rates and occupancy levels across our network. Room rates for our franchised hotels are determined by the franchisees based on local market condition.
 
Monitoring. Through the use of our web-based property management system, we are able to monitor each hotel’s occupancy status, average daily rates, RevPAR and other operating data on a real-time basis. Real-time hotel operating information allows us to adjust our sales efforts and other resources to rapidly capitalize on changes in the market and to maximize operating efficiency.
 
Centralized cash management. Our leased hotels deposit cash into our central account several times a week. We also generally centralize all payments for expenditures. Our manachised and franchised hotels manage their cash separately.
 
Centralized procurement system. Our centralized procurement system has enabled us to efficiently manage our operating costs, especially with respect to supplies used in large quantities. Given the scale of our hotel network and our centralized procurement system, we have the purchasing power to secure favorable terms from suppliers for all of our hotels.
 
Quality assurance. We have developed an operating manual to which our staff closely adhere to ensure the consistency and quality of our customer experience. We conduct periodic internal quality checks of our hotels to ensure that our operating policies and procedures are followed. We also engage “mystery guests” from time to time to ensure that we are providing consistent quality services. Furthermore, we actively solicit customer feedbacks by conducting outbound e-mail surveys and monitor customer messages left in hotel guestbooks as well as comments posted on our website and third-party websites.
 
Training. We view the quality and skill sets of our employees as essential to our business and thus have made employee training one of our top priorities. Our HuaZhu University, previously known as HanTing College, together with our regional management teams, offers structured training programs for our hotel managers, other hotel-based staff and corporate staff. Our hotel managers are required to attend a three-week intensive training program, covering topics such as our corporate culture, team management, sales and marketing, customer service, hotel operation standards and financial and human resource management. Approximately 80% of our hotel managers have received training completion certificates. Our HuaZhu University also rolled out a new-hire training package in October 2009 to standardize the training for hotel-based staff across our hotel group. In addition, we provide our corporate staff with various training programs, such as managerial skills, office software skills and corporate culture. In 2014, our hotel-based staff and corporate staff on average have received approximately 60 and 40 hours of training, respectively.
 
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Hotel Information Platform and Operational Systems
 
We have successfully developed and implemented an advanced operating platform capable of supporting our nationwide operations. This operating platform enables us to increase the efficiency of our operations and make timely decisions. The following is a description of our key information and management systems.
 
Web property management system (Web-PMS). Our Web-PMS is a web-based, centralized application that integrates all the critical operational information in our hotel network. This system enables us to manage our room inventory, reservations and pricing for all of our hotels on a real-time basis. The system is designed to enable us to enhance our profitability and compete more effectively by integrating with our central reservation system and customer relationship management system. We believe our Web-PMS enables our management to more effectively assess the performance of our hotels on a timely basis and to efficiently allocate resources and effectively identify specific market and sales targets.
 
Central reservation system. We have a real-time central reservation system available 24 hours a day, seven days a week. Our central reservation system allows reservations through multiple channels including our website, mobile apps, call center, third-party travel agents and online reservation partners. The real-time inventory management capability of the system improves the efficiency of reservations, enhances customer satisfaction and maximizes our profitability.
 
Customer relationship management (CRM) system. Our integrated CRM system maintains information of our HuaZhu Club members, including reservation and consumption history and pattern, points accumulated and redeemed, and prepayment and balance. By closely tracking and monitoring member information and behavior, we are able to better serve the members of our loyalty program and offer targeted promotions to enhance customer loyalty. The CRM system also allows us to monitor the performance of our corporate client sales representatives.
 
Internet service system. Our Internet service system consists of our website (www.huazhu.com), our mobile website (m.huazhu.com) and our mobile apps for smart phones running iOS, Android or other systems. The system provides our HuaZhu Club members and the general public with convenient, friendly and updated services, including information and search services for our hotels, such as location, amenities and pricing, reservation services, online payment and online room selection functions, membership registration and management and member community services. Our members can reload their individual account balance through the system as well. Our mobile apps also provide location-based services, including search services for our nearby hotels.
 
Multi-functional Huazhu Club Membership Card.The HuaZhu Club membership card is a multi-functional card that is available to our Huazhu Club members. The Huazhu Club membership cards represent the membership identity and offer a variety of functions for our Huazhu Club members to utilize hotel facilities. For example, our Huazhu Club members can use it as a pre-paid card for in-hotel purchases and are entitled to free beverage and Internet access when using it in the business areas. It also enables elevator and room access, easy check-in and express check-out. We also roll out HuaZhu Club membership cards in innovative formats, such as the co-branded card with Voice of China, a popular televised singing competition in China, so that our Huazhu Club members can enjoy benefits offered by third parties, and cards in the form of cell phone covers which combine membership cards and cell phone covers in one.
 
Sales and Marketing
 
Our marketing strategy is designed to enhance our brand recognition and customer loyalty. Building and differentiating the brand image of each of our hotel products is critical to increasing our brand recognition. We focus on targeting the distinct guest segments that each of our hotel products serves and adopting effective marketing measures based on thorough analysis and application of data and analytics. In 2014, 92% of our room nights were sold through our own sales platforms and the remaining 8% of our room nights through intermediaries.
 
We use our Web-PMS system to conduct pricing management for all of our hotels except for ourfranchised hotels. We review our hotel pricing regularly and adjust room rates as needed based on local market conditions and the specific location of each hotel, focusing mainly on three factors: (i) optimum occupancy rate of the hotel and our other hotels nearby, (ii) seasonal demand for the hotel and (iii) event-driven demand for the hotel.
 
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A key component of our marketing efforts is the HuaZhu Club, our loyalty program, which covers all of our brands. We believe the HuaZhu Club loyalty program allow us to build customer loyalty and conduct lower-cost, targeted marketing campaigns. A majority of individual members of the HuaZhu Club pay to enroll in the program. As of December 31, 2014, our HuaZhu Club had more than 31 million members. In 2014, more than 85% of our room nights were sold to our HuaZhu Club members. Members of the HuaZhu Club are provided with discounts on room rates, free breakfasts (for gold and platinum members), more convenient check-out procedures and other benefits. HuaZhu Club members can also accumulate points through stays in our hotels or by purchasing products and services provided at our hotels. These points can be redeemed for gifts or free nights in our hotels. We also have joint promotional programs with leading financial institutions and airlines to recruit new members of our loyalty program. The HuaZhu Club includes four levels of membership: star, silver, gold and platinum. Star membership is the entry level and can be obtained from online registration for free. We charge RMB39 as the one-time membership fee for the silver membership. The one-time membership fee for the gold membership is RMB198 or RMB159, if purchased as an existing silver member. Memberships can be upgraded to the next level upon the satisfaction of certain conditions. HuaZhu Club was previously known as HanTing Club. We renamed HanTing Club as HuaZhu Club in 2013.
 
Our marketing activities also include Internet advertising, press and sponsored activities held jointly with our corporate partners and advertisements on travel and business magazines.
 
Competition
 
The lodging industry in China is highly fragmented. A significant majority of the room supply has come from stand-alone hotels, guest houses and other lodging facilities. In recent years hotel groups emerged and began to consolidate the market by converting standalone hotels into members of their hotel groups. As a multi-brand hotel group we believe that we compete primarily based on location, room rates, brand recognition, quality of accommodations, geographic coverage, service quality, range of services, guest amenities and convenience of the central reservation system. We primarily compete with other hotel groups as well as various stand-alone lodging facilities in each of the markets in which we operate. Our HanTing Hotels mainly compete with Home Inns, Jinjiang Inn, 7 Days Inn, various regional hotel groups and stand-alone hotels, and certain international brands such as Super 8. We also compete with two- and three-star hotels, as we offer rooms with amenities comparable to many of those hotels. Our JI Hotels and Starway Hotels face competition from existing three-star and certain four-star hotels, boutique hotels whose price could be comparable and a few hotel chains such as Vienna Hotels and Holiday Inn Express. Our Hi Inns compete mainly with stand-alone guest houses, low-price hotels and budget hotel chains such as Pod Inns, 99 Inns and 100 Inns. Our Joya Hotels and Manxin Hotels & Resorts compete with existing four-star and five-star hotels. Our Manxin Hotels & Resorts also competes with boutique resort hotels. Our Elan Hotels compete with existing economy hotel chains such as 7 Days Inn, Home Inns and GreenTree Inn.
 
Intellectual Property
 
We regard our trademarks, copyrights, domain names, trade secrets and other intellectual property rights as critical to our business. We rely on a combination of copyright and trademark law, trade secret protection and confidentiality agreements with our employees, lecturers, business partners and others, to protect our intellectual property rights.
 
As of December 31, 2014, we have registered253 trademarks and logos with the China Trademark Office. The trademarks and logos used in our current hotels are under protection of the registered trademarks and logos. An additional 96 trademark applications are under review by the authority. We have also registered one trademark in each of Singapore, Macau, Taiwan and Hong Kong and three trademarks in Korea. We have filed three trademark applications both in Thailand and Malaysia, which are under review by the authority in Thailand and Malaysia. As of December 31, 2014, we have applied for and received five patents in the PRC.  We have also received copyright registration certificates for 13 software programs developed by us as of December 31, 2014. In addition, we have registered 129 national and international top-level domain names, including www.htinns.com, www.hantinghotels.com and www.huazhu.com as of December 31, 2014.
 
Our intellectual property is subject to risks of theft and other unauthorized use, and our ability to protect our intellectual property from unauthorized use is limited. In addition, we may be subject to claims that we have infringed the intellectual property rights of others. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Failure to protect our trademarks and other intellectual property rights could have a negative impact on our brand and adversely affect our business.”
 
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Insurance
 
We believe that our hotels are covered by adequate property and liability insurance policies with coverage features and insured limits that we believe are customary for similar companies in China. We also require our franchisees to carry adequate property and liability insurance policies. We carry property insurance that covers the assets that we own at our hotels. Although we require our franchisees to purchase customary insurance policies, we cannot guarantee that they will adhere to such requirements. If we were held liable for amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our business, results of operations and financial condition may be materially and adversely affected. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Our limited insurance coverage may expose us to losses, which may have a material adverse effect on our reputation, business, financial condition and results of operations.”
 
Legal and Administrative Proceedings
 
In the ordinary course of our business, we, our directors, management and employees are subject to periodic legal or administrative proceedings. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, our directors, management and employees, we do not believe that any currently pending legal or administrative proceeding to which we, our directors, management and employees are a party will have a material adverse effect on our business or reputation. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — We, our directors, management and employees may be subject to certain risks related to legal proceedings filed by or against us, and adverse results may harm our business.”
 
Regulation
 
The hotel industry in China is subject to a number of laws and regulations, including laws and regulations relating specifically to hotel operation and management and commercial franchising, as well as those relating to environmental and consumer protection. The principal regulation governing foreign ownership of hotel businesses in the PRC is the  Foreign Investment Industrial Guidance Catalogue  issued by the National Development and Reform Commission and the PRC Ministry of Commerce, or the MOC, which was most recently updated on December 24, 2011. Pursuant to this regulation, there are no restrictions on foreign investment in limited service hotel businesses in China aside from business licenses and other permits that every hotel must obtain. Relative to other industries in China, regulations governing the hotel industry in China are still developing and evolving. As a result, most legislative actions have consisted of general measures such as industry standards, rules or circulars issued by different ministries rather than detailed legislations. This section summarizes the principal PRC regulations currently relevant to our business and operations.
 
Regulations on Hotel Operation
 
In November 1987, the Ministry of Public Security issued the Measures for the Control of Security in the Hotel Industry, and in June 2004, the State Council promulgated the  Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary To Be Retained . Under these two regulations, anyone who applies to operate a hotel is subject to examination and approval by the local public security authority and must obtain a special industry license. The Measures for the Control of Security in the Hotel Industry impose certain security control obligations on the operators. For example, the hotel must examine the identification card of any guest to whom accommodation is provided and make an accurate registration. The hotel must also report to the local public security authority if it discovers anyone violating the law or behaving suspiciously or an offender wanted by the public security authority. Pursuant to the  Measures for the Control of Security in the Hotel Industry , hotels failing to obtain the special industry license may be subject to warnings or fines of up to RMB200. In addition, pursuant to various local regulations, hotels failing to obtain the special industry license may be subject to warnings, orders to suspend or cease continuing business operations, confiscations of illegal gains or fines.
 
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In April 1987, the State Council promulgated the Public Area Hygiene Administration Regulation, according to which, a hotel must obtain a public area hygiene license before opening for business. Pursuant to this regulation, hotels failing to obtain a public area hygiene license may be subject to the following administrative penalties depending on the seriousness of their respective activities: (i) warnings; (ii) fines; or (iii) orders to suspend or cease continuing business operations. In March 2011, the Ministry of Health promulgated the  Implementation Rules of the Public Area Hygiene Administration Regulation , according to which, starting from May 1, 2011, hotel operators shall establish hygiene administration system and keep records of hygiene administration. In February 2009, the Standing Committee of the National People’s Congress, or the SCNPC, enacted the PRC Law on Food Safety , according to which any hotel that provides food must obtain a food service license; any food hygiene license which had been obtained prior to June 1, 2009 will be replaced by the food service license once the food hygiene license expires. To simplify licensing procedures, some cities such as Nanjing, Chengdu and Xi’an have combined the public area hygiene license and the food service license (or formerly food hygiene license) into one unified hygiene license. Pursuant to this law, hotels failing to obtain a food service license (or formerly food hygiene license) may be subject to: (i) confiscation of illegal gains, food illegally produced for sale and tools, facilities and raw materials used for illegal production; or (ii) fines between RMB2,000 and RMB50,000 if the value of food illegally produced is less than RMB10,000 or fines equal to 500% to 1000% of the value of food if such value is equal to or more than RMB10,000.
 
The Fire Prevention Law, as amended by the SCNPC in October 2008, and the Provisions on Supervision and Inspection on Fire Prevention and Control , promulgated by the Ministry of Public Security and effective as of May 1, 2009, require that public gathering places such as hotels submit a fire prevention design plan to apply for the completion acceptance of fire prevention facilities for their construction projects and to pass a fire prevention safety inspection by the local public security fire department, which is a prerequisite for opening business. Pursuant to these regulations, hotels failing to obtain approval of fire prevention design plans or failing fire prevention safety inspections may be subject to: (i) orders to suspend the construction of projects, use or operation of business; and (ii) fines between RMB30,000 and RMB300,000.
 
In January 2006, the State Council promulgated the Regulations for Administration of Entertainment Places. The Ministry of Culture issued the  Circular on Carrying Out the Regulations for Administration of Entertainment Places  in March 2006 and the Administrative Measures for Entertainment Places  in February 2013. Under these regulations, hotels that provide entertainment facilities, such as discos or ballrooms, are required to obtain a license for entertainment business operations.
 
On October 18, 2010, the General Administration of Quality Supervision, Inspection and Quarantine and Standardization Administration approved and issued  Classification and Accreditation for Star-rated Tourist Hotels  (GB/T14308-2010), which became effective on January 1, 2011. On November 19, 2010, the National Tourist Administration promulgated the Implementation Measures of Classification and Accreditation for Star-rated Tourist Hotels , which became effective on January 1, 2011. Under these regulations, all hotels with operations of over one year are eligible to apply for a star rating assessment. There are five ratings from one star to five stars for tourist hotels, assessed based on the level of facilities, management standards and quality of service. A star rating, once granted, is valid for three years.
 
On September 21, 2012, the Ministry of Commerce promulgated the Provisional Administrative Measures for Single-purpose Commercial Prepaid Cards , according to which, if an enterprise engaged in retail, accommodation and catering, or residential services issues any single-purpose commercial prepaid card to its customers, it shall undergo a record-filing procedure. For a hotel primarily engaged in the business of accommodation, the aggregate balance of the advance payment under the single-purpose commercial prepaid cards it issued shall not exceed 40% of its income from its primary business in the previous financial year.
 
On April 25, 2013, the Standing Committee of the National People’s Congress issued theTourism Law of the People’s Republic of China , which became effective on October 1, 2013.  According to this law, the accommodation operators shall fulfill their obligations under the agreements with consumers. If the accommodation operators subcontract part of their services to any third party or involve any third party to provide services to customers, the accommodation operators shall assume the joint and several liabilities with the third parties for any damage caused to the customers.
 
Regulations on Leasing
 
Under the Law on Urban Real Estate Administration promulgated by the SCNPC, which took effect as of January 1995 and was amended in August 2007 and the  Administrative Measures for Commodity House Leasing  promulgated by the Ministry of Housing and Urban-rural Construction, which took effect as of February 1, 2011, when leasing premises, the lessor and lessee are required to enter into a written lease contract, prescribing such provisions as the leasing term, use of the premises, rental and repair liabilities, and other rights and obligations of both parties. Both lessor and lessee are also required to go through registration procedures to record the lease with the real estate administration department. Pursuant to these laws and regulations and various local regulations, if the lessor and lessee fail to go through the registration procedures, both lessor and lessee may be subject to fines, and the leasing interest will be subordinated to an interested third party acting in good faith.
 
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In March 1999, the National People’s Congress, the China legislature, passed the PRC Contract Law, of which Chapter 13 governs lease agreements. According to the  PRC Contract Law , subject to consent of the lessor, the lessee may sublease the leased item to a third party. Where the lessee subleases the lease item, the leasing contract between the lessee and the lessor remains valid. The lessor is entitled to terminate the contract if the lessee subleases the lease item without the consent of the lessor.
 
In March 16, 2007, the National People’s Congress passed the PRC Property Law, pursuant to which where a mortgagor leases the mortgaged property before the mortgage contract is concluded, the previously established leasing relation shall not be affected; and where a mortgagor leases the mortgaged property after the creation of the mortgage interest, the leasing interest will be subordinated to the registered mortgage interest.
 
Regulations on Consumer Protection
 
In October 1993, the SCNPC promulgated the Law on the Protection of the Rights and Interests of Consumers, or the Consumer Protection Law, which became effective on January 1, 1994 and was amended on March 15, 2014. Under the Consumer Protection Law, a business operator providing a commodity or service to a consumer is subject to a number of requirements, including the following:
 
·                 to ensure that commodities and services meet with certain safety requirements;
 
·                 to protect the safety of consumers;
 
·                 to disclose serious defects of a commodity or a service and to adopt preventive measures against damage occurrence;
 
·                 to provide consumers with accurate information and to refrain from conducting false advertising;
 
·                 to obtain consents of consumers and todisclose the rules for the collectionand/or use of informationwhen collecting data or information from consumers; to take technical measures and other necessary measures to protect the personal information collected from consumers; not to divulge, sell, or illegally provide consumers’ information to others; not to send commercial information to consumers without the consent or request of consumers or with a clear refusal from consumers;
 
·                 not to set unreasonable or unfair terms for consumers or alleviate or release itself from civil liability for harming the legal rights and interests of consumers by means of standard contracts, circulars, announcements, shop notices or other means;
 
·                 to remind consumers in a conspicuous manner to pay attention to the quality, quantity and prices or fees of commodities or services, duration and manner of performance, safety precautions and risk warnings, after-sales service, civil liability and other terms and conditions vital to the interests of consumers under a standard form of agreement prepared by the business operators, and to provide explanations as required by consumers; and
 
·                 not to insult or slander consumers or to search the person of, or articles carried by, a consumer or to infringe upon the personal freedom of a consumer.
 
Business operators may be subject to civil liabilities for failing to fulfill the obligations discussed above. These liabilities include restoring the consumer’s reputation, eliminating the adverse effects suffered by the consumer, and offering an apology and compensation for any losses incurred. The following penalties may also be imposed upon business operators for the infraction of these obligations: issuance of a warning, confiscation of any illegal income, imposition of a fine, an order to cease business operation, revocation of its business license or imposition of criminal liabilities under circumstances that are specified in laws and statutory regulations.
 
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In December 2003, the Supreme People’s Court in China enacted the Interpretation of Some Issues Concerning the Application of Law for the Trial of Cases on Compensation for Personal Injury , which further increases the liabilities of business operators engaged in the operation of hotels, restaurants, or entertainment facilities and subjects such operators to compensatory liabilities for failing to fulfill their statutory obligations to a reasonable extent or to guarantee the personal safety of others.
 
Regulations on Environmental Protection
 
In February 2012, the SCNPC issued the newly amended Law on Promoting Clean Production, which regulates service enterprises such as restaurants, entertainment establishments and hotels and requires them to use technologies and equipment that conserve energy and water, serve other environmental protection purposes, and reduce or stop the use of consumer goods that waste resources or pollute the environment.
 
According to the Environmental Protection Law of the People’s Republic of China and the Environmental Impact Assessment Law of the People’s Republic of China  promulgated by the SCNPC on December 26, 1989 and October 28, 2002, respectively, the  Regulations Governing Environmental Protection in Construction Projects  promulgated by the State Council on November 29, 1998, and the  Regulations Governing Completion Acceptance of Environmental Protection in Construction Projects  promulgated by the Ministry of Environmental Protection on December 27, 2001, hotels shall submit a Report on Environmental Impact Assessment and an Application Letter for Acceptance of Environmental Protection Facilities in Construction Projects to competent environmental protection authorities for approvals before commencing the operation. Pursuant to the  Environmental Impact Assessment Law of the People’s Republic of China , any hotel failing to obtain the approval of an Environmental Impact Assessment may be ordered to cease construction and apply for the approval within a specified time limit. If the hotel still fails to obtain approval within the specified time limit, it may be subject to fines between RMB50,000 and RMB200,000, and the person directly responsible for the project may be subject to certain administrative penalties. Pursuant to the  Regulations Governing Completion Acceptance of Environmental Protection in Construction Projects , any hotel failing to obtain an Acceptance of Environmental Protection Facilities in Construction Projects may be subject to fines and an order to obtain approval within a specified time limit.
 
Regulations on Commercial Franchising
 
Franchise operations are subject to the supervision and administration of the MOC, and its regional counterparts. Such activities are currently regulated by the  Regulations for Administration of Commercial Franchising , which was promulgated by the State Council on February 6, 2007 and became effective on May 1, 2007. The  Regulations for Administration of Commercial Franchising  were subsequently supplemented by the  Administrative Measures for Archival Filing of Commercial Franchises , which was promulgated by the MOC on April 30, 2007 and became effective on May 1, 2007 and the newly amended Administrative Measures for Information Disclosure of Commercial Franchises, which was promulgated by the MOC on February 23, 2012 and became effective on April 1, 2012.
 
Under the above applicable regulations, a franchisor must have certain prerequisites including a mature business model, the capability to provide long-term business guidance and training services to franchisees and ownership of at least two self-operated storefronts that have been in operation for at least one year within China. Franchisors engaged in franchising activities without satisfying the above requirements may be subject to penalties such as forfeit of illegal income and imposition of fines between RMB100,000 and RMB500,000 and may be bulletined by the MOC or its local counterparts. Franchise contracts shall include certain required provisions, such as terms, termination rights and payments.
 
Franchisors are generally required to file franchise contracts with the MOC or its local counterparts. Failure to report franchising activities may result in penalties such as fines up to RMB100,000. Such noncompliance may also be bulletined. In the first quarter of every year, franchisors are required to report to the MOC or its local counterparts any franchise contracts they executed, canceled, renewed or amended in the previous year.
 
The term of a franchise contract shall be no less than three years unless otherwise agreed by franchisees. The franchisee is entitled to terminate the franchise contract in his sole discretion within a set period of time upon signing of the franchise contract.
 
Pursuant to the Administrative Measures for Information Disclosure of Commercial Franchises, 30 days prior to the execution of franchise contracts, franchisors are required to provide franchisees with copies of the franchise contracts, as well as written true and accurate basic information on matters including:
 
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·                 the name, domiciles, legal representative, registered capital, scope of business and basic information relating to its commercial franchising;
 
·                 basic information relating to the registered trademark, logo, patent, know-how and business model;
 
·                 the type, amount and method of payment of franchise fees (including payment of deposit and the conditions and method of refund of deposit);
 
·                 the price and conditions for the franchisor to provide goods, service and equipment to the franchisee;
 
·                 the detailed plan, provision and implementation plan of consistent services including operational guidance, technical support and business training provided to the franchisee;
 
·                 detailed measures for guiding and supervising the operation of the franchisor;
 
·                 investment budget for all franchised hotels of the franchisee;
 
·                 the current numbers, territory and operation evaluation of the franchisees within China;
 
·                 a summary of accounting statements audited by an accounting firm and a summary of audit reports for the previous two years;
 
·                 information on any lawsuit in which the franchisor has been involved in the previous five years;
 
·                 basic information regarding whether the franchisor and its legal representative have any record of material violation; and
 
·                 other information required to be disclosed by the MOC.
 
In the event of failure to disclose or misrepresentation, the franchisee may terminate the franchise contract and the franchisor may be fined up to RMB100,000. In addition, such noncompliance may be bulletined.
 
According to the 2008 Handbook of Market Access of Foreign Investment promulgated by the MOC in December 2008, if an existing foreign-invested company wishes to operate a franchise in China, it must apply to its original examination and approval authority to expand its business scope to include “engaging in commercial activities by way of franchise.”
 
Regulations on Trademarks
 
Both the PRC Trademark Law adopted by the SCNPC in 1982 and revised in 2001 and the Implementation Regulation of the PRC Trademark Law  adopted by the State Council in 2002 give protection to the holders of registered trademarks and trade names. The Trademark Office under the State Administration for Industry and Commerce, or the SAIC, handles trademark registrations and grants a term of ten years to registered trademarks. Trademark license agreements must be filed with the Trademark Office.
 
Regulations on Foreign Currency Exchange
 
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations promulgated by the State Council, as amended on August 5, 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange, or the SAFE, is obtained and prior registration with the SAFE is made.
 
On August 29, 2008, the SAFE promulgated the Notice on Perfecting Practices Concerning Foreign Exchange Settlement Regarding the Capital Contribution by Foreign-invested Enterprises , or Circular 142, regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that the registered capital of a foreign-invested enterprise settled in RMB converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, the SAFE strengthened its oversight of the flow and use of the registered capital of foreign-invested enterprises settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without the SAFE’s approval, and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines.
 
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On December 25, 2006, the People’s Bank of China issued the Administration Measures on Individual Foreign Exchange Control  and its Implementation Rules were issued by the SAFE on January 5, 2007, both of which became effective on February 1, 2007. Under these regulations, all foreign exchange matters involved in the employee stock ownership plan, stock option plan and other similar plans, participated by onshore individuals shall be transacted upon approval from the SAFE or its authorized branch. On February 25, 2012, the SAFE promulgated the  Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Individuals Participating in the Stock Incentive Plan of An Overseas Listed Company , or Circular 7, to replace the  Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Option Plan or Stock Option Plan of An Overseas Listed Company . Under Circular 7, the board members, supervisors, officers or other employees, including PRC citizens and foreigners having lived within the territory of the PRC successively for at least one year of a PRC entity, who participate in stock incentive plans or equity compensation plans by an overseas publicly listed company, or the PRC participants, are required, through a PRC agent or PRC subsidiaries of such overseas publicly-listed company, to complete certain foreign exchange registration procedures with respect to the plans upon the examination by, and approval of, the SAFE. We and our PRC participants who have been granted stock options are subject to Circular 7. If our PRC participants who hold such options or our PRC subsidiary fail to comply with these regulations, such participants and their PRC employer may be subject to fines and legal sanctions.
 
Regulations on Share Capital
 
In October 2005, the SCNPC issued the newly amended Company Law of the People’s Republic of China, which became effective on January 1, 2006. In April 2006, the SAIC, the MOC, the General Administration of Customs and the SAFE jointly issued the  Implementation Opinions on Several Issues regarding the Laws Applicable to the Administration of Approval and Registration of Foreign-invested Companies . Pursuant to the above regulations, shareholders of a foreign-invested company are obligated to make full and timely contribution to the registered capital of the foreign-invested company. On June 17, 2014, the MOC issued the  Notice of the Ministry of Commerce on Improving the Administration of Foreign Investment Review .  Pursuant to which, restrictions or requirements on the percentage of initial capital contribution, the percentage of cash contribution and the period of contribution imposed on foreign-invested companies (including companies invested by investors from Taiwan, Hong Kong and Macao regions) are abolished.  A company which proposes to reduce its registered capital shall prepare a balance sheet and a list of assets. The company shall notify its creditors within ten days from the date of resolution on reduction of registered capital and publish an announcement on the newspapers within 30 days. The creditors may, within 30 days from receipt of the notice or within 45 days from the announcement date, require the company to settle the debts or provide corresponding guarantee
 
Regulations on Dividend Distribution
 
The principal regulations governing distribution of dividends of foreign-invested enterprises include the Foreign-invested Enterprise Law  promulgated by the SCNPC, as amended on October 31, 2000, and the  Implementation Rules of the Foreign-invested Enterprise Law  issued by the State Council, as amended on March 1, 2014.
 
Under these laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.
 
Regulations on Offshore Financing
 
On October 21, 2005, the SAFE issued Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles , or Circular 75, which became effective as of November 1, 2005. Under Circular 75, if PRC residents use assets or equity interests in their PRC entities as capital contributions to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, they are required to register with local SAFE branches with respect to their overseas investments in offshore companies. PRC residents are also required to file amendments to their registrations if their offshore companies experience material events involving capital variation, such as changes in share capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or uses of assets in China to guarantee offshore obligations.
 
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Moreover, Circular 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past were required to complete the relevant registration procedures with the local SAFE branch by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures set forth in Circular 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the increase of its registered capital, the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC residents who control our company are required to register periodically with the SAFE in connection with their investments in us.
 
The SAFE issued a series of guidelines to its local branches with respect to the operational process for SAFE registration, including the  Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment , or Circular 59, which came into effect as of December 17, 2012. The guidelines standardized more specific and stringent supervision on the registration required by Circular 75. For example, the guidelines impose obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to the local SAFE authorities in case any shareholder or beneficial owner of the offshore entity is a PRC citizen or resident. Untrue statements by the onshore subsidiaries will lead to potential liability for the subsidiaries, and in some instances, for their legal representatives and other individuals.
 
On July 4, 2014, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange for Overseas Investment and Financing and Reverse Investment by Domestic Residents via Special Purpose Vehicles , or Circular 37, which became effective and suspended Circular 75 on the same date, and Circular 37 shall prevail over any other inconsistency between itself and relevant regulations promulgated earlier.  Pursuant to Circular 37, any PRC residents, including both PRC institutions and individual residents, are required to register with the local SAFE branch before making contribution to a company set up or controlled by the PRC residents outside of the PRC for the purpose of overseas investment or financing with their legally owned domestic or offshore assets or interests, referred to in this circular as a “special purpose vehicle”.  Under Circular 37, the term “PRC institutions” refers to entities with legal person status or other economic organizations established within the territory of the PRC. The term “PRC individual residents” includes all PRC citizens (also including PRC citizens abroad) and foreigners who habitually reside in the PRC for economic benefit.  A registered special purpose vehicle is required to amend its SAFE registration or file with respect to such vehicle in connection with any change of basic information including PRC individual resident shareholder, name, term of operation, or PRC individual resident’s increase or decrease of capital, transfer or exchange of shares, merger, division or other material changes. In addition, if a non-listed special purpose vehicle grants any equity incentives to directors, supervisors or employees of domestic companies under its direct or indirect control, the relevant PRC individual residents could register with the local SAFE branch before exercising such options.  The SAFE simultaneously issued a series of guidance to its local branches with respect to the implementation of Circular 37. Under Circular 37, failure to comply with the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including restrictions on the payment of dividends and other distributions to its offshore parent company and the capital inflow from the offshore entity, and may also subject the relevant PRC residents and onshore company to penalties under the PRC foreign exchange administration regulations.  See “Risk Factors—Risks related to our business—PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.”
 
Regulations on Merger and Acquisition and Overseas Listing
 
On August 8, 2006, six PRC regulatory agencies, namely the MOC, the State Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the SAFE, jointly adopted the Regulations on  Mergers and Acquisitions of Domestic Enterprises by Foreign Investors , or the New M&A Rule, which became effective on September 8, 2006. This New M&A Rule, as amended on June 22, 2009, purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by SPVs seeking the CSRC approval of their overseas listings.
 
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While the application of this new regulation remains unclear, we believe, based on the advice of our PRC counsel, that CSRC approval is not required in the context of our initial public offering because we established our PRC subsidiaries by means of direct investment other than by merger or acquisition of domestic companies, and we started to operate our business in the PRC through foreign invested enterprises before September 8, 2006, the effective date of the New M&A Rule. However, we cannot assure you that the relevant PRC government agency, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines that CSRC’s approval was required for our initial public offering, we may face sanctions by the CSRC or other PRC regulatory agencies, which could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.
 
The New M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOC be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC domestic enterprise.
 
Regulation on Security Review
 
In August 2011, the MOC promulgated the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors , or the MOC Security Review Rule, which came into effect on September 1, 2011, to implement the  Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors  promulgated on February 3, 2011. Under these regulations, a security review is required for foreign investors’ mergers and acquisitions having “national defense and security” implications and mergers and acquisitions by which foreign investors may acquire “de facto control” of domestic enterprises having “national security” implications. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to a security review, the MOC will look into the substance and actual impact of the transaction. The MOC Security Review Rule further prohibits foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
 
Regulations on Labor Contracts
 
The labor contract law that became effective on January 1, 2008, as amended on December 28, 2012, seeks to clarify the responsibilities of both employers and employees and codifies certain basic rights and protections of employees. Among others, the labor contract law provides that after completing two fixed-term employment contracts, an employee that desires to continue working for an employer is entitled to require a non-fixed-term employment contract. In addition, employees who have been employed for more than ten years by the same employer are entitled to require a non-fixed-term contract. The labor contract law also requires that the employees dispatched from human resources outsourcing firms or labor agencies be limited to temporary, auxiliary or substitute positions. Furthermore, an employer may be held jointly liable for any damages to its dispatched employees caused by its human resources outsourcing firm or labor agency if it hired such employees through these entities. According to the Interim Provisions on Labor Dispatch , which was promulgated in December 2013 to implement the provisions of the labor contract law regarding labor dispatch, a company is permitted to use dispatched employees for up to 10% of its labor force and the companies currently using dispatched employees are given a two-year grace period after March 1, 2014 to comply with this limit.
 
Considering thePRC governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the labor contract law, and the interpretation and implementation of these regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in compliance with the new regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Our current employment practices may be adversely impacted under the labor contract law of the PRC.”
 
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Regulation on Information Protection on Networks
 
On December 28, 2012, the Standing Committee of the National People’s Congress issued Decision of the Standing Committee of the National People’s Congress on Strengthening Information Protection on Networks , pursuant to which network service providers and other enterprises and institutions shall, when gathering and using electronic personal information of citizens in business activities, publish their collection and use rules and adhere to the principles of legality, rationality and necessarily, explicitly state the purposes, manners and scopes of collecting and using information, and obtain the consent of those from whom information is collected, and shall not collect and use information in violation of laws and regulations and the agreement between both sides; and the network service providers and other enterprises and institutions and their personnel must strictly keep such information confidential and may not divulge, alter, damage, sell, or illegally provide others with such information.
 
On July 16, 2013, the Ministry of Industry and Information Technology, or the MIIT, issued the Order for the Protection of Telecommunication and Internet User Personal Information . The requirements under this order are stricter and wider compared to the above decision issued by the National People’s Congress. According to this order, if a network service provider wishes to collect or use personal information, it may do so only if such collection is necessary for the services it provides. Furthermore, it must disclose to its users the purpose, method and scope of any such collection or usage, and must obtain consent from the users whose information is being collected or used. Network service providers are also required to establish and publish their protocols relating to personal information collection or usage, keep any collected information strictly confidential and take technological and other measures to maintain the security of such information. Network service providers are required to cease any collection or usage of the relevant personal information, and de-register the relevant user account, when a user stops using the relevant Internet service. Network service providers are further prohibited from divulging, distorting or destroying any such personal information, or selling or providing such personal information unlawfully to other parties. In addition, if a network service provider appoints an agent to undertake any marketing or technical services that involve the collection or usage of personal information, the network service provider is required to supervise and manage the protection of the information. The order states, in broad terms, that violators may face warnings, fines, public exposure and, in the most severe cases, criminal liability.
 
4.C. Organizational Structure
 
The following diagram illustrates our corporate and ownership structure, the place of formation and the ownership interests of our subsidiaries as of March 31, 2015.
 
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The following table sets forthsummary information for our significant subsidiaries as ofMarch 31, 2015.
 
Major Subsidiaries	 	Percentage of
Ownership	 	Date of or
Incorporation/Acquisition	 	Place of Incorporation	
China Lodging Holdings (HK) Limited	 	100	%	October 22, 2008	 	Hong Kong	
China Lodging Holdings Singapore Pte. Ltd.	 	100	%	April 14, 2010	 	Singapore	
Shanghai HanTing Hotel Management Group, Ltd.	 	100	%	November 17, 2004	 	PRC	
HanTing Xingkong (Shanghai) Hotel Management Co., Ltd.	 	100	%	March 3, 2006	 	PRC	
HanTing (Tianjin) Investment Consulting Co., Ltd.	 	100	%	January 16, 2008	 	PRC	
Yiju (Shanghai) Hotel Management Co., Ltd.	 	100	%	April 12, 2007	 	PRC	
HanTing Technology (Suzhou) Co., Ltd.	 	100	%	December 3, 2008	 	PRC	
HanTing (Shanghai) Enterprise Management Co., Ltd.	 	100	%	December 14, 2010	 	PRC	
Starway Hotels (Hong Kong) Limited	 	100	%	May 1, 2012	 	Hong Kong	
Starway Hotel Management (Shanghai) Co., Ltd.	 	100	%	May 1, 2012	 	PRC	
HuaZhu Hotel Management Co., Ltd.	 	100	%	August 16, 2012	 	PRC	
 
4.D. Property, Plants and Equipment
 
Our headquarters are located in Shanghai, China andoccupy nearly8,300 square meters of office space, about 1,500 square meters of which is owned by us and the rest is leased. As of December 31, 2014, we leased 611 out of our 1,995 hotel facilities with an aggregate size of approximately 2.9 million square meters, including approximately 72,000 square meters subleased to third parties. For detailed information about the locations of our hotels, see “Item 4. Information on the Company — B. Business Overview — Our Hotel Network.”
 
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ITEM 4A. UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 5.                       OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
5.A. Operating Results
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information — D. Risk Factors” or in other parts of this annual report on Form 20-F.
 
Overview
 
Weare a leading and fast-growingmulti-brandhotelgroup in China with leased, manachised andfranchised models. Under the lease model, we directly operate hotels typically located on leased properties. Under the manachise model, we manage manachised hotels through the on-site hotel managers we appoint and collect fees from franchisees. Under the franchise model, we provide training, reservation and support services to the franchised hotels and collect fees from franchisees but do not appoint on-site hotel managers. We apply a consistent standard and platform across all of our hotels. As of December 31, 2014, we had 611 leased, 1,376 manachised and 8 franchised hotels in operation and 29 leased hotels and 644 manachised hotels under development.
 
As of the date of this annual report, we offerseven hotelbrands that are designed to target distinct segments of customers:
 
·                 Joya Hotel,our upscale brand concept targeting affluent travelers and corporate events. Joya hotels are typically located in central business districts;
 
·                 Manxin Hotels & Resorts, our mid-to-upscale brand concept targeting leisure travelers, families and small-scale corporate events. Manxin Hotels & Resorts targets popular vacation destinations;
 
·                 JI Hotel, ourstandardizedmid-scale limited service hotel product which targets mature and experienced travelers who seek a quality experience in hotel stays, previously marketed first under the name of HanTing Hotel and then HanTing Seasons Hotel;
 
·                 Starway Hotel, our mid-scale limited service hotel product with variety in design and consistency in quality which targets middle class travelers who seek a spacious room, reasonable price and guaranteed quality;
 
·                 Elan Hotel,our economy hotel product which targets business travelers, young customers andurban tourists. Elan Hotel is committed to provide a unique business and travel life experience for its guests;
 
·                 HanTing Hotel,our economy hotel product which targets knowledge workers and value- and quality-conscious travelers, originally marketed under the name of HanTing Express Hotel; and
 
·                 Hi Inn,our budget hotel product which targets practical and price-conscious travelers,originally marketed under the name of HanTing Hi Inn.
 
As a result of our customer-oriented approach, we have developed strong brand recognition and a loyal customer base. In 2014, more than 85% of our room nights were sold to members of HuaZhu Club, our loyalty program.
 
Our operations commenced with mid-scale limited service hotels and commercial property development and management in 2005. We began our current business of operating and managing a multi-brand hotel group in 2007. Our total revenues grew from RMB3,419.3 million in 2012 to RMB5,265.2 million (US$848.6 million) in 2014. We had net income attributable to our company of RMB174.9 million, RMB279.9 million and RMB307.3 million (US$49.5 million) in 2012, 2013 and 2014, respectively. We had net cash provided by operating activities of RMB715.7 million, RMB1,070.2 million and RMB1,454.0 million (US$234.3 million) in 2012, 2013 and 2014, respectively.
 
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Specific factors affecting our results of operations
 
While our business is affected by factors relating to general economic conditions and the lodging industry in China (see “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Our operating results are subject to conditions affecting the lodging industry in general.”), we believe that our results of operations are also affected by company-specific factors, including, among others:
 
·                 The total number of hotels and hotel rooms in our hotel network. Our revenues largely depend on the size of our hotel network. Furthermore, we believe the expanded geographic coverage of our hotel network will enhance our brand recognition. Whether we can successfully increase the number of hotels and hotel rooms in our hotel group is largely affected by our ability to effectively identify and lease, manachise or franchise additional hotel properties at desirable locations on commercially favorable terms and the availability of funding to make necessary capital investments to open these new hotels.
 
·                 The fixed-cost nature of our business. A significant portion of our operating costs and expenses, including rent and depreciation and amortization, is relatively fixed. As a result, an increase in our revenues achieved through higher RevPAR generally will result in higher profitability. Vice versa, a decrease in our revenues could result in a disproportionately larger decrease in our earnings because our operating costs and expenses are unlikely to decrease proportionately.
 
·                 The number of new leased hotels under development. Generally, the operation of each leased hotel goes through three stages: development, ramp-up and mature operations. During the development stage, leased hotels generally incur pre-opening expenses ranging from approximately RMB0.5 to RMB6.0 million per hotel and generate no revenue. During periods when a large number of new leased hotels are under development, the pre-opening expenses incurred may have a significant negative impact on our financial performance.
 
·                 The mix of mature leased hotels, new leased hotels,manachisedhotels and franchisedhotels. When a new hotel starts operation and goes through the ramp-up stage, the occupancy rate is relatively low and the room rate may be subject to discount. Revenues generated by these hotels are lower than those generated by mature hotels and may be insufficient to cover their operating costs, which are relatively fixed in nature and are similar to those of mature hotels. The lower profitability during the ramp-up stage for leased hotels may have a significant negative impact on our financial performance. The length of ramp-up stage may be affected by factors such as hotel size, seasonality and location. New hotels opened in lower-tier cities generally have longer ramp-up period. On average, it takes our hotels approximately six months to ramp up. We define mature leased hotels as those that have been in operation for more than six months. Our mature leased hotels have been and will continue to be the main contributor to our revenues and profit.
 
Under the manachise and franchise models, we generate revenues from fees we charge to each manachised and franchised hotel while the franchisee bears substantially all the capital expenditures, pre-opening and operational expenses. The hotel operating costs relating to manachised hotels are mainly costs for hotel managers as we hire and send them to manachised hotels.
 
Key Performance Indicators
 
We utilize a set of non-financial and financial key performance indicators which our senior management reviews frequently. The review of these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing our business to react promptly to changing customer demands and market conditions.
 
Non-financial Key Performance Indicators
 
Our non-financial key performance indicators consist of (i) change in the total number of hotels and hotel rooms in our hotel group, (ii) RevPAR, especially RevPAR achieved by our leased hotels and (iii) same-hotel RevPAR change.
 
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Change in the total number of hotels and hotel rooms. We track the change in the total number of hotels and hotel rooms in operation to monitor our business expansion. Our total hotels in operation increased from 1,035 in 2012 to 1,995 in 2014 and our total hotel room-nights available for sale increased from 33.2 million in 2012 to 65.3 million in 2014. The following table sets forth various measures of changes in the total number of hotels and hotel rooms as of and for the dates and periods indicated.
 
 	 	As of December 31,	 	
 	 	2012	 	2013	 	2014	 	
Total hotels in operation	 	1,035	 	1,425	 	1,995	 	
Leased hotels	 	465	 	565	 	611	 	
Manachised hotels	 	516	 	835	 	1,376	 	
Franchised hotels	 	54	 	25	 	8	 	
Total hotel rooms in operation	 	113,650	 	152,879	 	209,955	 	
Leased hotels	 	54,694	 	65,836	 	72,335	 	
Manachised hotels	 	53,381	 	84,437	 	136,689	 	
Franchised hotels	 	5,575	 	2,606	 	931	 	
Total hotel room-nights available for sale	 	33,204,656	 	48,092,877	 	65,321,955	 	
Leased hotels	 	16,704,181	 	21,731,349	 	25,286,195	 	
Manachised hotels	 	14,655,177	 	25,293,118	 	39,542,356	 	
Franchised hotels	 	1,845,298	 	1,068,410	 	493,404	 	
Number of cities	 	171	 	249	 	300	 	
 
RevPAR. RevPAR is a commonly used operating measure in the lodging industry and is defined as the product of average occupancy rates and average daily rates achieved. Occupancy rates of our hotels mainly depend on the locations of our hotels, product and service offering, the effectiveness of our sales and brand promotion efforts, our ability to effectively manage hotel reservations, the performance of managerial and other employees of our hotels, as well as our ability to respond to competitive pressure. From year to year, occupancy of our portfolio may fluctuate as a result of change in the mix of mature and ramp-up hotels, as well as special event such as the Shanghai Expo in 2010. We set the room rates of our hotels primarily based on the location of a hotel, room rates charged by our competitors within the same locality, and our relative brand and product strength in the city or city cluster. From year to year, average daily rate of our portfolio may change due to our yield management practice, city mix change and special events such as Shanghai Expo in 2010. The following table sets forth our RevPAR, average daily room rate and occupancy rate for our leased and manachised hotels for the periods indicated. We do not track the RevPAR, average daily room rate or occupancy rate for our franchised hotels.
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
RevPAR (in RMB)	 	 	 	 	 	 	 	
Leased hotels	 	173	 	168	 	169	 	
Manachised hotels	 	163	 	159	 	153	 	
Total hotels in operation	 	168	 	163	 	159	 	
Average daily room rate (in RMB)	 	 	 	 	 	 	 	
Leased hotels	 	184	 	187	 	190	 	
Manachised hotels	 	172	 	174	 	172	 	
Total hotels in operation	 	178	 	180	 	179	 	
Occupancy rate (as a percentage)	 	 	 	 	 	 	 	
Leased hotels	 	94	 	90	 	89	 	
Manachised hotels	 	95	 	92	 	89	 	
Total hotels in operation	 	94	 	91	 	89	 	
Weight of hotel room-nights available for sale contributed by leased hotels less than 6 months (as a percentage)	 	13	 	12	 	7	 	
 
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RevPAR may change from period to period due to (i) the change in the mix of our leased hotels in the ramp-up and mature phases, (ii) the change in the mix of our hotels in different cities and locations, (iii) the change in the mix of our hotels of different brands, and (iv) the change in same-hotel RevPAR. The total hotel RevPAR in 2014 is lower than that in 2013, mainly as a result of the relatively soft overall market and the city mix shifting toward lower-tier cities, in particular a higher percentage of newly-opened hotels in lower-tier cites as a result of the our accelerated growth in manachise business nationwide. The total hotel RevPAR in 2013 is lower than that in 2012, mainly as a result of the relatively soft overall market and the city mix shifting toward lower-tier cities.
 
The seasonality of our business may cause fluctuations in our quarterly RevPAR. We typically have the lowest RevPAR in the first quarter due to reduced travel activities in the winter and during the Spring Festival holidays, and the highest RevPAR in the third quarter due to increased travel during the summer. National and regional special events that attract large numbers of people to travel may also cause fluctuations in our RevPAR.
 
 	 	For the Three Months Ended	 	
 	 	March 31,
2013	 	June 30,
2013	 	September
30, 2013	 	December
31, 2013	 	March 31,
2014	 	June 30,
2014	 	September
30, 2014	 	December
31, 2014	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
RevPAR (in RMB):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Leased hotels	 	152	 	172	 	179	 	166	 	151	 	174	 	184	 	166	 	
Manachised hotels	 	146	 	162	 	171	 	155	 	143	 	158	 	166	 	145	 	
Totalleased and manachised hotels in operation	 	149	 	167	 	175	 	160	 	146	 	164	 	173	 	153	 	
 
Same-hotel RevPAR change. Our overall RevPAR trend does not reflect the trend of a stable and mature portfolio, because it may fluctuate when city mix and mix of mature and ramp-up hotels change. We track same-hotel year-over-year RevPAR change for hotels in operation for at least 18 months to monitor RevPAR trend for our mature hotels on a comparable basis. The following table sets forth our same-hotel RevPAR for hotels in operation for at least 18 months for the periods indicated.
 
 	 	For the Three Months Ended	 	
 	 	March 31,
2013	 	June 30,
2013	 	September
30, 2013	 	December
31, 2013	 	March 31,
2014	 	June 30,
2014	 	September
30, 2014	 	December
31, 2014	 	
Number of hotels in operation for at least 18 months	 	570	 	628	 	674	 	757	 	841	 	959	 	1,049	 	1,178	 	
RevPAR (RMB)	 	165	 	185	 	190	 	173	 	157	 	176	 	183	 	161	 	
Same-hotel RevPAR change (as a percentage)	 	1	 	0	 	1	 	1	 	-1	 	0	 	0	 	-3	 	
 
Financial Key Performance Indicators
 
Our financial key performance indicators consist of (i) revenues, (ii) operating costs and expenses, (iii) EBITDA and adjusted EBITDA, (iv) hotel income and (v) net cash provided by operating activities.
 
Revenues. We primarily derive our revenues from operations of our leased hotels and franchise and service fees from our manachised and franchised hotels. Our revenues are subject to a business tax of 5% and other related taxes. The following table sets forth the revenues generated by our leased and manachised and franchised hotels, both in absolute amount and as a percentage of total revenues for the periods indicated.
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	%	 	(RMB)	 	%	 	(RMB)	 	(US$)	 	%	 	
 	 	(In thousands except percentages)	 	
Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Leased hotels	 	3,069,431	 	89.8	 	3,870,887	 	87.6	 	4,522,431	 	728,884	 	85.9	 	
Manachisedand franchised hotels	 	349,847	 	10.2	 	549,958	 	12.4	 	742,797	 	119,717	 	14.1	 	
Total revenues	 	3,419,278	 	100.0	 	4,420,845	 	100.0	 	5,265,228	 	848,601	 	100.0	 	
Less: Business tax and related taxes	 	194,751	 	5.7	 	252,216	 	5.7	 	300,500	 	48,432	 	5.7	 	
Net revenues	 	3,224,527	 	94.3	 	4,168,629	 	94.3	 	4,964,728	 	800,169	 	94.3	 	
 
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·                 Leased Hotels. In 2012, we generated revenues of RMB3,069.4 million from our leased hotels, which accounted for 89.8% of our total revenues for the year. In 2013, we generated revenues of RMB3,870.9 million from our leased hotels, which accounted for 87.6% of our total revenues for the year. In 2014, we generated revenue of RMB4,522.4 million (US$728.9 million) from our leased hotels, which accounted for 85.9% of our total revenues for the year. We expect that revenues from our leased hotels will continue to constitute a substantial majority of our total revenues in the foreseeable future. As of December 31, 2014, we had 29 leased hotels under development.
 
For our leased hotels, we lease properties from real estate owners or lessors and we are responsible for hotel development and customization to conform to our standards, as well as for repairs and maintenance and operating costs and expenses of properties over the term of the lease. We are also responsible for all aspects of hotel operations and management, including hiring, training and supervising the hotel managers and employees required to operate our hotels and purchasing supplies. Our typical lease term ranges from ten to 20 years .  We typically enjoy an initial two- to six-month rent-free period. We generally pay fixed rent on a quarterly or biannual basis for the first three to five years of the lease term, after which we are generally subject to a 3% to 5% increase every three to five years.
 
Our revenues generated from leased hotels are significantly affected by the following two operating measures:
 
·                 The total number of room nights available from the leased hotels in our hotelgroup. The future growth of revenues generated from our leased hotels will depend significantly upon our ability to expand our hotel group into new locations in China and maintain and further increase our RevPAR at existing hotels. As of December 31, 2014, we had entered into binding contracts with lessors of 29 properties for our leased hotels, which are currently under development.
 
·                 RevPAR achieved by our leased hotels, which represents the product of average daily rates and occupancy rates. To understand factors impacting our RevPAR, please see “— Non-financial Key Performance Indicators — RevPAR.”
 
·                 Manachisedand FranchisedHotels. In 2012, we generated revenues of RMB349.8 million from ourmanachisedand franchised hotels, which accounted for 10.2% of our total revenues for the year, among which the revenues we generated from our franchised hotels were insignificant. In 2013, we generated revenues of RMB550.0 million from our manachised and franchised hotels, which accounted for 12.4% of our total revenues for the year.  In 2014, we generated revenues of RMB742.8 million (US$119.7 million) from our manachised hotels, which accounted for 14.1% of our total revenues for the year. We expect that revenues from our manachised hotels will increase in the foreseeable future as we add more manachised hotels in our hotel group. We also expect the number of our manachised hotels as a percentage of the total number of hotels in our network to increase. As of December 31, 2014, we had 644 manachised hotels under development.
 
·                 Manachised Hotels. Our franchisees either lease or own their hotel properties and also invest in the renovation of their properties according to our product standards. Our franchisees are typically responsible for the costs of developing and operating the hotels, including renovating the hotels according to our standards, and all of the operating expenses. We directly manage our manachised hotels and impose the same standards for all manachised hotels to ensure product quality and consistency across our hotel network. Management services we provide to our franchisees for our manachised hotels generally include hiring, appointing and training hotel managers, managing reservations, providing sales and marketing support, conducting quality assurance inspections and providing other operational support and information. We believe our manachise model has enabled us to quickly and effectively expand our geographical coverage and market share in a less capital-intensive manner through leveraging the local knowledge and relationships of our franchisees.
 
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We collect fees from our franchisees and do not bear the loss, if any, incurred by our franchisees. They are also responsible for all costs and expenses related to hotel construction and refurbishing. Our franchise and management agreements for manachised hotels typically run for an initial term of eight to ten years. Our franchisees are generally required to pay us a one-time franchise fee ranging between RMB100,000 and RMB300,000. In general, we charge a monthly franchise fee of approximately 5% of the total revenues generated by each manachised hotel. We also collect from franchisees a reservation fee for using our central reservation system and a membership registration fee to service customers who join our HuaZhu Club loyalty program at the manachised hotels. Furthermore, we employ and appoint hotel managers for the manachised hotels and charge the franchisees a monthly fee for such service.
 
·                 FranchisedHotels.Under our typical franchise agreements,we provide our franchisees with training, central reservation, sales and marketing support, quality assurance inspections and other operational support and information services. We do not appoint hotel managers for our franchised hotels. We collect fees from the franchisees of our franchised hotels and do not bear any loss or share any profit incurred or realized by our franchisees.
 
Operating Costs and Expenses. Our operating costs and expenses consist of costs for hotel operation, selling and marketing expenses, general and administrative expenses and pre-opening expenses. The following table sets forth the components of our operating costs and expenses, both in absolute amount and as a percentage of net revenues for the periods indicated.
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	%	 	(RMB)	 	%	 	(RMB)	 	(US$)	 	%	 	
 	 	(In thousands except percentages)	 	
Net revenues	 	3,224,527	 	100.0	 	4,168,629	 	100.0	 	4,964,728	 	800,169	 	100.0	 	
Operating costs and expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Hotel operating costs:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Rents	 	916,357	 	28.4	 	1,255,663	 	30.1	 	1,543,651	 	248,791	 	31.1	 	
Utilities	 	215,768	 	6.7	 	273,314	 	6.5	 	323,837	 	52,193	 	6.5	 	
Personnel costs	 	505,773	 	15.7	 	638,511	 	15.3	 	788,973	 	127,159	 	15.9	 	
Depreciation and amortization	 	337,162	 	10.5	 	453,062	 	10.9	 	558,833	 	90,068	 	11.3	 	
Consumables, food and beverage	 	333,245	 	10.3	 	391,715	 	9.4	 	454,795	 	73,300	 	9.2	 	
Others	 	145,597	 	4.5	 	169,401	 	4.1	 	207,938	 	33,514	 	4.1	 	
Total hotel operating costs	 	2,453,902	 	76.1	 	3,181,666	 	76.3	 	3,878,027	 	625,025	 	78.1	 	
Selling and marketing expenses	 	102,814	 	3.2	 	138,129	 	3.3	 	187,435	 	30,209	 	3.8	 	
General and administrative expenses	 	224,111	 	7.0	 	284,756	 	6.8	 	342,128	 	55,141	 	6.9	 	
Pre-opening expenses	 	230,690	 	7.2	 	211,284	 	5.1	 	186,325	 	30,030	 	3.8	 	
Total operating costs and expenses	 	3,011,517	 	93.5	 	3,815,835	 	91.5	 	4,593,915	 	740,405	 	92.6	 	
 
·                 Hotel Operating Costs. Our hotel operating costs consistprimarilyof costs and expenses directly attributable to the operation of our leased and manachised hotels. Leased hotel operating costs primarily include rental payments and utility costs for hotel properties, compensation and benefits for our hotel-based employees, costs of hotel room consumable products and depreciation and amortization of leasehold improvements. Manachised hotel operating costs primarily include compensation and benefits for manachised hotel managers and other limited number of employees directly hired by us, which are recouped by us in the form of monthly service fees. We anticipate that our hotel operating costs in absolute amount will increase as we continue to open new hotels. Our hotel operating costs as a percentage of our total revenue may change from period to period mainly driven by three factors, namely, (i) the hotel operating costs as a percentage of revenues from our leased hotels, (ii) the operating costs, mainly personnel costs, as a percentage of revenues from the manachised and franchised business and (iii) the weight of manachised and franchised hotels in our revenue mix.
 
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·                 Selling and Marketing Expenses. Our selling and marketing expenses consist primarily of commissions to travel intermediaries, expenses for marketing programs and materials, bank fees for processing bank card payments, and compensation and benefits for our sales and marketing personnel, including personnel at our centralized reservation center. We expect that our selling and marketing expenses will increase as our sales increase and as we further expand into new geographic locations and promote our brands.
 
·                 General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation and benefits for our corporate and regional office employees and other employees who are not sales and marketing or hotel-based employees, travel and communication expenses of our general and administrative staff, costs of third-party professional services, and office expenses for corporate and regional office. We expect that our general and administrative expenses will increase in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business.
 
·                 Pre-opening Expenses. Our pre-opening expenses consist primarily of rents, personnel cost, and other miscellaneous expenses incurred prior to the opening of a new leased hotel.
 
Our pre-opening expenses are largely determined by the number of pre-opening hotels in the pipeline and the rental fees incurred during the development stage. Landlords typically offer a two- to six-month rent-free period at the beginning of the lease. Nevertheless, rental is booked during this period on a straight-line basis. Therefore, a portion of pre-opening expenses is non-cash rental expenses. The following table sets forth the components of our pre-opening expenses for the periods indicated.
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(In thousands)	 	
Rents	 	191,538	 	186,656	 	163,155	 	26,296	 	
Personnel cost	 	15,488	 	8,700	 	7,217	 	1,163	 	
Others	 	23,664	 	15,928	 	15,953	 	2,571	 	
Total pre-opening expenses	 	230,690	 	211,284	 	186,325	 	30,030	 	
 
Our hotel operating costs, selling and marketing expenses and general and administrative expenses include share-based compensation expenses. The following table sets forth the allocation of our share-based compensation expenses, both in absolute amount and as a percentage of total share-based compensation expenses, among the cost and expense items set forth below.
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	%	 	(RMB)	 	%	 	(RMB)	 	(US$)	 	%	 	
 	 	(In thousands except percentages)	 	
Hotel operating costs	 	2,592	 	12.4	 	4,948	 	16.2	 	6,830	 	1,101	 	21.4	 	
Selling and marketing expenses	 	1,031	 	5.0	 	973	 	3.2	 	939	 	151	 	2.9	 	
General and administrative expenses	 	17,214	 	82.6	 	24,547	 	80.6	 	24,168	 	3,895	 	75.7	 	
Total share-based compensation expenses	 	20,837	 	100.0	 	30,468	 	100.0	 	31,937	 	5,147	 	100.0	 	
 
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We adopted our 2007 Global Share Plan and 2008 Global Share Plan in February and June 2007, respectively, expanded the 2008 Global Share Plan in October 2008, adopted the 2009 Share Incentive Plan in September 2009, and expanded the 2009 Share Incentive Plan in October 2009, August 2010 and March 2015. We have granted options to purchase 2,838,795, nil and 319,480 of our ordinary shares in 2012, 2013 and 2014, respectively. We granted 2,554,405, 979,950 and 1,167,100 shares of restricted stock in 2012, 2013 and 2014, respectively. We recognized share-based compensation as compensation expenses in the statement of comprehensive income based on the fair value of equity awards on the date of the grant, with the compensation expenses recognized over the period in which the recipient is required to provide service to us in exchange for the equity award. Share-based compensation expenses have been categorized as hotel operating costs, general and administrative expenses, or selling and marketing expenses, depending on the job functions of the grantees.
 
EBITDA and Adjusted EBITDA. We use earnings before interest income, interest expense, tax expense (benefit) and depreciation and amortization, or EBITDA, a non-GAAP financial measure, to assess our results of operations before the impact of investing and financing transactions and income taxes. Given the significant investments that we have made in leasehold improvements, depreciation and amortization expense comprises a significant portion of our cost structure. We believe that EBITDA is widely used by other companies in the lodging industry and may be used by investors as a measure of our financial performance. We also use Adjusted EBITDA, another non-GAAP measure, which is defined as EBITDA before share-based compensation expenses. We present Adjusted EBITDA because it is used by our management to evaluate our operating performance. We also believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.
 
The following tables present certain unaudited financial data and selected operating data as of and for the years ended December 31, 2012, 2013 and 2014:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(In thousands)	 	
Non-GAAP Financial Data	 	 	 	 	 	 	 	 	 	
EBITDA(1) 	 	562,899	 	841,781	 	969,546	 	156,263	 	
Adjusted EBITDA(1) 	 	583,736	 	872,249	 	1,001,483	 	161,410	 	

(1)        We believe that EBITDA is a useful financial metric to assess our operating and financial performance before the impact of investing and financing transactions and income taxes. Given the significant investments that we have made in leasehold improvements, depreciation and amortization expense comprises a significant portion of our cost structure. In addition, we believe that EBITDA is widely used by other companies in the lodging industry and may be used by investors as a measure of our financial performance. We believe that EBITDA will provide investors with a useful tool for comparability between periods because it eliminates depreciation and amortization expense attributable to capital expenditures. We also use Adjusted EBITDA, which is defined as EBITDA before share-based compensation expenses. We present Adjusted EBITDA because it is used by our management to evaluate our operating performance. We also believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies. Our calculation of EBITDA and Adjusted EBITDA does not deduct foreign exchange loss which was RMB2.0 million in 2012, or foreign exchange gain, which was RMB0.02 million in 2013, or foreign exchange loss, which was RMB0.2 million (US$0.04 million) in 2014. The presentation of EBITDA and Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business.
 
The use of EBITDA and Adjusted EBITDA has certain limitations. Depreciation and amortization expense for various long-term assets, income tax, interest income and interest expense have been and will be incurred and are not reflected in the presentation of EBITDA. Share-based compensation expenses have been and will be incurred and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, EBITDA or Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation and amortization, interest income, interest expense, income tax expense, share-based compensation expenses, capital expenditures and other relevant items both in our reconciliations to the U.S. GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance.
 
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The terms EBITDA and Adjusted EBITDA are not defined under U.S. GAAP, and neither EBITDA nor Adjusted EBITDA is a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our EBITDA or Adjusted EBITDA may not be comparable to EBITDA or Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA or Adjusted EBITDA in the same manner as we do.
 
A reconciliation of EBITDA and Adjusted EBITDA to net income, which is the most directly comparable U.S. GAAP measure, is provided below:
 
 	 	For the Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(in thousands)	 	
Net income attributable to our company	 	174,887	 	279,858	 	307,348	 	49,536	 	
Interest income	 	(14,554	)	(6,856	)	(23,162	)	(3,733	)	
Interest expense	 	822	 	813	 	1,533	 	247	 	
Tax expense	 	54,169	 	104,820	 	113,105	 	18,229	 	
Depreciation and amortization	 	347,575	 	463,146	 	570,722	 	91,984	 	
EBITDA (Non-GAAP)	 	562,899	 	841,781	 	969,546	 	156,263	 	
Share-based compensation expenses	 	20,837	 	30,468	 	31,937	 	5,147	 	
Adjusted EBITDA (Non-GAAP)	 	583,736	 	872,249	 	1,001,483	 	161,410	 	
 
Hotel Income. Hotel income is the difference between net revenues and hotel operating costs. Hotel income was RMB1,086.7 million (US$175.1 million) for 2014, compared with RMB987.0 million for 2013. The year-over-year increase was mainly due to higher hotel income generated from our expanded network of manachised hotels and mature leased hotels.
 
