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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 20-F

 

(Mark one)

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

OR

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

For the fiscal year ended December 31, 2020

OR

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

For the transition period from                      to                      

OR

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

Date of event requiring this shell company report                     

Commission File Number: 001-31583

 

 

Nam Tai Property Inc.

(Exact name of registrant as specified in its charter)

 

British Virgin Islands

(Jurisdiction of incorporation or organization)

Nam Tai Estate, No. 2, Namtai Road, Gushu Community, Xixiang Township,

Baoan District, Shenzhen City 518000, Guangdong Province, People’s Republic of China

(Address of principal executive offices)

Raymond Wen, Board Secretary and Head of Investor Relations

Nam Tai Estate, No. 2, Namtai Road, Gushu Community, Xixiang Township,
Baoan District, Shenzhen City 518000, Guangdong Province, People’s Republic of China

 

Tel:(852) 3955-2809

Fax: (86755) 2747-2636

(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

 

Trading Symbol(s)

 ---

Name of each exchange on which registered

 

Common shares, $0.01 par value per share

NTP

New York Stock Exchange

 

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

None.
(Title of Class)

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

None.
(Title of Class)

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

As of December 31, 2020, there were 39,197,991 common shares of the registrant outstanding.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      Yes      No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.      Yes       No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes       No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No

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

Large accelerated

 

Accelerated filer

 

Non-accelerated filer 

Emerging growth company

 

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

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

U.S. GAAP  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  

Other  

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:      Item 17      Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).      Yes      No

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.       Yes      No

 

 

 


 

Table of Contents

 

NOTE REGARDING USE OF FORWARD LOOKING STATEMENTS

3

 

 

FINANCIAL STATEMENTS AND CURRENCY PRESENTATION

3

 

 

INTRODUCTION

3

 

 

PART I

4

 

 

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

4

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

4

ITEM 3.

KEY INFORMATION

4

 

A. Selected Financial Data

4

 

B. Capitalization and Indebtedness

7

 

C. Reasons for the Offer and Use of Proceeds

7

 

D. Risk Factors

7

ITEM 4.

INFORMATION ON THE COMPANY

25

 

A. History and Development of the Company

25

 

B. Business Overview

27

 

C. Organizational Structure

57

 

D. Property, Plants and Equipment

59

ITEM 4A.

UNRESOLVED STAFF COMMENTS

60

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

60

 

A. Operating Results

60

 

B. Liquidity and Capital Resources

67

 

C. Research and Development, Patents and licenses, etc.

69

 

D. Trend Information

69

 

E. Off-balance Sheet Arrangements

69

 

F. Tabular Disclosure of Contractual Obligations

69

 

G. Safe Harbor

70

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

70

 

A. Directors and Senior Management

70

 

B. Compensation

72

 

C. Board Practices

73

 

D. Employees

74

 

E. Share Ownership

75

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

75

 

A. Major Shareholders

75

 

B. Related Party Transactions

76

 

C. Interest of Experts and Counsel

77

ITEM 8.

FINANCIAL INFORMATION

77

 

A. Consolidated Statements and Other Financial Information

77

 

B. Significant Changes

79

ITEM 9.

THE OFFER AND LISTING

79

 

A. Offer and Listing Details

79

 

B. Plan of Distribution

79

 

C. Markets

79

 

D. Selling Shareholders

80

 

E. Dilution

80

 

F. Expenses of the Issue

80

ITEM 10.

ADDITIONAL INFORMATION

80

 

A. Share Capital

80

 

B. Memorandum and Articles of Association

80

 

C. Material Contracts

88

 

D. Exchange Controls

88

 

E. Taxation

88

 

F. Dividends and Paying Agents

93

 

G. Statement by Experts

93

 

H. Documents on Display

93

 

I. Subsidiary Information

93

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

93

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

94

 

 

1


PART II

95

 

 

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

95

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

95

ITEM 15.

CONTROLS AND PROCEDURES

95

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

96

ITEM 16.

RESERVED

97

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

97

ITEM 16B.

CODE OF ETHICS

97

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

97

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

98

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

98

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

98

ITEM 16G.

CORPORATE GOVERNANCE

98

ITEM 16H.

MINE SAFETY DISCLOSURE

98

 

 

 

PART III

99

 

 

 

ITEM 17.

FINANCIAL STATEMENTS

99

ITEM 18.

FINANCIAL STATEMENTS

99

 

 

 

Index to Consolidated Financial Statements

99

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-1

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

F-4

CONSOLIDATED BALANCE SHEETS

F-5

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS

F-7

ITEM 19.

EXHIBITS

 

 

 

 

2


 

 

NOTE REGARDING USE OF FORWARD LOOKING STATEMENTS

This Annual Report on Form 20-F (this “Report”) contains forward-looking statements. Words such as “aim”, “anticipate”, “aspire”, “assume”, “believe”, “consider”, “continue”, “envision”, “estimate”, “expect”, “forecast”, “going forward”, “intend”, “plan”, “potential”, “predict”, “project”, “propose”, “seek”, “target”, “can”, “could”, “may”, “might”, “will”, “would”, “shall”, “should”, and the negative forms of these words and other similar expressions are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, and the effects of future regulation and the effects of competition. We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business. These statements are subject to many important factors, certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Risk Factors” under Item 3. Key Information. We operate in an evolving environment. New risks emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in any forward-looking statement.

You should not place undue reliance on forward-looking statements, which reflect management’s view only as of the date of this Report. We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in management’s expectations. You should also carefully review the risk factors described in other documents we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”)

FINANCIAL STATEMENTS AND CURRENCY PRESENTATION

We prepare our consolidated financial statements in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) and publish our financial statements in U.S. dollars.

INTRODUCTION

Except where the context otherwise requires and for purposes of this Report only:

 

“we”, “us”, “our company”, “our”, the “Company” or “Nam Tai” refers to Nam Tai Property Inc. and, in the context of describing our operations, also includes our PRC operating companies;

 

“Board” or “Board of Directors” refers to our board of directors;

 

“common shares” or “shares” refer to our common shares, $0.01 par value per share;

 

“China” or “PRC” refers to the People’s Republic of China, excluding Taiwan, Hong Kong and Macao for purpose of this Report;

 

“Taiwan” refers to the Taiwan province of the People’s Republic of China;

 

“Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China;

 

“Macao” refers to the Macao Special Administrative Region of the People’s Republic of China; and

 

“HK$” or “Hong Kong dollars” refers to the legal currency of Hong Kong. “Renminbi”, “RMB” or “yuan” refers to the legal currency of China. “U.S. dollars”, “US$” or “$” refers to the legal currency of the United States.

 

3


 

 

PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.

KEY INFORMATION

A.

Selected Financial Data

The following table presents the selected consolidated financial information of our company. Our historical consolidated financial statements are prepared in accordance with U.S. GAAP and are presented in U.S. dollars. The following selected consolidated statements of comprehensive income (loss) income data for each of the three years ended December 31, 2020 and the consolidated balance sheet data as of December 31, 2019 and 2020 are derived from our consolidated financial statements and notes thereto included elsewhere in this Report. The selected consolidated statements of comprehensive (loss) income data for years ended December 31, 2016 and 2017 and the consolidated balance sheet data as of December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements not included in this Report. Our historical results do not necessarily indicate results to be expected in any future period. The following data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”.

4


 

Our Selected Consolidated Financial Information

 

 

 

Year ended December 31,

 

Consolidated statements of comprehensive (loss) income data:

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

(in thousands of U.S. dollars, except per share data)

 

Revenue

 

$

2,508

 

 

$

1,851

 

 

$

493

 

 

$

2,965

 

 

$

71,206

 

Cost of revenue

 

 

(740

)

 

 

 

 

 

(73

)

 

 

(1,356

)

 

 

(27,381

)

Gross profit

 

 

1,768

 

 

 

1,851

 

 

 

420

 

 

 

1,609

 

 

 

43,825

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

(8,359

)

 

 

(9,450

)

 

 

(20,402

)

 

 

(12,484

)

 

 

(15,923

)

Selling and marketing expenses

 

 

 

 

 

 

 

 

(813

)

 

 

(6,460

)

 

 

(6,998

)

Net (loss) income from operations

 

 

(6,591

)

 

 

(7,599

)

 

 

(20,795

)

 

 

(17,335

)

 

 

20,904

 

Other (expenses) income, net

 

 

(8,497

)

 

 

8,495

 

 

 

(714

)

 

 

(253

)

 

 

42

 

Interest income

 

 

5,554

 

 

 

7,621

 

 

 

5,601

 

 

 

2,357

 

 

 

1,326

 

Write off of demolished building

 

 

 

 

 

(4,573

)

 

 

(35

)

 

 

 

 

 

 

Loss on demolished building facilities

 

 

 

 

 

 

 

 

(4,074

)

 

 

 

 

 

 

Gain on disposal of property

 

 

 

 

 

 

 

 

6,763

 

 

 

 

 

 

 

(Loss) income before income tax

 

 

(9,534

)

 

 

3,944

 

 

 

(13,254

)

 

 

(15,231

)

 

 

22,272

 

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

 

 

2,040

 

 

 

(6,579

)

Consolidated net (loss) income

 

 

(9,534

)

 

 

3,944

 

 

 

(13,254

)

 

 

(13,191

)

 

 

15,693

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(7,736

)

 

 

6,311

 

 

 

(10,437

)

 

 

(3,136

)

 

 

13,597

 

Consolidated comprehensive (loss) income

 

 

(17,270

)

 

 

10,255

 

 

 

(23,691

)

 

 

(16,327

)

 

 

29,290

 

Weighted average number of shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36,673

 

 

 

36,807

 

 

 

37,826

 

 

 

38,331

 

 

 

39,012

 

Diluted

 

 

36,673

 

 

 

37,492

 

 

 

37,826

 

 

 

38,331

 

 

 

39,045

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) earnings per share

 

$

(0.26

)

 

$

0.11

 

 

$

(0.35

)

 

$

(0.34

)

 

$

0.40

 

Diluted net (loss) earnings per share

 

$

(0.26

)

 

$

0.11

 

 

$

(0.35

)

 

$

(0.34

)

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated balance sheet data:

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

 

(in thousands of U.S. dollars, except per share data)

 

Cash and cash equivalents

 

 

94,558

 

 

 

165,173

 

 

 

62,919

 

 

 

130,218

 

 

 

60,980

 

Short term investments

 

 

89,624

 

 

 

 

 

 

46,952

 

 

 

2,166

 

 

 

150,150

 

Working capital(1)

 

 

194,731

 

 

 

152,554

 

 

 

26,398

 

 

 

28,374

 

 

 

(56,184

)

Land use rights, property, plant and equipment, net

and real estate properties under development, net

 

 

41,514

 

 

 

89,436

 

 

 

199,052

 

 

 

277,635

 

 

 

338,753

 

Real estate properties held for sales type lease

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,558

 

Real estate properties held for lease, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

92,207

 

Total assets

 

 

248,801

 

 

 

262,077

 

 

 

318,107

 

 

 

430,410

 

 

 

701,210

 

Amount due to a shareholder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

146,869

 

Current portion of long term bank loans

 

 

 

 

 

 

 

 

 

 

 

2,081

 

 

 

122,883

 

Long term bank loans

 

 

 

 

 

 

 

 

 

 

 

93,861

 

 

 

 

Total shareholders’ equity

 

 

236,346

 

 

 

244,358

 

 

 

227,891

 

 

 

214,738

 

 

 

248,828

 

Common shares

 

 

364

 

 

 

376

 

 

 

382

 

 

 

386

 

 

 

392

 

Total dividend per share(2)

 

 

0.28

 

 

 

0.28

 

 

 

n/a

 

 

 

n/a

 

 

n/a

 

Total number of common shares issued

 

 

36,447

 

 

 

37,551

 

 

 

38,187

 

 

 

38,632

 

 

 

39,198

 

 

5


 

 

Notes:

(1)

Working Capital represents the excess of current assets over current liabilities.

(2)

We declared a quarterly dividend in 2016 and 2017, respectively. In the fourth quarter of 2018, following its review of our financial results for the nine months of 2018, our Board of Directors decided to suspend the payment of dividends, and no dividend has been declared since then. See “Item 8. Financial Information—A. Consolidated Statement and Other Financial Information—Dividends”.

 

 


6


 

 

Exchange Rate Information

Our financial statements and other financial data included in this annual report are presented in U.S. dollars. Our business and operations are primarily conducted in China through our PRC subsidiaries. The functional currency of our PRC subsidiaries is RMB. The financial statements of our PRC subsidiaries are translated into U.S. dollars using published exchange rates in China, based on (i) year-end exchange rates for assets and liabilities and (ii) average yearly exchange rates for revenues and expenses. Capital accounts are translated at historical exchange rates when the transactions occurred. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report (i) for assets and liabilities were made at a rate of RMB6.94, RMB6.52, RMB6.86  RMB6.98 and RMB6.52 to $1.00 for each of the financial years 2016, 2017, 2018, 2019 and 2020 respectively, and (ii) for revenue and expenses were made at a rate of RMB6.6340, RMB6.7770, RMB6.5974, RMB6.8829 and RMB6.8955, to $1.00 for each of the financial years 2016, 2017, 2018, 2019 and 2020, respectively. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in our shareholders’ equity. 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 at any particular rate.

The RMB is not freely convertible into foreign currency. 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. Since 2005, the People’s Bank of China, (the “PBOC”), has allowed the RMB to fluctuate within a narrow and managed band against a basket of foreign currencies according to market demand and supply conditions. The PBOC announces the RMB closing price each day and that rate serves as the mid-point of the next day’s trading band.

B.

Capitalization and Indebtedness

Not applicable.

C.

Reasons for the Offer and Use of Proceeds

Not applicable.

D.

Risk Factors

Investing in our company involves a high degree of risk. You should carefully consider the following risks, as well as other information contained in this annual report, before making an investment in our company. The risks discussed below could materially and adversely affect our business, prospects, financial condition, results of operations, cash flows, ability to pay dividends and the trading price of our common shares. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, prospects, financial condition, results of operations, cash flows and ability to pay dividends, and you may lose all or part of your investment.

Risks Related to Our Business

Our business could be materially and adversely affected as a result of shareholder activism, proxy contest and related litigation, including the current dispute with one of our shareholders.

Our business could be materially and adversely affected as a result of shareholder activism, proxy contest and related litigation.  We have been involved in an ongoing dispute with IsZo Capital LP (“IsZo”), one of our shareholders.  Following the legal proceedings instituted by IsZo in October 2020 against us and other parties in the High Court of Justice of the British Virgin Islands of the Eastern Caribbean Supreme Court (the “Court”), the Court handed down a judgment (the “Judgment”) on March 3, 2021, holding that the private placement previously announced by us on October 5, 2020 (the “Private Placement”) was void and should be set aside, and that we shall convene a special meeting of shareholders regarding the removal and election of directors as soon as possible.  For a discussion of our dispute with IsZo, see “—B. Business Overview—Recent Developments.” Although we have, as instructed by the Court, updated our register of members to remove all entries in respect of the Private Placement, and planned to convene a special meeting of shareholders to be held on April 26, 2021 (the “Special Meeting”) with respect to the resolutions proposed by IsZo to remove directors contested and elect new directors proposed, we have filed an appeal against the Judgment. There is no assurance that the appeal will be successful. The final outcome of the appeal could have a material adverse effect on our business, financial condition, results of operations and cash flows.

7


 

The ongoing dispute with IsZo has caused concern from our lending banks, local authorities and suppliers. After the Judgment was handed down, we received demand letters from four of our lending banks in China, making demand upon certain of our subsidiaries for payment in full of the amounts due under their loan agreements with our subsidiaries and restricting the remittance from the bank accounts of our subsidiaries held with the banks.  Although we have been negotiating with the lending banks, we cannot rule out the possibility that the lending banks may take further action to require payment of all or part of the loans under the relevant loan agreements and/or enforce all or any of the security for such loans in a short period of time, while local authorities may further scrutinize our applications for licenses, permits and certificates for development of real estate. In addition, some sub-contractors of the Nam Tai Inno Park project have issued demand letters. If our contractor does not pay these sub-contractors, the Company may be liable to them for construction fees.  On March 12, 2021, a group of around 150 workers of a sub-contractor of our main contractor (the “Contractor”) protested at the construction site of Nam Tai Technology Center and surrounded the facilities. The Contractor is demanding us to settle costs of RMB36.3 million ($5.6 million), which is deemed to be payable pursuant to the contract with the Contractor.  Due to our recent liquidity issues, the progress of the construction works for our projects have been adversely affected.  We are negotiating with the Contractor but there is no assurance that the dispute can be resolved in the near term.

Shareholder activism, proxy contest and related litigation have resulted, and are expected to continue to result in substantial costs to us and divert management’s and our Board’s attention and resources from our business.  Additionally, such shareholder activism and litigation could give rise to perceived uncertainties as to our future, materially and adversely affect our relationships with banks, suppliers and contractors, and make it more difficult to attract and retain qualified personnel. Also, we may incur significant legal fees and other expenses related to shareholder activism, proxy contest and related litigation. Our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any shareholder activism, proxy contest and related litigation. Our operations may encounter significant uncertainties, which could materially and adversely affect our business, financial condition, results of operations or cash flows, as well as lead to liquidity crises or even bankruptcy.

Failure to repay our debt timely, upon demand or comply with the restrictive covenants imposed by our loans could restrict future borrowings or cause all of our debt to become immediately due and payable, which could impair operations and adversely affect our results of operations and financial condition.

We have several loan agreements with commercial banks in China and may enter into new loan agreements with banks in and outside China. If we fail to repay the principal or interest when it becomes due or fail to comply with certain restrictive covenants in any of our loan agreements, we will be in default under the loan agreement, which may trigger cross-defaults in other loan agreements. Certain loan agreements contain covenants restricting our relevant PRC subsidiaries from (i) engaging in mergers, joint ventures, or restructurings, (ii) engaging in material investments, capital reduction, equity transfers, or transfer of material assets, (iii) substantially increasing our indebtedness, or (iv) distributing dividends without the relevant lender’s prior written consent, failing which we may be required to fully settle the outstanding amounts under the relevant loan agreements. Upon the occurrence of any material adverse change, as may be determined by the banks which affects or will affect our ability to repay the debt or the banks’ rights and interests, or if any cross-default occurs, these banks are entitled to accelerate payment of all or any part of the loan under the relevant loan agreements and/or to enforce all or any of the security for such loans.