We track Hotel Income separately for our leased hotels, as well as formanachisedand franchisedhotels. The hotel income from the leased hotels was RMB548.4 million (US$88.4 million) for the full year of 2014. The hotel income from the manachised and franchised hotels was RMB538.3 million (US$86.7 million) during the full year of 2014, or accounting for approximately 50% of total hotel income.
 
Net Cash Provided by Operating Activities. Our net cash provided by operating activities is primarily attributable to our net income, add-backs from share-based compensation expenses, depreciation and amortization and deferred rent and changes in deferred revenue and prepaid rent. We use net cash provided by operating activities to assess the cash generation capability and return profile of our business. Compared with EBITDA, net cash provided by operating activities neutralizes the impact of straight-line based rental accounting and timing difference in certain areas of revenue recognition when assessing the return profile and profitability of our business. We had net cash provided by operating activities of RMB715.7 million, RMB1,070.2 million and RMB1,454.0 million (US$234.3 million) in 2012, 2013 and 2014, respectively. The year-over-year increase was mainly due to the expansion of our hotel network. We expect that our net cash provided by operating activities will continue to increase as we further expand our hotel network.
 
Taxation
 
We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments we make are not subject to withholding tax in the Cayman Islands.
 
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China Lodging HK and Starway HK are subject to a profit tax at the rate of 16.5% on assessable profit determined under relevant Hong Kong tax regulations. To date, neither China Lodging HK nor Starway HK has been required to pay profit tax as it had no assessable profit.
 
China Lodging Singapore is subject to Singapore corporate income tax at a rate of 17% in 2014. No Singapore profit tax has been provided as we have not had assessable profit that was earned in or derived from Singapore during the years presented.
 
Prior to January 1, 2008, our PRC operating entities were governed by the Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises and the Provisional Regulations of the PRC on Enterprises Income Tax , or the old EIT Laws. Pursuant to the old EIT Laws, PRC enterprises were generally subject to the enterprise income tax at a statutory rate of 33% (30% state income tax plus 3% local income tax). On March 16, 2007, the National People’s Congress passed the Enterprise Income Tax Law, and on December 6, 2007, the PRC State Council issued the  Implementation Regulations of the Enterprise Income Tax Law , both of which became effective on January 1, 2008. The Enterprise Income Tax Law and its Implementation Regulations, or the EIT Law, applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises.
 
The EIT Law imposes a withholding tax of 10% on dividends distributed by a PRC foreign-invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered 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. Holding companies in Hong Kong, for example, are subject to a 5% withholding tax rate. The Cayman Islands, where we are incorporated, does not have such a tax treaty with China. Thus, dividends paid to us by our subsidiaries in China may be subject to the 10% withholding tax if we are considered a “non-resident enterprise” under the EIT Law. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — It is unclear whether we will be considered as a PRC ‘resident enterprise’ under the EIT Law, and depending on the determination of our PRC ‘resident enterprise’ status, dividends paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide income, and holders of our ADSs or ordinary shares may be subject to PRC withholding tax on dividends paid by us and gains realized on their transfer of our ADSs or ordinary shares.”
 
Critical Accounting Policies
 
We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We continue to evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
 
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
 
Revenue Recognition
 
Our revenuesfrom leased hotelsare derived from operations of leased hotels, including the rental of rooms, food and beverage sales and souvenir sales. Revenues are recognized when rooms are occupied and food and beverages and souvenirs are sold.
 
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Our revenues frommanachised and franchised hotels are derived fromfranchise agreements where the franchisees are required to pay (i) an initial one-time franchise fee and (ii) an ongoing franchise fee, the major part of which is charged at approximately 5.0% of the revenues of the manachised and franchised hotels.  Aside from the revenue-based fee, we also charge a central reservation system usage fee and a monthly system maintenance and support fee which are recognized when services are provided. The one-time franchise fee, which is non-refundable, is recognized when the manachised and franchised hotel opens for business, and we have fulfilled all our commitments and obligations, including assistance to the franchisees in property design, leasehold improvement construction project management, systems installation, personnel recruiting and training. Ongoing franchise fees are recognized when the underlying service revenues are recognized by the franchisees’ operations. The system maintenance, support fee and central reservation system usage fee is recognized when services are provided.
 
We account for hotel manager fees related to the hotels under themanachise program as revenues. Pursuant to the franchise agreements under the manachise program, we charge the franchisees fixed hotel manager fees to cover the manachised hotel managers’ salaries, social welfare benefits and certain other out-of-pocket expenses that we incur on behalf of the manachised hotels. The hotel manager fee is recognized as revenue monthly. During the years ended December 31, 2012, 2013 and 2014, the hotel manager fees that were recognized as revenue were RMB72.1 million, RMB116.9 million and RMB166.6 million (US$26.9 million), respectively.
 
Revenues derived from selling membership cards at leased, manachisedand franchisedhotels are earned on a straight-line basis over the estimated membership life which is estimated to be approximately two to five years dependent upon membership level. Membership life is estimated at the time the membership card is sold based on management’s industry experience and data accumulated by our company, including usage frequency and actual attrition. These estimates are updated regularly to reflect actual membership retention.
 
Long-Lived Assets
 
We evaluate the carrying value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur, such as receiving government zoning notification. Inherent in reviewing the carrying amounts of the long-lived assets is the use of various estimates. First, our management must determine the usage of the asset. Impairment of an asset is more likely to be recognized where and to the extent our management decides that such asset may be disposed of or sold. Assets must be tested at the lowest level, generally the individual hotel, for which identifiable cash flows exist. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. If our ongoing estimates of future cash flows are not met, we may have to record additional impairment charges in future accounting periods. Our estimates of cash flow are based on the current regulatory, social and economic climates where we conduct our operations as well as recent operating information and budgets for our business. These estimates could be negatively impacted by changes in laws and regulations, economic downturns, or other events affecting various forms of travel and access to our hotels.
 
Goodwill Impairment
 
Goodwill is required to be tested for impairment at least annually or more frequently if events or changes in circumstances indicate that these assets might be impaired. If we determine that the carrying value of our goodwill has been impaired, the carrying value will be written down.
 
We complete a two-step goodwill impairment test. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying value of a reporting unit exceeds its fair value, we would perform the second step in our assessment process and record an impairment loss to earnings to the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value. We estimate the fair value of each reporting unit through internal analysis and external valuations, which utilize income and market valuation approaches through the application of capitalized earnings and discounted cash flow. These valuation techniques are based on a number of estimates and assumptions, including the projected future operating results of the reporting unit, appropriate discount rates and long-term growth rates. The significant assumptions regarding our future operating performance are revenue growth rates, discount rates and terminal values. If any of these assumptions changes, the estimated fair value of our reporting unit will change, which could affect the amount of goodwill impairment charges, if any.
 
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Customer Loyalty Program
 
HuaZhu Club is our customer loyalty program. Our members can earn points based on spending at our leased, manachised and franchised hotels and participating in certain marketing programs. Points can be redeemed for room night awards and gifts within two years after the points are earned. Management determines the fair value of the future redemption obligation based on certain formulas which project the future point redemption behavior based on historical experience, including an estimate of points that will never be redeemed, and an estimate of the points that will eventually be redeemed as well as the cost to be incurred in conjunction with the point redemption. The actual expenditure may differ from the estimated liability recorded. Prior to February 28, 2009, we recorded estimated liabilities for all points earned by our customers as we did not have sufficient historical information to determine point forfeitures or breakage. Based on our accumulated knowledge on reward points redemption and expiration, we began to apply historical redemption rates in estimating the costs of points earned from March 1, 2009 onwards.
 
Income Taxes
 
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, we recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and tax basis of assets and liabilities. A valuation allowance is required to reduce the carrying amounts of deferred tax assets if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on a more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss in the China’s limited service hotel industry, tax planning strategy implemented and other tax planning alternatives. Prior to 2009, we had significant operating losses attributable to rapid expansion and related pre-opening costs incurred. As of December 31, 2012,  2013 and 2014, we had deferred tax assets generated from net loss carryforward after valuation allowance of RMB35.3 million, RMB39.4 million and RMB50.5 million (US$8.1 million), respectively. We expect many of our hotels that were put in operation since 2010 will become mature and generate sufficient taxable profit to utilize the substantial portion of the net loss carryforward. If our operating results are less than currently projected and there is no objectively verifiable evidence to support the realization of our deferred tax asset, additional valuation allowance may be required to further reduce our deferred tax asset. The reduction of the deferred tax asset could increase our income tax expenses and have an adverse effect on our results of operations and tangible net worth in the period in which the allowance is recorded.
 
The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Our tax rate is based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. For interim financial reporting, we estimate the annual tax rate based on projected taxable income for the full year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the year progresses, we refine the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining our effective tax rate and in evaluating its tax positions.
 
We recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense.
 
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Share-Based Compensation
 
The costs of share based payments are recognized in our consolidated financial statements based on their grant-date fair value over the vesting. We determine fair value of our share options as of the grant date using binomial option pricing model and the fair value of our nonvested restricted stocks as of the grant date based on the fair market value of the underlying ordinary shares. Under the binomial option pricing model, we make a number of assumptions regarding fair value including the expected price multiple at which employee are likely to exercise stock options, the expected volatility of our future ordinary share price, the risk free interest rate and the expected dividend yield. In July 2012, we granted (i) nonvested restricted stocks with market conditions, the fair value of which was determined using a Monte Carlo simulation, and (ii) options and nonvested restricted stocks with performance conditions.Determining the value of our share-based compensation expense in future periods also requires the input of subjective assumptions around estimated forfeitures of the underlying shares and likely future performance. The compensation expenses for the awards with performance conditions based upon our judgment of likely future performance and may be adjusted in future periods depending on actual performance. The compensation expenses for the awards with market conditions are recognized during the requisite service period, even if the market condition is never satisfied. We estimate our forfeitures based on past employee retention rates, our expectations of future retention rates, and we will prospectively revise our forfeiture rates based on actual history. We estimate our future performance based on our historical results. Our compensation charges may change based on changes to our assumptions.
 
Results of Operations
 
The following table sets forth a summary of our consolidated results of operations, both in absolute amount and as a percentage of net revenues for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report.
 
We have grown rapidly since we began our current business of operating and managing a multi-brand hotelgroup in 2007. Our relatively limited operating history makes it difficult to predict our future operating results. We believe that the year-to-year comparison of operating results should not be relied upon as being indicative of future performance.
 
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 	 	For the Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	RMB	 	%	 	RMB	 	%	 	(RMB)	 	(US$)	 	%	 	
 	 	(In thousands except percentages)	 	
Consolidated Statementof Comprehensive Income Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Leased hotels	 	3,069,431	 	95.2	 	3,870,887	 	92.9	 	4,522,431	 	728,884	 	91.1	 	
Manachisedand franchisedhotels	 	349,847	 	10.8	 	549,958	 	13.2	 	742,797	 	119,717	 	15.0	 	
Total revenues	 	3,419,278	 	106.0	 	4,420,845	 	106.1	 	5,265,228	 	848,601	 	106.1	 	
Less: Business tax and related taxes	 	194,751	 	6.0	 	252,216	 	6.1	 	300,500	 	48,432	 	6.1	 	
Net revenues	 	3,224,527	 	100.0	 	4,168,629	 	100.0	 	4,964,728	 	800,169	 	100.0	 	
Operating costs and expenses(1):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Hotel operating costs	 	2,453,902	 	76.1	 	3,181,666	 	76.3	 	3,878,027	 	625,025	 	78.1	 	
Selling and marketing expenses	 	102,814	 	3.2	 	138,129	 	3.3	 	187,435	 	30,209	 	3.8	 	
General and administrative expenses	 	224,111	 	7.0	 	284,756	 	6.8	 	342,128	 	55,141	 	6.9	 	
Pre-opening expenses	 	230,690	 	7.2	 	211,284	 	5.1	 	186,325	 	30,030	 	3.8	 	
Total operating costs and expenses	 	3,011,517	 	93.5	 	3,815,835	 	91.5	 	4,593,915	 	740,405	 	92.6	 	
Other operating income	 	6,723	 	0.3	 	27,750	 	0.6	 	18,551	 	2,990	 	0.5	 	
Income from operations	 	219,733	 	6.8	 	380,544	 	9.1	 	389,364	 	62,754	 	7.9	 	
Interest income	 	14,554	 	0.5	 	6,856	 	0.2	 	23,162	 	3,733	 	0.5	 	
Interest expenses	 	822	 	0.1	 	813	 	0.0	 	1,533	 	247	 	0.0	 	
Other income	 	2,208	 	0.1	 	1,907	 	0.0	 	4,749	 	765	 	0.1	 	
Foreign exchange gain (loss)	 	(2,000	)	(0.1	)	21	 	0.0	 	(246	)	(39	)	0.0	 	
Income before income taxes	 	233,673	 	7.2	 	388,515	 	9.3	 	415,496	 	66,966	 	8.5	 	
Income tax expense	 	54,169	 	1.6	 	104,820	 	2.5	 	113,105	 	18,229	 	2.3	 	
Net income	 	179,504	 	5.6	 	283,695	 	6.8	 	302,391	 	48,737	 	6.2	 	
Less: net income (loss) attributable to noncontrolling interest	 	4,617	 	0.2	 	3,837	 	0.1	 	(4,957	)	(799	)	(0.1	)	
Net income attributable toChina Lodging Group, Limited	 	174,887	 	5.4	 	279,858	 	6.7	 	307,348	 	49,536	 	6.3	 	

Note: (1) Includes share-based compensation expenses as follows:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(In thousands)	 	
Share-based compensation expenses	 	20,837	 	30,468	 	31,937	 	5,147	 	
 
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
 
Revenues. Our net revenues increased by19.1% from RMB4,168.6 million in 2013 to RMB4,964.7 million (US$800.2 million) in 2014.
 
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·                 Leased Hotels. Revenues from our leased hotels increased by16.8% from RMB3,870.9 million in 2013 to RMB4,522.4 million (US$728.9 million) in 2014. This increase was primarily due to our continued expansion of leased hotels from 565 hotels and 65,836 hotel rooms as of December 31, 2013 to 611 hotels and 72,335 hotel rooms as of December 31, 2014. The slight increase of RevPAR for our leased hotels from RMB168 in 2013 to RMB169 (US$27.2) in 2014 was also attributable to the increase.
 
·                 Manachisedand FranchisedHotels. Revenues from ourmanachisedand franchisedhotels increased by35.1% from RMB550.0 million in 2013 to RMB742.8 million (US$119.7 million) in 2014. This increase was primarily due to our continued expansion of manachised hotels from 835 hotels and 84,437 hotel rooms as of December 31, 2013 to 1,376 hotels and 136,689 hotel rooms as of December 31, 2014, partially offset by a decrease in RevPAR. RevPAR for our manachised hotels decreased from RMB159 in 2013 to RMB153 (US$24.7) in 2014, primarily due to the relatively soft overall market and the city mix shifting toward lower-tier cities, in particular a higher percentage of newly-opened hotels in lower-tier cities as a result of our accelerated growth in manachise business nationwide.
 
Operating Costs and Expenses. Our total operating costs and expenses increased by20.4% from RMB3,815.8 million in 2013 to RMB4,593.9 million (US$740.4 million) in 2014.
 
·                 Hotel Operating Costs. Our hotel operating costs increased by21.9% from RMB3,181.7 million in 2013 to RMB3,878.0 million (US$625.0 million) in 2014. This increase was primarily due to our expansion of leased hotels from 565 hotels as of December 31, 2013 to 611 hotels as of December 31, 2014. The increase in personnel costs, part of hotel operating costs, was also attributable to our expansion of manachised hotels from 835 hotels as of December 31, 2013 to 1,376 hotels as of December 31, 2014. Our hotel operating costs as a percentage of net revenues increased from 76.3% in 2013 to 78.1% in 2014. The year-over-year increase in the percentage was mainly attributed to the deceased RevPAR and the increased number of midscale leased hotels in the ramping-up stage.
 
·                 Selling and Marketing Expenses. Our selling and marketing expenses increased by35.7% from RMB138.1 million in 2013 to RMB187.4 million (US$30.2 million) in 2014. Our selling and marketing expenses as a percentage of net revenues increased from 3.3% in 2013 to 3.8% in 2014. The increase was mainly due to various promotional activities to attract new Huazhu Club members in 2014. The members of our HuaZhu Club increased from more than 15 million to more than 31 million.  The increase was also attributable to the increased reservations for new brands through third-party agencies in 2014.
 
·                 General and Administrative Expenses. Our general and administrative expenses increased from RMB284.8 million in 2013 to RMB342.1 million (US$55.1 million) in 2014, primarily as a result of our business expansion, IT development and brand portfolio growth. Our general and administrative expenses as a percentage of net revenues remained relatively stable in 2013 and 2014.
 
·                 Pre-opening Expenses. Our pre-opening expenses decreased from RMB211.3 million in 2013 to RMB186.3 million (US$30.0 million) in 2014. Our pre-opening expenses as a percentage of net revenues decreased from 5.1% in 2013 to 3.8% in 2014. These decreases were primarily due to fewer leased hotels opened and in the pipeline in 2014 and enlarged revenue base.
 
Other Operating Income.Our other operating income was RMB27.8 million and RMB18.6 million (US$3.0 million)in 2013 and 2014, respectively, which mainly includes government grants and gain or loss arising from the write-off of property and equipment associated with the leased hotels demolished due to government zoning.
 
Income from Operations. As a result of the foregoing, we had income from operations of RMB389.4 million (US$62.8 million) in 2014, compared to income from operations of RMB380.5 million in 2013.
 
Interest Income (Expense), Net. Our net interest income was RMB21.7 million(US$3.5 million)in 2014. Our interest income was RMB23.2 million (US$3.7 million) in 2014, and our interest expense was RMB1.5 million (US$0.2 million). Our net interest income was RMB6.0 million in 2013. Our interest income was RMB6.9 million in 2013, and our interest expense was RMB0.9 million. The increase in interest income from 2013 to 2014 was primarily due to the significant increase in our cash and cash equivalents.
 
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Other Income (Expense). Our other income wasRMB1.9 million and RMB4.7 million (US$0.8 million)in 2013 and 2014, respectively, primarily attributable to reimbursement from the depositary of our ADSs for certain expenses incurred by us in respect of the ADR program established pursuant to the deposit agreement and profit sharing in our joint ventures.
 
Foreign ExchangeLoss or Gain. We had foreign exchange loss of RMB0.2 million (US$0.04 million) in 2014, compared to foreign exchange gain of RMB0.02 million in 2013. Our foreign exchange loss in 2014 was primarily attributable to the depreciation of the Renminbi against the U.S. dollar in 2014.
 
Income Tax Expense. Our tax expensesincreased from RMB104.8 million in 2013 to RMB113.1 million (US$18.2 million) in 2014, primarily due to the increase in our income before income taxes from RMB388.5 million in 2013 to RMB415.5 million (US$67.0 million) in 2014. Our effective tax rate in 2014 was 27.2%, which remained relatively stable compared to 27.0% in 2013.
 
Net Income Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interest represents joint venture partners’ share of our net income based on their equity interest in the leased hotels owned by the joint ventures. Net income attributable to noncontrolling interest was RMB3.8 million in 2013. Net loss attributable to noncontrolling interest was RMB5.0 million (US$0.8 million) in 2014, primarily due to losses of some joint ventures.
 
Net Income Attributable to China Lodging Group, Limited. As a result of the foregoing, we had net income attributable to China Lodging Group, Limited of RMB307.3 million (US$49.5 million) in 2014 compared to net income attributable to China Lodging Group, Limited of RMB279.9 million in 2013.
 
EBITDA and Adjusted EBITDA. EBITDA (non-GAAP) was RMB969.5 million (US$156.3 million) in 2014, compared with EBITDA of RMB841.8 million in 2013. Adjusted EBITDA (non-GAAP) increased from RMB872.2 million in 2013 to RMB1,001.5 million (US$161.4 million) in 2014. This change was primarily due to the expansion of our hotel network.
 
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
 
Revenues. Our net revenues increased by29.3% from RMB3,224.5 million in 2012 to RMB4,168.6 million in 2013.
 
·                 Leased Hotels. Revenues from our leased hotels increased by26.1% from RMB3,069.4 million in 2012 to RMB3,870.9 million in 2013. This increase was primarily due to our continued expansion of leased hotels from 465 hotels and 54,694 hotel rooms as of December 31, 2012 to 565 hotels and 65,836 hotel rooms as of December 31, 2013, partially offset by a decrease in RevPAR.  RevPAR for our leased hotels decreased from RMB173 in 2012 to RMB168 in 2013 primarily due to a decrease in the occupancy rate of our leased hotels from 94% in 2012 to 90% in 2013, which was mainly as a result of the relatively soft overall market, partially offset by an increase in the average daily rate of our leased hotels from RMB184 in 2012 to RMB187 in 2013.
 
·                 Manachisedand FranchisedHotels. Revenues from ourmanachisedand franchisedhotels increased by57.2% from RMB349.8 million in 2012 to RMB550.0 million in 2013. This increase was primarily due to our continued expansion of manachised hotels from 516 hotels and 53,381 hotel rooms as of December 31, 2012 to 835 hotels and 84,437 hotel rooms as of December 31, 2013, partially offset by a decrease in RevPAR. RevPAR for our manachised hotels decreased from RMB163 in 2012 to RMB159 in 2013 primarily due to the relatively soft overall market and the city mix shifting toward lower-tier cities.
 
Operating Costs and Expenses. Our total operating costs and expenses increased by 26.7% from RMB3,011.5 million in 2012 to RMB3,815.8 million in 2013.
 
·                 Hotel Operating Costs. Our hotel operating costs increased by29.7% from RMB2,453.9 million in 2012 to RMB3,181.7 million in 2013. This increase was primarily due to our expansion of leased hotels from 465 hotels as of December 31, 2012 to 565 hotels as of December 31, 2013. The increase in personnel costs, part of hotel operating costs, was also attributable to our expansion of manachised hotels from 516 hotels as of December 31, 2012 to 835 hotels as of December 31, 2013. Our hotel operating costs as a percentage of net revenues increased slightly from 76.1% in 2012 to 76.3% in 2013.
 
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·                 Selling and Marketing Expenses. Our selling and marketing expenses increased by34.3% from RMB102.8 million in 2012 to RMB138.1 million in 2013. The increase was in line with our expansion of business and increase of revenues. Our selling and marketing expenses as a percentage of net revenues increased slightly from 3.2% in 2012 to 3.3% in 2013.
 
·                 General and Administrative Expenses. Our general and administrative expenses increased from RMB224.1 million in 2012 to RMB284.8 million in 2013, primarily as a result of our business expansion. Our general and administrative expenses as a percentage of net revenues decreased slightly from 7.0% in 2012 to 6.8% in 2013.
 
·                 Pre-opening Expenses. Our pre-opening expenses decreased from RMB230.7 million in 2012 to RMB211.3 million in 2013, primarily due to decrease in leased hotel openings and shortened development cycle in 2013. Our pre-opening expenses as a percentage of net revenues decreased from 7.2% in 2012 to 5.1% in 2013 to primarily due to our expanded revenue base.
 
Other Operating Income.Our other operating income was RMB6.7 million and RMB27.8 million in 2012 and 2013, respectively, which mainly includes government grants and reimbursements from government zoning. The prior period amounts have been reclassified from an offset to general and administrative expenses to conform to the current year presentation.
 
Income from Operations. As a result of the foregoing, we had income from operations of RMB380.5 million in 2013 compared to income from operations of RMB219.7 million in 2012.
 
Interest Income (Expense), Net. Our net interest income was RMB6.0 million in 2013. Our interest income was RMB6.9 million in 2013, and our interest expense was RMB0.9 million. Our net interest income was RMB13.8 million in 2012. Our interest income was RMB14.6 million in 2012, and our interest expense was RMB0.8 million. The decrease in interest income from 2012 to 2013 was primarily due to the decrease in the average balance of our cash and cash equivalents.
 
Other Income (Expense). Our other income was RMB2.2 million andRMB1.9 millionin2012 and2013, respectively, primarily attributable to reimbursement from the depositary of our ADSs for certain expenses incurred by us in respect of the ADR program established pursuant to the deposit agreement.
 
Foreign ExchangeLoss or Gain. We had foreign exchange gain of RMB0.02 million in 2013 compared toforeign exchange loss of RMB2.0 million in 2012. Our foreign exchange loss in 2012 was primarily attributable to the depreciation of the Renminbi against the U.S. dollar in the first half of 2012.
 
Income Tax Expense. Our tax expensesincreased from RMB54.2 million in 2012 to RMB104.8 million in 2013, primarily due to the increase in our income before income taxes from RMB233.7 million in 2012 to RMB388.5 million in 2013 and the increase in our effective tax rate. Our effective tax rate increased from 23.2% in 2012 to 27.0% in 2013, primarily because the benefit of the tax holiday that we enjoyed decreased in 2013.
 
Net Income Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interest represents joint venture partners’ share of our net income based on their equity interest in the leased hotels owned by the joint ventures. Net income attributable to noncontrolling interest decreased from RMB4.6 million in 2012 to RMB3.8 million in 2013, primarily due to increased loss in some new joint ventures in 2013.
 
Net Income Attributable to China Lodging Group, Limited. As a result of the foregoing, we had net income attributable to China Lodging Group, Limited of RMB279.9 million in 2013 compared to net income attributable to China Lodging Group, Limited of RMB174.9 million in 2012.
 
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EBITDA and Adjusted EBITDA. EBITDA (non-GAAP) was RMB841.8 million in 2013, compared with EBITDA of RMB562.9 million in 2012. Adjusted EBITDA (non-GAAP) increased from RMB583.7 million in 2012 to RMB872.2 million in 2013. This change was primarily due to the expansion of our hotel network.
 
Outstanding Indebtedness
 
In March 2012, we entered intoacredit facility with the Industrial and Commercial Bank of China under which we can draw down up to RMB500.0 million, subject to adjustment, by May 21, 2015 with the final tranche of repayment due in March 2017. The interest rate for each draw down is established on the draw-down date and is adjusted annually, based on the loan interest rate stipulated by the People’s bank of China for the corresponding period.  As of December 31, 2012, we had drawn down this credit facility of RMB1.0 million and repaid RMB1.0 million and RMB100.0 million of this credit facility expired. As of December, 31, 2013, we had drawn down nil and had available credit facility of RMB399.0 million for future borrowing. As of December, 31, 2014, we had drawn down nil and had available credit facility of RMB399.0 million (US$64.3 million) for future borrowing. The weighted average interest rate for borrowings drawn under such credit was 6.9% for the year ended December 31, 2012.
 
In September 2012, we entered into a three-year revolving credit facility with China Merchants Bank under which we can borrow up to RMB300.0 million by October 9, 2015. As of December 31, 2012, 2013 and 2014, we had drawn down this credit facility of nil, RMB104.5 million and nil and repaid nil, RMB104.5 million and nil, respectively. The weighted average interest rate for borrowings drawn under such credit facility was 6.0% for the year ended December 31, 2013. In December 2013, we renewed the bank credit facility under which we can borrow up to RMB500.0 million by December 11, 2016. The interest rate for this credit facility was determined on the draw-down date. A letter of guarantee of RMB0.7 million (US$0.1 million) was issued under this credit facility in 2013, and RMB499.3 million (US$80.5 million) was available for future borrowing as of December 31, 2014.
 
In December 2012, we entered into a thirty-month credit facility with Luso International Banking Ltd. under which we can borrow up to US$10.0 million by April 5, 2013. The interest rate for each draw-down is established on the draw-down date and is based on the twelve-Month London Interbank Offered Rate on the draw-down date plus a margin of 2.7%. Each draw-down will be guaranteed by a letter of guarantee or a stand-by letter of credit. As of December 31, 2013, we had drawn down US$0.2 million and repaid US$0.2 million and the credit facility had expired. The weighted average interest rate for borrowings drawn under such credit facility was 3.54% for the year ended December 31, 2013.
 
In December 2013, we entered into a one-year entrusted loan agreement with a subsidiary of Ctrip.com International, Ltd., or Ctrip, and the China Construction Bank Corporation, Shanghai Minhang Subbranch, pursuant to which we can borrow up to RMB300.0 million for a period from January 6, 2014 to January 5, 2015. The interest rate of this loan is 5.4%. According to a guarantee letter between Ctrip and us, if the loan is in default, we shall settle the unpaid principal and interest with a number of our ordinary shares at market price. As of December 31, 2014, we had drawn down RMB300.0 million (US$48.4 million) and repaid RMB300.0 million (US$48.4 million). The weighted average interest rate was 5.4% for the year ended December 31, 2014.
 
5.B. Liquidity and Capital Resources
 
Our principal sources of liquidity have been cash generated from operating activities, our sale of preferred shares, ordinary shares and convertible notes through private placements, our initial public offering and borrowings from PRC commercial banks. Our cash and cash equivalents consist of cash on hand and liquid investments which have maturities of three months or less when acquired and are unrestricted as to withdrawal or use. As of December 31, 2014, we had entered into binding contracts with lessors of 29 properties for our leased hotels under development. As of December 31, 2014, we expected to incur approximately RMB930.9 million of capital expenditures in connection with certain recently completed leasehold improvements and to fund the leasehold improvements of these 29 leased hotels. We intend to fund this planned expansion with our operating cash flow, our cash balance and our credit facilities.
 
We have been able to meet our working capital needs, and we believe that we will be able to meet our working capital needs for at least the next 12 months with our operating cash flow, existing cash balance and our credit facilities.
 
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The following table sets forth a summary of our cash flows for the periods indicated:
 
 	 	For the Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	(US$)	 	
 	 	(in thousands)	 	
Net cash provided by operating activities	 	715,720	 	1,070,169	 	1,454,015	 	234,345	 	
Net cash used in investing activities	 	(1,068,130	)	(1,152,248	)	(1,063,186	)	(171,355	)	
Net cash provided by financing activities	 	19,895	 	30,646	 	21,683	 	3,495	 	
Effect of exchange rate changes on cash and cash equivalents	 	758	 	(976	)	(1,082	)	(175	)	
Net increase (decrease) in cash and cash equivalents	 	(331,757	)	(52,409	)	411,430	 	66,310	 	
Cash and cash equivalents at the beginning of the year	 	781,601	 	449,844	 	397,435	 	64,055	 	
Cash and cash equivalents at the end of the year	 	449,844	 	397,435	 	808,865	 	130,365	 	
 
Operating Activities
 
In 2012, 2013 and 2014, we financed our operating activities primarily through cash generated from operations. We currently anticipate that we will be able to meet our needs to fund operations in the next 12 months with operating cash flow.
 
Net cash provided by operating activities amounted to RMB1,454.0 million(US$234.3 million)in 2014, primarily attributable to (i) our net income of RMB302.4 million (US$48.7 million) in 2014, (ii) an add-back of RMB570.7 million (US$92.0 million) in depreciation and amortization in 2014, (iii) an add-back of RMB182.6 million (US$29.4 million) in deferred rent because rental accrued on a straight-line basis exceeded rental paid out of our contractual liabilities, and (iv) an increase of RMB253.6 million (US$40.9 million) in deferred revenue primarily attributable to one-time membership fees in connection with our HuaZhu Club loyalty program as well as advances received from customers and franchisees, partially offset by an increase of other current assets of RMB42.4 million (US$6.8 million) and an increase of RMB21.6 million (US$3.5 million) in prepaid rent.
 
Net cash provided by operating activities amounted to RMB1,070.2 million in 2013, primarily attributable to (i) our net income of RMB283.7 million in 2013, (ii) an add-back of RMB463.1 million in depreciation and amortization in 2013, (iii) an add-back of RMB187.2 million in deferred rent because rental accrued on a straight-line basis exceeded rental paid out of our contractual liabilities, and (iv) an increase of RMB115.8 in deferred revenue primarily attributable to one-time membership fees in connection with our HuaZhu Club loyalty program as well as advances received from customers and franchisees, partially offset by an increase of other assets of RMB50.2 million and an increase of RMB42.3 million in prepaid rent.
 
Net cash provided by operating activities amounted to RMB715.7 million in 2012, primarily attributable to (i) our net income of RMB179.5 million in 2012, (ii) an add-back of RMB347.6 million in depreciation and amortization in 2012, (iii) an add-back of RMB143.9 million in deferred rent because rental accrued on a straight-line basis exceeded rental paid out of our contractual liabilities, (iv) an increase of RMB90.5 million in deferred revenue primarily attributable to one-time membership fees in connection with our HuaZhu Club loyalty program as well as advances received from customers and franchisees, and (v) an increase of RMB93.2 million in prepaid rent, which partially offset factors (i) to (iv).
 
Net cash provided by operating activities increased from RMB1,070.2 million in 2013 to RMB1,454.0 million(US$234.3 million) in 2014, primarily due to (i) an increase in the add back of our depreciation and amortization from RMB463.1 million in 2013 to RMB570.7 million (US$92.0 million) in 2014, (ii) an increase in deferred revenue from RMB115.8 million in 2013 to RMB253.6 million (US$40.9 million) in 2014 and (iii) an increase in our net income from to RMB283.7 million in 2013 to RMB302.4 million (US$48.7 million) in 2014.
 
Net cash provided by operating activities increased from RMB715.7 million in 2012 to RMB1,070.2 million in 2013, primarily due to (i) an increase in the add-back of our depreciation and amortization from RMB347.6 million in 2012 to RMB463.1 million in 2013, (ii) an increase in our net income from to RMB179.5 million in 2012 to RMB283.7 million in 2013 and (iii) an increase in deferred revenue from RMB90.5 million in 2012 to RMB115.8 million in 2013.
 
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Investing Activities
 
Our cash used in investing activities in 2014 is primarily related to our leasehold improvements, purchase of equipment, fixtures and software used in leased hotels and acquisition of hotels and other investments, such as our investments in Quanjude and GOOAGOO. In 2012, 2013 and 2014, we experienced net cash outflows from investing activities.
 
Net cash used in investing activities decreased from RMB1,152.2 million in 2013 to RMB1,063.2 million (US$171.4 million) in 2014, primarily due to a decrease in our purchases of property and equipment from RMB1,072.6 million in 2013 to RMB930.9 million (US$150.0 million) in 2014.
 
Net cash used in investing activities increased from RMB1,068.1million in 2012 to RMB1,152.2 million in 2013, primarily due to (i) an increase in our purchases of property and equipment from RMB998.1 million in 2012 to RMB1,072.6 million in 2013 and (ii) an increase in our purchase of long-term investments from RMB28.1 million in 2012 to RMB54.7 million in 2013, partially offset by an increase in the amount received as a result of government zoning of RMB15.0 million in 2013.
 
Financing Activities
 
Our major financing activities since 2012 consist of loans with PRC commercial banks and entrusted loans from related party. Net cash provided by financing activities decreased from RMB30.6 million in 2013 to RMB21.7 million (US$3.5 million) in 2014. Net cash provided by financing activities in 2014 primarily consisted of (i) proceeds of RMB300.0 million (US$48.4 million) from short-term debt, (ii) proceeds of RMB21.0 million (US$3.4 million) from issuance of ordinary shares upon exercise of options (iii) excess tax benefit from share-based compensation in the amount of RMB11.7 million (US$1.9 million), partially offset by (i) repayment of RMB300.0 million (US$48.4 million) from short-term debt, (ii) dividend paid to noncontrolling interest holders in the amount of RMB5.4 million (US$0.9 million), (iii) acquisition of noncontrolling interest in the amount of RMB4.1 million (US$0.7 million) and (iv) repayment of funds advanced from noncontrolling shareholders in the amount of RMB1.6 million (US$0.3 million).
 
Net cash provided by financing activitiesincreased from RMB19.9 million in 2012 to RMB30.6 million in 2013. Net cash provided by financing activities in 2013 primarily consisted of (i) proceeds of RMB105.8 million from short-term debt, (ii) proceeds of RMB28.1 million from issuance of ordinary shares upon exercise of options and (iii) excess tax benefit from share-based compensation in the amount of RMB14.6 million, partially offset by (i) the repayment of RMB105.8 million from short-term debt, (ii) the repayment of funds advanced from noncontrolling shareholders in the amount of RMB6.6 million, (iii) acquisition of noncontrolling interest in the amount of RMB4.2 million and (iv) dividend paid to noncontrolling interest holders in the amount of RMB3.2 million.
 
Restrictions on Cash Transfers to Us
 
We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid to us by our subsidiaries. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Pursuant to laws applicable to entities incorporated in the PRC, our 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); the other fund appropriations are at the subsidiaries’ discretion. These reserve funds can only be used for the specific purposes of enterprise expansion, staff bonus and welfare, and are not distributable as cash dividends. In addition, due to restrictions on the distribution of share capital from our PRC subsidiaries, the share capital of our PRC subsidiaries is considered restricted. As a result of the PRC laws and regulations, as of December 31, 2014, approximately RMB2,181.6 million (US$351.6 million) was not available for distribution to us by our PRC subsidiaries in the form of dividends, loans, or advances.
 
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Furthermore, under regulations of the SAFE, the Renminbi is not convertible into foreign currencies for capital account items, such as loans, repatriation of investments and investments outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made.
 
The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises.” Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body.” See “Item 10. Additional Information — E. Taxation — PRC Taxation.”
 
The EIT Law imposes a withholding tax of 10% on dividends distributed by a foreign-invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered 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. Holding companies in Hong Kong, for example, are subject to a 5% withholding tax rate. The Cayman Islands, where we are incorporated, does not have such a tax treaty with China. Thus, dividends paid to us by our subsidiaries in China may be subject to the 10% withholding tax if we are considered a “non-resident enterprise” under the EIT Law.
 
The EIT Law provides that PRC “resident enterprises” are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. Therefore, if we are treated as a PRC “resident enterprise,” we will be subject to PRC income tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations, although dividends distributed from our PRC subsidiaries to us would be exempt from the PRC dividend withholding tax, since such income is exempted under the EIT Law to a PRC resident recipient.
 
We do not expect any of such restrictions or taxes to have a material impact on our ability to meet our cash obligations.
 
Capital Expenditures
 
Our capital expenditures were incurred primarily in connection with leasehold improvements, investments in furniture, fixtures and equipment and technology, information and operational software. Our capital expenditures totaled RMB1,200.0 million, RMB1,097.9 million and RMB928.8million (US$149.7 million) in 2012, 2013 and 2014, respectively. Our capital expenditures in 2014 consist of RMB918.3 million (US$148.0 million) in property and equipment and RMB10.5 million (US$1.7 million) in software.  We will continue to make capital expenditures to meet the expected growth of our operations and expect our cash balance, cash generated from our operating activities and credit facilities will meet our capital expenditure needs in the foreseeable future.
 
5.C. Research and Development, Patents and Licenses, etc.
 
See “Item 4. Information on the Company — B. Business Overview — Hotel Information Platform and Operational Systems” and “— Intellectual Property”.
 
5.D. Trend Information
 
One of our wholly owned subsidiaries, Hanting Technology (Suzhou) Co., Ltd., as a recognized software development entity located at Suzhou Industrial Park in Suzhou of PRC, is entitled to a two-year exemption and three-year 50% reduction starting from the first profit making year after absorbing all prior years’ tax losses. Hanting Technology (Suzhou) Co., Ltd. has entered into the first tax profitable year for the year ended December 31, 2011. Therefore, the five-year period for favourable tax treatment is from January 1, 2011 to December 31, 2015. Starting from 2016, Hanting Suzhou will be subject to statutory income tax rate of 25% unless the subsidiary becomes qualified for other preferential tax treatment. The aggregate amount and per share effect of tax holidays were as follows:
 
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 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
 	 	(RMB)	 	(RMB)	 	(RMB)	 	
 	 	(in thousands,
except per share data)	 	
Aggregate amount	 	28,139	 	12,721	 	9,131	 	
Per share effect—basic	 	0.12	 	0.05	 	0.04	 	
Per share effect—diluted	 	0.11	 	0.05	 	0.04	 	
 
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the current fiscal year that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
 
5.E. Off-Balance Sheet Arrangements
 
Other than operating lease and purchase obligations set forth in the table under “Item 5. Operating and Financial Review and Prospects — F. Tabular Disclosure of Contractual Obligations,” we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
 
5.F. Tabular Disclosure of Contractual Obligations
 
The following table sets forth our contractual obligations as of December 31, 2014:
 
 	 	Payment Due in the year ending December 31,	 	Payment Due	 	
 	 	Total	 	2015	 	2016	 	2017	 	2018	 	2019	 	Thereafter	 	
 	 	(In RMB millions)	 	
Operating Lease Obligations	 	20,225	 	1,791	 	1,845	 	1,836	 	1,793	 	1,753	 	11,207	 	
Purchase Obligations	 	115	 	115	 	—	 	—	 	—	 	—	 	—	 	
Total	 	20,340	 	1,906	 	1,845	 	1,836	 	1,793	 	1,753	 	11,207	 	
 
Our operating lease obligations related to our obligations under lease agreements with lessors of our leased hotels. Our purchase obligations primarily consisted of contractual commitments in connection with leasehold improvements and installation of equipment for our leased hotels.
 
As of December 31, 2014, we recorded uncertain tax benefits of approximately RMB8.3 million associated with the interests on intercompany loans.
 
5.G. Safe Harbor
 
This annual report on Form 20-F contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
 
·                 our anticipated growth strategies, including developing new hotels at desirable locations in a timely and cost-effective manner and launching a new hotel brand;
 
·                 our future business development, results of operations and financial condition;
 
·                 expected changes in our revenues and certain cost or expense items;
 
·                 our ability to attract customers and leverage our brand; and
 
·                 trends and competition in the lodging industry.
 
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In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “future,” “is/are likely to,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Item 3. Key Information — D. Risk Factors” and elsewhere in this annual report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
 
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. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.
 
ITEM 6.                                               DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
6.A. Directors and Senior Management
 
The following table sets forth the name, age and position of each of our directors and executive officers as of the date of this annual report. The business address of all of our directors and executive officers is No. 2266 Hongqiao Road, Changning District, Shanghai 200336, People’s Republic of China.
 
Directors and Executive Officers	 	Age	 	Position/Title	
Qi Ji	 	48	 	Founder, Executive Chairman of the Board of Directors, Chief Executive Officer	
John Jiong Wu	 	47	 	Co-founder, Independent Director	
Tong Tong Zhao	 	48	 	Co-founder, Independent Director	
Min Fan	 	49	 	Director	
Qionger Jiang	 	38	 	Director	
Jian Shang	 	47	 	Independent Director	
Joseph Chow	 	51	 	Independent Director	
Min (Jenny) Zhang	 	41	 	President and Chief Financial Officer	
Hui Jin	 	37	 	Executive Vice President	
Hui Chen	 	48	 	Executive Vice President	
Yi (Sophia) Wu	 	39	 	Executive Vice President	
 
Qi Jiis our founder and has also served as the executive chairman of our board since February 2007. He also served as our chief executive officer from 2007 to August 2009 and returned to this role in January 2012. Mr. Ji has served on the board as a director for UBOX since June 2012. He co-founded Home Inns & Hotels Management Inc., or Home Inns, and served as its chief executive officer from January 2001 to January 2005. He also co-founded Ctrip, one of the largest online travel services providers in China, in 1999, acted as its chief executive officer and president until December 2001, and currently serves on Ctrip’s board as an independent director. Prior to founding Ctrip, Mr. Ji was the chief executive officer of Shanghai Sunflower High-Tech Group, which he founded in 1997. He headed the East China Division of Beijing Zhonghua Yinghua Intelligence System Co., Ltd. from 1995 to 1997. Mr. Ji received both his Master’s and Bachelor’s degrees from Shanghai Jiao Tong University.
 
John Jiong Wu, a co-founder of our company, has served as our director since January 2007. He is the founder and Managing Partner of F&H Fund Management Pte. Ltd. He served as the Venture Partner of Northern Light Venture Capital from 2008 to 2010 and was an angel investor and the Chief Technology Officer of Alibaba Group from 2000 to 2007. Prior to joining Alibaba Group, he worked as an engineer or manager in several companies in the Silicon Valley, including Oracle and Yahoo! Inc. Mr. Wu received his Bachelor of Science in Computer Science degree from the University of Michigan.
 
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Tong Tong Zhao, a co-founder of our company, has served as our director since February 2007. She also serves as a member of the board of directors of China Education & Technology Group Limited. She was the General Manager of Shanghai Asia-Tang Health Technology Development Co., Ltd. from 2004 to 2006, the General Manager of Shanghai Hong Ying Hi-Tech Co., Ltd. from 1999 to 2001, and the Deputy General Manager of Shanghai Xie Cheng Science and Technology Co., Ltd. from 1997 to 1998. Ms. Zhao received her Master of Science degree from Shanghai Jiao Tong University and obtained her Master of Business Administration degree from McGill University.
 
Min Fan has served as our director since March 2010. He is one of the co-founders of Ctrip and has served as the vice chairman of its board of directors since March 2013, as a member of its board of director since October 2006 and as its president since February 2009. Previously, Mr. Fan served as Ctrip’s chief executive officer from January 2006 to February 2013, as its chief operating officer from November 2004 to January 2006 and as its executive vice president from 2000 to November 2004. From 1997 to 2000, Mr. Fan was the chief executive officer of Shanghai Travel Service Company, a leading domestic travel agency in China. From 1990 to 1997, he served as the deputy general manager and in a number of other senior positions at Shanghai New Asia Hotel Management Company, which was one of the leading hotel management companies in China. In addition to his positions at Ctrip, Mr. Fan currently serves on the boards and compensation committees of PerfectEnergy International, Ltd., ChinaEdu Corporation and 99 Joyu Tourism Operating Group. Mr. Fan received his Master’s and Bachelor’s degrees from Shanghai Jiao Tong University. He also studied at the Lausanne Hotel Management School of Switzerland in 1995.
 
Qionger Jiang has served as our director since October 2014. Jiang has been acting as the chief executive officer and artistic director of SHANG XIA since 2008 and she is an international renowned designer. SHANG XIA is the first international famous Chinese luxury brand, in partnership with Hermes. Ms. Jiang received a Bachelor of Arts degree at designing school of Shanghai Tongji University, and continued her studies of furniture and interior design at the École nationale supérieure des Arts Décoratifs in Paris. In 2013, she also received “chevalier des arts et lettres” decoration from French president.
 
Jian Shanghas served as our independent director since May 2014. He has over 15 years of experience in corporate management and financial innovation. He served as Managing Director of UBS Global Asset Management and as chief executive officer of UBS SDIC Fund Management Company from 2006 to 2012. Prior to that, he served as chief executive officer of Yin Hua Fund Management Company, deputy chief executive officer of Hua An Fund Management Company, and head of strategic planning of Shanghai Stock Exchange respectively from 2001 to 2006. Previously, he was a deputy Division Director of China Securities Regulatory Commission from 1997 to 2000. Mr. Shang obtained his PhD in Finance and MA in Economics from University of Connecticut, and his Bachelor’s degree in engineering from Shanghai Jiao Tong University.
 
Joseph Chow has served as our independent director since August 2010. He has over 20 years of experience in corporate finance, financial advisory and management and has held senior executive and managerial positions in various public and private companies. Mr. Chow was recently a managing director of Moelis and Company and was previously a managing director at Goldman Sachs (Asia) LLP. Prior to that, he served as an independent financial consultant, as chief financial officer of Harbor Networks Limited, and as chief financial officer of China Netcom (Holdings) Company Limited. Prior to that, Mr. Chow served as the director of strategic planning of Bombardier Capital, Inc., as vice president of international operations of Citigroup and as the corporate auditor of GE Capital. Mr. Chow currently sits on the board as a director for Synutra International, Inc., a company listed on NASDAQ, and an independent non-executive director for Intime Department Store (Group) Co., Ltd., a company listed on the Stock Exchange of Hong Kong. Mr. Chow obtained a Bachelor of Arts degree in political science from Nanjing Institute of International Relations and a Master of Business Administration degree from the University of Maryland at College Park.
 
Min (Jenny) Zhang has served as our president since January 2015 andour chief financial officer since March 2008. She served as our chief strategic officer from November 2013 to January 2015. Prior to joining us, she served as the Finance Director of Eli Lilly (Asia) Inc., Thailand Branch and the Chief Financial Officer of ASIMCO Casting (Beijing) Company, Ltd. She also worked previously with McKinsey & Company, Inc. as a consultant. Ms. Zhang has served on the board as a director for Synutra International, Inc. since February 2011. She obtained her Master of Business Administration degree from Harvard Business School and received both Master’s and Bachelor’s degrees from the University of International Business and Economics.
 
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Hui Jinjoined us in 2005 and has served as director of our Development Department and Vice President of our Group, respectively. Mr. Jin is currently our Executive Vice President mainly responsible for overseeing the work of hotel development and construction, and franchise business. Prior to joining us, Mr. Jin worked with Home Inns & Hotels Management Inc. Mr. Jin received his Executive Master’s degree from China Europe International Business School and a Bachelor of Science degree in Psychology from the East China Normal University.
 
Hui Chenjoined us in 2014 and has served as our executive vice president of finance responsible for internal financial management. Ms. Chen has deep financial management expertise in the travel and hotel industries in China. Prior to joining us, Ms. Chen once served as the chief financial officer of Home Inns Group and the finance director of Ctrip.com. Ms. Chen obtained her Master degree in Management from Shanghai Jiaotong University.
 
Yi (Sophia) Wu joined us in 2015 and has served as our executive vice president of finance responsible for external reporting, investor relations, merger and acquisitions, investment and financing. Ms. Wu has more than 14 years of experience in corporate finance, SEC reporting, audit and merger and acquisitions with multinational companies. Her prior experience included merger and acquisitions transaction service and auditing at Deloitte & Touche, LLP New York Office, as well as reporting and analysis team at Goldman Sachs global headquarter in New York. She held a Master degree in accounting from State University of New York at Albany, and received her Bachelor degree in International Business Administration from Shanghai University of Finance and Economics. Ms. Wu is a Certified Public Accountant in the United States.
 
Employment Agreements
 
We have entered into an employment agreement with each of our named executive officers. Each of our named executive officers is employed for a specified time period, which will be automatically extended unless either we or the named executive officer gives prior notice to terminate such employment. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts, including but not limited to the conviction of a criminal offence and negligent or dishonest acts to our detriment. A named executive officer may terminate his or her employment at any time with a one-month prior written notice.
 
Each named executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence, and not to use, except as required in the performance of his or her duties in connection with the employment, any of our confidential information or trade secrets or the confidential or proprietary information of any third party received by us and for which we have confidential obligations. In addition, each named executive officer has agreed to be bound by non-competition restrictions. Specifically, each named executive officer has agreed not to, during his or her employment with us and for a period of two years following his or her termination with our company, be engaged as employee or in another capacity to participant directly or indirectly in any business that is in competition with ours. Each named executive officer also agrees to comply with all material applicable laws and regulations related to his or her responsibilities at our company as well as all material written corporate and business policies and procedures of our company.
 
6.B. Compensation
 
For the fiscal year ended December 31, 2014, the aggregate cash compensation and benefits that we paid to our directors and executive officers were approximately RMB7.5 million (US$1.2 million). No pension, retirement or similar benefits have been set aside or accrued for our executive officers or directors. We have no service contracts with any of our directors providing for benefits upon termination of employment.
 
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Share Incentive Plans
 
In February 2007, our board of directors and our shareholders adopted our 2007 Global Share Plan to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to selected employees, directors, and consultants and to promote the success of our business. Our 2007 Global Share Plan was subsequently amended in December 2007. Ten million ordinary shares may be issued under our amended and restated 2007 Global Share Plan, or the Amended and Restated 2007 Plan.
 
In June 2007, our board of directors and our shareholders adopted our 2008 Global Share Plan with the same purpose as our 2007 Global Share Plan. Our 2008 Global Share Plan was subsequently amended in October 2008. Seven million ordinary shares may be issued under our amended and restated 2008 Global Share Plan, or the Amended and Restated 2008 Plan.
 
In September 2009, our board of directors and our shareholders adopted our 2009 Share Incentive Plan with purposes similar to our 2007 Global Share Plan and 2008 Global Share Plan. Our 2009 Share Incentive Plan was subsequently amended in October 2009, August 2010 and March 2015. 43 million ordinary shares may be issued under our amended 2009 Share Incentive Plan, or the Amended 2009 Plan.
 
Plan Administration. The compensation committee appointed by our board administers all of our share incentive plans. Mr. Qi Ji has been delegated the authority to grant, in his sole discretion, option and restricted stock to be issued under our share incentive plans to any of our employees and consultants except for our directors and executive officers. The aggregate number of shares covered by any single grant he makes shall not exceed 500,000 ordinary shares.
 
Types of Awards. The following briefly describes the principal features of the various awards that may be granted under our Amended and Restated 2007 and 2008 Plans.
 
·                 Options. Each option agreement must specify the exercise price. The exercise price of an option must not be less than 100% of the fair market value of the underlying shares on the option grant date, and a higher percentage may be required. The term of an option granted under the Amended and Restated 2007 and 2008 Plans must not exceed ten years from the date the option is granted, and a shorter term may be required.
 
·                 Share Purchase Rights. A share purchase right is a right to purchase restricted stock. Each share purchase right under the Amended and Restated 2007 and 2008 Plans must be evidenced by a restricted stock purchase agreement between the purchaser and us. The purchase price will be determined by the administrator. The share purchase rights will automatically expire if not exercised by the purchaser within 30 days after the grant date.
 
The following briefly describes the principal features of the various awards that may be granted under our Amended 2009 Plan:
 
·                 Options. The purchase price per share under an option will be determined by a committee appointed by our board and set forth in the award agreement. The term of an option granted under the Amended 2009 Plan must not exceed ten years from the grant date, and a shorter term may be required.
 
·      Restricted Stock and Restricted Stock Units. An award of restricted stock is a grant of our ordinary shares subject to restrictions the committee appointed by our board may impose. A restricted stock unit is a contractual right that is denominated in our ordinary shares, each of which represents a right to receive the value of a share or a specified percentage of such value upon the terms and conditions set forth in the Amended 2009 Plan and the applicable award agreement.
 
·                 Other Stock-based Awards. The committee is authorized to grant other stock-based awards that are denominated or payable in or otherwise related to our ordinary shares such as stock appreciation rights and rights to dividends and dividend equivalents. Terms and conditions of such awards will be determined by the committee appointed by our board. Unless the awards are granted in substitution for outstanding awards previously granted by an entity that we acquired or combined, the value of the consideration for the ordinary shares to be purchased upon the exercise of such awards shall not be less than the fair market value of the underlying ordinary shares on the grant date.
 
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Vesting Schedule. As of the date of this annual report, we have entered into option agreements and restricted stock award agreements respectively under our Amended and Restated 2007 and 2008 Plans and our Amended 2009 Plan. Pursuant to our typical option agreement, 50% of the options granted shall vest on the second anniversary of the vesting commencement date specified in the corresponding option agreement, and 1/48 of the options shall vest each month thereafter over the next two years on the first day of each month, subject to the optionee’s continuing to provide services to us. Pursuant to each restricted stock award agreement, 50% of the restricted stock granted shall vest on the second anniversary of the vesting commencement date specified in the corresponding restricted stock award agreement, and 1/8 of the restricted stock shall vest each six-month period thereafter over the next two years on the last day of each six-month period, subject to the grantee’s continuing to provide services to us. For certain grants, we may also apply different vesting schedules set forth in the relevant agreements between the grantees and us.
 
Termination of the Amended and Restated 2007 and 2008 Plans and the Amended 2009 Plan. Our Amended and Restated 2007 and 2008 Plans and our Amended 2009 Plan will terminate in 2017, 2018 and 2019, respectively. Our board of directors may amend, suspend, or terminate our Amended and Restated 2007 and 2008 Plans and our Amended 2009 Plan at any time. No amendment, alteration, suspension, or termination of these plans shall materially and adversely impair the rights of any participant with respect to an outstanding award, unless mutually agreed otherwise between the participant and the administrator.
 
The following tables summarize options and restricted stocks that we have granted to our directors and executive officers and to other individuals as a group under our share incentive plans as of December 31, 2014.
 
Name	 	Ordinary Shares
Underlying Options
Awarded	 	Exercise Price
(US$/Share)	 	Date of Grant	 	Date of Expiration	 	
Qi Ji	 	400,000	 	1.53	 	October 1, 2009	 	October 1, 2019	 	
 	 	436,348	(1)	2.76	 	July 17, 2012	 	July 17, 2018	 	
Tong Tong Zhao	 	100,000	 	1.53	 	October 1, 2009	 	October 1, 2019	 	
John Jiong Wu	 	100,000	 	1.53	 	October 1, 2009	 	October 1, 2019	 	
Min (Jenny) Zhang	 	*	 	1.40/	 	October 1, 2007/	 	October 1, 2017/	 	
 	 	 	 	1.53	 	November 20, 2009	 	November 20, 2019	 	
 	 	 	 	2.76	 	July 17, 2012	 	July 17, 2018	 	
Yunhang Xie**	 	*	 	2.76	 	July 17, 2012	 	July 17, 2018	 	
Hui Jin	 	*	 	0.50/
4.265	 	February 4, 2007/
March 31, 2011	 	February 4, 2017/
March 31, 2017	 	
Other individuals as a group	 	15,642,507	 	0.50-5.42	 	February 4, 2007 –
May 13, 2014	 	February 4, 2017 –
July 20, 2020	 	
 
Name	 	Ordinary Shares
Underlying Restricted
Stocks Awarded	 	Date of Grant	 	
Qi Ji	 	200,000	 	August 6, 2011	 	
 	 	897,880	(1)	July 17, 2012	 	
Min (Jenny) Zhang	 	*	 	July 17, 2012	 	
Yunhang Xie	 	*	 	July 17, 2012	 	
Joseph Chow	 	*	 	August 8, 2013	 	
Hui Jin	 	*	 	March 31, 2011/
July 2, 2012/
July 1,2013	 	
Jian Shang	 	*	 	May 5, 2014	 	
Qionger Jiang	 	*	 	October 30, 2014	 	
Other individuals as a group	 	2,882,984	 	February 7, 2011 – December 10, 2014	 	

*                Upon exercise of all options granted and vesting of restricted stocks granted, would beneficially own less than 1% of our outstanding ordinary shares.
 
**         Resigned as Chief Strategy Officer in April 2015.
 
(1)        The number of ordinary shares underlying options and restricted stocks awarded has been adjusted based on actual performance.
 
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6.C. Board Practices
 
General
 
Our board of directors currently consists of seven directors. Under our amended and restated memorandum and articles of association, which came into effect upon our initial public offering, our board of directors shall consist of at least two directors. Our directors shall be elected by the holders of ordinary shares. There is no shareholding requirement for qualification to serve as a member of our board of directors.
 
Our board of directors may exercise all the powers of the company to borrow money, mortgage or charge its undertaking, property and uncalled capital, and issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
 
We believe that each of Ms. Tong Tong Zhao, Mr. John Jiong Wu, Mr. Joseph Chow and Mr. Jian Shang are an “independent director” as that term is used in NASDAQ corporate governance rules.
 
Duties of Directors
 
Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association.
 
Terms of Directors and Executive Officers
 
Each of our directors holds office until a successor has been duly elected and qualified. All of our executive officers are appointed by and serve at the discretion of our board of directors.
 
Board Committees
 
We have established two committees under the board of directors — the audit committee and the compensation committee. We have adopted a charter for each of the board committees. Each committee’s members and functions are described below. We currently do not plan to establish a nominations committee. As a foreign private issuer, we are permitted to follow home country corporate governance practices under Rule 5615(a)(3) of the NASDAQ Marketplace Rules. This home country practice of ours differs from Rule 5605(e) of the NASDAQ Marketplace Rules regarding implementation of a nominations committee, because there are no specific requirements under Cayman Islands law on the establishment of a nominations committee.
 
Audit Committee
 
Our audit committee consists of three directors, namely Mr. John Jiong Wu, Mr. Joseph Chow and Mr. Jian Shang. All of these three directors satisfy the “independence” requirements of the NASDAQ Global Select Market and the SEC regulations. In addition, our board of directors has determined that Mr. Joseph Chow is qualified as an audit committee financial expert within the meaning of the SEC regulations. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
 
·                 selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
 
·                 setting clear hiring policies for employees or former employees of the independent auditors;
 
·                 reviewing with the independent auditors any audit problems or difficulties and management’s response;
 
·                 reviewing and approving all proposed related-party transactions;
 
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·                 discussing the annual audited financial statements with management and the independent auditors;
 
·                 discussing with management and the independent auditors major issues regarding accounting principles and financial statement presentations;
 
·                 reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments;
 
·                 reviewing with management and the independent auditors related-party transactions and off-balance sheet transactions and structures;
 
·                 reviewing with management and the independent auditors the effect of regulatory and accounting initiatives and actions;
 
·                 reviewing policies with respect to risk assessment and risk management;
 
·                 reviewing our disclosure controls and procedures and internal control over financial reporting;
 
·                 timely reviewing reports from the independent auditors regarding all critical accounting policies and practices to be used by our company, all alternative treatments of financial information within GAAP that have been discussed with management and all other material written communications between the independent auditors and management;
 
·                 establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
 
·                 annually reviewing and reassessing the adequacy of our audit committee charter;
 
·                 such other matters that are specifically delegated to our audit committee by our board of directors from time to time; and
 
·                 meeting separately, periodically, with management, the internal auditors and the independent auditors.
 
Compensation Committee
 
Our compensation committee consists of Mr. John Jiong Wu, Mr. Joseph Chow and Mr. Jian Shang. All of these three directors satisfy the “independence” requirements of NASDAQ Marketplace Rules and the SEC regulations. Our compensation committee assists the board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. The compensation committee is responsible for, among other things:
 
·                 reviewing and approving the compensation for our senior executives;
 
·                 reviewing and evaluating our executive compensation and benefits policies generally;
 
·                 reporting to our board of directors periodically;
 
·                 evaluating its own performance and reporting to our board of directors on such evaluation;
 
·                 periodically reviewing and assessing the adequacy of the compensation committee charter and recommending any proposed changes to our board of directors; and
 
·                 such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
 
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6.D. Employees
 
We had12,833, 14,102 and15,551 employees as of December 31, 2012, 2013 and 2014, respectively. As of December 31, 2014, 6,368 of our 15,551 employees were contracted through third-party human resources companies. We recruit and directly train and manage all of our employees. We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes. Our employees have not entered into any collective bargaining agreements.
 
6.E. Share Ownership
 
The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares, as of March 31, 2015 by:
 
·                 each of our directors and executive officers; and
 
·                 each person known to us to own beneficially more than 5% of our ordinary shares.
 
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the ordinary shares. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them.
 
 	 	Ordinary Shares Beneficially Owned(1)	 	
 	 	Number	 	%	 	
Directors and Executive Officers:	 	 	 	 	 	
Qi Ji	 	106,713,085	(2)	42.5	 	
Tong Tong Zhao	 	31,534,220	(3)	12.6	 	
John Jiong Wu	 	9,733,333	 	3.9	 	
Min Fan	 	22,049,446	(4)	8.8	 	
Qionger Jiang	 	*	 	*	 	
Jian Shang	 	*	 	*	 	
Joseph Chow	 	*	 	*	 	
Min (Jenny) Zhang	 	*	 	*	 	
Hui Jin	 	*	 	*	 	
Hui Chen	 	*	 	*	 	
Yi (Sophia) Wu	 	*	 	*	 	
All Directors and Executive Officers as a Group	 	140,929,472	(5)	56.1	%	
Principal Shareholders:	 	 	 	 	 	
Winner Crown Holdings Limited	 	74,009,449	(6)	29.4	 	
East Leader International Limited	 	31,258,412	(7)	12.6	 	
Ctrip.com International, Ltd.	 	22,049,446	(8)	8.8	 	

*                Less than 1%.
 
(1)        The number of ordinary shares outstanding in calculating the percentages for each listed person or group includes the ordinary shares underlying options held by such person or group exercisable within 60 days after March 31, 2015. Percentage of beneficial ownership of each listed person or group is based on (i) 251,306,303 ordinary shares outstanding as of March 31, 2015, including 2,303,872 shares of restricted stock and (ii) the ordinary shares underlying share options exercisable by such person within 60 days after March 31, 2015.
 
(2)        Includes (i) 74,009,449 ordinary sharesheldby Winner Crown Holdings Limited, or Winner Crown, a British Virgin Islands company wholly owned by Sherman Holdings Limited, a Bahamas company, which is in turn wholly owned by Credit Suisse Trust Limited, or CS Trustee. CS Trustee acts as trustee of the Ji Family Trust, of which Mr. Qi Ji and his family members are the beneficiaries, (ii) 709,052 ordinary shares issuable upon exercise of options held by Mr. Qi Ji that are exercisable within 60 days after March 31, 2015, (iii) 736,172 shares of restricted stock held by Mr. Ji, and (iv) 4,000,000 Restricted ADSs representing 16,000,000 ordinary shares, 5,153 ADSs representing 20,612 ordinary shares and 15,237,800 ordinary shares held by East Leader, over which Mr. Ji has voting power pursuant to a power of attorney dated November 27, 2014. East Leader is wholly owned by Perfect Will Holdings Limited, or Perfect Will, a British Virgin Islands company, which is in turn wholly owned by Asia Square Holdings Ltd., or Asia Square, as nominee for J. Safra Sarasin Trust Company (Singapore) Ltd., or Sarasin Trust. Sarasin Trust acts as trustee of the Tanya Trust, of which Ms. Tong Tong Zhao and her family members are the beneficiaries.
 
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(3)        Includes (i) 100,000 ordinary shares issuable upon exercise of options held by Ms. Tong Tong Zhao that are exercisable within 60 days after March 31, 2015, (ii) 43,952 ADSs representing 175,808 ordinary shares that Ms. Tong Tong Zhao purchased from open market; and (iii) 4,000,000 Restricted ADSs representing 16,000,000 ordinary shares, 5,153 ADSs representing 20,612 ordinary shares and 15,237,800 ordinary shares held by East Leader, a British Virgin Islands company wholly owned by Perfect Will, a British Virgin Islands company, which is in turn wholly owned by Asia Square, as nominee for Sarasin Trust. Sarasin Trust acts as trustee of the Tanya Trust, of which Ms. Tong Tong Zhao and her family members are the beneficiaries. Ms. Zhao is the sole director of East Leader.
 
(4)        Includes (i) 7,202,482 ordinary shares that Ctrip purchased from us, (ii) an aggregate of 11,646,964 of our ordinary shares that Ctrip purchased from the Chengwei Funds, CDH Courtyard Limited, the IDG Funds, the Northern Light Funds and Pinpoint Capital 2006 A Limited, and (iii) 800,000 ADSs representing 3,200,000 ordinary shares that Ctrip subscribed in our initial public offering. By virtue of being the vice chairman of the board of directors and president of Ctrip, Mr. Fan may be deemed to beneficially own an aggregate of 22,049,446 ordinary shares. Mr. Fan disclaims beneficial ownership of the shares beneficially owned by Ctrip except to the extent of his pecuniary interests therein. Mr. Fan’s business address is 99 Fu Quan Road, Shanghai 200335, People’s Republic of China.
 
(5)        Includes ordinary shares and ordinary shares issuable upon exercise of all of the options that are exercisable within 60 days after March 31, 2015 held by all of our directors and executive officers as a group.
 
(6)        Winner Crown is a British Virgin Islands company wholly owned by Sherman Holdings Limited, a Bahamas company, which is in turn wholly owned by Credit Suisse Trust Limited, or CS Trustee. CS Trustee acts as trustee of the Ji Family Trust, of which Mr. Qi Ji, our founder and executive chairman, and his family members, are the beneficiaries. Mr. Ji is the sole director of Winner Crown. The address of Winner Crown is Akara Bldg., 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands.
 
(7)        East Leader is a British Virgin Islands company wholly owned by Perfect Will Holdings Limited, a British Virgin Islands company, which is in turn wholly owned by Bank Sarasin Nominees (CI) Limited, as nominee for Sarasin Trust Company Guernsey Limited, or Sarasin Trust. Sarasin Trust acts as trustee of the Tanya Trust, of which Ms. Tong Tong Zhao and her family members, are the beneficiaries. Ms. Zhao is the sole director of East Leader. The address of East Leader is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
 
(8)        Includes (i) 7,202,482 ordinary shares that Ctrip purchased from us, (ii) an aggregate of 11,646,964 of our ordinary shares that Ctrip purchased from the Chengwei Funds, CDH Courtyard Limited, the IDG Funds, the Northern Light Funds and Pinpoint Capital 2006 A Limited, and (iii) 800,000 ADSs representing 3,200,000 ordinary shares that Ctrip subscribed in our initial public offering. Ctrip is a Cayman Islands company and its address is 99 Fu Quan Road, Shanghai 200335, People’s Republic of China.
 
As of March 31, 2015, we had 251,306,303 ordinary shares issued and outstanding. To our knowledge, we had only two record shareholders in the United States, including Citibank, N.A., which is the depositary of our ADS program and held approximately 52% of our total outstanding ordinary shares under our ADS program and the depositary of our restricted ADS program and held approximately 6.4% of our total outstanding ordinary shares under our restricted ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.
 
In addition, pursuant to a securities purchase agreement entered into between Accor and us in December 2014, we agreed to issue ordinary shares to Accor which will represent up to 10% of our ordinary shares outstanding after the issuance. See “Item 4. Information on the Company — A. History and Development of the Company.”
 
None of our existing shareholders has different voting rights from other shareholders since the closing of our initial public offering. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
 
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ITEM 7.                                               MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
7.A. Major Shareholders
 
Please refer to “Item 6. Directors, Senior Management and Employees — E. Share Ownership.”
 
7.B. Related Party Transactions
 
Transactions with Ctrip
 
We conduct transactions in the ordinary course of our business with Ctrip.com International, Ltd., or Ctrip, an entity in which Mr. Qi Ji, our founder, is a co-founder and independent director. Ctrip rendered reservation services to us to facilitate our customers in making reservations at our hotels from Ctrip’s hotel booking system. In 2012, 2013 and 2014, the aggregate commission fees of our leased hotels paid to Ctrip.com for its reservation services amounted to RMB10.9 million, RMB17.1 million and RMB19.2 million (US$3.1 million), respectively.
 
In a private placement before our initial public offering in 2010, Ctrip purchased 7,202,482 ordinary shares from us and an aggregate of 11,646,964 of our ordinary shares from the Chengwei Funds, CDH Courtyard Limited, the IDG Funds, the Northern Light Funds and Pinpoint Capital 2006 A Limited at a price equal to the initial public offering price per share. The investments by Ctrip were made pursuant to transactions exempt from registration under the Securities Act. In connection with these transactions, Ctrip was granted registration rights substantially similar to those granted to certain holders of our registrable securities under our amended and restated shareholders agreement. In addition, we have granted Ctrip the right to nominate one person to serve on our board as long as Ctrip and its affiliates continuously maintain (i) at least 5% of our total outstanding ordinary shares in the three years following the closing of our initial public offering and (ii) at least 8% of our total outstanding ordinary shares thereafter. In addition, Ctrip subscribed a total of 800,000 ADSs in our initial public offering at the initial public offering price. The ADSs issued and sold to Ctrip are on the same terms as the other ADSs being offered in our initial public offering.
 
On April 15, 2012, we entered into a definitive agreement to acquire a 51% equity interest of Starway HK from C-Travel International Limited, or C-Travel, a wholly-owned subsidiary of Ctrip. The base acquisition price was RMB17.3 million in cash, which was funded with cash on hand. The acquisition of the 51% equity interest in Starway HK became effective in May 2012. In addition, in December 2013, we acquired the remaining 49% equity interest of Starway HK from C-Travel. The acquisition price was RMB16.5 million, RMB4.2 million paid in cash in December 2013, RMB4.1 million paid in cash in 2014 and RMB8.2 million included in payables as of December 31, 2014. We will retain the Starway brand and we plan to continue to open new hotels under the Starway brand in the foreseeable future. We introduced the lease and manachise models to the Starway brand and gradually converted the franchised hotels Starway HK had before our acquisition to manachised or leased hotels where appropriate. We also terminated certain franchise agreements in cases where the franchised hotels could not meet the new Starway brand standards or the franchisees did not accept certain changes we made to the franchise agreement after the acquisition. We integrated most of Starway Hotels’ support functions into our existing corporate platform and significantly reduced the personnel and other operating costs for Starway HK.
 
In December 2013, we entered into a one-year entrusted loan agreement with a subsidiary ofCtrip, and the China Construction Bank Corporation, Shanghai Minhang Subbranch, pursuant to which we can borrow up to RMB300.0 million for a period from January 6, 2014 to January 5, 2015. The interest rate of this loan is 5.4%. As of December 31, 2014, we had drawn down RMB300.0 million (US$48.4 million) and repaid RMB300.0 million (US$48.4 million) and thus had nil balance under such entrusted loan agreement.
 
Investment in UBOX
 
One of our directors, Mr. John Jiong Wu, owns and controls Whistling Kite Limited. In April, 2012, one of our wholly owned subsidiaries, China Lodging HK, together with Whistling Kite Limited, entered into a definitive agreement with UBOX and certain other parties, to subscribe for preferred shares of UBOX. Pursuant to this definition agreement, China Lodging HK invested US$4.4 million in return for an approximately 4.3% equity interest in UBOX in June 2012. Mr. Qi Ji, our founder, executive chairman and chief executive officer, has served as a member of the board of directors of UBOX since June 2012. In December 2012, we purchased a convertible promissory note in the amount of US$1.3 million from UBOX. UBOX engages mainly in the vending machine business. In December 2013, we converted the principal of promissory note to 8,530,731 ordinary shares of UBOX. In August 2013, we purchased additional convertible promissory note of US$0.7 million from UBOX. The interest income of the convertible promissory note was RMB1.4 million and RMB0.5 million (US$0.1 million) for the year ended December 31, 2013 and 2014, respectively. UBOX is one of the largest vending machine operators in China. Under our cooperation with UBOX in operating vending machines, the service fee we’ve charged amounted to RMB0.8 million and RMB0.4 million (US$0.1 million) for the year ended December 31, 2013 and 2014, respectively.
 
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Transaction with Yibang
 
In May 2013, we acquired 30% equity interest in Lijiang Yibang Changchunteng Hotel Co., Limited (“Yibang”) and consider Yibang as a joint venture. In April 2014, we acquired additional 20% equity interest in Yibang and held its 50% equity interest as of December 31, 2014. We provided reservation, system maintenance and other support service to Yibang and charged service fee of RMB0.2 million and RMB0.5 million (US$0.1 million) for the year ended December 31, 2013 and 2014, respectively.
 
Transaction with Sheen Star
 
In November 2013, We entered into an investment agreement to acquire 50% equity interest in Suzhou Kangdu Property Co., Limited, or Kangdu, a real estate company, for RMB100 million. Concurrently we entered into a property transfer agreement with Kangdu to acquire the property developed by Kangdu for a purchase price of RMB175 million. Such property is scheduled to be transferred to us in October 2015. We injected RMB50 million in November 2013 and RMB30 million in January 2014 to Kangdu for the equity interest in Kangdu. In April 2014, we set up Sheen Star Group Limited, or Sheen Star, together with Mr. Qi Ji and an independent third party. We own 19.99% of the equity interest in Sheen Star and Mr. Qi Ji owns 50.01%. We then transferred our investment in Kangdu to Sheen Star for a consideration of RMB82.8 million, together with all of our rights and obligations under the property purchase agreement. We had not paid any consideration to Kangdu for the property before the transfer to Sheen Star.
 
Employment Agreements
 
See “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management — Employment Agreements” for a description of the employment agreements we have entered into with our senior executive officers.
 
Share Incentives
 
See “Item 6. Directors, Senior Management and Employees — B. Compensation of Directors and Executive Officers — Share Incentive Plans” for a description of share options we have granted to our directors, officers and other individuals as a group.
 
7.C. Interests of Experts and Counsel
 
Not applicable.
 
ITEM 8.                                               FINANCIAL INFORMATION
 
8.A. Consolidated Statements and Other Financial Information
 
8.A.1. See “Item 18. Financial Statements” for our audited consolidated financial statements.
 
8.A.2. See “Item 18. Financial Statements” for our audited consolidated financial statements, which cover the last three financial years.
 
8.A.3. See page F-2 for the report of our independent registered public accounting firm.
 
8.A.4. Not applicable.
 
8.A.5. Not applicable.
 
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8.A.6. Not applicable.
 
8.A.7.See “Item 4. Information on the Company — B. Business Overview — Legal and Administrative Proceedings.”
 
8.A.8. Dividend Policy
 
We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. We had never declared or paid dividends prior to December 31, 2014 and we do not have any plan to declare or pay any dividends in the near future.
 
Our board of directors has complete discretion in deciding whether to distribute dividends. Even if our board of directors decides to pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, 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.
 
If we pay any dividends, our ADS holders will be entitled to such dividends to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
 
We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid to us by our subsidiaries. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Pursuant to laws applicable to entities incorporated in the PRC, our 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); the other fund appropriations are at the subsidiaries’ discretion. These reserve funds can only be used for specific purposes of enterprise expansion, staff bonus and welfare, and are not distributable as cash dividends.
 
8.B. Significant Changes
 
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
 
ITEM 9.                                               THE OFFER AND LISTING
 
9.A. Offering and Listing Details
 
Our ADSs have been listed on the NASDAQ Global Select Market under the symbol “HTHT” since March 26, 2010. The table below sets forth, for the periods indicated, the high and low market prices on the NASDAQ Global Select Market for our ADSs.
 
 	 	High	 	Low	 	
2010 (from March 26)	 	US$	27.50	 	US$	13.49	 	
2011	 	 	24.47	 	 	12.00	 	
2012	 	 	17.55	 	 	10.51	 	
2013	 	 	32.29	 	 	14.75	 	
First quarter	 	 	19.93	 	 	15.36	 	
Second quarter	 	 	17.00	 	 	14.75	 	
Third quarter	 	 	20.48	 	 	15.38	 	
Fourth quarter	 	 	32.29	 	 	18.56	 	
2014	 	 	31.25	 	 	19.99	 	
First quarter	 	 	31.25	 	 	22.16	 	
Second quarter	 	 	25.99	 	 	19.99	 	
Third quarter	 	 	28.50	 	 	23.98	 	
Fourth quarter	 	 	28.38	 	 	22.57	 	
October	 	 	27.65	 	 	23.98	 	
November	 	 	28.38	 	 	24.11	 	
December	 	 	26.46	 	 	22.57	 	
2015	 	 	 	 	 	 	 	
First quarter	 	 	26.50	 	 	15.35	 	
January	 	 	26.50	 	 	20.53	 	
February	 	 	23.27	 	 	20.80	 	
March	 	 	21.40	 	 	15.35	 	
April (through April 16, 2015)	 	 	22.27	 	 	19.45	 	
 
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9.B. Plan of Distribution
 
Not applicable.
 
9.C. Markets
 
The principal trading market for our shares is the NASDAQ Global Select Market, on which our shares are traded in the form of ADSs.
 
9.D. Selling Shareholders
 
Not applicable.
 
9.E. Dilution
 
Not applicable.
 
9.F. Expenses of the Issue
 
Not applicable.
 
ITEM 10.  ADDITIONAL INFORMATION
 
10.A. Share Capital
 
Not applicable.
 
10.B. Memorandum and Articles of Association
 
We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association contained in our registration statement on Form F-1 (File No. 333-165247) originally filed with the Securities and Exchange Commission on March 5, 2010, as amended. Our shareholders adopted our amended and restated memorandum and articles of association by a special resolution on March 12, 2010 and further amended our amended and restated memorandum and articles of association by a special resolution on November 21, 2012.
 
10.C. Material Contracts
 
We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4, “Information on the Company” and in Item 7, “Major Shareholders and Related Party Transactions” or elsewhere in this annual report.
 
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10.D. Exchange Controls
 
See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Foreign Currency Exchange.”
 
10.E. Taxation
 
The following summary of the material Cayman Islands, People’s Republic of China and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws.
 
Cayman Islands Taxation
 
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 tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, brought to, or produced before a court of the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
 
PRC Taxation
 
PRC taxation on us
 
On March 16, 2007, the National People’s Congress, the Chinese legislature, passed the Enterprise Income Tax Law, and on December 6, 2007, the PRC State Council issued the  Implementation Regulations of the Enterprise Income Tax Law , both of which became effective on January 1, 2008. The Enterprise Income Tax Law and its Implementation Regulations, or the EIT Law, applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises. There is a transition period for enterprises, whether foreign-invested or domestic, which currently receive preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and gradually transfer to the new tax rate within five years after the effective date of the EIT Law. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires. Preferential tax treatments will continue to be granted to industries and projects that are strongly supported and encouraged by the state, and enterprises classified as “high and new technology enterprises strongly supported by the state” are entitled to a 15% enterprise income tax rate.
 
The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises.” The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body.” The State Administration of Taxation, or the SAT, issued the  Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies , or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled offshore incorporated enterprise is located in China, which include: (a) the location where senior management members responsible for an enterprise’s daily operations discharge their duties; (b) the location where financial and human resource decisions are made or approved by organizations or persons; (c) the location where the major assets and corporate documents are kept; and (d) the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. In addition, the SAT issued the  Administrative Measures on Income Taxes of Chinese-controlled Offshore Incorporated Resident Enterprises (Trial Implementation) , or Tax Trial Measures, on July 27, 2011, effective September 1, 2011, providing more guidance on the implementation of Circular 82. The Tax Trial Measures clarify matters including resident status determination, post-determination administration and competent tax authorities. Both Circular 82 and the Tax Trial Measures apply only to offshore enterprises controlled by PRC enterprises or PRC enterprise groups and not applicable to our case. But the determining criteria set forth in Circular 82 and the Tax Trial Measures may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals. As such, it is still unclear if the PRC tax authorities would determine that, notwithstanding our status as the Cayman Islands holding company of our operating business in China, we should be classified as a PRC “resident enterprise.”
 
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The EIT Law imposes a withholding tax of 10% on dividends distributed by a foreign-invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered 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. Holding companies in Hong Kong, for example, are subject to a 5% withholding tax rate if the holding companies are the beneficial owners of the dividends. The Cayman Islands, where we are incorporated, does not have such a tax treaty with China. Thus, dividends paid to us by our subsidiaries in China may be subject to the 10% withholding tax if we are considered a “non-resident enterprise” under the EIT Law.
 
The EIT Law provides that PRC “resident enterprises” are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. Therefore, if we are treated as a PRC “resident enterprise,” we will be subject to PRC income tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations, although dividends distributed from our PRC subsidiaries to us would be exempt from the PRC dividend withholding tax, since such income is exempted under the EIT Law to a PRC resident recipient. However, if we are required under the EIT Law to pay income tax on any dividends we receive from our subsidiaries, our income tax expenses will increase and the amount of dividends, if any, we may pay to our shareholders and ADS holders may be materially and adversely affected.
 
PRC taxation of our overseas shareholders
 
Under the EIT Law, PRC withholding tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to 10% PRC withholding tax if such gain is regarded as income derived from sources within the PRC. Therefore, if we are considered a PRC “resident enterprise,” dividends we pay to non-resident enterprise investors with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares may be considered as income derived from sources within the PRC and be subject to PRC withholding tax at a rate of 10% or lower, subject to the provisions of any applicable bilateral tax treaty. The double taxation treaty between the PRC and the United States, or the Treaty, does not reduce the 10% tax rate.
 
Moreover, non-resident individual investors are required to pay PRC individual income tax on dividends payable to the investors or any capital gains realized from the transfer of ADSs or ordinary shares if such gains are deemed income derived from sources within the PRC. Under the PRC Individual Income Tax Law, or IITL, non-resident individual refers to an individual who has no domicile in China and does not stay in the territory of China or who has no domicile in China and has stayed in the territory of China for less than one year. Pursuant to the IITL and its implementation rules, for purposes of the PRC capital gains tax, the taxable income will be the balance of the total income realized from the transfer of the ADSs or ordinary shares minus all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. Therefore, if we are considered as a PRC “resident enterprise” and dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares are considered income derived from sources within the PRC by relevant competent PRC tax authorities, such dividends and gains earned by non-resident individuals may also be subject to PRC withholding tax.
 
U.S. Federal Income Tax Considerations
 
The following is a description of the material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of ordinary shares or ADSs, but it does not purport to be a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to own such ordinary shares or ADSs. This discussion applies only to a U.S. Holder that holds ordinary shares or ADSs as capital assets for tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of the U.S. Holder’s particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), known as the Medicare contribution tax and tax consequences applicable to U.S. Holders subject to special rules, such as:
 
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·                 certain financial institutions;
 
·                 dealers or traders in securities who use a mark-to-market method of tax accounting;
 
·                 persons holding ordinary shares or ADSs as part of a straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the ordinary shares or ADSs;
 
·                 persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
 
·                 entities classified as partnerships for U.S. federal income tax purposes;
 
·                 tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”;
 
·                 persons that own or are deemed to own ten percent or more of our voting stock;
 
·                 persons who acquired our ordinary shares or ADSs pursuant to the exercise of an employee stock option or otherwise as compensation; or
 
·                 persons holding shares in connection with a trade or business conducted outside of the United States.
 
If an entity that is classified as a partnership for U.S. federal income tax purposes owns ordinary shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning ordinary shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the ordinary shares or ADSs.
 
This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations, all as of the date hereof, any of which is subject to change, possibly with retroactive effect. It is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms.
 
A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of ordinary shares or ADSs and is:
 
·                 a citizen or individual resident of the United States;
 
·                 a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
 
·                 an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
 
In general, a U.S. Holder who owns ADSs will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.
 
The U.S. Treasury has expressed concern that parties to whom American depositary shares are released before shares are delivered to the depositary, also referred to as pre-release, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of American depositary shares. These actions would also be inconsistent with the claiming of the favorable tax rates, described below, applicable to dividends received by certain non-corporate holders and thus may affect the availability of these rates to such holders.
 
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U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of ordinary shares or ADSs in their particular circumstances.
 
This discussion assumes that we are not, and will not become, a passive foreign investment company, as described below.
 
Taxation of Distributions
 
Distributions paid on ordinary shares or ADSs, other than certain pro rata distributions of ordinary shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid to certain non-corporate U.S. Holders may be taxable at rates applicable to long-term capital gain. U.S. Holders should consult their tax advisers regarding the availability of these favorable rates on dividends. The amount of the dividend will be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Subject to applicable limitations, some of which may vary depending upon a U.S. Holder’s circumstances, and subject to the discussion above regarding concerns expressed by the U.S. Treasury, PRC income taxes withheld from dividends on ordinary shares or ADSs at a rate not exceeding the rate applicable under the Treaty will be creditable against the U.S. Holder’s U.S. federal income tax liability. PRC taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S. Holder’s federal income tax liability. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s, or in the case of ADSs, the depositary’s, receipt of the dividend. The amount of any dividend income paid in RMB will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
 
Sale or Other Disposition of Ordinary Shares or ADSs
 
For U.S. federal income tax purposes, gain or loss realized on the sale or other disposition of ordinary shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder held the ordinary shares or ADSs for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the ordinary shares or ADSs disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. The deductibility of capital losses is subject to limitations.
 
As described in “Taxation — PRC Taxation — PRC taxation on us,” if we were deemed to be a tax resident enterprise under PRC tax law, gains from dispositions of our ordinary shares or ADSs may be subject to PRC withholding tax. In that case, a U.S. Holder’s amount realized would include the gross amount of the proceeds of the sale or disposition before deduction of the PRC tax. Although any such gain of a U.S. Holder would generally be characterized as U.S.-source income, a U.S. Holder that is eligible for the benefits of the Treaty may be entitled to elect to treat the gain as foreign-source income for foreign tax credit purposes. U.S. Holders should consult their tax advisers regarding their eligibility for benefits under the Treaty and the creditability of any PRC tax on dispositions in their particular circumstances.
 
Passive Foreign Investment Company Rules
 
We do not believe we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our 2014 taxable year. However, because PFIC status depends on the composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that we will not be a PFIC for any taxable year. In general, a non-U.S. corporation will be considered a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and capital gains.
 
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If we were a PFIC for any taxable year during which a U.S. Holder held ordinary shares or ADSs, gain recognized by a U.S. Holder on a sale or other disposition (including certain pledges) of the ordinary shares or ADSs would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares or ADSs. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amount allocated to that taxable year. Further, to the extent that any distribution received by a U.S. Holder on its ordinary shares or ADSs exceeds 125% of the average of the annual distributions on the ordinary shares or ADSs received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, described immediately above.
 
Alternatively, if we were a PFIC, a U.S. Holder could, if certain conditions are met, make a mark-to-market election that would result in tax treatment different from the general tax treatment for PFICs described above. If a U.S. Holder were to make such an election, the holder generally would recognize as ordinary income any excess of the fair market value of the ADSs at the end of each taxable year over its adjusted tax basis, and would recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). If we were a PFIC, it is unclear whether our ordinary shares would be treated as “marketable stock” eligible for the mark-to-market election. If a U.S. Holder makes the election, the holder’s tax basis in the ADSs will be adjusted to reflect these income or loss amounts. Any gain recognized on the sale or other disposition of ADSs in a year when we are a PFIC would be treated as ordinary income and any loss would be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election).
 
A timely election to treat us as a qualified electing fund under Section 1295 of the Code would also result in alternative treatment from the general treatment for PFICs described above (which alternative treatment could, in certain circumstances, mitigate the adverse tax consequences of holding shares in a PFIC). U.S. Holders should be aware, however, that we do not intend to satisfy record-keeping and other requirements that would permit U.S. Holders to make qualified electing fund elections if we were a PFIC.
 
In addition, if we were a PFIC, the favorable rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. Furthermore, if we were a PFIC for any taxable year during which a U.S. Holder held ordinary shares or ADSs, such U.S. Holder may be required to file a report containing such information as the U.S. Treasury may require. U.S. Holders should consult their tax advisers regarding whether we are or were a PFIC and the potential application of the PFIC rules.
 
Information Reporting and Backup Withholding
 
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale or exchange of ADSs or ordinary shares may be subject to information reporting to the Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on Internal Revenue Service Form W-9. U.S. Holders should consult their tax advisers regarding the application of the U.S. information reporting and backup withholding rules.
 
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the Internal Revenue Service and furnishing any required information.
 
10.F. Dividends and Paying Agents
 
Not applicable.
 
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10.G. Statement by Experts
 
Not applicable.
 
10.H. Documents on Display
 
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than four months after the close of each fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
 
We will furnish Citibank, N.A., the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
 
10.I. Subsidiary Information
 
Not applicable.
 
ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
Our exposure to interest rate risk primarily relates to the interest rates for our outstanding debt and the interest income generated by excess cash invested in liquid investments with original maturities of three months or less. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk.
 
We have not been exposed to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.
 
Foreign Exchange Risk
 
Substantially all of our revenues and most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash and cash equivalents denominated in U.S. dollars as a result of our past issuances of preferred shares through a private placement and proceeds from our initial public offering. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.
 
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The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. To the extent that we need to convert U.S. dollars we received from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB denominated cash amounts into U.S. dollars amounts for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. By way of example, assuming we had converted a U.S. dollar denominated cash balance of US$1.0 million as of December 31, 2014 into Renminbi at the exchange rate of US$1.00 for RMB6.2046, such cash balance would have been approximately RMB6.2 million (US$1.0 million). Assuming a further 1.0% appreciation of the Renminbi against the U.S. dollar, such cash balance would have decreased to RMB6.1 million (US$1.0 million) as of December 31, 2014. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.
 
Inflation
 
Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, consumer price index in China increased by 2.6%, 2.6% and 2.0% in  2012, 2013 and 2014, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.
 
ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
12.A. Debt Securities
 
Not applicable.
 
12.B. Warrants and Rights
 
Not applicable.
 
12.C. Other Securities
 
Not applicable.
 
12.D. American Depositary Shares
 
Fees and Charges Our ADS holders May Have to Pay
 
An ADS holder will be required to pay the following service fees to the depositary, Citibank, N.A.:
 
Service	 	Fees	
·    Issuance of ADSs	 	Up to U.S. 5¢ per ADS issued	
·    Cancellation of ADSs	 	Up to U.S. 5¢ per ADS canceled	
·    Distribution of cash dividends or other cash distributions	 	Up to U.S. 5¢ per ADS held	
·    Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights	 	Up to U.S. 5¢ per ADS held	
·    Distribution of securities other than ADSs or rights to purchase additional ADSs	 	Up to U.S. 5¢ per ADS held	
·    Depositary Services	 	Up to U.S. 5¢ per ADS held on the applicable record date(s) established by the Depositary (U.S. 2¢ per ADS for the year of 2014)	
 
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An ADS holder will also be responsible to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:
 
·                 Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of ordinary shares).
 
·                 Expenses incurred for converting foreign currency into U.S. dollars.
 
·                 Expenses for cable, telex and fax transmissions and for delivery of securities.
 
·                 Taxes and duties upon the transfer of securities (i.e., when ordinary shares are deposited or withdrawn from deposit).
 
·                 Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
 
Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary banks by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary banks and by the brokers (on behalf of their clients) delivering the ADSs to the depositary banks for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary banks to the holders of record of ADSs as of the applicable ADS record date.
 
The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary banks charge the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary banks send invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via The Depository Trust Company (“DTC”)), the depositary banks generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.
 
In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
 
The fees and charges an ADS holder may be required to pay may vary over time and may be changed by us and by the depositary. An ADS holder will receive prior notice of such changes.
 
Fees and Other Payments Made by the Depositary to Us
 
The depositary may reimburse us for certain expenses incurred by us in respect of the ADR program established pursuant to the deposit agreement, by making available a portion of the depositary fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary may agree from time to time. For the year ended December 31, 2014, we have received a total of RMB1.0 million (US$0.2 million) from the depositary as reimbursement for our expenses incurred in connection with investor relationship programs related to the ADS program.
 
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PART II
 
ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
None of these events occurred in any of the years ended December 31, 2012, 2013 and 2014.
 
ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
There have been no material modifications to the rights of securities holders or the use of proceeds.
 
ITEM 15.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this annual report. Based on such evaluation, our management has concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective.
 
Management’s Annual Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
 
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
 
As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management assessed the effectiveness of the internal control over financial reporting as of December 31, 2014 using criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.
 
Attestation Report of the Registered Public Accounting Firm
 
The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Deloitte Touche Tohmatsu Certified Public Accountants LLP, an independent registered public accounting firm. The attestation report issued by Deloitte Touche Tohmatsu Certified Public Accountants LLP can be found on page F-3 of this annual report on Form 20-F.
 
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Changes in Internal Control over Financial Reporting
 
There were no significant changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during 2014.
 
ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT
 
Our board of directors has determined that Mr. Joseph Chow is an audit committee financial expert, as that term is defined in Item 16A(b) of Form 20-F, and is independent for the purposes of Rule 5605(a)(2) of the NASDAQ Marketplace Rules, or the NASDAQ Rules, and Rule 10A-3 under the Exchange Act.
 
ITEM 16B.  CODE OF ETHICS
 
Our board of directors adopted a code of business conduct and ethics on January 27, 2010 that applies to our directors, officers, employees and agents, including certain provisions that specifically apply to our executive officers and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as an exhibit to our registration statement on Form F-1 (File No. 333-165247) originally filed with the Securities and Exchange Commission on March 5, 2010, as amended. Our code of business conduct and ethics is publicly available on our website at http://ir.huazhu.com/.
 
ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Deloitte Touche Tohmatsu Certified Public Accountants LLP, or Deloitte, our independent registered public accounting firm, began serving as our auditor in August 2009.
 
Our audit committee is responsible for the oversight of Deloitte’s work. The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte, including audit services, audit-related services, tax services and other services, other than those for  de minimis  services which are approved by the audit committee prior to the completion of the audit.
 
We paid the following fees for professional services to Deloitte for the years ended December 31, 2013 and 2014.
 
 	 	Year Ended December 31,	 	
 	 	2013	 	2014	 	
 	 	US$	 	US$	 	
 	 	(in thousands)	 	
Audit Fees(1)	 	980	 	1,023	 	
Audit-Related Fees	 	—	 	—	 	
Tax Fees	 	—	 	—	 	
All Other Fees	 	—	 	—	 	
Total	 	980	 	1,023	 	

Note:                 (1) Audit Fees. This category includes the aggregate fees billed for the professional services rendered by our principal auditors for assurance and related services. Our 2013 and 2014 audit fees mainly include the audit of our annual financial statements, the services provided in connection with our compliance with the Sarbanes-Oxley Act, or services that are normally provided by the accountant in connection with statutory and regulatory filings.
 
ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
Not applicable.
 
ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
None.
 
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ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
 
Not applicable.
 
ITEM 16G.  CORPORATE GOVERNANCE
 
The NASDAQ Rules provide that foreign private issuers may follow home country practice in lieu of the corporate governance requirements of the NASDAQ Stock Market LLC, subject to certain exceptions and requirements and except to the extent that such exemptions would be contrary to U.S. federal securities laws and regulations. The significant differences between our corporate governance practices and those followed by U.S. companies under the NASDAQ Rules are summarized as follows:
 
·                 We follow home country practice that permits our independent directors not to hold regularly scheduled meetings at which only independent directors are present in lieu of complying with Rule 5605(b)(2).
 
·                 We follow home country practice that permits our board of directors not to implement a nominations committee, in lieu of complying with Rule 5605(e) of the NASDAQ Rules that requires the implementation of a nominations committee.
 
Other than the above, we have followed and intend to continue to follow the applicable corporate governance standards under the NASDAQ Marketplace Rules.
 
In accordance with Rule 5250(d)(1) under NASDAQ Marketplace Rules, we will post this annual report on Form 20-F on our company website at http://ir.huazhu.com. In addition, we will provide hard copies of our annual report free of charge to shareholders and ADS holders upon request.
 
ITEM 16H.  MINE SAFETY DISCLOSURE
 
Not applicable.
 
PART III
 
ITEM 17.  FINANCIAL STATEMENTS
 
We have elected to provide financial statements pursuant to Item 18.
 
ITEM 18.  FINANCIAL STATEMENTS
 
Our consolidated financial statements are included at the end of this annual report.
 
ITEM 19.  EXHIBITS
 
Exhibit
Number	 	Description of Document	
1.1	 	Amended and Restated Memorandum and Articles of Association of the Registrant. (Incorporated by reference to Exhibits 3.2 from the Amendment No. 1 to our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 12, 2010.)	
 	 	 	
1.2	 	Amendment to the Amended and Restated Articles of Association of the Registrant, adopted by the shareholders of the Registrant on November 21, 2012. (Incorporated by reference to Exhibit 1.2 from our annual report on Form 20-F filed with the Securities and Exchange Commission on April 23, 2013.)	
 	 	 	
2.1	 	Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3).	
 	 	 	
2.2	 	Registrant’s Specimen Certificate for Ordinary Shares. (Incorporated by reference to Exhibit 4.2 from our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 5, 2010.)	
 
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2.3	 	Form of Deposit Agreement among the Registrant, the Depositary and all Holders and Beneficial Owners of the American Depositary Shares issued thereunder. (Incorporated by reference to Exhibits 4.3 from the Amendment No. 1 to our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 12, 2010.)	
 	 	 	
4.1	 	Amended and Restated 2007 Global Share Plan, amended and restated as of December 12, 2007. (Incorporated by reference to Exhibit 10.1 from our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 5, 2010.)	
 	 	 	
4.2	 	Amended and Restated 2008 Global Share Plan, amended and restated as of October 31, 2008. (Incorporated by reference to Exhibit 10.2 from our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 5, 2010.)	
 	 	 	
4.3	 	Amended and Restated 2009 Share Incentive Plan, amended and restated as of October 1, 2009. (Incorporated by reference to Exhibit 10.3 from our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 5, 2010.)	
 	 	 	
4.4	 	Amendment to the Amended and Restated 2009 Share Incentive Plan, amended as of August 26, 2010. (Incorporated by reference to Exhibit 99.2 from our report on Form 6-K (file no. 333-34656) filed with the Securities and Exchange Commission on July 15, 2010.)	
 	 	 	
4.5	 	Amendment to the Amended and Restated 2009 Share Incentive Plan, amended as of March 26, 2015. (Incorporated by reference to Exhibit 99.2 from our report on Form 6-K filed with the Securities and Exchange Commission on March 27, 2015.)	
 	 	 	
4.6	 	Form of Indemnification Agreement with the Registrant’s Directors. (Incorporated by reference to Exhibit 10.4 from our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 5, 2010.)	
 	 	 	
4.7	 	English translation of theForm of Employment Agreement between the Registrant and Executive Officers of the Registrant. (Incorporated by reference to Exhibit 4.6 from our annual report on Form 20-F (File No. 001-34656) filed with the Securities and Exchange Commission on April 12, 2012.)	
 	 	 	
4.8	 	English translation of the Fixed Assets Loan Contract between the Industrial and Commercial Bank of China and HanTing Xingkong (Shanghai) Hotel Management Co., Ltd., dated March 2, 2012. (Incorporated by reference to Exhibit 4.10 from our annual report on Form 20-F (File No. 001-34656) filed with the Securities and Exchange Commission on April 12, 2012.)	
 	 	 	
4.9	 	English translation of the Facility Agreement between China Merchants Bank and HanTing Xingkong (Shanghai) Hotel Management Co., Ltd., dated September 25, 2012. (Incorporated by reference to Exhibit 4.8 from our annual report on Form 20-F filed with the Securities and Exchange Commission on April 23, 2013.)	
 	 	 	
4.10	 	Subscription Agreement between the Registrant and Ctrip.com International, Ltd., dated March 12, 2010. (Incorporated by reference to Exhibit 10.9 from the Amendment No. 1 to our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 12, 2010.)	
 	 	 	
4.11	 	Investor and Registration Rights Agreement between the Registrant and Ctrip.com International, Ltd., dated March 12, 2010. (Incorporated by reference to Exhibit 10.10 from the Amendment No. 1 to our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 12, 2010.)	
 	 	 	
4.12	 	Share Purchase Agreement by and between China Lodging Holdings (HK) Limited and C-Travel International Limited, dated April 15, 2012. (Incorporated by reference to Exhibit 4.11 from our annual report on Form 20-F filed with the Securities and Exchange Commission on April 23, 2013.)	
 	 	 	
4.13	 	English translation of Entrusted Loan agreement by and between HanTing Xingkong (Shanghai) Hotel Management Co., Ltd, Ctrip Computer Technology Co.,Ltd and China Construction Bank Corporation, Shanghai Minhang Subbranch, dated December 19, 2013 (Incorporated by reference to Exhibit 4.12 from our annual report on Form 20-F filed with the Securities and Exchange Commission on April 17, 2014.)	
 
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4.14	 	English translation of Letter of Guarantee by and between Ctrip.com International, Ltd. and China Lodging Group Ltd., dated December 19, 2013 (Incorporated by reference to Exhibit 4.13 from our annual report on Form 20-F filed with the Securities and Exchange Commission on April 17, 2014.)	
 	 	 	
4.15*	 	Master Purchase Agreement among China Lodging Group Ltd., AAPC Singapore Pte. Ltd. and AAPC Hong Kong Limited dated December 14, 2014	
 	 	 	
4.16*	 	Securities purchase agreement between China Lodging Group Ltd. and AAPC Hong Kong Limited, dated December 14, 2014	
 	 	 	
8.1*	 	Subsidiaries of the Registrant.	
 	 	 	
11.1	 	Code of Business Conduct and Ethics of the Registrant. (Incorporated by reference to Exhibit 99.1 from our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 5, 2010.)	
 	 	 	
12.1*	 	Certification of Qi Ji, Chief Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	 	
12.2*	 	Certification of Min (Jenny) Zhang, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	 	
13.1**	 	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	 	
23.1*	 	Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP, Independent Registered Public Accounting Firm.	
 	 	 	
101.INS*	 	XBRL Instance Document	
 	 	 	
101.SCH*	 	XBRL Taxonomy Extension Schema Document	
 	 	 	
101.CAL*	 	XBRL Taxonomy Extension Calculation Linkbase Document	
 	 	 	
101.DEF*	 	XBRL Taxonomy Extension Definition Linkbase Document	
 	 	 	
101.LAB*	 	XBRL Taxonomy Extension Label Linkbase Document	
 	 	 	
101.PRE*	 	XBRL Taxonomy Extension Presentation Linkbase Document	

*                                        Filed with this Annual Report on Form 20-F.
**                                 Furnished with this Annual Report on Form 20-F.
 
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SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
 	CHINA LODGING GROUP, LIMITED	

 	By:	/s/ Qi Ji	
 	 	Name:	Qi Ji	
 	 	Title:	Chief Executive Officer	
 
Date: April 17, 2015
 
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CHINA LODGING GROUP, LIMITED
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2012, 2013 AND 2014
 
Reports of Independent Registered Public Accounting Firm	F-2	
Consolidated Balance Sheets as of December 31, 2013 and 2014	F-4	
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2013 and 2014	F-5	
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2012, 2013 and 2014	F-6	
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2013 and 2014	F-7	
Notes to the Consolidated Financial Statements	F-8	
Financial Statement Schedule I — Financial Information for Parent Company	F-32	
Financial Statement Schedule II — Valuation and Qualifying Accounts	F-36	
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CHINA LODGING GROUP, LIMITED
 
We have audited the accompanying consolidated balance sheets of China Lodging Group, Limited and its subsidiaries (the “Group”) as of December 31, 2013 and 2014, and the related consolidated statements of comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014 and the related financial statement schedules. These financial statements and financial statement schedules are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of China Lodging Group, Limited and its subsidiaries as of December 31, 2013 and 2014 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein.
 
Our audits also comprehended the translation of Renminbi amounts into United States dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. Such United States dollar amounts are presented solely for the convenience of readers in the United States of America.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2014, based on the criteria established in  Internal Control — Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 17, 2015 expressed an unqualified opinion on the Group’s internal control over financial reporting.

/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP	 	
 	 	
Shanghai, China	 	
April 17, 2015	 	
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CHINA LODGING GROUP, LIMITED
 
We have audited the internal control over financial reporting of China Lodging Group, Limited and its subsidiaries (the “Group”) as of December 31, 2014 based on criteria established in  Internal Control — Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in  Internal Control — Integrated Framework(2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2014 of the Group and our report dated April 17, 2015 expressed an unqualified opinion on those financial statements and financial statement schedules and included an explanatory paragraph regarding the translation of Renminbi amounts into United States dollar amounts for the convenience of readers in the United States of America.
 
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP	 	
Shanghai, China	 	
April 17, 2015	 	
 
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CHINA LODGING GROUP, LIMITED
 
CONSOLIDATED BALANCE SHEETS
(Renminbi in thousands, except share and per share data, unless otherwise stated)
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	2014	 	
 	 	 	 	 	 	US$’000
(Note 2)	 	
ASSETS	 	 	 	 	 	 	 	
Current assets:	 	 	 	 	 	 	 	
Cash and cash equivalents	 	397,435	 	808,865	 	130,365	 	
Restricted cash	 	3,317	 	—	 	—	 	
Short-term investments	 	—	 	26,615	 	4,290	 	
Accounts receivable, net of allowance of RMB7,256 and RMB5,977 in 2013 and 2014, respectively	 	74,646	 	89,243	 	14,384	 	
Amounts due from related parties	 	658	 	16,293	 	2,626	 	
Prepaid rent	 	363,581	 	385,158	 	62,076	 	
Inventories	 	34,013	 	29,882	 	4,816	 	
Other current assets	 	116,979	 	160,582	 	25,881	 	
Deferred tax assets	 	51,759	 	80,026	 	12,898	 	
Total current assets	 	1,042,388	 	1,596,664	 	257,336	 	
Property and equipment, net	 	3,634,039	 	3,907,343	 	629,749	 	
Intangible assets, net	 	101,845	 	104,537	 	16,848	 	
Long-term investments	 	90,517	 	229,005	 	36,909	 	
Goodwill	 	64,842	 	64,654	 	10,421	 	
Other assets	 	184,013	 	197,233	 	31,788	 	
Deferred tax assets	 	67,408	 	83,470	 	13,453	 	
Total assets	 	5,185,052	 	6,182,906	 	996,504	 	
 	 	 	 	 	 	 	 	
LIABILITIES AND EQUITY	 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	 	
Accounts payable	 	677,305	 	640,691	 	103,261	 	
Amounts due to a related party	 	5,593	 	6,403	 	1,032	 	
Salary and welfare payables	 	147,238	 	186,051	 	29,986	 	
Deferred revenue	 	297,284	 	514,268	 	82,885	 	
Accrued expenses and other current liabilities	 	249,185	 	313,017	 	50,449	 	
Income tax payable	 	26,053	 	59,630	 	9,610	 	
Deferred tax liabilities	 	151	 	701	 	113	 	
Total current liabilities	 	1,402,809	 	1,720,761	 	277,336	 	
Deferred rent	 	653,831	 	830,414	 	133,838	 	
Deferred revenue	 	118,818	 	155,395	 	25,046	 	
Amounts due to a related party	 	8,167	 	4,083	 	658	 	
Other long-term liabilities	 	147,565	 	215,762	 	34,774	 	
Deferred tax liabilities	 	26,071	 	37,778	 	6,089	 	
Total liabilities	 	2,357,261	 	2,964,193	 	477,741	 	
Commitments and contingencies (Note 18)	 	 	 	 	 	 	 	
Equity:	 	 	 	 	 	 	 	
Ordinary shares (US$0.0001 par value per share; 8,000,000,000 shares authorized; 247,551,999 and 250,747,255 shares issued and outstanding as of December 31, 2013 and 2014, respectively)	 	182	 	184	 	30	 	
Additional paid-in capital	 	2,315,083	 	2,381,568	 	383,839	 	
Retained earnings	 	539,872	 	847,220	 	136,547	 	
Accumulated other comprehensive loss	 	(39,384	)	(12,008	)	(1,935	)	
Total China Lodging Group, Limited shareholders’ equity	 	2,815,753	 	3,216,964	 	518,481	 	
Noncontrolling interest	 	12,038	 	1,749	 	282	 	
Total equity	 	2,827,791	 	3,218,713	 	518,763	 	
Total liabilities and equity	 	5,185,052	 	6,182,906	 	996,504	 	
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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CHINA LODGING GROUP, LIMITED
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Renminbi in thousands, except share and per share data, unless otherwise stated)
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	2014	 	
 	 	 	 	 	 	 	 	US$’000
(Note 2)	 	
Revenues:	 	 	 	 	 	 	 	 	 	
Leased hotels	 	3,069,431	 	3,870,887	 	4,522,431	 	728,884	 	
Manachised and franchised hotels	 	349,847	 	549,958	 	742,797	 	119,717	 	
Total revenues	 	3,419,278	 	4,420,845	 	5,265,228	 	848,601	 	
Less: Business tax and related taxes	 	194,751	 	252,216	 	300,500	 	48,432	 	
Net revenues	 	3,224,527	 	4,168,629	 	4,964,728	 	800,169	 	
Operating costs and expenses:	 	 	 	 	 	 	 	 	 	
Hotel operating costs	 	2,453,902	 	3,181,666	 	3,878,027	 	625,025	 	
Selling and marketing expenses	 	102,814	 	138,129	 	187,435	 	30,209	 	
General and administrative expenses	 	224,111	 	284,756	 	342,128	 	55,141	 	
Pre-opening expenses	 	230,690	 	211,284	 	186,325	 	30,030	 	
Total operating costs and expenses	 	3,011,517	 	3,815,835	 	4,593,915	 	740,405	 	
Other operating income, net	 	6,723	 	27,750	 	18,551	 	2,990	 	
Income from operations	 	219,733	 	380,544	 	389,364	 	62,754	 	
Interest income	 	14,554	 	6,856	 	23,162	 	3,733	 	
Interest expense	 	822	 	813	 	1,533	 	247	 	
Other income, net	 	2,208	 	1,907	 	4,749	 	765	 	
Foreign exchange gain (loss)	 	(2,000	)	21	 	(246	)	(39	)	
Income before income taxes	 	233,673	 	388,515	 	415,496	 	66,966	 	
Income tax expense	 	54,169	 	104,820	 	113,105	 	18,229	 	
Net income	 	179,504	 	283,695	 	302,391	 	48,737	 	
Less: net income (loss) attributable to noncontrolling interest	 	4,617	 	3,837	 	(4,957	)	(799	)	
Net income attributable to China Lodging Group, Limited	 	174,887	 	279,858	 	307,348	 	49,536	 	
 	 	 	 	 	 	 	 	 	 	
Other comprehensive income	 	 	 	 	 	 	 	 	 	
Unrealized securities holding gains, net of tax of nil, nil and 9,485 for 2012, 2013 and 2014	 	—	 	—	 	28,458	 	4,587	 	
Foreign currency translation adjustments, net of tax of nil for 2012, 2013 and 2014	 	758	 	(976	)	(1,082	)	(175	)	
Comprehensive income	 	180,262	 	282,719	 	329,767	 	53,149	 	
Comprehensive income (loss) attributable to the noncontrolling interest	 	4,617	 	3,837	 	(4,957	)	(799	)	
Comprehensive income attributable to China Lodging Group, Limited	 	175,645	 	278,882	 	334,724	 	53,948	 	
 	 	 	 	 	 	 	 	 	 	
Earnings per share:	 	 	 	 	 	 	 	 	 	
Basic	 	0.72	 	1.14	 	1.23	 	0.20	 	
Diluted	 	0.71	 	1.12	 	1.21	 	0.20	 	
Weighted average number of shares used in computation:	 	 	 	 	 	 	 	 	 	
Basic	 	243,284,332	 	245,187,348	 	248,957,645	 	248,957,645	 	
Diluted	 	246,981,001	 	249,486,284	 	253,004,204	 	253,004,204	 	
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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CHINA LODGING GROUP, LIMITED
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Renminbi in thousands, except share data, unless otherwise stated)
 
 	 	Ordinary Shares	 	Additional Paid-in	 	Retained earnings	 	Accumulated Other	 	Noncontrolling	 	 	 	
 	 	Share	 	Amount	 	Capital	 	(Accumulated Deficit)	 	Comprehensive loss	 	Interest	 	Total Equity	 	
Balance at January 1, 2012	 	242,604,223	 	179	 	2,199,954	 	85,127	 	(39,166	)	9,790	 	2,255,884	 	
Issuance of ordinary shares upon exercise of options	 	1,889,872	 	1	 	18,310	 	—	 	—	 	—	 	18,311	 	
Share-based compensation	 	—	 	—	 	20,837	 	—	 	—	 	—	 	20,837	 	
Excess tax benefit from share-based compensation	 	—	 	—	 	4,302	 	—	 	—	 	—	 	4,302	 	
Capital contribution from noncontrolling interest holders	 	—	 	—	 	—	 	—	 	—	 	240	 	240	 	
Noncontrolling interest recognized in connection with acquisitions	 	—	 	—	 	—	 	—	 	—	 	14,215	 	14,215	 	
Net income	 	—	 	—	 	—	 	174,887	 	—	 	4,617	 	179,504	 	
Dividend paid to noncontrolling interest holders	 	—	 	—	 	—	 	—	 	—	 	(3,486	)	(3,486	)	
Foreign currency translation adjustments	 	—	 	—	 	—	 	—	 	758	 	—	 	758	 	
Balance at December 31, 2012	 	244,494,095	 	180	 	2,243,403	 	260,014	 	(38,408	)	25,376	 	2,490,565	 	
Issuance of ordinary shares upon exercise of options and vesting of restricted stocks	 	3,057,904	 	2	 	29,144	 	—	 	—	 	—	 	29,146	 	
Share-based compensation	 	—	 	—	 	30,468	 	—	 	—	 	—	 	30,468	 	
Excess tax benefit from share-based compensation	 	—	 	—	 	14,582	 	—	 	—	 	—	 	14,582	 	
Acquisitionsof noncontrolling interest	 	—	 	—	 	(2,514	)	—	 	—	 	(13,946	)	(16,460	)	
Net income	 	—	 	—	 	—	 	279,858	 	—	 	3,837	 	283,695	 	
Dividend paid to noncontrolling interest holders	 	—	 	—	 	—	 	—	 	—	 	(3,229	)	(3,229	)	
Foreign currency translation adjustments	 	—	 	—	 	—	 	—	 	(976	)	—	 	(976	)	
Balance at December 31, 2013	 	247,551,999	 	182	 	2,315,083	 	539,872	 	(39,384	)	12,038	 	2,827,791	 	
Issuance of ordinary shares upon exercise of options and vesting of restricted stock	 	3,144,224	 	2	 	20,851	 	—	 	—	 	—	 	20,853	 	
Issuance of ordinary shares in exchange of service	 	51,032	 	—	 	2,000	 	—	 	—	 	—	 	2,000	 	
Share-based compensation	 	 	 	 	 	31,937	 	—	 	—	 	—	 	31,937	 	
Excess tax benefit from share-based compensation	 	—	 	—	 	11,697	 	—	 	—	 	—	 	11,697	 	
Noncontrolling interest recognized in connection with acquisitions	 	—	 	—	 	—	 	—	 	—	 	25	 	25	 	
Net income	 	 	 	 	 	 	 	307,348	 	—	 	(4,957	)	302,391	 	
Unrealized securities holding gains , net of tax	 	—	 	—	 	—	 	—	 	28,458	 	—	 	28,458	 	
Dividend paid to noncontrolling interest holders	 	—	 	—	 	—	 	—	 	—	 	(5,357	)	(5,357	)	
Foreign currency translation adjustments	 	—	 	—	 	—	 	—	 	(1,082	)	—	 	(1,082	)	
Balance at December 31, 2014	 	250,747,255	 	184	 	2,381,568	 	847,220	 	(12,008	)	1,749	 	3,218,713	 	
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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CHINA LODGING GROUP, LIMITED
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Renminbi in thousands, unless otherwise stated)
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	2014	 	
 	 	 	 	 	 	 	 	US$’000
(Note 2)	 	
Operating activities:	 	 	 	 	 	 	 	 	 	
Net income	 	179,504	 	283,695	 	302,391	 	48,737	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	
Share-based compensation	 	20,837	 	30,468	 	31,937	 	5,147	 	
Depreciation and amortization	 	347,575	 	463,146	 	570,722	 	91,984	 	
Deferred taxes	 	(18,226	)	(22,619	)	(42,391	)	(6,832	)	
Bad debt expenses	 	1,238	 	4,573	 	4,770	 	769	 	
Deferred rent	 	143,858	 	187,214	 	182,580	 	29,427	 	
Loss (gain) from disposal of property and equipment	 	—	 	(10,734	)	803	 	129	 	
Impairment loss	 	5,349	 	7,965	 	27,391	 	4,415	 	
Investment loss(income)	 	—	 	430	 	(4,902	)	(790	)	
Excess tax benefit from share-based compensation	 	(4,302	)	(14,582	)	(11,697	)	(1,885	)	
Changes in operating assets and liabilities, net of effect of acquisitions:	 	 	 	 	 	 	 	 	 	
Accounts receivable	 	(12,336	)	(28,270	)	(18,773	)	(3,026	)	
Prepaid rent	 	(93,218	)	(42,276	)	(21,577	)	(3,478	)	
Inventories	 	(6,714	)	4,043	 	4,130	 	665	 	
Amounts due from related parties	 	—	 	(658	)	256	 	41	 	
Other current assets	 	(29,404	)	(26,400	)	(42,369	)	(6,829	)	
Other assets	 	(31,482	)	(50,228	)	(13,220	)	(2,131	)	
Accounts payable	 	3,390	 	3,605	 	18,016	 	2,904	 	
Amountsdue toarelated party	 	(229	)	708	 	810	 	131	 	
Salary and welfare payables	 	36,809	 	28,768	 	38,813	 	6,256	 	
Deferred revenue	 	90,468	 	115,787	 	253,562	 	40,867	 	
Accrued expenses and other current liabilities	 	36,076	 	62,545	 	58,995	 	9,508	 	
Income tax payable	 	13,296	 	17,493	 	45,274	 	7,297	 	
Other long-term liabilities	 	33,231	 	55,496	 	68,494	 	11,039	 	
Net cash provided by operating activities	 	715,720	 	1,070,169	 	1,454,015	 	234,345	 	
Investing activities:	 	 	 	 	 	 	 	 	 	
Purchases of property and equipment for hotels in operation and headquarters	 	(127,056	)	(170,481	)	(282,467	)	(45,525	)	
Purchases of property and equipment for hotels under development	 	(870,994	)	(902,166	)	(648,455	)	(104,512	)	
Purchases of intangibles	 	(3,532	)	(4,290	)	(10,423	)	(1,680	)	
Amount received as a result of government zoning	 	—	 	15,030	 	10,557	 	1,701	 	
Acquisitions, net of cash received	 	(30,055	)	(34,070	)	(16,050	)	(2,587	)	
Proceeds from disposal of subsidiary and branch	 	—	 	—	 	18,484	 	2,979	 	
Purchase of long-term investments	 	(28,129	)	(54,744	)	(191,064	)	(30,794	)	
Payment for shareholder loan to joint venture	 	—	 	—	 	(15,640	)	(2,521	)	
Proceeds frommaturity/sale of long-term investments	 	—	 	—	 	88,266	 	14,226	 	
Purchases of short-term investments	 	(8,074	)	—	 	(75,210	)	(12,122	)	
Proceeds from sale of short-term investments	 	—	 	—	 	55,499	 	8,945	 	
Decrease (increase) in restricted cash	 	(290	)	(1,527	)	3,317	 	535	 	
Net cash used in investing activities	 	(1,068,130	)	(1,152,248	)	(1,063,186	)	(171,355	)	
Financing activities:	 	 	 	 	 	 	 	 	 	
Net proceeds from issuance of ordinary shares upon exercise of options	 	18,520	 	28,122	 	20,985	 	3,382	 	
Proceeds fromshort-term debt	 	—	 	105,796	 	300,000	 	48,351	 	
Repayment ofshort-term debt	 	—	 	(105,796	)	(300,000	)	(48,351	)	
Proceeds from long-term debt	 	1,000	 	—	 	—	 	—	 	
Repayment of long-term debt	 	(1,000	)	—	 	—	 	—	 	
Funds advanced from noncontrolling interest holders	 	3,000	 	1,945	 	—	 	—	 	
Repayment of funds advanced from noncontrolling interest holders	 	(2,681	)	(6,564	)	(1,559	)	(251	)	
Acquisitions of noncontrolling interest	 	—	 	(4,210	)	(4,083	)	(658	)	
Contribution from noncontrolling interest holders	 	240	 	—	 	—	 	—	 	
Dividend paid to noncontrolling interest holders	 	(3,486	)	(3,229	)	(5,357	)	(863	)	
Excess tax benefit from share-based compensation	 	4,302	 	14,582	 	11,697	 	1,885	 	
Net cash provided by financing activities	 	19,895	 	30,646	 	21,683	 	3,495	 	
Effect of exchange rate changes on cash and cash equivalents	 	758	 	(976	)	(1,082	)	(175	)	
Net increase (decrease) in cash and cash equivalents	 	(331,757	)	(52,409	)	411,430	 	66,310	 	
Cash and cash equivalents at the beginning of the year	 	781,601	 	449,844	 	397,435	 	64,055	 	
Cash and cash equivalents at the end of the year	 	449,844	 	397,435	 	808,865	 	130,365	 	
Supplemental disclosure of cash flow information:	 	 	 	 	 	 	 	 	 	
Interest paid	 	859	 	1,084	 	14,733	 	2,374	 	
Income taxes paid	 	69,980	 	99,065	 	110,222	 	17,765	 	
Supplemental schedule of non-cash investing and financing activities:	 	 	 	 	 	 	 	 	 	
Purchases of property and equipment included in payables	 	590,873	 	639,749	 	585,119	 	94,304	 	
Consideration payable for business acquisition	 	10,506	 	8,939	 	7,560	 	1,218	 	
Purchase of intangible assets included in payables	 	10,584	 	9,660	 	8,682	 	1,399	 	
Reimbursement of government zoning included in receivables	 	3,042	 	6,042	 	1,000	 	161	 	
Proceeds from disposal of subsidiary and branch included in receivables	 	—	 	—	 	5,000	 	806	 	
Proceeds from issuance of ordinary shares upon exercise of options included in receivables	 	290	 	1,318	 	1,185	 	191	 	
Acquisition of noncontrolling interest included in payables	 	—	 	12,250	 	8,167	 	1,316	 	
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
1.             ORGANIZATION AND PRINCIPAL ACTIVITIES
 
China Lodging Group, Limited (the “Company”) was incorporated in the Cayman Islands under the laws of the Cayman Islands on January 4, 2007. The principal business activities of the Company and its subsidiaries (the “Group”) are to develop leased, manachised and franchised hotels under the “Joya Hotel”, “Manxin Hotels & Resorts “, “JI Hotel”, “Starway Hotel” , “HanTing Hotel”, “Elan Hotel” and “Hi Inn” brands in the People’s Republic of China (“PRC”).  As of December 31, 2014, the Group does not own any hotel properties.
 
Leased hotels
 
The Group leases hotel properties from property owners and is responsible for all aspects of hotel operations and management, including hiring, training and supervising the managers and employees required to operate the hotels. In addition, the Group is responsible for hotel development and customization to conform to the standards of the Group brands at the beginning of the lease, as well as repairs and maintenance, operating expenses and management of properties over the term of the lease.
 
Under the lease arrangements, the Group typically receives rental holidays of twoto six months and pays rent on a quarterly or biannual basis. Rent is typically subject to the fixed escalations of three to five percent every three to five years. The Group recognizes rental expense on a straight-line basis over the lease term.
 
As of December 31, 2013and 2014, the Group had 565 and611leased hotels in operation, respectively.
 
Manachised and franchised hotels
 
Typically the Group enters into certain franchiseand managementarrangements withfranchisees for which the Group is responsible for providing branding, quality assurance, training, reservation, hiring and appointing of the hotel general manager and various other support services relating to the hotel renovation and operation. Those hotels are classified as manachised hotels. Under typical franchise and management agreements, the franchisee is required to pay an initial franchise fee and ongoing franchise and management service fees, the majority of which are equal to a certain percentage of the revenues of the hotel. The franchisee is responsible for the costs of hotel development, renovation and the costs of its operations. The term of the franchise and management agreements are typically eight to ten years and are renewable upon mutual agreement between the Group and the franchisee. The Group also has a small number of franchised hotels in which cases the Group does not provide a hotel general manager. As of December 31, 2013 and 2014, the Group had 835 and 1,376 manachised hotels in operation and 25 and 8 franchised hotels in operation, respectively.
 
2.             SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
 
Basis of presentation
 
The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).
 
Basis of consolidation
 
The consolidated financial statements include the financial statements of the Company and its majority-owned subsidiaries. All significant intercompany transactions and balances are eliminated on consolidation.
 
The Group evaluates the need to consolidate certain variable interest entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.
 
The Group is deemed as the primary beneficiary of and consolidates variable interest entities when the Group has the power to direct the activities that most significantly impact the economic success of the entities and effectively assumes the obligation to absorb losses and has the rights to receive benefits that are potentially significant to the entities.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
The Group evaluates its business activities and arrangements with the entities that operate the manachised and franchised hotels to identify potential variable interest entities. Generally, these entities qualify for the business scope exception, therefore consolidation is not appropriate under the variable interest entity consolidation guidance.
 
Use of estimates
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets, long lived assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Group bases its estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant accounting estimates reflected in the Group’s consolidated financial statements include the useful lives and impairment of property and equipment and intangible assets, valuation allowance of deferred tax assets, impairment of goodwill, share-based compensation and costs related to its customer loyalty program.
 
Cash and cash equivalents
 
Cash and cash equivalents consist of cash on hand and demand deposits, which are unrestricted as to withdrawal and use, and which have original maturities of three months or less when purchased.
 
Restricted cash
 
Restricted cash represents bank demand deposits collateralized for certain newly established subsidiaries pending capital verification procedures of relevant PRC government authority and deposits used as security against borrowings. The capital verification approval process typically takes between three to six months.
 
Short-term investments
 
Short-term investments represent held-to-maturity securities and are measured at amortized cost in the consolidated balance sheets. The Group classifies investments with maturities of more than three months and less than 12 months as short-term investments.
 
Accounts receivable, net of allowance
 
Trade receivables mainly consist of franchise fee receivables, amounts due from corporate customers, travel agents, hotel guests and credit card receivables, which are recognized and carried at the original invoice amount less an allowance for doubtful accounts. The Group establishes an allowance for doubtful accounts primarily based on the age of the receivables and factors surrounding the credit risk of specific customers.
 
Inventories
 
Inventories mainly consist of small appliances, bedding and daily consumables. Small appliances and beddingfor new hotels opened are stated at cost, less accumulated amortization, and are amortized over their estimated useful lives, generally one year, from the time they are put into use. Daily consumables and beddings replacement are expensed when used.
 
Property and equipment, net
 
Property and equipment, net are stated at cost less accumulated depreciation and amortization. The renovations, betterments and interest cost incurred during construction are capitalized. Depreciation and amortization of property and equipment is provided using the straight line method over their expected useful lives. The expected useful lives are as follows:
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
Leasehold improvements	Shorter of the lease term or their estimated useful lives	
Buildings	40 years	
Furniture, fixtures and equipment	3-5 years	
Motor vehicles	5 years	
 
Construction in progress represents leasehold improvements under construction or being installed and is stated at cost. Cost comprises original cost of property and equipment, installation, construction and other direct costs. Construction in progress is transferred to leasehold improvements and depreciation commences when the asset is ready for its intended use.
 
Expenditures for repairs and maintenance are expensed as incurred. Gain or loss on disposal of property and equipment, if any, is recognized in the consolidated statements of comprehensive income as the difference between the net sales proceeds and the carrying amount of the underlying asset.
 
Intangible assets, net and unfavorable lease
 
Intangible assets consist primarily ofbrand name, non-compete agreements, franchise agreements andfavorable leases acquired in business combinations and purchased software. 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, including brand name, non-compete agreements, franchise agreements and favorable lease agreements acquired from business combination are recognized and measured at fair value upon acquisition. Non-compete agreements, franchise agreements and favorable lease agreements are amortized over the expected useful life, remaining franchise contract terms and remaining operating lease terms. Unfavorable lease agreements from business combination transactions are recognized as other long-term liabilities and are amortized over the remaining operating lease terms. Purchased software is stated at cost less accumulated amortization.
 
Brand name is considered to have an indefinite life. The Group evaluates the brand name each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Impairment is tested annually or more frequently if events or changes in circumstances indicate that it might be impaired. The Group measures the impairment by comparing the fair value of brand name with its carrying amount. If the carrying amount of brand name exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. The Group measured the fair value of the brand name under the relief-from-royalty method. Management performs its annual brand name impairment test on November 30.
 
Long-term investments
 
Long-term investments include cost-method investment, equity-method investment,available-for-sale securities and held-to-maturity securities.
 
The Group accounts for the investment in an investee of which the Group owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity as cost-method investment. The Group’s cost-method investment is carried at historical cost in its consolidated financial statements and measured at fair value on a nonrecurring basis when there are events or changes in circumstances that may have a significant adverse effect. An impairment loss is recognized in the consolidated statements of comprehensive income equal to the excess of the investment’s cost over its fair value when the impairment is deemed other-than-temporary.
 