Since the Judgment was handed down by the Court, we have received demand letters from four of our lending banks, making demand upon certain subsidiaries for payment in full of the amounts due under their loan agreements with our subsidiaries and restricting remittances from the bank accounts of our subsidiaries held with the banks. Although we have been negotiating with the lending banks, we cannot rule out the possibility that the lending banks may take further action to require payment of all or part of the loans under the relevant loan agreements and/or enforce all or any of the security for such loans in a short period of time. This could reduce our available funds at a time when we are experiencing difficulties generating sufficient funds from our operations or obtaining financing. Any default restricts our ability to obtain financing in the future, which could materially and adversely impact our financial condition and cash flows.

8


 

We have a liquidity issue, and we may be required to raise funds through one or several measures, including accelerating leasing and presale of current projects, raising debt which may impose upon us additional financial obligations, issuing equity securities, which could result in additional dilution to our shareholders, or sale of assets.

Besides negotiating with our lenders and other creditors, we are taking various measures to tackle the liquidity issue. We have instructed valuers to produce valuation reports on our major projects. We have also reached out to potential funders for providing urgent financings on a secured or non-secured basis. Other measures such as project sales and rights issue are also being considered.   However, there are significant uncertainties due to the governing and management of the Company pertaining to the Special Meeting. The appropriate course of actions will have to be decided by the Board and management subsequent to the meeting, while the current Board and management are committed to taking actions to preserve the best interests of all shareholders and explore options that will be able to be considered.  Based on the above premises, in the best estimate of the management, our financial statements for the year ended December 31, 2020 were prepared on a going concern basis.  We have projected the cash needs in the next twelve months to be $512 million.  The cash and cash equivalents on hand was approximately $91 million as of April 1, 2021, which cannot meet the cash needs in the next twelve months. The Company is evaluating several measures of financing, such as external financings, acceleration of the leasing of Nam Tai Inno Park, and presale of Nam Tai Technology Center and Nam Tai•Longxi, failing which rights issue and project disposal will also be considered. Currently, the Company intends to raise loans from financial institutions and potential funders to maintain its normal operations. However, the Company does not have any commitments to obtain financing and cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

We may require additional cash resources to address our liquidity issue, business plan and future developments, including any investments or acquisitions we may decide to pursue. The amount and timing of such additional financing needs will vary principally depending on the timing of our property developments, investments and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity, debt or convertible securities. Sales of additional equity, debt or convertible securities could result in additional dilution to our current shareholders. The incurrence of indebtedness could result in increased debt service obligations and may also result in operating and financing covenants that would restrict our operations, including our ability to pay dividends or redeem stock.

Furthermore, in October 2020, following notices from our lending banks expressing concern that substantial uncertainties may be cast upon our operations and management control in light of recent actions taken by IsZo, we completed a Private Placement, raising gross proceeds of approximately $171 million to address our liquidity issue. After the Judgment was handed down holding that the Private Placement was void and should be set aside and an injunction was granted restricting us from dealing with the proceeds raised from the Private Placement, we received a notice of arbitration (the “Notice”) from one of the investors who purchased our common shares in the Private Placement, seeking remedy to request us to repay such consideration.  The vast majority of the proceeds has been placed into an investment fund managed by Credit Suisse, which we were notified that it was terminated on March 4, 2021. Even though such fund is managed by Credit Suisse with underlying notes insured by insurance companies with a credit rating of at least “A” by Standard & Poor’s or “A2” by Moody’s, there is no assurance that the we can fully recover our proceeds and return the proceeds to the investors, in which case there may be addition dispute with investors which would have a material and adverse effect on our business, financial condition, results of operations or cash flows.

We are heavily dependent on China’s economy and the performance of the PRC real estate market, particularly in the Guangdong-Hong Kong-Macao Greater Bay Area (the “GBA”).

Our major real estate development, leasing and sales operations are located in China, particular in Shenzhen and the GBA. Compared with traditional homebuilders, we are more focused on the development of industrial land, and our current major target clients are enterprises. Therefore, our business prospects significantly depend on the performance of the general economy and the real estate market in China, particularly in the GBA.

As of January 31, 2021, we have five projects located in the GBA and two in the Yangtze River Delta Economic Zone, among which the development projects in Shenzhen and Dongguan, including Nam Tai Inno Park, Nam Tai Technology Center, Nam Tai Inno Valley and Nam Tai•Longxi, are most significant. We also intend to enter other regions and cities in China. In the event that general economic conditions in the cities and regions where we operate or intend to operate are not performing as expected, demand for office or commercial properties may decrease, which could adversely affect our business, operating results and financial position.

The real estate market in China is highly cyclical and supply and demand in the real estate market is affected by changes in economic, social and political, regulatory, environmental and other conditions beyond our control. We cannot assure you that there will not be an oversupply of properties in the GBA or other parts of China where we operate or intend to expand into. In the event of an oversupply of properties, property prices in the markets may decline. Any market downturn in the cities or regions where we operate could adversely affect our business, results of operations and financial condition.

9


 

We may not be able to obtain land reserves at commercially acceptable prices, or at all.

We derive our revenue principally from the sale and leasing of properties that we have developed. We must maintain or increase our land reserves in strategic locations in order to ensure sustainable business growth. Our ability to identify and acquire suitable development sites is subject to many different factors, some of which are beyond our control.

The supply of land in China is substantially controlled by the PRC government. Land supply policies adopted by the PRC government directly impact our ability to acquire land use rights for development. In recent years, the PRC government has implemented various measures to regulate the means by which property developers may obtain land. The PRC government also controls land supply through zoning, land usage regulations and other means. All these measures further intensify the competition for land in China among property developers. The implementation of these measures may increase land transfer prices and require property developers to maintain a higher level of working capital. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations on Real Estate Development and Management” for information on the regulatory procedures and restrictions relating to land acquisition in PRC.

In addition, we cannot assure you that the parcels of land we have acquired to date will appreciate, or that we will continue to be able to acquire land of sufficient size and with an appropriate scope of usage in desirable locations at commercially acceptable prices, or at all. If we fail to acquire sufficient land reserves in a timely manner and on acceptable terms, or at all, our business, results of operations, financial condition and prospects may be materially and adversely affected.

Our results of operations may vary significantly from period to period.

We derive the majority of our revenue from the sale and leasing of properties that we have developed. Our results of operations tend to fluctuate from period to period due to various factors including the overall schedule of our property development projects, the timing of the sale and leasing of our properties, the size of our land bank, our revenue recognition policies and changes in costs and expenses such as land acquisition and construction costs. The number of properties that we can develop or complete during any particular period is limited due to the size of our land bank, the substantial capital required for land acquisition and construction, as well as the development periods required before positive cash flows may be generated. At the same time, sales and leasing of real estate will be affected by the market conditions.

In addition, our projects under development including Nam Tai Inno Park and Nam Tai Technology Center are large scale and are developed in multiple phases over the course of several years. The selling or leasing prices of the office and commercial units in larger scale property developments tend to vary over time, which may impact our sales proceeds and rental income, and accordingly our revenues for any given period.

Our financial condition and results of operations may fluctuate significantly due to seasonality, and our quarterly financial results may not fully reflect the underlying performance of our business.

Our quarterly operating results have fluctuated in the past and will fluctuate in the future due to seasonality. We generally rent out a greater number of units during spring and fall. We typically experience a lower level of rental in the summer and winter months, especially around lunar year-end, when large number of workers return to their hometowns to celebrate the Chinese New Year. Rental generally picks up after the Chinese New Year when these workers return to work and factories re-open. As a result of these factors, our revenues may vary from quarter to quarter, and our annual results of operations may be difficult to predict based on a quarter-to-quarter comparison of our results of operations. The quarterly fluctuations in our revenues and results of operations could result in volatility and cause the price of our common shares to fall. As our revenues grow, these seasonal fluctuations may become more pronounced.

We may face intense competition from other developers.

The property industry in the PRC is highly competitive. In 2019 and 2020, the total floor area and the vacancy rate of office properties in Shenzhen and Shanghai increased while the rental rate declined. We are exposed to such risk and the possibility that property prices may fall significantly will adversely affect our revenue and profitability.

There has also been an increase in the number of competing projects in our proximity, which could intensify competition among property developers and force us to reduce prices or incur additional costs to make our properties more attractive. Moreover, as Shenzhen transforms from a labor-intensive electronic manufacturing hub to a research and innovation center, many factories located on industrial lands are being converted to technology parks similar to Nam Tai Inno Park, Nam Tai Technology Center and Nam Tai Inno Valley.

10


 

Some of our competitors have competitive advantages over us, including greater economies of scale, more well-known brands, new and different business models, lower costs, larger customer bases, more experience in real estate development and greater financial, marketing, technology, human resources, and other expertise and resources. Furthermore, property developers that are better capitalized than we are may be more competitive in acquiring land through the auction process. We cannot assure you that we will always be able to successfully compete against our competitors. In addition, competition among property developers may result in increased costs, shortage of raw materials, oversupply of properties, and difficulty in hiring or retaining qualified personnel, any of which may adversely affect our business, financial condition and results of operations.

Our business may be materially and adversely affected by government measures affecting China’s real estate sector, especially the industrial real estate sub-sector.

The real estate sector in China, especially the industrial real estate sub-sector is subject to government regulations, including measures intended to curtail rapid price increases and property speculation, as well as stabilize the cost of housing for enterprises. To achieve these objectives, the Chinese government tightened its real estate policies, implementing measures and policies intended to promote the healthy development of the real estate sector.

The regulations promulgated by the central and local governments may change from time to time to either stimulate or depress the real estate market, and it is difficult to foresee the timing or direction of regulatory changes. Since 2016, many local governments in first-tier and second-tier cities including Beijing, Shanghai, Shenzhen, Guangzhou and Tianjin have issued notices restricting the purchase of houses. The restrictive measures include, but are not limited to, an adjustment to the percentage of initial down payment required, more restrictive eligibility requirement imposed on purchasers and a limit on the maximum number of houses one may purchase. It is uncertain for how long these measures will remain in effect, and whether the central or local governments will further tighten their policies or adopt new measures that are less restrictive in the future.

In May 2018, the PRC Ministry of Housing and Urban-Rural Development (“MOHURD”) issued a circular (the “May Circular”) intended to increase the supply of property. The May Circular provided that banks strictly examine the mortgagor’s loan repayment capacity before granting any mortgages, enterprises use solely their own funds to purchase land (as opposed to borrowed funds), and that the source of such purchasing funds would be under stringent supervision.

In July 2018, the General Office of the People's Government of Shenzhen Municipality issued a circular (the “July Circular”) intended to further strengthen the regulation of and promote the steady and healthy development of the real estate market in Shenzhen. The July Circular included restrictions on the transfer of residences and commercial apartments built on land zoned as either residential, commercial, or mixed-use.

In July 2020, the Housing and Construction Bureau of Shenzhen Municipality issued a Notice on Further Promoting the Stable and Healthy Development of the Real Estate Market, in which stricter regulations were imposed on the qualifications to purchase houses, the calculation of the number of houses purchased by divorced persons, the online signing of mortgage contracts, and the disclosure of second-hand housing information.

On February 8, 2021, Shenzhen Housing and Construction Bureau issued a Notice on the Establishment of Release Mechanism on Second-hand Housing Transaction Reference Price. The notice prescribed that Shenzhen shall establish second-hand housing transaction reference price release mechanism which aims to promote the transparency of second-hand housing market, guide real estate brokerage agencies to issue listing prices reasonably, steer commercial banks to grant second-hand housing loans reasonably, prevent and control personal housing credit risk, and stabilize market expectations. Current second-hand housing market in Shenzhen has been struck by the notice.

On February 27, 2021, Dongguan Housing and Urban-Rural Construction Bureau, Municipal Natural Resources Bureau and other six departments jointly issued Notice on the Further Regulating the Real Estate Market Regulation, to firmly curb speculation and excessive price increases. Regulations in the notice include increase on ratio of initial down payment, strengthen the new housing record price guidance and others.

These measures and policies principally apply to residences and commercial apartments that are built on land zoned as residential, commercial or mixed-use. Our development project Nam Tai•Longxi may be affected., Nam Tai Inno Park, Nam Tai Technology Center and Nam Tai Inno Valley, are built on land zoned as industrial, so most of these measures and policies do not directly apply to the projects. However, these measures and policies may depress the market prices of the PRC and Shenzhen real estate properties, dissuade potential buyers from making purchases, reduce transaction volume, and cause a decline in average selling prices, any of which could affect the selling or rental prices we may charge.

11


 

MOHURD, National Development and Reform Commission (“NDRC”), Ministry of Public Security, China Quality Certification Center, the China Banking and Insurance Regulatory Commission and Cyberspace Administration of China also issued the Opinions on Rectifying and Regulating the Order of the Housing Rental Market (the Opinions”) in December 2019. The Opinions stipulated requirements for the management of lease registration and the control of rent financing business. Stricter control imposed on the leasing industry may increase our costs to comply with the requirements and adversely affect our business operations and financial position.

The Regulations on Urban Renewal of the Shenzhen Special Economic Zone (the "Renewal Regulations"), effective from March 1, 2021, stipulated that the land use rights assignment contract shall specify the urban renewal unit planning and include project implementation supervision agreement. In case of industrial projects, the developer shall also sign an industrial development supervision agreement with the competent authority to clarify the regulatory requirements. Any failure to comply with the regulatory requirements may result in penalty on the developer.

See “Item 4. Information on the Company—B. Business Overview—PRC Regulations on Real Estate Development and Management” for additional information.

In addition, we cannot assure you that the PRC or Shenzhen governments will not adopt new measures in the future that may result in lower growth in the real estate industry. Frequent changes in government policies may also create uncertainty that could discourage investment in real estate. If we fail to comply with these measures, we may face penalties or sanctions from the government. Our operation results and financial position may be significantly and adversely affected.

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

The global macroeconomic environment is facing challenges, including the global pandemic of the COVID-19, the production conflicts among major oil producers in the world, the economic slowdown in the Eurozone since 2014 and uncertainties over the impact of Brexit. The Chinese economy has shown slower growth compared to the previous decade since 2012 and the trend may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest in the Middle East, Europe and Africa, which have resulted in market volatility. There have also been concerns over the relationship between China and other countries, including surrounding Asian countries. Recent international trade disputes, including tariff actions announced by the United States, China and certain other countries, and the uncertainties created by such disputes may cause disruptions in the international flow of goods and services and may adversely affect the Chinese economy as well as global markets and economic conditions. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, financial condition, results of operations and prospects.

We may fail to obtain, or experience material delays in obtaining requisite licenses, certificates, permits or governmental approvals for our technology park development projects. As a result, our development plans, business, results of operations and financial condition may be materially and adversely affected.

Property development in the PRC, and in Shenzhen in particular, is highly regulated by the government and has long and complicated processes, which generally require a large amount of capital and involve numerous parties such as designers, material suppliers, contractors and subcontractors, and potential purchasers and tenants. At various stages of our development projects, we are required to obtain and maintain certain licenses, certificates, permits and governmental approvals, including but not limited to, qualification certificates, land use rights certificates, land use permits, construction planning permits, construction permits, pre-sale permits, construction acceptance certificates and property ownership certificates. Before government authorities issue any license, certificate or permit, we must satisfy certain specific conditions and requirements. We cannot assure you that we will not encounter material delays or difficulties in fulfilling the necessary conditions to obtain all necessary licenses, certificates or permits for our projects in a timely manner, or at all.

The site of Nam Tai Inno Valley is on industrial land within the designated industrial block lines. Pursuant to the Measures on Administration for the Industrial Block of Shenzhen promulgated by the Shenzhen Government, the government strictly controls the ratio of the site that can be re-designated from “M-1” to “M-0” and will need to approve the ratio. The re-designation ratio, floor area ratio and the gross floor area (“GFA”) of our Nam Tai Inno Valley are still subject to the approvals of the Shenzhen Government. We cannot assure you that the final GFA of Nam Tai Inno Valley as approved by the government will be the same as expected. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations on Real Estate Development and Management for more information.

12


 

The leasing model of the Nam Tai Inno Park project is relatively new and may not receive wide-scale acceptance.

The units in the Nam Tai Inno Park are offered for lease since we are not permitted to subdivide the title pursuant to our land use rights assignment agreement and its subsequent amendments in which the industrial land was zoned as M-1 with 50 years of land use rights from 2007. In our leasing model, lease terms can range from one year to up to the expiry of our land use rights. For short-term leases, the rent and management fees are collected monthly. For long-term leases, we also offer the lessees a leasing option where the total lease payment for the entire lease period is collected upfront, with management fees to be paid monthly.

Upfront lease payment for industrial properties is a relatively new leasing model that has not been widely adopted. Our cash flow could be enhanced significantly, and the stable demand of leases could be satisfied with the upfront payment option. We cannot assure you that the upfront payment arrangement will not be challenged or further regulated by the relevant governmental authorities. If new laws, regulations or rules are enacted to restrict or prohibit such arrangement, we will have to change our leasing model and may need to find alternative sources of capital. Failure to do so could adversely affect our business, financial condition and results of operations and cash flows.

We may not have adequate financing to fund our current or planned technology park developments.

Property development is capital intensive, and we need significant capital resources to fund our existing and future construction and development activities. PRC laws and regulations with respect to the property development sector impose stringent requirements on banks providing loans to property development enterprises, and we cannot assure you that the PRC government will not further tighten such restrictions. These restrictions may limit our ability and flexibility to use the financing we have at our disposal or to obtain bank credit to finance our technology park development project. We cannot assure you that we will be able to generate sufficient cash from our operations to meet our funding needs.

We may not successfully market Nam Tai Inno Park to our targeted clients.

We are current targeting companies in the AI, new technology and new material industries as potential tenants for the Nam Tai Inno Park. Given the large scope of the Nam Tai Inno Park, especially in the area where it is located, we cannot guarantee that we will achieve the ideal rental rate in a short period of time, and we may have to adjust our target tenants based on market demand. To better serve our tenants and attract target tenants, we will need to integrate multiple advanced network systems in the Nam Tai Inno Park to create an intelligent platform and provide a highly efficient, business-friendly environment. Moreover, target tenants of our technology parks may also make relocation decisions based on factors such as our ability to successfully attract a group of innovative businesses, availability of government subsidies and public or private financial supports, as well as a number of other external factors specific to their unique situations. If we fail to provide proper network integration, make available an intelligent platform, or clear paths for our target tenants to receive comprehensive support, these potential tenants may not choose our technology park.