The Group accounts for the investment in joint venture under equity-method accounting. Under this method, the Group’s pro rata share of income (loss) from investment is recognized in the consolidated statements of comprehensive income. Dividends received reduce the carrying amount of the investment. Equity-method investment is reviewed for impairment by assessing if the decline in market value of the investment below the carrying value is other-than-temporary. In making this determination, factors are evaluated in determining whether a loss in value should be recognized. These include consideration of the intent and ability of the Group to hold investment and the ability of the investee to sustain an earnings capacity, justifying the carrying amount of the investment. Impairment losses are recognized in other expense when a decline in value is deemed to be other-than-temporary.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
Investments in securities that have readily determinable fair values are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses recorded as a component of other comprehensive income or loss. Realized gains or losses are recognized in the consolidated statements of comprehensive income during the period in which the gains or losses are realized. If the Group determines that a decline in the fair value of the individual available-for-sale security is other-than-temporary, the cost basis of the security is written down to the fair value as a new cost basis and the amount of the write-down is accounted for as a realized loss. The new cost basis will not be changed for subsequent recoveries in fair value. The Group reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to: (1) the nature of the investment; (2) the cause and duration of the impairment; (3) the extent to which fair value is less than cost; (4) financial conditions and near term prospects of the issuers; and (5) the Group’s ability to hold the security for a period of time sufficient to allow for any anticipated recovery of its amortized cost or fair value.  Available-for-sale securities not expected to be realized in cash or sold in the next normal operating cycle of the business are classified as long-term investments.
 
Held-to-maturity securities are recorded in amortized cost.
 
No event had occurred that indicated that an other-than-temporary impairment existed and therefore theGroup did not record any impairment charges for these investments during 2012, 2013 or 2014.
 
Impairment of long-lived assets
 
The Group evaluates its long-lived assets and finite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When these events occur, the Group measures impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group recognizes an impairment loss equal to the difference between the carrying amount and fair value of these assets.
 
The Group performed a recoverability test of its long-lived assets associated with certain hotels due to the continue underperformance relative to the projected operating results, of which the carrying amount of the property and equipment exceed the future undiscounted net cash flows, and recognized an impairment loss of RMB5,349, RMB7,965 and RMB27,203 during the year ended December 31, 2012, 2013 and 2014, respectively.
 
Fair value of the property and equipment was determined by the Group based on the income approach using the discounted cash flow associated with the underlying assets, which incorporated certain assumptions including projected hotels’ revenue, growth rates and projected operating costs based on current economic condition, expectation of management and projected trends of current operating results.
 
Goodwill
 
Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable assets less liabilities acquired.
 
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. The Group completes a two-step goodwill impairment test. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Management performs its annual goodwill impairment test on November 30.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
The Group recognized goodwill impairment ofnil,nil and RMB188 for years ended December 31, 2012, 2013 and 2014, respectively.
 
Accruals for customer loyalty program
 
The Group invites its customers to participate in a customer loyalty program. The membership has an unlimited life. Members enjoy favorable treatment such as more convenient check-out procedures and late check-out, discounts on room rates and accumulate membership points for their paid stays, which can be redeemed for room night awards and other gifts within two years after the points are earned. The estimated incremental costs to provide room night awards and other gifts are accrued and recorded as accruals for customer loyalty program as members accumulate points and are recognized as cost and expense in the accompanying consolidated statements of comprehensive income. As members redeem awards or their entitlements expire, the provision is reduced correspondingly. As of December 31, 2013 and 2014, the accruals for estimated liabilities under the customer loyalty program amounted to RMB15,061 and RMB71,475, respectively.
 
Deferred revenue
 
Deferred revenue generally consists of non-refundable advances received from customers for rental of rooms, cash received for membership fees and initial franchise fees received prior to the Group fulfilling its commitments to the franchisees.
 
Revenue recognition
 
Revenue from leased hotels is derived from hotel operations, mainly including the rental of rooms, food and beverage sales and souvenir sales. Revenue is recognized when rooms are occupied and food and beverages and souvenirs are sold.
 
Revenues frommanachised andfranchised hotels are derived from franchise agreements where the franchisees are primarily required to pay (i) an initial one-time franchise fee, and (ii) continuing franchise fees, which mainly consist of (a) on-going management and service fees mainly based on a certain percentage of the room revenues of the franchised hotels, and (b) system maintenance, support fees and central reservation system usage fees. The one-time franchise fee is recognized when the manachised and franchised hotel opens for business, the fee becomes non-refundable, and the Group has fulfilled all its commitments and obligations, including the assistance to the franchisees in property design, leasehold improvement construction project management, systems installation and personnel recruiting and training. The ongoing management and service fees are recognized when the underlying service revenue is recognized by the franchisees’ operations. The system maintenance, support fee and central reservation system usage fee is recognized over the period when services are provided.
 
In addition, the Group accounts for hotel manager fees related to the manachised hotels under the franchise program as revenues. Pursuant to the franchise agreements, the Group charges the franchisees fixed hotel manager fees to cover the manachised hotel managers’ payroll, social welfare benefits and certain other out-of-pocket expenses that the Group incurs on behalf of the manachised hotels. The hotel manager fee is recognized as revenue monthly. During the years ended December 31, 2012, 2013 and 2014, the hotel manager fees that were recognized as revenue were RMB72,061, RMB116,885 and RMB166,572, respectively.
 
Membership fees from the Group’s customer loyalty program are earned and recognized on a straight-line basis over the expected membership duration of the different membership levels. Such duration is estimated based on the Group’s and management’s experience and is adjusted on a periodic basis to reflect changes in membership retention. The membership duration is estimated to be two to five years which reflects the expected membership retention. Revenues recognized from the customer loyalty program were RMB51,132, RMB74,715 and RMB107,737 for the years ended December 31, 2012, 2013 and 2014, respectively.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
Business tax and related taxes
 
The Group is subject to business tax, education surtax and urban maintenance and construction tax, on the services provided in the PRC. Such taxes are primarily levied based on revenue at applicable rates and are recorded as a reduction of revenues.
 
Advertising and promotional expenses
 
Advertising related expenses, including promotion expenses and production costs of marketing materials, are charged to the consolidated statements of comprehensive income as incurred, and amounted to RMB30,053, RMB43,807 and RMB79,806 for the years ended December 31, 2012, 2013 and 2014, respectively.
 
Government grants
 
Unrestricted government subsidies from local governmental agencies allowing the Group full discretion to utilize the funds were RMB6,723, RMB17,016 and RMB19,657 for the years ended December 31, 2012, 2013 and 2014, respectively, which were recorded as other operating income.
 
Leases
 
A lease of which substantially all the benefits and risks incidental to ownership remain withthelessor is classified as an operating lease. All leases of the Group are currently classified as operating leases. When a lease contains rent holidays or requires fixed escalations of the minimum lease payments, the Group records the total rental expense on a straight-line basis over the initial lease term and the difference between the straight-line rental expense and cash payment under the lease is recorded as deferred rent. As of December 31, 2013 and 2014, deferred rent of RMB15,704 and RMB21,701 were recorded as other current liabilities and RMB653,831  and RMB830,414 were recorded as long-term liabilities, respectively.
 
Capitalization of interest
 
Interest cost incurred on funds used to construct leasehold improvements during the active construction period is capitalized. The interest capitalized is determined by applying the borrowing interest rate to the average amount of accumulated capital expenditures for the assets under construction during the period. The interest expense incurred for the years ended December 31, 2012, 2013 and 2014 were RMB859, RMB1,084 and RMB14,733, of which RMB37, RMB271 and RMB13,200 were capitalized as additions to assets under construction, respectively.
 
Income taxes
 
Current income taxes are provided for in accordance with the relevant statutory tax laws and regulations.
 
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Net operating losses are carried forward and credited by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of the Group, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on the characteristics of the underlying assets and liabilities, or the expected timing of their use when they do not relate to a specific asset or liability.
 
Foreign currency translation
 
The reporting currency of the Group is the Renminbi (“RMB”). The functional currency of the Company is the United States dollar (“US dollar”). Monetary assets and liabilities denominated in currencies other than the US dollar are translated into US dollar at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the US dollar during the year are converted into the US dollar at the applicable rates of exchange prevailing on the day transactions occurred. Transaction gains and losses are recognized in the statements of comprehensive income. Assets and liabilities are translated into RMB at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive loss in the consolidated statements of comprehensive income.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
The financial records of the Group’s subsidiaries are maintained in local currencies, RMB, which is the functional currency.
 
Comprehensive income
 
Comprehensive income includes all changes in equity except for those resulting from investments by owners and distributions to owners and is comprised of net income, foreign-currency translation adjustments and unrealized securities holding gains (losses). The consolidated financial statements have been adjusted for the retrospective application of the authoritative guidance regarding presentation of comprehensive income, which was adopted by the Group on January 1, 2012.
 
Concentration of credit risk
 
Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investments and accounts receivable.
 
All of the Group’s cash and cash equivalentsandrestricted cash are held with financial institutions that Group management believes to be high credit quality. In addition, the Group’s investment policy limits its exposure to concentrations of credit risk and the Group’s short-term investments consist of corporate debt securities with high credit quality. The Group conducts credit evaluations on its group and agency customers and generally does not require collateral or other security from such customers. The Group periodically evaluates the creditworthiness of the existing customers in determining an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers.
 
Fair value
 
The Group 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 measurements 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.
 
The established fair value hierarchy 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. The three levels of inputs may be used to measure fair value include:
 
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
The estimated fair value of the Group’s financial instruments, including cash, restricted cash, short-term investments, receivables, payables and accruals, approximates their carrying value due to their short-term nature.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
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 measures fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates.
 
As of December 31, 2014, information about inputs into the fair value measurements of theGroup’s assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:
 
 	 	 	 	Fair Value Measurements at Reporting Date Using	 	
Description	 	Year Ended
December 31,
2014	 	Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)	 	Significant
Other
Observable
Inputs
(Level 2)	 	Significant
Unobservable
Inputs
(Level 3)	 	
Available-for-sale securities	 	137,943	 	137,943	 	—	 	—	 	
 
The following table presents the Group’s assets measured at fair value on a non-recurring basis for the years ended December 31, 2012, 2013 and 2014:
 
 	 	 	 	 	 	Fair Value Measurements at Reporting Date Using	 	
Year Ended
December 31,	 	Description	 	Fair value	 	Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)	 	Significant
Other
Observable
Inputs
(Level 2)	 	Significant
Unobservable
Inputs
(Level 3)	 	Total loss	 	
2012	 	Property and equipment	 	4,991	 	—	 	—	 	4,991	 	5,349	 	
2013	 	Property and equipment	 	5,382	 	—	 	—	 	5,382	 	7,965	 	
2014	 	Property and equipment	 	13,561	 	—	 	—	 	13,561	 	27,203	 	
2014	 	Goodwill	 	—	 	—	 	—	 	—	 	188	 	
 
As a result of reduced expectations of future cash flows from certainleased hotels, theGroup determined that the hotels property and equipment with a carrying amount of RMB10,340, RMB13,347 and RMB40,764 was not fully recoverable and consequently recorded an impairment charge of RMB5,349, RMB7,965  and RMB27,203 for the years ended December 31, 2012, 2013 and 2014, respectively. The Company also determined that the goodwill amount with a carrying amount of RMB188 was impaired as a result of the impairment assessment.
 
Fair value of the property and equipmentas well as the reporting unitswas determined by the Group based on the income approach using the discounted cash flow associated with the underlying assets, which incorporated certain assumptions including projected hotels’ revenue, growth rates and projected operating costs based on current economic condition, expectation of management and projected trends of current operating results. As a result, the Group has determined that the majority of the inputs used to value its long-lived assets held and used and its reporting units are unobservable inputs that fall within Level 3 of the fair value hierarchy. The revenue growth rate and the discount rate were the significant unobservable input used in the fair value measurement, which are 4% and 15%, 4% and 20%, and 4% and 20% for the years ended December 31, 2012, 2013 and 2014, respectively.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
Share-based compensation
 
The Group recognizes share-based compensation in the consolidated statements of comprehensive income based on the fair value of equity awards on the date of the grant, with compensation expenses recognized over the period in which the grantee is required to provide service to the Group in exchange for the equity award. The share-based compensation expenses have been categorized as either hotel operating costs, general and administrative expenses or selling and marketing expenses, depending on the job functions of the grantees. For the years ended December 31, 2012, 2013 and 2014, the Group recognized share-based compensation expenses of RMB20,837, RMB30,468 and RMB31,937, respectively, which was classified as follows:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
Hotel operating costs	 	2,592	 	4,948	 	6,830	 	
Selling and marketing expenses	 	1,031	 	973	 	939	 	
General and administrative expenses	 	17,214	 	24,547	 	24,168	 	
Total	 	20,837	 	30,468	 	31,937	 	
 
Earnings per share
 
Basic earnings per share is computed by dividing income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares and is calculated using the treasury stock method for stock options and nonvested restricted stocks.
 
Segment reporting
 
The Group operates and manages its business as a single segment. The Group primarily generates its revenues from customers in the PRC. Accordingly, no geographical segments are presented. Substantially all of the Group’s long-lived assets are located in the PRC.
 
Recently issued accounting pronouncements
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded the revenue recognition requirement in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, it also superseded the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and created new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, which will be effective for annual reporting period beginning after December 15, 2016. The Group is still in the process of assessing the impact of this newly issued ASU on the Group’s consolidated financial statements.
 
In August 2014, the FASB issued ASU No. 2014-15, Presentation of financial statements—going concern (Subtopic 205-40), which provided guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures so as to reduce the diversity in the timing and content of footnote disclosures. ASU 2014-15 will be effective for annual periods ending after December 15, 2016. The Group does not expect the adoption will have a material impact on the Group’s consolidated financial statements.
 
Translation into United States Dollars
 
The financial statements of the Group are stated in RMB. Translations of amounts from RMB into United States dollars are solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.2046, on December 31, 2014, as set forth in H.10 statistical release of the Federal Reserve Board. The translation is not intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into United States dollars at that rate on December 31, 2014, or at any other rate.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
3.             ACQUISITIONS
 
(i) During the year ended December 31, 2012, to enrich the Group’s brand and accelerate the Group’s expansion in the mid-scale market, the Group acquired 51% equity interest of Starway Hotels (Hong Kong) Limited (“Starway”), a franchised hotel chain from C-Travel International Limited (“C-Travel”), a wholly owned subsidiary of Ctrip.com International, Ltd. for total cash consideration of RMB17,292. C-Travel granted the Group a purchase right to acquire the remaining 49% equity interest of Starway at an amount in US$ equal to RMB16,460 within one year. The right may be exercised by the Group in its sole discretion. The business acquisition was accounted for under purchase accounting.
 
The following is a summary of the fair values of the assets acquired and liabilities assumed:
 
 	 	2012	 	Amortization period	 	
Current assets	 	954	 	 	 	
Intangible assets	 	299	 	5 years	 	
Property and equipment	 	667	 	5-10 years	 	
Brand name	 	28,600	 	indefinite	 	
Non-compete agreement	 	400	 	10 years	 	
Franchise agreements	 	7,700	 	remainingcontract terms	 	
Goodwill	 	21,491	 	 	 	
Current liabilities	 	(19,430	)	 	 	
Deferred tax liabilities	 	(9,174	)	 	 	
Noncontrolling interest	 	(14,215	)	 	 	
Total	 	17,292	 	 	 	
 
Brand name represents the registered trademark of Starway which is well recognized brand in mid-scale hotel market in PRC. The useful life of brand name is indefinite. The Group measured the fair value of the brand name under the relief-from-royalty method.
 
Goodwill was recognized as a result of expected synergies from combining operations of the Group and Starway and other intangible assets that do not qualify for separate recognition. Goodwill is not amortized and is not deductible for tax purpose.
 
During the year ended December 31, 2013, the Group acquired the remaining 49% equity interest of Starway for cash consideration of RMB16,460, of which RMB4,210 and RMB 4,083 has been paid in 2013 and 2014, respectively, with the remaining amount of RMB8,167 to be paid in the next two years. The purchase of the remaining 49% noncontrolling interest is treated as an equity transaction. The difference between the purchase consideration and the related carrying value of the noncontrolling interests of RMB2,514 was recorded as a reduction of additional paid-in capital during the year ended December 31, 2013.
 
(ii) During the years ended December 31, 2012, 2013 and2014, the Group acquired one,nine and oneindividual hotels in the form of leased hotel for total cash consideration of RMB7,000, RMB33,423 and RMB12,975, respectively. The business acquisitions were accounted for under purchase accounting.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
The following is a summary of the fair values of the assets acquired and liabilities assumed:
 
 	 	2012	 	2013	 	2014	 	Amortization period	 	
Current assets	 	127	 	5,552	 	25	 	 	 	
Property and equipment	 	4,668	 	29,805	 	10,477	 	5-10 years	 	
Favorable leases	 	2,470	 	6,422	 	3,330	 	remaining lease terms	 	
Deferred tax assets	 	—	 	6,628	 	—	 	 	 	
Franchise agreements	 	200	 	—	 	—	 	remaining contracts terms	 	
Goodwill	 	153	 	662	 	—	 	 	 	
Current liabilities	 	—	 	(2,501	)	—	 	 	 	
Deferred tax liabilities	 	(618	)	(13,145	)	(832	)	 	 	
Noncontrolling interest	 	—	 	—	 	(25	)	 	 	
Total	 	7,000	 	33,423	 	12,975	 	 	 	
 
4.             PROPERTY AND EQUIPMENT, NET
 
Property and equipment, net consist of the following:
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	
Cost:	 	 	 	 	 	
Buildings	 	12,115	 	12,115	 	
Leasehold improvements	 	4,190,693	 	4,916,270	 	
Furniture, fixtures and equipment	 	619,200	 	742,682	 	
Motor vehicles	 	820	 	820	 	
 	 	4,822,828	 	5,671,887	 	
Less: Accumulated depreciation	 	(1,463,547	)	(2,008,882	)	
 	 	3,359,281	 	3,663,005	 	
Construction in progress	 	274,758	 	244,338	 	
Property and equipment, net	 	3,634,039	 	3,907,343	 	
 
Depreciation expense was RMB337,511, RMB453,637 and RMB559,918 for the years ended December 31, 2012, 2013and 2014, respectively.
 
In 2012,the Group demolished one leased hotel due to local government zoning requirements. As a result, the Group wrote off property and equipment of RMB3,042 associated with this hotel, which has been recorded as receivable in other current assets as of December 31, 2012 and 2013. No gain or loss was recognized. RMB4,553 has been received in February 2014.
 
In 2013, the Group demolished three leased hotels due to local government zoning requirements. As a result, the Group wrote off property and equipment of RMB7,296 associated with these hotels and recognized a gain of RMB10,734 as other operating income, which is net of RMB15,030 cash received and RMB3,000 receivable recorded in other current assets as of December 31, 2013. In March 2014, RMB2,000 has been received.
 
In 2014, the Group demolished one leased hotels due to local government zoning requirements. As a result, the Group wrote off property and equipment of RMB3,971 associated with this hotel and recognized a gain of RMB33 as other operating income with RMB4,004 cash received.
 
As of December 31, 2014, the Group has been formally notified by local government authorities thattwoadditional leased hotels of the Group will likely be demolished due to local government zoning requirements. The aggregate carrying amount of property and equipment at the associated hotels was RMB10,075 as of December 31, 2014. Neither of the associated hotels has recorded intangible assets or goodwill. The Group has not recognized any impairment as expected cash flows from the hotels’ operations prior to demolition and expected amounts to be received as a result of the demolition will likely exceed the carrying value of such assets. The Group estimated amounts to be received based on the relevant PRC laws and regulations, terms of the lease agreements, and the prevailing market practice.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
5.             INTANGIBLE ASSETS, NET AND UNFAVORABLE LEASE
 
Intangible assets, net consist of the following:
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	
Brand name	 	28,600	 	28,600	 	
Franchise agreements	 	7,700	 	7,700	 	
Non-compete agreement	 	400	 	400	 	
Favorable lease agreements	 	76,048	 	79,378	 	
Purchased software	 	24,835	 	35,298	 	
Total	 	137,583	 	151,376	 	
Less: Accumulated amortization	 	(35,738	)	(46,839	)	
Total	 	101,845	 	104,537	 	
 
Unfavorable lease
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	
Unfavorable lease agreements	 	3,924	 	3,924	 	
Less: Accumulated amortization	 	(2,307	)	(2,604	)	
Unfavorable lease agreements, net	 	1,617	 	1,320	 	
 
The values of favorable lease agreements were determined based on the estimated present value of the amount the Group has avoided paying as a result of entering into the lease agreements. Unfavorable lease agreements were determined based on the estimated present value of the acquired lease that exceeded market prices and are recognized as other long-term liabilities. The value of favorable and unfavorable lease agreements is amortized using the straight-line method over the remaining lease term.
 
Amortization expense of intangible assets for the years ended December 31, 2012, 2013and 2014amounted to RMB10,501, RMB9,846 and RMB11,101, respectively.
 
The annual estimated amortization expense for the above intangible assets and unfavorable lease for the following years is as follows:
 
 	 	Amortization for
Intangible Assets	 	Amortization for
Unfavorable Lease	 	Net Amortization	 	
2015	 	10,570	 	(289	)	10,281	 	
2016	 	10,076	 	(209	)	9,867	 	
2017	 	9,723	 	(130	)	9,593	 	
2018	 	8,619	 	(130	)	8,489	 	
2019	 	8,099	 	(130	)	7,969	 	
Thereafter	 	28,850	 	(432	)	28,418	 	
 	 	75,937	 	(1,320	)	74,617	 	
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
6.             LONG-TERM INVESTMENTS
 
The long-term investments as of December 31, 2013 and 2014 were as follows:
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	
UBOX	 	40,517	 	40,517	 	
Kangdu	 	50,000	 	—	 	
Sheen Star	 	—	 	20,990	 	
Yibang	 	—	 	2,482	 	
Quanjude	 	—	 	137,943	 	
Loan to franchisees	 	—	 	5,140	 	
Campsort	 	—	 	11,644	 	
GOOAGOO	 	—	 	10,289	 	
Total	 	90,517	 	229,005	 	
 
In June 2012, the Group purchased 46,200,000 Series A preferred shares of UBOX International Holdings Co., Limited (“UBOX”), a privately-held company, for the consideration of RMB28,129.
 
In December 2012, the Group purchasedconvertible promissory note of RMB8,074 fromUBOX. In December 2013, the Group converted the principal of the promissory note to 8,530,731 ordinary shares of UBOX. In August 2013, the Group purchased another convertible promissory note of RMB4,314 from UBOX. In August 2014, the Group converted the principal of the promissory note to 3,946,897 ordinary shares. As of December 31, 2014, the Group had approximately 3.7% of UBOX’s equity interest and the investments were accounted for using the cost method since the Group does not have the ability to exert significant influence over UBOX. As of December 31, 2014, there had been no identified events or changes in circumstances that had a significant adverse effect on the investments or other indicates of impairment.
 
In November 2013, the Group entered into an investment agreement to inject RMB100,000 to Suzhou Kangdu Property Co., Limited (“Kangdu”), a real estate company, for 50% equity interest of Kangdu. According to the investment agreement, the Group will not participate in the operation of Kangdu, nor share the earnings. Concurrently the Group entered into the agreement with Kangdu to acquire the property developed by Kangdu for a purchase price of RMB175,000 and the property is scheduled to be completed and transferred to the Group in October 2015. In addition, the Group was granted a put option to require the other investors of Kangdu to repurchase its equity interest for RMB100,000 plus 8% interest at such time the property is scheduled to be transferred to the Group in October 2015. The Group had injected RMB50,000 in November 2013 and RMB30,000 in January 2014. The Group accounted for the investment as available-for-sale securities.  In April 2014, the Group transferred its investment in Kangdu to Sheen Star Group Limited (“Sheen Star”), in which the Group owns minority interest (see the following paragraph for the equity structure of Sheen Star), for consideration of RMB82,785, and its rights and obligations associated with the property purchase agreement were transferred to Sheen Star contemporaneously.
 
In April 2014, the Group set up Sheen Star together with Mr. Qi Ji, the founder, executive chairman and chief executive officer of the Group and a third party. Sheen Star is a real estate investment company which the Group contributed RMB20,990 and owned equity interest of 19.99%, and Mr. Qi Ji owned 50.01%. The Group accounted for the investment in Sheen Star under equity-method as the Group has the ability to exert significant influence. The unrealized gain (loss) was immaterial in 2014.
 
In May 2013, the Group acquired 30% equity interest in Lijiang Yibang Changchunteng Hotel Co., Limited (“Yibang”) for consideration of RMB430. In April 2014, The Group acquired additional 20% equity interest in Yibang for consideration of RMB285. The Group accounted for the investment under equity-method because the Group has the ability to exert significant influence but does not have the control over Yibang.  The Group recognized investment loss of RMB430 and investment income of RMB2,197 in 2013 and 2014, respectively, which was recorded in other income.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
From April to December 2014, the Group entered into entrusted loan agreements with franchisees to provide financial support to them.  The terms of the entrusted loans are typically two to three years, and the interest rates are from 8% to 8.5%. The Group recognized RMB266 interest income for the loans in 2014.
 
In June 2014, the Group purchased 7,241,131 ordinary shares of China Quanjude (Group) Co., Ltd. (“Quanjude”), a top restaurant brand listed in Shenzhen Stock Exchange in China, through a private placement. The purchase price was set at RMB13.81 per ordinary share and the total purchase cost was RMB100 million. Upon the closing of the transaction described above, the Group holds approximately 2.35% of Quanjude’s total outstanding shares. Given the level of investment, the Group accounts for its investment in Quanjude as “available-for-sale” and measured the fair value at every period end. Unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized. The closing price of Quanjude as of December 31, 2014 was RMB19.05 per share. As of December 31, 2014, the Group recorded the investment in Quanjude at the fair value of RMB137,943, with RMB28,458 increase in fair value of the investment, net of tax, credited to other comprehensive income.
 
In July 2014, the Group acquired 30% equity interest in Shanghai Campsort Travel Development Co., Ltd. (“Campsort”), a new resort hotel chain in China, for consideration of RMB15,000. In November 2014, the Group transferred 6% equity interest to Shanghai Homeinn Hotel Management Co., Ltd. (“Homeinn”) for consideration of RMB3,000. Therefore, the Group held 24% equity interest of Campsort and accounted for the investment under equity-method because the Group has the ability to exert significant influence over Campsort. The Group recognized investment loss of RMB356 in 2014.
 
In November 2014, the Group purchased 8% equity interest in Beijing GOOAGOO Technology Service Co., Ltd. (“GOOAGOO”), a high-tech service provider for Offline-To-Online data processing and platform operation, for the consideration of RMB10,289. The Group accounted the investment under cost method since the Group does not have the ability to exert significant influence over GOOAGOO.
 
7.             GOODWILL
 
The changes in the carrying amount of goodwill for the years ended December 31, 2012,2013and 2014were as follows:
 
 	 	Gross
Amount	 	Accumulated
Impairment Loss	 	Net
Amount	 	
Balance atJanuary 1, 2012	 	44,344	 	(1,808	)	42,536	 	
Increase in goodwill related to acquisitions	 	21,644	 	—	 	21,644	 	
Balance at December 31, 2012	 	65,988	 	(1,808	)	64,180	 	
Increase in goodwill related to acquisitions	 	662	 	—	 	662	 	
Balance at December 31, 2013	 	66,650	 	(1,808	)	64,842	 	
Impairment losses recognized	 	—	 	(188	)	(188	)	
Balance at December 31, 2014	 	66,650	 	(1,996	)	64,654	 	
 
8.             DEBT
 
In March 2012, the Group entered into afive-year bank credit facility under which the Group can borrow up to RMB500,000 by May 21, 2015, which is subject to bank’s reevaluation from time to time. The credit facility has a specified expiration schedule for draw down. The interest rate for each draw down is established on the draw-down date and is adjusted annually, based on the loan interest rate stipulated by the People’s Bank of China for the corresponding period. As of December 31, 2012, the Group had drawn down the credit facility of RMB1,000, repaid RMB1,000, and RMB100,000 of the credit facility has expired. In 2013 and 2014, the Group did not have any additional draw-down and credit facility of RMB399,000 was available for future borrowing as of December 31, 2014, which will expire on May 21, 2015. The weighted average interest rate for borrowings drawn under such credit facility was 6.9% for the year ended December 31, 2012. The credit facility is restricted to certain hotels’ renovation and the credit facility is not collateralized.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
In September 2012, the Group entered into athree-year revolvingbankcredit facility under which theGroupcan draw-down up to RMB300,000 by October 9, 2015. As of December 31, 2012, 2013 and 2014, the Group has drawn down the credit facility of nil, RMB104,540 and nil and repaid nil, RMB104,540 and nil, respectively. The weighted average interest rate for borrowings drawn under such credit facility was 6.0% for the year ended December 31, 2013. In December 2013, the Group renewed the bank credit facility under which the Group can borrow up to RMB 500,000 by December 11, 2016. The interest rate for this credit facility was determined on the draw-down date and the credit facility was not collateralized. As of December 31, 2014, a letter of guarantee of RMB700 was issued under this credit facility, and RMB499,300 was available for future borrowing.
 
In December 2012, the Group entered into a thirty-month bank credit facility under which the Group can draw down up to US$10 million by April 5, 2013. The interest rate for each draw down is based on the twelve-month London Interbank Offered Rate (“Libor”) on draw-down date plus 2.7%.  Each draw down will be guaranteed by letter of guarantee or stand-by letter of credit.  As of December 31, 2013, the Group has drawn down US$200 thousand and repaid US$200 thousand and the facility has expired. The weighted average interest rate for borrowings drawn under such credit facility was 3.54% for the year ended December 31, 2013.
 
In December 2013, the Group signed a one-year entrusted loan contract with a subsidiary of Ctrip.com International, Ltd. under which the Group can borrow up to RMB 300,000 for the period from January 6, 2014 to January 5, 2015. The interest rate of this borrowing is 5.4%. According to the agreement, the Group shall settle the unpaid principal and interest with its ordinary shares if the loan is in default. In January 2014, the Group had drawn down RMB 300,000 under this contract and repaid RMB 300,000 in November 2014.
 
9.             ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	
Payable for business acquisitions	 	6,398	 	5,745	 	
Business taxes and other surcharge payables	 	48,557	 	58,887	 	
Accrual for customer loyalty program	 	15,061	 	71,475	 	
Payable to noncontrolling interest holders	 	7,112	 	5,552	 	
Other payables	 	51,386	 	41,864	 	
Accrued rental	 	41,517	 	44,125	 	
Accrued utilities	 	38,336	 	37,320	 	
Other accrued expenses	 	40,818	 	48,049	 	
Total	 	249,185	 	313,017	 	
 
From time to time, the Group receives cash advances from noncontrolling interest holders ofhotels that are not wholly owned by the Group. Such advances are non-interest bearing and are payable within one year.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
10.      HOTEL OPERATING COSTS
 
Hotel operating costs include all direct costs incurred in the operation of the leased hotels, manachised andfranchised hotels and consist of the following:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
Rents	 	916,357	 	1,255,663	 	1,543,651	 	
Utilities	 	215,768	 	273,314	 	323,837	 	
Personnel costs	 	505,773	 	638,511	 	788,973	 	
Depreciation and amortization	 	337,162	 	453,062	 	558,833	 	
Consumable, food and beverage	 	333,245	 	391,715	 	454,795	 	
Others	 	145,597	 	169,401	 	207,938	 	
Total	 	2,453,902	 	3,181,666	 	3,878,027	 	
 
11.      PRE-OPENING EXPENSES
 
The Group expenses all costs incurred in connection with start-up activities, including pre-operating costs associated with new hotel facilities and costs incurred with the formation of the subsidiaries, such as organization costs. Pre-opening expenses primarily include rental expenses and employee costs incurred during the hotel pre-opening period.
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
Rents	 	191,538	 	186,656	 	163,155	 	
Personnel costs	 	15,488	 	8,700	 	7,217	 	
Others	 	23,664	 	15,928	 	15,953	 	
Total	 	230,690	 	211,284	 	186,325	 	
 
12.      SHARE-BASED COMPENSATION
 
In February 2007, the Group adopted the 2007 Global Share Plan which allows the Group to offer incentive awards to employees, officers, directors and consultants or advisors (the “Participants”). Under the 2007 Global Share Plan, the Group may issue incentive awards to the Participants to purchase not more than 10,000,000 ordinary shares. In June 2007, the Group adopted the 2008 Global Share Plan which allows the Group to offer incentive awards to Participants. Under the 2008 Global Share Plan, the Group may issue incentive awards to purchase up to 3,000,000 ordinary shares. In October 2008, the Group increased the maximum number of incentive awards available under the 2008 Global Share Plan to 7,000,000. In September 2009, the Group adopted the 2009 Share Incentive Plan which allows the Group to offer incentive awards to Participants. Under the 2009 Share Incentive Plan, the Group may issue incentive awards to purchase up to 3,000,000 ordinary shares. In July 2010, the Group increased the maximum number of incentive awards available under the 2009 Share Incentive Plan to 15,000,000. The 2007 and 2008 Global Share Plans and 2009 Share Incentive Plan (collectively, the “Incentive Award Plans”) contain the same terms and conditions. The incentive awards granted under the Incentive Award Plans typically have a maximum life of ten years and vest 50% on the second anniversary of the stated vesting commencement date with the remaining 50% vesting ratably over the following two years. As of December 31, 2014, the Group had granted 24,456,389 options and 5,613,738 nonvested restricted stocks.
 
Share options
 
In July 2012, the Group granted 1,475,366 options to executive officers that will vest 50% on the second anniversary of the stated vesting commencement date with the remaining 50% vesting ratably over the following two years and will become exercisable if the Group satisfies certain performance conditions for the three-year period ending December 31, 2014. The number of underlying shares that may become exercisable will range from 0% to 200% depending upon whether the performance conditions are achieved and, if achieved, to what level. The Group recognizes compensation expenses for the awards with performance conditions based upon the Group’s judgment of likely future performance and may be adjusted in future periods depending on actual performance. As of December 31, 2014, the Group has adjusted the number of options granted to 869,232 based on the actual performance.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
The weighted-average grant date fair value for options granted during the years ended December 31, 2012 and 2014 was RMB8.52 (US$1.35) and RMB15.79 (US$2.57), respectively, computed using the binomial option pricing model. The binomial model requires the input of subjective assumptions including the expected stock price volatility and the expected price multiple at which employees are likely to exercise stock options. The Group uses historical data to estimate forfeiture rate. Expected volatilities are based on the average volatility of the Group and comparable companies. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 
The fair value of stock options was estimated using the following significant assumptions:
 
 	 	2012	 	2014	 	
Suboptimal exercise factor	 	7.45 to 7.66	 	4.40	 	
Risk-free interest rate	 	0.81 to 1.19%	 	1.89 to 1.99%	 	
Volatility	 	51.35 to 51.89%	 	47.22 to 47.75%	 	
Dividend yield	 	—	 	—	 	
Life of option	 	6 years	 	6 years	 	
 
The following table summarized the Group’s share option activity under the option plans:
 
 	 	Number of
Options	 	Weighted Average
Exercise Price	 	Weighted Average
Remaining
Contractual Life	 	Aggregate Intrinsic
Value	 	
 	 	 	 	US$	 	Years	 	US$’000	 	
Share options outstanding at January 1, 2014	 	6,825,784	 	2.12	 	 	 	 	 	
Granted	 	319,480	 	5.48	 	 	 	 	 	
Adjustment based on actual performance	 	(606,134	)	2.75	 	 	 	 	 	
Forfeited	 	(26,128	)	6.23	 	 	 	 	 	
Exercised	 	(1,591,004	)	2.14	 	 	 	 	 	
Share options outstanding at December 31, 2014	 	4,921,998	 	2.23	 	4.01	 	21,344	 	
Share options vested or expected to vest at December 31, 2014	 	4,842,378	 	2.20	 	4.04	 	21,153	 	
Share options exercisable at December 31, 2014	 	3,827,558	 	1.90	 	4.03	 	17,873	 	
 
As of December 31, 2014, there was RMB 10,515 in total unrecognized compensation expense related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.11 years.
 
During the years ended December 31, 2012, 2013 and 2014, 1,889,872, 2,802,488 and 1,591,004 options were exercised having an aggregate intrinsic value of RMB32,562, RMB74,321 and RMB42,740, respectively.
 
Nonvested restricted stocks
 
The fair value of nonvested restricted stock with service conditions or performance conditions is based on the fair market value of the underlying ordinary shares on the date of grant.
 
In July 2012, the Group granted 1,059,977 nonvested restricted stocks to executive officers which will become exercisable if the Group satisfies certain performance conditions for the three-year period ending December 31, 2014, and 213,209 nonvested restricted stocks to executive officers which will become exercisable if the Group satisfies certain market condition for the three-year period ending December 31, 2014. These awards vest 50% on the second anniversary of the stated vesting commencement date with the remaining 50% vesting ratably over the following two years.  The number of underlying shares that may become exercisable will range from 0% to 200% depending upon whether the performance conditions and market condition are achieved and, if achieved, to what level. The Group recognizes compensation expense for the awards with performance conditions based upon the Group’s judgment of likely future performance and may be adjusted in future periods depending on actual performance. The Group estimated the grant date fair value of the awards with market conditions using a Monte Carlo simulation. Compensation expenses for the awards with market conditions are recognized during the requisite service period, even if the market condition is never satisfied. The significant assumptions of the Monte Carlo simulation are the following:
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
 	 	2012	 	
Expected dividends	 	—	 	
Risk-free interest rate	 	0.29	%	
Expected volatility	 	48.41	%	
 
As of December 31, 2014, the Group adjusted the number of nonvested restricted stocks granted to executive officers to 1,557,408 based on the three year performance.
 
The following table summarized the Group’s nonvested restricted stock activity in 2014.
 
 	 	Number of restricted stocks	 	Weighted average grant date
fair value	 	
 	 	 	 	US$	 	
Nonvested restricted stocks outstanding at January 1, 2014	 	3,637,956	 	3.33	 	
Granted	 	1,167,100	 	6.11	 	
Adjustment based on actual performance	 	284,222	 	2.75	 	
Forfeited	 	(298,818	)	5.11	 	
Vested	 	(1,553,220	)	3.04	 	
Nonvested restricted stocks outstanding at December 31, 2014	 	3,237,240	 	4.25	 	
 
As of December 31, 2014, there was RMB61,063 in unrecognized compensation costs, net of estimated forfeitures, related to unvested restricted stocks, which is expected to be recognized over a weighted-average period of 2.67 years.
 
The total fair value of nonvested restricted stocks vested in 2013 and 2014 was RMB 7,089 and RMB59,475.
 
13.      EARNINGS PER SHARE
 
The following table sets forth the computation of basic and diluted earnings per share for the years indicated:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
Net income attributable to ordinary shareholders — basic	 	174,887	 	279,858	 	307,348	 	
Net income attributable to ordinary shareholders — diluted	 	174,887	 	279,858	 	307,348	 	
Weighted average ordinary shares outstanding — basic	 	243,284,332	 	245,187,348	 	248,957,645	 	
Incremental weighted-average ordinary shares from assumed exercise of share options and nonvested restricted stocks using the treasury stock method	 	3,696,669	 	4,298,936	 	4,046,559	 	
Weighted average ordinary shares outstanding — diluted	 	246,981,001	 	249,486,284	 	253,004,204	 	
Basic earnings per share	 	0.72	 	1.14	 	1.23	 	
Diluted earnings per share	 	0.71	 	1.12	 	1.21	 	
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
For the years ended December 31, 2012, 2013 and 2014, the Group had securities which could potentially dilute basic earnings per share in the future, but which were excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive. Such outstanding securities consist of the following:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
Outstanding employee options and nonvested restricted stocks	 	797,981	 	—	 	293,512	 	
 
14.      INCOME TAXES
 
Cayman Islands
 
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain.
 
Hong Kong
 
China Lodging Holdings (HK) Limited and Starway Hotels (HongKong) Limited are subject to Hong Kong profit tax at a rate of 16.5% in 2012, 2013 and 2014. No Hong Kong profit tax has been provided as the Group has not had assessable profit that was earned in or derived from Hong Kong during the years presented.
 
Singapore
 
China Lodging Holdings Singapore Pte. Ltd. is subject to Singapore corporate income tax at a rate of 17% in 2012, 2013 and 2014. No Singapore profit tax has been provided as the Group has not had assessable profit that was earned in or derived from Singapore during the years presented.
 
PRC
 
Under the Law of the People’s Republic of China on Enterprise Income Tax (“EIT Law”), which was effective from January 1, 2008, domestically-owned enterprises and foreign-invested enterprises are subject to a uniform tax rate of 25%.
 
Hanting Technology (Suzhou) Co., Ltd, as a recognized software development entity located at Suzhou Industrial Park in Suzhou of PRC, is entitled to a two-year exemption and three-year 50% reduction starting from the first profit making year after absorbing all prior years’ tax losses. Hanting Suzhou has entered into the first tax profitable year for the year ended December 31, 2011.
 
Tax expense (benefit) is comprised of the following:
 
 	 	As of December 31,	 	
 	 	2012	 	2013	 	2014	 	
Current Tax	 	72,395	 	127,439	 	155,496	 	
Deferred Tax	 	(18,226	)	(22,619	)	(42,391	)	
Total	 	54,169	 	104,820	 	113,105	 	
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
A reconciliation between the effective income tax rate and the PRC statutory income tax rate is as follows:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
PRC statutory tax rate	 	25	%	25	%	25	%	
Tax effect of other expenses that are not deductible in determining taxable profit	 	3	%	3	%	2	%	
Effect of different tax rate of group entities operating in other jurisdictions	 	1	%	(1	)%	—	 	
Effect of change in valuation allowance	 	6	%	3	%	3	%	
Effect of tax holiday	 	(12	)%	(3	)%	(3	)%	
Effective tax rate	 	23	%	27	%	27	%	
 
The aggregate amount and per share effect of the tax holidays are as follows:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
Aggregate amount	 	28,139	 	12,721	 	9,131	 	
Per share effect—basic	 	0.12	 	0.05	 	0.04	 	
Per share effect—diluted	 	0.11	 	0.05	 	0.04	 	
 
The principal components of the Group’s deferred income tax assets and liabilities as of December 31, 2013 and 2014 are as follows:
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	
Deferred tax assets:	 	 	 	 	 	
Net loss carryforward	 	90,983	 	113,333	 	
Pre-opening expenses	 	393	 	306	 	
Deferred revenue	 	48,960	 	62,977	 	
Deferred rent	 	5,450	 	4,684	 	
Unfavorable lease	 	3,698	 	8,759	 	
Bad debt provision	 	1,892	 	1,494	 	
Accrual for customer loyalty program	 	3,765	 	17,869	 	
Accrued payroll	 	2,001	 	2,462	 	
Other accrued expenses	 	—	 	4,457	 	
Share-based compensation	 	12,267	 	9,745	 	
Others	 	1,354	 	278	 	
Valuation allowance	 	(51,596	)	(62,868	)	
Total deferred tax assets	 	119,167	 	163,496	 	
Deferred tax liabilities:	 	 	 	 	 	
Favorable lease	 	24,340	 	23,545	 	
Capitalized interest	 	1,601	 	4,410	 	
Fair market value for investment	 	—	 	9,485	 	
Others	 	281	 	1,039	 	
Total deferred tax liabilities	 	26,222	 	38,479	 	
Deferred tax assets are analyzed as:	 	 	 	 	 	
Current	 	51,759	 	80,026	 	
Non-Current	 	67,408	 	83,470	 	
 	 	119,167	 	163,496	 	
Deferred tax liabilities are analyzed as:	 	 	 	 	 	
Current	 	151	 	701	 	
Non-current	 	26,071	 	37,778	 	
 	 	26,222	 	38,479	 	
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
For the years ended December 31, 2013 and 2014, valuation allowance of RMB22,158 and RMB29,693 were provided, respectively, and RMB9,984 and RMB18,421 were reversed, respectively. The additional valuation allowance of RMB3,139 was due to the acquisitions for the year ended December 31, 2013. The Group considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, the Group’s experience with tax attributes expiring unused and tax planning alternatives. Valuation allowances have been established for deferred tax assets based on a more likely than not threshold. The Group’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carryforward periods provided for in the tax law.
 
As of December 31, 2014, the Group had tax loss carryforwards of RMB453,332 which will expire between 2015 and 2019 if not used.
 
The Group determines whether or not a tax position is “more-likely-than-not” of being sustained upon audit based solely on the technical merits of the position. At December 31, 2013 and 2014, the Group had recorded uncertain tax benefits of approximately RMB7,122 and RMB8,345 associated with the interests on intercompany loans, respectively.  No interest or penalty expense was recorded for the years ended December 31, 2012, 2013 and 2014.The Group does not anticipate any significant changes to its liability for unrecognized tax benefits within the next 12 months.
 
The following table is a roll-forward of the unrecognized tax benefits:
 
 	 	As of December 31,	 	
 	 	2012	 	2013	 	2014	 	
Balance at January 1	 	1,494	 	4,148	 	7,122	 	
Addition for tax positions	 	2,654	 	2,974	 	1,223	 	
Balance at December 31	 	4,148	 	7,122	 	8,345	 	
 
In accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises (“FIEs”) earned after January 1, 2008, are subject to a 10% withholding income tax. A lower withholding tax rate may be applied if there is a favorable tax treaty between mainland China and the jurisdiction of the foreign holding company. For example, holding companies in Hong Kong that are also tax residents in Hong Kong are eligible for a 5% withholding tax on dividends under the Tax Memorandum between China and the Hong Kong Special Administrative Region if the holding company is the beneficial owner of the dividends. Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial reporting basis over tax basis in a domestic subsidiary. The cumulated undistributed earnings of the Group’s PRC subsidiaries were RMB806,564 as of December 31, 2014. The Group intends to indefinitely reinvest the undistributed earnings of the Group’s PRC subsidiaries, therefore, no provision for PRC dividend withholding tax was provided.
 
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes is due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of income tax liability exceeding RMB100 is specifically listed as a special circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The Group’s PRC subsidiaries are therefore subject to examination by the PRC tax authorities from 2010 through 2014 on non-transfer pricing matters, and from the inception of the Group through 2014 on transfer pricing matters.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
15.      MAINLAND CHINA CONTRIBUTION PLAN
 
Full time employees of the Group in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Group to accrue for these benefits based on a certain percentage of the employees’ salaries. The total contribution for such employee benefits were RMB93,178, RMB119,015 and RMB143,419 for the years ended December 31, 2012, 2013 and 2014, respectively. The Group has no ongoing obligation to its employees subsequent to its contributions to the PRC plan.
 
16.      RESTRICTED NET ASSETS
 
Pursuant to laws applicable to entities incorporated in the PRC, the subsidiaries of the Group 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 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 their registered capital; the other fund appropriations are at the subsidiaries’ discretion. These reserve funds can only be used for specific purposes of offsetting future losses, enterprise expansion and staff bonus and welfare and are not distributable as cash dividends and amounted to RMB49,626, RMB64,957 and RMB105,604 as of December 31 2012, 2013 and 2014, respectively. In addition, due to restrictions on the distribution of share capital from the Company’s PRC subsidiaries, the PRC subsidiaries share capital of RMB2,075,975 at December 31, 2014 is considered restricted. As a result of these PRC laws and regulations, as of December 31, 2014, approximately RMB2,181,579 is not available for distribution to the Company by its PRC subsidiaries in the form of dividends, loans or advances.
 
17.      RELATED PARTY TRANSACTIONS AND BALANCES
 
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 or common significant influence. Related parties may be individuals or corporate entities.
 
The following entities are considered to be related parties to the Group. The related parties only act as service providers, service recipients and lessors to the Group and there is no other relationship wherein the Group has the ability to exercise significant influence over the operating and financial policies of these parties. The Group is not obligated to provide any type of financial support to these related parties.
 
Related Party	 	Nature of the Party	 	Relationship with the Group	
Ctrip.com International, Ltd. (“Ctrip”)	 	Online travel services provider	 	Mr. Qi Ji is a director	
UBOX International Holdings Co Limited (“UBOX”)	 	Vending machine operator	 	Mr. Qi Ji is a director	
Lijiang Yibang Changchunteng Hotel Co Limited (“Yibang”)	 	Hotel	 	Joint venture of the Group	
Sheen Star Group Limited (“Sheen Star”)*	 	Investment holding company	 	Investee of the Group, controlled by Mr. Qi Ji	

*Sheen Star was established in April 2014 by Mr. Qi Ji, the Group and a third party whereby the Group owns equity interest of 19.99%, and Mr. Qi Ji owns 50.01%.
 
(a)                Related party balances
 
Amounts due from related parties were comprised of the interest receivables derived from convertible bonds purchased in August, 2013 and service fee receivables from UBOX and shareholder loan to Yibang.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	
UBOX	 	256	 	—	 	
Yibang	 	402	 	16,293	 	
Total	 	658	 	16,293	 	
 
Amounts due to a related party were comprised of commissions payable for reservation services and Starway acquisition payable to Ctrip. The commissions payable for reservation services were interest free and payable upon demand and the Starway acquisition payable was to be paid in the next two years.
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	
Ctrip	 	 	 	 	 	
-Payables for hotel reservation services	 	1,510	 	2,319	 	
- Payables for Starway acquisition	 	12,250	 	8,167	 	
 	 	13,760	 	10,486	 	
 
(b)                    Related party transactions
 
During the years ended December 31, 2012, 2013 and 2014, related party transactions consisted of the following:
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	
Commission expenses — Ctrip	 	10,945	 	17,128	 	19,235	 	
Service fee — UBOX	 	—	 	847	 	392	 	
Interest income — UBOX	 	—	 	1,373	 	541	 	
Service fee — Yibang	 	—	 	199	 	527	 	
 
In May 2012, the Group acquired a 51% equity interest of Starway Hotels (Hong Kong) Limited from C-Travel, a wholly-owned subsidiary of Ctrip. The acquisition price was RMB17,292 in cash. In December 2013, the Group acquired the remaining 49% equity interest at the consideration of RMB16,460.
 
In December 2012, the Group purchased convertible promissory note of RMB8,074 from UBOX. In December 2013, the Group converted the principal of promissory note to 8,530,731ordinary shares of UBOX. In August 2013, the Group purchased another convertible promissory note of RMB4,314 from UBOX. For the year ended December 31, 2014, the Group converted the convertible note to 3,946,897 ordinary shares of UBOX.
 
The Group transferred its investment in Kangdu to Sheen Star for consideration of RMB82,785, and its rights and obligations associated with the property purchase agreement was transferred to Sheen Star contemporaneously.
 
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CHINA LODGING GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
18.                              COMMITMENTS AND CONTINGENCIES
 
(a)                    Operating lease commitments
 
The Group has entered into lease agreements for certain hotels which it operates. Such leases are classified as operating leases.
 
Future minimum lease payments under non-cancellable operating lease agreements at December 31, 2014 were as follows:
 
Year Ending December 31,	 	 	 	
2015	 	1,791,198	 	
2016	 	1,845,430	 	
2017	 	1,836,051	 	
2018	 	1,792,665	 	
2019	 	1,752,800	 	
Thereafter	 	11,206,521	 	
Total	 	20,224,665	 	
 
(b)                    Purchase Commitments
 
As of December 31, 2014, the Group’s commitments related to leasehold improvements and installation of equipment for hotel operations was RMB114,649, which is expected to be incurred within one year.
 
(c)                     Contingencies
 
The Group is subject to periodic legal or administrative proceedings in the ordinary course of our business. The Group does not believe that any currently pending legal or administrative proceeding to which the Group is a party will have a material adverse effect on the financial statements.
 
19. SUBSEQUENT EVENT
 
On December 14, 2014, the Group entered into binding documents with Accor S.A. (“Accor”) to join forces in the Pan-China region to develop Accor brands and to form an extensive and long-term alliance. Pursuant to the transaction, Accor’s economy and midscale platform will become part of the Group’s network. Brands under this platform include Grand Mercure, Novotel, Mercure, Ibis and Ibis Styles (collectively, the “MEB portfolio”), for which the Group receives the exclusive rights as a master franchisee in mainland China, Taiwan region and Mongolia. Accor will continue to lead in the operations and development of the luxury and upscale brands such as Sofitel, Pullman, M Gallery and The Sebel (collectively, the “LUB portfolio”), for which the Group will become a minority shareholder in the Pan-China region. Under the arrangement, the Group will issue up to 10% of its ordinary shares outstanding after issuance to Accor as the consideration. Closing of the transaction is conditional upon the completion of certain corporation restructure, receipt of antitrust approvals, which the Group has obtained in March 2015, and other customary closing conditions.
 
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Table of Contents
 
ADDITIONAL FINANCIAL INFORMATION — FINANCIAL STATEMENTS SCHEDULE I
CHINA LODGING GROUP, LIMITED
FINANCIAL INFORMATION FOR PARENT COMPANY
 
BALANCE SHEETS
(Renminbi in thousands, except share data and per share data, unless otherwise stated)
 
 	 	As of December 31,	 	
 	 	2013	 	2014	 	2014	 	
 	 	 	 	 	 	US$’000
(Note 2)	 	
Assets	 	 	 	 	 	 	 	
Current assets:	 	 	 	 	 	 	 	
Cash and cash equivalents	 	61,182	 	94,749	 	15,271	 	
Other current assets	 	3,639	 	4,185	 	675	 	
Total current assets	 	64,821	 	98,934	 	15,946	 	
Other assets	 	314	 	157	 	25	 	
Investment in subsidiaries	 	2,760,330	 	3,131,189	 	504,656	 	
Total assets	 	2,825,465	 	3,230,280	 	520,627	 	
Liabilities and equity	 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	 	
Salary and welfare payable	 	—	 	111	 	18	 	
Deferred revenue	 	1,451	 	364	 	59	 	
Accrued expenses and other current liabilities	 	7,898	 	12,841	 	2,069	 	
Total current liabilities	 	9,349	 	13,316	 	2,146	 	
Deferred revenue	 	363	 	—	 	—	 	
Total liabilities	 	9,712	 	13,316	 	2,146	 	
Equity:	 	 	 	 	 	 	 	
Ordinary shares(US$0.0001 par value per share; 8,000,000,000 shares authorized; 247,551,999 and 250,747,255 shares issued and outstanding as of December 31, 2013 and 2014, respectively)	 	182	 	184	 	30	 	
Additional paid-in capital	 	2,315,083	 	2,381,568	 	383,839	 	
Retained earnings	 	539,872	 	847,220	 	136,547	 	
Accumulated other comprehensive loss	 	(39,384	)	(12,008	)	(1,935	)	
Total equity	 	2,815,753	 	3,216,964	 	518,481	 	
Total liabilities and equity	 	2,825,465	 	3,230,280	 	520,627	 	
 
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Table of Contents
 
ADDITIONAL FINANCIAL INFORMATION — FINANCIAL STATEMENTS SCHEDULE I
CHINA LODGING GROUP, LIMITED
FINANCIAL INFORMATION FOR PARENT COMPANY
 
STATEMENTS OF COMPREHENSIVE INCOME
(Renminbi in thousands, unless otherwise stated)
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	2014	 	
 	 	 	 	 	 	 	 	US$’000
(Note 2)	 	
Operating costs and expenses:	 	 	 	 	 	 	 	 	 	
Selling and marketing expenses	 	157	 	157	 	157	 	25	 	
General and administrative expenses	 	24,902	 	33,308	 	35,434	 	5,711	 	
Total operating costs and expenses	 	25,059	 	33,465	 	35,591	 	5,736	 	
Loss from operations	 	(25,059	)	(33,465	)	(35,591	)	(5,736	)	
Interest income	 	131	 	6	 	75	 	12	 	
Foreign exchange loss	 	(141	)	—	 	—	 	—	 	
Other income, net	 	2,208	 	2,438	 	2,419	 	390	 	
Income in investment in subsidiaries	 	197,748	 	310,879	 	340,445	 	54,870	 	
Net income attributable to China Lodging Group, Limited	 	174,887	 	279,858	 	307,348	 	49,536	 	
 	 	 	 	 	 	 	 	 	 	
Other comprehensive income	 	 	 	 	 	 	 	 	 	
Unrealized securities holding gains , net of tax of nil, nil and 9,485 for 2012, 2013 and 2014	 	—	 	—	 	28,458	 	4,587	 	
Foreign currency translation adjustments, net of tax of nil for 2012, 2013 and 2014	 	758	 	(976	)	(1,082	)	(175	)	
Comprehensive income	 	175,645	 	278,882	 	334,724	 	53,948	 	
 
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Table of Contents
 
ADDITIONAL FINANCIAL INFORMATION — FINANCIAL STATEMENTS SCHEDULE I
CHINA LODGING GROUP, LIMITED
FINANCIAL INFORMATION FOR PARENT COMPANY
 
STATEMENTS OF CASH FLOWS
(Renminbi in thousands, unless otherwise stated)
 
 	 	Year Ended December 31,	 	
 	 	2012	 	2013	 	2014	 	2014	 	
 	 	 	 	 	 	 	 	US$’000
(Note 2)	 	
Operating activities:	 	 	 	 	 	 	 	 	 	
Net income	 	174,887	 	279,858	 	307,348	 	49,536	 	
Adjustments to reconcile net income to net cash used in operating activities:	 	 	 	 	 	 	 	 	 	
Share-based compensation	 	20,837	 	30,468	 	31,937	 	5,147	 	
Income in investment in subsidiaries	 	(197,748	)	(310,879	)	(340,445	)	(54,870	)	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	 	
Deferred revenue	 	(1,508	)	(1,552	)	(1,450	)	(234	)	
Other current assets	 	(2,412	)	915	 	1,477	 	238	 	
Salary and welfare payable	 	—	 	—	 	111	 	18	 	
Accrued expenses and other current liabilities	 	840	 	7,058	 	4,943	 	797	 	
Net cash provided by (used in) operating activities	 	(5,104	)	5,868	 	3,921	 	632	 	
Investing activities:	 	 	 	 	 	 	 	 	 	
Investment in subsidiaries	 	(35,227	)	—	 	—	 	—	 	
Receipt of investment in subsidiaries	 	—	 	12,320	 	8,876	 	1,431	 	
Net cash provided by (used in) investing activities	 	(35,227	)	12,320	 	8,876	 	1,431	 	
Financing activities:	 	 	 	 	 	 	 	 	 	
Net proceeds from issuance of ordinary shares upon exercise of option	 	18,520	 	28,122	 	20,985	 	3,382	 	
Net cash provided by financing activities	 	18,520	 	28,122	 	20,985	 	3,382	 	
Effect of exchange rate changes on cash and cash equivalents	 	(305	)	(8,081	)	(215	)	(35	)	
Net increase(decrease) in cash and cash equivalents	 	(22,116	)	38,229	 	33,567	 	5,410	 	
Cash and cash equivalents at the beginning of the year	 	45,069	 	22,953	 	61,182	 	9,861	 	
Cash and cash equivalents at the end of the year	 	22,953	 	61,182	 	94,749	 	15,271	 	
Supplemental schedule of non-cash investing and financing activities:	 	 	 	 	 	 	 	 	 	
Proceeds from issuance of ordinary shares upon exercise of option included in receivables	 	290	 	1,318	 	1,185	 	191	 	
 
The accompanying notes are an integral part of these consolidated financial statements
 
F-34

Table of Contents
 
ADDITIONAL FINANCIAL INFORMATION — FINANCIAL STATEMENTS SCHEDULE I
CHINA LODGING GROUP, LIMITED
FINANCIAL INFORMATION FOR PARENT COMPANY
 
Note to Schedule I
 
Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 5-04-(c) of Regulation S-X, which require condensed financial information as to the financial position, change in financial position and results of operations of a parent company as of the same dates and for the same periods for which audited consolidated financial statements have been presented when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
 
The condensed financial information has been prepared using the same accounting policies as set out in the accompanying consolidated financial statements except that the equity method has been used to account for investments in its subsidiaries. Such investments in subsidiaries are presented on the balance sheets as investment in subsidiaries and the profit of the subsidiaries is presented as income in investment in subsidiaries.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the accompanying consolidated financial statements.
 
As of December 31, 2014, there are no material contingencies, mandatory dividend, significant provision of long-term obligation or guarantee of the Company, except for those which have separately disclosed in the consolidated financial statements.
 
F-35

Table of Contents
 
ADDITION INFORMATION — FINANCIAL STATEMENTS SCHEDULE II
 
CHINA LODGING GROUP, LIMITED
 
This financial information has been prepared in conformity with accounting principles generally accepted in the United States.
 
VALUATION AND QUALIFYING ACCOUNTS
 
 	 	Balance at
Beginning of
Year	 	Charge to Costs and
Expenses	 	Addition due to
acquisition	 	Charge Taken
Against Allowance	 	Write off	 	Balance at
end of Year	 	
 	 	(Renminbi in thousands)	 	
Allowance for doubtful accounts of accounts receivables and other receivables:	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2012	 	2,945	 	1,238	 	—	 	—	 	(1,000	)	3,183	 	
December 31, 2013	 	3,183	 	4,573	 	—	 	—	 	—	 	7,756	 	
December 31, 2014	 	7,756	 	4,770	 	—	 	—	 	(6,049	)	6,477	 	
Valuation allowance for deferred tax assets	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2012	 	21,552	 	18,792	 	1,597	 	(5,658	)	—	 	36,283	 	
December 31, 2013	 	36,283	 	22,158	 	3,139	 	(9,984	)	—	 	51,596	 	
December 31, 2014	 	51,596	 	29,693	 	—	 	(18,421	)	—	 	62,868	 	
 
*  *  *  *  *  *
 
F-36

Exhibit 4.15

 
MASTERPURCHASE AGREEMENT

among
 
AAPC Singapore Pte. Ltd.,
 
AAPC Hong Kong Limited,
 
and
 
China Lodging Group, Limited
 
Dated as of December 14, 2014

 
TABLE OF CONTENTS
 
 	 	Page	
 	 	
ARTICLE I	 	
 	 	
DEFINITIONS	 	
 	 	
Section 1.01	Certain Defined Terms	1	
Section 1.02	Definitions	15	
Section 1.03	Interpretation and Rules of Construction	16	
 	 	 	
ARTICLE II	 	
 	 	
PURCHASE AND SALE	 	
 	 	
Section 2.01	Purchase and Sale of theTargetShares	17	
Section 2.02	Purchase Consideration	18	
Section 2.03	Closing	18	
Section 2.04	Closing Deliveries by the Seller	19	
Section 2.05	Withholding	20	
Section 2.06	Closing Deliveries by the Purchaser	20	
Section 2.07	Post-Closing Adjustment of Purchase Consideration	20	
Section 2.08	Interest on Payments	22	
Section 2.09	Hong Kong Stamp Duty Filing and Related Procedures	22	
Section 3.27	Purchaser Parent Due Diligence	41	
Section 3.28	No Other Representations or Warranties	41	
 	 	 	
ARTICLE IV	 	
 	 	 	
REPRESENTATIONS AND WARRANTIES	 	
OF PURCHASER PARENT	 	
 	 	
Section 4.01	Organization and Authority of Purchaser Parent	42	
Section 4.02	No Conflict	42	
Section 4.03	Governmental Consents and Approvals	43	
Section 4.04	Litigation	43	
Section 4.05	No Other Representations or Warranties	43	
 	 	 	
ARTICLE V	 	
 	 	 	
STRATEGIC COOPERATION	 	
 	 	
Section 5.01	Arrangement with respect to Third Party Hotel Agreements and Company Leased Real Property	43	
Section 5.02	Interim Management Agreement	45	
Section 5.03	Transaction Documents, Transition and Support Services, Access to Relevant Personnel, Etc.	45	
 
1

 
Section 5.04	Franchisor Registration	47	
Section 5.05	Requisite Permits	48	
Section 5.06	Real Estate Enterprise Registration	48	
Section 5.07	Arrangement with respect to Retained Hotels	48	
 	 	 	
ARTICLE VI	 	
 	 	 	
ADDITIONAL AGREEMENTS	 	
 	 	 	
Section 6.01	Conduct of Business Prior to the Closing	48	
Section 6.02	Access to Information	49	
Section 6.03	Confidentiality	50	
Section 6.04	Regulatory and Other Authorizations; Notices and Consents	50	
Section 6.05	Notice of Developments	51	
Section 6.06	Anti-Sandbagging	52	
Section 6.07	Restructuring	52	
Section 6.08	Renovation and Refurbishment of Company Owned Real Property	52	
Section 6.09	Release of Indemnity Obligations	52	
Section 6.10	Intercompany Arrangements	53	
Section 6.11	Payments on Behalf of Affiliates	53	
Section 6.12	Further Action	53	
Section 6.13	Guarantee and Undertaking by Accor Guarantor	53	
Section 6.14	Guarantee and Undertaking by Purchaser Parent	54	
Section 6.15	No Set-Off	55	
 	 	 	
ARTICLE VII	 	
 	 	 	
TAX MATTERS	 	
 	 	 	
Section 7.01	Indemnity	55	
Section 7.02	Returns and Payments	55	
Section 7.03	Refunds	56	
Section 7.04	Contests	57	
Section 7.05	Time of Payment	58	
Section 7.06	Tax Cooperation and Exchange of Information	58	
Section 7.07	Conveyance Taxes	58	
Section 7.08	Miscellaneous	59	
 	 	 	
ARTICLE VIII	 	
 	 	 	
CONDITIONS TO CLOSING	 	
 	 	 	
Section 8.01	Conditions to Obligations of the Seller	60	
Section 8.02	Conditions to Obligations of the Purchaser	61	
 
2

 
ARTICLE IX	 	
 	 	 	
INDEMNIFICATION	 	
 	 	 	
Section 9.01	Survival of Representations and Warranties	62	
Section 9.02	Indemnification by the Seller	63	
Section 9.03	Indemnification by the Purchaser	63	
Section 9.04	Limits on Indemnification	64	
Section 9.05	Notice of Loss; Third Party Claims	65	
Section 9.06	Securities and Purchase Agreement; the NewCo2 Subscription Agreement	66	
Section 9.07	Exclusive Remedies	66	
 	 	 	
ARTICLE X	 	
 	 	 	
TERMINATION	 	
 	 	 	
Section 10.01	Termination	67	
Section 10.02	Effect of Termination	68	
 	 	 	
ARTICLE XI	 	
 	 	 	
GENERAL PROVISIONS	 	
 	 	 	
Section 11.01	Expenses	68	
Section 11.02	Notices	68	
Section 11.03	Public Announcements	70	
Section 11.04	Severability	70	
Section 11.05	Entire Agreement	70	
Section 11.06	Assignment	70	
Section 11.07	Amendment	70	
Section 11.08	Waiver	70	
Section 11.09	No Third Party Beneficiaries	71	
Section 11.10	Specific Performance	71	
Section 11.11	Governing Law	71	
Section 11.12	Arbitration	71	
Section 11.13	Currency	73	
Section 11.14	Counterparts	73	
 
SCHEDULES
 
SCHEDULE 1: Details of Hotels under Seller Brands
 
3

 
SCHEDULE 2: Real Property
 
SCHEDULE 3: Transferred Subsidiaries
 
SCHEDULE 4: Pre-Closing Restructuring
 
SCHEDULE 5: Pre-Closing Restructuring Approvals
 
SCHEDULE 6: Disclosure Schedule
 
SCHEDULE 7: Renovation and Refurbishment of certain Ibis hotels
 
SCHEDULE 8: Retained Hotels
 
SCHEDULE 9: Requisite Permits
 
EXHIBITS
 
EXHIBIT A: NewCo2 Shareholders Agreement
 
EXHIBIT B: Retained Hotels Management Agreement
 
EXHIBIT C: Form ofRelease and Discharge
 
EXHIBIT D: Form of Unwind Agreement
 
EXHIBIT E: Voting and ROFR Agreement
 
EXHIBIT F: Brand Franchise Agreements
 
EXHIBIT G:MEBMaster Brand Agreement
 
EXHIBIT H: Registration Rights Agreement
 
EXHIBIT I: Interim Management Agreement
 
EXHIBIT J: Terms of Loyalty and Collaboration Agreement
 
EXHIBIT K: Pro Forma Statement
 
4

 
EXHIBIT L: Loan Schedule
 
EXHIBIT M:LUB Brand Use Fees
 
5

 
MASTER PURCHASE AGREEMENT, dated as of December 14, 2014, amongAAPC Hong Kong Limited, a limited company organized under the laws of Hong Kong with its registered office at Room 803, 8 th  Floor, AXA Centre, 151 Gloucester Road, Wan Chai, Hong Kong (the “ Seller ”), AAPC Singapore Pte. Ltd., a company incorporated under the laws of Singapore with its registered office at 250 North Bridge Road, Level 31 Raffles City Tower, Singapore 179101  (“ Accor Guarantor ”), and China Lodging Group, Limited, a company incorporated under the laws of Cayman Islands and having its registered office at the office of Offshore Codan Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman KY1-1111, Cayman Islands (“ Purchaser Parent ”).
 
WHEREAS, the Seller and its Subsidiariesare engaged in the business ofowning, leasing, franchising, operating and managing hotels and hotel chains under the Seller Brands in both (a) the Midscale and Economy Market and (b) the Luxury and Upscale Market, in the PRC, Mongolia, Hong Kong, Macau and Taiwan.
 
WHEREAS, the parties intend to effect the Pre-Closing Restructuring prior to the Closing;
 
WHEREAS, after giving effect to the Pre-Closing Restructuring and immediately prior to the Closing, (a) the Seller will own all of the issued and outstanding shares of each of Ibis China Investment, NewCo1 and NewCo2 (each a “ Company ” and collectively, the “ Companies ”); (b) Ibis China Investment will, among other things, directly or indirectly through its Subsidiaries, own all of the Company Owned Real Property; (c) NewCo1 will, among other things, directly or indirectly through its Subsidiaries, hold (i) all of the leasehold interests with respect to all of the Company Leased Real Property, (ii) all of the MEB Management Contracts, and (iii) all of the MEB Franchise Agreements; and (d) NewCo2 will, among other things, directly or indirectly through its Subsidiaries, hold all of the LUB Management Contracts and all LUB License Agreements;
 
WHEREAS, the Seller wishes to sell or procure the issue to the Purchaser or cause its Subsidiaries to issue to the Purchaser, and Purchaser Parent wishes to procure the purchase by the Purchaser from the Seller or any of its Subsidiaries, the Target Shares upon the terms and subject to the conditions set forth herein;
 
WHEREAS, pursuant to the terms hereof,Accor Guarantor wishes to procure that the Seller comply with its obligations under, and guarantee the financial obligations of the Seller, under this Agreement, and Purchaser Parent wishes to procure that the Purchaser comply with its obligations under, and guarantee the financial obligations of the Purchaser under, this Agreement.
 
NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, and intending to be legally bound, the parties hereby agree as follows:
 
ARTICLE I
 
DEFINITIONS
 
Section 1.01                            Certain Defined Terms.  For purposes of this Agreement:
 
1

 
“Acquired Business” means (i) the MEB Business, and (ii) the ICI Business.
 
“Acquired Business Employee” means each of the employees of anymember of the Target Group.
 
“Action” means any claim, complaint, litigation, hearing, audit, action, suit, arbitration, inquiry, proceeding (whether civil, criminal or administrative) or investigation by or before any Governmental Authority.
 
“Affiliate” means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person.
 
“Agreement” or “this Agreement” means thisSharePurchase Agreement between the parties hereto (including the Exhibits and Schedules hereto and the Disclosure Schedule) and all amendments hereto made in accordance with the provisions of Section 11.07.
 
“Anti-Monopoly Law” means the Anti-Monopoly Law of the PRC (and such other applicable Laws of the PRC relating to competition control in mergers, acquisitions or business combinations) and the rules and regulations promulgated thereunder as in effect from time to time.
 
“Assets” means the MEB Assets and the LUB Assets.
 
“Balance Sheet Date” means December 31, 2013.
 
“Big Four Accounting Firm” means each of PricewaterhouseCoopers, Ernst & Young, Deloitte Touche Tohmatsu and KPMG.
 
“Brand Franchise Agreement” means each of the LUB Brand Franchise Agreements and the MEB Brand Franchise Agreements.
 
“Business” means the LUB Business, the MEB Business and the ICI Business.
 
“Business Day” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in Hong Kong or Shanghai.
 
“Circular 698” means Circular 698 issued by the PRC State Administration of Taxation on December 10, 2009, titled “Notice on Strengthening the Administration of Enterprise Income Tax on Income Derived from Equity Transfer Made by Non-Resident Enterprise” (关于加强非居民企业股权转让所得企业所得税管理的通知), effective as of January 1, 2008, and any PRC Laws in force from time to time that operate to restate, amend or repeal any of the aforesaid regulation or any part thereof.
 
“Claims” means any and all administrative, regulatory or judicial actions, suits, petitions, appeals, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations, proceedings, consent orders or consent agreements.
 
2

 
“Closing Date” means the date of the Closing.
 
“Closing Documents” means:
 
(a)                                the Registration Rights Agreement;
 
(b)                                the Voting and ROFR Agreement;
 
(c)                                 each Master Brand Agreement;
 
(d)                                each Brand Franchise Agreement;
 
(e)                                 the NewCo2 Articles;
 
(f)                                  the NewCo2 Shareholders Agreement;
 
(g)                                 the NewCo2 Subscription Agreement;
 
(h)                                each Retained Hotel Management Agreement;
 
(i)                                    the Loyalty and Collaboration Agreement;
 
(j)                                   the Transition and Support Services Agreement; and
 
(k)                                the Unwind Agreement.
 
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
 
“Company IP Agreement” means any agreement pursuant to which any Licensed Intellectual Property  has been granted to the Seller or any of its Subsidiaries by any third party.
 
“Company Leased Real Property” means the real property, together with all buildings and other structures, facilities or improvements currently or hereafter located thereon, set forth in Part A of Schedule 2.
 
“Company Owned Real Property” means the real property, together with all buildings and other structures, facilities or improvements currently or hereafter located thereon, set forth in Part B of Schedule 2.
 
“Competition Clearance” means approvals and consents granted by the Ministry of Commerce of the PRC pursuant to the Anti-Monopoly Law, with respect to the transactions contemplated by this Agreement and the other Transaction Documents.
 
“control” (including the terms “controlled by” and “under common control with ”), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative or executor, by contract, credit arrangement or otherwise.
 
3

 
“Conveyance Taxes” means sales, use, value added, goods and services, transfer, stamp, stock transfer, real property transfer and similar taxes, fees or charges (together with any interest, penalties or additions in respect thereof) imposed by any Governmental Authority in respect of the transaction contemplated under this Agreement.
 
“Deed of Undertaking” means the deed of undertaking dated on or about the date hereof between Purchaser Parent, the Purchaser Parties and the Seller.
 
“Disclosure Schedule” means the Disclosure Schedule, dated as of the date hereof, delivered by the Seller to Purchaser Parent in connection with this Agreement and attached hereto as  Schedule 6 .
 
“Disposal” means, in respect of any securities, property or other asset, any direct or indirect sale, assignment, transfer, distribution or other disposition thereof (including any effective economic disposition of any interest therein or by virtue of any issuance of equity securities of any Person holding such securities, property or other asset) or of a participation therein, or other conveyance of legal or beneficial interest therein, or any short position in a security, whether voluntarily or by operation of law or any agreement or commitment to do any of the foregoing.
 
“Eminent Domain” means an exercise of the right of a government or a competent Governmental Authority to expropriate, seize, compulsorily acquire or take private property, whether for public use or otherwise.
 
“Employer Entity” meansany member of the Target Group, which serves as employer of any Acquired Business Employee.
 
“Encumbrance” means any security interest, pledge, hypothecation, mortgage, lien (including environmental and tax liens), violation, charge, lease, license, encumbrance, servient easement, adverse claim, reversion, reverter, preferential arrangement, restrictive covenant, condition or restriction of any kind, including any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.
 
“Environmental Claims” means any Claims relating in any way to any Environmental Law or any related Permits.
 
“Environmental Laws” means all Laws, now or hereafter in effect and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety, natural resources or hazardous materials.
 
“Excluded Taxes” means (a) all Taxes imposed on or payable by any member of the Target Group for a Pre-Closing Period; (b) all Taxes imposed on any member of the Target Group, or for which a member of the Target Group may be liable, as a result of having been a member of any consolidated, combined, affiliated or unitary group on or prior to the Closing Date with respect to any Pre-Closing Period; (c) all Taxes of any other Person for which a member of the Target Group is liable by operation of law, as a transferee or successor, or pursuant to any contractual agreement entered into on or before the Closing Date with respect to
 
4

 
any Pre-Closing Period; (d) any income, capital gain or other Taxes of any Seller or its Affiliates, including, but not limited to, any capital gains, income or other taxes for which the Seller is responsible under applicable Law as a result of transfer of the Target Shares or otherwise in connection with (i) the Pre-Closing Restructuring and (ii) the transactions contemplated by this Agreement (including any Taxes imposed under Circular 698 and any withholding taxes imposed on the Seller or any member of the Target Group); and (e) any Liabilities with respect to amounts described in clauses (a)-(d) above.
 
“Financial Cut-Off Date” means the later to occur of: (a) the date that is five Business Days following the date on which the Competition Clearance shall have been obtained, or the applicable waiting periods (and any extension thereof) under the Anti-Monopoly Law shall have expired or shall have been terminated and no investigation shall have been instituted thereunder, and (b) April 1, 2015.
 
“Founder” means Mr. Qi Ji, the Chairman of Purchaser Parent.
 
“Governmental Authority” means any federal, national, foreign, supranational, state, provincial, local, municipal or other political subdivision or other government, governmental, regulatory or administrative authority, agency, board, bureau, department, instrumentality or commission or any court, tribunal, judicial or arbitral body of competent jurisdiction or stock exchange.
 
“Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, determination, award, ruling, decision, verdict, subpoena, consent, injunction or other similar determination or finding entered by or with any Governmental Authority.
 
“Hong Kong GAAP” means Hong Kong Generally Accepted Accounting Principles.
 
“Hong Kong” means the Hong Kong Special Administrative Region of the PRC.
 
“Hotel Network” means each of the hotels opened for full operation or currently proposed to be opened, (a) which is owned or leased, as the case may be, and operated by the Seller or any of its Affiliates under a Seller LU Brand or Seller ME Brand, or (b) for which the Seller or any of its Affiliates has signed a binding agreement for the operation or management under a Seller LU Brand or Seller ME Brand by the Seller or its Affiliates, or for a license or franchise of a Seller LU Brand or Seller ME Brand with respect to such hotel, in the case of each of (a) and (b), in the Target Territories.
 
“Ibis Brand Franchise Agreement” means the brand franchise agreement in the form set out in Part A of  Exhibit F , to be entered into by the Seller, Purchaser Parent and NewCo1.
 
“Ibis China Entities” means each of Ibis China Investment and each ICI Transferred Subsidiary.
 
“Ibis China Investment” means Ibis China Investment Ltd., alimited liability company organized under the laws of Hong Kong.
 
5

 
“ICI Business” means the business of owning the Company Owned Real Properties.
 
“ICI Transferred Subsidiary” means each of the Transferred Subsidiaries listed in the rows numbered 1 to 7 in the table of Transferred Subsidiaries set out in Schedule 3.
 
“Indebtedness” means, with respect to any Person, (a) all indebtedness of such Person, whether or not contingent, for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services, (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property),(c) all obligations of such Person as lessee under leases that have been or should be, in accordance with Hong Kong GAAP or PRC GAAP, recorded as capital leases, (d) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (e) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of such Person or any warrants, rights or options to acquire such capital stock, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (f) all Indebtedness of others referred to in clauses (a) through (e) above guaranteed directly or indirectly in any manner by such Person, or guaranteed directly or indirectly by such Person through an agreement (I) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (II) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (III) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered), or (IV) otherwise to assure a creditor against loss, and (i) all Indebtedness referred to in clauses (a) through (e) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness.
 
“Indemnified Party” means a Purchaser Indemnified Party or a Seller Indemnified Party, as the case may be.
 
“Indemnifying Party” means the Seller pursuant to Section 9.02 or the Purchaser pursuant to Section 9.03, as the case may be.
 
“Intellectual Property” means (a) patents, patent applications and statutory invention registrations, (b) trademarks, service marks, domain names, trade dress, logos, trade names, corporate names and other identifiers of source or goodwill, including registrations and applications for registration thereof and including the goodwill of the business symbolized thereby or associated therewith, (c) mask works and copyrights, including copyrights in computer software, and registrations and applications for registration thereof, and
 
6

 
(d) confidential and proprietary information, including trade secrets, know-how and invention rights.
 
“Interim Management LUB Adjustment Amount” means an amount determined as follows:
 
0.80 × (A- B)
 
where:
 
A = an amount equal to the pro forma operating profit of the LUB Group Entities taken as a whole (as if the Pre-Closing Restructuring has been completed as of the Financial Cut-Off Date) for the  Interim Management Period, determined as of the Closing Date in accordance with the Pro Forma Statement, taking into account the transitional nature of the said period (to allow for the costs of the Shared Services and other transitional costs) in the manner agreed between the Parties, applying consistent principles, practices, methodologies, assumptions and policies as used in the preparation of the Pro Forma Statement (it being understood and agreed that the expense items set forth therein shall not include any charges made or payable to the Seller or any Seller Affiliate, other than the specific cost allocations agreed to by the Parties prior to the date hereof); and
 
B = an amount equal to the depreciation and amortization attributable to the LUB Business for the Interim Management Period, determined as of the Closing Date, applying consistent principles, practices, methodologies, assumptions and policies as used in the preparation of the Financial Statements.
 
“Interim Management MEB Adjustment Amount” means an amount determined as follows:
 
0.80 × (A- B)
 
where:
 
A = an amount equal to the aggregate pro forma operating profit of the MEB Group Entities taken as a whole (as if the Pre-Closing Restructuring has been completed as of the Financial Cut-Off Date) for the  Interim Management Period, determined as of the Closing Date in accordance with the Pro Forma Statement, taking into account the transitional nature of the said period (to allow for the costs of the Shared Services and other transitional costs) in the manner agreed between the Parties, applying consistent principles, practices, methodologies, assumptions and policies as used in the preparation of the Pro Forma Statement (it being understood and agreed that the expense items set forth therein shall not include any charges made or payable to the Seller or any Seller Affiliate, other than the specific cost allocations agreed to by the Parties prior to the date hereof); and
 
B = an amount equal to the depreciation and amortization and interest payment (as applicable as per the loan schedule set forth in  Exhibit L  hereto) attributable
 
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to the Acquired Business for the Interim Management Period, determined as of the Closing Date, applying consistent principles, practices, methodologies, assumptions and policies as used in the preparation of the Financial Statements.
 
“Interim Management Agreement” means the interim management agreement entered into between Purchaser Parent and the Seller on or about the date hereof.
 
“Interim Management Period” means the period commencing on the Financial Cut-Off Date and ending on the Closing Date.
 
“Key Personnel” means the current directors of the Seller, being Michael Issenberg, Kim Mooney, Paul Richardson, Chan Waichin and Raymond Tong.
 
“Law” means any federal, national, supranational, state, provincial, local or similar statute, law, ordinance, regulation, rule, code, order, requirement or rule of law (including common law), official policy or interpretation of any Governmental Authority and including any Governmental Order.
 
“Liabilities” means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or un-matured or determined or determinable, including those arising under any Law, Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking.
 
“Licensed Intellectual Property” means any Intellectual Property owned by the Seller Parent currently licensed to the Seller or its Subsidiaries with respect to the MEB Business and the LUB Business, and upon Closing to be licensed to Purchaser Parent pursuant to the Master Brand Agreements and the Brand Franchise Agreements.
 
“LUB Brand Franchise Agreements” means each brand franchise agreement referred to in Section 5.03(a)(vi).
 
“LUB Business” means the business ofoperating and managing, orlicensing orfranchising for operation and management, hotels and hotel chains within the Hotel Network under the Seller LU Brands in the Target Territories and the Seller ME Brands in Hong Kong and Macau.
 
“LUB Closing Adjustment Amount” means an amount (expressed as a positive, if positive, or as a negative, if negative) equal to (a) the LUB Closing Current Assets,  minus  (b) the LUB Closing Liabilities,  minus  (c) the Interim Management LUB Adjustment Amount, in each case, as shown on the final Closing Statement.
 
“LUB Closing Current Assets” means cash and short-term deposits, trade and other receivables, inventories and prepayments (excluding any deposits made to landlords and other long-term deposits) of the LUB Group Entities, each as determined as of the Closing Date pursuant to Hong Kong GAAP, applying consistent principles, practices, methodologies, assumptions and policies as used in preparation of the Financial Statements.
 
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“LUB Closing Liabilities” means all Liabilities of the LUB Group Entities, including without limitation trade payables, advances received, accounts payable, and other payables, accrued expenses and provisions, Tax payable, amounts outstanding or accrued in respect of inter-company activity owed by any LUB Group Entity to the Seller or any Seller Affiliate, financial indebtedness and other Liabilities for borrowed money (together with accrued interest), and all other amounts, whether current, short-term or long-term, owed by any LUB Group Entity, each as determined as of the Closing Date pursuant to Hong Kong GAAP, applying consistent principles, practices, methodologies, assumptions and policies as used in preparation of the Financial Statements.
 
“LUB License Agreements” means the hotel license agreements and other similar agreements pursuant to which the Seller or any of its Affiliates grants a license to any Person in relation to the operation or management of any hotel or hotel chain business (a) under any Seller LU Brand in any of the Target Territories and (b) under any Seller ME Brand in Hong Kong and/or Macau.
 
“LUB Group Entities” means NewCo2 and its Subsidiaries (assuming the consummation of, or after giving effect to, the Pre-Closing Restructuring).
 
“LUB Management Contracts” means the hotel management contracts and other similar agreements entered into by the Seller or any of its Affiliates prior to the Closing, under or pursuant to which the Seller or its of Subsidiaries operates any hotels (a) under any Seller LU Brand in any of the Target Territories and (b) under any Seller ME Brand in Hong Kong and/or Macau.
 
“Luxury and Upscale Market” means the market for hotels positioned by branded hotel companies in the market segments designated as the Luxury, Upper Upscale and/or Upscale segments in the then latest STR Global Chain Scales.
 
“Macau” means the Macau Special Administrative Region of the PRC.
 
“Master Brand Agreement” means each of the LUB Master Brand Agreement  and MEB Master Brand Agreement.
 
“Material Adverse Effect” means any event, occurrence, fact, condition, change or effect that is, or would reasonably be likely to be, individually or in the aggregate, together with all other events, occurrences, facts, conditions, changes or effects, materially adverse to (a) the business, financial condition, assets or results of operations of any MEB Group Entity, any LUB Group Entity, or the Business taken as a whole, or (b) the ability of Seller and its Affiliates to consummate the transactions contemplated hereby and by the Transaction Documents in accordance with the terms hereof and thereof on a timely basis;  provided ,  however , that “Material Adverse Effect” shall not include any event, occurrence, fact, condition, change or effect, directly or indirectly arising out of or attributable to:
 
(i)                                    general political or economic conditions, general financial and capital market conditions (including interest rates) or general conditions in any of the industries in which the Business is engaged, or, in each case, any changes in them (including as a result of (A) an outbreak or escalation of hostilities involving any country in the Target Territories or the
 
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declaration by any country in the Target Territories of a national emergency or war, or (B) the occurrence of any other calamity or crisis (including any act of terrorism) or natural disaster or any change in financial, political or economic conditions in any country in the Target Territories or elsewhere);
 
(ii)                                 changes in Law, Hong Kong GAAP or PRC GAAP or any authoritative interpretations thereof;
 
(iii)                              any action required by this Agreement or any action taken (or omitted to be taken) with the explicit, or written consent of or at the explicit, or written request of, Purchaser Parent;
 
(iv)                             any failure to meet Seller’s or any of its Affiliates’ internal forecasts for the Business ( provided  that this clause (iv) shall not be construed as providing that the circumstances or events giving rise to any such failure do not constitute or contribute to a Material Adverse Effect and,  provided , further ,  that this clause (iv) shall not be construed as implying that Seller or any of its Affiliates is making any representation or warranty under this Agreement with regard to any internal forecasts for the Business); or
 
(v)                                the announcement, disclosure or pendency of the sale of the Business, the execution of this Agreement or any other Transaction Document or the consummation of the transactions contemplated hereby or by any other Transaction Documents.
 
“MEB Brand Franchise Agreement” means the Ibis Brand Franchise Agreement, and each brand franchise agreement referred to in Section 5.03(a)(vi)(x)(i).
 
“MEB Business” means the business ofoperating and managing, orlicensing orfranchising for operation and management, hotels and hotel chains within the Hotel Network under the Seller ME Brands in the PRC, Mongolia and Taiwan, including without limitation the operation and management of the hotels located at the Company Owned Real Property and the Company Leased Real Property, but specifically excluding the ownership or leasing of any real property.
 
“MEB Closing Adjustment Amount” means an amount (expressed as a positive, if positive, or as a negative, if negative) equal to (a) the MEB Closing Current Assets,  minus  (b) the MEB Closing Liabilities,  minus  (c) the Interim Management MEB Adjustment Amount, in each case, as shown on the final Closing Statement.
 
“MEB Closing Current Assets” means cash and short-term deposits, trade and other receivables, inventories and prepayments (excluding any deposits made to landlords and other long-term deposits) of the MEB Group Entities, each as determined as of the Closing Date pursuant to Hong Kong GAAP, applying consistent principles, practices, methodologies, assumptions and policies as used in preparation of the Financial Statements.
 
“MEB Closing Liabilities” means all Liabilities of the MEB Group Entities, including without limitation trade payables, advances received, accounts payable, and other payables, accrued expenses and provisions, Tax payable, amounts outstanding or accrued in respect of inter-company activity owed by any MEB Group Entity to the Seller or any Seller
 
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Affiliate, financial indebtedness and other Liabilities for borrowed money (together with accrued interest), and all other amounts, whether current, short-term or long-term, owed by any MEB Group Entity, each as determined as of the Closing Date pursuant to Hong Kong GAAP, applying consistent principles, practices, methodologies, assumptions and policies as used in preparation of the Financial Statements.
 
“MEB Franchise Agreements” means the hotel franchise agreements and other similar agreements entered into by the Seller or any of its Affiliates prior to the Closing, pursuant to which the Seller or any of its Affiliates grants a franchise to any Person in relation to the operation or management of any hotel or hotel chain business under any Seller ME Brand in the PRC, Taiwan and/or Mongolia.
 
“MEB Group Entities” means the NewCo1 Entities and the Ibis China Entities.
 
“MEB Management Contracts” means the hotel management contracts and other similar agreements entered into by the Seller or any of its Affiliates prior to the Closing, pursuant to which the Seller and its Subsidiaries operate any hotels under any Seller ME Brand in the PRC, Taiwan and/or Mongolia.
 
“MEB Master Brand Agreement” means the master brand agreement in the form set out in Exhibit G.
 
“Midscale and Economy Market” means the market for hotels positioned by branded hotel companies in the market segments designated as the Upper Midscale, Midscale and/or Economy segments in the then latest STR Global Chain Scales.
 
“NewCo1”means AAPCGreater China Limited, alimited liabilitycompany incorporated in Hong Kong with company number 2161347, and having its registered office at Room 803, 8/F AXA Centre, 151 Gloucester Road, Wanchai, Hong Kong.
 
“NewCo1 Entities” means NewCo1 and each NewCo1 Transferred Subsidiary.
 
“NewCo1 PRC” means alimited liability company to be incorporatedin the PRC as a wholly owned subsidiary of NewCo1.
 
“NewCo1 Transferred Subsidiary” means each of the Transferred Subsidiaries listed in the rows numbered 8 and 9 in the table of Transferred Subsidiaries set out in Schedule 3.
 
“NewCo2” meansalimited liability company to be incorporated by the Seller under the laws of Hong Kong, for the sole purpose of consummating the Pre-Closing Restructuring in the manner contemplated by  Schedule 4  hereto.
 
“NewCo2 Articles” the amendment to the NewCo2 Articles referred to in Section 5.03(a)(viii).
 
“NewCo2 PRC” means a company to be established in the PRC as a wholly owned subsidiary of NewCo2.
 
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“NewCo2 Shareholders Agreement” means the shareholders agreement to be entered into among NewCo2, the Seller and the Purchaser, substantially in the form attached as  Exhibit A  hereto.
 
“NewCo2 Subscription Agreement” means a subscription agreement by and between NewCo2 and the Purchaser, in a form to be agreed.
 
“Non-Competition Agreement” means the non-competition agreement dated on or about the date hereof among Seller Parent, the Seller, Purchaser Parent and the Founder.
 
“Owned Intellectual Property” means Intellectual Property owned by themembers of the Target Group.
 
“Permitted Encumbrances” means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced and as to which neither the Seller nor any of its Subsidiaries is otherwise subject to civil or criminal liability due to its existence:  (a) liens for Taxes not yet due and payable, for which adequate reserves have been maintained in accordance with Hong Kong GAAP or PRC GAAP; (b) Encumbrances imposed by Law, such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s liens and other similar liens arising in the ordinary course of business securing obligations that (i) are not in excess of $100,000 in the aggregate at any time; (c) pledges or deposits to secure obligations under workers’ compensation Laws or similar legislation or to secure public or statutory obligations; and (d) minor survey exceptions, reciprocal easement agreements, and other customary defects to or encumbrances on title to real property that (i) were not incurred in connection with any Indebtedness, (ii) do not render title to the property encumbered thereby unmarketable, and (iii) do not, individually or in the aggregate, materially and adversely affect the value of or the use of such property for its current and anticipated purposes.
 
“Permits” means all permits, licenses, franchises, registrations, certificates, clearances, exemptions, variances, approvals, waivers and other authorizations obtained from or required by any Governmental Authority.
 
“Person” means any individual, partnership, firm, corporation, limited liability company, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
 
“Post-Closing Period” means any taxable period (or portion thereof) beginning the day after the Closing Date.
 
“PRC” means the People’s Republic of China, for the purposes of this Agreement, excluding Hong Kong, Macau and Taiwan.
 
“Pre-Closing Period” means any taxable period (or portion thereof) ending on or prior to the Closing Date.
 
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“Pre-Closing Restructuring” means theactions and transactions set forth in Schedule 4 hereto.
 
“Pre-Closing Restructuring Agreements” means the agreements entered into, whether prior to or after the date hereof, by the Seller and its Affiliates in connection with the Pre-Closing Restructuring.
 
“Pre-Closing Restructuring Approvals” means the approvals of the relevant PRC Governmental Authorities with respect to certain of the transactions contemplated by the Pre-Closing Restructuring, as set forth in  Schedule 5 hereto.
 
“Pro Forma Statement” means the samplepro forma statement of income of the Target Group attached as  Exhibit K  hereto.
 
“Purchaser Party”means each of the Founder, Sherman Holdings Limited, Serangoon Limited, Seletar Limited, Credit Suisse Trust Limited and Winner Crown Holdings Limited.
 
“Registration Rights Agreement” means the registration rights agreement substantially in the form set forth in  Exhibit H  hereto.
 
“Requisite Permits” means, in respect each Transferred Subsidiary, the Permits set forth in Schedule 9 hereto with respect to such Transferred Subsidiary.
 
“Retained Hotels” means the hotel properties and facilities set forth in Schedule 8 hereto.
 
“Retained Hotel Commercial Terms” meansthe terms described in Part B of Exhibit B hereto.
 
“Retained Hotel Management Agreement” meanseach hotel management agreement to be entered into between an the Seller or its Affiliate and NewCo1 in relation to the management of the Retained Hotels, substantially in the form attached as Part A of  Exhibit B  as provided in clause Section 5.03(a)(iv), and, for the avoidance of doubt, incorporating the terms set out in the Retained Hotels Commercial Terms.
 
“Securities Purchase Agreement” means the private placement agreement, dated on or about the date hereof, between Purchaser Parent and the Seller.
 
“Seller Affiliate” means each Affiliate of the Seller, other than the Companies and their respective Subsidiaries (assuming the consummation of, or after giving effect to, the Pre-Closing Restructuring).
 
“Seller Brands” means the Seller ME Brands and the Seller LU Brands.
 
“Seller Group” means prior to Closing, the Seller, Ibis China Investment, and the Transferred Subsidiaries, specifically excluding any Subsidiaries of the Seller which are not Transferred Subsidiaries, and after Closing, the Companies and the Transferred Subsidiaries.
 
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“Seller LU Brands” means the following hotel brands:  “Sofitel”, “Pullman”, “The Sebel” and “MGallery”.
 
“Seller ME Brands” means the following hotel brands:  “Novotel”, “Mercure”, “Ibis”, “Ibis Styles” and “Grand Mercure”.
 
“Seller Parent” means Accor S.A., a joint stock company organized under the laws of France with registered office at 110, Avenue d France, Paris, France.
 
“Seller’s Knowledge” means the actual knowledge of Key Personnel, Gaurav Bhushan (Chief Development & Investment Officer, Accor Asia Pacific) and Janice Gan (General Counsel, Accor Asia Pacific), in each case, after reasonable inquiry.
 
“Seller’s Warranties” means each statement referred to in Article III.
 
“Shared Services” has the meaning given to it under the Interim Management Agreement.
 
“Straddle Period” means any taxable period beginning on or prior to and ending after the Closing Date.
 
“Subsidiary” means, with respect to any specified Person, any corporation, partnership, limited liability company, or other organization, whether incorporated or unincorporated, which is controlled by such Person directly or indirectly through one or more intermediaries.  For the avoidance of doubt, before the Closing, each of the Companies and the Transferred Subsidiaries shall be deemed a Subsidiary of the Seller.
 
“Target Group” means (a) at any time prior to the Closing, the Ibis China Investments and the Transferred Subsidiaries but excluding any Subsidiaries of the Seller which are not Transferred Subsidiaries, and (b) at any time following the Closing, the Companies and their respective Subsidiaries.
 
“Target Shares” means, collectively, theIbis China InvestmentShares, the NewCo1 Shares and the NewCo2 Shares.
 
“Target Territories” meansthe PRC, Mongolia, Hong Kong, Macau and Taiwan.
 
“Tax Returns” means any return, declaration, report, election, claim for refund or information return or other statement or form relating to, filed or required to be filed with any Taxing Authority, including any schedule or attachment thereto or any amendment thereof.
 
“Taxes” means any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto),  whether disputed or not, imposed by any government or Taxing Authority, including (without prejudice to the foregoing) taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers’ compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad
 
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valorem, stamp, transfer, value added, or gains taxes; license, registration and documentation fees; and customs’ duties, tariffs, and similar charges.
 
“Taxing Authority” means any government or subdivision, agency, commission or authority thereof, or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or other imposition of Taxes.
 
“Third Party HotelAgreements” means the MEB Franchise Agreements, the MEB Management Contracts, LUB License Agreement, and the LUB Management Contracts.
 
“Transaction Documents” means:
 
(a)                                this Agreement;
 
(b)                                the Securities Purchase Agreement;
 
(c)                                 the Non-Competition Agreement;
 
(d)                                the Deed of Undertaking;
 
(e)                                 the Interim Management Agreement; and
 
(f)                                  each of the Closing Documents.
 
“Transferred Subsidiary” means each of entities listed in Schedule 3.
 
“Unwind Agreement” means theagreement in theform set out in Exhibit D, or the agreement referred to in Section 5.03(a)(i), if its terms have been agreed by Closing.
 
“Voting and ROFR Agreement” means an agreement in the form set out in Exhibit E.
 
Section 1.02                            Definitions.  The following terms have the meanings set forth in the Sections set forth below:
 
Definition	 	Location	
“Accor Guarantor”	 	Preamble	
“Ancillary Proceedings”	 	Section 11.12(c)	
“Arbitration Rules”	 	Section 11.12(a)	
“Cap”	 	Section 9.04(a)	
“Closing Statement”	 	Section 2.07(a)(ii)	
“Closing”	 	Section 2.03	
“Companies”	 	Recitals	
“CompanyPermits”	 	Section 3.06	
“De Minimis Amount”	 	Section 9.04(a)	
“Deductible Amount”	 	Section 9.04(a)	
“End Date”	 	Section 9.01(a)	
“Expenses”	 	Section 11.01	
 
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Definition	 	Location	
“Filing Party”	 	Section 7.07	
“Financial Statements”	 	Section 3.10(a)	
“Franchisor Registration”	 	Section 5.04(a)	
“HKIAC”	 	Section 11.12(a)	
“Hotel Termination Fee”	 	Section 5.07(a)	
“Ibis China Investment Shares”	 	Section 2.01(i)	
“Independent Accounting Firm”	 	Section 2.07(b)(ii)	
“lease”	 	Section 3.05(a)	
“Long-term Assets”	 	Section 3.05(f)	
“Loss”	 	Section 9.02	
“Loyalty and Collaboration Agreement ”	 	Section 5.03(a)(ii)	
“LUB Assets”	 	Section 3.05(d)	
“LUB Master Brand Agreement”	 	Section 5.03(a)(iv)	
“Material Contracts”	 	Section 3.15(a)	
“Materiality Qualifiers”	 	Section 8.02(a)	
“MEB Assets”	 	Section 3.05(c)	
“NewCo1 Shares”	 	Section 2.01(ii)	
“NewCo2 Shares”	 	Section 2.01	
“NewCo3”	 	Section 5.04(a)	
“Options”	 	Section 3.17(g)	
“Plans”	 	Section 3.19	
“Prohibited Payment”	 	Section 3.14(c)	
“Purchase Consideration Shares”	 	Section 2.02	
“Purchaser Indemnified Party”	 	Section 9.02	
“Purchaser Parent Shares”	 	Section 2.02	
“Purchaser Parent”	 	Preamble	
“Purchaser’sGuaranteed Obligations ”	 	Section 6.14(a)	
“Purchaser”	 	Section 2.01(b)	
“Related Party Transactions”	 	Section 3.23(a)	
“Relevant Personnel”	 	Section 5.03(e)	
“Seller Indemnified Amount”	 	Section 9.03	
“Seller Indemnified Party”	 	Section 9.03	
“Seller’sGuaranteed Obligations ”	 	Section 6.13(a)	
“Seller”	 	Preamble	
“SPA Closing”	 	Section 9.02(a)	
“Submission Date”	 	Section 11.12(a)	
“Subsequent Disclosed Events”	 	Section 8.02(a)	
“Third Party Claim”	 	Section 9.05(b)	
“Third PartyConsent”	 	Section 5.01(a)	
“Transition and Support Services Agreement ”	 	Section 5.03(a)(iii)	
 
Section 1.03                            Interpretation and Rules of Construction.  In this Agreement, except to the extent otherwise provided or that the context otherwise requires:
 
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(a)                                when a reference is made in this Agreement to an Article, Section, Exhibit or Schedule, such reference is to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated;
 
(b)                                the table of contents and headings for this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of this Agreement;
 
(c)                                 whenever the words “include”, “includes” or “including” are used in this Agreement, they are deemed to be followed by the words “without limitation”;
 
(d)                                the words “hereof”, “herein” and “hereunder” and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement;
 
(e)                                 all terms defined in this Agreement have the defined meanings when used in any certificate or other document made or delivered pursuant hereto, unless otherwise defined therein;
 
(f)                                  the definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms;
 
(g)                                 any Law defined or referred to herein or in any agreement or instrument that is referred to herein means such Law or statute as from time to time amended, modified or supplemented, including by succession of comparable successor Laws;
 
(h)                                references to a Person are also to its successors and permitted assigns;
 
(i)                                    the use of “or” is not intended to be exclusive unless expressly indicated otherwise; and
 
(j)                                   an action taken by a Person shall be deemed to have been taken “in the ordinary course” or “in the ordinary course of business” only if such action is (x) consistent with the past practices and is taken in the ordinary course of its normal day-to-day operations in compliance with applicable Laws, and (y) similar in nature and magnitude to actions customarily taken in the ordinary course of its normal day-to-day operations, without any authorization by its board of directors or its shareholder(s).
 
ARTICLE II
 
PURCHASE AND SALE
 
Section 2.01                            Purchase and Sale of theTargetShares.
 
(a)                                Upon the terms and subject to the conditions of this Agreement, at the Closing, the Seller shall sell, assign, transfer, convey and deliver, or cause to be sold, assigned, transferred, conveyed and delivered, to the Purchaser, and Purchaser Parent shall procure that the Purchaser purchase, and the Purchaser shall purchase:
 
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(i)                                    all the issuedordinaryshares, HK$1.00 par value per share, of Ibis China Investment (the “Ibis China Investment Shares ”), and
 
(ii)                                 ordinary shares representing 100% of the issued share capital of NewCo1 on an as-converted and fully diluted basis as of the Closing (the “ NewCo1 Shares ”); and
 
the Seller shall procure that NewCo2 issue, and Purchaser Parent shall procure that the Purchaser acquire, pursuant to the NewCo2 Subscription Agreement, shares representing ten percent (10%) in its issued share capital on an as-converted and fully diluted basis as of the Closing (the “ NewCo2 Shares ”).
 
(b)                                Purchaser Parent shall (i) designate, in accordance with the terms of and subject to this Section 2.01(b), one or more of its wholly owned Subsidiaries to purchase the Target Shares (such Subsidiary or Subsidiaries of Purchaser Parent, the “ Purchaser ”), it being understood and agreed that no such designation shall relieve Purchaser Parent of any of its obligations hereunder or under any of the other Transaction Documents to which it is a party, and (ii) by no later than thirty (30) days prior to the Closing Date, deliver (x) a notice in writing setting forth the details of the Purchaser that will enter into specified Transaction Documents and purchase the Target Shares in accordance with the terms hereof; and (y) a joinder to this Agreement executed by the Purchaser pursuant to which the Purchaser agrees to perform, observe and be bound by all of the obligations applicable to the Purchaser hereunder, whereupon the Purchaser shall become a party hereto and have the rights and obligations of the Purchaser hereunder.  The Parties agree and acknowledge that, prior to the execution of the foregoing joinder, Purchaser Parent shall be entitled to, and may enforce, all rights of the Purchaser hereunder and shall be liable for all obligations of Purchaser.  To the extent Purchaser Parent does not designate a Purchaser, all obligations hereunder of the Purchaser shall be deemed to be obligations of Purchaser Parent.
 
Section 2.02                            Purchase Consideration. As purchase consideration for the Target Shares and in consideration of the covenants and agreements of the Seller and its Affiliates set forth in this Agreement and the other Transaction Documents, Purchaser Parent shall issue certain ordinary shares, par value US$0.0001 per share, in its capital (the “ Purchaser Parent Shares ”) to the Seller in accordance with the Securities Purchase Agreement (the “ Purchase Consideration Shares ”).
 
Section 2.03                            Closing.
 
(a)                                Subject to the terms and conditions of this Agreement, the sale and purchase and issue of theTarget Shares contemplated by this Agreement shall take place at a closing (the “ Closing ”) to be held at the offices of Shearman & Sterling LLP, 12/F Gloucester Tower, The Landmark, 15 Queen’s Road Central, Hong Kong, at 11:00 a.m. Hong Kong time on the fifth Business Day following the satisfaction or waiver of all conditions to the obligations of the parties set forth in Sections 8.01(c), (d) and (e) and Sections 8.02(c) to (g) or at such other place or at such other time or on such other date as the Seller and Purchaser Parent may mutually agree upon in writing.
 
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(b)                                The parties agree and acknowledge that, notwithstanding anything to the contrary contained in any of the Transaction Documents, (i) the closing of the issuance of shares contemplated by the Securities Purchase Agreement and (ii) the closing of the sale and purchase and issue of the Target Shares hereunder, shall be conditional upon and shall take place simultaneously with each other, and all actions required to be taken at the closing hereunder and under the Securities Purchase Agreement (including, without limitation the execution of the Closing Documents) shall, and shall be deemed to, take place simultaneously.
 
Section 2.04                            Closing Deliveries by the Seller.  At the Closing, the Seller shall deliver or cause to be delivered to the Purchaser:
 
(a)                                original duly executed original instruments of transfer and sold notes for the Ibis China Investment Shares and the NewCo1 Shares in favor of the Purchaser;
 
(b)                                to the extent permitted by Law, share certificates in the name of the Purchaser, representing the Purchaser’s ownership of the Target Shares;
 
(c)                                 a certified true copy of the updated register of members of NewCo2 evidencing the Purchaser’s ownership of the NewCo2 Shares;
 
(d)                                the written resignations (together with a release of claims against Ibis China Investment, NewCo1 and their respective Subsidiaries), effective as of the Closing, of all of the directors and officers of Ibis China Investment, NewCo1 and their respective Subsidiaries, except for such persons as shall have been designated in writing prior to the Closing by Purchaser Parent or the Purchaser to the Seller;
 
(e)                                 true and complete copies of the resolutions duly and validly adopted by the shareholders and board of directors of NewCo2 evidencing their authorization of (i) the adoption of the NewCo2 Articles, (ii) the appointment of the person nominated by the Purchaser to the board of directors of NewCo2 in accordance with the NewCo2 Shareholders Agreement, and (iii) the issuance of the NewCo2 Shares to the Purchaser;
 
(f)                                  the general release and discharge from the Seller and the Seller Affiliates referred to in Section 6.09 in the form and substance attached hereto as  Exhibit C .
 
(g)                                 executed counterparts of each Closing Document to which the Seller, Seller Parent or any Seller Affiliate is a party;
 
(h)                                true and complete copies of the resolutions duly and validly adopted by the boards of directors of the Seller and NewCo2 (i) evidencing their authorization of the execution and delivery of each Transaction Document to which the Seller or NewCo2, as the case may be, is a party, and (ii) certifying the names and signatures of the officers of the Seller or NewCo2 authorized to sign the relevant Transaction Document and the other documents to be delivered hereunder and thereunder; and
 
(i)                                    a certificate of a duly authorized officer of the Seller certifying as to the matters set forth in Section 8.02(a).
 
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Section 2.05                            Withholding.  Each of Purchaser Parent, the Purchaser and any of the Transferred Subsidiaries (and any other Person required to withhold with respect to any payment made under this Agreement), shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement such amounts as may be required to be deducted or withheld therefrom under any provision of federal, local or foreign Tax Law.  To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid.  Prior to undertaking any such withholding, Purchaser Parent or the Purchaser shall provide the Seller with notice of the intent to withhold and shall cooperate with the Seller to take all reasonable steps to eliminate or reduce such withholding.
 
Section 2.06                            Closing Deliveries by the Purchaser.  At the Closing, the Purchaser shall deliver to the Seller:
 
(a)                                executed counterparts of each Closing Document to which the Purchaser, Purchaser Parent, or any Purchaser Party is a party;
 
(b)                                true and complete copies of the resolutions duly and validly adopted by the board of directors of the Purchaser (i) evidencing its authorization of the execution and delivery of this Agreement and the other Transaction Documents, and (ii) certifying the names and signatures of the officers of the Purchaser authorized to sign this Agreement and the relevant Transaction Documents and the other documents to be delivered hereunder and thereunder; and
 
(c)                                 a certificate of a duly authorized officer of the Purchaser certifying as to the matters set forth in Section 8.01(a).
 
Section 2.07                            Post-Closing Adjustment of Purchase Consideration.  The parties agree that the purchase consideration for the Target Shares shall be adjusted after the Closing by way of the payments specified in this Section 2.07:
 
(a)                                Closing Statement.  As promptly as practicable, but in any event:
 
(i)                                    within 30 calendar days following the Closing, the Seller shall deliver to the Purchaser the following unaudited financial statements: (A) consolidated and individual balance sheets of (x) the MEB Group Entities and (y) the LUB Group Entities as of the Closing Date, prepared in accordance with Hong Kong GAAP applied on a basis consistent with the preparation of the Financial Statements; (B) consolidated and individual statements of income of (x) the MEB Group Entities and (y) the LUB Group Entities for the periods beginning on January 1, 2014 (or, in the case of any newly incorporated entity, the date of incorporation thereof) and ending on the Closing Date, prepared in accordance with Hong Kong GAAP applied on a basis consistent with the preparation of the Financial Statements; and (C) pro forma statements of income of (x) the MEB Group Entities and (y) the LUB Group Entities (in each case, taken as a whole, as if the Pre-Closing Restructuring has been completed as of the Financial Cut-Off Date) for the Interim Management Period, prepared in accordance with the Pro Forma Statement, applying consistent principles, practices, methodologies, assumptions and policies as used in the preparation of the Pro Forma Statement; and
 
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(ii)                                 within 90 calendar days following the Closing, the Seller shall deliver to the Purchaser: (A) the financial statements described in Section 2.07(a)(i)(A) to 2.07(a)(i)(C), audited by the Seller’s accountants, and (B) a statement of calculation of the MEB Closing Adjustment Amount and the LUB Closing Adjustment Amount (collectively, subject to the provisions of Section 2.07(b), the “ Closing Statement ”), together with the report thereon of the Seller’s accountants, stating that the Closing Statement fairly presents the financial position of the MEB Group Entities or the LUB Group Entities, as the case may be, at the Closing.
 
(b)                                Disputes.  (i)  Subject to clause (ii) of this Section 2.07(b), the Closing Statement delivered by the Seller to the Purchaser shall be final, binding and conclusive on the parties hereto.
 
(ii)                                 The Purchaser may dispute any amounts reflected on the audited Closing Statement; provided, however, that the Purchaser shall have notified the Seller and the Seller’s accountants in writing of each disputed item, specifying the estimated amount thereof in dispute and setting forth, in reasonable detail, the basis for such dispute, within 60 calendar days of the Seller’s delivery of the audited Closing Statement to the Purchaser.  In the event of such a dispute, the Purchaser’s accountants and the Seller’s accountants shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto.  If the Seller’s accountants and the Purchaser’s accountants are unable to reach a resolution within 20 Business Days after the receipt by the Seller and the Seller’s accountants of the Purchaser’s written notice of dispute, the Purchaser’s accountants and the Seller’s accountants shall submit the items remaining in dispute for resolution to an independent Big Four Accounting Firm (or, if such firm shall decline or is unable to act or is not, at the time of such submission, independent of the Seller and the Purchaser, to another independent accounting firm of international reputation mutually acceptable to the Seller and the Purchaser) (the independent Big Four Accounting Firm or such other accounting firm being referred to herein as the “ Independent Accounting Firm ”), which shall, within 30 Business Days after such submission, determine and report to the Seller and the Purchaser upon such remaining disputed items, and such report shall be final, binding and conclusive on the Seller and the Purchaser.  The fees and disbursements of the Independent Accounting Firm shall be allocated between the Seller and the Purchaser in the same proportion that the aggregate amount of such remaining disputed items so submitted to the Independent Accounting Firm that is unsuccessfully disputed by each such party (as finally determined by the Independent Accounting Firm) bears to the total amount of such remaining disputed items so submitted.
 
(iii)                              In acting under this Agreement, the Seller’s accountants, the Purchaser’s accountants and the Independent Accounting Firm shall be entitled to the privileges and immunities of arbitrators.
 
(c)                                 Closing Adjustments.  The Closing Statement shall be deemed final for the purposes of this Section 2.07 upon the earliest of (x) the failure of the Purchaser to notify the Seller of a dispute within 60 calendar days of the Seller’s delivery of the Closing Statement to the Purchaser, (y) the resolution of all disputes, pursuant to Section 2.07(b)(ii), by the Seller’s
 
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accountants and the Purchaser’s accountants, and (z) the resolution of all disputes, pursuant to Section 2.07(b)(ii), by the Independent Accounting Firm.  Within five Business Days of the Closing Statement being deemed final, an adjustment payment shall be made as follows:
 
(i)                                    In the event that the MEB Closing Adjustment Amount is a negative number, the Seller shall pay a sum equal to the absolute value of the MEB Closing Adjustment Amount to the Purchaser by wire transfer in immediately available funds.
 
(ii)                                 In the event that the MEB Closing Adjustment Amount is a positive number, the Purchaser shall pay a sum equal to the absolute value of the MEB Closing Adjustment Amount to the Seller by wire transfer in immediately available funds.
 
(iii)                              In the event that the LUB Closing Adjustment Amount is a negative number, the Seller shall pay a sum equal to the absolute value of the LUB Closing Adjustment Amount to NewCo2 by wire transfer in immediately available funds.
 
(iv)                             In the event that the LUB Closing Adjustment Amount is a positive number, the Seller may require NewCo2 to pay to the Seller a sum equal to the absolute value of the LUB Closing Adjustment Amount to the Seller by wire transfer in immediately available funds.
 
Section 2.08                            Interest on Payments.  Any payments required to be made by the Seller or the Purchaser pursuant to Section 2.07(c) shall bear interest from the Closing through the date of payment at the then current reference three-month term rate of interest publicly announced by the People’s Bank of China or any successor thereto from time to time, from the Closing to the date of each payment.
 
Section 2.09                            Hong Kong Stamp Duty Filing and Related Procedures.
 
(a)                                As soon as reasonably practicable after Closing (and in any event within two days after Closing where the sale or purchase of the Target Shares is effected in Hong Kong or, where the sale or purchase of the Target Shares is effected outside Hong Kong, within 30 days after Closing), the Purchaser shall submit a duly executed original instrument of transfer and duly executed original bought and sold notes in respect of the Ibis China Investment Shares and the NewCo1 Shares, together with all other supporting documents, to the Hong Kong Stamp Office for assessment of the amount of stamp duty payable, and each of Buyer and Seller shall in equal parts, pay the stamp duty in accordance with the amount as adjudicated by the Hong Kong Stamp Office within one Business Day from such adjudication.
 
(b)                                Within two Business Days from the date on which the duly stamped original instrument of transfer and duly executed original bought and sold contract notes are returned to the Purchaser by the Hong Kong Stamp Office, the Purchaser shall procure (and, if necessary, Seller shall take all actions to effect the same) (i) the removal of Seller’s name in the register of members of each Company in respect of the Ibis China Investment Shares and the NewCo1 Shares and procure the entry of the Purchaser’s name in the register of members of each such Company as the legal owner of the Ibis China Investment Shares and the NewCo1 Shares; and (ii) the issuance of the share certificates representing the Ibis China Investment Shares and the NewCo1 Shares to the Purchaser.
 
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ARTICLE III
 
REPRESENTATIONS AND WARRANTIES
OF THE SELLER
 
As an inducement to Purchaser Parent to enter into this Agreement and the other TransactionDocuments, the Seller hereby represents and warrants to Purchaser Parent that, except as set forth on the Section of the Disclosure Schedule that corresponds to the Section of this Article III in which such representation or warranty is made (it being understood and agreed by the parties hereto that disclosure of any item on any section or subsection of the Disclosure Schedule shall be deemed disclosure with respect of any other section or subsection of the Disclosure Schedule to the extent it is readily  apparent from such disclosure that such disclosure is applicable to such other section or subsection), as of the date hereof each of the statements contained in this Article III are true, accurate and not misleading.
 
Section 3.01                            Organization, Authority and Qualification of the Seller and the Accor Guarantor.
 
(a)                                Each of the Seller and the Accor Guarantor is a corporation duly organized and validly existing under the Laws of the jurisdiction of its incorporation and the Seller and the Accor Guarantor each have full corporate power and authority to own, lease, manage or operate the properties, rights and assets now owned, leased, managed or operated by the Seller, and to carry on the Business as it has been and is currently conducted. The Seller and the Accor Guarantor each has all necessary power and authority to enter into this Agreement and the other Transaction Documents to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.  The execution and delivery by each of the Accor Guarantor and the Seller of this Agreement and the other Transaction Documents to which it is or will become a party, the performance by it of its obligations hereunder and thereunder and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of and the Accor Guarantor or the Seller, as the case may be.  This Agreement has been, and upon their execution the other Transaction Documents to which the Accor Guarantor or the Seller is a party shall have been, duly executed and delivered by and the Accor Guarantor or the Seller, as the case may be, and (assuming due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and upon their execution the other Transaction Documents to which and the Accor Guarantor or the Seller is a party is a party shall constitute, its legal, valid and binding obligations, enforceable against it in accordance with their respective terms.
 
(b)                                Each of the Seller and the Accor Guarantor is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary.
 
Section 3.02                            Organization, Authority and Qualification of the Companies.
 
(a)                                As of the Closing Date, each Companywill be a corporation duly organized and validly existing under the Laws of the jurisdiction of its incorporation and will
 
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have all necessary power and authority to own, operate or lease the properties and assets owned, operated or leased by it and (together with the other Companies) to carry on the Business.  All corporate actions taken by each Company have been duly authorized, and no Company has taken any action that in any respect conflicts with, constitutes a default under, or results in a violation of, any provision of its certificate of incorporation or articles of association (or similar organizational documents).  As of the Closing Date, true and correct copies of the certificate of incorporation and articles of association (or similar organizational documents) of each Company have been delivered by the Seller to Purchaser Parent.
 
(b)                                As of the Closing Date, each Company, and as of the date hereof, Ibis China Investment, is duly licensed or qualified to do business in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary.
 
(c)                                 As of the Closing Date, each of NewCo1 and NewCo2 will have been incorporated solely for the purpose of engaging in the transactions contemplated by this Agreement and as of the Closing Date will not have traded, engaged in any business activities or conducted any operations other than in connection with the transactions contemplated by this Agreement, including, without limitation, the Pre-Closing Restructuring. As of the Closing Date, (i) neither NewCo1 and NewCo2 will have passed any resolution, whether of shareholders or directors, other than in connection with its formation, the appointment of its directors and officers, the Pre-Closing Restructuring or the transactions contemplated by this Agreement, and (ii) NewCo1 and NewCo2 will have, at all times since their formation, complied with their constituent documents and all applicable Laws.
 
Section 3.03                            Transferred Subsidiaries.
 
(a)                                Schedule 3 hereto sets forth a true and complete list of all Transferred Subsidiaries, listing for each Transferred Subsidiary its name, type of entity, the jurisdiction and date of its incorporation or organization, its authorized capital, partnership capital or equivalent, the number and type of its issued and outstanding shares or other securities, partnership interests or similar ownership interests and the ownership of such shares, partnership interests or similar ownership interests, as of the date hereof and as of Closing.
 
(b)                                As of Closing, no Affiliate of the Seller or Seller Parent shall be engaged in the conduct of the Business other than through the provision of services that will be made available to the Purchaser, Purchaser Parent or the Companies prior to and/or after Closing pursuant to the Brand Franchise Agreements, the Transition and Support Services Agreement and the Interim Management Agreement. As of the Closing Date, (i) the Acquired Business will be conducted by the MEB Group Entities, (ii) there will be no other corporations, partnerships, joint ventures, associations or other entities in which any Company or any Transferred Subsidiary owns, of record or beneficially, any direct or indirect equity or other interest; and (iii) no Company or any Transferred Subsidiary will be a member of (nor is any part of the Business conducted through) any partnership nor will any Company or any Transferred Subsidiary a participant in any joint venture or similar arrangement.
 
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(c)                                 EachTransferred Subsidiary is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation and has all necessary power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on its operations as is currently operated, except where such failure would not adversely affect the ability of the Transferred Subsidiary to conduct the Business in the manner contemplated by the Transaction Documents.  Each Transferred Subsidiary is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary except where the failure to be qualified would not adversely affect the ability of the Transferred Subsidiary to conduct the Business in the manner contemplated by the Transaction Documents.
 
(d)                                All corporate actions taken by each Transferred Subsidiary in connection with the matters described in this Agreement have been duly authorized and no Transferred Subsidiary has taken any such corporate action that in any respect conflicts with, constitutes a default under or results in a violation of any provision of its certificate of incorporation or articles of association (or similar organizational documents).  True and correct copies of the certificate of incorporation and articles of association (or similar organizational documents) of each Transferred Subsidiary have been delivered by the Seller to Purchaser Parent.
 
Section 3.04                            Capitalization; Ownership of Target Shares.
 
(a)                                As of the date hereof, 788,457,390ordinaryshares inIbis China Investment have been issued, all of which are validly issued and fully paid and were not issued in violation of any preemptive rights.
 
(b)                                There are no options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to any shares or securities of, or any other interest in, any of the Companies or obligating either the Seller or the relevant Company to issue or sell any shares or securities of, or any other interest in, any Company.  Except as provided for in the Transaction Documents (including, without limitation pursuant to the Pre-Closing Restructuring), there are no outstanding contractual obligations of any Company to repurchase, redeem or otherwise acquire any ordinary shares or to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any other Person.  Upon consummation of the Pre-Closing Restructuring, all of the shares in the issued share capital of each Company shall be owned of record and beneficially by the Seller free and clear of all Encumbrances.
 
(c)                                 All the issued and outstanding shares of or equity interest in each Transferred Subsidiary are validly issued, fully paid, non-assessable and, free of preemptive rights and as of the date hereof, are owned by Ibis China Investment, whether directly or indirectly, free and clear of all Encumbrances.  The registered capital of each Transferred Subsidiary that is incorporated in the PRC has been fully paid and has not been withdrawn at any time, in whole or in part.  There are no options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the shares or securities of, or other interest in, any
 
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Transferred Subsidiary or obligating the Seller, any Company or any Transferred Subsidiary to issue or sell any shares or securities of, or any other interest in, any Transferred Subsidiary.  There are no voting trusts, stockholder agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any shares of or equity interest in any Transferred Subsidiary.  Each Transferred Subsidiary that is incorporated in the PRC has made sufficient annual allocation to its statutory reserve fund in accordance with applicable Laws and has adopted proper accounting treatment with respect to such statutory reserve fund.
 
(d)                                The share or member register (or other similar governmental registration document) of eachTransferred Subsidiary accurately records:  (i) the name and address of each Person owning shares of or equity in such Transferred Subsidiary, and (ii) the certificate number of each certificate evidencing shares or equity interest issued by such Transferred Subsidiary, the number of shares or the amount of equity interest evidenced by each such certificate, the date of issuance thereof and, in the case of cancellation, the date of cancellation.  Each of the Transferred Subsidiaries are indirectly wholly owned by the Seller. The Seller has provided Purchaser Parent with a copy of the issued incorporation certificates issued by the PRC Ministry of Commerce in respect of each Transferred Subsidiary.
 
(e)                                 Immediately prior to the Closing, (i) the Seller shall own ordinary shares in the capital of each Company, representing 100% of the issued outstanding share capital of each Company, and (ii) Ibis China Investment shall, directly or indirectly, own 100% of the issued outstanding share capital of each ICI Transferred Subsidiary, and NewCo1  shall, directly or indirectly, own 100% of the issued outstanding share capital of each NewCo1 Transferred Subsidiary, all of which shares and equity interests referred to in the foregoing (i) and (ii) shall be (x) validly issued and fully paid and not have been issued or transferred in violation of any preemptive rights, and (y) owned of record and beneficially by the Seller and its Subsidiaries, whether directly or indirectly, free and clear of all Encumbrances.
 
(f)                                  Upon the consummation of the transactions contemplated by this Agreement and the NewCo2 Subscription Agreement, immediately following the Closing, (i) the Purchaser will own the Target Shares representing (x) 100% of the issued and outstanding share capital of Ibis China Investment, (y) 100% of the issued outstanding share capital of NewCo1, and (z) ten (10%) of the issued outstanding share capital of NewCo2, in each case, on an as-converted and fully diluted basis, and owned of record and beneficially by the Purchaser free and clear of all Encumbrances, and (ii) the Target Shares will be fully paid and there will be no unpaid capital contributions outstanding with respect to any Company.
 
(g)                                 As of the Closing Date, other than the NewCo2 Shareholders Agreement, there are no voting trusts, shareholder agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the shares in the issued share capital of the Companies.
 
Section 3.05                            Hotels underSellerBrands.
 
(a)                                Schedule 1 heretosets forth a true and complete list of all hotels within the Hotel Network as at December 1, 2014.  Other than as set forth in  Schedule 1 , the Seller and its Affiliates do not operate or manage, or license or franchise for operation or management, any hotel under any Seller Brand in any of the Target Territories.
 
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(b)                                Other than the Seller ME Brands,the Seller and its Affiliates do not operate or manage, or license or franchise for operation or management, any hotel or hotel chain business targeted primarily at the Midscale and Economy Market under any hotel brand or name anywhere in the Target Territories, and have not entered any agreement to do so.  Other than the Seller LU Brands, the Seller and its Affiliates do not operate or manage, or license or franchise for operation or management, any hotel or hotel chain business targeted primarily at the Luxury and Upscale Market under any hotel brand or name anywhere in the Target Territories, and have not entered any agreement to do so.  Other than as set forth in  Schedule 1  hereto, the Seller and its Affiliates do not operate or manage, or license or franchise for operation or management, any hotel or hotel chain business anywhere in the Target Territories, and do have not entered any agreement to do so.  Neither the Seller nor any of its Affiliates have entered into (i) any license agreement with any third party in relation to the operation or management of any hotel under any Seller ME Brand in the Target Territories, or (ii) any franchise agreement with any third party in relation to the operation or management of any hotel under any Seller LU Brand in the Target Territories.
 
(c)                                 (i) As of the date hereof, the Seller and its Subsidiaries, and (ii) as of Closing, the NewCo1 Entities, (A) collectively have the legal rights to use the Licensed Intellectual Property in respect of the MEB Business, (B) are the lessees of the Company Leased Real Properties, holding valid or subsisting leasehold interests in relation thereto, (C) hold all the Company Permits relevant to the MEB Business, (D) own all the tangible personal property, including equipment, computers and other similar tangible items provided by Seller and its Affiliates to employees who will work in the MEB Business post-Closing and (E) are parties to, and conduct the MEB Business through, the MEB Management Contracts and MEB Franchise Agreements (together, the “ MEB Assets ”, which, for the avoidance of doubt, shall not include the corporate computer networks of the Seller and the Seller Affiliates).  The MEB Assets constitute all the assets and rights used by the Seller and its Subsidiaries in the operation of the MEB Business other than the Company Owned Real Property and the Company Leased Real Property.
 
(d)                                (i) As of the date hereof, the Seller and its Subsidiaries, and (ii) as of Closing, NewCo2, (A) collectively have (or has) the legal rights to use the Licensed Intellectual Property in respect of the LUB Business, (B) hold(s) all the Company Permits relevant to the LUB Business, and (C) are parties to, and conduct the LUB Business through, the LUB Management Contracts and LUB License Agreements (together, the “ LUB Assets ”).  The LUB Assets constitute all the assets and rights used by the Seller and its Subsidiaries in the operation of the LUB Business.
 
(e)                                 The Seller does not, directly or indirectly through any of its Subsidiaries, engage in any business in the Target Territories other than the Business.
 