We cannot guarantee our success in new investments.

Since the second half of 2019, we have started operating commercial and industrial properties owned by third parties, such as Nam Tai • Tang Xi Technology Park and Nam Tai • U-Creative Space (Lujiazui). We may face challenges in attracting tenants and catering to their needs, such as building a more competitive operation system and enhancing the efficiency of our sales and operation teams. We may also be subject to additional compliance requirements. If we fail to attract tenants successfully and reach a satisfactory rental rate, we may suffer a loss in the operation of these properties in its early stages.

In March 2020, we acquired a commercial and residential land parcel (No. 2020WR002), through a public auction, in Dongguan. We may invest in new real estate properties through bidding, acquisition and urban renewal in 2021 and will have additional capital needs for the acquisition of land use rights and the development, construction, and sale or lease of such properties. In addition, we may explore other investment opportunity depending on the market conditions.

As each investment is subject to various risk factors, we cannot guarantee its success. Failure to develop a given project successfully may adversely affect our revenue, earnings and cash flow.

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Increases in the rate of cancellations of leasing agreements could have an adverse effect on our business.

We have signed lease agreements with tenants for some of the units in Nam Tai Inno Park. In some cases, lessees may cancel the lease agreements for reasons such as failure for tenants to obtain necessary business approvals and certificate, changes in state and local laws and regulations, or the lessee’s inability to obtain financing, or our inability to complete and deliver the units as scheduled. If there is a downturn in the economy of China and the real estate market, or if mortgage financing becomes less available than expected, more lessees may cancel their lease agreements with us which would have an adverse effect on our business and results of operations.

We may be unable to complete our technology park development projects on time and within budget.

The progress and costs for a project in development can be adversely affected by many factors, including:

delays in obtaining necessary licenses, certificates, permits or approvals from government agencies or authorities;

shortage of materials, equipment, contractors and skilled labor or increased labor or raw material costs;

failure by our third-party contractors to comply with our designs, specifications or standards;

onsite labor disputes or work accidents;

natural catastrophes or adverse weather conditions, including strong winds, storms, floods, and earthquakes;

changes in government practices and policies, including reclamation of land for public works or facilities; and

other unforeseen problems or circumstances.

Any construction delays or failure to complete a project according to our planned specifications or budget may delay our lease sale schedule, which could adversely affect our revenues, cash flows and our reputation. We may also be penalized by the local authority if we fail to complete our projects on time. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations on Real Estate Development and Management” for information on the regulatory procedures and restrictions relating to delay of construction acceptance in PRC.

We may be required to write off our long-lived assets, which could result in an impairment charge that would adversely affect our operating results.

We plan to write off the existing buildings located in Nam Tai Inno Valley when they are demolished in preparation of re-construction. The valuation of our long-lived assets requires us to make assumptions about future income. Our assumptions are used to forecast future undiscounted cash flows. Given the volatile and uncertain nature of the current economic environment and uncertainties regarding the duration and severity of these conditions, forecasting future business is difficult and subject to modification. If actual market conditions differ or our forecasts change, we may be required to reassess long-lived assets and subsequently record an impairment charge. Any such charge relating to long-lived assets would adversely affect our operating results.

We might not be able to carry all our operating losses forward.

Our operating activities in the short term will consist principally of leasing and sale of properties. Certain operating losses may be carried forward as tax benefits in future years. If there are changes in the relevant PRC tax policy with respect to the real estate industry, we may not be able to carry all our operating losses forward and our forecasted profits in the future may also be affected.

We rely on the support of our key management members.

We have commenced certain strategic cooperation with Kaisa Group Holdings Limited (“Kaisa” or “Kaisa Group”), including hiring experienced real estate engineers and professionals from Kaisa to join us as officers and employees. Dr. Lai Ling Tam, a senior advisor at Kaisa, was appointed as the Director and Executive Chairman of our company while Mr. Jiabiao Wang was appointed as our chief executive officer. The strategic cooperation with Kaisa has also enabled the company to have access to financing resources, build the network with various suppliers and partners, increase its brand awareness and market influence. The services provided by these key management members are integral for our Company’s growth.

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In the event that we lose the services of any key management member, we may be unable to identify and recruit suitable successors from the market in a timely manner. Competition for management talent is intense in the property development sector in the PRC, especially in industrial property development where comprehensive industry knowledge and well-rounded abilities are essential. If we cannot attract and retain suitable talent, especially at senior management level, our business and ability to complete our projects on time may be adversely affected.

The interests of our major shareholders may not be aligned with the interests of our other shareholders.

As of March 15, 2021, our top three largest shareholders, namely Kaisa Group Holdings Limited, Mr. Peter R. Kellogg and IsZo Capital LP, beneficially owned approximately 56% of our common shares, collectively. If acting together, they may be able to control and substantially influence the outcome of all matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of their shares. These actions may be taken even if they are opposed by our other shareholders.  In addition, Kaisa also engages in the real estate business in GBA, China. We cannot assure you that Kaisa, the companies controlled by Kaisa or its affiliates will not engage in activities that may compete directly with our major development projects in Mainland China.

We face risks related to the outbreak of COVID-19 and other local and global public health emergencies, natural disasters and other catastrophic events.

Our business could be adversely affected by the effects of COVID-19—Corona Virus Disease, 2019 (COVID-19), avian influenza, severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, or other epidemics and outbreaks. Health or other government regulations adopted in response to such emergencies or epidemics, natural disasters such as earthquakes, tsunamis, storms, floods or hazardous air pollution, or other catastrophic events may require temporary suspension of part or all operations. Such a suspension could disrupt our business and adversely affect the results of our operations and our financial conditions. Moreover, these types of events could negatively impact the economy and the business of our tenants, which would in turn adversely impact our business and our results of operations and financial conditions.

The COVID-19 pandemic has spread worldwide, infecting millions of people and bringing adversely impact on economy. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. The COVID-19 outbreak in China has caused us to temporarily close our offices and project sites in early and mid-February 2020. In addition, many businesses and social activities in China have been severely disrupted, including those of our tenants, contractors and suppliers. We have experienced certain delays caused by some of our contractors and agreed to reduce the rent for certain of our tenants. Such disruptions have not had a material adverse effect on our business. Our business operation could also be disrupted if any of our employees or workers on our properties has contracted or is suspected of having contracted any contagious disease or condition, since it could require our employees and workers to be quarantined or our offices to be closed down and disinfected. Since April 2020, the outbreak of COIVD-19 has been under control in China, and work resumption has been taking place. However, given the uncertainties of the pandemic, we cannot assure you that we or our business partners or tenants will not experience further disruptions and the potential slowdown of China’s economy in 2021 and beyond and the changes in the outlook of the property market will not have a material adverse effect on our results of operations and financial condition. In addition, if there is any further outbreak, the commercial markets are likely to be distressed as short - to medium-term outlook may be unclear. Enterprises are also sensitive on leasing cost and cautious about relocating and expanding office space, which could reduce the demand on the office and commercial space of our projects and cause a significant negative impact on our operating results and financial condition. We are uncertain as to when the outbreak of COVID-19 will be contained worldwide and if the impact will be short-lived or long-lasting, accordingly, we cannot yet predict the extent to which the COVID-19 outbreak will ultimately affect our business, results of operations or financial condition.

Other natural disasters and catastrophic events, such as fires, floods, typhoons, earthquakes, power loss, telecommunications failures, wars, riots, terrorist attacks or similar events, could also cause severe disruption to our operations or to those of our contractors, suppliers or tenants, which could materially and adversely affect our results of operations and financial condition.

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We may be adversely affected by the performance of third-party contractors.

We rely on third-party contractors to provide various services, including design, pile setting, foundation digging, construction, equipment installation, interior decoration, and other works. Our principal third-party contractors carry out property construction and may subcontract various works to independent subcontractors. We endeavor to employ contractors with good reputations, strong track records, and adequate financial resources. We also adopt and follow our own quality control procedures and routinely monitor works performed by third-party contractors. However, we cannot assure you that all work performed by third-party contractors will meet our quality standard and that expensive and time-costly replacements or remedial actions may have to be deployed, delaying our project schedules. As we expand into new regional markets in China, we may not be able to recruit sufficient qualified contractors. Contractors may also undertake projects for other developers, engage in risky or unsound practices, or encounter financial and other difficulties, any of which may adversely affect their ability to complete their work for us on time and within budget.

Injuries or damages may arise from construction accidents.

Risks related to injuries or damages arising from construction accidents are inherent in our business. As a policy, we require and uphold high construction safety standards within our project construction teams, in line with those set by reputable industry organizations in China. We also endeavor to instill the highest applicable safety standards and ensure all contractor and subcontractor personnel comply with such safety standards through training, supervision and monitoring. However, we cannot assure you that there will not be any construction accidents or related third party claims for damages. We may also be subject to claims from customers or other third parties, resulting from the use of our properties. Any substantial accident or harm caused to third parties during the construction of our projects could damage our reputation and relationship with regulators and customers, and adversely affect our business operations.

We face litigation risks and regulatory disputes in the course of our business.

In the ordinary course of our business, claims and disputes involving project owners, customers, labor, contractors, suppliers, business partners and regulatory authorities may be brought against us and by us. Claims may be brought against us for alleged defective or incomplete work, liabilities for defective products, related personal injuries and death, damage to or destruction of property, breaches of warranty and late completion of the project, as well as claims relating to taxes, among others. Such claims could involve actual and liquidated damages. We may also engage in disputes with regulatory authorities on taxation and matters in connection with our business and operations. Negotiation and legal processes for claims and disputes may be lengthy and costly, and result in adverse impact on our business, financial condition and results of operations.

Damage to or other potential losses involving our assets and business may not be covered by insurance.

We maintain property and liability insurance policies with coverage features and insured limits that we believe are consistent with market practice in the property development sector in Shenzhen, China. Nonetheless, the scope of insurance coverage that we can obtain may be limited as we have to consider the commercial reasonableness of the insurance cost. There are also certain types of losses that are currently uninsurable in China. Our contractors may not be sufficiently insured themselves or have the financial ability to absorb any losses that arise with respect to our projects or settle any claims we may have against them.  We generally do not maintain any business disruption insurance or key-man insurance. As such, certain types of losses, generally of an unforeseen or catastrophic nature, such as those caused by the outbreak of COVID-19 or other infectious diseases, fires, natural disasters, terrorist acts, may not be sufficiently, or at all, covered by insurance. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial conditions and results of operations, could be materially and adversely affected.

We are subject to potential environmental liability.

We are subject to a variety of laws and regulations concerning the protection of health and the environment. Environmental laws and regulations that apply to any given development site vary significantly according to the site’s location, environmental condition, the present and former uses of the site and the nature of the adjoining properties. Compliance with environmental laws and regulations may result in delays, may cause us to incur substantial compliance and other costs and can prohibit or severely restrict project development activities. Although we have received environmental assessments by the local PRC environmental regulatory authorities that we are permitted to proceed with our projects, it is possible that these reviews did not reveal all environmental liabilities and the PRC environmental regulatory authorities could in the future curtail our operations. In addition, we also cannot assure you that the PRC government will not change the existing laws and regulations or impose additional or stricter laws or regulations, the compliance of which may cause us to incur significant capital expenditures.

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The property development business is subject to claims under statutory quality warranties.

Under PRC law, all property developers in the PRC must provide certain quality warranties for the properties they construct or sell. We will be required to provide these warranties to our tenants and customers. Generally, we receive quality warranties from our third-party contractors with respect to our development projects, which we are permitted to rely upon. If a significant number of claims were brought against us under our warranties and if we were unable to obtain reimbursement for such claims from our third-party contractors in a timely manner or at all, or if the money retained by us to cover our payment obligations under the quality warranties was not sufficient, we could incur significant expenses to resolve such claims or face delays in remedying the related defects, which could in turn harm our reputation, and materially adversely affect our business, financial condition and results of operations.

 

Risks Related to Regulatory Oversight

We may be classified as a passive foreign investment company for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. investors.

We are classified as a passive foreign investment company (a “PFIC”), for any taxable year if either: (a) at least 75% of our gross income is “passive income” for purposes of the PFIC rules or (b) at least 50% of our assets (determined on the basis of a quarterly average) is attributable to assets that produce or are held for the production of passive income.  Passive income for this purpose generally includes dividends, interest, royalties, rent and capital gains.  However, rents and gains derived in the active conduct of a trade or business in certain circumstances are considered active income.  In applying these tests, we are treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the equity interests.  

We believe we were likely a PFIC for the taxable year ending December 31, 2018 and maybe certain other taxable years preceding such taxable year. However, we believe we were not a PFIC for the taxable year ending December 31, 2019. Furthermore, based on, among other matters, the historic, current and anticipated composition of our income, assets and operations, and our market capitalization, we do not expect to be classified as a PFIC for the taxable year ending December 31, 2020 or in the foreseeable future.  However, whether we are classified as a PFIC is a factual determination that depends on, among other matters, the ownership and the composition of the income and assets, as well as the value of the assets (which may fluctuate with our market capitalization) of our group from time to time.  Moreover, the application of the PFIC rules with respect to us is unclear in certain respects.  The United States Internal Revenue Service (the “IRS”) or a court may disagree with our determinations, including the manner in which we determine the value of our assets and the percentage of our assets that are passive assets under the PFIC rules.  For example, based on the current and anticipated structure and operations of our group, as well as rules contained in recently finalized U.S. Treasury Regulations, we intend to treat certain rents and gains from any real property that we hold directly or that is held directly by our subsidiaries as active income.  The application of the rules addressing active rental income to our facts is complex, however, and it is possible that final U.S. Treasury Regulations may adversely change these rules or the IRS may not agree with our conclusions.  As a result, there can be no assurance that we will not be classified as a PFIC for the taxable year ending December 31, 2020 or for any future taxable year.  

If we are or become a PFIC for U.S. federal income tax purposes, U.S. investors may become subject to increased income tax liabilities and burdensome reporting requirements under U.S. federal income tax laws.  In particular, because we believe we were likely a PFIC prior to the taxable year ending December 31, 2019, for a U.S. investor who has held our common shares from the period during which we were considered a PFIC, we may continue to be treated as a PFIC even if we cease to be a PFIC unless such investor makes certain “deemed sale” election.  See “Item 10. Additional Information—E. Taxation—Certain U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

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Regulatory initiatives in the United States, such as the Dodd-Frank Act and the Sarbanes-Oxley Act have increased, and may continue to increase the time and costs of being a U.S. public company and any further changes would likely continue to increase our costs.

In the United States, changes in corporate governance practices due to the Dodd-Frank Act and the Sarbanes-Oxley Act, changes in the continued listing rules of the New York Stock Exchange (the “NYSE”) new accounting pronouncements and new regulatory legislation, rules or accounting changes have increased our cost of being a U.S. public company and may have an adverse impact on our future financial position and operating results. These regulatory changes and other legislative initiatives have made some activities more time-consuming and have increased financial compliance and administrative costs for public companies, including foreign private issuers like us. In addition, any future changes in regulatory legislation, rules or accounting may cause our legal and accounting costs to further increase. These new rules and regulations require increasing time commitments and resource commitments from our company, including from senior management. This increased cost could negatively impact our earnings and have a material adverse effect on our financial position or results of operations.

The BVI Economic Substance Act may affect our operations.

The British Virgin Islands has enacted the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “BVI Economic Substance Act”).  We are required to comply with the BVI Economic Substance Act.  As we are a British Virgin Islands company, compliance obligations include filing notifications and reports for the Company, which need to state whether we are carrying out any relevant activities and if we have satisfied economic substance tests to the extent required under the BVI Economic Substance Act.  As it is a new regime, it is anticipated that the BVI Economic Substance Act will evolve and be subject to further clarifications and amendments.  We may need to allocate additional resources to keep updated with these developments and may have to make changes to our operations in order to comply with all requirements under the BVI Economic Substance Law.  Failure to satisfy these requirements may subject us to penalties under the BVI Economic Substance Act.

It may be difficult to serve us with legal process or enforce judgments against our management or us.

We are a British Virgin Islands holding corporation with subsidiaries in Hong Kong and mainland China. Substantially, most of our assets are located in the PRC. In addition, most of our directors and executive officers reside within the PRC or Hong Kong, and substantially all of the assets of these persons are located within the PRC or Hong Kong. It may not be possible to affect service of process within the United States or elsewhere outside the PRC or Hong Kong upon our directors, or executive officers, including effecting service of process with respect to matters arising under United States federal securities laws or applicable state securities laws. The PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States and many other countries. As a result, recognition and enforcement in the PRC of judgments of a court in the United States or many other jurisdictions in relation to any matter, including securities laws, may be difficult or impossible. An original action may be brought against our assets and our subsidiaries, our directors and executive officers in the PRC only if the actions are not required to be arbitrated by PRC law and only if the facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC court may award civil liability, including monetary damages.

No treaty exists between Hong Kong or the British Virgin Islands and the United States providing for the reciprocal enforcement of foreign judgments. However, the courts of Hong Kong and the British Virgin Islands are generally prepared to accept a foreign judgment as evidence of a debt due. An action may then be commenced in Hong Kong or the British Virgin Islands for recovery of this debt. A Hong Kong or British Virgin Islands court will only accept a foreign judgment as evidence of a debt due if:

 

the judgment is for a liquidated amount in a civil matter;

 

the judgment is final and conclusive;

 

the judgment is not, directly or indirectly, for the payment of foreign taxes, penalties, fines or charges of a like nature (in this regard, a Hong Kong court is unlikely to accept a judgment for an amount obtained by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained by the person in whose favor the judgment was given);

 

the judgment was not obtained by actual or constructive fraud or duress;

 

the foreign court has taken jurisdiction on grounds that are recognized by the common law rules as to conflict of laws in Hong Kong or the British Virgin Islands;

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the proceedings in which the judgment was obtained were not contrary to natural justice (i.e. the concept of fair adjudication);

 

the proceedings in which the judgment was obtained, the judgment itself and the enforcement of the judgment are not contrary to the public policy of Hong Kong or the British Virgin Islands;

 

the person against whom the judgment is given is subject to the jurisdiction of a foreign court; and

 

the judgment is not on a claim for contribution in respect of damages awarded by a judgment, which fall under Section 7 of the Protection of Trading Interests Ordinance, Chapter 7 of the Laws of Hong Kong.