(f)                                  Upon Closing, (i) all rooms of each hotel that constitutes Company Owned Real Property or Company Leased Real Property shall be fully operational, with all necessary functionality, decoration and supplies, (ii) the MEB Group Entities shall collectively (A) own all tangible and intangible assets (including without limitation, any personal property), fixed assets and facilities (including any fixtures and improvements made to or constructed) on the Company Owned Real Property and Company Leased Real Property, previously owned and used in respect
 
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of the Acquired Business by the Seller and its Affiliates (other than any assets which the Seller agrees to provide use of to the Purchaser at cost under the Transition and Support Services Agreement), and (B) hold, and have the legal rights with respect to, all long-term deposits (including any deposit provided to a landlord of Company Leased Real Property or a long-term service provider) and other long-term receivables, arising in the ordinary course of business (each as determined pursuant to Hong Kong GAAP, applying consistent principles, practices, methodologies, assumptions and policies as used in preparation of the Financial Statements) (the assets described in (A) and (B), together, the “ Long-term Assets ”), and (iii) the inventory of all rooms of each hotel that constitutes Company Owned Real Property or Company Leased Real Property shall collectively be no less in number than that set forth in Part B of Schedule 1.
 
Section 3.06                            Permits.  With respect to each member of the Target Group, the Permits set forth in 3.06 of the Disclosure Schedule constitute all Permits that are necessary for it (a) to own, operate or lease the properties and assets owned, operated or leased by it, and (b) to conduct the Business as currently conducted under the applicable Laws (collectively, the “ Company Permits ”).  Each of the Company Permits is valid, current and in full force and effect.  No member of the Target Group has received (i) any written notice from any Governmental Authority alleging that it is in violation of any requirement under any Law with respect to any Company Permit, or (ii) any written notice of proceedings relating to the revocation or modification of any Company Permit.  With respect to any Company Permits which are subject to periodic renewal, to the Seller’s Knowledge, there is no event or circumstance that would likely cause such requisite renewals not to be granted by the relevant Governmental Authorities.
 
Section 3.07                            Corporate Books and Records.  The minute books (or similar corporate records) of each of Ibis China Investment and each of the Transferred Subsidiaries contain accurate records of all material meetings and material actions taken by its shareholders and board of directors.
 
Section 3.08                            No Conflict.  Assuming that all consents, approvals, authorizations and other actions described in Section 3.09 have been obtained and all filings and notifications listed in Section 3.09 of the Disclosure Schedule have been made and any applicable waiting period has expired or been terminated, except as may result from any facts or circumstances relating solely to the Purchaser or Purchaser Parent, the execution, delivery and performance by the Seller, Accor Guarantor or any Seller Affiliate of this Agreement and the other Transaction Documents to which the Seller, Accor Guarantor or any Seller Affiliate is a party, and the consummation of the transactions contemplated hereby or thereby, do not and will not (a) violate, conflict with or result in the breach of any provision of the certificate of incorporation or articles of association (or similar organizational documents) of the Seller, Accor Guarantor, any Seller Affiliate, any Company or any Transferred Subsidiary; (b) conflict with or violate any Law or Governmental Order applicable to the Seller, Accor Guarantor, any Seller Affiliate, any Company, any Transferred Subsidiary, or any of their respective assets, properties or businesses, except to the extent that such conflict or violation would not (i) adversely affect the ability of the Seller, Accor Guarantor or any Seller Affiliate to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement and the other Transaction Documents or (ii) adversely affect the ability of the Companies and the Target Group to conduct the Business; (c) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent
 
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under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, any contract, agreement or other arrangement to which the Seller, Accor Guarantor, any Seller Affiliate, any Company or any Transferred Subsidiary is a party except where such conflict, breach or default would have not a Material Adverse Effect; or (d) result in the creation of any Encumbrance on any of the Target Shares or any of the Assets pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which any Company or any Transferred Subsidiary is a party or by which any of the Target Shares or any of such assets or properties is bound or affected.
 
Section 3.09                            Governmental Consents and Approvals.  Except as described in Section 3.09 of the Disclosure Schedule, the execution, delivery and performance by each of the Seller, Accor Guarantor and any Seller Affiliate of this Agreement and each Transaction Document to which it is a party do not and will not require any consent, approval, authorization or other order of, action by, filing with or notification to, any Governmental Authority.
 
Section 3.10                            Financial Information; Books and Records.
 
(a)                                True and complete copies of (i) the unaudited balance sheet dated September 30, 2014, and the audited accounts for the financial year ended December 31, 2013 for each of the financial years ended as of December 31, 2013 and December 31, 2012, of Ibis China Investment, and (ii) audited accounts for each of the Transferred Subsidiaries for the financial year ended December 31, 2013 (collectively referred to herein as the “ Financial Statements ”) have been provided to the Seller.  The Financial Statements (i) were prepared in accordance with the books of account and other financial records of Ibis China Investment and each Transferred Subsidiary, (ii) presents fairly in all material respects the financial condition of Ibis China Investment and each Transferred Subsidiary, as of the date thereof, (iii) have been prepared in accordance with Hong Kong GAAP (with respect to Ibis China Investment) or PRC GAAP (with respect to the Transferred Subsidiaries) applied on a basis consistent with the past practices, and (iv) includes all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the financial condition of Ibis China Investment and each Transferred Subsidiary, as of the date thereof.
 
(b)                                The Financial Statements (i) reflect all material items of income and expense and all material assets and Liabilities required to be reflected therein in accordance with Hong Kong GAAP or PRC GAAP applied on a basis constituent with past practices of the Ibis China Investment and each Transferred Subsidiary, and (ii) are in all material respects complete and correct, and do not contain or reflect any material inaccuracies or discrepancies.
 
Section 3.11                            Absence of Undisclosed Liabilities.
 
(a)                                To the Seller’s Knowledge, there are no material Liabilities in respect of any MEB Group Entity of any kind, whether disclosed or undisclosed, matured or un-matured, accrued, absolute, contingent or otherwise, other than Liabilities (i) reflected or reserved against or disclosed in the Financial Statements, (ii) incurred since the Balance Sheet Date in the ordinary course of business, consistent with past practice, or (iii) incurred in connection with the execution and performance of this Agreement.
 
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(b)                                Upon Closing, NewCo2 will not have any Liabilities of any kind, whether disclosed or undisclosed, matured or un-matured, accrued, absolute, contingent or otherwise, other than obligations pursuant to the Brand Franchise Agreements, the LUB Management Contracts, the LUB License Agreements, and Liabilities (i) reflected or reserved against or disclosed in the Financial Statements, (ii) incurred since the Balance Sheet Date in the ordinary course of business, or (iii) incurred in connection with the execution of this Agreement, or the Pre-Closing Restructuring.
 
Section 3.12                            Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions.  Since the Balance Sheet Date, except as set forth in Section 3.12 of the Disclosure Schedule and subject to the consummation of the Pre-Closing Restructuring, the Business has been conducted in the ordinary course and consistent with past practice.  As amplification and without limitation to the foregoing, since the Balance Sheet Date neither the Seller nor any Company or Transferred Subsidiary has, in connection with the Business:
 
(a)                                except in the ordinary course of business consistent with past practice, discharged or otherwise obtained the release of any Encumbrance related to the Business or paid or otherwise discharged any Liability related to the Business;
 
(b)                                permitted or allowed any of the Assets to be subjected to any Encumbrance, other than Permitted Encumbrances and Encumbrances that will be released at or prior to the Closing;
 
(c)                                 made any change in any method of accounting or accounting practice or policy used by the Seller or any of its Subsidiaries, other than such changes required by Hong Kong GAAP or PRC GAAP, as applicable;
 
(d)                                except in the ordinary course of business, amended, terminated, cancelled or compromised any material claims, or waived any other material rights, in respect of any of the MEB Franchise Agreements, MEB Management Contracts, LUB Management Contracts, LUB License Agreements, Company Owned Real Property or Company Leased Real Property;
 
(e)                                 except in the ordinary course of business, sold, transferred, leased, subleased, licensed or otherwise disposed of any properties or assets, real, personal or mixed (including leasehold interests and intangible property);
 
(f)                                  issued or sold any shares, capital stock, notes, bonds or other securities, or any option, warrant or other right to acquire the same;
 
(g)                                 redeemed any of the capital stock or declared, made or paid any dividends or distributions (whether in cash, securities or other property);
 
(h)                                merged with, entered into a consolidation with or acquired an interest of 5% or more in any Person or acquired a substantial portion of the assets or business of any Person or any division or line of business thereof, or otherwise acquired any material assets;
 
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(i)                                    (i) except in the ordinary course of business, acquired, opened, renovated, commenced operating any hotel, or (ii) made any capital expenditure (or commitment for any capital expenditure that will not be paid or satisfied in full prior to Closing) in excess of $500,000 individually or $5,000,000 in the aggregate;
 
(j)                                   entered into any contract or agreementwhich involves making any payment in excess of $500,000;
 
(k)                                made, revoked or changed any Tax election or method of Tax accounting or settled or compromised any liability with respect to Taxes;
 
(l)                                    incurred any Indebtedness, other than Indebtedness incurred in respect of Company Owned Real Property which will be repaid prior to Closing;
 
(m)                            made any loan to, guaranteed any Indebtedness of, or otherwise incurred any Indebtedness on behalf of, any Person, other than Indebtedness incurred in respect of Company Owned Real Property which will be repaid prior to Closing;
 
(n)                                failed to pay any creditor any material amount owed to such creditor when due;
 
(o)                                except in the ordinary course of business, (i) granted any increase, or announced any increase, in the wages, salaries, compensation (including, without limitation, severance), bonuses (except for ordinary year-end bonuses), incentives, pension or other benefits payable to any Acquired Business Employee, in either case except as required by Law and involving ordinary increases consistent with the past practices;
 
(p)                                except in the ordinary course of business, entered into any agreement, arrangement or transaction with any of its directors, officers, employees or stockholders (or with any relative, beneficiary, spouse or Affiliate of such Persons);
 
(q)                                except in the ordinary course of business,  terminated, discontinued, closed or disposed of any hotel, any material facilities thereof, or any other business operation, or laid off any employees (other than layoffs of less than 50 employees in any six-month period in the ordinary course of business consistent with past practice);
 
(r)                                   allowed any Permit that was issued or relates to the Business to lapse or terminate or failed to renew any insurance policy or any Permit that is scheduled to terminate or expire within 45 calendar days of the Closing;
 
(s)                                  failed to maintain any Company Owned Real Property or Company Leased Real Property in operating condition, ordinary wear and tear excepted;
 
(t)                                   suffered any casualty loss or damage with respect to any of the Assets which in the aggregate have a replacement cost of more than US$250,000, whether or not such loss or damage shall have been covered by insurance;
 
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(u)                                except in the ordinary course of business,  amended, modified or consented to the termination of any Material Contract or any of their rights thereunder;
 
(v)                                amended or restated their certificate of incorporation or articles of association (or other organizational documents);
 
(w)                              (i) abandoned, sold, assigned, or granted any security interest in or to any of theOwned Intellectual Property or Licensed Intellectual Property;
 
(x)                                suffered any Material Adverse Effect; or
 
(y)                                entered into any agreement to take any of the actions specified in this Section 3.12, except as expressly contemplated by this Agreement and the other Transaction Documents.
 
Section 3.13                            Litigation.  There are no Actions by or against the Seller, any Company or any Transferred Subsidiary (or by or against the Seller or any of its Affiliates relating to the Business, any Company or any Transferred Subsidiary) affecting any of the Assets or the Business pending before any Governmental Authority (or threatened to be brought by or before any Governmental Authority), to Seller’s Knowledge or of which the Seller or any of its Subsidiaries have received notice in writing.  None of the Seller, any Company, any Transferred Subsidiary, or any Company Owned Real Property, Company Leased Real Property, or any Asset, is subject to any Governmental Order (nor are there any such Governmental Orders threatened to be imposed by any Governmental Authority or of which the Seller or any of its Subsidiaries has received notice in writing), which has or has had a Material Adverse Effect or could affect the legality, validity or enforceability of this Agreement, any Transaction Document or the consummation of the transactions contemplated hereby or thereby.
 
Section 3.14                            Compliance with Laws(a)    .  The Seller, the Companies and the Transferred Subsidiaries have each conducted the Business in accordance with all Laws and Governmental Orders applicable to each of them or the Assets in all material respects.  For a period of three (3) years prior to the date of this Agreement, none of the Seller or any of its Subsidiaries has received written notice from any Governmental Authority alleging that it is in material violation of any Law or Governmental Order in relation to the conduct of the Business.
 
(b)                                All filings and registrationsand other requisite formalitieswith Governmental Authorities required in respect of the Seller or any of its Subsidiaries and their operations have been duly completed in accordance with the applicable Laws in all material respects.
 
(c)                                 None of (x) the Seller, the Companies or the Transferred Subsidiaries, nor (y) to the Seller’s Knowledge, any of their respective directors, officers, employees, or other Persons acting on behalf of any of the foregoing, directly or indirectly, has (i) violated or is in violation of any applicable anti-corruption Law, including but not limited to the Foreign Corrupt Practices Act of 1977, as amended, and any rules and regulations thereunder, (ii) made, offered to make, promised to make or authorized the payment or giving of, directly or indirectly, any bribe, rebate, payoff, influence payment, kickback or other payment or gift of money or anything of value (including meals or entertainment) to any officer, employee or ceremonial office holder
 
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of any government or instrumentality thereof, any political party or supra-national organization (such as the United Nations), any political candidate, any royal family member or any other person who is connected or associated personally with any of the foregoing that is prohibited under any Law or otherwise for the purpose of influencing any act or decision of such payee in his official capacity, inducing such payee to do or omit to do any act in violation of his lawful duty, securing any improper advantage or inducing such payee to use his influence with a government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality (“ Prohibited Payments ”), or (iii) been subject to any investigation by any Governmental Authority with regard to any actual or alleged Prohibited Payment.
 
Section 3.15                            Material Contracts.
 
(a)                                Section 3.15(a) of the Disclosure Schedule lists each of the following categories of contracts and agreements entered into by the Seller, any Company or the Transferred Subsidiaries which relates to the Business (“ Material Contracts ”), other than with respect to contracts or agreements of the nature described in paragraphs (i), (ii), (v), and (vii) to (x), those that will be terminated prior to Closing:
 
(i)                                    contracts or agreementswhich involves a consideration of $500,000 or more in aggregate during the calendar year ended 31 December, 2014, or is likely to involve a consideration of $500,000 or more over the term of such contract, and which are for a term of 1 year or longer and cannot be terminated by the Seller or its Affiliate by written notice;
 
(ii)                                 all executory construction contracts and agreements to which any member of the Target Group is a party;
 
(iii)                              all the MEB Management Contracts and the LUB Management Contracts;
 
(iv)                             all the MEB Franchise Agreements, LUB License Agreements, and all other franchise agreements pursuant to which the Seller or any of its Affiliates grants a franchise to any Person (other than a member of the Target Group ) in relation to the operation of any hotel or any other hotel business in the Target Territories;
 
(v)                                each Company IP Agreement;
 
(vi)                             each of the leases in respect of the Company Leased Real Property;
 
(vii)                          all contracts and agreements relating to Indebtedness of any Company or Transferred Subsidiary, other than Indebtedness incurred in respect of Company Owned Real Property which will be repaid prior to Closing;
 
(viii)                       all contracts and agreements with any Governmental Authority to which any member of the Target Group is a party;
 
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(ix)                             all contracts and agreements that limit the ability of any member of the Target Group to compete in any line of business or with any Person or in any geographic area or during any period of time; and
 
(x)                                all contracts and agreements between or among any member of the Target Group, on the one hand, and the Seller or any Seller Affiliate on the other hand.
 
For purposes of this Section 3.15 andSection 3.17and Section 6.04(d) , the term “lease” shall include any and all leases, subleases, sale/leaseback agreements or similar arrangements.
 
(b)                                Each Material Contract:  (i) is valid and binding on the Seller, Seller Affiliate, MEB Group Entity or LUB Group Entity party thereto and is in full force and effect, and to the Seller’s Knowledge is valid and binding on the other parties thereto, (ii) if required to be assigned as part of the Pre-Closing Restructuring, is freely and fully assignable to the Purchaser or a party designated by Purchaser Parent without penalty or other adverse consequences and (iii) subject to any requirement to obtain the relevant Third Party Consents, upon consummation of the transactions contemplated by this Agreement and the other Transaction Documents, shall continue in full force and effect without penalty or other adverse consequence.  None of the Seller, any Company or Transferred Subsidiary is in breach of or default (with or without notice, lapse of time or both) under any material representation, covenant or obligation of any Material Contract.
 
(c)                                 To the Seller’s Knowledge, no other party to any Material Contract is in breach thereof or default thereunder and no member of the Target Group has received any notice of termination, cancellation, breach or default under any Material Contract.
 
(d)                                The Seller has made available to Purchaser Parent true and complete copies of all Material Contracts.
 
(e)                                 (i) AllMaterial Contracts that are required by applicable Law to be filed with any GovernmentalAuthority have been duly filed, and (ii) all fees and other amounts payable under the Third Party Hotel Agreements have been paid when due in full in accordance therewith.
 
(f)                                  There is no contract, agreement or other arrangement granting any Person any preferential right to purchase any of the Assets (other than in the ordinary course of business consistent with past practice) or any of the Target Shares.
 
(g)                                 The Material Contracts constitute all of the material contracts that the Seller or its Subsidiaries are a party to and used by them in connection with the Business.
 
Section 3.16                            Intellectual Property.
 
(a)                                Section 3.16 of the Disclosure Schedule sets forth a true and complete list of (i) all the Owned Intellectual Property, and (ii) all Licensed Intellectual Property, material to the Acquired Business.  Except as set forth in Section 3.16 of the Disclosure Schedule, there are no items of Intellectual Property that are material to the ordinary day-to-day conduct of the Acquired Business.
 
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(b)                                As of the Closing Date, (i) pursuant to the MEB Master Brand Agreement and each MEB Brand Franchise Agreement, Purchaser Parent will be the exclusive licensee of the entire right, title and interest in and to the Licensed Intellectual Property in connection with the MEB Business in the Target Territories, and have a valid license to use the Licensed Intellectual Property in connection with the MEB Business; and (ii) pursuant to the LUB Master Brand Agreement and each LUB Brand Franchise Agreement, NewCo2 will (x) be the exclusive licensee of the entire right, title and interest in an to such Licensed Intellectual Property in connection with the LUB Business in the Target Territories, and (y) have a valid license to use the Licensed Intellectual Property in connection with the LUB Business.   As of the Closing Date, a Company or a Transferred Subsidiary is the exclusive owner of the entire right, title and interest in and to the Owned Intellectual Property.
 
(c)                                 (i) The Seller is duly authorized to grant the right to use the Licensed Intellectual Property, as shall be granted to Purchaser Parent or its Affiliates pursuant to the Master Brand Agreements and each Brand Franchise Agreement; (ii) the Seller has valid and sufficient right to use, license and disclose the Licensed Intellectual Property pursuant to the Master Brand Agreements and each Brand Franchise Agreement; (iii) none of the Owned Intellectual Property or Licensed Intellectual Property, nor the conduct of the Acquired Business as currently conducted infringes upon or misappropriates the intellectual property rights of any third party; (iv) the Seller has not previously granted any rights to any third party that are not consistent with the rights granted by it or its Affiliate pursuant to the Master Brand Agreements or any Brand Franchise Agreement.  To the Seller’s Knowledge, no Person is engaging in any activity that infringes the Owned Intellectual Property.
 
(d)                                The Seller has been granted a master franchise to operate, develop, establish and maintain hotels in the Target Territories using the Seller LU Brands and the Seller ME Brands and to grant franchises (including sub-franchises) to third parties, and is entitled thereunder to grant franchise rights to Purchaser Parent and its Affiliates.
 
(e)                                 NoOwned Intellectual Propertyis subject to any outstanding decree, order, injunction, judgment or ruling restricting the use of such Owned Intellectual Property or that would impair the validity or enforceability of such Owned Intellectual Property.
 
Section 3.17                            Real Property.
 
(a)                                Section 3.17(a) of the Disclosure Schedule sets forth a true and complete list of:  (i) the street address of each parcel of Company Owned Real Property, (ii) the date on which each parcel of Company Owned Real Property was acquired, (iii) the current owner of each parcel of Company Owned Real Property, (iv) information relating to the recordation of the deed pursuant to which each parcel of Company Owned Real Property was acquired, (v) the current use of each parcel of Company Owned Real Property, and (vi) the size of the facilities and the number of rooms of each hotel establishment located at each parcel of Company Owned Real Property.
 
(b)                                Notwithstanding anything in this Section 3.17 to the contrary, the Seller is making no representations or warranties with respect to the physical condition of the Real
 
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Property and the Purchaser is making this investment on an AS IS WHERE IS basis with respect to such matters.
 
(c)                                 Section 3.17(c) of the Disclosure Schedulesets forth a true and completelist of:  (i) the street address of each parcel of Company Leased Real Property, (ii) the identity of the lessor, lessee and current occupant (if different from lessee) of each such parcel of Company Leased Real Property, (iii) the terms (referencing applicable renewal periods) and rental payment amounts (including all escalations) pertaining to each such parcel of Company Leased Real Property, (iv) the current use of each such parcel of Company Leased Real Property, and (v) the size of the facilities and the number of rooms of each hotel establishment located at each parcel of Company Leased Real Property.
 
(d)                                At Closing, the Company Leased Real Property constitutes all real property leased by the Target Group in the Target Territories. The Company Owned Real Property constitutes all of the real property in the Target Territories to which the Target Group has land use rights (or equivalent interest).
 
(e)                                 (i) The ICI Transferred Subsidiaries have granted land use rights in respect of each Company Owned Real Property, free and clear of any Claims or Encumbrances; (ii) each of the ICI Transferred Subsidiaries shall have duly obtained a property ownership certificate and a land use right certificate in respect of each Company Owned Real Property, (iii) the land use right in respect of each Company Owned Real Property shall be of a nature that permits the use of such Company Owned Real Property for hotel operations, (iv) no MEB Group Entity shall have leased any parcel or portion of any such Company Owned Real Property to any other Person and no other Person shall have any rights to the use, occupancy or enjoyment thereof pursuant to any lease, license, occupancy or other agreement.
 
(f)                                  (i) As of the Closing Date, the NewCo1 Entitiesshallhave valid leasehold interests in all Company Leased Real Property; (ii) to the Seller’s Knowledge, the owner of each parcel of Company Leased Real Property shall have duly obtained a property ownership certificate and a land use right certificate in respect of such Company Leased Real Property, (iii) the land use right in respect of such Company Leased Real Property shall be of a nature that permits the lease of such Company Leased Real Property or the lease of such Company Leased Real Property for hotel operations, (iv) in the event that the lessor under any lease contract in respect any such Company Leased Real Property shall not be the owner of such Company Leased Real Property, to the Seller’s Knowledge, such lessor shall not have failed to obtain authorization from the owner of such Company Leased Real Property, or otherwise shall have valid legal rights, to enter into the relevant lease contract, (v) with respect to each lease contract in respect of such Company Leased Real Property, (A) it shall be valid, binding and enforceable under applicable Law in accordance with its terms and be in full force and effect with respect to the parties thereto; (B) no event of default shall have occurred which (with or without notice or lapse of time) would constitute a default thereunder on the part of the relevant NewCo1 Entity; (C) no event of default shall have occurred which (with or without notice or lapse of time) would constitute a default thereunder on the part of any other party thereto; and (D) the leasehold interests in the Company Leased Real Property shall be free and clear of all Encumbrances; (vi) each lease contract in respect of such Company Leased Real Property shall have been duly registered with the proper Governmental Authority (if so required under applicable Law); (vii) 
 
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no NewCo1 Entityshall have leased any parcel or any portion of any parcel of any such CompanyLeasedReal Property to any other Person t, nor shall any NewCo1 Entity have assigned its interest under any lease in respect of such Company Leased Real Property to any third party.
 
(g)                                 The Seller has delivered to Purchaser Parent correct and complete copies of all leases relating to the Company Leased Real Property, including all amendments, modifications, supplements, exhibits, schedules, addenda and restatements thereto.  With respect to each of such leases, except as otherwise set forth in Section 3.17(g) of the Disclosure Schedule, neither the Seller nor any of its Affiliates has exercised or given any notice of exercise of, nor has any lessor or landlord exercised or received any notice of exercise by a lessor or landlord of, any option, right of first offer or right of first refusal contained in any such lease or sublease, including any such option or right pertaining to purchase, expansion, renewal, extension or relocation (collectively, “ Options ”).
 
(h)                                Except as set forth in Section 3.17(h) of the Disclosure Schedule, (i) the use of each Company Owned Real Property and Company Leased Real Property for hotel operations and other purposes for which it is presently being used by the Seller and Seller Affiliates is permitted under all applicable Laws, including applicable zoning Laws and applicable zoning plans of any Governmental Authority, and (ii) each Company Owned Real Property and Company Leased Real Property is in compliance in all material respects with all applicable Laws, including those pertaining to environmental impact, fire safety, food safety, siting and construction and licensing and permitting of occupancy and uses presently carried out on such property.
 
(i)                                    Except as set forth in Section 3.17(i) of the Disclosure Schedule, to the Seller’s Knowledge, (i) there is no existing or proposed plan that has been submitted for approval to the relevant Governmental Authority to modify or realign any street adjoining, or highway in the vicinity of, or any zoning Laws and zoning plans of any Governmental Authority applicable to, any of the Real Property, and (ii) there are no existing or proposed Eminent Domain Action that would affect any Company Owned Real Property or Company Leased Real Property or that would prevent or hinder the continued use of any Company Owned Real Property or Company Leased Real Property by any member of the Target Group as heretofore used in the conduct of the Business.
 
Section 3.18                            Environmental Related Matters.  Each member of the Target Group hasbeen in compliancein all material respects with all applicable Environmental Laws and all related Permits.  There are no Environmental Claims pending or threatened in writing against any member of the Target Group or any Company Owned Real Property or to the Seller’s Knowledge, Company Leased Real Property, and to the Seller’s Knowledge, there are no circumstances that can reasonably be expected to form the basis of any such Environmental Claim.
 
Section 3.19                            Employee Benefit Matters.  There are, and as of the Closing Date there will be, no compensation, benefit, fringe benefit and other plans, programs, arrangements or agreements (i) to which any Employer Entity is a party or (ii) that are maintained, contributed
 
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to or sponsored byanyEmployer Entity for the benefit of any current or formerAcquired Business Employee (the “ Plans ”).
 
Section 3.20                            Labor Matters.
 
(a)                                Other than the Employer Entities, no MEB Group Entity has any employees or any Liabilities with respect to any former employees. No Employer Entity is a party to any collective bargaining agreement or other labor union contract applicable to Acquired Business Employees, and currently there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit which could affect any Employer Entity; (b) there are no controversies, strikes, slowdowns or work stoppages pending or, to the Seller’s Knowledge, threatened between any Employer Entity and any of their respective employees, and no Employer Entity has experienced any such controversy, strike, slowdown or work stoppage within the past three years; (c) no Employer Entity has materially breached or otherwise failed to comply with the provisions of any collective bargaining or union contract, and there are no material grievances outstanding against any Employer Entity under any such agreement or contract; (d) there are no unfair labor practice complaints pending against any Employer Entity before any Governmental Authority or any current union representation questions involving employees of any Employer Entity; (e) each Employer Entity is materially in compliance with all applicable Laws relating to the employment of labor, including those related to wages, hours, collective bargaining and the payment and withholding of Taxes and other sums as required by the appropriate Governmental Authority and has withheld and paid to the appropriate Governmental Authority or is holding for payment not yet due to such Governmental Authority all amounts required to be withheld from Acquired Business Employees and is not liable for any arrears of wages, Taxes, penalties or other sums for failure to comply with any of the foregoing; (f) each Employer Entity has paid in full to all their respective employees or adequately accrued for in accordance with PRC GAAP, all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees; (g) there is no claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or threatened before any Governmental Authority with respect to any Person who is or has been an Acquired Business Employee within the past three years; (h) no Employer Entity is a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Authority relating to employees or employment practices; (i) there is no charge or proceeding with respect to a violation of any occupational safety or health standard that has been asserted or is now pending or, to the Seller’s Knowledge, threatened with respect to any Employer Entity; and (j) there is no charge of discrimination in employment or employment practices, for any reason, including age, gender, race, religion or other legally protected category, which has been asserted or is now pending or, to the Seller’s Knowledge, threatened before any Governmental Authority in any jurisdiction in which any Employer Entity has employed or currently employs any Person.  No Employer Entity has misclassified an Acquired Business Employee as a non-employee with respect to Tax withholding or provision of benefits.
 
Section 3.21                            Certain Interests.
 
(a)                                To the Seller’s Knowledge, no officer or director of the Seller or any of its Affiliates and no spouse who resides with, or is a dependent of, any such officer or director:
 
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(i)                                    has any controlling interest in any competitor, supplier or customer ofany member of the Target Group;
 
(ii)                                 owns, directly or indirectly, in whole or in part, or has any other interest in, any tangible or intangible property that any member of the Target Group uses or has used in the conduct of the Acquired Business or otherwise; or
 
(iii)                              has outstanding any Indebtedness toany member of the Target Group.
 
(b)                                Nomember of the Target Group has any Liability of any nature whatsoever to any officer or director of any member of the Target Group or to any spouse who resides with, or is a dependent of, any such officer or director.
 
Section 3.22                            Taxes.
 
(a)                                Except where the failure of such representation to be true would not have a Material Adverse Effect on the Target Group, (i) all Tax Returns required to be filed by or with respect to each member of the Target Group have been duly and timely filed (taking into account any applicable extension periods); (ii) all Taxes due and owning by all members of the Target Group have been duly and timely paid; (iii) all such Tax Returns are true, correct and complete in all material respects; (iv) there are no material claims, assessments, audits, examinations, requests for information or other proceedings pending or threatened in writing with respect to any Taxes of any member of the Target Group, and all Tax deficiencies assessed against members of the Target Group have been paid or finally settled with no remaining amounts owed or are being contested in good faith and for which appropriate reserves have established in accordance with Hong Kong GAAP or PRC GAAP (as applicable); (v)  all material transactions between the Seller or any of it Affiliates and any other member of the Target Group, and between any members of the Target Group, and between any members of the Target Group, have been conducted on an arm’s-length basis; (vi) no member of the Target Group is a party to any agreement or arrangement providing for the allocation or sharing of Taxes, including any terminated agreement as to which any member of the Target Group could have any continuing liabilities, and after the Closing Date, and no member of the Target Group will be bound by any such agreement or similar arrangement or have any liability thereunder for any amounts due in respect of periods prior to the Closing Date; (vii)  there are no liens for Taxes on any assets of any member of the Target Group other than Permitted Encumbrances; (viii) no member of the Target Group is doing business in or engaged in a  trade or business in any jurisdiction in which it has not filed all required Tax Returns, and no notice or inquiry in writing has been received from a Taxing Authority in any jurisdiction in which Tax Returns have not been filed by any member of the Target Group to the effect that the filing of Tax Returns may be required; and (ixi) (A) no submissions made to any governmental entity in connection with obtaining Tax exemptions, Tax holidays, Tax deferrals, Tax incentives or other preferential Tax treatments that are currently in effect or Tax rebates contained any misstatement or omission that would have affected the granting of such Tax exemptions, preferential treatments or rebates; (B)  no suspension, revocation or cancellation of any such Tax exemptions, preferential treatments or rebates is pending or, to the Seller’s best knowledge, threatened; and (C) the consummation of the transactions contemplated by this Agreement shall not have any adverse effect on the
 
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continued validity and effectiveness of any such Tax exemptions, Tax holidays, Tax incentives or other preferential Tax treatments of the members of the Target Group.
 
(b)                                (i) No member of the Target Group is or has ever been a member of a group of corporations with which it has filed (or been required to file) consolidated, combined or unitary Tax Returns; (ii) no member of the Target Group has any actual or potential liability as a result of being a member of a group of corporations that files consolidated, combined or unitary Tax Returns, by operation of law, as a transferee or successor, or pursuant to any contractual obligation, or otherwise for any Taxes of any Person (other than a member of the Target Group or the group of corporations including the Parent); and (iii) no member of the Target Group will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any transaction occurring prior to the Closing Date.
 
(c)                                 Except where the failure of such representation to be true would not have a Material Adverse Effect on the Target Group, (i) there are no outstanding waivers or agreements extending the statute of limitations for any period with respect to any Tax to which any member of the Target Group may be subject; (ii) to the Seller’s Knowledge, there are no proposed reassessments of any property owned by any member of the Target Group or other proposals that could increase the amount of any Tax to which any member of the Target Group would be subject; (iii) no power of attorney that is currently in force has been granted with respect to any matter relating to Taxes that could affect any member of the Target Group.
 
(d)                                The Seller has delivered to Purchaser Parent correct and complete copies of all federal, state and foreign income, franchise and similar Tax Returns, material examination reports, and material statements of deficiencies assessed or agreed to by any member of the Target Group since January 1, 2010.
 
Section 3.23                            Related Party Transactions.
 
(a)                                Other than as described in the Financial Statements, other than as entered into in the ordinary course of business consistent with past practice, there are no outstanding transactions relating to the Business which are either (i) between the Seller and any Seller Affiliate on the one hand and any Company or any Transferred Subsidiary on the other hand, or (ii) between any Subsidiary of the Seller on the one hand and the Seller or any Seller Affiliate on the other hand (in relation to the Business), and which will be assigned to any Company or any Transferred Subsidiary on or prior to the Closing, including any payments, loaned or borrowed funds, any commitment with respect to Indebtedness, any guarantee or other security arrangement related to Indebtedness, or any real property or credit arrangement (“ Related Party Transactions ”).  All such transactions have been duly and validly authorized or ratified by all requisite corporate and other actions.
 
(b)                                As of theClosing, there is no Indebtedness owed by (i) the Seller or any Seller Affiliate to any member of the Target Group, or (ii) any member of the Target Group to the Seller or any Seller Affiliate.
 
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Section 3.24                            Insurance. The Seller has provided the Purchase with all currently effective insurance policies related to Company Owned Real Property and Company Leased Real Property.
 
Section 3.25                            Certain Business Practices.  None of (a) the Seller, the Companies or the Transferred Subsidiaries, or (b) to the Seller’s Knowledge, any of their respective directors, officers, agents, representatives or employees (in their capacity as directors, officers, agents, representatives or employees) has, in relation to the Business:  (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) directly or indirectly, paid or delivered any fee, commission or other sum of money or item of property, however characterized, to any finder, agent, or other party acting on behalf of or under the auspices of a governmental official or Governmental Authority, in any country, which is in any manner illegal under any applicable Law; or (iii) made any payment to any customer or supplier of any of them or any officer, director, partner, employee or agent of any such customer or supplier for an unlawful reciprocal practice, or made any other unlawful payment or given any other unlawful consideration to any such customer or supplier or any such officer, director, partner, employee or agent, in respect of the Business.
 
Section 3.26                            Brokers.  No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement or the other Transaction Documents based upon arrangements made by or on behalf of the Seller.
 
Section 3.27                            Purchaser Parent Due Diligence.  Purchaser Parent has conducted due diligence on the Business, has been granted access to any information, documents and persons, and has had full opportunity to review material matters, related to the Companies and the Business.  The Purchaser acknowledges that it does not rely on and has not been induced to enter into this Agreement on the basis of any warranties, representations, covenants, undertakings, indemnities or other statements whatsoever, other than those expressly set out in this Agreement, and acknowledges that neither the Seller nor its agents, officers and employees have given any such warranties, representations, covenants, undertakings, indemnities or other statement other than those set out in this Agreement.  For the avoidance of doubt and notwithstanding anything herein to the contrary, the Seller has provided and discussed with the Purchaser materials and information including projections, plans and other forward looking statements but the Seller is making no representations (implied or explicit) as to the accuracy or completeness of any such documents or information conveyed in any medium.  In no event will the Purchaser have any claims (pursuant to this Agreement or Law or otherwise) against the Seller for any matters covered by the preceding sentence.
 
Section 3.28                            No Other Representations or Warranties.  Except for the Seller’s Warranties and the representations and warranties contained in each other Transaction Document, neither the Seller nor any other Person makes any express or implied representation or warranty on behalf of the Seller or with respect to the Seller, its Affiliates, the Target Shares or the transactions contemplated by the Transaction Documents.
 
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ARTICLE IV
 
REPRESENTATIONS AND WARRANTIES
OF PURCHASER PARENT
 
As an inducement to the Seller to enter into this Agreement and the other TransactionDocuments, the Purchaser hereby represents and warrants to the Seller, as of the date hereof, as follows:
 
Section 4.01                            Organization and Authority of Purchaser Parent.  Purchaser Parent is, and as of the Closing Date, the Purchaser shall be, a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation and has all necessary corporate power and authority to enter into this Agreement and the other Transaction Documents to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.  The execution and delivery by each of Purchaser Parent and, as of the Closing Date, the Purchaser of this Agreement and the other Transaction Documents to which it is a party, the performance by it of its obligations hereunder and thereunder and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of Purchaser Parent or, as of the Closing Date, the Purchaser, as the case may be.  This Agreement has been, and upon their execution the other Transaction Documents to which Purchaser Parent is or, as of the Closing Date, the Purchaser shall be a party shall have been, duly executed and delivered by the Purchaser or Purchaser Parent, as the case may be, and (assuming due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and upon their execution the other Transaction Documents to which Purchaser Parent is or, as of the Closing Date, the Purchaser shall be a party shall constitute, its legal, valid and binding obligations enforceable against its in accordance with their respective terms.
 
Section 4.02                            No Conflict.  Assuming the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions referred to in Section 4.03, except as may result from any facts or circumstances relating solely to the Seller, the execution, delivery and performance by Purchaser Parent or, as of the Closing Date, the Purchaser of this Agreement and the other Transaction Documents to which it is or shall be a party do not and will not (a) violate, conflict with or result in the breach of any provision of the certificate of incorporation or articles of association (or similar organizational documents) of the Purchaser or Purchaser Parent, (b) conflict with or violate any Law or Governmental Order applicable to the Purchaser or Purchaser Parent, or (c) conflict with, or result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which Purchaser Parent is, or as of the Closing Date, the Purchaser shall be, a party, which would adversely affect the ability of the Purchaser or Purchaser Parent to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement or the other Transaction Documents.
 
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Section 4.03                            Governmental Consents and Approvals.  The execution, delivery and performance by Purchaser Parent or, as of the Closing Date, the Purchaser of this Agreement and each Transaction Document to which it is or shall be a party do not and will not require any consent, approval, authorization or other order of, action by, filing with, or notification to any Governmental Authority, except as described in a writing given to the Seller by Purchaser Parent on the date of this Agreement or prior to the Closing Date.  As of the date hereof, Purchaser Parent knows of no reason why all the consents, approvals and authorizations necessary for the consummation of the transactions contemplated by this Agreement and the other Transaction Documents will not be received.
 
Section 4.04                            Litigation.  Except as set forth in a writing given to the Seller by Purchaser Parent on the date of this Agreement or prior to the Closing Date, no Action by or against Purchaser Parent is pending or, to the best knowledge of Purchaser Parent after due inquiry, threatened, which could affect the legality, validity or enforceability of this Agreement, any Transaction Document or the consummation of the transactions contemplated hereby or thereby.
 
Section 4.05                            No Other Representations or Warranties.  Except for the Purchaser Parent’s and Purchaser’s representations and warranties contained in the Transaction Documents, neither Purchaser Parent, the Purchaser nor any other Person makes any express or implied representation or warranty on behalf of itself or with respect to Purchaser Parent, the Purchaser Seller, any of their Affiliates, or the transactions contemplated by the Transaction Documents.
 
ARTICLE V
 
STRATEGIC COOPERATION
 
Section 5.01                            Arrangement with respect to Third Party Hotel Agreements and Company Leased Real Property.
 
(a)                                The Seller shall, and shall cause its Affiliates to, take all steps necessary or desirable to ensure that (x) all MEB Franchise Agreements and MEB Management Contracts are assigned or transferred to the MEB Group Entities in accordance with the Pre-Closing Restructuring, (y) all LUB License Agreements and LUB Management Contracts are assigned or transferred to the LUB Group Entities in accordance with  the Pre-Closing Restructuring, in each case, by and as of the Closing Date, and (z) each lease in respect of the Company Leased Real Property is assigned or transferred to NewCo1 PRC, in each case, by and as of the Closing Date.  To the extent that any such assignment or transfer requires an agreement of novation by, or the consent, approval or waiver of, the counterparty to the relevant Third Party Hotel Agreement or lessor of Company Leased Real Property (each, a “ Third Party Consent ”), the Seller shall, and shall cause its Affiliates to, use all reasonable efforts to obtain any Third Party Consent prior to the Closing Date.  The Purchaser shall not be obligated to, and the Seller shall ensure that no MEB Group Entity or LUB Group Entity shall, enter into or agree to a Third Party Consent which would make the rights, benefits or obligations of the Purchaser or an MEB Group Entity or LUB Group Entity in respect of the relevant Third Party Hotel Agreement or lease of any Company Leased Real Property less favorable to the Purchaser or an MEB Group Entity or LUB Group Entity than those rights or benefits that were enjoyed by the relevant Affiliate of the
 
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Seller, or those obligations to which the relevant Affiliate of the Seller were subject, before the Third Party Consent.  The Seller shall deliver any Third Party Consent to the Purchaser as soon as reasonably possible after its receipt.
 
(b)                                If for any reason any Third Party Consent has not been obtained by the Closing Date, then thereafter and until it is obtained:
 
(i)                                    the obligation of theSeller to use all reasonable efforts to obtain such Third Party Consent shall continue;
 
(ii)                                 the transfer of the relevant Third Party Hotel Agreement or lease of Company Leased Real Property(to the extent that a Third Party Consent is required) shall not take effect and the Seller shall, and shall cause the relevant Seller Affiliate to, from the Closing hold it on trust for the relevant MEB Group Entity or LUB Group Entity specified in  the Pre-Closing Restructuring (or another member of the Target Group reasonably designated by Purchaser Parent or the Purchaser) and account for and pay or deliver to such MEB Group Entity or LUB Group Entity (as soon as reasonably practicable after receipt) any moneys and other benefits which it receives after the Closing to the extent that they relate to such Third Party Hotel Agreement or Company Leased Real Property (it being understood and agreed that all payments required to be made pursuant to this Section 5.01(b) shall be made by wire transfer of immediately available funds to the bank account or accounts designated by Purchaser Parent or the Purchaser or of the relevant MEB Group Entity or LUB Group Entity receiving such payment, free and clear and without reduction for Tax or any other deductions); and
 
(iii)                              the Seller shall (x) authorize and permit suchMEB Group Entity or LUB Group Entity specified in  the Pre-Closing Restructuring (or another member of the Target Group reasonably designated by the Purchaser Parent or the Purchaser)  to perform (as sub-contractor or agent of the relevant Seller Affiliate) all the obligations of the relevant Seller Affiliate under such Third Party Hotel Agreement or lease to be discharged after the Closing, and (y) give such reasonable assistance as Purchaser Parent or the Purchaser may from time to time request, to enable such MEB Group Entity or LUB Group Entity to enforce its rights under such Third Party Hotel Agreement or lease.
 
(c)                                 If (i) the terms of any Third Party Hotel Agreement or lease (in respect of which a Third Party Consent is not obtained by the Closing Date) do not permit the relevant MEB Group Entity or LUB Group Entity specified in  the Pre-Closing Restructuring (or another member of the Target Group reasonably designated by Purchaser Parent or the Purchaser) to perform the relevant Seller Affiliate’s obligations as sub-contractor or as agent, or (ii) the relevant Third Party Consent is (x) not obtained within six (6) months after the Closing Date or (y) refused and the provisions of this Section 5.01 do not enable the rights and benefits of such Third Party Hotel Agreement or lease to be enjoyed in all material respects by the Purchaser or the relevant MEB Group Entity or LUB Group Entity after the Closing Date, then the Seller and Purchaser Parent (or the Purchaser) shall use all reasonable efforts to achieve an alternative solution by which the relevant MEB Group Entity or LUB Group Entity shall receive the benefit of such Third Party Hotel Agreement or lease and assume the obligations and burdens thereunder.
 
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Section 5.02                            Interim Management Agreement. The Interim Management Agreement sets out (i) the process for identification and allocation of employees of the Seller and its Affiliates between the Target Group and the Seller and its Affiliates, following Closing, and (ii) the allocation of the profits, losses, risks and benefits of the Business for the period following the Financial Cut-Off Date and prior to Closing.
 
Section 5.03                            Transaction Documents, Transition and Support Services, Access to Relevant Personnel, Etc.
 
(a)                                The Parties shall cooperate in good faith to negotiate the terms of and agree upon the form of the following Transaction Documents as soon as possible after the date hereof, and in any event by no later than the Financial Cut-Off Date:
 
(i)                                    an agreement to be entered into between the Seller, the Purchaser and the Purchaser Parent in respect of the matters referred to in the Unwind Agreement, it being understood that in the event that such agreement has not been negotiated by the Closing Date the Parties shall execute the Unwind Agreement, which shall be binding upon the Parties and their Affiliates;
 
(ii)                                 an agreement in respect of (x) the Seller Parent’s and Purchaser Parent’s respective loyalty programs, and (y) the linkage of the Parties’ respective reservation platforms (the “ Loyalty and Collaboration Agreement ”) to be entered into between Seller Parent and Purchaser Parent, it being understood that in the event that such agreement has not been negotiated by the Closing Date the provisions set forth in  Exhibit J  hereto shall be binding upon the Parties and their Affiliates;
 
(iii)                              a services agreement to be entered into between Seller and the Purchaser with respect to certain transition and support services (which shall include the use of any systems that may be located in any regional/country offices) to be provided by Seller Parent and its Affiliates to the MEB Group Entities after the Closing (the “ Transition and Support Services Agreement ”);
 
(iv)                             a master brand agreement substantially in the same form as the MEB Master Brand Agreement, with the applicable brand use fees set forth in  Exhibit M  hereto, to be entered into between the Seller Parent, Seller and NewCo2 in respect of the Seller LU Brands (the “ LUB Master Brand Agreement ”);
 
(v)                                each Retained Hotel Management Agreement;
 
(vi)                             brand franchise agreements substantially in the same form as the Ibis Brand Franchise Agreement, however including the necessary modifications noted in Part B of  Exhibit F  hereto with respect to the relevant Seller Brands, to be entered into between (x) the Seller, Purchaser Parent and NewCo1 for each of the Seller ME Brands, and (y) the Seller and NewCo2 for each of the Seller LU Brands, and, in respect of Hong Kong and Macau, Ibis and Novotel;
 
(vii)                          the NewCo2 Subscription Agreement; and
 
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(viii)                       an amendment to the articles of association of NewCo2 incorporating certain matters referred to in the NewCo2 Shareholders Agreement.
 
(b)                                Without limiting the generality of the foregoing, the Parties agree that the Seller shall, as soon as practicable after the date hereof, work together with Purchaser Parent and its Affiliates to identify the specific transition and/or regional and global support services that would be included in the Transition and Support Services Agreement (other than the services contemplated by the Master Brand Agreements and the Brand Franchise Agreements) and are required by Purchaser Parent or the Purchaser in connection with the transfer of the MEB Business following the Closing, and that Seller Affiliates shall provide such services at cost, as applicable, to Purchaser Parent and its Affiliates.
 
(c)                                 The Parties shall discuss in good faith and determine, as soon as practicable after the date hereof, an appropriate allocation of the assets (other than the MEB Assets and the Long-term Assets) currently used by the Target Group in connection with the Business.  The Seller shall ensure that, as of the Closing;
 
(i)                                    the MEB Group Entities shall (x) own and hold the MEB Assets, the Long-term Assets and any assets allocated to the MEB Group Entities pursuant to this Section 5.03(c), in each case, free and clear of all Encumbrances, (y) not have any account receivables, account payables or other commitments (other than those arising in the ordinary course of business), and (z) not be party to any contract or agreement with the Seller or any Seller Affiliate (other than the Transaction Documents) that cannot be cancelled or terminated by the MEB Group Entities at any time without penalty or further payment; and
 
(ii)                                 the LUB Group Entities shall (x) own and hold the LUB Assets and any assets allocated to the LUB Group Entities pursuant to this Section 5.03(c), in each case, free and clear of all Encumbrances, (y) not have any account receivables, account payables or other commitments (other than those arising in the ordinary course of business), and (z) not be party to any contract or agreement with the Seller or any Seller Affiliate other than on arm’s length terms.
 
(d)                                In furtherance of the transactions contemplated by the Master Brand Agreements and the Brand Franchise Agreements, the Parties shall discuss and work together in good faith to agree on, as soon as practicable after the date hereof, (i) appropriate localization for the Target Territories of Accor brand standards for the Seller Brands licensed or franchised thereunder, and any resulting modifications to such brand standards applicable under the relevant Transaction Documents, including without limitation the operational standards applicable to hotels within the Hotel Network and the criteria to be applied in any project validation process, (ii) an alternative solution to simplify, combine or substitute certain of the audits required under the Brand Franchise Agreements and the applicable Accor brand standards be conducted with respect to hotels operated under the Seller Brands in the Target Territories, and (iii) the application of Accor visual identity (VI) standards in association with Huazhu elements (it being understood and agreed that, unless otherwise agreed to by the Parties, (A) the provisions of Exhibit J and the Loyalty and Collaboration Agreement, as applicable, shall, with respect to any matter provided therein, prevail in the event of any inconsistency with Accor standards, and (B) 
 
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Purchaser Parent and its Affiliates shall comply with the current Accor brand standards as applicable under the relevant Brand Franchise Agreements, except to the extent that such standards have been modified in accordance with this Section 5.03(d)).
 
(e)                                 The Seller shall, and shall ensure the relevant Seller Affiliates shall, for a period commencing on the date hereof and ending on the first anniversary of the Closing Date, (i) afford Purchaser Parent and its Affiliates reasonable access, during normal business hours and for a reasonable period, to those officers, directors, employees and other personnel of the Seller and its Affiliates (the “ Relevant Personnel ”) who have been actively and directly participating in, or otherwise have specific knowledge relating to, the conduct of the MEB Business prior to the Closing, and (ii) cause the Relevant Personnel to provide such operational data and information concerning the MEB Assets and/or the conduct of the MEB Business, as may reasonably be requested by Purchaser Parent and its Affiliates.
 
(f)                                  The Seller shall, prior to the Closing, provide Purchaser Parent and the Purchaser with an updated schedule that sets forth a true and complete list of all hotels within the Hotel Network as of the Closing Date, setting forth for each hotel such details as are included in Schedule 1 hereto.
 
(g)                                 The Seller shall, by no later than January 15, 2015, provide Purchaser Parent with a schedule that sets forth a true and complete list of all hotels within the Accor MEB Network (as defined in the MEB Master Brand Agreement) that are not, as of the date hereof, in compliance with the brand audit participation requirements described under the heading “Brand Audit and Hygiene Audit” in Schedule 1 to the IBIS Brand Franchise Agreement.
 
Section 5.04                            Franchisor Registration.
 
(a)                                The Seller shall, at the Purchaser’s cost, as soon as practicable after the date hereof, (i) incorporate an entity in the PRC (“ NewCo3 ”), and (ii) procure that NewCo3 use reasonable efforts to complete the franchisor registration (特许人备案) (“ Franchisor Registration ”) for each of the Seller ME Brands (other than Ibis) in accordance with applicable PRC Laws.
 
(b)                                The Seller shall, at the Purchaser’s cost, cooperate with all reasonable requests of Purchaser Parent or the Purchaser in connection with any filings or agreements as required to assist the Purchaser in obtaining such Franchisor Registrations and transferring to the Purchaser or its Affiliate an entity that can use such registration for the franchising of any Seller ME Brand (other than Ibis) in the PRC.
 
(c)                                 The Seller shall hold all of the equity interest in NewCo3 until such time as Purchaser Parent or the Purchaser may reasonably request, upon which the Seller shall transfer 100% of the equity interest in NewCo3 to the Purchaser or its Affiliate free and clear of any Indebtedness or Encumbrance, other than incurred in respect of the matters referred to in Section 5.04. The Purchaser shall be responsible for any Conveyance Taxes payable on the transfer of such interest, including that which is assessed to be payable by the Seller.
 
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(d)                                Purchaser Parent indemnify the Seller for any losses incurred by the Seller or any of its Affiliates as a result of the Seller complying with its obligations under this Section 5.04.
 
Section 5.05                            Requisite Permits.  As soon as practicable after the date hereof and in any event by no later than two months after the Financial Cut-Off Date, the Seller shall (a) cause the Transferred Subsidiaries to obtain the Requisite Permits (to the extent not so obtained as of the date hereof), and (b) promptly provide Purchaser Parent and the Purchaser with documentary evidence thereof.
 
Section 5.06                            Real Estate Enterprise Registration.  The Seller shall use all reasonable efforts to cause each ICI Transferred Subsidiary to complete the Foreign Invested Real Estate Enterprise Registration (外商投资房地产企业备案) with the competent Governmental Authorities as soon as practicable after the date hereof and in any event prior to the Closing, and provide Purchaser Parent and the Purchaser with documentary evidence thereof promptly after such registration.
 
Section 5.07                            Arrangement with respect to Retained Hotels.
 
(a)                                If at any time during the term of a Retained Hotel Management Agreement, the relevant Retained Hotel is transferred or otherwise disposed of by any Seller Affiliate, and the transferee thereof does not, for any reason agree, to assume the obligations of the Seller or any Seller Affiliate under the Retained Hotel Management Agreement (or enter into a separate agreement on substantially the same terms) with respect to the management of the relevant Retained Hotel, the Seller shall, within thirty (30) days after the date of consummation of such transfer or disposal, pay or cause to be paid to the Purchaser, by wire transfer of immediately available funds to the bank account or accounts designated by the Purchaser, an amount (the “ Hotel Termination Fee ”) equal to the termination fee as provided in the Retained Hotels Commercial Terms.
 
(b)                                The parties acknowledge and agree that the Hotel Termination Fee is not a penalty, but constitutes liquidated damages in an amount that has been computed as a reasonable estimate of the anticipated harm which would be suffered and the value of the transactions to be consummated under the Retained Hotels Management Agreement, and the Seller further waives any defense that the Hotel Termination Fee provided for herein is invalid or unenforceable because such amount would be void as a penalty and not reasonably related to actual damages.
 
ARTICLE VI
 
ADDITIONAL AGREEMENTS
 
Section 6.01                            Conduct of Business Prior to the Closing.  Subject tothe matters included in the Pre-Closing Restructuring and the Interim Management Agreement:
 
(a)                                The Seller covenants and agrees that, between the date hereof and the time of the Closing and except as pursuant to any instructions, consent, waiver or approval of Purchaser Parent or the Purchaser, no member of the Target Group shall conduct the Acquired
 
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Business other than in the ordinary course and consistent with prior practice of such member of the Target Group.  Without limiting the generality of the foregoing and except for any actions taken as part of the Pre-Closing Restructuring, the Seller shall cause each member of the Target Group to (i) continue their advertising and promotional activities, and pricing and purchasing policies, in accordance with past practice; (ii) not shorten or lengthen the customary payment cycles for any of their payables or receivables; (iii) use their reasonable best efforts to (A) preserve intact their business organizations and the business organization of the Acquired Business, (B) keep available to the Purchaser the services of the employees of each member of the Target Group as provided in Section 5, (C) continue in full force and effect without material modification all existing policies or binders of insurance currently maintained in respect of each member of the Target Group and the Business, and (D) preserve their current relationships with their customers, suppliers and other persons with which they have had significant business relationships; (iv) exercise, but only after notice to Purchaser Parent or the Purchaser and receipt of Purchaser Parent’s or the Purchaser’s prior written approval, any rights of renewal pursuant to the terms of any of the leases or subleases set forth in Section 3.17 of the Disclosure Schedule which by their terms would otherwise expire; and (v) not engage in any practice, take any action, fail to take any action or enter into any transaction which would reasonably be likely to cause any representation or warranty of the Seller to be untrue or result in a breach of any covenant made by the Seller in this Agreement.
 
(b)                                Except as described in Section 6.01(b) of the Disclosure Schedule, the Seller covenants and agrees that, between the date hereof and the time of the Closing, without the prior written consent of Purchaser Parent or the Purchaser, no member of the Target Group will intentionally do any of the things specified in the second sentence of Section 3.12.
 
(c)                                 The Seller shall not, between the date hereof and the time of the Closing, without the prior written consent of Purchaser Parent or the Purchaser, terminate the Management Agreement (as defined in the IBIS Brand Franchise Agreement) of any of the hotels described in Section 5.03(g) herein due to failure of such hotel to comply with brand audit participation requirements (and not due to any other failure to comply with any other applicable requirements).
 
Section 6.02                            Access to Information.
 
(a)                                From the date hereof until the Closing, upon reasonable notice, the Seller shall cause its officers, directors, employees, agents, representatives, accountants and counsel, and shall cause each member of the Target Group and each of their respective officers, directors, employees, agents, representatives, accountants and counsel to: (i) afford the officers, employees, agents, accountants, counsel, financing sources and representatives of Purchaser Parent and the Purchaser reasonable access, during normal business hours, to the offices, properties, plants, other facilities, books and records of the Seller (limited to information related to the Acquired Business) and each other member of the Target Group, and to those officers, directors, employees, agents, accountants and counsel of the Seller and each other member of the Target Group who have any knowledge relating to any member of the Target Group or the Acquired Business and (ii) furnish to the officers, employees, agents, accountants, counsel, financing sources and representatives of Purchaser Parent and the Purchaser such additional financial and operating data and other information regarding the assets, properties, liabilities and
 
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goodwill of member of the Target Group or the Business (or legible copies thereof) as Purchaser Parent or the Purchaser may from time to time reasonably request.
 
(b)                                In order to facilitate the resolution of any claims made against or incurred by the Seller prior to the Closing, for a period of seven years after the Closing, the Purchaser shall (i) retain the books and records relating to the Business and each member of the Target Group relating to periods prior to the Closing in a manner reasonably consistent with the prior practice of such member of the Target Group and (ii) upon reasonable notice, afford the officers, employees, agents and representatives of the Seller reasonable access (including the right to make, at the Seller’s expense, photocopies), during normal business hours, to such books and records.
 
(c)                                 In order to facilitate the resolution of any claims made by or against or incurred by the Purchaser or any member of the Target Group after the Closing or for any other reasonable purpose, for a period of seven years following the Closing, the Seller shall (i) retain the books and records of the Seller which relate to the Business, any member of the Target Group or their operations for periods prior to the Closing and which shall not otherwise have been delivered to the Purchaser, and (ii) upon reasonable notice, afford the officers, employees, agents and representatives of the Purchaser reasonable access (including the right to make photocopies, at the expense of the Purchaser), during normal business hours, to such books and records.
 
Section 6.03                            Confidentiality.  Each of Accor Guarantor, the Seller, Purchaser and Purchaser Parent agrees to, and shall cause its agents, representatives, Affiliates, employees, officers and directors to:  (a) treat and hold as confidential (and not disclose or provide access to any Person to) all information relating to the transactions contemplated by this Agreement, or the terms or conditions or any other facts relating thereto, including, without limitation, the existence of the Transaction Documents and the terms and conditions thereof, (b) in the event that Accor Guarantor, the Seller or any such agent, representative, Affiliate, employee, officer or director becomes legally compelled to disclose any such information, provide Purchaser Parent with prompt written notice of such requirement so that Purchaser Parent, the Purchaser or a member of the Target Group may seek a protective order or other remedy or waive compliance with this Section 6.03, and (c) in the event that such protective order or other remedy is not obtained, or Purchaser Parent waives compliance with this Section 6.03, furnish only that portion of such confidential information which is legally required to be provided and exercise its best efforts to obtain assurances that confidential treatment will be accorded such information;  provided ,  however , that this sentence shall not apply to any information that, (x) is required to be disclosed pursuant to any Law or Government Order, or (y) at the time of disclosure, is available publicly and was not disclosed in breach of this Agreement by Accor Guarantor, the Seller, or their respective agents, representatives, Affiliates, employees, officers or directors.  The terms of this Section 6.03 shall survive termination of this Agreement for any reason.
 
Section 6.04                            Regulatory and Other Authorizations; Notices and Consents.
 
(a)                                The Seller shall, and shallcauseeach othermember of the Target Group to use its reasonable efforts to obtain all authorizations, consents, orders and approvals of all Governmental Authorities and officials that may be or become necessary for its execution and
 
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delivery of, and the performance of its obligations pursuant to, this Agreement (including the Pre-Closing Restructuring) and the other Transaction Documents to which it is a party, and will cooperate fully with Purchaser Parent and the Purchaser in promptly seeking to obtain all such authorizations, consents, orders and approvals.  Each party hereto agrees to make an appropriate filing, if necessary, pursuant to any antitrust Law with respect to the transactions contemplated by this Agreement as promptly as practicable after the date hereof and to supply as promptly as practicable to the appropriate Governmental Authorities any additional information and documentary material that may be requested pursuant to any applicable antitrust Law.
 
(b)                                The Seller shall, or shall cause each other member of the Target Group to, give promptly such notices to third parties and use its or their reasonable efforts to obtain such third party consents and estoppel certificates as Purchaser Parent or the Purchaser may in its reasonable discretion deem necessary in connection with the transactions contemplated by this Agreement;  provided ,  however , that the Seller shall have no obligation to give any guarantee or other consideration of any nature in connection with any such notice, consent or estoppel certificate or to consent to any change in the terms of any agreement or arrangement which the Seller in its reasonable discretion may deem adverse to the interests of the Seller, any of its Affiliates or any member of the Target Group or the Acquired Business.
 
(c)                                 Purchaser Parent shall (and shall ensure that the Purchaser shall) cooperate to assist the Seller in giving such notices and obtaining such consents and estoppel certificates;  provided ,  however , that neither Purchaser Parent nor the Purchaser shall have any obligation to give any guarantee or other consideration of any nature in connection with any such notice, consent or estoppel certificate or to consent to any change in the terms of any agreement or arrangement which Purchaser Parent or the Purchaser in its reasonable discretion may deem adverse to the interests of any member of the Target Group or the Acquired Business.
 
(d)                                The Parties agree that, in the event that any consent, approval or authorization necessary for the Acquired Business or each other member of the Target Group, any right or benefit under any lease, license, contract, commitment or other agreement or arrangement to which each other member of the Target Group is a party is not obtained prior to the Closing, the Seller will, subsequent to the Closing, cooperate with the Purchaser and each member of the Target Group in attempting to obtain such consent, approval or authorization as promptly thereafter as practicable.  If such consent, approval or authorization cannot be obtained, the Seller shall use commercially reasonable efforts to provide the Purchaser or the relevant member of the Target Group, as the case may be, with the rights and benefits of the affected lease, license, contract, commitment or other agreement or arrangement for the term of such lease, license, contract or other agreement or arrangement, and, if the Seller provides such rights and benefits, the relevant member of the Target Group shall assume the obligations and burdens thereunder.
 
Section 6.05                            Notice of Developments.  Prior to the Closing, the Seller shall promptly notify Purchaser Parent and the Purchaser in writing of (a) all events, circumstances, facts and occurrences arising subsequent to the date of this Agreement which could result in any breach of a representation or warranty or covenant of the Seller in this Agreement or which could have the effect of making any representation or warranty of the Seller in this Agreement untrue or incorrect in any respect and (b) all other material developments affecting the assets,
 
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Liabilities, business, financial condition, operations, results of operations, customer or supplier relations, employee relations, projections or prospects of any member of the Target Group.
 
Section 6.06                            Anti-Sandbagging.  If, before Closing, Purchaser Parent or the Purchaser receives a notice from the Seller under Section 6.05(a), or Purchaser Parent or the Purchaser identifies that any of the Seller’s Warranties is untrue, inaccurate or misleading, and the matters described in such notice or such untrue, inaccurate or misleading warranties (without giving effect to any materiality thresholds in such warranties) gives rise to a Material Adverse Effect, then Purchaser Parent or the Purchaser may, by written notice to the Seller, terminate this Agreement without prejudice to any other remedy available to it.  If this Agreement is so terminated then the provisions of Article X shall apply.  If Purchaser Parent and the Purchaser elect not to terminate this Agreement, then, from and after the Closing and notwithstanding the provisions of Article IX, neither Purchaser Parent nor the Purchaser shall have any claim against the Seller with respect to the disclosed fact, matter or circumstance that caused such Seller’s Warranty to be untrue, inaccurate or misleading, unless the Seller has failed to fully and fairly disclose any matters in accordance with Section 6.05(a).
 
Section 6.07                            Restructuring.  The Seller shall, and shall cause its Affiliates to, use reasonable efforts to complete the Pre-Closing Restructuring promptly and shall ensure that, as soon as practicable after the date hereof, each of the actions set forth in  Schedule 4  hereto has been completed (in each case, in form and substance reasonably acceptable to Purchaser Parent).  The Seller shall, and shall cause its Affiliates, (i) to use reasonable efforts to effect promptly the Pre-Closing Restructuring in accordance with the terms and subject to the conditions set forth in  Schedule 4 , (ii) to keep Purchaser Parent fully and promptly informed as to all material aspects of the Pre-Closing Restructuring, (iii) to permit Purchaser Parent to participate fully in the implementation of the Pre-Closing Restructuring, (iv) to provide Purchaser Parent with all material information relating to the Pre-Closing Restructuring, and such other information as such other party may request, and (v) with respect to any member of the Target Group, not to enter into any agreement or arrangement in connection with the Pre-Closing Restructuring except for the Pre-Closing Restructuring Agreements that have been agreed to by, and in each case, in such form and substance reasonably acceptable to, Purchaser Parent, or to amend, modify or terminate any such Pre-Closing Restructuring Agreement, without the prior written consent of Purchaser Parent.
 