Enforcement of a foreign judgment in the PRC, Hong Kong or the British Virgin Islands may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement and moratorium, or similar laws relating to or affecting creditors’ rights and will be subject to a statutory limitation of time within which proceedings may be brought.

Our status as a foreign private issuer in the United States exempts us from certain reporting requirements under the Securities Exchange Act of 1934 and corporate governance standards of the NYSE, limiting the protections and information afforded to investors.

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934. As such, we are exempt from certain provisions applicable to U.S. domestic public companies, including:

 

the NYSE Listed Company Manual requiring that shareholder approval be obtained in certain circumstances prior to an issuance of securities to a related party or its affiliates and prior to an issuance of the securities which exceed certain thresholds;

 

the rules under the Securities Exchange Act of 1934 requiring the filing with the SEC of quarterly reports on Form 10-Q, current reports on Form 8-K and annual reports on Form 10-K;

 

the section of the Securities Exchange Act of 1934 regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

the section of the Securities Exchange Act of 1934 requiring directors, officers and 10% holders to file public reporting of their stock ownership and trading activities and imposing liability on insiders who profit from trades made in a short period of time;

 

the selective disclosure rules under Regulation FD restricting issuers from selectively disclosing material nonpublic information; and

 

the sections of the Securities Exchange Act of 1934 requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months).

In addition, because we are a foreign private issuer, certain corporate governance standards of the NYSE that apply to domestic companies may not be applicable to us. For information regarding how our corporate governance standards differ from those applied to U.S. domestic issuers, see the discussion under “NYSE listed Company Manual Disclosure” in “Item 6. Directors, Senior Management and Employees—C. Board Practices”. Because of these exemptions, investors may be afforded less protections than they otherwise would under the NYSE corporate governance requirements applicable to U.S. domestic issuers, or investors may not afford the same information generally available to investors holding shares in public companies organized in the United States or traded on the NYSE that are not foreign private issuers.

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Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

As an NYSE listed company, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, may not be subject to these restrictions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We cannot assure you, however, that our employees or other agents will not engage in such conduct for which we may be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial position and results of operations.

The consolidated financial statements included in the periodic reports we file with the SEC are prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to changes in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our financial position and results of operations.

Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors or fraud, or in informing management of all material information in a timely manner.

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and internal controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur simply because of error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, and its degree of compliance with certain policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur or may not be detected.

Risks Related to China

Changes in China’s economic, political or social conditions or government policies could have a material and adverse effect on our business and operations.

Most of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are affected by economic, political and social conditions in China generally and by continued economic growth in China as a whole.

China’s economy differs from the economies of most developed countries in many aspects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development. The Chinese government exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to certain industries or companies.

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The growth of China’s economy has been uneven both geographically and among various sectors of the economy. Some government measures may benefit the overall Chinese economy, such as policies supporting technology and innovation enterprises that may help increase the number and rental capacity of potential tenants in our technology parks. But some may have a negative effect on us, e.g. stricter control in leasing. However, any stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could adversely affect our results of operations and financial condition.

China’s economy has a direct impact on the business market, and our major customers -- enterprises. Our results and our financial position would be materially and adversely affected if business demand for offices or businesses declines in the face of slowing or stagnant economic growth in China.

Recent trade or investment policy announced by the United States administration against the PRC may adversely affect our business.

During the past year, the U.S. government imposed new, or increased existing, tariffs on goods exported from China and limited U.S. investment portfolio flows into China. For example, in May 2020, under pressure from U.S. administration officials, the independent Federal Retirement Thrift Investment Board suspended its implementation of plans to change the benchmark of one of its retirement asset funds to an international index that includes companies in emerging markets, including China. In November 2020, the U.S. administration issued U.S. Executive Order 13959, which was subsequently amended in January 2021, prohibiting investments by any U.S. persons in publicly traded securities of certain Chinese companies that are deemed owned or controlled by the Chinese military. As a result, in December 2020, and again in January 2021, the New York Stock Exchange, or the NYSE, announced plans to delist the American depositary shares of China Telecom, China Mobile and China Unicom to comply with this executive order. Geopolitical tensions between China and the United States may intensify and the United States may adopt even more drastic measures in the future. Global trade and investment between China and the United States continue to remain dynamic, and there are still many uncertainties.

The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively affecting China’s overall economic condition, which could have a negative impact on us as the vast majority of our operations are in China. Furthermore, imposition of tariffs could have a negative impact to our potential tenants and buyers, most of whom are technology companies and may be subject to the tariffs imposed by the two governments, which would indirectly impact our business and operating results.

Changes in government control of currency conversion and in PRC foreign exchange regulations may adversely affect our business operations.

The PRC government imposes controls on the convertibility between Renminbi and foreign currencies and the remittance of foreign exchange out of China. We receive substantially all our revenue in Renminbi. Our PRC subsidiaries must convert their Renminbi earnings into foreign currency before they may pay cash dividends to us or service their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current-account items may be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”), by complying with certain procedural requirements.

However, approval from appropriate governmental authorities is required when Renminbi is converted into foreign currencies and remitted out of China for capital-account transactions, such as the repatriation of equity investment in China and the repayment of the principal of loans denominated in foreign currencies. Such restrictions on foreign exchange transactions under capital accounts also affect our ability to finance our PRC subsidiaries and restrict our ability to act in response to changing market conditions.

As part of our assets and operating activities are denominated in Renminbi and part of those are denominated in U.S dollars, the translation of Renminbi-denominated assets to U.S. dollars for reporting purposes and the translation of U.S. dollar denominated assets to Renminbi for operation purposes can result in a foreign exchange loss. We expect to continue to see fluctuations in the reporting of foreign exchange loss/gain in the financial statements due to the movement of Renminbi against the U.S. dollar.

Uncertainties with respect to the PRC legal system could adversely affect us.

We conduct our business primarily through our subsidiaries and consolidated affiliated entities in China. Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.

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PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China for the past decades. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all. As a result, we may not be aware of our potential violation of these policies and rules. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

Changes to PRC tax laws and heightened efforts by the PRC tax authorities to increase revenues have subjected us to greater taxes.

Under PRC law before 2008, we were afforded a number of tax concessions by, and tax refunds from, PRC tax authorities on a substantial portion of our operations in China by reinvesting all or part of the profits attributable to our PRC manufacturing operations. However, on March 16, 2007, the PRC government enacted a unified enterprise income tax (“EIT”) law which became effective on January 1, 2008. Prior to the EIT, as a foreign invested enterprise (“FIE”), located in Shenzhen, China, our PRC subsidiaries enjoyed a national income tax rate of 15% and were exempted from the 3% local income tax. The preferential tax treatment given to our subsidiaries in the PRC as a result of reinvesting their profits earned in previous years in the PRC also expired on January 1, 2008. Under the EIT, most domestic enterprises and FIEs are subject to a single PRC EIT rate of 25% from 2012 onwards. For information on the EIT rates as announced by the PRC’s State Council for the transition period until year 2013, see the table in “Item 5. Operating and Financial Review and Prospects”.

We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various administrative regions and countries in which we have assets or conduct activities; however, our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law, which changes may have a retroactive effect. Pursuant to the Circular of the State Administration of Taxation on Issues Related to the End of Various Preferential Tax Policies for Foreign and Foreign-Invested Enterprises (STA [2008] No. 23) published by the State Administration of Taxation of the PRC) on February 27, 2008, an FIE may be required to pay back the taxes previously exempted as a result of the preferential tax treatment enjoyed in accordance with the Income Tax Law of People’s Republic of China for Foreign Investment Enterprises and Foreign Enterprise, if such FIE no longer meets the conditions for preferential tax treatment after 2008 due to a change in its nature of business or if the term of its business operation is determined to be less than ten years since its inception. As we have ceased production operations at all of our manufacturing facilities and are switching our core business to technology park management and development, our tax position may be subject to review by relevant tax authorities, and we cannot determine in advance whether, or to what extent a tax policy may require us to pay taxes or make payments in lieu of taxes.

We face uncertainty from the Circular on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises’ Share Transfer (“Circular 698”) released in December 2009 by the PRC State Administration of Taxation, effective January 1, 2008.

Where a foreign investor indirectly transfers equity interests in a PRC resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that PRC resident enterprise with the relevant information within 30 days of any such transfer.

Where a foreign investor indirectly transfers equity interests in a PRC resident enterprise through the abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the tax authority has the power to re-assess the nature of the equity transfer in accordance with the “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. “Income derived from equity transfers” as mentioned in Circular 698 refers to income derived by non-resident enterprises from direct or indirect transfers of equity interest in the PRC resident enterprises, excluding share in the PRC resident enterprises that are bought and sold openly on the stock exchange.

While the term “indirectly transfer” is not defined, we understand that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with the PRC. The relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the relevant country or jurisdiction, and the process of the disclosure to the tax authority in charge of that PRC resident enterprise. Meanwhile, there are no formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose”, which can be utilized by us to determine if our company complies with the Circular 698.

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Payment of dividends by our subsidiaries in the PRC to our subsidiaries outside of the PRC and to us, as the ultimate parent, is subject to restrictions under PRC law. If we determine to re-initiate our payment of dividends to our shareholders, the PRC tax law could force us to reduce the amount of dividends we have historically paid to our shareholders or possibly eliminate our ability to pay any dividends at all.

Under PRC law, dividends may only be paid out of distributable profits. Distributable profits with respect to our subsidiaries in the PRC refers to after-tax profits as determined in accordance with accounting principles and financial regulations applicable to PRC enterprises (“PRC GAAP”), less any recovery of accumulated losses and allocations to statutory funds we are required to make. Any distributable profits that are not distributed in a given year are retained and available for distribution in subsequent years. As a result, our subsidiaries in the PRC may not be able to pay a dividend in a given year. China’s tax authorities may also change the determination of income which would limit our PRC subsidiaries’ ability to pay dividends and make other distributions.

Prior to the EIT law, which became effective on January 1, 2008, PRC-organized companies were exempt from withholding taxes with respect to earnings distributions, or dividends, paid to shareholders of PRC companies outside the PRC. However, under the EIT, dividends payable to foreign investors that are derived from sources within the PRC are subject to income tax at a rate of 10% by way of withholding unless the foreign investors are companies incorporated in countries that have tax treaty agreements with the PRC, whereupon the rate agreed by both countries will be applied. For example, under the terms of the tax treaty between Hong Kong and the PRC, which became effective in December 2006, distributions from our PRC subsidiaries to our Hong Kong subsidiary are subject to a withholding tax at a rate ranging from 5% to 10%, depending on the extent of ownership of equity interests held by our Hong Kong subsidiary in our PRC enterprises. As a result of this PRC withholding tax, amounts available to us in earnings distributions from our PRC enterprises will be reduced. Since we derive most of our profits from our subsidiaries in the PRC, the reduction in amounts available for distribution from our PRC enterprises could, depending on the income generated by our PRC subsidiaries, impair our ability to issue dividends to our shareholders in the future.

Certain information contained in this Report is derived from unofficial publications.

Certain information in this Report relating to the growth of Shenzhen, Shanghai and other areas, including statistics relating to the growth of its gross domestic product (“GDP”), and industry sectors, is derived from various government publications. Such information may not be consistent with those prepared by other independent market research bodies within or outside of the mainland China. Such information also has not been independently verified by us.

The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board, and as such, our investors are deprived of the benefits of such inspection. In addition, the enactment of the Holding Foreign Companies Accountable Act and the adoption of any rules, legislations or other efforts to increase U.S. regulatory access to audit information could cause uncertainty and our securities listed on the NYSE could be delisted or prohibited from being traded “over-the-counter” if we are unable to meet the PCAOB requirement in time.

Our independent registered public accounting firm which issues the audit reports included in our annual reports filed with the SEC is an auditor of companies that are traded publicly in the United States. A firm registered with the Public Company Accounting Oversight Board (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 of the United States and professional standards. Our auditor is located in Hong Kong, China, a jurisdiction where the PCAOB is currently unable to conduct full inspections without the approval of the Chinese authorities.

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission (the “CSRC”), and the PRC Ministry of Finance, which established a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and China, respectively. The PCAOB continued to discuss with the CSRC, and the PRC Ministry of Finance on joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. stock exchanges.

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China.

On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risk that disclosures will be insufficient in many emerging markets, including China, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement again highlights the PCAOB’s inability to inspect audit work paper and practices of accounting firms in China with respect to their audit work of U.S. reporting companies.

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On June 4, 2020, the then U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets (the PWG”) to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch and by the SEC or the PCAOB on Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the U.S. On August 6, 2020, the PWG released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate (“NCJs”), the PWG recommends enhanced listing standards on U.S. stock exchanges. This would require, as a condition to continued exchange listing, the PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to the firm’s audit work papers and practices to conduct an appropriate inspection of the co-audit firm. There is currently no legal process under which such a co-audit may be performed in China. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies. The measures in the report are expected to be subject to the standard SEC rulemaking process before becoming effective. If we fail to meet the new listing standards before the deadline specified thereunder due to factors beyond our control, we could face possible de-listing from the NYSE deregistration from the SEC and/or other risks, which may materially and adversely affect the market price and liquidity of the ADSs, or effectively terminate, our ADS trading in the United States. There were recent media reports about the SEC’s proposed rulemaking in this regard. It is uncertain whether the PWG recommendations will be adopted, in whole or in part, and the impact of any new rule on us cannot be estimated at this time.

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. This lack of the PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in the common shares to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, on December 18, 2020, the Holding Foreign Companies Accountable Act was enacted. In essence, the act requires the SEC to prohibit securities of any foreign companies from being listed on U.S. securities exchanges or traded “over-the-counter” if a company retains a foreign accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. On March 24, 2021, the SEC adopted interim final amendments to implement the HFCA Act. A registrant will not be required to comply with the amendments until the SEC has identified it as having a non-inspection year. As of the date of this annual report, the SEC is seeking public comment on this identification process. Our independent registered public accounting firm is located in and organized under the laws of the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, and therefore our auditors are currently not inspected by the PCAOB. We are not required to comply with the amendments until the SEC has identified us as having a “non-inspection” year under a process to be subsequently established by the SEC. If we are identified by the SEC as a registrant that will have to comply with the interim final amendments, we will be subject to additional submission and disclosure requirements. For example, the amendments will require any identified registrant to submit documentation to the SEC establishing that the registrant is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant. The SEC is seeking public comment on these submission and disclosure requirements and plans to separately address implementation of the trading prohibitions in the HFCA Act in the future.

Risks Related to Our Common Shares

The market price of our shares will likely be subject to substantial price and volume fluctuations.

The markets for equity securities have been volatile and the price of our common shares has been, and could continue to be, subject to wide fluctuations in response to variations in our operating results, news announcements, trading volume, sales of common shares by our officers, directors and our principal shareholders, customers, suppliers or other publicly traded companies, general market trends both domestically and internationally, currency movements and interest rate fluctuations. Other events, such as the issuance of common shares upon the exercise of our outstanding stock options and the execution of private investment in public equity could also materially and adversely affect the prevailing market price of our common shares.

We have experienced low trading volume on our common shares in recent years. We cannot assure you that as an existing shareholder, you will be able to sell part of or all of your shares or increase your share position in a reasonable bid-ask spread due to the low turnover over.

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Further, the stock markets have often experienced extreme price and volume fluctuations that have affected the market prices of the equity securities of many companies and such fluctuations have been unrelated or disproportionate to the operating performance of such companies. These fluctuations may materially and adversely affect the market price of our common shares.

Shares owned by one of our major shareholders have been pledged.

On December 31, 2019, Kaisa Group, one of our major shareholders, filed a Schedule 13D/A reporting all of its shares of Nam Tai were pledged to an affiliate of Deutsche Bank, with Kaisa’s voting rights currently unaffected, as part of an amended credit facility with the bank. In the event that Kaisa triggers any default provision in the pledge arrangement, Deutsche Bank may have the right to appoint any person to be a receiver of the shares, transfer any or all of the charged securities or exercise the voting rights on the pledged shares without any prior notice. Accordingly, there may be significant adverse impacts on the operations and share price of Nam Tai.  

Future issuances of preference shares could materially and adversely affect the holders of our common shares or delay or prevent a change of control.

Our Board of Directors may amend our Memorandum and Articles of Association without shareholder approval to create, from time to time, and issue, one or more classes of preference shares (which are analogous to preferred stock of corporations organized in the United States). While we have never issued any preference shares and we have none outstanding, we could issue preference shares in the future. Future issuance of preference shares could materially and adversely affect the rights of the holders of our common shares, or delay or prevent a change of control.

There is an uncertainty whether we will declare dividend in the future.

We declared the payment of quarterly dividends of $0.02, $0.07 and $0.07 per share for 2016, 2017 and 2018, respectively. For 2019 and 2020, after considering a number of factors, our Board of Directors decided against declaring any future dividends or setting a dividend schedule. Whether future dividends will be declared again will depend on our future growth and earnings, of which there can be no assurance, and our cash flow needs for our business. Accordingly, there can be no assurance that cash dividends on our common shares will be declared again, what the amounts of such dividends will be or whether such dividends, once declared, will continue for any future period, or at all. For additional information on the dividends we declared for 2018 and historically, see “Item 8. Financial Information—Dividends”

ITEM 4.

INFORMATION ON THE COMPANY

A.

History and Development of the Company

We are a real estate developer and operator, and we mainly conduct business in mainland China. Our main land resources are located in the Guangdong-Hong Kong-Macao Greater Bay Area (“Greater Bay Area”) and Wuxi, China. The three plots in Shenzhen are being developed into Nam Tai Inno Park, Nam Tai Technology Center and Nam Tai Inno Valley, respectively. We plan to build these projects into landmark parks in the region, provide high-quality industrial spaces to our tenants, and supply comprehensive industrial services to corporate tenants through our full-chain industrial model. We will also strategically extend our business to the commercial and residential property market so as to grasp the arising opportunities. While economic growth prospects of China continue, we will seize opportunities in the Greater Bay Area and other first- and second-tier cities in China and continue to grow our business.

Formerly known as Nam Tai Electronics, Inc., we were founded in 1975 and engaged in the business of production and sales of electronic parts. In August 1987, we were reincorporated as a limited liability International Business Company under the laws of the British Virgin Islands, and re-registered as a business company under the British Virgin Islands Business Companies Act (amended) in 2007. In 1988, we successfully listed our shares on the NASDAQ. In 1990, we moved our electronics manufacturing facilities to China to take advantage of lower overhead costs, lower material costs and competitive labor rates available. In 2003, we transferred our shares to the NYSE under the symbol NTE. In 2007, we established facilities in Wuxi City, Jiangsu Province, and expanded our operations in the Yangtze River Delta region of China. In 2014, we underwent a strategic business transformation, exited the electronic manufacturing business, and transformed into a developer of technology parks. In April 2014, we announced the change of company name to Nam Tai Property Inc. with the symbol NTP.

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On July 12, 2017, Kaisa Group, in a private secondary transaction, purchased 6,504,355 common shares of our company from our former chairman, Mr. Ming Kown Koo, and his wife, at a price of $17.00 per share. Subsequently, Kaisa continued to purchase common shares of our company in the open market. Following Kaisa Group’s initial purchase in July 2017, we began certain strategic cooperation arrangements with Kaisa Group, including hiring a number of engineers and real estate professionals from Kaisa Group to join us as officers and employees.

In May 2018, Nam Tai Inno Park, our first technology park project, commenced its construction of main structure and it opened for lease in March 2019. Phase I of Nam Tai Inno City was re-named as Nam Tai Technology Center to better reflect its positioning as a premier future center for leading technology enterprises. In July 2019, we began the construction of main structure of our second project, Nam Tai Technology Center. In September and December 2019, through asset-light operation model, we rented an industrial building in Baoan District, Shenzhen, and some office spaces in Pudong New District, Shanghai, respectively, and transferred them to be Nam Tai • Tang Xi Technology Park and Nam Tai • U-Creative Space (Lujiazui), respectively. As of December 31, 2019, we had leased approximately 34,848 square meters of Inno Park to tenants.

In March 2020, we acquired a land parcel in Machong Town, Dongguan City, through public auction, and planned to develop it into high-quality residential and commercial properties under the name of Nam Tai • Longxi. In addition, in the same month, we filed the construction acceptance record for Nam Tai Inno Park. In May 2020, we obtained property ownership certificates for 11 buildings within Inno Park. In the second quarter of 2020, we submitted the application of urban renewal for Nam Tai Inno Valley to the City Renewal and Land Development Bureau of Shenzhen Baoan District. In the third quarter of 2020, we started to deliver units in Inno Park to our tenants and we had obtained the foundation work construction permit for Nam Tai • Longxi project.

In September 2020, our Board of Directors appointed Mr. Lai Ling Tam as our executive chairman of the Board, together with the appointments of Mr. Jiaobiao Wang as our chief executive officer and Mr. Wai Hang Wan as our chief financial officer. The appointment of new director and management members significantly strengthened our leadership team and set the stage for a new phase of growth and development for the Company. Mr. Wan resigned as our chief financial officer in March 2021. On March 18, 2021, the Board appointed Mr. Terrence Lu as Chief Financial Officer of the Company, succeeding Mr. Wan, the former Chief Financial Officer, effective immediately. Mr. Wan has been retained as an advisor to the Company.  Mr. Lu has extensive experience in overall strategic planning and investment and financing management.

As of December 31, 2020, approximately 600 dormitory units in Inno Park were delivered to our tenants. By the end of 2020, we have leased floor area of approximately 112,771 square meters in Inno Park to tenants, equal to an occupancy rate of 43%.

For a discussion of our ongoing dispute with IsZo, see “—B. Business Overview—Recent Developments.” We have engaged in discussions with IsZo regarding our ongoing dispute, including discussions between a member of our Board and a representative of IsZo.

Nam Tai Property Inc. is a company incorporated in the British Virgin Islands. Our corporate administrative matters are conducted in British Virgin Islands through our registered agent, Maples Corporate Services (BVI) Limited. Our registered office is located at Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands. Our principal executive offices are located at Nam Tai Estate, No. 2, Namtai Road, Gushu Community, Xixiang Township, Baoan District, Shenzhen City, Guangdong Province, People’s Republic of China and the telephone number at this address is + (86755) 2749-0666. Our agent for service of process in the United States is Cogency Global Inc., located at 10 E. 40th Street, 10th Floor, New York, NY 10016.

For a discussion of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures”.

The SEC maintains an Internet website that contains electronically submitted reports, proxy documents, statements and other information about our company at www.sec.gov. Our official website is https://www.namtai.com/. The information contained on our website does not form part of this annual report.  


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B.

Business Overview

The following is a brief outline of our main business development in 2020.

 

January

 

     We entered into a loan contract with Xiamen International Bank Co., Ltd. Zhuhai branch with a credit line of $15.76 million for the construction of Nam Tai Inno Park.

February

 

     Nam Tai Inno Park Industrial Showroom was temporarily closed due to the COVID-19 pandemic. The construction of Nam Tai Inno Park and Nam Tai Technology Center was suspended.

     A series of measures were adopted to prevent the spread of the pandemic, including responding promptly, making anti-pandemic plans, forming crisis management team, monitoring closing, cleaning and disinfecting.  

     We also organized an online live broadcast industrial event with the theme of "how do enterprises rescue themselves after the pandemic".

March

 

     We successfully filed the construction acceptance record for Nam Tai Inno Park.

     The Company accelerated the construction progress of Nam Tai Technology Center after resuming the construction.

     We strategically expanded to a fast-growing city near to Shenzhen by acquiring a commercial and residential land parcel in Machong Town, Dongguan City through public auction.

April

 

     We organized “Explore AI Unicorn – UBTECH” in Nam Tai Inno Park.

 

 

May

 

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     We obtained property ownership certificates for 11 buildings within Nam Tai Inno Park.

     We were awarded as “A Top 10 Industrial Investment Enterprise of 2019” by the Government of Guangming District, Shenzhen.

     Demystifying 5G: “Harbin Institute of Technology & Investors Joint Conference” and “AI Opens a New Era of Smart Manufacturing – Smart Manufacturing & Robotic Industry Sharing Salon” were held successfully in Nam Tai Inno Park.

     We obtained the real property ownership certificate - land use right for Nam Tai • Longxi.

 

 

(A Top 10 Industrial Investment Enterprise of 2019)

 

June

 

     We completed the renovation work for the operation service center of Nam Tai Inno Park, which will help us provide professional services to enterprise tenants.

     The construction work of Nam Tai Technology Center fully resumed.

     We submitted the application of urban renewal for Nam Tai Inno Valley to the Urban Renewal and Land Development Bureau of Shenzhen Baoan District.

     We obtained the land use permit for Nam Tai • Longxi and begun preparation works such as pile testing and earthwork excavation planning.

     As of June 30,2020, the occupancy rate of Nam Tai Inno Park increased to 23%.

July

 

     We obtained the foundation work construction permit for Nam Tai • Longxi.

     We held numerous industrial operation activities, such as Future Insights on Guangming District -- AI Technology Application Salon.

August

 

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     Towers A, B and C of Nam Tai Technology Center received Gold precertification under the Leadership in Energy and Environmental Design (LEED) v4 Building Design and Construction: Core and Shell Development (CS) rating system.

     Nam Tai was honored to receive the award of “Industrial Real Estate Model Enterprise of 2020” in the “20th Annual Conference of the Boao•21st Century Real Estate Forum” for its comprehensive capacities and brand influence.

     Nam Tai was awarded the “Top 20 2020 Guangdong-Hong Kong-Macau Greater Bay Area Excellent Industrial Park Operator” by CRIC research for its highly adaptable operational model and high-quality operational services.

     The China Mobile 5G Innovation Center, Integrated Circuit Industry Base and Integrated Circuit Industry Public Service Platform were established in Nam Tai Inno Park.

 

 

(LEED Gold Precertification of Towers A, B and C of Nam Tai Technology Center)

 

 

(Top 20 Guangdong-Hong Kong-Macau Greater Bay Area Excellent Industrial Park Operator for 2020)

September

 

     The grand opening of Nam Tai Inno Park was held at Guangming Community Sports Center, and we hosted a ceremony with corporate tenants and business partners.

     Tower 1 of Nam Tai Inno Park was delivered to tenants, and Towers 6 and 7 were completed and ready for delivery.

     The main structures of the basements of Towers A and C for Nam Tai Technology Center were completed.

 

 

(Grand opening of Nam Tai Inno Park)

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November

 

     Nam Tai was invited to participate in the 22 China Hi-Tech Fair in 2020.

     The Launch Ceremony for Nam Tai • U-Creative Space (Guangming) was successfully held in Nam Tai Inno Park.

 

 

(Launch Ceremony of Nam Tai • U-Creative Space)

December

 

     The Nam Tai Inno Park Branch of Guangming District Administration Service Center was officially opened, offering convenient, 24-hour service to enterprises and workers in the park and surrounding areas.

     We obtained the construction works planning permit and construction works commencement permit for Nam Tai • Longxi.

     As of December 30, 2020, the occupancy rate of Nam Tai Inno Park increased to 43%.

 

 

Nam Tai Inno Park Branch of Guangming District Administration Service Center

 

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Our Competitiveness

We believe that the competitiveness shown below sets us apart from other technology park operators:

 

Our main projects are located in Shenzhen, a fast growing city with technology focus. We hold several technology parks with gross floor area of approximately 700,000 square meters in Shenzhen. We acquired these land parcels at relatively low costs, which will help us achieve better profitability after these projects are completed. In addition, Shenzhen is one of the four first-tier cities in China with rapid economic growth and a dynamic technology industry, which will be beneficial to our leasing, sales and financing activities.

 

The management team has substantial experience in the Chinese real estate sector and excellent project management capabilities. Our management has extensive experience in corporate finance, real estate development, construction, sales and operations in China, especially in the Guangdong-Hong Kong-Macau Greater Bay Area. We completed the main structure of Nam Tai Inno Park in April 2019 and have started to deliver its units since the third quarter of 2020. As of the end of 2020, the occupancy rate of Inno Park increased to 43%. As our first technology park development project, Inno Park was awarded the Excellent Site for Safe Production and Civilized Construction of Shenzhen Construction Projects issued by Shenzhen Construction Industry Association in April 2019, affirming the quality of our technology park. In addition, we have commenced the construction of main structure of Nam Tai Technology Center and obtained the construction works commencement permit for Nam Tai • Longxi in December 2020. The aforesaid accomplishments reflect our excellent project management and execution capabilities.

 

We have a differentiated operational model by providing high quality and diversified industrial space for our customers. Our three major projects in Shenzhen are being developed to be the landmark technology parks in the region. In August 2020, Nam Tai Technology Center received LEED Gold precertification, acknowledging Nam Tai’s commitment to high-performance green building. In terms of industrial operation, Nam Tai is building a "3+4+5" full-chain industrial service model with the industrial resources accumulated over the years, aiming to assist the enterprises in technology consulting, capital raising, talent recruitment, policy consultancy, marketing and other aspects.

 

The strategic relationship with Kaisa Group supports our long-term development. Kaisa is one of the major shareholders and an important strategic partner of the Company. It is a nationally leading real estate developer with over 20 years of experience in the field of urban renewal development and has managed over 100 urban renewal projects with a set of mature renovation mode. In 2020, Kaisa was named "One of the 40 Most Respected Enterprises in Shenzhen". The strategic relationship with Kaisa not only brings us the valuable industry talents and increases our access to bank financing, but also help gain the confidence of the market in general, including from the customers and suppliers.

 

Our strategic focus on the Greater Bay Area provides us opportunities for value creation. The Central People’s Government of China and the State Council have issued the “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area” in February 2019 and “Opinions on Supporting Shenzhen to Build a Pilot Demonstration Area of Socialism with Chinese Characteristics” in August 2019, which outlined the direction for future development of the Greater Bay Area. In addition, the Commission of Shenzhen Municipality and General Office of Shenzhen Municipal People’s Government has issued the “Action Plan to Build Shenzhen Pilot Demonstration Area of Socialism with Chinese Characteristics (2019-2025)” (the “Action Plan”) in December 2019. The Action Plan proposes a new round of innovation-driven development strategies, including the comprehensive promotion of the Science City in Guangming District. It also aims to develop a new generation IT industry with a focus on 5G-related technologies. Our key development areas are in line with China’s development strategy, which will help us grasp the opportunities brought by the development of the country.

Macro Economy and Policy Overview

In 2020, despite the outbreak of the COVID-19 pandemic, the economy of China and its major, first-tier cities continued to grow. During this period, China's GDP reached around RMB101.6 trillion, an increase of 2.3% year-on-year, in which the information transmission, software and information technology services industry grew by 16.9%, and the industrial sector grew by 2.4%. With respect to cities, Shenzhen's regional GDP grew 3.1% year-on-year, while Shanghai’s grew by 1.7% year-on-year. Despite the economic downturn in the first half of 2020, per capita disposable income of Shenzhen residents rebounded in the latter half, reaching RMB64,878 by the end of 2020, an increase of 3.8% from the previous year.

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In the real estate market, the sales of commercial housing reached to approximately RMB17.4 trillion with a growth of 8.7% year-on year and the floor area of commercial housing sold amounted to 1.7609 billion square meters, an increase of 2.6% from the previous year. Among them, total residential housing floor area sold increased by 3.2%, total office floor area sold decreased by 10.4%, and total commercial building floor area sold fell by 8.7%. In 2020, the commercial housing by floor area in Shenzhen increased by 12.4% year-on-year to approximately 9.3 million square meters.

On October 30, 2020, the Government of Guangdong province and the Hong Kong Special Administrative Region Government jointly issued the 2020 Work Plan of the Framework Agreement on Hong Kong/Guangdong Co-operation (“2020 Work Plan”). The direction and objectives of the 2020 Work Plan continue to be the implementation of the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (“Outline Development Plan”) and the further deepening of the co-operation between Guangdong and Hong Kong. The 2020 Work Plan covers a diverse range of issues in eight major areas, including joint development of an international innovation and technology hub; fostering of co-operation in modern service industries (including co-operation in the financial services sector, professional services, cultural sector and tourism); forwarding co-operation in education, talents and youth matters; developing an internationalized business environment; joint development of a quality living circle, etc. It aims to further facilitate exchanges between residents of Guangdong and Hong Kong, improve the quality of living of the people, forward the development in innovation and technology, and strengthen co-operation in various sectors and industries, thereby contributing to the joint endeavor of Guangdong and Hong Kong to support and lead the Guangdong-Hong Kong-Macao Greater Bay Area (“Greater Bay Area”) in the economic development and opening up of the country.

On December 30, 2020, the Shenzhen Committee of the Communist Party’s Proposals for Formulating the 14th Five-Year Plan (2021-2025) and the 2035 Long-Range Objectives for National Economic and Social Development were released. During the period of the 14th Five-Year Plan, it is suggested that Shenzhen should deepen and improve the whole-process innovation ecological chain and build a technological and industrial innovation highland with global influence; speed up the construction of the Shenzhen metropolitan area and enhance the transportation network. It is planned to construct 1,000 kilometers subways, 1,000 kilometers light rail and intercity railways, and 1,000 kilometers high-speed roads in Shenzhen by 2025. It is also planned to make Shenzhen a world-class capital of innovation, entrepreneurship and creativity by 2035.

With respect to the technology industry, Shenzhen has incubated various strategic emerging industries in recent years. The Shenzhen Municipal Government issued the Implementation Plan on Further Accelerating the Development of Strategic Emerging Industries in December 2018, which proposed to focus on seven major strategic emerging industries including next-generation information technology, high-end equipment manufacturing, green low-carbon industry, biomedicine, digital economy, new materials and marine economy, adopting an innovation-driven development strategy,  fostering growth in industrial technology, and accelerating the formation of industrial clusters with international competitiveness. In 2020, the added value of Shenzhen’s strategic emerging industries was RMB1.0273 trillion, accounting for 37.1% of the regional GDP, a year-on-year increase of 3.1%. Among them, the added value of the new generation of information technology industry reached RMB489.345 billion, a yearly increase of 2.6%. The high-end equipment manufacturing industry was RMB138.069 billion, an increase of 1.8%. The green and low-carbon industry reached RMB122.704 billion, an increase of 6.2%; the marine economy industry grew to RMB42.776 billion, an increase of 2.4% and the biomedical industry was 40.825 billion yuan with a yearly increase of 24.4%.

Our Strategies

Our goal is to become a leading technology park developer and operator with the commitment for sustainable growth and bringing long-term benefits to shareholders. We plan to achieve our goals through the following strategies:

 

Build three existing projects in Shenzhen into high-quality technology parks, laying a good foundation for future sustainable development. Developing existing projects will help build our brand in China, obtain rental and sales income, and accumulate experience in construction and project management. We value the quality of construction and the ability to operate and service, maintain good relationships with tenants, and provide value-added services to achieve healthy long-term development.

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Expand resources on industrial property project and replicate successful experiences. Based on the transformation and development experience of Nam Tai Inno Park and Nam Tai Technology Center, together with the rich experience of our management, we will explore industrial property resources in the Greater Bay Area and other first and second-tier cities in China for redevelopment or renovation. In terms of redevelopment project, we plan to lock up projects with relatively small initial investment, obtain land use rights through primary land market development, and then proceed with development. Although the industrial property redevelopment project takes a relatively long time, generally for five years or more from the early negotiation to the sale or lease, it can provide us land resources in lower cost, which is conducive to our long-term development and income. The industrial property redevelopment and renovation model may include the following stages: 1) acquiring or leasing industrial property; 2) demolishing existing buildings and constructing or renovating existing buildings; 3) improving the project’s operations and enhancing rent or selling prices; 4) obtaining income through sales or leases or exit and cash out through other methods.

 

Steady expansion of commercial and residential development projects. We will also actively explore the investment opportunities for commercial and residential development projects in the Greater Bay Area and other first- and second-tier cities in China, and acquire land resources through bidding, auctioning, listing or acquisitions, etc. Compared with industrial property redevelopment projects, land for commercial and residential development projects can generally be developed quickly and pre-sale and cash collection can be carried out after certain conditions are met. This type of fast-turnover projects generally only take about 1-2 years from obtaining land use rights to pre-sale. Considering that there is oversupply in the Shenzhen office market, combining long-cycle industrial property redevelopment projects and fast-turnover short-cycle projects can make our operating and financial status more balanced, which is beneficial to the Company’s long-term development. The commercial and residential property development and sale model may include the following stages: 1) researching the target market and identifying investment opportunities; 2) acquiring land resources through bidding, auctioning, listing or acquisition; 3) obtaining project financing through construction loan or from other financial institutions; 4) planning and constructing through standardized procedures; 5) carrying out pre-sale and collecting cash, or holding some properties for leasing and operation.