Section 6.08                            Renovation and Refurbishment of Company Owned Real Property.  The Seller shall ensure that the relevant ICI Transferred Subsidiary shall have completed the renovation and expansion of the hotel facilities specified in Schedule 7 in the manner and by no later than the Closing Date.
 
Section 6.09                            Release of Indemnity Obligations.  The Seller covenants and agrees, on or prior to the Closing, to execute and deliver to the Purchaser, for the benefit of the Companies and the Transferred Subsidiaries, a general release and discharge, in the form of Exhibit C, releasing and discharging the Companies and the Transferred Subsidiaries from any and all obligations to indemnify the Seller or any Seller Affiliate or otherwise hold it or any Seller Affiliate harmless pursuant to any agreement or other arrangement entered into prior to the Closing.
 
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Section 6.10                            Intercompany Arrangements.  Prior to the Closing, the Seller shall cause any contract or arrangement that is disclosed (or should have been disclosed) in Section 3.15(a)(x) of the Disclosure Schedule, other than those contracts or arrangements set forth in Section 6.10 of the Disclosure Schedule, to be terminated or otherwise amended to exclude the Companies and the Transferred Subsidiaries as parties thereto.
 
Section 6.11                            Payments on Behalf of Affiliates.  Payments made or received by the Purchaser pursuant to Article II, Article VII or Article IX hereof shall, in appropriate circumstances, be made on behalf of, or received in trust for the benefit of, the relevant Affiliate of the Purchaser.  The Purchaser may direct in writing any such payment to be made by or to the appropriate Affiliate, and the Seller shall comply with any such direction (and the Purchaser shall provide an acknowledgement of the discharge by the Seller of such amount owed to the Purchaser) received at least two Business Days prior to the date such payment is due. Such payment by the Seller shall constitute a proper discharge of obligations owed by it to the Purchaser.
 
Section 6.12                            Further Action.  Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable Law, and to execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and the Transaction Documents to which it is a party and consummate and make effective the transactions contemplated hereby and thereby.
 
Section 6.13                            Guarantee and Undertaking by Accor Guarantor.
 
(a)                                Accor Guarantor herebyabsolutely, irrevocably and unconditionally (i) undertakes tocausethe Seller and its Affiliates to, observe and perform all of the financial obligations of the Seller and any of the relevant Affiliates of the Seller under the Transaction Documents to which the Seller or its Affiliate is a party (the “ Seller’s Guaranteed Obligations ”); (ii) undertakes not to, and shall ensure that none of the Seller and Seller’s Affiliates shall, take any action or omit to take any action that would result in any breach or violation of any of the Seller’s Guaranteed Obligations or any of the covenants, agreements or obligations of the Seller and its Affiliates set forth in the Transaction Documents; and (iii) undertakes not to, and shall ensure that none of the Seller and Seller’s Affiliates shall, take any action or do or cause anything to be done (A) that would result in any breach or violation by the Seller and Seller’s Affiliates of the Seller’s Guaranteed Obligations or (B) so as to avoid or seek to avoid the observance or performance of any of the Seller’s Guaranteed Obligations.
 
(b)                                The Accor Guarantorshall, and shall causethe Seller’s Affiliates to, take, or cause to be taken, all appropriate action, to do or cause to be done all things necessary, proper or advisable (including exercising all rights and powers of control over the affairs of any other Person which it is able to exercise, directly or indirectly) to perform, and ensure the performance by the Seller or the Seller’s Affiliates (as applicable) of, the Seller’s Guaranteed Obligations.
 
(c)                                 To inducePurchaser Parentto enter intothisAgreement and the other Transaction Documents to which it is a party, the Accor Guarantor hereby irrevocably and unconditionally agrees (as primary obligor and not only as surety) (i) that promptly on Purchaser
 
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Parent’s demand it will pay to the Purchaser or any of its Affiliates any and all sums of money which the Seller or any of its Affiliates is at any time liable, or expressed to be liable, to pay to the Purchaser or any of its Affiliates under or pursuant to any or all of the Transaction Documents; and (ii) to indemnify and hold harmless the Purchaser or any of its Affiliates on demand from and against any loss incurred by the Purchaser or any of its Affiliates as a result of the obligations of or expressed to be assumed by the Seller or any of its Affiliates under or pursuant to the Transaction Documents being or becoming void, unenforceable or ineffective as against the Seller or any of its Affiliates for any reason whatsoever (whether or not known to Purchaser Parent or any other Person), the amount of such loss being the amount which the Purchaser or its Affiliate would have been entitled to recover from the Seller or its Affiliate.
 
Section 6.14                            Guarantee and Undertaking by Purchaser Parent.
 
(a)                                Purchaser Parent herebyabsolutely, irrevocably and unconditionally (i) undertakes tocausethe Purchaser and its Affiliates to, observe and perform all financial obligations of the Purchaser and any of the relevant Affiliates of the Purchaser under the Transaction Documents to which the Purchaser or its Affiliate is a Party (the “ Purchaser’s Guaranteed Obligations ”); (ii) undertakes not to, and shall ensure that none of the Purchaser and Purchaser’s Affiliates shall, take any action or omit to take any action that would result in any breach or violation of any of the Purchaser’s Guaranteed Obligations or any of the covenants, agreements or obligations of the Purchaser and its Affiliates set forth in the Transaction Documents; and (iii) undertakes not to, and shall ensure that none of the Purchaser and Purchaser’s Affiliates shall, take any action or do or cause anything to be done (A) that would result in any breach or violation by the Purchaser and Purchaser’s Affiliates of the Purchaser’s Guaranteed Obligations or (B) so as to avoid or seek to avoid the observance or performance of any of the Guaranteed Obligations.
 
(b)                                Purchaser Parentshall, and shall causethe Purchaserand thePurchaser’s Affiliates to, take, or cause to be taken, all appropriate action, to do or cause to be done all things necessary, proper or advisable (including exercising all rights and powers of control over the affairs of any other Person which it is able to exercise, directly or indirectly) to perform, and ensure the performance by the Purchaser or the Purchaser’s Affiliates (as applicable) of, the Purchaser’s Guaranteed Obligations.
 
(c)                                 To inducethe Sellerto enter intothisAgreement and the other Transaction Documents to which it is a party, the Purchaser Parent hereby irrevocably and unconditionally agrees (as primary obligor and not only as surety) (i) that promptly on the Seller’s demand it will pay to the Seller or any of its Affiliates any and all sums of money which the Purchaser or any of its Affiliates is at any time liable, or expressed to be liable, to pay in cash to the Seller or any of its Affiliates under or pursuant to any or all of the Transaction Documents; and (ii) to indemnify and hold harmless the Seller or any of its Affiliates on demand from and against any loss incurred by the Seller or any of its Affiliates as a result of the obligations of or expressed to be assumed by the Purchaser or any of its Affiliates under or pursuant to the Transaction Documents being or becoming void, unenforceable or ineffective as against the Purchaser or any of its Affiliates for any reason whatsoever (whether or not known to the Seller or any other Person), the amount of such loss being the amount which the Seller or its Affiliate would have been entitled to recover from the Purchaser or its Affiliate.
 
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Section 6.15                            No Set-Off.  Purchaser Parent and the Purchaser shall not be entitled to set off any amounts owed by it to the Seller or any Affiliate of the Seller under this Agreement against any amount owed by the Seller or any Affiliate of the Seller to Purchaser Parent or the Purchaser under any other Transaction Document. The Seller shall not be entitled to set off any amounts owed by it to Purchaser Parent or the Purchaser under this Agreement against any amount owed by Purchaser Parent or the Purchaser to the Seller under any other Transaction Document.
 
ARTICLE VII
 
TAX MATTERS
 
Section 7.01                            Indemnity.
 
(a)                                The Seller agrees to indemnify and hold harmless the Purchaser Parent, the Purchaser, each member of the Target Group and their respective Affiliates, officers, directors, employees, agents, successors and assigns against all Excluded Taxes other than Taxes that are included as part of the MEB Closing Liabilities or LUB Closing Liabilities reflected on the Closing Statement.
 
(b)                                In the case of Taxes that are payable with respect to a Straddle Period, the portion of any such Tax that is allocable to a Pre-Closing Period shall be:
 
(i)                                    in the case of Taxes that are either (x) based upon or related to income or receipts, or (y) imposed in connection with any sale or other transfer or assignment of property (real or personal, tangible or intangible) (other than Conveyance Taxes described in Section 7.07), deemed equal to the amount which would be payable if the taxable year ended at the end of business on the Closing Date; and
 
(ii)                                 in the case of Taxes imposed on a periodic basis with respect to the assets of any member of the Target Group or otherwise measured by the level of any item, deemed to be the amount of such Taxes for the entire Straddle Period (or, in the case of such Taxes determined on an arrears basis, the amount of such Taxes for the immediately preceding period), multiplied by a fraction the numerator of which is the number of calendar days in the portion of the Straddle Period ending on the Closing Date and the denominator of which is the number of calendar days in the entire Straddle Period.  Any credit or refund resulting from an overpayment of Taxes for a Straddle Period shall be prorated based upon the method employed in this paragraph (b) taking into account the type of the Tax to which the refund relates.  In the case of any Tax based upon or measured by capital (including net worth or long-term debt) or intangibles, any amount thereof required to be allocated under this Section 7.01(b) shall be computed by reference to the level of such items on the date of the Closing.  All determinations necessary to effect the foregoing allocations shall be made in a manner consistent with prior practice of the relevant member of the Target Group.
 
Section 7.02                            Returns and Payments.
 
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(a)                                From the date of this Agreement through and after theClosing Date, the Seller shall prepare and file or otherwise furnish in proper form to the appropriate Taxing Authority (or cause to be prepared and filed or so furnished) in a timely manner all Tax Returns relating to members of the Target Group that are due on or before or relate to any taxable period ending on or before the Closing Date (and the Purchaser shall do the same with respect to all other Tax Returns).  In doing so, to the extent that any jurisdiction allows an election to file Tax Returns by closing the books as of the Closing Date, the parties shall agree to make, and to take all required action to cause, such election.  Tax Returns of members of the Target Group not yet filed for any taxable period that begins before the Closing Date shall be prepared in a manner consistent with past practices employed with respect to the relevant member of the Target Group (except to the extent that counsel for the Seller renders a written legal opinion that there is no reasonable basis in law therefor or determines that a Tax Return cannot be so prepared and filed without being subject to penalties).  With respect to any such Tax Return required to be filed by the Purchaser or the Seller, the filing party shall provide the other party and its authorized representatives with a copy of such completed Tax Return and, if applicable, a statement certifying the amount of Tax shown on such Tax Return that is allocable to such other party pursuant to Section 7.01(b), together with appropriate supporting information and schedules at least twenty (20) Business Days prior to the due date (including any extension hereof) for the filing of such Tax Return for such party’s review and consent, which review and consent shall be timely and shall not be unreasonably withheld, delayed, or conditioned.
 
(b)                                The Seller, shall (i) timely file, or cause to be timely filed, all information and Tax Returns that are due under PRC Law (including, without limitation, pursuant to Circular 698) in connection with the transactions contemplated under this Agreement, (ii) timely pay, or cause to be timely paid, all Taxes due and payable with respect to such information and Tax Returns, and (iii) provide the Purchaser with a copy of such completed information and Tax Returns for their review and consent at least twenty (20) Business Days prior to the due date (including any extension thereof) for the filing of such Tax Returns for the Purchaser’s review and consent, which review and consent shall be timely and shall not be unreasonably withheld, delayed, or conditioned.
 
(c)                                 Subject to (d) below, the Seller shall pay, or cause to be paid, when due and payable all Taxes with respect to the members of the Target Group for any Pre-Closing Period other than Taxes that are included as part of the Closing Liabilities reflected on the Closing Statement, and the Purchaser shall so pay or cause to be paid Taxes for any Post-Closing Period (subject to its right of indemnification from the Seller by the date set forth in Section 7.05 for Taxes attributable to the portion of any Straddle Period pursuant to Section 7.01(a) and Section 7.01(b)).
 
Section 7.03                            Refunds.  Any Tax refund or credit for overpayment of Taxes (including any interest with respect thereto received from a Tax Authority) relating to any member of the Target Group for any Pre-Closing Period shall be the property of the Seller, and if received by the Purchaser or any member of the Target Group shall be paid over promptly to the Seller;  provided ,  however , that if a Taxing Authority subsequently disallows any refund with respect to which the Seller has received a payment pursuant to this sentence, the Seller shall promptly pay to the Purchaser (or pay directly to the Tax Authority) the full amount of such refund (including any interest payable to the tax authorities with respect thereto).
 
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Notwithstanding the foregoing, any Tax refund (or equivalent benefit to the Seller through a reduction in Tax liability) for any Pre-Closing Period arising out of the carryback of a loss of credit incurred by any member of the Target Group in any Post-Closing Period shall be the property of the Purchaser and, if received by the Seller, shall be paid over promptly to the Purchaser.
 
Section 7.04                            Contests.
 
(a)                                After the Closing, the Purchaser shall promptly notify the Seller in writing of (i) the initiation of any audit or other examination by a taxing authority of any Pre-Closing Period and (ii) any written notice of a proposed assessment or claim in an audit or administrative or judicial proceeding of the Purchaser or any member of the Target Group which, if determined adversely to the taxpayer, would be grounds for indemnification under this Article VII;  provided ,  however , that the failure to give such notice will not affect the Purchaser’s right to indemnification under this Article VII except to the extent, if any, that such failure to promptly provide notice materially affected the ability of the Seller to successfully avoid or materially reduce the Tax liability in question.
 
(b)                                In the case of an audit or administrative or judicial proceeding that relates to Pre-Closing Period, the Seller shall have the right at its expense to participate in and control the conduct of such audit or proceeding; the Purchaser also may participate, at its own expense, in any such audit or proceeding, provided that the Purchaser may not settle such audit or proceeding without the Purchaser’s consent if the Seller does not agree prior to entering into such settlement to pay the resulting Tax.  I If the Seller does not assume the control of any such audit or proceeding, the Purchaser may defend the same in such manner as it may deem appropriate, including settling such audit or proceeding, subject to the Seller’s consent, which shall not be unreasonable withheld or delayed.  In the event that issues relating to a potential adjustment are required to be contested in the same audit or proceeding as separate issues relating to a potential adjustment for which the Purchaser would be liable, the Purchaser shall have the right, at its expense, to control the audit or proceeding with respect to the latter issues, except to the extent that it would be harmful to the Seller.
 
(c)                                 With respect to issues relating to a potential adjustment for which both the Seller and the Purchaser or any member of the Target Group could be liable, (i) both the Seller and the Purchaser may participate in the audit or proceeding and (ii) the audit or proceeding shall be controlled by the Purchaser, and the Seller and Purchaser shall take commercially reasonable efforts to separate such audit or proceeding so that issues relating to each of them can be handled separately.  The principle set forth in this Section 7.04(c) also shall govern for purposes of deciding any issue that must be decided jointly (including choice of judicial forum) in situations in which separate issues are otherwise controlled under this Article VII by the Purchaser and the Seller.
 
(d)                                With respect to any Tax audit or proceeding for a Pre-Closing Period, neither the Purchaser nor the Seller shall enter into any compromise or agree to settle any claim pursuant to such audit or proceeding which would adversely affect the other party for such taxable period or a subsequent taxable period without the written consent of the other party, which consent shall be timely and shall not be unreasonably withheld, delayed or conditioned.
 
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The Purchaser and the Seller agree to cooperate, and the Purchaser agrees to cause its Affiliates to cooperate, in the defense against or compromise of any claim in any such audit or proceeding.
 
Section 7.05                            Time of Payment.  Payment by the Seller of any amounts due under this Article VII in respect of Taxes shall be made (a) at least three (3) Business Days before the due date of the applicable estimated or final Tax Return required to be filed by the Purchaser on which is required to be reported income for a taxable period ending after the date of the Closing for which the Seller is responsible under Section 7.01(a) and Section 7.01(b) without regard to whether the Tax Return shows overall net income or loss for such period or (b) within three (3) Business Days following an agreement between the Seller and the Purchaser that an indemnity amount is payable, an assessment of a Tax by a Taxing Authority.  If liability under this Article VII is in respect of costs or expenses other than Taxes, payment by the Seller of any amounts due under this Article VII shall be made within five (5) Business Days after the date when the Seller has been notified by the Purchaser that the Seller has a liability for a determinable amount under this Article VII and is provided with calculations or other materials supporting such liability.
 
Section 7.06                            Tax Cooperation and Exchange of Information.  The Seller and the Purchaser shall provide each other with such cooperation and information as either of them reasonably may request of the other (and the Purchaser shall cause its Affiliates to provide such cooperation and information) in (a) filing any Tax Return, amended Tax Return or claim for refund, (b) determining a liability for Taxes or a right to a refund of Taxes, (c) participating in or conducting any audit or other proceeding in respect of Taxes, or (d) making representations to or furnishing information to parties subsequently desiring to purchase any part of the Target Shares, the Assets, the Business, or Purchaser’s interest in any members of the Target Group from the Purchaser.  Such cooperation and information shall include providing copies of relevant Tax Returns or portions thereof, together with related work papers and documents relating to rulings or other determinations by Taxing Authorities.  The Seller and the Purchaser shall make themselves (and their respective employees) reasonably available on a mutually convenient basis to provide explanations of any documents or information provided under this Section 7.06.  Notwithstanding anything to the contrary in Section 6.02, each of the Seller and the Purchaser shall retain all Tax Returns, work papers and all material records or other documents in its possession (or in the possession of its Affiliates) relating to Tax matters of any member of the Target Group for any taxable period that includes the date of the Closing and for all prior taxable periods until the later of (i) the expiration of the statute of limitations of the taxable periods to which such Tax Returns and other documents relate, without regard to extensions and (ii) six years following the due date (without extension) for such Tax Returns.  After such time, before the Seller or the Purchaser shall dispose of any such documents in its possession (or in the possession of its Affiliates), the other party shall be given an opportunity, after 90 days prior written notice, to remove and retain all or any part of such documents as such other party may select (at such other party’s expense).  Any information obtained under this Section 7.06 shall be kept confidential, except as may be otherwise necessary in connection with the filing of Tax Returns or claims for refund or in conducting an audit or other proceeding.
 
Section 7.07                            Conveyance Taxes.  All Conveyance Taxes incurred in connection with the transactions contemplated by this Agreement shall be borne 50% by the Purchaser and 50% by the Seller. If a Tax Return is required, the party that has the primary obligation to file
 
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any Tax Return that is required to be filed in respect of any Transfer Taxes (the “Filing Party”) shall prepare and file such return after providing the other party the opportunity to review and approve the return (which approval shall not be unreasonably withheld, delayed or conditioned).  The Filing Party shall, subject to reimbursement from the other party, as provided in this Section 7.07, pay (or cause to be paid) the Taxes shown on such Tax Return and the other party shall reimburse the Filing Party for its share of such Conveyance Taxes by wire transfer of immediately available funds no later than five days after receipt of written notice (or notice delivered by electronic communication) from the Filing Party that any such Conveyance Tax is required to be paid to the applicable Governmental Authority.  The parties agree to cooperate with each other in connection with the preparation and filing of any such Tax Returns, in obtaining all available exemptions from such Transfer Taxes, and in timely providing each other with resale certificates or other documents necessary to satisfy any such exemptions.
 
Section 7.08                            Miscellaneous.
 
(a)                                The Parties agree to treat all payments made by any of them to or for the benefit of any other Party (including any payments to any member of the Target Group) under this Article VII, under other indemnity provisions of this Agreement and for any misrepresentations or breaches of warranties or covenants as adjustments to the Purchase Price or as capital contributions for Tax purposes and that such treatment shall govern for purposes hereof except to the extent that the Laws of a particular jurisdiction provide otherwise, in which case such payments shall be made in an amount sufficient to indemnify the relevant party on an after-Tax basis.
 
(b)                                Notwithstanding any provisions in this Agreement to the contrary, the obligations of the Seller to indemnify and hold harmless the Purchaser and each member of the Target Group pursuant to this Article VII, and the representations and warranties contained in Section 3.22, shall terminate at the close of business on the 120th day following the expiration of the applicable statute of limitations with respect to the Tax liabilities in question (giving effect to any waiver, mitigation or extension thereof).
 
(c)                                 From and after the date of this Agreement, the Seller shall not, without the prior written consent of Purchaser Parent or the Purchaser (which may, in its reasonable discretion, withhold such consent), (i) make, or cause or permit to be made, any Tax election that would affect any member of the Target Group; (ii) request a Tax ruling or enter into any material closing agreement, agree to an extension of the statute of limitations with respect to the assessment or collection of a material amount of Taxes; (iii) surrender any material claim for a material refund of Taxes; (iv) file any Tax Return in a manner that is materially inconsistent with past custom and practice, amend any material Tax Return; or (v) make any material change to any of its methods of accounting or methods of reporting income or deductions for Tax from those employed in the preparation of its most recent Tax Return.
 
(d)                                For purposes of this Article VII, “the Purchaser” and “the Seller,” respectively, shall include each member of the affiliated group of corporations of which it is or becomes a member (other than the Companies and the Transferred Subsidiaries, except to the extent expressly referenced).
 
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(e)                                 The Purchaser shall be entitled to recover professional fees and related costs that it may reasonably incur to enforce the provisions of this Article VII.
 
(f)                                  Notwithstanding anything to the contrary in this Agreement, the rights and obligations of the parties with respect to indemnification for any and all Tax matters shall be governed solely by this Article VII.
 
ARTICLE VIII
 
CONDITIONS TO CLOSING
 
Section 8.01                            Conditions to Obligations of the Seller.  The obligations of the Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or written waiver, at or prior to the Closing, of each of the following conditions:
 
(a)                                Representations, Warranties and Covenants.  (i) The representations and warranties of Purchaser Parent contained in this Agreement shall have been true and correct in all material respects when made and shall be true and correct in all material respects as of the Closing, except to the extent such representations and warranties are as of another date, in which case, such representations and warranties shall be true and correct in all material respects as of that date, in each case, with the same force and effect as if made as of the Closing, and (ii) the covenants and agreements contained in this Agreement to be complied with by the Purchaser or Purchaser Parent on or before the Closing shall have been complied with in all material respects;
 
(b)                                No Proceeding or Litigation.  No Action shall have been commenced by or before any Governmental Authority against the Seller, any member of the Target Group or the Purchaser, seeking to restrain or materially and adversely alter the transactions contemplated by this Agreement which would render it impossible or unlawful to consummate such transactions;  provided ,  however , that this Section 8.01(b) shall not apply if the Seller has directly or indirectly solicited or encouraged any such Action;
 
(c)                                 Consents and Approvals.  The Purchaser and the Seller shall have received all authorizations, consents, orders and approvals of all Governmental Authorities and officials for the consummation of the transactions contemplated by this Agreement and the other Transaction Documents;
 
(d)                                Transaction Documents.  Each ofthe Transaction Documents shall have been duly and validly executed by the Purchaser, Purchaser Parent and any Purchaser Party (to the extent it is a party thereto);
 
(e)                                 Anti-Trust.  The Parties (or their Affiliates) shall have received the Competition Clearance, or the applicable waiting periods (and any extension thereof) under the Anti-Monopoly Law shall have expired or shall have been terminated and no investigation shall have been instituted thereunder; and
 
(f)                                  Securities Purchase Agreement.  Each of the conditions set out in Section 3 of the Securities Purchase Agreement shall have been satisfied or waived in accordance with the terms thereof.
 
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Section 8.02                            Conditions to Obligations of the Purchaser.  The obligations of the Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or written waiver, at or prior to the Closing, of each of the following conditions:
 
(a)                                Representations, Warranties and Covenants.  (I) (1) the Seller’s Warranties that are made as of the date hereof or as of a specific date: (i) that are qualified by “material”, “materiality”, “Material Adverse Effect” or other terms of similar import (“ Materiality Qualifiers ”) shall be true and correct in all respects, or (ii) that are not qualified by Materiality Qualifiers shall be true and correct in all material respects, in each case when made or as of the specific date made; (2) the Seller’s Warranties that are not made as of a specific date as updated by any matters disclosed by the Seller under Section 6.05 (“ Subsequent Disclosed Events ”) (i) that are qualified by Materiality Qualifiers shall be true and correct as of the Closing in all respects, or (ii) that are not qualified by Materiality Qualifiers shall be true and correct as of the Closing in all material respects, and (3) the Subsequent Disclosed Events shall not have, individually or in the aggregate, caused or resulted in a Material Adverse Effect; and (II) the Seller, Accor Guarantor, and each Seller Affiliate shall have performed and complied in all material respects with all, and not be in material breach or default under any, agreements, covenants and obligations contained in this Agreement or any of the Transaction Documents that the Seller, Accor Guarantor or any relevant Seller Affiliate is required to perform or comply with on or before the Closing Date.
 
(b)                                No Proceeding or Litigation.  No Action shall have been commenced or threatened by or before any Governmental Authority against the Seller, any member of the Target Group or the Purchaser, seeking to restrain or materially and adversely alter the transactions contemplated by this Agreement which would render it impossible or unlawful to consummate such transactions or which could have a Material Adverse Effect;
 
(c)                                 Anti-Trust. The Parties (or their Affiliate) shall have received the Competition Clearance, or the applicable waiting periods (and any extension thereof) under the Anti-Monopoly Law shall have expired or shall have been terminated and no investigation shall have been instituted thereunder;
 
(d)                                Consents and Approvals.  The Purchaser and the Seller shall have received(i) all authorizations, consents, orders and approvals of all Governmental Authorities and officials and all third party consents and estoppel certificates required to effect the Pre-Closing Restructuring (including (A) all of the Governmental Approvals and Third Party Consents set forth in Section 3.09 of the Disclosure Schedule and (B) all of the Pre-Closing Restructuring Approvals); and (ii)  all authorizations, consents, orders and approvals of all Governmental Authorities and officials necessary for the consummation of the transactions contemplated by this Agreement and the other Transaction Documents;
 
(e)                                 Pre-Closing Restructuring.  ThePurchaser shall have received evidence reasonably satisfactory to it that transactions set forth in  Schedule 4  shall have been effected in accordance with the terms and subject to the conditions set forth therein, including without limitation, (A) true and complete copies of all agreements, instruments and other documents executed or delivered in connection with the Pre-Closing Restructuring, and (B) true and complete copies of all the resolutions duly and validly adopted by the board of directors of the
 
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parties to the relevant transfer or other transaction, evidencing their respective authorization of the execution and delivery of any and all agreements and legal documents requisite for the effect of such transaction, and (C) the amended business license of each Transferred Subsidiary issued by the competent Governmental Authorities supervising such Transferred Subsidiary, evidencing the ownership of the equity interest in such Transferred Subsidiary by NewCo1 PRC or NewCo2 PRC, as the case may be;
 
(f)                                  Transaction Documents.  Each ofthe Transaction Documents shall have been duly and validly executed by the parties thereto (other than the Purchaser, Purchaser Parent and any Purchaser Party); and
 
(g)                                 Franchisor Registration.  NewCo1 PRC shall have completed the franchisor registration (特许人备案) for Ibis in accordance with applicable PRC Laws.
 
ARTICLE IX
 
INDEMNIFICATION
 
Section 9.01                            Survival of Representations and Warranties.
 
(a)                                The representations and warranties of the Seller contained in this Agreement and the Transaction Documents shall survive the Closing until the date being 18 months following the Closing (“ End Date ”);  provided , however , that (i) the representations and warranties made pursuant to Section 3.01, Section 3.02, Section 3.03, Section 3.04 and Section 3.26 shall survive indefinitely, (ii) the representations and warranties made pursuant to Section 3.22 shall survive until 90 days after the expiration of the relevant statute of limitations for the liabilities in question, and (iii) insofar as any claim is made by Purchaser Parent or the Purchaser for the breach of any representation or warranty of the Seller contained herein, which claim arises out of allegations of personal injury or property damage suffered by any third party on or prior to the Closing or attributable to activities or omissions that occur on or prior to the Closing, such representations and warranties shall, for purposes of such claim by Purchaser Parent or the Purchaser, survive until thirty calendar days after the expiration of the applicable statute of limitations governing such claims shall. Subject to Section 6.06, neither the period of survival nor the liability of the Seller with respect to their representations and warranties shall be reduced by any investigation made at any time by or on behalf of Purchaser Parent or the Purchaser.  If written notice of a claim has been given prior to the expiration of the applicable representations and warranties by Purchaser Parent or the Purchaser to the Seller, then the relevant representations and warranties shall survive as to such claim, until such claim has been finally resolved.
 
(b)                                The representations and warranties of the Purchaser Parent contained in this Agreement and theother Transaction Documents shall survive the Closing until the End Date;  provided ,  however , that the representations and warranties made pursuant to Section 4.01 shall survive indefinitely.  Neither the period of survival nor the liability of the Purchaser Parent with respect to its representations and warranties shall be reduced by any investigation made at any time by or on behalf of the Seller.  If written notice of a claim has been given prior to the expiration of the applicable representations and warranties by the Seller to Purchaser Parent, then
 
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the relevant representations and warranties shall survive as to such claim, until such claim has been finally resolved.
 
Section 9.02                            Indemnification by the Seller.  From and after Closing, Purchaser Parent, the Purchaser and their respective Affiliates, officers, directors, employees, agents, successors and assigns (each a “ Purchaser Indemnified Party ”) shall be indemnified and held harmless by the Seller for and against any and all Liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including attorneys’ and consultants’ fees and expenses) actually suffered or incurred by them (including any Action brought or otherwise initiated by any of them which have been agreed or determined by (x) settlement between the Seller and Purchaser, (y) legal or arbitration proceedings between the Seller and the Purchaser which judgment has been given for the Purchaser and where such judgment or award is either no longer subject to appeal or has not been applied with a period of 60 days after the date of the relevant judgment (whichever is earlier), or (z) the enforcement of any such settlement referred to in (x) or (y) (hereinafter a “ Loss ”), arising out of or resulting from:
 
(a)                                (i) the failure of any of the Seller’s Warranties to be true and correct as of the date hereof, (ii) the failure of any of the Seller’s Warranties, subject to any Subsequent Disclosed Event, to be true and correct as of Closing with the same force as if made as of the Closing, (iii) the failure of any representation or warranty made by the Seller or any Seller Affiliate contained in the Securities Purchase Agreement or the NewCo2 Subscription Agreement to be true and correct as of the date hereof, and (iv) the failure of any representation or warranty made by the Seller or any Seller Affiliate contained in the Securities Purchase Agreement or the NewCo2 Subscription Agreement to be true and correct as of Closing (as defined in the Securities Purchase Agreement (“ SPA Closing ”)) with the same force as if made as of the SPA Closing (in each case, the determination of whether such breach or failure occurred and the calculation of Losses to be made without giving effect to any limitations as to materiality or “Material Adverse Effect” set forth therein);
 
(b)                                the breach of any covenant or agreement by the Seller or any of its Affiliates contained in this Agreement, the Securities Purchase Agreement or the NewCo2 Subscription Agreement; or
 
(c)                                 any Liabilities of the MEB Entities arising prior to the Closing, (i) not reflected or reserved against or disclosed on the Financial Statements; (ii) incurred since the Balance Sheet Date not in the ordinary course of business; or (iii) incurred in connection with the Pre-Closing Restructuring.
 
To the extent that the Seller’s undertakings set forth in this Section 9.02 may be unenforceable, the Seller shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Purchaser Indemnified Parties.
 
Section 9.03                            Indemnification by the Purchaser.  From and after Closing, the Seller and its Affiliates, officers, directors, employees, agents, successors and assigns (each a “ Seller Indemnified Party ”) shall be indemnified and held harmless by the Purchaser for and against any and all Losses, arising out of or resulting from:
 
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(a)                                (i) the failure of any of the warranties set out in Article IV to be true and correct as of the date hereof,  (ii) the failure of any of the warranties set out in Article IV to be true and correct as of Closing with the same force as if made as of the Closing, (iii) the failure of any representation or warranty made by the Purchaser Parent contained in the Securities Purchase Agreement or the NewCo2 Subscription Agreement to be true and correct as of the date hereof, and (iv) the failure of any representation or warranty made by the Purchaser Parent contained in the Securities Purchase Agreement or the NewCo2 Subscription Agreement to be true and correct as of SPA Closing, subject to any Subsequent Disclosed Events (as defined in the Securities Purchase Agreement), as of SPA Closing with the same force as if made as the SPA Closing (in each case, the determination of whether such breach or failure occurred and the calculation of Losses to be made without giving effect to any limitations as to materiality set forth therein); or
 
(b)                                the breach of any covenant or agreement by the Purchaser, Purchaser Parent or any of their Affiliates contained in this Agreement, the Securities Purchase Agreement or the NewCo2 Subscription Agreement.
 
To the extent that the Purchaser’s undertakings set forth in this Section 9.03 may be unenforceable, the Purchaser shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Seller Indemnified Parties.
 
Section 9.04                            Limits on Indemnification.
 
(a)                                The Seller shall have no liability under Section 9.02 for any claim for indemnification in respect of Purchaser Indemnified Parties’ Losses, and the Purchaser shall not have any liability under Section 9.03 for any claim for indemnification in respect of Seller Indemnified Parties’ Losses, (i) which individually (except that if the Losses are a series of related Losses, then in the aggregate) are less than $100,000 (the “ De Minimis Amount ”) (provided that in the event that the amount of any Loss with respect to such individual claim, or series of related Losses exceeds the De Minimis Amount, subject to the limitations in (ii), indemnification shall be made from the first dollar of Losses resulting from such claim not withstanding that any individual claim may involve a Loss of less than the De Minimis Amount,) and (ii) until the aggregate amount of the respective Indemnified Parties’ Losses associated with indemnification claims under such Section exceeds $1,000,000 (the “ Deductible Amount ”), after which the Indemnifying Party shall be obligated for all such Indemnified Parties’ Losses, and not only the portion of such Losses exceeding the Deductible Amount. The maximum liability of each Indemnifying Party under Section 9.02 shall not exceed $80,000,000 (the “ Cap ”). The provisions of this Section 9.04 shall not apply with respect to indemnification for (x) breach of any covenant or agreement, or (y) Taxes.
 
(b)                                The Seller shall have no liability under Section 9.02 for any claim for indemnification in respect of Purchaser Indemnified Parties’ Losses, and the Purchaser shall not have any liability under Section 9.03 for any claim for indemnification in respect of Seller Indemnified Parties’ Losses, (i) to the extent that such Losses result solely and exclusively from the Indemnified Party undertaking any action required to be taken pursuant to a covenant or obligation applicable to the Indemnifying Party set forth in this Agreement (including without
 
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limitation the Pre-Closing Restructuring or pursuant to the Interim Management Agreement), and (ii) directly resulting from any actions taken by the Indemnifying Party pursuant to and in accordance with any written instruction, consent, approval or waiver given by the Indemnified Party.
 
(c)                                 Notwithstanding any other provision of this Agreement, the limitations in Section 9.04(a) shall not qualify or limit the liability of an Indemnifying Party in relation to (i) any of those representations and warranties contained in Section 3.01, Section 3.02, Section 3.03, Section 3.04 or Section 4.01 hereof, or Clauses 4.1, 4.2, 4.6 or 5.1 of the Securities Purchase Agreement, or (ii) any claim under any representation or warranty that is attributable to fraud, willful dishonesty or willful concealment on the part of the Indemnifying Party.
 
(d)                                Payments by an Indemnifying Party pursuant to Section 9.02 or Section 9.03 in respect of any Loss shall be limited to the amount of any liability or damage that remains after deducting therefrom any insurance proceeds and any indemnity, contribution or other similar payment actually received by the Indemnified Party in respect of any such claim, (promptly after the realization of any insurance proceeds, indemnity, contribution or other similar payment, the Indemnified Party shall reimburse the Indemnifying Party for such reduction in Losses (net of any reasonable direct related costs incurred by the Indemnified Party in pursuing such claims, including any Taxes on such costs and expenses) for which the Indemnified Party was indemnified prior to the realization of reduction of such Losses);  provided  that payments in respect of Losses shall not be reduced by this Section 9.04(d) in respect of insurance deductibles actually paid by the Indemnified Party.
 
Section 9.05                            Notice of Loss; Third Party Claims.
 
(a)                                An Indemnified Party shall give the Indemnifying Party notice of any matter that an Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, within 60 days of such determination, stating the amount of the Loss, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises and setting forth in reasonable detail the basis for such right of indemnification.
 
(b)                                If an Indemnified Party shall receive notice of any Action, audit, demand or assessment against it or which may give rise to a claim for Loss under this Article IX (each, a “ Third Party Claim ”), within 30 days of the receipt of such notice, the Indemnified Party shall give the Indemnifying Party notice of such Third Party Claim;  provided ,  however , that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations under this Article IX except to the extent that the Indemnifying Party is materially prejudiced by such failure and shall not relieve the Indemnifying Party from any other obligation or Liability that it may have to any Indemnified Party otherwise than under this Article IX.  If the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party hereunder against any Losses that may result from such Third Party Claim, then the Indemnifying Party shall be entitled to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives notice of its intention to do so to the Indemnified Party within five days of the receipt of notice from the Indemnified Party of such Third Party Claim;  provided , however , that if there exists or is reasonably likely to exist a conflict of interest that
 
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would make it inappropriate in the judgment of the Indemnified Party in its sole and absolute discretion for the same counsel to represent both the Indemnified Party and the Indemnifying Party, then the Indemnified Party shall be entitled to retain its own counsel in each jurisdiction for which the Indemnified Party determines counsel is required, at the expense of the Indemnifying Party.  In the event that the Indemnifying Party exercises the right to undertake any such defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party, at the Indemnifying Party’s expense, all witnesses, pertinent records, materials and information in the Indemnified Party’s possession or under the Indemnified Party’s control relating thereto as is reasonably required by the Indemnifying Party.  Similarly, in the event the Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, at the Indemnifying Party’s expense, all such witnesses, records, materials and information in the Indemnifying Party’s possession or under the Indemnifying Party’s control relating thereto as is reasonably required by the Indemnified Party.  No such Third Party Claim may be settled by (i) the respective Indemnifying Party without the prior written consent of the respective Indemnified Party, or (ii) by the respective Indemnified Party without the prior written consent of the respective Indemnifying Party.
 
Section 9.06                            Securities and Purchase Agreement; the NewCo2 Subscription Agreement.
 
(a)                                The Parties are entering into this Agreement in conjunction with the Securities Purchase Agreement and the NewCo2 Subscription Agreement, and accordingly the Parties shall, as a term of this Agreement, comply with their respective obligations under the Securities Purchase Agreement and the NewCo2 Subscription Agreement, and any breach by either Party thereunder shall be considered a breach of this Agreement.
 
(b)                                For the purposes of calculating any Losses incurred by the Seller under the Securities Purchase Agreement and any applicable remedies, such Losses shall be calculated based on the purchase by the Seller of the Purchased Shares and Top-Up Shares (as defined in the Securities Purchase Agreement), as if all representations in the Securities and Purchase Agreement were given with respect to the Purchased Shares and the Top-Up Shares.
 
Section 9.07                            Exclusive Remedies.  Subject to Section 11.10, the parties acknowledge and agree that, following the Closing, their sole and exclusive remedy with respect to any and all Losses (other than as set forth below) for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, the Securities Purchase Agreement or the NewCo2 Subscription Agreement, shall be pursuant to the indemnification provisions set forth in this Article IX.  In furtherance of the foregoing, each party hereby waives, following the Closing, to the fullest extent permitted under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the Target Shares, the Target Group, the Transferred Subsidiaries or to the subject matter of this Agreement, the Securities Purchase Agreement or the NewCo2 Subscription Agreement it may have against the other parties hereto and their Affiliates and each of Purchaser Indemnified Party or Seller Indemnified Party (as the case may be) arising under or based upon any Law, except pursuant to the indemnification provisions set forth in this Article IX.  Nothing in this Section
 
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9.06 shall limit any Person’s right to seek and obtain any equitable relief to which any Person shall be entitled.  For the avoidance of doubt, nothing in this Article IX shall limit either party’s right to bring a claim, whether in Law or equity, arising from or relating to (i) fraud, criminal activity or willful misconduct, (ii) any breach of any representation, warranty, covenant, agreement or obligation set forth in or otherwise relating to the subject matter of any of the other Transaction Documents, or (iii) Tax matters, and the limitations in Section 9.04 shall not apply to any such claim.
 
ARTICLE X
 
TERMINATION
 
Section 10.01                     Termination.  This Agreement will terminate automatically on termination the Securities Purchase Agreement and may also be terminated at any time prior to the Closing:
 
(a)                                by Purchaser Parent if, between the date hereof and the Closing: (i) any representations and warranties of the Seller contained in this Agreement (A) that are not qualified by “materiality” or “Material Adverse Effect” shall not have been true and correct in all material respects when made or (B) that are qualified by “materiality “ or “Material Adverse Effect” shall not have been true and correct when made, (ii) the Seller or Accor Guarantor shall not have complied in all material respects with the covenants or agreements contained in this Agreement to be complied with by it, or (iii) the Seller, Seller Parent, Accor Guarantor, any Company or any Transferred Subsidiary makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Seller, Seller Parent, Accor Guarantor, any Company or any Transferred Subsidiary seeking to adjudicate any of them as bankrupt or insolvent, or seeking any of their liquidation, winding up or reorganization, or seeking any arrangement, adjustment, protection, relief or composition of any of their debts under any Law relating to bankruptcy, insolvency or reorganization;
 
(b)                                by the Seller if, between the date hereof and the Closing the Purchaser or Purchaser Parent makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Purchaser or Purchaser Parent, any Company or any Transferred Subsidiary seeking to adjudicate any of them as bankrupt or insolvent, or seeking any of their liquidation, winding up or reorganization, or seeking any arrangement, adjustment, protection, relief or composition of any of their debts under any Law relating to bankruptcy, insolvency or reorganization
 
(c)                                 by either the Seller or Purchaser Parent if the Closing shall not have occurred by the date being 15 months following the date of this Agreement;  provided ,  however , that the right to terminate this Agreement under this Section 10.01(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date;
 
(d)                                by either Purchaser Parent or the Seller in the event that any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, or the
 
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Securities Purchase Agreement, and such order, decree, ruling or other action shall have become final and non-appealable; or
 
(e)                                 by the mutual written consent of the Seller and the Purchaser.
 
Section 10.02                     Effect of Termination.  In the event of termination of this Agreement the Securities Purchase Agreement and the NewCo2 Subscription Agreement, all rights and obligations of the Parties shall cease immediately upon termination except that (i) termination will not affect the then accrued rights and obligations of the Parties (including the right to damages for breach, if any, given rise to the termination and nay other pre-termination breach by any Party), and (ii) termination will be without prejudice to the continued application of Article XI, Section 6.03, and any provision of this Agreement, the Securities Purchase Agreement and the NewCo2 Subscription Agreement, which is expressed to come into effect on, or to continue in effect after, that termination (and all provisions relevant to the interpretation and enforcement thereof), will remain in full force and effect.
 
ARTICLE XI
 
GENERAL PROVISIONS
 
Section 11.01                     Expenses.
 
(a)                                Except as otherwise specified in this Agreement, all costs and expenses, including fees and disbursements of counsel, financial advisors and accountants (“ Expenses ”), incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such Expenses, whether or not the Closing shall have occurred.  The Seller will cause each the Companies and the Transferred Subsidiaries not to incur any out-of-pocket expenses in connection with this Agreement.
 
(b)                                The costs incurred by the Seller and its Affiliates in respect of the Pre-Closing Restructuring (including but not limited to all professional fees and expenses) shall be borne by the Seller, except for the costs of incorporation and related fees in respect of the incorporation of NewCo1 and NewCo1 PRC which shall be borne equally by the Seller and Purchaser.  The allocation of Conveyance Taxes, including without limitation stamp duty payable on the transfer to the Purchaser of the Ibis China Investment Shares and the NewCo1 Shares, shall be borne by the Parties as provided in Section 2.09 and Section 7.07.
 
Section 11.02                     Notices.  All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been given or made when received by delivery in person, by an internationally recognized overnight courier service, by facsimile or email transmission, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties hereto at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 11.02):
 
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(a)	if to Accor Guarantor or the Seller:	
 	 	 	
 	Address:	Room 803, 8th Floor, Axa Center, 151 Gloucester Road,
Wanchai, Hong Kong	
 	Email:	kim.mooney@accor.com	
 	Facsimile:	+65 6820 7081	
 	Attention:	Kim Mooney	
 	 	 	
 	with a copy to:	 	
 	 	 	
 	Address:	Proskauer Rose LLP	
 	 	Eleven Times Square	
 	 	(Eighth Avenue & 41st Street)	
 	 	New York, NY 10036-8299	
 	 	 	
 	Email:	jhorwitz@proskauer.com	
 	Facsimile:	+1 212-969-2900	
 	Attention:	Jeffrey A. Horwitz	
 	 	 	
 	 	&	
 	 	 	
 	Address:	Proskauer Rose	
 	 	17/F, Two Exchange Square	
 	 	8 Connaught Place, Central	
 	 	Hong Kong	
 	 	 	
 	Email:	ytal@proskauer.com	
 	Facsimile:	+852 3410 8001	
 	Attention:	Yuval Tal	
 	 	 	
(b)	if to Purchaser Parent or the Purchaser:	
 	 	 	
 	c/o Offshore Codan Trust Company (Cayman) Limited	
 	Cricket Square, Hutchins Drive	
 	PO Box 2681	
 	Grand Cayman KY1-1111	
 	Cayman Islands	

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 	with a copy to:	
 	 	
 	Shearman & Sterling LLP	
 	12/F East Tower, Twin Towers	
 	B-12 Jianguomenwai Dajie	
 	Beijing 100022, P.R. China	
 	Email:Lee.Edwards@shearman.com	
 	Facsimile: +86 10 6563 6001	
 	Attention:  Lee Edwards Esq.	
 
Section 11.03                     Public Announcements.  Neither party hereto shall make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of the other parties, unless otherwise required by Law or applicable stock exchange regulation, and the parties hereto shall cooperate as to the timing and contents of any such press release, public announcement or communication.
 
Section 11.04                     Severability.  If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect for so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party hereto.  Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.
 
Section 11.05                     Entire Agreement.  This Agreement and theotherTransaction Documents constitute the entire agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings, both written and oral, between the parties with respect to the subject matter hereof and thereof.
 
Section 11.06                     Assignment.  This Agreement may not be assigned by operation of law or otherwise without the express written consent of the parties hereto (which consent may be granted or withheld in the sole discretion of each party) and any such assignment or attempted assignment without such consent shall be void;  provided ,  however , that the Purchaser may assign this Agreement or any of its rights and obligations hereunder to one or more wholly owned Subsidiaries of Purchaser Parent without the consent of the Seller.
 
Section 11.07                     Amendment.  This Agreement may not be amended or modified except (a) by an instrument in writing signed by, or on behalf of, the parties or (b) by a waiver in accordance with Section 11.08.
 
Section 11.08                     Waiver.  Each party to this Agreement may (a) extend the time for the performance of any of the obligations or other acts of any other party, (b) waive any
 
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inaccuracies in the representations and warranties of any other party contained herein or in any document delivered by any other party pursuant hereto, or (c) waive compliance with any of the agreements of any other party or conditions to such party’s obligations contained herein.  Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby.  Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition of this Agreement.  The failure of any party hereto to assert any of its rights hereunder shall not constitute a waiver of any of such rights.  All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
 
Section 11.09                     No Third Party Beneficiaries.  Except for the provisions of Article IX relating to indemnified parties, this Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person, including any union or any employee or former employee of the Seller or the Purchaser, any legal or equitable right, benefit or remedy of any nature whatsoever, including any rights of employment for any specified period, under or by reason of this Agreement.
 
Section 11.10                     Specific Performance.  The Seller acknowledges and agrees that the Purchaser and Purchaser Parent would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms and that any breach of this Agreement by the Seller could not be adequately compensated in all cases by monetary damages alone.  Accordingly, in addition to any other right or remedy to which the Purchaser or Purchaser Parent may be entitled, at law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.
 
Section 11.11                     Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of Hong Kong without regard to the conflict of laws rules stated therein.
 
Section 11.12                     Arbitration.
 
(a)                                In the event of any controversy or dispute between or among the Parties and any other persons executing this Agreement arising out of, relating to, or in connection with this Agreement, including any question regarding its existence, validity, or termination, and any question as to whether a particular dispute is arbitrable hereunder, the relevant parties shall attempt, promptly, diligently and in good faith, to resolve any such controversy or dispute by attending a meeting to discuss such dispute.  If the Parties are unable to resolve any such controversy or dispute within a reasonable time (but in no event exceeding sixty calendar days) of one Party giving notice in writing to the other requesting that amicable settlement be attempted, then either Party may require, by making a submission (the date of such submission, the “ Submission Date ”) to the Hong Kong International Arbitration Center (“ HKIAC ”) in Hong Kong that the controversy or dispute be finally resolved by binding arbitration administered by HKIAC in accordance with HKIAC Procedures for Arbitration in force at the date of this
 
71

 
Agreement including such additions to the UNCITRAL Arbitration Rules as are therein contained and as amended below (the “ Arbitration Rules ”):
 
(i)                                    The arbitration proceedings shall be conducted in Hong Kong.
 
(ii)                                 The arbitration tribunal shall consist of three arbitrators, one appointed by each Party.
 
(iii)                              A third arbitrator shall be appointed by agreement between the Parties within thirty days of the Submission Date, and if such Parties fail to jointly appoint the third arbitrator he shall be appointed in accordance with the Arbitration Rules.
 
(iv)                             The arbitration proceedings shall be conducted in English.
 
(v)                                All costs of arbitration (including arbitration fees, costs of arbitrators and legal fees and disbursements) shall be borne by the losing Party, unless otherwise determined by the arbitration tribunal.
 
(vi)                             All arbitration awards shall be final and binding.
 
(vii)                          The Parties irrevocably waive any objection which they may have now or hereafter to the laying of the venue of any suit, action or proceedings in arbitration as is referred to this clause and any claim that any such proceedings have been brought in an inconvenient or inappropriate forum.
 
(b)                                HKIAC shall have exclusive jurisdiction with regard to all claims arising under or relating to this Agreement.  Notwithstanding the foregoing, in the event that either Party desires to seek an emergency temporary restraining order and/or preliminary injunction, the sixty day mediation period above shall not apply, and said Party may, but shall not be required to, seek such provisional remedy in the courts of Hong Kong (and the parties irrevocably consent to the jurisdiction of such courts) or any other relevant jurisdiction in aid of the arbitration proceeding in order to prevent a continuing violation of the Agreement.
 
(c)                                 The Parties hereby waive in any legal proceedings concerning or arising out of any such arbitration, including without limitation proceedings to compel arbitration, stay litigation, issue interim measures of protection including attachments, issue an injunction prior to the constitution of the arbitral tribunal, recognize or enforce an arbitral award, or enforce a court judgment issued on an arbitral award (“ Ancillary Proceedings ”) any defense of lack of personal jurisdiction or forum non conveniens or other similar doctrine and further irrevocably agree that decision in arbitration as provided above shall be conclusive and binding upon the Parties and may be enforced in the courts of any jurisdiction.
 
(d)                                All costs of arbitration or any Ancillary Proceedings (including arbitration fees, costs of arbitrators and legal fees and disbursements) shall be borne by the losing Party.
 
(e)                                 All arbitration awards shall be final and binding and may be enforced in the courts of any jurisdiction.  The Parties agree that, if enforcement of the award (following confirmation by a Hong Kong court) is sought in China, neither Party shall challenge the award
 
72

 
or its enforceability in any court in China, if the award has been recognized by a Hong Kong court.
 
(f)                                  Each Party and any other person executing this Agreement hereby unconditionally and irrevocably: (1) agrees that, should any legal action or arbitral proceeding be brought against it in relation to a dispute arising under or related to this agreement, no immunity (sovereign or otherwise) from such legal action or arbitral proceeding shall be claimed by or on behalf of itself and is hereby waived to the maximum extent permitted by law; (2) consents generally to the maximum extent permitted by law in respect of the enforcement of any order, judgment or arbitral award against it in any relevant proceedings, to the giving of any relief or the issue of any process in connection with such proceedings including, without limitation, to the maximum extent permitted by law, the making, enforcement or execution against or in respect of any property used for commercial activity whatsoever; and (3) expressly disavows and waives to the maximum extent permitted by law any right to claim sovereign immunity in connection with any proceedings to compel arbitration or any proceedings to enforce or execute upon any arbitral award arising under or related to this agreement.
 
Section 11.13                     Currency.  Unless otherwise specified in this Agreement, all references to currency, monetary values and dollars set forth herein shall mean United States (U.S.) dollars and all payments hereunder shall be made in United States dollars.
 
Section 11.14                     Counterparts.  This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement.
 
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.

SELLER
 
THE COMMON SEAL of	)	 	 	 	 	
AAPC HONG KONG LIMITED	)	 	 	 	 	
was hereunto affixed in accordance with its articles of association	)	 	 	Common Seal	 	
 	)	 	 	 	 	 	
 	)	 	 	 	 	 	
 	)	 	 	/s/ Kim Mooney	 	 	
 	 	 	 	Name:Kim Mooney	 	 	
in the presence of:	 	 	 	Title:Director	 	 	
Witness Signature:	/s/ Natta Charoennaew	 	 	 	 	
 	 	 	 	 	 	
Name:	Natta Charoennaew	 	 	 	 	
 	 	 	 	 	 	
Address:	Blk 203 Serangoon Central
# 05-80 Singapore 550203	 	 	 	 	
 	 	 	 	 	 	
Occupation:	Legal Assistant	 	 	 	 	

 
PURCHASER PARENT
 
Solely with respect to the guarantee and other obligations under Article VI :
 
THE COMMON SEAL of	)	 	 	 	 	
CHINA LODGING GROUP, LIMITED	)	 	 	 	 	
was hereunto affixed in accordance with its articles of association	)	 	 	Common Seal	 	
 	)	 	 	 	 	 	
 	)	 	 	 	 	 	
 	)	 	 	/s/ Qi Ji	 	 	
 	 	 	 	Name:Qi Ji	 	 	
in the presence of:	 	 	 	Title:Chairman of the Board and CEO	 	 	
Witness Signature:	/s/ Yuewu Rong	 	 	 	 	
 	 	 	 	 	 	
Name:	YUEWU RONG	 	 	 	 	
 	 	 	 	 	 	
Address:	2266 Hongqiao Road,
200336 Shanghai China	 	 	 	 	
 	 	 	 	 	 	
Occupation:	Legal Director	 	 	 	 	

 
ACCOR GUARANTOR
 
Solely with respect to the guarantee and other obligations under Article VI:
 
THE COMMON SEAL of	)	 	 	 	 	
AAPC SINGAPORE PTE. LTD.	)	 	 	 	 	
was hereunto affixed in accordance with its articles of association	)	 	 	Common Seal	 	
 	)	 	 	 	 	 	
 	)	 	 	 	 	 	
 	 	 	 	/s/ Michael Issenberg	 	 	
in the presence of:	 	 	 	Name:Michael Issenberg	 	 	
 	 	 	 	Title:Director	 	 	
Witness Signature:	/s/ Natta Charoennaew	 	 	 	 	
 	 	 	 	 	 	
 	 	 	/s/ Kim Mooney	 	 	
Name:	Natta Charoennaew	 	Name:Kim Mooney	 	 	
 	 	 	Title:Director	 	 	
Address:	Blk 203 Serangoon Central
# 05-80 Singapore 550203	 	 	 	 	
 	 	 	 	 	 	
Occupation:	Legal Assistant	 	 	 	 	

 
SCHEDULE 1
 
DETAILS OF HOTELS UNDER SELLER BRANDS

 
SCHEDULE 2
 
REAL PROPERTY

 
SCHEDULE3
 
TRANSFERRED SUBSIDIARIES

 
SCHEDULE4
 
PRE-CLOSING RESTRUCTURING

 
SCHEDULE 5
 
PRE-CLOSING RESTRUCTURING APPROVALS

 
SCHEDULE 6
 
DISCLOSURE SCHEDULE

 
SCHEDULE 7
 
RENOVATION ANDREFURBISHMENT OF CERTAIN IBIS HOTELS

 
SCHEDULE 8
 
RETAINED HOTELS

 
Exhibit A : NewCo2 Shareholders Agreement

 
Exhibit B : Retained Hotels Management Agreement

 
Exhibit C : Form of Release and Discharge

 
Exhibit D : Form of Unwind Agreement

 
Exhibit E : Voting and ROFR Agreement

 
Exhibit F : Brand Franchise Agreements

 
Exhibit G : MEB Master Brand Agreement

 
Exhibit H : Registration Rights Agreement

 
Exhibit I : Interim Management Agreement

 
Exhibit J : Terms of Loyalty and Collaboration Agreement

 
Exhibit K : Pro Forma Statement

 
Exhibit L : Loan Schedule

 
Exhibit M:LUB Brand Use Fees

Exhibit 4.16
 
SECURITIES PURCHASE AGREEMENT
 
THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of 14 December, 2014, is by and among China Lodging Group, Limited, an exempted company incorporated under the laws of the Cayman Islands having its registered office at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands (the “ Company ”), and AAPC Hong Kong Limited, a company incorporated under the laws of Hong Kong having its registered office address at Room 803, 8th Floor, Axa Centre, 151, Gloucester Road, Wan Chai, Hong Kong (the “ Investor ”).  Unless otherwise defined, capitalized terms used in this Agreement are defined in  clause 11  or in the Master Purchase Agreement (as defined below); references to a “ Schedule ” are, unless otherwise specified, to a Schedule attached to this Agreement.
 
WHEREAS, China Lodging Investment Limited, a wholly-owned subsidiary of the Company (the “ Purchaser ”), has entered as of the date hereof into the Master Purchase Agreement with Investor (“ Master Purchase Agreement ”) pursuant to which the Purchaser will purchase interests in certain Hong Kong entities with underlying operations in the PRC, Taiwan and Mongolia and such other rights as detailed therein (the “ Consideration ”), in consideration for the issuance of Ordinary Shares as described herein.
 
WHEREAS, the Master Purchase Agreement sets out the terms of the purchase of the Hong Kong entities by the Purchaser but provides that the terms of the purchase of shares of the Company shall be described in a separate purchase agreement.
 
WHEREAS, the Company and the Investor are executing and delivering this Agreement in reliance upon the exemption from registration afforded by Regulation S as promulgated under the Securities Act (“ Regulation S ”);
 
WHEREAS, the Company desires to issue and sell to the Investor and the Investor desires to purchase from the Company, upon the terms and conditions stated in this Agreement, the Purchased Shares and Top-Up Shares, if any (as both are defined below);
 
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor respectively agree, as follows:
 
1.                                     Agreement to Sell and Purchase Securities.
 
1.1                              At the Closing, subject to the terms and conditions of this Agreement, the Investor will purchase from the Company, and the Company will issue and sell to the Investor, the Purchased Shares in consideration for the Consideration.
 
1.2                              The Parties agree and acknowledge that it is the desire of Investor and the Company that at the Closing Investor would own 10% of the Pro Forma Share Capital and that as of the date hereof, the Purchased Shares (if issued as of the date hereof) would represent a smaller percentage of the Company’s issued and outstanding shares.  The Parties agree that (i)

 
subject to the standstill restrictions contained in the Non-Competition Agreement, the Investor may purchase Ordinary Shares or ADSs prior to the Closing (“ Public Purchases ”); and (ii) at the Closing, subject to the terms and conditions of this Agreement, at the election of the Purchaser, to be made in writing to the Company no later than three Business Days prior to Closing (which election shall specify the number of Top-Up Shares to be purchased by the Investor at the Closing) the Company shall issue and sell to the Investor, and the Investor shall purchase, the number of Top-Up Shares the Investor elects to purchase (subject to the limitation on the possible number of Top-Up Shares set forth in the definition of “Top-Up Shares” set forth herein), at a price per Ordinary Share of $6.2625 (“ Top-Up Share Price ”).
 
1.3                              The number of Purchased Shares shall be adjusted as follows:
 
(a)                                in the event the result of subtracting the Total Adjusted Valuation from 160,631,000 is positive, by reducing the number of Purchased Shares by an amount equal to such result divided by 6.6375; and
 
(b)                                in the event the result of subtracting the Total Adjusted Valuation from 160,631,000 is negative, by increasing the number of Purchased Shares by an amount equal to such result (as a positive and not a negative number) divided by 6.6375.
 
2.                                     Closing of Sale and Purchase of Securities.
 
2.1                              The purchase and delivery of the Purchased Shares and the Top-Up Shares, if any, shall take place at the same location as Closing (as defined in the Master Purchase Agreement) at a closing (the “ Closing ”) on the Closing Date.
 
2.2                              At the Closing, the Company will deliver or cause to be delivered to the Investor:
 
(a)                                one or more duly executed share certificates in original form, registered in the name of the Investor, together with a certified true copy of the register of the members of the Company, evidencing that the Purchased Shares and the Top-Up Shares, if any, have been issued and sold to the Investor;
 
(b)                                a certificate of an officer of the Company dated the Closing Date, certifying that the conditions specified in clause 3.2(a)  have been fulfilled;
 
(c)                                 a certificate of an officer of the Company dated the Closing Date, certifying the capitalization of the Company as of the close of trading on the last Business Day immediately preceding the Closing Date and all such other matters described in  clause 4.5 , including without limitation, a list of all authorized, reserved and issued and outstanding securities of the Company and any Options, Convertible Securities or any other legally binding commitments to authorize, reserve or issue any securities or any instrument that could convert into any securities of the Company;

 
(d)                                a copy of resolutions (the “Board Resolutions”) adopted by the Board of Directors approving (i) the transactions contemplated by this Agreement, including without limitation, the issuance of the Purchased Shares and Top-Up Shares, if any, (ii) the appointment of a director designated by the Investor to the Board of Directors of the Company, effective upon Closing, and (iii) any Cayman Islands filing requirements with respect thereto; and
 
(e)                                 a certificate of the Secretary of the Company, dated as of the Closing Date, (i) certifying the Board Resolutions, (ii) certifying the current version of the Articles, and (iii) certifying as to the signatures and authority of persons signing the Transaction Documents and related documents on behalf of the Company.
 
2.3                              At the Closing, the Investor shall deliver or cause to be delivered to the Company:
 
(a)                                the Consideration, in the manner described in the Master Purchase Agreement;
 
(b)                                a certificate of an officer of the Investor dated the Closing Date, certifying that the conditions specified in clause 3.3(a)  have been fulfilled (each an “ Investor Certificate ”); and
 
(c)                                 an amount equal to the product of the number of Top-Up Shares multiplied by the Top-Up Share Price, in the event that the Company is required to issue any Top-Up Shares under  clause 1.2 , to a bank account designated by the Company no less than three Business Days prior to the Closing.
 
3.                                     Conditions to Closing.
 
3.1                              Conditions Precedent to Obligations of the Investor and the Company on the Closing Date.  The Company’s obligation to issue the Purchased Shares and Top-Up Shares at the Closing and the obligation of the Investor to purchase and pay for the Purchased Shares and Top-Up Shares to be sold to it at the Closing are subject to the fulfillment prior to or at the Closing of the following conditions, any or all of which may be waived in writing at the option of both the Company and the Investor:
 
(a)                                Investment Not Prohibited.  On the Closing Date, the purchase of the Purchased Shares by the Investor shall not be enjoined (temporarily or permanently) under, prohibited by or contrary to any injunction, order or decree applicable to the Investor or the Company.
 
(b)                                Master Purchase Agreement and other Transaction Documents.  Simultaneously with the Closing, the parties and/or their Affiliates shall consummate the transactions and actions to be consummated at the closing of the Master Purchase Agreement, including without limitation the due execution and delivery of, and the taking (or waiver) of any actions required at or prior to Closing pursuant to, all Transaction Documents.

 
3.2                              Conditions Precedent to Obligations of the Investor on the Closing Date.  The obligation of the Investor to purchase and pay for the Purchased Shares and the Top-Up Shares, if any, to be sold to it at the Closing is subject to the fulfillment prior to or at the Closing of the following conditions, any or all of which may be waived in writing at the option of the Investor:
 
(a)                                Representations, Warranties, Covenants and Agreements.  (I) (1) The representations and warranties of the Company contained herein that are made as of the date hereof or as of a specific date: (i) that are qualified by “material”, “materiality”, “Material Adverse Effect” or other terms of similar import (“ Materiality Qualifiers ”) shall be true and correct in all respects, or (ii) that are not qualified by Materiality Qualifiers shall be true and correct in all material respects, in each case when made or as of the specific date made; (2) the representations and warranties of the Company contained herein that are not made as of a specific date, as updated by any matters disclosed in any SEC Filings with respect to events that occurred after the date hereof of the Company (“ Subsequent Disclosed Events ”) (i) that are qualified by Materiality Qualifiers shall be true and correct as of the Closing in all respects, or (ii) that are not qualified by Materiality Qualifiers shall be true and correct as of the Closing in all material respects, and (3) the Subsequent Disclosed Events, shall not have, individually or in the aggregate, caused or resulted in a Material Adverse Effect; and (II) the Company shall have performed and complied in all material respects with all, and not be in material breach or default under any, agreements, covenants and obligations contained in this Agreement or any of the Transaction Documents that the Company is required to perform or comply with on or before the Closing Date.
 
(b)                                Corporate Approvals.  The Company will have duly approved the execution, delivery and performance of this Agreement, including without limitation, the issuance of the Purchased Shares and the Top-Up Shares, if any, to the Investor.
 