 

Manage financial resources and control cost prudently. We are committed to ensuring the sufficient funding for the construction and operation of our projects through bank financing, cash from sales or leasing and internal funds. For new investment projects, we will conduct a comprehensive assessment in advance, including but not limited to project financing capabilities and estimated project profit margins. In addition, we will continue to optimize the cost structures by reviewing the project costs and enhancing project scale.

 

Focus on the Greater Bay Area and continue to explore differentiated products and services. The Chinese government’s development plan for the Greater Bay Area, together with the continuing economic growth and development of high-tech companies in this region, have brought us opportunities for growth. At the same time, the challenge of homogeneous products and services also exists in the region. We will continue to observe and research to explore differentiated products and business modes.

Our Customers/Tenants

Our source of revenue is primarily the rental income from property within PRC, excluding Hong Kong.

In 2018, our main customers were corporate tenants in Nam Tai Inno Valley located in Shenzhen, China and tenants of factories in Wuxi, China. In the second half of 2018, we renamed our existing buildings on site of Nam Tai Inno Valley to the current name, and subdivided and renovated our existing facilities for leases. In October 2018, we signed a lease agreement to lease the Wuxi factory to a third party. In 2019, our main customers were corporate tenants of three projects in Shenzhen, including Nam Tai Inno Park, Nam Tai Inno Valley and Nam Tai • Tang Xi Technology Park as well as one project in Wuxi. In 2020, our main customers were corporate and individual tenants of three projects in Shenzhen, including Nam Tai Inno Park, Nam Tai Inno Valley and Nam Tai • Tang Xi Technology Park in Shenzhen and one project in Shanghai: Nam Tai • U-Creative Space (Lujiazui), as well as tenants of factories in Wuxi.

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Our Projects and Properties

Project Progress

Nam Tai Inno Park

Nam Tai Inno Park is located in Fenghuang Community, Guangming District, Shenzhen, China. The project covers a land area of about 104,000 square meters and has a total floor area of about 332,000 square meters. After completion of the construction, the project will include five industrial R&D buildings, two industrial service centers and three supporting dormitory buildings. The project’s main target tenants are companies in the artificial intelligence, next-generation information technology and new materials industries. In terms of construction, in May 2018, we started the main structure of the project; in April 2019, its main structure was completed; in March 2020, we filed the completion acceptance and obtained the property ownership certificate for Nam Tai Inno Park in May 2020. As of December 31, 2020, the construction of Towers 1, 2, 4, 6, 7, 8, 9 and 10 was completed and Towers 1, 8 and 9 were delivered to customers. We expect to complete the construction works of the project in the second quarter of 2021. In terms of leasing, in March 2019, Nam Tai Inno Park was officially opened for lease. As of December 31, 2020, the leasable area was 264,337 square meters and the occupancy rate was 43%.

Nam Tai Technology Center

Nam Tai Technology Center, formerly known as “Phase I of Nam Tai Inno City”, is located in Namtai Road, Baoan District, Shenzhen, China. The project covers a land area of about 22,000 square meters and a total floor area of about 195,000 square meters. After completion of the construction, the project will include three industrial R&D buildings, one supporting dormitory building and some podium commercial spaces. The main target tenants of the project are artificial intelligence companies. In terms of construction, in the first half of 2018, we demolished the original factories on the land of Nam Tai Technology Center as the preliminary preparation for the construction; in December 2018, we commenced the construction of the project; in the second quarter of 2019, we renamed the first phase of Nam Tai Inno City as Nam Tai Technology Center so as to reflect its positioning as a leading technology center; in September 2019, we settled the payment of the additional land premium and obtained the Land Use Rights Certificate of Nam Tai Technology Center in November 2019. Currently, we are undergoing the construction stage of the main structure of its four towers.

Nam Tai Inno Valley

Nam Tai Inno Valley, formerly known as “Phase II of Nam Tai Inno City”, is located on Namtai Road, Baoan District, Shenzhen, China, adjacent to Nam Tai Technology Center. The project covers a land area of about 22,000 square meters and the existing building has a floor area of about 42,000 square meters. We submitted the urban renewal application for the project and plan to expand the floor area to approximately 170,000 square meters. At present, most of Nam Tai Inno Valley’s units have been leased to corporate tenants. In terms of project development, in the second half of 2018, we divided and refurbished the existing plants on the site of Nam Tai Inno Valley and rented it out until the project reaches length requirement of city renewal in Shenzhen. Before the redevelopment, we renamed the second phase of Nam Tai Inno City as Nam Tai Inno Valley in the second quarter of 2019. In terms of leasing, as of December 31, 2020, we had leased area of 29,561 square meters to tenants in Nam Tai Inno Valley and the occupancy rate was 77%.

The site of Nam Tai Inno Valley is on industrial land within the designated industrial block lines. Pursuant to the Measures on Administration for Industrial Block of Shenzhen promulgated by the Shenzhen Government, the government strictly controls the ratio of the site that can be re-designated from “M-1” to “M-0” and will need to approve the ratio. The re-designation ratio, floor area ratio and the gross floor area (“GFA”) of our Nam Tai Inno Valley are still subject to the approvals of the Shenzhen Government. We cannot ensure that the final GFA of Nam Tai Inno Valley as approved by the government will be the same as we expected.  See “Item 3 Key Information—D Risk Factors—Risks Related to our Business—We may fail to obtain, or experience material delays in obtaining requisite licenses, certificates, permits or governmental approvals for our technology park development projects. As a result, our development plans, business, results of operations and financial condition may be materially and adversely affected.”

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Nam Tai • Longxi

Nam Tai • Longxi is located in the central area of Machong town, Dongguan City, the project is bordered by the Machong river, Xinhua College of Sun Yat-sen University and the Machong Avenue with scenic landscape and a wealth of supporting facilities. The project covers a land area of about 34,000 square and a capacity floor area up to 84,408 square meters with a non-capacity area of 30,112 square meters of parking spaces. As a condition of acquiring the land parcel, we will need to build a commercial floor area of 20,000 square meters on the plot at the standard of roughcast house to be handed over to an institution designated by the Machong Town Government for free upon completion. We will build high-quality residential and commercial properties and provide potential customers with high-quality residential and commercial spaces. The project’s main target customers are the locals with rigid demand and demand to improve living conditions in Machong Town, Dongguan, as well as customers in the urban areas of Dongguan and Guangzhou.

In March 2020 and May 2020, we paid RMB120 million (equivalent to approximately $16.93 million) and RMB585.48 million (equivalent to approximately $82.58 million) for the land price respectively. On construction, in May 2020 and June 2020, we obtained the real property ownership certificate - land use right and land use permit respectively; in July 2020, we obtained the foundation work construction permit and started the foundation work; in December, we obtained the construction works planning permit and construction works commencement permit for Nam Tai • Longxi.

Wuxi Facilities

The Wuxi Facilities are located in Wuxi City, Jiangsu Province, China. The project covers a land area of 43,698 square meters. The plant has ceased production in 2013. In October 2018, we signed a lease agreement to lease the Wuxi Facilities to a third party. The lease period is 12 years, with a 10-month rent-free period from the date of delivery. The properties were delivered to the third party in February 2019.

Nam Tai • Tang Xi Technology Park

Nam Tai • Tang Xi Technology Park is located in Baoan District, Shenzhen. In September 2019, we signed a lease agreement with a third-party for a lease period of 9.6 years, by which we rented an industrial building with contracted area of approximately 7,586 square meters. The building was converted to be a technology park which targeted enterprise tenants in industries such as light production, intelligent product production and assembly, and intelligent management services. We started to optimize and renovate the project in September 2019, and began leasing in the fourth quarter of 2019. As of December 31, 2020, the occupancy rate reached 78%.

Nam Tai • U-Creative Space (Lujiazui)

Nam Tai • U-Creative Space (Lujiazui) is located in Lanqiao International Building, Century Avenue, Pudong New District, Shanghai. In December 2019, we signed a lease contract with a third party to rent units in 3,981 square meters, and the lease period is 9 years. Its target tenants are finance, design, consulting, advertising, and technology companies. After the renovation work for the spaces in the first quarter of 2020, the project was open for lease. As of December 31, 2020, the occupancy rate was 70%.

Recent Developments

Dispute with IsZo

On May 27, 2020, IsZo filed a Schedule 13D, disclosing its intent to remove five of the seven then existing Board members for the election of its control-slate of nominees to the Board. On the same day, IsZo released an open letter to our shareholders, in which it commented on the composition of the Board, our performance and relationship with Kaisa Group.

On June 5, 2020, at our 2020 Annual Meeting of Shareholders, all seven of the then existing directors were re-elected, reflecting shareholders’ trust and support for the Board. The shareholders decided not to elect one new nominee to the Board, keeping the Board’s composition consistent.

On July 20, 2020, IsZo issued a letter to our shareholders seeking support to convene a shareholders meeting in order (i) to remove a majority of our directors and any new director(s) appointed by the Board since the conclusion of our 2020 Annual Meeting of Shareholders, and (ii) to appoint a control slate of six individuals nominated by IsZo as our directors.  On the same day, IsZo and its relevant reporting persons filed a Schedule 13D noting the aforementioned intent.

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In late September of 2020, our lending banks notified us that substantial uncertainties may be cast upon our operations and management control in light of recent actions taken by IsZo. If the Board was to lose its relationship with Kaisa Group, which may be the case if IsZo’s control slate of nominees were elected to the Board, we would run the risk of loans being canceled, consequently leading to significant liquidity issues with our operations and construction works. Furthermore, the banks warned at the time that the requisition notice and further actions relating to a potential change in control pursued by IsZo could trigger an early repayment of outstanding loans demanded by the banks under relevant loan covenants.

By the end of September 2020, after negotiation with one of our lending banks, we made early repayment of $29 million to such lending bank.

On October 5, 2020, we entered into a Purchase Agreement with Greater Sail Ltd. (“Greater Sail”), a wholly owned subsidiary of Kaisa Group, and West Ridge Investment Company Limited (“West Ridge”), an affiliate of a large-scale integrated financial group based in Hong Kong, pursuant to which we issued and sold to Greater Sail and West Ridge 16,051,219 and 2,603,366 of our common shares, respectively, par value $0.01 per share at a price of $9.15 per share in the Private Placement. The Private Placement yielded net proceeds of approximately $171 million.

On October 13, 2020, IsZo commenced legal proceedings against us, Greater Sail and West Ridge, in the High Court of Justice of the British Virgin Islands of the Eastern Caribbean Supreme Court (the “Proceedings”). IsZo sought orders from the Court that, among other things, the Private Placement was invalid and should be set aside, and the Company should hold the Special Meeting as per the requisition to remove and elect directors to the Company's Board.

In November 2020, after rounds of negotiation with another lending bank, Bank of China, which raised their concerns again following commencement of the Proceedings, we agreed to make early repayment of approximately $43.5 million to such bank in three equal installments, by the end of December 2020, March 2021 and May 2021. In December 2020, the Company repaid $14.5 million to Bank of China.

On March 3, 2021, the Court handed down the Judgment holding that the Private Placement was void and should be set aside, and that we shall convene a Special Meeting of shareholders regarding the removal and election of directors as soon as practicable. Subsequently, we updated our register of members to remove all entries in respect of the Private Placement, and the Special Meeting has been determined to be held on April 26, 2021.

The Court has also imposed on us an injunctive order that, until the expiry of a period of 7 days from the declaration of the results of the Special Meeting, we shall not, among other things, dispose, encumber or otherwise deal with the monies and assets we received from the Private Placement.

On April 6, 2021, the Company filed a Notice of Appeal (the Appeal”) along with an application for an order staying the Judgment (the Stay Application”).  We appealed on the basis that the Judgement discloses a number of significant errors and, in particular, a demonstrable failure to take account of important evidence. The dates for hearing the Stay Application and the Appeal have not yet been fixed.

In accordance with our Articles of Association and the order of the Court, we have notified shareholders that the Special Meeting will be held virtually on April 26, 2021 at 10 a.m. Eastern Time.  Due to the continuing public health implications of the COVID-19 pandemic and our desire to promote the health and welfare of our shareholders, the Special Meeting will be held exclusively online via a live interactive webcast on the internet.

On March 16, 2021, a member of the Board spoke with a representative of IsZo to provide an update of our situation based on publicly available information, to express a willingness of the Board to work constructively with IsZo and to extend an invitation for the IsZo representative to meet with the Executive Chairman of the Board.

We continue in good faith to seek an agreed resolution of these matters and take steps to safeguard the interests of all shareholders. As of the date of this annual report, however, we have not reached any settlement with IsZo or other relevant parties.

For more details, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings.”

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Demand Letters

Following the Judgment, our subsidiaries received demand letters from four lending banks, namely Bank of China, Bank of Beijing, Xiamen International Bank and the Industrial Bank Co., Ltd., Shenzhen Branch (the “Lending Banks”), demanding accelerated repayment of outstanding principal and interest within three to five days upon receiving the demand letters, of approximately RMB621.8 million ($96.1 million), RMB44.9 million ($6.9 million), RMB103.4 million ($15.9 million) and RMB27.5 million ($4.23 million), respectively (the “Demanded Repayments”). In the demand letters, the Lending Banks expressed concerns over the uncertainty of our ownership and the upcoming election of directors relating to our recent litigation with IsZo.

Following the issuance of the demand letters, the Lending Banks restricted remittances from the bank accounts of our subsidiaries held at the Lending Banks.

We do not have sufficient cash to repay the Demanded Repayments in full or substantially. We are negotiating with the Lending banks and seeking alternative sources of financing.

Arbitration Notice

On March 12, 2021, we received the Notice from Greater Sail pursuant to the Purchase Agreement according to which we issued and sold 16,051,219 common shares of the Company to Greater Sail for US$146.9 million. However, as a result of the Judgment handed down on March 3, 2021, an injunction order was granted restricting us from dealing with the consideration paid by Greater Sail.  In the Notice, Greater Sail seeks an order requiring us to repay such consideration.

We have placed the vast majority of the proceeds from the Private Placement into an investment fund managed by Credit Suisse with underlying notes insured by insurance companies with a credit rating of at least A by Standard & Poor’s or A2 by Moody’s. The fund was terminated on March 4, 2021 and will be liquidated due to some of the fund’s assets being subject to considerable valuation uncertainty and reduced availability of insurance coverage for new investments. We have been notified by the fund that the liquidation proceeds will be repaid in installments.

Construction Works

On March 12, 2021, a group of around 150 workers of a sub-contractor of our major contractor (the “Contractor”) protested at the construction site of Nam Tai Technology Center and surrounded the facilities. The Contractor is demanding us to settle costs of around RMB36.3 million ($5.6 million) which is deemed to be payable pursuant to the contract with the Contractor.

Due to our recent liquidity issues, the progress of the construction works for our projects have been adversely affected. We are negotiating with the Contractor.

Going Concern

Besides negotiating with our lenders and other creditors, we are taking various measures to tackle the liquidity issue. We have instructed valuers to produce valuation reports on our major projects. We have also reached out to potential funders for providing urgent financings on a secured or non-secured basis. Other measures such as project sales and rights issue are also being considered.

However, there are significant uncertainties due to the governing and management of the Company pertaining to the Special Meeting. The appropriate course of actions will have to be decided by the Board and management subsequent to the meeting, while the current Board and management are committed to taking actions to preserve the best interests of all shareholders and explore options that will be able to be considered.

Based on the above premises, in the best estimate of the management, our financial statements for the year ended December 31, 2020 are prepared on a going concern basis.

We have projected the cash needs in the next twelve months to be $512 million. The cash and cash equivalents on hand was $91 million as of April 1, 2021, which cannot meet the cash needs in the next twelve months. The Company is evaluating several measures of financing, such as external financings, acceleration of the leasing of Nam Tai Inno Park, and presale of Nam Tai Technology Center and Nam TaiLongxi, failing which rights issue and project disposal will also be considered. Currently, the Company intends to raise loans from financial institutions and potential funders to maintain its normal operations. However, the Company does not have any commitments to obtain financing and cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

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Project Portfolio – Summary

The following three stages are the principal stages for our properties:

 

Properties Completed, comprising the properties held for sale and leasing for which the completion acceptance has been filed and the construction has been completed and the internal acceptance criteria are met.

 

Properties Under Development, comprising properties for which the foundation work construction permits have been obtained and are in the process of obtaining completion acceptance.

 

Properties for Future Development, comprising properties for which we have obtained the land use right certificate and are in the process of obtaining the foundation work construction permits, or we have entered into land grant contracts or are in the process of applying for special planning although the land use right certificate is not yet obtained.

Project Portfolio - As of December 31, 2020

 

Projects

Nam Tai Inno
Park

 

Nam Tai
Technology Center

 

Nam Tai Inno
Valley

 

Nam Tai •
Longxi

 

Location

Shenzhen

 

Shenzhen

 

Shenzhen

 

Dongguan

 

Type(1)

Office and Dormitory

 

Office and Dormitory

 

Office and Dormitory

 

Residential and Commercial Property

 

Site Area (sq. m.)

 

103,739

 

 

22,364

 

 

22,367

 

 

33,763

 

Capacity GFA (sq.m.)

 

265,139

 

 

139,746

 

N/A

 

 

84,408

 

Total GFA (sq. m.)

 

331,701

 

 

194,595

 

170,200(2)

 

 

114,520

 

Total GFA

Under Development (sq. m.)

 

140,979

 

 

194,595

 

 

 

114,520

 

Completed (sq. m.)(3)

190,722(4)

 

 

 

 

Future Development (sq. m.)

 

 

170,200(2)

 

 

Interest attributable to us

100%

 

100%

 

100%

 

100%

 

Address

Fenghuang Community, Guangming District, Shenzhen

 

Namtai Road, Baoan District, Shenzhen

 

 

 

 

Dongtai Village, Machong Town, Dongguan

 

 

Notes:

(1)

The types of our projects are based on our planning or certificates issued by relevant authority and may be changed subject to relevant authority’s final approval.

(2)

The gross floor area and type are based on the assumption that we will receive M-0 zoning approval for Nam Tai Inno Valley prior to its development. If we do not receive the M-0 zoning approval, we will be required to develop Nam Tai Inno Valley under M-1 zoning requirement. In this situation, adjustments to our plan will have to be made. The current floor area of buildings on the site of Nam Tai Inno Valley is 41,927 square meters. The site of Nam Tai Inno Valley is on industrial land within the designated industrial block lines. Pursuant to the Measures on Administration for Industrial Block of Shenzhen promulgated by the Shenzhen Government, the government strictly controls the ratio of the site that can be re-designated from “M-1” to “M-0” and will need to approve the ratio. The re-designation ratio, floor area ratio and the gross floor area (“GFA”) of our Nam Tai Inno Valley are still subject to the approvals of the Shenzhen Government. We cannot ensure that the final GFA of Nam Tai Inno Valley as approved by the government will be the same as we expected.  See “Item 3 Key Information—D. Risk Factors—Risks Related to our Business—We may fail to obtain, or experience material delays in obtaining requisite licenses, certificates, permits or governmental approvals for our technology park development projects. As a result, our development plans, business, results of operations and financial condition may be materially and adversely affected.”

(3)

Properties completed refer to the status following the completion of the construction of the properties, the registration of the completion acceptance and the internal acceptance criteria.

(4)

As of December 31, 2020, the construction of Towers 1, 2, 4, 6, 7, 8, 9 and 10 of Nam Tai Inno Park was completed.

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The above figures are subject to adjustment upon the final approval of the relevant authorities in China.

Properties Under Development

The table below sets forth certain information of our property projects or project phases under development as of December 31, 2020, comprising properties under development with the foundation work construction permits obtained but the construction work was still in progress.

 

Project

 

Nam Tai Inno
Park

 

 

Nam Tai
Technology
Center

 

 

Nam Tai •
Longxi

 

Location

 

Shenzhen

 

 

Shenzhen

 

 

Dongguan

 

(Estimated) Total GFA (sq. m.)

 

 

331,701

 

 

 

194,595

 

 

 

114,520

 

(Estimated) Leasable GFA (sq. m.)

 

 

264,337

 

 

-

 

 

-

 

(Estimated) Saleable GFA (sq. m.)

 

-

 

 

 

130,166

 

 

64,408(1)

 

Commencement Time of Construction

 

May 2017

 

 

December 2018

 

 

July 2020

 

Status of Pre-sale Permit

 

Not eligible

 

 

To be obtained

 

 

To be obtained

 

Estimated Completion Time

 

2021 Q2(2)

 

 

2022

 

 

2022

 

Interest Attributable to Us

 

100%

 

 

100%

 

 

100%

 

Note:

(1)

Excluding construction area that needs to be handed over to the local government free of charge and parking space. The final floor area is subject to the approval of the government.

(2)

We are working on the inner decoration of Towers 3 and 5 of Nam Tai Inno Park.

Properties for Future Development

The table below sets forth certain information of our property projects held for future development as of December 31, 2020.

 

Project

 

Nam Tai Inno Valley

 

Location

 

Shenzhen

 

Estimated Total GFA(1) (sq. m.)

 

 

170,200

 

Estimated Completion Time

 

2025

 

 

Note:

(1)

The estimated total GFA is based on our future planning and is subject to the relevant authority’s final approval.

Projects for Operation and Management

The table below sets forth certain information of our projects leased from third parties for operation and management as of December 31, 2020.

 

 

Project

Location

Contracted Floor Area

(sq. m.)

Operation Model

1

Nam Tai • Tang Xi Technology Park

Shenzhen

7,586

Leasing and Operation

2

Nam Tai • U-Creative Space (Lujiazui)

Shanghai

3,981

Leasing and Operation

Introduction to Main Projects

 

Nam Tai Inno Park

Nam Tai Inno Park is located in Fenghuang Community, Guangming District, Shenzhen, China. The project covers a land area of about 104,000 square meters and has a total floor area of about 332,000 square meters. After completion of the construction, the project will include five industrial R&D buildings, two industrial service centers and three supporting dormitory buildings.

The project’s main target tenants are companies in the artificial intelligence, next-generation information technology and new materials industries.

 

Nam Tai Technology Center

Nam Tai Technology Center is located on Namtai Road, Baoan District, Shenzhen, China. The project covers a land area of about 22,000 square meters and a total floor area of about 195,000 square meters. After completion of the construction, the project will include three industrial R&D buildings, one supporting dormitory building and some podium commercial spaces.

The main target tenants of the project are artificial intelligence companies.

 

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Nam Tai Inno Valley

Nam Tai Inno Valley is located on Namtai Road, Baoan District, Shenzhen, China, adjacent to Nam Tai Technology Center. The project covers a land area of about 22,000 square meters and the existing building has a floor area of about 42,000 square meters. The project is awaiting an urban renewal application for redevelopment. At present, most of Nam Tai Inno Valley’s units have been leased to corporate tenants.

 

Nam Tai • Longxi

Nam Tai • Longxi is located on Machong Avenue, Machong Town, Dongguan City, China. The project covers a land area of about 33,800 square meters and a total floor area of about 114,500 square meters including non-capacity area of 30,112 square meters of parking spaces. After completion of the construction, the project will include six residential properties and one commercial property, and a commercial floor area of 20,000 square meters on the plot at the standard of roughcast house will be handed over to an institution designated by the government.

The main target tenants of the project are the locals with rigid demand and demand to improve living conditions in Machong Town, as well as customers in the urban areas of Dongguan and Guangzhou.

 

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Project Location

The map below indicates the locations of our various projects in China.

 

 

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The Process of PRC Real Estate Development Projects

The following flow chart summaries the technical process of typical real estate developing projects in the PRC:

 

 

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Planning and Design

Our project planning and design process includes concept and architectural design, construction and engineering design, budgeting, financial analysis and projections as well as arranging for financing. We believe careful planning is essential to control costs, quality and timing of our projects.

We outsource our design work to reputable third-party design firms. Our planning and development team works closely with project managers as well as our external designers and architects to ensure that our designs comply with PRC laws and regulations, and meet our design and other project objectives as a part of our design management process. Our senior management is also actively involved in the process, especially in the master planning and architectural design of our projects. We conduct preliminary planning and scheduling for each stage of the development project, including planning our outsourcing requirements for the project construction stage.

We seek to integrate technology in our projects by incorporating various sensors to our building automation systems with designs that focus on the comfort and convenience of the tenants. In determining the architectural designs of our projects, we consider the proposed type of products to be developed in light of the surrounding environment and neighborhood.

In selecting external design firms, we consider, among other things, their reputation for reliability and quality, their track record in the market, the design proposed and the price quoted. Design firms can participate in the tender process by our invitation only. Our planning and design team monitors the progress and quality of the design firms to ensure that they meet our requirements.

Construction and Management

We outsource all of our construction work to independent construction companies that are selected mainly through our invitation to tender bids for a project. We generally hire one or more main contractors for each of our projects with a number of subcontractors. The main contractors are responsible for a designated portion of the project. We have established a selection procedure in order to ensure compliance with our quality and workmanship standards. We take into account the construction companies’ professional qualifications, reputation, track record, financial condition and resources when inviting candidates to bid. We also review the qualifications and performance of our construction contractors periodically. We closely supervise and manage the construction process of the entire project to monitor and analyze information regarding quality of the construction and material purchased on a real-time basis. We collect information throughout the development cycle on the entire project, including information from our third-party contractors, to avoid unanticipated delays and cost overruns.

Our construction contracts typically provide for limited flexible payments, which provide for adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel and cement prices, as well as labor costs. The contractors are typically responsible for procuring the necessary raw materials, as well as providing engineering and construction services. We procure certain ancillary fixtures for installation, such as elevators, windows and entrance doors. For our purchases of such fixtures, we use a centralized procurement process to help increase our negotiating power and lower our unit costs. We maintain good relationships with our suppliers and have not encountered any significant supply shortages or disruptions in the past.

Marketing, Sales and Leasing

We maintain an internal marketing team for our development projects and will adjust our own sales force and operating team. We may also use outside agencies on our projects when appropriate. Our marketing teams survey the demographics of each project area to determine the appropriate unit sizes and design features. They also work with the sales force and outside agencies to prepare the advertising, promotion, and selling plans for each project. The sales force at each project is responsible for following through on the entire sales and leasing process, including setting monthly sales or leasing targets, controlling prices, implementing special promotions, monitoring external agency performance, and processing customer feedback.

Delivery, After-Sale Services and Property Management Operation

We assist customers in obtaining financing and provide related information. We also have set up a specific service office to assist our customers in various title registration procedures and agreement execution. We offer various communication channels for customers to give their feedback about our properties or services. We also cooperate with third party property management companies to better manage our properties and ancillary facilities, such as clubhouses, and to handle customer feedback.

We endeavor to deliver the units to our customers on a timely basis. We closely monitor the   construction progress of our property projects and conduct pre-delivery property inspections to ensure timely delivery. Once a property development has passed the requisite government inspections and is ready for delivery, we will notify our customers and hand over keys and possession of the properties.

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To ensure smooth operation and high-quality management service of our property, we also provide various property management services for each of our properties, including security, landscaping, building management and management of public facilities and equipment, cultural activities, housekeeping, repair and so on.

Quality Control

We emphasize quality control to ensure that our properties meet our standards and provide high quality service. We engage third-party contractors to provide various services, including design, pile setting, foundation digging, construction, equipment installation, interior decoration, electromechanical engineering, pipeline engineering and elevator installation. We endeavor to employ contractors with good reputations, strong track records, and adequate financial resources. We also adopt and follow our own quality control procedures and routinely monitor works performed by third-party contractors. We require our contractors to comply with relevant laws and regulations in China and the cities we operate, as well as our own standards and specifications. We also employ independent surveyors to supervise the construction progress. In addition, the construction of real estate projects is regularly inspected and supervised by PRC governmental authorities. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be adversely affected by the performance of third-party contractors.”

Competition

The property sector in the PRC is highly competitive. In 2019 and 2020, the total floor area and the vacancy rate of office properties in Shenzhen and Shanghai climbed while the rental rate declined. Also, there was an increase in the number of competing projects in proximity, which could intensify the competition among property developers, and force us to reduce prices or incur additional costs to make our properties more attractive. As Shenzhen transforms from a labor-intensive electronic manufacturing hub to a research and development based innovation center, many factories located on industrial lands are being converted to technology parks similar to our development projects such as Nam Tai Inno Park and Nam Tai Technology Center. Some of our current and future competitors have competitive advantages over us, including greater economies of scale, more well-known brands, new and different business models, lower cost, larger customer bases, more experience in real estate development and greater financial, marketing, technology, human resources, and other expertise and resources. The risk of office property over-supply is increasing in certain parts of China, where property investment, trading and speculation have become overly active. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may face intense competition from other developers.”

Seasonality

Our operating results have been, and may continue to be subject to seasonality. Our occupancy and revenues have been generally higher during the spring (i.e. from March to May) and fall (i.e. from September to November) seasons than the summer (i.e. from June to August) and winter (i.e. from December to February) seasons of each year, because of several factors, including the hometown travelling in spring festival period, hot weather in summer and cold weather in winter. See “Item 3. Key Information—D Risk Factors—Risks Related to Our Business—Our financial condition and results of operations may fluctuate significantly due to seasonality, and our quarterly financial results may not fully reflect the underlying performance of our business.”

Intellectual Properties

We own trademarks for “Nam Tai Inno Park”, “Nam Tai”, Company logo , and   in the form of Chinese character in the PRC and Hong Kong. We rely on the country and region’s intellectual property and anti-unfair competition laws and contractual restrictions to protect brand name and trademarks. We believe our brand, trademarks and other intellectual property rights are important to our success. Any unauthorized use of our brand, trademarks and other intellectual property rights could harm our competitive advantages and business.

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Insurance

We maintain property and liability insurance policies with coverage and insured limits that we believe are consistent with market practice in the property development sector in Shenzhen, China. We have bought third-party insurance and property damage liability insurance for some of our operating projects and properties. Nonetheless, the scope of insurance coverage that we can obtain may be limited as we have to consider the commercial reasonableness of the insurance cost. There are also certain types of losses that are currently uninsurable in China. Our contractors may not be sufficiently insured themselves or have the financial ability to absorb any losses that arise with respect to our projects or settle any claims we may have against them.  We generally do not maintain any business disruption insurance policies or key-man insurance. As such, certain types of losses, generally of an unforeseen or catastrophic nature, such as fires, natural disasters, terrorist acts, the outbreak of infectious disease or any resulting losses causing disruptions to our business operations, may not be sufficiently, or at all, covered by insurance. See also “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Damage to or other potential losses involving our assets and business may not be covered by insurance”. We also maintain directors and officers liability insurance.

Environmental Matters

We are subject to a variety of laws and regulations concerning the protection of health and the environment. Environmental laws and regulations that apply to any given development site vary significantly according to the site’s location, environmental condition, the present and former uses of the site and the nature of the adjoining properties. Although we have received environmental assessments by the local PRC environmental regulatory authorities that we are permitted to proceed with our projects, it is possible that these reviews did not reveal all environmental liabilities and the PRC environmental regulatory authorities could in the future curtail our operations. In addition, we also cannot assure you that the PRC government will not change the existing laws and regulations or impose additional or stricter laws or regulations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We are subject to potential environmental liability.”

The laws and regulations governing the environmental protection requirements for real estate development in China include the PRC Environmental Protection Law, the PRC Prevention and Control of Noise Pollution Law, the PRC Environmental Impact Assessment Law and the PRC Administrative Regulations on Environmental Protection for Development Projects. Pursuant to these laws and regulations, depending on the impact of the project on the environment, an environmental impact report, an environmental impact analysis table or an environmental impact registration form must be submitted by a developer before the relevant authorities grant approval for the commencement of construction of the property development. In addition, upon completion of the property development, the project company (other than the environmental authorities) should conduct environmental protection inspection of the completed project to ensure compliance with the applicable environmental protection standards and regulations before the property can be delivered. The project company shall formulate environmental protection inspection report, disclose the report to the public, and submit the relevant data and information through the online platform of environmental protection inspection on completion of construction projects. See “Item 4. Information on the Company—B Business Overview—PRC Regulations on Real Estate Development and Management.

PRC Regulations on Real Estate Development and Management

The PRC government regulates the real estate sector. The following discussion summarizes the principal laws, regulations, policies and administrative directives relating to our business. Non-compliance with PRC regulations could subject us to penalties and other adverse consequences.

The PRC legal system is based on the PRC Constitution and is made up of written laws, regulations, directives and local laws, of Special Administrative Regions and laws resulting from international treaties entered into by the PRC government. Court verdicts do not constitute binding precedents. However, they are used for the purposes of judicial reference and guidance.

The National People’s Congress of the PRC (“National People’s Congress”) and the Standing Committee of the National People’s Congress are empowered by the PRC Constitution to exercise the legislative power of the State. The State Council is the highest organ of the State administration and has the power to enact administrative rules and regulations. Several ministries and agencies are under the State Council’s authority, including the MOHURD, the Ministry of Natural Resources (MNR), the Ministry of Commerce (“MOFCOM”), NDRC, the State Administration for Market Regulation, the State Administration of Taxation, and SAFE, and their respective authorized local counterparts.

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Shenzhen City Zoning Measures

Our three development projects, Nam Tai Inno Park, Nam Tai Technology Center and Nam Tai Inno Valley, are located within the municipality of Shenzhen. Accordingly, our developments must be made in compliance with the relevant Shenzhen rules and regulations.

The Urban Planning Standards and Guidelines, promulgated by Shenzhen Municipal People’s Government (the “Shenzhen Government”) in 2014, and amended in 2021, among other things, classifies zoning of urban land into nine categories, including “residential”, “commercial and service”, “government and community”, “industrial”, “logistics and warehouse” “transportation utilities”, “municipal utilities”, “green spaces and squares “and other land. Typically, specific plots of land will be zoned into one category, but the zoning of a specific plot of land may be mixed after satisfying certain conditions. The residential zone category is for use by residential buildings and their auxiliary service facilities. The commercial and service zone category is for use of offices and commercial activities. The industrial zone category, marked as “M”, is mainly used for activities that include the production, manufacture and fine machining of products, and other auxiliary uses include research, design, testing, management and other activities.

Within the M zone category, “M-1” refers to common industrial land that is mainly zoned for factory buildings for production and manufacturing activities, but also encompasses uses including warehouse, small business, staff dormitory, attachable public facilities, attachable transportation facilities and other auxiliary facilities. “M-0” refers to a new type of industrial zone that combines research, originality, design, test pilot production, pollution-free production, other innovative industry and relevant supporting services. Land zoned as “M-0” is mainly used for factory buildings (pollution-free production) and research and development buildings and can also be used for associated commercial and staff dormitory, attachable public facilities, attachable transportation facilities and other auxiliary facilities.

The unit allowed for subdivision and transfer in M-0 zone has a lower minimum size of 300 square meters as compared to the unit in M-1 zone, which is 1000 square meters. We believe smaller minimum sizes are more favorable to us with respect to permitting us to sell smaller subdivided units. Further, buildings in M-0 zone must follow certain legal planning construction index allocations that mandate percentages of the buildings that are required to be designated as research and development offices, commercial uses, dormitories, while index allocations for buildings in M-1 zone must be designated as factory buildings, small commercial uses or dormitories. In addition, the permitted floor area ratio for the “M-0” is generally higher than “M-1” zone that means M-0 zone has larger permitted building areas and potentially higher developments value. As a result, we believe the planning construction index for the “M-0” zone offers us greater commercial advantages because we can build complexes with larger floor plans.

Our three development projects in Shenzhen, Nam Tai Inno Park, Nam Tai Technology Center and Nam Tai Inno Park are located on industrial lands.

Nam Tai Inno Park has an “M-1” designation with 50-years of land use right that commenced in 2007. If the land use right holder does not renew the land use rights on maturity, the land will be reverted back to being state-owned.

Nam Tai Technology Center has a “M-0” designation with 50-years of land use right that commenced in 1993. We renewed its land use right on October 25, 2018, which means its land use right has been restarted from the date of the renewal for 50 years.