(c)                                 Material Licenses. All Authorizations required by the Company to enable it to carry on its business as currently operated (other than Authorizations the absence of which would not materially affect the ability of the Company to conduct its business in the ordinary course and consistent with past practice) have been obtained or effected and are in full force and effect, and no such Authorization shall have expired, lapsed, terminated or revoked, except if such expiration, lapse, termination or revocation would not materially affect the ability of the Company to run its business as currently operated.
 
(d)                                Board Member.  The Board of Directors of the Company will have appointed a person designated by the Investor to the Board of Directors of the Company, effective as of Closing.
 
3.3                              Conditions Precedent to Obligations of the Company on the Closing Date.  The Company’s obligation to issue the Purchased Shares and the Top-Up Shares, if any, at the Closing is subject to the fulfillment prior to or at the Closing of the following conditions, any or all of which may be waived in writing at the option of the Company:

 
(a)                                Representations, Warranties, Covenants and Agreements.  The representations and warranties of the Investor contained herein shall be true and correct in all material respects as of the date when made and as of the Closing as though made on and as of such date (except for the representations and warranties that speak as of a specific date, which shall be made as of such date); and the Investor shall have performed and complied with all, and not be in material breach or default under any, agreements, covenants, conditions and obligations contained in this Agreement that are required to be performed or complied with on or before the Closing Date.
 
4.                                     Representations and Warranties of the Company.  The Company hereby represents and warrants as of the date hereof (except for the representations and warranties that speak as of a specific date, which shall be made as of such date) to the Investor as follows:
 
4.1                              Organization and Qualification.  The Company is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the requisite power and legal authority to own and use its properties and assets and to carry on its business as currently conducted.  The Company is not in violation of any of the provisions of its certificate of incorporation or Articles, bylaws or other organizational or charter documents.  The Company is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.
 
4.2                              Authorization; Enforcement.  The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents to which it is a party and otherwise to carry out its obligations hereunder and thereunder.  The execution and delivery by the Company of each of the Transaction Documents to which it is a party and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company and no further consent or action is required by the Company or its Board of Directors or shareholders.  Each of the Transaction Documents to which it is a party has been (or upon delivery will be) duly executed by the Company and each Transaction Document executed by the Company, or when delivered in accordance with the terms hereof, will, constitute the valid and binding obligation of the Company, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
 
4.3                              Filings, Consents and Approvals.  Except as set forth in Annex A hereto, the Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and

 
performance by the Company of the Transaction Documents, other than any filings required by the Securities Act to disclose the material terms of the Transaction Documents.
 
4.4                              No Conflicts.  The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby do not, and will not, (i) conflict with or violate any provision of its Articles or other governance documents, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, or result in the creation of any lien, security interest, charge or encumbrance upon any of its properties or assets under the terms or conditions of, any agreement, credit facility, debt or other instrument (evidencing the Company’s debt or otherwise) or other understanding to which the Company is a party or by which any property or asset of the Company is bound or affected, except to the extent that such conflict, default, termination, amendment, acceleration or cancellation right would not reasonably be expected to have a Material Adverse Effect, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including, assuming the accuracy of the representations and warranties of the Investor set forth in  clause 5  hereof, federal and state securities laws and regulations and the rules and regulations of any self-regulatory organization to which the Company or its securities are subject, including all applicable Trading Markets), or by which any property or asset of the Company is bound or affected, except to the extent that such violation would not reasonably be expected to have a Material Adverse Effect or would reasonably be expected to materially adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement.
 
4.5                              Purchased Shares and Top-Up Shares.  The Purchased Shares and the Top-Up Shares are duly authorized and, when issued and paid for in accordance with this Agreement, will be duly and validly issued, fully paid and non-assessable, free and clear of all Liens and will not be subject to preemptive or similar rights of shareholders.  No vote of any class or series of capital stock of or any equity interests in the Company is necessary to approve the issuance of the Purchased Shares and Top-Up Shares, if any, or any other matter or agreement included in any of the Transaction Documents. Assuming the accuracy of the representations and warranties of the Investor, the Purchased Securities and Top-Up Shares, if any, will be issued in compliance with all applicable federal and state securities laws, and following issuance shall be freely transferable subject to the Articles, applicable federal and state securities laws and the terms of the Transaction Documents.
 
4.6                              Capitalization.  The authorized, issued and outstanding capital stock of the Company is as of 24 November 2014, (i) 8,000,000,000 Ordinary Shares are authorized and 249,946,087 Ordinary Shares (“ Represented Capital ”) are issued and outstanding; (i) 1,000,000,000 Preferred Shares are authorized, none of which are issued and outstanding; and (iii) 100,000,000 ADSs are authorized and 33,431,294 ADSs are issued and outstanding and the Company does not have any other class of shares or equity securities authorized or issued.  As of 24 November 2014, 133,725,176 Ordinary Shares have been deposited with the depositary which

 
has issued 33,431,294 ADSs representing such Ordinary Shares.  As of the date hereof and as of the Closing Date, all outstanding shares of capital stock and ADSs are duly authorized, validly issued, fully paid and non-assessable and have been issued in compliance in all material respects with all applicable securities laws.  As of the date hereof, the Company has reserved 32,000,000 Ordinary Shares for issue pursuant to the Existing Share Incentive Plans, pursuant to which (i) the Company has issued 14,729,520 Ordinary Shares issued in respect of options already granted and exercised, (ii) options granted but not vested represent a total of 924,755 Ordinary Shares, (iii) options granted and vested but not yet exercised represent a total of 4,737,632 Ordinary Shares, (iv) restricted stock granted and vested represent a total of 1,011,688 Ordinary Shares, (v) restricted stock but not vested represent a total of 1,475,486 Ordinary Shares, and (vi) a maximum of 16,258,792 Ordinary Shares may still be issued by the Company.  Subject to the previous sentence, the Company did not have outstanding on the date hereof any other Options, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or entered into any agreement giving any Person any right to subscribe for or acquire or the right to have redeemed or purchased, any Company Securities, including without limitation, the Purchased Shares or the Top-Up Shares, if any, or securities or rights convertible or exchangeable into any Ordinary Shares.  Except as disclosed in SEC Filings, and except for customary adjustments as a result of stock dividends, share splits, combinations of shares, reorganizations, recapitalizations, reclassifications or other similar events, there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) and the issuance and sale of the Purchased Shares and the Top-Up Shares, if any, will not obligate the Company to issue any Company Securities to any Person (other than the Investor) and will not result in a right of any holder of securities to adjust the exercise, conversion, exchange or reset price under such securities.
 
4.7                              SEC Filings; Financial Statements.
 
(a)                                The Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the period from January 1, 2012 to the date hereof on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Filings prior to the expiration of any such extension.  Such reports required to be filed by the Company under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, together with any materials filed or furnished by the Company under the Exchange Act, whether or not any such reports were required, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “ SEC Filings ” and, together with this Agreement and the Schedule to this Agreement, the “ Disclosure Materials. ”
 
(b)                                As of their respective dates (or, if amended or superseded by a filing prior to the date hereof, then on the date of such filing), the SEC Filings filed by the Company complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the SEC promulgated thereunder, and none of the SEC Filings, when filed (or, if amended or superseded by a filing prior to the date hereof, then on the date of such filing) by the Company, contained any untrue statement of a material fact or omitted

 
to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except to the extent that such SEC Fillings may have been subsequently amended or supplemented to correct such misstatement or omission.
 
(c)                                 The audited financial statements of the Company included in the SEC Filings comply in all material respects with United States generally accepted account principles and the rules and regulations of the SEC with respect thereto as in effect at the time of filing (or, if amended or superseded by a filing prior to the Closing Date, then on the date of such filing).
 
4.8                              Material Changes.  Since the date of the latest audited financial statements included within the SEC Filings and prior to the date hereof, except as disclosed in the SEC Filings (other than forward-looking statements, risk factors and others statements cautionary in nature), (i) there has been no event, occurrence or development that, individually or in the aggregate, has had or that would result in a Material Adverse Effect), (ii) none of the Company Parties has altered its method of accounting or changed its auditors, (iii) none of the Company Parties has declared or made any dividend or distribution of cash or other property to its shareholders, in their capacities as such, or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (iv) none of the Company Parties has issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock-based plans. The Company does not have pending before the SEC any request for confidential treatment of information.
 
4.9                              Compliance with US Securities Laws.  Neither the Company, any of its Affiliates or any Person acting on its or their behalf has offered, sold, or solicited orders or offers to buy, or otherwise has taken any other action or has negotiated in respect of, any security of the Company under circumstances that would require the registration of the Purchased Shares under the Securities Act.
 
4.10                       Private Placement.  Neither the Company nor any of its Affiliates nor, any Person acting on the Company’s behalf has, directly or indirectly, at any time within the past six months, made any offer or sale of any security or solicitation of any offer to buy any security under circumstances that would (i) eliminate the availability of the exemption from registration under Regulation D under the Securities Act in connection with the offer and sale by the Company of the Purchased Shares as contemplated hereby, or (ii) cause the offering of the Purchased Shares and Top-Up Shares pursuant to the Transaction Documents to be integrated with prior offerings by the Company for purposes of any applicable law, regulation or shareholder approval provisions, including, without limitation, under the rules and regulations of any Trading Market.  Assuming the accuracy of the representations and warranties of the Investor set forth in  clause 5 , no registration under the Securities Act is required of the offer and sale of the Purchased Shares by the Company to Investor as contemplated hereby. The sale and issuance of the Purchased Shares and Top-Up Shares hereunder does not contravene the rules and regulations of any Trading Market on which the ADSs are listed or quoted.

 
4.11                       Listing and Maintenance Requirements.  The Company has not, in the twelve months preceding the date hereof, received notice (written or oral) from any Trading Market on which the Ordinary Shares or ADSs are or have been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market.  The Company is in compliance with all such listing and maintenance requirements and, to the Company’s knowledge, there are no circumstances that could reasonably be expected to result in any breach or non-compliance of such requirements.
 
4.12                       Registration Rights. Except as disclosed in the SEC Filings, the Company has not granted or agreed to grant to any Person any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the SEC or any other governmental authority that have not expired or been satisfied or waived. Except as disclosed in SEC filings, the Company is not restricted or limited in any way, pursuant to any agreement or otherwise, from granting the registration rights to be granted to the Investor under the Registration Rights Agreement.
 
4.13                       Absence of Litigation.  Except as disclosed in the SEC Filings (other than forward-looking statements, risk factors and others statements cautionary in nature), to the Company’s knowledge, there is no action, suit, claim, Proceeding, inquiry or investigation, before or by any court, public board, government agency, self-regulatory organization or body pending or, to the Company’s knowledge, threatened against or affecting the Company that would be reasonably likely, individually or in the aggregate, to result in a Material Adverse Effect.
 
4.14                       Material Licenses.  Except as would not be reasonably likely, individually or in the aggregate, to result in a Material Adverse Effect, (i) the Company has obtained all Authorizations required to enable it to carry on its business as currently operated and such Authorizations are in full force and effect, and (ii) neither the Company nor any Subsidiary has received any notice challenging the validity of or of any proceedings relating to the revocation or modification of, any such Authorizations.
 
4.15                       Compliance. Except as disclosed in the SEC Filings, (i) none of the Company Parties is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by any of them under) in any material respect, nor has any Company Party received written notice of a material claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) none of the Company Parties is in material violation of any order of any court, arbitrator or governmental body, and (iii) none of the Company Parties is and neither has been in material violation of any statute, rule or regulation of any governmental authority.
 
4.16                       Internal Accounting Controls.  The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions

 
are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
 
4.17                       Sarbanes-Oxley Act. The Company is in compliance in all respects with applicable requirements of the Sarbanes-Oxley Act of 2002 and applicable rules and regulations promulgated by the SEC thereunder, except where such noncompliance would not have, individually or in the aggregate, a Material Adverse Effect.
 
4.18                       Transactions With Affiliates and Employees. Except as set forth in the SEC Filings made on or prior to the date hereof, none of the officers or directors of the Company and, to the Company’s knowledge, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary or to a presently contemplated transaction (other than for services as employees, officers and directors) that would be required to be disclosed pursuant to Item 404 of Regulation S-K promulgated under the Securities Act.
 
4.19                       Conduct of Business. Neither the Company nor any Subsidiary, nor, to the Company’s Knowledge, any of its directors, officers, employees, agents or other Persons acting on behalf of the Company or any Subsidiary has, in the course of its actions for, or on behalf of, the Company: (a) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to foreign or domestic political activity; (b) made any direct or indirect unlawful payments to any foreign or domestic governmental officials or employees from corporate funds; (c) violated in any material respect any provision of any anti-corruption or similar laws of any applicable jurisdiction; or (d) made any other unlawful payment to any foreign or domestic government official or employee.
 
4.20                       Reliance by Investor. The Company acknowledges that the Investor will rely upon the truth and accuracy of, and the Company’s (and the Company’s Subsidiaries’) compliance with, the representations, warranties, agreements, acknowledgements and understandings of the Company set forth herein.
 
4.21                       Intellectual Property. Except as set forth in the SEC Reports, neither the Company nor any of its Subsidiaries has received any notice of and there is no pending or, to the Company’s knowledge, any threatened material action, suit, proceedings or claims by others that any of them infringe or otherwise violate any intellectual property rights of any other person.
 
5.                                     Representations and Warranties of the Investor.  The Investor hereby represents and warrants to the Company as follows:
 
5.1                              Organization; Authority.  The Investor is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate, partnership or other power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its

 
obligations hereunder and thereunder.  The Investor is a wholly-owned subsidiary of Seller Parent.  The purchase by the Investor of the Purchased Shares and Top-Up Shares hereunder has been duly authorized by all necessary corporate, partnership or other action on the part of the Investor.  This Agreement has been duly executed and delivered by the Investor and constitutes the valid and binding obligation of the Investor, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
 
5.2                              No Public Sale or Distribution.  The Investor is acquiring the Purchased Shares and the Top-Up Shares in the ordinary course of business for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities laws, and the Investor does not have a present arrangement to effect any distribution of the Purchased Shares or the Top-Up Shares to or through any person or entity.  The Investor understands that the Purchased Shares and the Top-Up Shares may not, absent an applicable exemption, be transferred without registration and/or qualification under the Securities Act and applicable state securities laws and the laws of any other applicable jurisdiction.
 
5.3                              Investor Status.  At the time the Investor was offered the Purchased Shares and the Top-Up Shares, it was, and at the date hereof it is, an “accredited investor,” as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act, or a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act.  The Investor is not a registered broker dealer registered under Section 15(a) of the Exchange Act, or a member of the Financial Regulatory Authority, Inc. (“ FINRA ”) or an entity engaged in the business of being a broker dealer.  Except as otherwise disclosed in writing to the Company on or prior to the date of this Agreement, the Investor is not affiliated with any broker dealer registered under Section 15(a) of the Exchange Act, or a member of FINRA or an entity engaged in the business of being a broker dealer.  Neither the Investor nor any of its Affiliates hold any shares in the Company or Ctrip.
 
5.4                              Offshore Transaction.  The Investor is a resident of Hong Kong and is not a U.S. person under the meaning of Regulation S.  At the time of completion, execution and delivery of this Agreement and the time of any offer to the Investor to purchase the Purchased Shares and the Top-Up Shares hereunder, the Investor was physically present outside the United State and the offer and sale of the Purchased Shares the Top-Up Shares being made to the Investor by the Company were made by the Company to the Investor outside of the United States.  The Investor hereby certifies to the Company that it is not acquiring the Purchased Shares or the Top-Up Shares for the account or benefit of any U.S. person.
 
5.5                              No Hedging.  Prior to Closing, neither the Investor nor any of its Affiliates will, directly or indirectly hold or maintain any short position in or engage in hedging

 
transactions with respect to any class of share capital of the Company or any other securities of the Company, other than in accordance with the Securities Act.  The Investor may purchase Ordinary Shares or ADSs prior to the Closing, as provided in Clause 9.
 
5.6                              General Solicitation.  The Investor is not purchasing the Purchased Shares or the Top-Up Shares as a result of any advertisement, article, notice or other communication regarding the Purchased Shares or the Top-Up Shares published in any newspaper, magazine or similar media, broadcast over television or radio, disseminated over the Internet or presented at any seminar or any other general solicitation or general advertisement.
 
5.7                              Experience of Investor.  The Investor, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Purchased Shares and the Top-Up Shares, and has so evaluated the merits and risks of such investment.  The Investor understands that it must bear the economic risk of this investment in the Purchased Shares and the the Top-Up Shares indefinitely, and is able to bear such risk and is able to afford a complete loss of such investment.
 
5.8                              Access to Information.  The Investor acknowledges that it has reviewed the Disclosure Materials, and all other materials the Investor deemed necessary for the purpose of making an investment decision with respect to the Purchased Shares the Top-Up Shares, and has been afforded:  (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the Company’s business, management and financial affairs and terms and conditions of the offering of the Purchased Shares the Top-Up Shares and the merits and risks of investing in the Purchased Shares the Top-Up Shares; (ii) access to information (including material non-public information) about the Company and its Subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment.  The Investor has evaluated the risks of investing in the Purchased Shares and the Top-Up Shares, understands there are substantial risks of loss incidental to the investment and has determined that it is a suitable investment for itself.
 
5.9                              No Governmental Review.  The Investor understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Purchased Shares or the Top-Up Shares or the fairness or suitability of the investment in the Purchased Shares or the Top-Up Shares nor have such authorities passed upon or endorsed the merits of the offering of the Purchased Shares or the Top-Up Shares.
 
5.10                       Reliance on Exemptions.  The Investor understands that the Purchased Shares and the Top-Up Shares have not been registered under the Securities Act or any state securities laws and are being offered and sold in reliance upon specific exemptions from the registration requirements of federal and state securities laws and that the Company is relying

 
upon the truth and accuracy of the representations and warranties of the Investor set forth herein in order to determine the availability of such exemptions and the eligibility of the Investor to acquire the Purchased Shares or the Top-Up Shares.
 
5.11                       Absence of Litigation.  To the Investor’s knowledge, there is no action, suit, claim, Proceeding, inquiry or investigation, before or by any court, public board, government agency, self-regulatory organization or body pending or, to the Investor’s knowledge, threatened against or affecting the Investor or any of its Affiliates that would be reasonably likely individually or in the aggregate to impair or delay the ability of the Investor, Accor Parent or any of their Affiliates to consummate the transactions contemplated by this Agreement.
 
5.12                       No Conflicts.  The execution, delivery and performance by the Investor of this Agreement and the consummation by the Investor of the transactions contemplated hereby will not (i) result in a violation of the organizational documents of the Investor or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Investor is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to the Investor, except in the case of clauses (ii) and (iii) above, for such that are not material to the transactions contemplated by this Agreement and do not otherwise affect the ability of the Investor to consummate the transactions contemplated hereby.
 
5.13                       Legends.  It is understood that certificates evidencing the Purchased Shares and the Top-Up Shares may bear any legend as required by the Blue Sky laws of any state.
 
5.14                       Reliance by Company. The Investor acknowledges that the Company will rely upon the truth and accuracy of, and the Investor’s compliance with, the representations, warranties, agreements, acknowledgements and understandings of the Investor set forth herein.
 
6.                                     Restrictions on Transfer; Other Agreements of the Parties.
 
6.1                              Legends and other Matters.
 
(a)                                Restrictive Legends.  Any certificate or other document issued in respect of any Purchased Shares and Top-Up Shares shall be endorsed with the legend set forth below:
 
“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED (1) ABSENT AN EFFECTIVE REGISTRATION

 
THEREOF UNDER THE SECURITIES ACT (2) ABSENT AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY STATE OR THAT SUCH TRANSACTION COMPLIES WITH THE RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY STATE OR, (3) EXCEPT IN A TRANSACTION IN COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, AND ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER BY THE TERMS OF A NON-COMPETITION AGREEMENT, DATED AS OF [ · ], ENTERED INTO AMONG THE COMPANY AND THE OTHER PARTIES THERETO, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF SUCH COMPANY.”
 
(b)                                The Company shall maintain a copy of this Agreement and any amendments thereto on file in its principal offices, and will make such copy available during normal business hours for inspection to any party thereto or will provide such copy to the Investor or any transferee upon its or their request.  Whenever the legend requirements imposed by this  clause 6.1 shall terminate, as provided in  clause 6.2 , the respective holders of Purchased Shares and Top-Up Shares for which such legend requirements have terminated shall be entitled to receive from the Company, at the Company’s expense, certificates representing the Purchased Shares and Top-Up Shares without such legend.
 
6.2                              Notice of Transfer, Opinions of Counsel.  Each holder of the Purchased Shares and Top-Up Shares bearing the restrictive legend set forth in  clause 6.1  above (a “ Restricted Security ”), agrees with respect to any transfer of such Restricted Security to give to the Company (a) written notice describing the transferee and the circumstances, if any, necessary to establish the availability of an exemption from the registration requirements of the Securities Act or any state law and (b) upon reasonable request by the Company to such transferring holder, an opinion of counsel (at the expense of such holder), which is knowledgeable in securities law matters (including in-house counsel), in form and substance reasonably satisfactory to the Company to the effect that the proposed transfer of such Restricted Security may be effected without registration of such Restricted Security under the Securities Act or any state law.  If for any reason the Company (after having been furnished with the opinion required to be furnished pursuant to this  clause 6.2 ), shall fail to notify such holder within ten Business Days after such holder shall have delivered such notice of opinion to the Company that, in its or its counsel’s opinion, the transfer may not be legally effective (the “ Illegal Transfer Notice ”), such holders shall thereupon be entitled to transfer the Restricted Security as proposed.  If the holder of the Restricted Security delivers to the Company an opinion of counsel (including in-house counselor regular counsel to the Investor or its investment adviser) which is in form and substance reasonably satisfactory to the Company that subsequent transfers of such Restricted Security will not require registration under the Securities Act or any state law, and the Company does not provide the holders with an Illegal Transfer Notice as set forth above, the Company will within a reasonable period after such contemplated transfer, deliver new certificates for such Restricted Security which do not bear the Securities Act legend set forth in  clause 6.1(a)  above.  The

 
restrictions imposed by this clause 6 upon the transferability of any particular Restricted Security shall cease and terminate when such Restricted Security has been sold pursuant to an effective registration statement under the Securities Act or transferred pursuant to Rule 144 promulgated under the Securities Act.  The holder of any Restricted Security as to which such restrictions shall have terminated shall be entitled to receive from the Company a new security of the same type but not bearing the restrictive Securities Act legend set forth in  clause 6.1  and not containing any other reference to the restrictions imposed by this clause 6 .  Notwithstanding any of the foregoing, no opinion of counsel will be required to be rendered pursuant to this  clause 6.2 with respect to the transfer of any securities on which the restrictive legend has been removed in accordance with this  clause 6.2 .  As used in this  clause 6.2 , the term “transfer” encompasses any sale, transfer or other disposition of any securities referred to herein.
 
6.3                              Lock Up and Standstill Restrictions.  Investor acknowledges that the Purchased Shares and Top-Up Shares are subject to certain lockup and standstill restrictions set forth in the Non-Competition Agreement.
 
7.                                     Board Representation.
 
7.1                              Effective at Closing, the size of the Board shall increase by one (1) director, and subject to the conditions described in the Voting and ROFR Agreement to be executed at the Closing, (a) such vacancy shall be filled by a person who is designated by Investor (the “ Investor Director ”) and who shall have no criminal record and the appointment of which shall not cause the Company to violate any anti-corruption rules or to lose any material licenses, and (b) such person shall, unless removed by Investor or otherwise as provide in Clause 7.2 below or for cause, serve as a duly appointed director of the Company.  Each subsequent designee of Investor shall be nominated by the Board for election by the Board or the shareholders to the Board, and if so appointed, shall serve as a duly appointed director of the Company all as set forth and subject to the conditions described in the Voting and ROFR Agreement to be executed at the Closing.
 
7.2                              From the date hereof, the Company shall procure that, on or prior to, and as a condition to, its issuance of any Securities (other than in connection with the grant and exercise of options and Restricted  Stock under the Company’s Existing Share Incentive Plans) it shall procure that the Articles will be amended as provided in the Voting and ROFR Agreement to take effect from and after the Closing, provided that such obligation shall permanently terminate upon the earlier to occur of (i) from and after the Closing, the Investor and its Affiliates failing for a period of twelve (12) consecutive months to own Ordinary Shares (including, without limitation, any Ordinary Shares represented by ADSs) that represent an amount equal to or greater than 5% of the Pro Forma Share Capital, and (ii) any other termination event with respect to such right of board representation as provided in the Voting and ROFR Agreement other than pursuant to clause 8.1(a) therein.  In addition, in the event the Company consummates any statutory merger, scheme of arrangement or other similar event, the obligations in clauses 7.1 and 7.2 shall bind any successor in interest to the Company.

 
7.3                              The references to the Voting and ROFR Agreement herein shall be to all relevant provisions of the Voting and ROFR Agreement (including those relevant to the termination of the Investor’s  right of board representation provided herein) regardless of whether or not the Voting and ROFR Agreement is then in effect or has been terminated.
 
8.                                     Succession. If at any time prior to Closing or the termination of this Agreement, the Founder leaves his position as chairman and chief executive officer of the Company, or ceases to be responsible for overall management of the Company, or any of his material duties or responsibilities are assigned to any other person including but not limited to by reason of his death, disability, retirement, termination of employment, or amendment of the terms of his employment as chief executive officer (the “Founder Departure” ), the Company shall (w) notify the Investor within 10 days thereof, (x) if the Founder Departure is prior to the Closing, procure that a representative designated by the Investor be appointed as a non-voting observer who shall have all the rights as other members of such committee other than the right to vote  (the  “Investor Observer” ) of the nomination committee of the Board (or, if no such committee is established, as a non-voting observer of the Company’s Board of Directors) or such other committee of the Board authorized to appoint his successor or any person assuming any of his material duties or responsibilities (“ Nomination Committee ”), and (y) promptly (and no later than the time such information is provided to any other members of the Board or its nomination committee) share with the Investor Observer or Investor Director all relevant information with respect to any potential candidates provided to any other members of the Board or its nomination committee.
 
9.                                     Further Assurance.  Prior to Closing, the Company shall not grant any Person any registration rights on terms and conditions that contradict or conflict with the registration rights to be granted to the Investor at Closing pursuant to the Registration Rights Agreement.
 
10.                              Termination.
 
10.1                       This Agreement shall terminate automatically upon termination of the Master Purchase Agreement, and may also be terminated at any time prior to the Closing:
 
(a)                                by the Investor if, between the date hereof and the Closing: (i) any representations and warranties of the Company contained in this Agreement (x) that are not qualified by “materiality” or “Material Adverse Effect” shall not have been true and correct in all material respects when made or (y) that are qualified by “materiality “ or “Material Adverse Effect” shall not have been true and correct when made, (ii) the Company shall not have complied in all material respects with the covenants or agreements contained in this Agreement to be complied with by it and such non-compliance cannot be cured by Closing, or (iii) the Company makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Seller seeking to it as bankrupt or insolvent, or seeking its liquidation, winding up or reorganization, or seeking any arrangement, adjustment, protection, relief or composition of its debts under any Law relating to bankruptcy, insolvency or reorganization;

 
(b)                                by the Company if, prior to the Closing, the Investor makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Investor seeking to adjudicate any of them as bankrupt or insolvent, or seeking any of their liquidation, winding up or reorganization, or seeking any arrangement, adjustment, protection, relief or composition of any of their debts under any Law relating to bankruptcy, insolvency or reorganization;
 
(c)                                 by the Investor if the Company makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Company seeking to adjudicate any of them as bankrupt or insolvent, or seeking any of their liquidation, winding up or reorganization, or seeking any arrangement, adjustment, protection, relief or composition of any of their debts under any Law relating to bankruptcy, insolvency or reorganization.
 
(d)                                by either the Investor or the Company if the Closing shall not have occurred by the date being 15 months following the date of this Agreement;  provided ,  however , that the right to terminate this Agreement under this Clause 10.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date;
 
(e)                                 by either the Investor or the Company in the event that any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable; or
 
(f)                                  by the mutual written consent of the Investor or the Company.
 
10.2                       In the event of termination of this Agreement as provided in Clause 10.1, all rights and obligations of the Parties shall cease immediately upon termination except that (i) termination will not affect the then accrued rights and obligations of the Parties (including the right to damages for breach, if any, given rise to the termination and nay other pre-termination breach by any Party), and (ii) termination will be without prejudice to the continued application of Clause 12, and any provision of this Agreement which is expressed to come into effect on, or to continue in effect after, that termination (and all provisions relevant to the interpretation and enforcement thereof), will remain in full force and effect.
 
11.                              Definitions As used herein the following terms have the following respective meanings:
 
“$” means United States Dollars, the lawful currency of the United States of America.
 
“ADSs” means the American Depositary Shares, par value $0.0001 each, each representing four Ordinary Shares, issued by the Company.
 
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144.

 
“Agreement” has the meaning set forth in the preamble, as amended, modified or supplemented from time to time, together with any exhibits, schedules, appendices or other attachments thereto.
 
“Articles” means memorandum and articles of association of the Company, as amended, restated and/or supplemented from time to time.
 
“Articles Share Capital” means the sum of (i) 251,586,959 Ordinary Shares, (ii) the Purchased Shares and Top-Up Shares to the extent purchased by the Investor, and (iii) any Ordinary Shares or other Securities issued as part of any issuances of Securities by the Company post-Closing in which the Investor was entitled to participate on a pro rata basis (each as adjusted for stock splits, dividends, recapitalizations and the like).
 
“Authorization” means any authorization, consent, approval, resolution, license, exemption, filing, notarisation, lodgement or registration related to a Governmental Authority or otherwise.
 
“Board of Directors” means the board of directors of the Company.
 
“Business Day” means any day that is not a Saturday, Sunday or other day in which banks are not required or authorized to be closed in New York City, New York.
 
“Capitalization Certificate” has the meaning set forth in clause 2.2(e).
 
“Closing” has the meaning set forth in clause 2.
 
“Closing Date” means the date and time of the Closing, which shall occur on the date of the closing of the Master Purchase Agreement, provided that all conditions precedent set forth in  clause 2  are satisfied or waived by the applicable parties or such other date and time as is mutually agreed to by the Company and the Investor.
 
“Company” has the meaning set forth in the preamble.
 
“Company Parties” means each of the Company and its Subsidiaries from time to time.
 
“Company Securities” means the Ordinary Shares, the Preferred Shares, the ADSs and any other securities that may be issued by the Company from time to time.
 
“Consideration” has the meaning set forth in the recitals.
 
“Convertible Securities” means any evidence of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for shares in the share capital of the Company, but excluding Options.
 
“Disclosure Materials” has the meaning set forth in clause 4.6(a).

 
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“Existing Share Incentive Plans” means the Amended and Restated 2007 Global Share Plan approved by the members of the Company on 12 December 2007, the Amended and Restated 2008 Global Share Plan approved by the members of the Company on 31 October 2008, and the Amended and Restated 2009 Share Incentive Plan approved by the members of the Company in September 2009.
 
“FINRA” has the meaning set forth in clause 5.3.
 
“Founder” means Mr. Qi Ji, the Chairman of the Company.
 
“Governmental Authority” means any governmental or quasi-governmental authority including, without limitation, any federal, state, territorial, county, municipal or other governmental or quasi-governmental agency, board, branch, bureau, commission, court, department or other instrumentality or political unit or subdivision, whether domestic or foreign.
 
“Illegal Transfer Notice” has the meaning set forth in clause 6.2.
 
“Investor” has the meaning set forth in the preamble.
 
“Investor Certificate” has the meaning set forth in clause 2.3(c).
 
“Lien” means any mortgage, lien (statutory or otherwise), charge, pledge, hypothecation, conditional sales agreement, adverse claim, title retention agreement or other security interest, encumbrance or other title defect in or on any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale, trust receipt or other title retention agreement with respect to any Property or asset of such Person.
 
“Losses” means any and all losses, claims, damages, liabilities, settlement costs and expenses, including, without limitation, reasonable attorneys’ fees.
 
“Material Adverse Effect” means a material adverse effect on the results of operations, assets, business or financial condition of the Company and the Subsidiaries taken as a whole on a consolidated basis, provided, that, none of the following alone or taken together with any other changes or effects shall be deemed, in and of itself, to constitute a Material Adverse Effect:  (a) a change in the market price or trading volume of the Common Stock; (b) changes in general business, economic or political conditions or changes affecting the industry or segments thereof in which the Company operates generally (as opposed to Company-specific changes), including legal and regulatory changes, so long as such changes do not have a disproportionate effect on the Company and its Subsidiaries taken as a whole; (c) events, circumstances, changes or effects affecting the financial, credit or securities markets where the Company conducts operations, including changes in interest rates or foreign exchange rates; (d) events, circumstances, changes or effects attributable to the consummation of the transactions contemplated by, or the announcement of the execution of, this Agreement or any Transaction Documents; (e) strikes, slowdowns or work stoppages; (f) any reduction in the price of services

 
or products offered by the Company or any of its Subsidiaries in response to the reduction in price of comparable services or products offered by a competitor; (g) any event, circumstance, change or effect caused by acts or armed hostility, sabotage, terrorism or war (whether or not declared), including any escalation or worsening thereof, (h) earthquakes, hurricanes, tsunamis, tornadoes, floods, mudslides or other natural disasters, weather conditions, explosions or fires or other force majeure events; (i) changes or modifications in applicable accounting principles or applicable law or the interpretation or enforcement thereof; (j) the failure by the Company or any of its Subsidiaries to meet any internal or industry estimates, expectations, forecasts, projections or budgets for any period; (k) any event, circumstance, change or effect that results from any actions taken or not taken pursuant to or in accordance with this Agreement or any Transaction Documents or at the request of the Investor and (l) any event, circumstance, change or effect relating to or arising out of any matter set forth in the Disclosure Materials.
 
“Non-Competition Agreement” means the non-competition agreement dated as of the date hereof, by and between Accor S.A. and the company.
 
“Options” means any outstanding rights, warrants or options to subscribe for or purchase Ordinary Shares or other securities of the Company.
 
“Ordinary Shares” means ordinary shares issued by the Company with par value $0.0001 per share.
 
“Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, a government or any department or agency thereof and any other legal entity.
 
“Preferred Shares” means preferred shares issued by the Company with par value $0.0001 per share.
 
“Pro Forma Share Capital” means the sum of (i) the Represented Capital (or, if the Represented Capital was incorrect, the actual number of issued and outstanding Ordinary Shares as of 24 November 2014), (ii) 1,640,872 Ordinary Shares, being the number of Ordinary Shares projected to be issued pursuant to the exercise of Options prior to the Closing, and (iii) the number of Purchased Shares, as adjusted for share splits, share dividends, combinations, recapitalizations and the like.
 
“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, a partial proceeding, such as a deposition), whether commenced or threatened in writing.
 
“Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.
 
“Purchased Shares” means (a) 24,200,500 Ordinary Shares, as adjusted pursuant to Clause 1.3 (as adjusted for share splits, share dividends, combinations, recapitalizations and the like).

 
“Registration Rights Agreement” means the Registration Rights Agreement to be entered between the Company and the Investor relating to the registration of the Purchased Shares as described in the Master Purchase Agreement.
 
“Regulation S” has the meaning set forth in the recitals.
 
“Restricted Security” has the meaning set forth in clause 6.2.
 
“Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such rules may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such Rule.
 
“SEC” means the United States Securities and Exchange Commission.
 
“SEC Filings” has the meaning set forth in clause 4.6(a).
 
“Securities” means any securities issued by the Company (including without limitation, Ordinary Shares, Preferred Shares, ADSs) and any options to acquire any such securities and any securities that are convertible into any of them.
 
“Securities Act” means the Securities Act of 1933, and the rules and regulations of the SEC promulgated thereunder, as from time to time amended.
 
“Subsidiary” means any entity in which the Company, directly or indirectly, owns a majority of the outstanding equity and/or control.
 
“Top-Up Shares” means the number of Ordinary Shares to be purchased by Investor at Closing for cash pursuant to Clause 1.2(ii), which shall not exceed the lesser of (a) 3,941,091 Ordinary Shares less any Public Purchases (each number as adjusted for share splits, share dividends, combinations, recapitalizations and the like) and (b) a number of Ordinary Shares that, when taken together with the Purchased Shares and any Public Purchases, would represent 10% of the Pro Forma Share Capital.
 
“Total Adjusted Valuation” means the adjusted valuation in US dollars as agreed by Investor and the Company in accordance with the Schedule ( Total Adjustment Valuation ), based on the 2014 audited accounts of Investor’s operating businesses in the PRC.
 
“Trading Market” means whichever of the New York Stock Exchange, the NYSE MKT, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market or OTC Bulletin Board on which the Common Stock is listed or quoted for trading on the date in question.
 
“Transaction Documents” shall have the meaning given to it in the Master Purchase Agreement.

 
“Voting and ROFR Agreement” means the Voting and ROFR Agreement to be entered between the Investor thereof, Mr. Ji Qi and various other parties.
 
12.                              Miscellaneous.
 
12.1                       Fees and Expenses.  Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.  The parties shall equally bear any transfer agent fees, stamp taxes and other taxes and duties levied in connection with the sale and issuance of the Purchased Shares and the Top-Up Shares.
 
12.2                       Entire Agreement.  The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.  For the avoidance of doubt, this Agreement should be read in conjunction with the Master Purchase Agreement and therefore: (i) a default under this Agreement would constitute a default under the Master Purchase Agreement; (ii) the termination of any of these two agreements prior to their consummation shall automatically cause the termination of the other agreement; and (iii) the existence of remedies, indemnities, etc. that may apply to situations covered by both agreements  shall not entitle any party to remedies pursuant to both agreements with respect to the same breach(es).
 
12.3                       Notices.  All notices, consents, approvals, waivers or other communications (each, a “ Notice ”) required or permitted shall be in writing and shall be deemed given when received by:  (i) delivery personally or by commercial messenger; (ii) via a recognized overnight courier service, or (iii) facsimile or email transmission; in each case so long as such Notice is addressed to the intended recipient thereof as set forth below:
 
If to the Company:                           China Lodging Group, Limited
c/o Offshore Codan Trust Company (Cayman) Limited
Cricket Square, Hutchins Drive
PO Box 2681
Grand Cayman KY1-1111
Cayman Islands
 
Email: jiqi@huazhu.com
 
Fax: +86 21 959536
 
Attention: Ji Qi
 
With a copy (which shall not constitute notice but is required) to:

 
Shearman & Sterling LLP
12th Floor East Tower, Twin Towers
B-12 Jianguomenwai Dajie
Beijing 100022 China
 
Email:  lee.edwards@shearman.com
 
Fax:  +86.10.59228081
 
Attention:  Lee Edwards, Esq.
 
If to the Investor:                                                                                               AAPC Hong Kong Limited
Room 803, 8th Floor, Axa Centre
151 Gloucester Road, Wanchai
Hong Kong
 
Email: kim.mooney@accor.com
 
Fax:
 
Attention: Kim Mooney
 
With a copy (which shall not constitute notice but is required) to:
 
Proskauer Rose LLP
Eleven Times Square
(Eighth Avenue & 41st Street)
New York, NY 10036-8299
 
Email:  jhorwitz@proskauer.com
 
Fax:  +1 212-969-2900
 
Attention:  Jeffrey A. Horwitz, Esq.
 
&
 
Proskauer Rose
17/F, Two Exchange Square
8 Connaught Place
Central, Hong Kong
 
Email: ytal@proskauer.com
 
Fax: +852-3410-8001

 
Attention: Yuval Tal, Esq.
 
Any party may change its address specified above by giving each party Notice of such change in accordance with this Clause 12.3 .  Any Notice shall be deemed given upon actual receipt (or refusal of receipt).
 
12.4                       Amendments; Waivers.  No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and the Investor, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought.  No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
 
12.5                       Construction.  The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
 
12.6                       Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns.  The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investor.  The Investor may assign its rights under this Agreement to any Person to whom the Investor assigns or transfers any Purchased Securities or Top-Up Shares, if any, in accordance with the terms of the Non-Competition Agreement, provided (i) such transferor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company after such assignment, (ii) the Company is furnished with written notice of (x) the name and address of such transferee or assignee and (y) the Purchased Securities or Top-Up Shares, if any, with respect to which such rights are being transferred or assigned, (iii) such transferee agrees in writing to be bound, with respect to the transferred Purchased Securities or Top-Up Shares, if any, by the provisions hereof and of the Non-Competition Agreement that apply to the Investor,  and (iv) such transfer shall have been made in accordance with the applicable requirements of this Agreement and of the Non-Competition Agreement and with all laws applicable thereto.
 
12.7                       No Third-Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.
 
12.8                       Governing Law and Jurisdiction.  This Agreement shall be governed by and construed in accordance with the Laws of Hong Kong, without regard to principles of conflicts of law thereunder.

 
12.9                       Arbitration.  In the event of any controversy or dispute between or among the Parties and any other persons executing this Agreement arising out of, relating to, or in connection with this Agreement, including any question regarding its existence, validity, or termination, and any question as to whether a particular dispute is arbitrable hereunder, the relevant parties shall attempt, promptly, diligently and in good faith, to resolve any such controversy or dispute by attending a meeting to discuss such dispute.  If the Parties are unable to resolve any such controversy or dispute within a reasonable time (but in no event exceeding sixty calendar days) of one Party giving notice in writing to the other requesting that amicable settlement be attempted, then either Party may require, by making a submission (the date of such submission, the “ Submission Date ”) to the Hong Kong International Arbitration Center (“ HKIAC ”) in Hong Kong that the controversy or dispute be finally resolved by binding arbitration administered by HKIAC in accordance with HKIAC Procedures for Arbitration in force at the date of this Agreement including such additions to the UNCITRAL Arbitration Rules as are therein contained and as amended below (the “Arbitration Rules”):
 
(i)                                    The arbitration proceedings shall be conducted in Hong Kong.
 
(ii)                                 The arbitration tribunal shall consist of three arbitrators, one appointed by each Party.
 
(iii)                              A third arbitrator shall be appointed by agreement between the Parties within thirty days of the Submission Date, and if such Parties fail to jointly appoint the third arbitrator he shall be appointed in accordance with the Arbitration Rules.
 
(iv)                             The arbitration proceedings shall be conducted in English.
 
(v)                                All costs of arbitration (including arbitration fees, costs of arbitrators and legal fees and disbursements) shall be borne by the losing Party, unless otherwise determined by the arbitration tribunal.
 
(vi)                             All arbitration awards shall be final and binding.
 
(vii)                          The Parties irrevocably waive any objection which they may have now or hereafter to the laying of the venue of any suit, action or proceedings in arbitration as is referred to this clause and any claim that any such proceedings have been brought in an inconvenient or inappropriate forum.
 
HKIAC shall have exclusive jurisdiction with regard to all claims arising under or relating to this Agreement.  Notwithstanding the foregoing, in the event that either Party desires to seek an emergency temporary restraining order and/or preliminary injunction, the sixty day mediation period above shall not apply, and said Party may, but shall not be required to, seek such provisional remedy in the courts of Hong Kong (and the parties irrevocably consent to the jurisdiction of such courts) or any other relevant jurisdiction in aid of the arbitration proceeding in order to prevent a continuing violation of the Agreement.

 
The Parties hereby waive in any legal proceedings concerning or arising out of any such arbitration, including without limitation proceedings to compel arbitration, stay litigation, issue interim measures of protection including attachments, issue an injunction prior to the constitution of the arbitral tribunal, recognize or enforce an arbitral award, or enforce a court judgment issued on an arbitral award (“ Ancillary Proceedings ”) any defense of lack of personal jurisdiction or forum non conveniens or other similar doctrine and further irrevocably agree that decision in arbitration as provided above shall be conclusive and binding upon the Parties and may be enforced in the courts of any jurisdiction.
 
All costs of arbitration or any Ancillary Proceedings (including arbitration fees, costs of arbitrators and legal fees and disbursements) shall be borne by the losing Party.
 
All arbitration awards shall be final and binding and may be enforced in the courts of any jurisdiction.  The Parties agree that, if enforcement of the award (following confirmation by a Hong Kong court) is sought in China, neither Party shall challenge the award or its enforceability in any court in China, if the award has been recognized by a Hong Kong court.
 
Each Party and any other person executing this Agreement hereby unconditionally and irrevocably:  (1) agrees that, should any legal action or arbitral proceeding be brought against it in relation to a dispute arising under or related to this agreement, no immunity (sovereign or otherwise) from such legal action or arbitral proceeding shall be claimed by or on behalf of itself and is hereby waived to the maximum extent permitted by law; (2) consents generally to the maximum extent permitted by law in respect of the enforcement of any order, judgment or arbitral award against it in any relevant proceedings, to the giving of any relief or the issue of any process in connection with such proceedings including, without limitation, to the maximum extent permitted by law, the making, enforcement or execution against or in respect of any property used for commercial activity whatsoever; and (3) expressly disavows and waives to the maximum extent permitted by law any right to claim sovereign immunity in connection with any proceedings to compel arbitration or any proceedings to enforce or execute upon any arbitral award arising under or related to this agreement.
 
12.10                Survival.  The representations and warranties contained herein shall survive the Closing for a period of one year following the Closing Date.
 
12.11                Execution.  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission or email attachment, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or email-attached signature page were an original thereof.
 
12.12                Severability.  If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and

 
provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.
 
12.13                Adjustments in Share Numbers.  In the event of any share split, subdivision, dividend or distribution payable in Purchased Shares and/or the Top-Up Shares (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly Purchased Shares and/or Top-Up Shares), combination or other similar recapitalization or event occurring after the date hereof, each reference in any Transaction Document to a number of shares shall be amended to appropriately account for such event.
 
12.14                Specific Performance.  The Company acknowledges and agrees that the Investor would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms and that any breach of this Agreement by the Company could not be adequately compensated in all cases by monetary damages alone.  Accordingly, in addition to any other right or remedy to which the Investor may be entitled, at law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.
 
12.15                Cross-Default. The Parties are entering into this Agreement in conjunction with the Master Purchase Agreement, and accordingly the Parties shall, as a term of this Agreement, comply with their respective obligations under the Master Purchase Agreement, and any breach by either Party thereunder shall be considered a breach of this Agreement. The Parties acknowledge that Section 9.06 ( Exclusive Remedies ) applies in respect of their rights and remedies in respect of any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement.

 
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
 
COMPANY
 
THE COMMON SEAL of
CHINA LODGING GROUP, LIMITED
was hereunto affixed in accordance with its
articles of association	)
)
)
)	 	 	Common Seal	
 	)	 	 	/s/ Qi Ji	
 	)	 	 	Name:Qi Ji	
 in the presence of:	 	 	 	Title:Chairman of the Board and CEO	
 	 	 	 	 	
Witness Signature:	/s/ Yuewu Rong	 	 	
 	 	 	
Name:	YUEWU RONG	 	 	
 	 	 	
Address:	2266 Hongqiao Road,	 	 	
 	200336 Shanghai China	 	 	
 	 	 	
Occupation:	Legal Director	 	 	

 

 
INVESTOR
 
THE COMMON SEAL of
AAPC HONG KONG LIMITED
was hereunto affixed in accordance with its
articles of association	)
)
)
)	 	 	Common Seal	
 	)	 	 	/s/ Kim Mooney	
 	)	 	 	Name:Kim Mooney	
 in the presence of:	 	 	 	Title:Director	
 	 	 	 	 	
Witness Signature:	/s/ Natta Charoennaew	 	 	
 	 	 	
Name:	Natta Charoennaew	 	 	
 	 	 	
Address:	Blk 203 Serangoon Central	 	 	
 	# 05-80 Singapore 550203	 	 	
 	 	 	
Occupation:	Legal Assistant	 	 	

 
SCHEDULE
 
TOTAL ADJUSTED VALUATION

Exhibit 8.1
 
List of Subsidiaries
 
Directly-Owned Subsidiaries:	
 	
Shanghai HanTing Hotel Management Group, Ltd. (PRC)	
HanTing Xingkong (Shanghai) Hotel Management Co., Ltd. (PRC)	
Yiju (Shanghai) Hotel Management Co., Ltd. (PRC)	
HanTing (Tianjin) Investment Consulting Co., Ltd. (PRC)	
China Lodging Holdings (HK) Limited (Hong Kong)	
China Lodging Holdings Singapore Pte. Ltd. (Singapore)	
 
Indirectly-Owned Subsidiaries:	
 	
1.	 	100% Owned Subsidiaries	
1.1	 	Shanghai HanTing Decoration and Engineering Co., Ltd.	
1.2	 	Shanghai Yiju Hotel Management Co., Ltd.	
1.3	 	Shanghai Aiting Hotel Management Co., Ltd.	
1.4	 	Shanghai Senting Hotel Management Co., Ltd.	
1.5	 	Shanghai Yuanting Hotel Management Co., Ltd.	
1.6	 	Shanghai Ningting Hotel Management Co., Ltd.	
1.7	 	Shanghai Guiting Hotel Management Co., Ltd.	
1.8	 	Shanghai Yiting Hotel Management Co., Ltd.	
1.9	 	Shanghai Songting Hotel Management Co., Ltd.	
1.10	 	Shanghai Xiting Hotel Management Co., Ltd.	
1.11	 	Shanghai Jiating Hotel Management Co., Ltd.	
1.12	 	Shanghai Hanhao Hotel Management Co., Ltd.	
1.13	 	Shanghai Yuanting Hotel Management Co., Ltd.	
1.14	 	Shanghai Yangting Hotel Management Co., Ltd.	
1.15	 	Shanghai Baoting Hotel Management Co., Ltd.	
1.16	 	Shanghai Yaogu Shangwu Hotel Management Co., Ltd.	
1.17	 	Shanghai Changting Hotel Management Co., Ltd.	
1.18	 	Shanghai Changting Hotel Management Co., Ltd.	
1.19	 	Shanghai Qinting Hotel Management Co., Ltd.	
1.20	 	Suzhou HanTing Hotel Management Co., Ltd.	
1.21	 	Suzhou Lishan Yatai Hotel Management Co., Ltd.	
1.22	 	Suzhou Yiting Hotel Management Co., Ltd.	
1.23	 	Beijing Beixie Hongyun Hotel Management Co., Ltd.	
1.24	 	Beijing Jiating Hotel Management Co., Ltd.	
1.25	 	Beijing Dongting Hotel Management Co., Ltd.	
1.26	 	Beijing Anting Hotel Management Co., Ltd.	
1.27	 	Beijing Yueting Hotel Management Co., Ltd.	

 
1.28	 	Hangzhou Senting Hotel Management Co., Ltd.	
1.29	 	Hangzhou Yishitan Investment and Management Co., Ltd.	
1.30	 	Hangzhou Qiuting Hotel Management Co., Ltd.	
1.31	 	Guangzhou Mengting Hotel Management Co., Ltd.	
1.32	 	Guangzhou Meiting Hotel Management Co., Ltd.	
1.33	 	Guangzhou Huiting Hotel Management Co., Ltd.	
1.34	 	Tianjin Xingting Hotel Management Co., Ltd.	
1.35	 	Tianjin HanTing Xingkong Hotel Management Co., Ltd.	
1.36	 	Tianjin Yiting Hotel Management Co., Ltd.	
1.37	 	Shenyang Maruika Hotel Management Co., Ltd.	
1.38	 	Shenyang Futing Hotel Management Co., Ltd.	
1.39	 	Wuhan HanTing Hotel Management Co., Ltd.	
1.40	 	Wuhan Changting Hotel Management Co., Ltd.	
1.41	 	Shenzhen HanTing Hotel Management Co., Ltd.	
1.42	 	Shenzhen Shenting Hotel Management Co., Ltd.	
1.43	 	Kunshan Lishan Hotel Management Co., Ltd.	
1.44	 	Ningbo Jiangdong Meijia City Hotel Co., Ltd.	
1.45	 	Yiwu HanTing Hotel Management Co., Ltd.	
1.46	 	Nanning HanTing Hotel Management Co., Ltd.	
1.47	 	Shanghai Hegao Hotel Management Co., Ltd.	
1.48	 	Xiamen Xiating Hotel Co., Ltd.	
1.49	 	Zibo HanTing Hotel Management Co., Ltd.	
1.50	 	Beijing HanTing Jiamei Hotel Management Co., Ltd.	
1.51	 	Xi’an HanTing Fukai Hotel Management Co., Ltd.	
1.52	 	Qingdao HanTing Hotel Management Co., Ltd.	
1.53	 	Shanghai Lanting Hotel Management Co., Ltd.	
1.54	 	Shanghai baiting Hotel Management Co., Ltd.	
1.55	 	Shanghai Jiangting Hotel Management Co., Ltd.	
1.56	 	Shanghai Zhenting Hotel Management Co., Ltd.	
1.57	 	Shanghai HanTing Guancheng Hotel Management Co., Ltd.	
1.58	 	Chengdu HanTing Hotel Management Co., Ltd.	
1.59	 	Shanghai Yiju Hotel Management Co., Ltd.	
1.60	 	Wuxi Yiju Hotel Management Co., Ltd.	
1.61	 	Hangzhou HanTing Kuaijie Hotel Management Co., Ltd.	
1.62	 	Beijing Yaoting Hotel Management Co., Ltd.	
1.63	 	Beijing Xiting Hotel Management Co., Ltd.	
1.64	 	Shanghai HanTing Service Apartment Hotel Management Co., Ltd.	
1.65	 	Shanghai Meiting Hotel Management Co., Ltd.	
1.66	 	Beijing HanTing Hotel Management Co., Ltd.	
1.67	 	Beijing HanTing Ruijing Hotel Management Co., Ltd.	
1.68	 	Shanghai Yuyi Hotel Management Co., Ltd.	
1.69	 	Shanghai Liansheng Hotel Management Co., Ltd.	
1.70	 	Shanghai Yate Zhongtan Hotel Management Co., Ltd.	

 
1.71	 	Shanghai Haoting Hotel Management Co., Ltd.	
1.72	 	Shanghai Luting Hotel Management Co., Ltd.	
1.73	 	Beijing Zhongting Hotel Management Co., Ltd.	
1.74	 	Taiyuan Xinting Hotel Management Co., Ltd.	
1.75	 	Nanchang Yinting Hotel Management Co., Ltd.	
1.76	 	Nantong Botong Hotel Co., Ltd.	
1.77	 	Taiyuan Ruiting Yingze Hotel Management Co., Ltd.	
1.78	 	Shanghai Yate Hotel Management Co., Ltd.	
1.79	 	Shanghai Rongting Hotel Management Co., Ltd.	
1.80	 	Shanghai Minting Hotel Management Co., Ltd.	
1.81	 	HanTing Technology (Suzhou) Co., Ltd.	
1.82	 	Hanting (Shanghai) Enterprise Management Co., Ltd.	
1.83	 	Xiamen Tingju Hotel Co., Ltd.	
1.84	 	Shanghai Pengting Hotel Management Co., Ltd.	
1.85	 	Nanjing Futing Hotel Management Co., Ltd.	
1.86	 	Suzhou Yongchangjiahe Hotel Management Co., Ltd.	
1.87	 	Hangzhou Anting Hotel Management Co., Ltd.	
1.88	 	Dalian Yuanyang Sikelai Hotel Co., Ltd.	
1.89	 	Guangzhou Chengting Hotel Management Co., Ltd.	
1.90	 	Guangzhou Xiuting Hotel Management Co., Ltd.	
1.91	 	Hangzhou Muting Hotel Management Co., Ltd.	
1.92	 	Shanghai Xinting Hotel Management Co., Ltd.	
1.93	 	Xiamen Jiangting Hotel Co., Ltd.	
1.94	 	Hanting Hesheng (Suzhou) Hotel Management Co., Ltd.	
1.95	 	Guangzhou Shangbin Hotel Co., Ltd.	
1.96	 	Baotoushi Anting Hotel Management Co., Ltd.	
1.97	 	Huazhu Hotel Management Co., Ltd.	
1.98	 	Starway Hotels (Hong Kong) Co., Ltd.	
1.99	 	Starway Hotels (Shanghai) Co., Ltd.	
1.100	 	Shanghai Yinting Hotel Management Co., Ltd.	
1.101	 	Xi’an Fengting Hotel Management Co., Ltd.	
1.102	 	Shanghai Lingting Hotel Management Co., Ltd.	
1.103	 	Xiamen Wuting Hotel Co., Ltd.	
1.104	 	Nanjing Ningru Hotel Management Co., Ltd.	
1.105	 	Beijing Duoting Hotel Management Co., Ltd.	
1.106	 	Wuhu Yinting Hotel Management Co., Ltd.	
1.107	 	Jiangsu Zhuke Information and Technology Co., Ltd.	
1.108	 	Mengguang Information and Technology (Shanghai) Co., Ltd.	
1.109	 	Shanghai Huiting Hotel Management Co., Ltd.	
1.110	 	Shanghai Xinting Hotel Management Co., Ltd.	
1.111	 	Shanghai Fanting Hotel Management Co., Ltd.	
1.112	 	Shanghai Qinting Hotel Management Co., Ltd.	
1.113	 	Shanghai Keting Hotel Management Co., Ltd.	

 
1.114	 	Shanghai Hongting Hotel Management Co., Ltd.	
1.115	 	Shanghai Shangting Hotel Management Co., Ltd.	
1.116	 	Wuxi Meixin Hotel Co., Ltd.	
1.117	 	Hangzhou Yilai Hotel Chain Co., Ltd.	
1.118	 	Hangzhou Maolu Yilai Hotel Co., Ltd.	
1.119	 	Hangzhou Yuejuan Yilai Hotel Co., Ltd.	
1.120	 	Hangzhou Yueli Yilai Hotel Co., Ltd.	
1.121	 	Hangzhou Yueting Yilai Hotel Co., Ltd.	
1.122	 	Hangzhou Qiandaohu Yilai Resort Co., Ltd.	
1.123	 	Hangzhou Yuexiu Yilai Hotel Co., Ltd.	
1.124	 	Jinan Hanting Hotel Management Co., Ltd.	
1.125	 	Kunming Xiting Hotel Management Co., Ltd.	
1.126	 	Shanghai Haoting Hotel Management Co., Ltd.	
1.127	 	Shanghai Hongxi Hotel Management Co., Ltd.	
1.128	 	Shanghai Tongji Hotel Management Co., Ltd.	
1.129	 	Hangzhou Ansheng Hotel Management Co., Ltd.	
1.130	 	Guangzhou Zhongting Quanji Hotel Management Co., Ltd.	
1.131	 	City Home Hotel Management Co., Ltd.	
1.132	 	Shanghai Huazhu Hanting Xiyue Electronic Commerce Co., Ltd.	
1.133	 	Huazhu Enterprise Management Co., Ltd.	
1.134	 	Shanghai Aiqu Enterprise Management Co., Ltd.	
1.135	 	Huazhu Investment (Shanghai) Co., Ltd.	
1.136	 	Shanghai Duting Hotel Management Co., Ltd.	
 	 	 	
2.	 	Majority-Owned Subsidiaries (all PRC companies)	
2.1	 	Beijing HanTing Shengshi Hotel Management Co., Ltd.	
 	 	- 80% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.2	 	Beijing HanTing Dongfang Hotel Management Co., Ltd.	
 	 	- 99% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.3	 	Hangzhou Hemei HanTing Hotel Management Co., Ltd.	
 	 	- 65% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.4	 	Hangzhou Heju HanTing Hotel Management Co., Ltd.	
 	 	- 65% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.5	 	Hangzhou Heting Hotel Management Co., Ltd.	
 	 	- 65% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.6	 	Shanghai Kailin Hotel Management Co., Ltd.	
 	 	- 65% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.7	 	Nantong HanTing Zhongcheng Hotel Co., Ltd.	
 	 	- 95% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.8	 	Chengdu HanTing Yangchen Hotel Management Co., Ltd.	
 	 	- 51% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.9	 	Suzhou Kangjia Shangwu Hotel Management Co., Ltd.	
 	 	- 51% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.10	 	Wuxi HanTing Hotel Management Co., Ltd.	
 	 	- 55% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.11	 	Taiyuan HanTing Jiangnan Hotel Management Co., Ltd.	
 	 	- 55% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.12	 	Shenzhen HanTing Shiji Hotel Management Co., Ltd.	
 	 	- 90% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.13	 	Changsha Changting Hotel Management Co., Ltd.	
 	 	- 51% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.14	 	Guilin Lishan Huiming Hotel Management Co., Ltd.	
 	 	- 79% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	

 
2.15	 	Shanghai HuiGu GangWan Hotel Management Co., Ltd.	
 	 	- 65% equity interests owned by HanTing Xingkong (Shanghai) Hotel Management Co., Ltd.	
2.16	 	Shanghai Huiting Hotel Management Co., Ltd.	
 	 	- 55.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.17	 	Shanghai Yuanting Hotel Management Co., Ltd.	
 	 	- 95.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.18	 	Xi’an Shengting Hotel Management Co., Ltd.	
 	 	- 99.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.19	 	Chongqing Yiting Hotel Management Co., Ltd.	
 	 	- 99.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.20	 	Xi’an Bangting Hotel Management Co., Ltd.	
 	 	- 99.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.21	 	Nanjing Leting Hotel Management Co., Ltd.	
 	 	- 80% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.22	 	Shanghai Suting Hotel Management Co., Ltd.	
 	 	- 99.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.23	 	Xianyang Dingcheng Hanting Hotel Co., Ltd.	
 	 	- 60.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.24	 	Urumqi Qiting Hotel management Co., Ltd.	
 	 	- 99.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.25	 	Urumqi Luting Hotel management Co., Ltd.	
 	 	- 99.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.26	 	Chengdu Changting Hotel management Co., Ltd.	
 	 	- 80.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.27	 	Chengdu Yvting Hotel management Co., Ltd.	
 	 	- 60.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.28	 	Baoding Lianting Hotel management Co., Ltd.	
 	 	- 99.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.29	 	Wuhushi Ronghe Hotel management Co., Ltd.	
 	 	- 99.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.30	 	Wuhu Jiangting Hotel management Co., Ltd.	
 	 	- 98.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	
2.31	 	Nanjing Yangting Hotel Management Co., Ltd.	
 	 	- 99.00% equity interests owned by Huazhu Hotel Management Co., Ltd.	
2.32	 	Changzhi Huating Hotel Management Co., Ltd.	
 	 	- 99.00% equity interests owned by Huazhu Hotel Management Co., Ltd.	
2.33	 	Xi’an Jvting Hotel Management Co., Ltd.	
 	 	- 90.00% equity interests owned by Huazhu Hotel Management Co., Ltd.	
2.34	 	Shanghai Moting Hotel Management Co., Ltd.	
 	 	- 51.00% equity interests owned by Huazhu Hotel Management Co., Ltd.	
2.35	 	Wenzhou Hanting Quanji Hotel Management Co., Ltd.	
 	 	- 98.00% equity interests owned by Huazhu Hotel Management Co., Ltd.	
2.36	 	Nanjing Starway Hotel Management Co., Ltd.	
 	 	- 95.00% equity interests owned by Starway Hotels (Shanghai) Co., Ltd.	
2.37	 	Xi’an Quanji Maoting Hotel Management Co., Ltd.	
 	 	- 51.00% equity interests owned by Huazhu Hotel Management Co., Ltd.	
2.38	 	Huazhu Xingshun (Suzhou) Tourism Investment Co., Ltd.	
 	 	- 55.00% equity interests owned by Huazhu Hotel Management Co., Ltd.	
2.39	 	Shenyang HanTing Yonglun Hotel Management Co., Ltd.	
 	 	- 60.00% equity interests owned by Shanghai HanTing Hotel Management Group, Ltd.	

Exhibit 12.1
 
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act
I, Qi Ji, certify that:
 
1.             I have reviewed this annual report on Form 20-F of China Lodging Group, Limited;
 
2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
4.             The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
 
(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)        Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)         Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)        Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
5.             The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
 
(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
 
Date: April 17, 2015
 
 	By:	/s/ Qi Ji	
 	 	Name:	Qi Ji	
 	 	Title:	Chief Executive Officer	

Exhibit 12.2
 
Certification Pursuant to
Section 302 of the Sarbanes-Oxley-Act of 2002
I, Min (Jenny) Zhang, certify that:
 
1.             I have reviewed this annual report on Form 20-F of China Lodging Group, Limited;
 
2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
4.             The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
 
(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)        Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)         Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)        Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
5.             The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
 
(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
 
Date: April 17, 2015

 	By:	/s/ Min (Jenny) Zhang	
 	 	Name:	Min (Jenny) Zhang	
 	 	Title:	Chief Financial Officer	

Exhibit 13.1
 
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
April 17, 2015
 
The certification set forth below is being submitted to the Securities and Exchange Commission in connection with the Annual Report on Form 20-F for the year ended December 31, 2014(the “Report”) of China Lodging Group, Limited (the “Company”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
Qi Ji, the Chief Executive Officer of the Company, and Min (Jenny) Zhang, the Chief Financial Officer of the Company, each certifies that, to the best of his or her knowledge:
 
1.             the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
 
2.             the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	 	/s/ Qi Ji	
 	 	Name:	Qi Ji	
 	 	Title:	Chief Executive Officer	
 	 	 	 	
 	 	/s/ Min (Jenny) Zhang	
 	 	Name:	Min (Jenny) Zhang	
 	 	Title:	Chief Financial Officer	

Exhibit 23.1
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the incorporation by reference in the Registration Statement 333-192295 on Form S-8 of our reports dated April 17, 2015, relating to the financial statements and financial statement schedules of China Lodging Group, Limited, and the effectiveness of China Lodging Group, Limited’s internal control over financial reporting, appearing in this Annual Report on Form 20-F of China Lodging Group, Limited for the year ended December 31, 2014.
 
/s/Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai, China
April 17, 2015