Nam Tai Inno Valley is currently has an “M-1” designation with 50 years of land use rights that commenced in 1999. We have applied for an “M-0” zoning designation approval in 2020 after our existing facilities on the site have aged for 15 years. Subject to receiving such approval for the “M-0” zoning designation, we also plan to renew the land use rights at that time.

Urban Renewal Measures of Shenzhen

On December 30, 2020, the Standing Committee of the Shenzhen Municipal People's Congress formulated and promulgated the Regulations on Urban Renewal of the Shenzhen Special Economic Zone (the "Renewal Regulations"), which is effective from March 1, 2021. The Renewal Regulations improved and modified the Urban Renewal Measures of Shenzhen.

Urban Renewal refers to comprehensive improvement and resettlement activities within specified old urban areas, including old industrial zones, old commercial districts, old residential districts, “town-in-city”, and old villages. Pursuant to the Renewal Regulations, all urban renewal projects in Shenzhen shall follow the key guidelines listed below:

Urban renewal should promote the public interest and follow the principles of government co-ordination, overall planning, public welfare, market operation and public participation.

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The land use rights assignment contract shall specify the urban renewal unit planning and include the contents of project implementation supervision agreement. In case of industrial projects, the developer shall also sign an industrial development supervision agreement with the competent authority to clarify the regulatory requirements. Any failure to comply the regulatory requirements may result in penalty on the developer.

The Shenzhen Government published the Urban Renewal Measures of Shenzhen on November 12, 2016. Urban Renewal refers to comprehensive improvement, redeveloping and resettlement activities within specified old urban areas, including old industrial zones, old commercial districts, old residential districts, “town-in-city”, and old villages. Pursuant to the measures, all urban renewal projects in Shenzhen shall follow the key guidelines listed below:

 

as changes to land use rights contracts, such as re-starting the term from the signing date or changing the proposed use of the land, are considered as giving more favorable terms to the users, the party conducting the urban renewal project needs to pay an additional land premium according to the relevant regulations.

Our Nam Tai Technology Center project and Nam Tai Inno Valley project are urban renewal projects for demolition and reconstruction, and can be subdivided and transferred, after obtaining approval documentation and payment of certain additional land premiums. The amount of land premiums differs based on the specific property usage or future transfer method. Our land was obtained at a relatively low cost, so we may be subject to significant additional land premiums when we renew the land use right contracts.

For Nam Tai Technology Center, we have received necessary approvals for urban renewal project and already paid additional land premiums of $21.0 million in 2018 and $49.0 million in 2019. Our payment of additional land premiums will increase the cost basis of Nam Tai Technology Center for the purpose of calculating land appreciation taxes (“LAT”), if we choose to sell the developed units.

For Nam Tai Inno Valley, if we are successful in receiving an “M-0” zoning designation approval for all or part of the site, we would renew the land use right contract to restart the 50 years term, upon which we would be required to pay the relevant additional land premiums.

In addition, pursuant to the Measures to Speed Up Urban Renewal issued by the government of Baoan District, the industrial supervision agreement shall be signed before pre-sale of industrial real estate development project, and if there is no pre-sale, the industrial supervision agreement shall be signed before obtaining plan acceptance certificate.  

As Nam Tai Technology Center and Nam Tai Inno Valley are on industrial sites, the Company shall sign a strict industrial development supervision agreement with authorities in compliance with specific regulatory indicators such as investment intensity, output efficiency and energy conservation and environmental protection.

The Interim Measures on Strengthening and Improving Urban Renewal Implementation promulgated by the Shenzhen government on December 29, 2016, with effect on January 1, 2017, provide that:

 

to apply to demolish and reconstruct buildings as a part of an urban renewal project, the age of the building must be no less than 20 years for buildings located in residential districts and must be no less than 15 years for buildings located in industrial or commercial districts,

The buildings located on the site of Nam Tai Technology Center have satisfied the 15-year age requirement.  We have applied the urban renewal plan in June 2020 after the buildings located on the site of the Nam Tai Inno Valley met the 15-year age requirement.

The floor area ratio of the Nam Tai Technology Center has greatly increased from 2.3 to 6 after the renewal land use rights and the achievement of “M-0” approval. For Nam Tai Inno Valley, it is also expected that the current floor area ratio 1.6 will be largely increased if we get the “M-0” approval from relevant authorities. As a result of these large increases, relevant regulations may require the project to be subject to certain usage limitations and may also require us to not sell the developments to certain third parties.

The Measures on Administration for Industrial Block of Shenzhen promulgated by the Shenzhen Government on August 2, 2018, among other things, provide that:

 

the Shenzhen government shall strictly implement the re-designation of industrial zones from M-1 to M-0 within the designated block line, and the proportion of such re-designation in several districts, shall not exceed 20% of the aggregate land lots within the industrial block;

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if a transferor transfers property zoned as industrial land within the designated first-tier industrial block line or partially transfers an industrial building, the transferee must be an enterprise that has been engaged in manufacturing, research and design of products for more than three years, and has paid all taxes; and

 

factory buildings within both M-1 and M-0 zones shall not be changed from dormitory to commodity residences. Research and development buildings and auxiliary facilities shall not adopt commodity residence features. The floor area of each unit with an “M-1” designation shall be no less than 1,000 square meters and the floor area of each research and development units with an “M-0” designation shall be no less than 300 square meters.

The site of Nam Tai Inno Valley is on industrial land within the designated industrial block lines. Pursuant to the Measures on Administration for Industrial Block of Shenzhen promulgated by the Shenzhen Government, the government strictly controls the ratio of the site that can be re-designated from “M-1” to “M-0” and will need to approve the ratio. The re-designation ratio, floor area ratio and the gross floor area (“GFA”) of our Nam Tai Inno Valley are still subject to the approvals of the Shenzhen Government. We cannot assure you that the final GFA of Nam Tai Inno Valley as approved by the government will be the same as we expected.  

Regulations on Development of a Real Estate Project

The following is a summary of the relevant permits and certificates required to be obtained to complete our projects, together with the applicable regulations. See “Item 4. Information on the Company—B. Business Overview” for the estimated timetable of when we expect to obtain each of the following permits and certificates: (a) and use permit, (b) land use rights certificates (c) Construction Works Planning Permit, (d) Construction Works Commencement Permit, (e) Construction Acceptance Certificate, and (f) Property Ownership Certificate.

Regulations on Land

The Law of Land Administration of the PRC, promulgated on June 25, 1986 and amended on September 6, 2019, distinguishes between ownership of land and the right to use land. All land in the PRC is either state-owned or collectively-owned, depending on location. Generally, land in urban areas within a city or town is state-owned and land in rural areas of a city or town and rural land are collectively-owned.

Land Use Permit

The Urban and Rural Planning Law of PRC, promulgated by the National People’s Congress on October 28, 2007 as amended on April 23, 2019, which replaced the previous Urban Planning Law of PRC, and the Measures for Control and Administration of Grant and Assignment of Right to Use Urban State-Owned Land promulgated by the Ministry of Construction in December 1992 and amended in January 2011, provides that a developer who has obtained land use rights by grant must, after obtaining approval for a construction project and signing a land use rights grant contract, apply to the urban planning authority for a land use permit.

Pursuant to the renewed land use rights assignment contract dated July 8, 2015 for Nam Tai Inno Park, the authority required us to complete the construction of the main structures by July 7, 2018. If we fail to complete such construction before this date, the Shenzhen Planning and Land Resources Committee may impose a penalty on us as a condition for us to receive the construction acceptance certificate. If the delay is within 6 months, the penalty could be 5% of the original land acquisition price; for a delay between 6 months to 1 year, 10%; between 1 and 2 years, 15%; over 2 years, the land and the buildings may be reverted back to being state-owned. We have already paid penalty in an amount of $0.2 million and applied for an extension until July 6, 2020.

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Land Use Rights Certificate

Although all land in the PRC is owned by the governments or by the collectives, individuals and enterprises are permitted to hold, lease and develop land for a specified term without ever owning the land, the duration of which depends on the specific use purpose of the land. A system of assignment and transfer of the right to use state-owned land was adopted pursuant to the Interim Regulations on Grant and Transfer of the Right to Use State-Owned Land in Urban Areas of PRC, which is promulgated on and effective as of May 19, 1990 by the State Council. Enterprises, companies and other organizations who intend to hold, lease and develop land, shall pay a land premium to the government as consideration for the grant of the land use rights on terms of use prescribed by the government. Land users may transfer, lease, mortgage or otherwise commercially exploit the land use rights within the terms of use.  After payment of the land premiums in full, their land user registers the land use rights with the land administration authority and obtains a “land use rights certificate”. The maximum terms with respect to the land use rights are: (a) 70 years for residential purposes; (b) 50 years for industrial purposes; (c) 50 years for the purposes of education, science, culture, health and physical education; (d) 40 years for commercial, tourist and recreational purposes; and (e) 50 years for other purposes.

The PRC Property Rights Law became effective on October 1, 2007. According to the Property Rights Law, when the term of the right to use construction land for residential (but not other) purposes expires, it will be renewed automatically. Unless it is otherwise prescribed by any law, the owner of construction land use rights has the right to transfer, exchange, and use such land use rights as equity contributions or collateral for financing. If the state takes the premises owned by entities or individuals, it must compensate the property owners in accordance with law and protect the lawful rights and interests of the property owners.

Construction Works Planning Permit

The Measures for Control and Administration of Grant and Assignment of Right to Use Urban State-Owned Land promulgated by the Ministry of Construction in December 1992 and amended in January 2011 provides that a property developer who has a proposed construction project within the planning area of a city or town must, after obtaining a land use permit, prepare the necessary planning and design work, and submit the detailed planning and design report, together with the land use rights certificate, to the urban planning authority or the town government designated by the provincial government, and apply for a construction works planning permit.

A construction works planning permit is different from land use permit. Land use permits prove that the land use corresponds with the applicable urban planning requirements, while construction works planning permits prove that the design, construction and engineering satisfy the urban planning requirements.

The Urban and Rural Planning Law of PRC also provides regulations with respect to the formulation, implementation, modification, control, supervision of, and related legal liabilities associated with, measures aimed at curbing conflicts during urban and rural construction developments. The scope of the measures includes the planning, layout and construction of cities, towns with administrative status and villages. The Urban and Rural Planning Law stipulates that where any construction project is commenced without a construction works planning permit, or where such permit has been obtained but construction has not proceeded in accordance with that permit, the Urban and Rural Planning Department at the county level or above may issue an order to cease the construction works. In the case that the construction can be remedied to conform to the relevant planning rules, an order can be made to rectify the construction in a prescribed period of time and a fine totaling between 5% and 10% of the total construction cost may be imposed. Where the construction cannot conform to relevant planning rules, an order for its demolition will be issued or, where demolition is not possible, the property and/or illegal income derived from the property will be confiscated and a fine totaling less than 10% of the construction cost will be imposed.

Construction Works Commencement Permit

On June 25, 2014, the MOHURD promulgated the Measures for the Administration of Construction Permits for Construction Projects, which superseded its 1999 version. When a construction site has been properly prepared and is ready for the commencement of construction, the developer must apply for a construction works commencement permit from the construction authorities at or above the county level.

According to the Notice Regarding Strengthening and Regulating the Administration of Newly-Commenced Projects issued by the General Office of the State Council on November 17, 2007, before commencement of construction, all projects shall fulfill certain conditions, including, among other things, compliance with national industrial policies, submission of development plans, compliance with land supply policies and market access standards, completion of all approval and filing procedures, compliance with zoning plans, completion of proper land use procedures and obtaining proper environmental valuation approvals and construction permits or reports.

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Nam Tai Inno Park, Nam Tai Technology Park and Nam Tai Longxi have already obtained construction works commencement permits.

Construction Acceptance Certificate

According to the Development Regulations and the Regulation on the Quality Management of Construction Projects promulgated by the State Council on January 30, 2000, as amended on April 23, 2018, and the Provisions on Inspection and Acceptance Upon Completion of Buildings and Municipal Infrastructure promulgated by MOHURD in December 2013, after the completion of the construction and achievement of the construction acceptance report, the property must undergo further inspection and receive relevant approvals from local authorities including planning bureaus, fire safety authorities and environmental protection authorities. Thereafter, the property developer shall apply for construction acceptance certificate at the property development authority. Failure to obtain such acceptance certificate may affect our ability to deliver units to third parties. If we fail to deliver units on time, our customers may allege breach of contract and commence litigation against us.

Property Ownership Certificate

Under the Measures for Administration of Sale of Commodity Properties, developers must submit an application for property ownership certificates to local real estate administration authorities within 60 days after the delivery of property to customers. Developers are required to assist customers in applying for subdivision amendments in the procedures for land use rights and registration procedures for property ownership.

In accordance with the Measures for Administration of Pre-Sale of Commodity Properties promulgated by Ministry of Construction on November 15, 1994 and amended on August 15, 2001 and July 20, 2004, purchasers must apply for individual property ownership certificates with local real estate administration authorities within 90 days after the delivery of pre-sale property. Developers are required to assist and provide purchasers with necessary verifying documents. Where purchasers fail to obtain the individual Property Ownership Certificates within the required period due to the fault of the developer, the developer will be liable for breach of contract unless the parties agree otherwise. Property developers, including us, usually specify deadline for the delivery of the individual property ownership certificates in the sale agreements to allow sufficient time for the application and approval processes. Nevertheless, delays by the various administrative authorities in reviewing the application, granting approvals and certain other factors may affect timely delivery of the property ownership certificates. Accordingly, we may not be able to deliver individual real property certificates to purchasers on time as a result of delays in the administrative approval processes or for any other reason beyond our control, which may result in us having to pay liquidated damages. Or in the case of a prolonged delay, the customers may terminate the sales agreement.

Regulations on Transfer of Property Interest

According to the Urban Real Estate Administration Law promulgated by the National People’s Congress on July 5, 1994, as amended on August 26, 2019, transfer of real estate means transfer the title of property from the original owner to another owner through sale, donation or other lawful means. When transferring a building, the title of the building and the land use rights to the site on which the building is situated are transferred together.

Where the land use rights are originally obtained through assignment, the real property may only be transferred on the conditions that: (a) the assignment price has been paid and a land use rights certificate has been obtained; and (b) development has been carried out according to the land use rights assignment contract and, in the case of a project in which buildings are being developed, development representing more than 25% of the total investment has been completed.

The title of each unit of Nam Tai • Longxi can be transferred to the buyers, and we will help each of our buyer to obtain property ownership certificate.

The Measures on the Transfer of Industrial Building and Supporting Building promulgated by the Shenzhen Government on January 19, 2020, provide that legally built industrial buildings and their public facilities in Shenzhen may be transferred as whole, or can be divided and transferred in accordance with the relevant approval documents on land use or the land use rights assignment contract.

Transferees of industrial buildings must be registered enterprises. Especially, the transferee of the supporting dormitory shall be the registered enterprise who holds office space in the same industrial project. Besides, the assignee of the industrial buildings shall not transfer the title to any third party within 5 years.

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The property of both Nam Tai Technology Center project and Nam Tai Inno Valley project only can be partially subdivided and transferred. However, we are limited to selling office and dormitory units in those two projects to enterprises, as the buildings are still considered industrial buildings.

Our Nam Tai Inno Park project is neither an urban renewal project nor is it stipulated in the relevant land use rights contract that it may be subdivided and partially transferred. We intend to conduct leases for the remainder of the land use rights period with respect to the properties in our Nam Tai Inno Park so as to not run afoul of the prohibition on partial subdivisions and transfers.

Under the current PRC regulations, there are certain restrictions placed on individuals purchasing residential units in a residential building. On October 4, 2016, the people’s government of Shenzhen promulgated the Measures Concerning Tightening Up Stable and Healthy Development of Real Estate Market, which provides, among other things, that (i) each household with a registered residence in Shenzhen may purchase no more than two residential units within Shenzhen’s residential zone and (ii) the amount of the mortgage loans permitted shall be regulated according to the specific circumstances. On February 27, 2021, Dongguan Housing and Urban-Rural Construction Bureau, Municipal Natural Resources Bureau and other six departments jointly issued Notice on the Further Regulating the Real Estate Market Regulation, to firmly curb speculation and excessive price increases. Regulations in the notice include increase on ratio of initial down payment, strengthen the new housing record price guidance and others.  

Our Nam Tai Longxi, a residential and commercial project, will be affected by such restrictions. Since our Nam Tai Inno Park and Nam Tai Technology Center are industrial buildings and the major purchasers or tenants of units in our two projects are required to be enterprises as described above, the aforementioned restrictions do not apply, and our target enterprise purchasers or tenants may purchase any number of units. Nevertheless, as each successive owner of units in an industrial building must be enterprises, not individuals, except for special circumstance, this may affect the transferability of both our office and dormitory units.

Regulations on Leases

The Administrative Measures for Commodity House Leasing promulgated by the MOHURD on December 1, 2010 and implemented on February 1, 2011, requires that parties to a leasehold arrangement of a property shall register the leasing agreement with property administrative authorities within 30 days after entering into such leasing agreement. In addition, enterprises may be imposed fines between RMB1,000 and RMB10,000 and individuals may be imposed fines of less than RMB1,000 if the parties fail to comply such requirement. In addition, PRC Contract Law imposes a maximum leasing term of 20 years.

MOHURD, National Development and Reform Commission (“NDRC”), Ministry of Public Security, China Quality Certification Center, the China Banking and Insurance Regulatory Commission and Cyberspace Administration of China also issued the “Opinions on Rectifying and Regulating the Order of the Housing Rental Market” (the “Opinions”), in December 2019. The Opinions stipulated requirements for the management of lease registration and the control of rent financing business. Regulatory requirements for the business of rent financing became more stringent. Rent financing loans shall be made based on the leasing contract signed and filed online, and the term of the loans shall not exceed the term of the contract. Stricter control imposed in the leasing industry may increase our costs to comply with the requirements and adversely affect our business operations and financial position.

Regulation on Receipt of Lease Prepayments by Commercial Enterprises

Under PRC laws and regulations, there are various restrictions applicable to real estate development enterprises accepting prepayments for presale of units in commercial and residential buildings. However, the units in Nam Tai Inno Park are offered for lease since we are not permitted to subdivide. As a result, these restrictions do not directly apply to the subsidiary who owns Nam Tai Inno Park.

For Nam Tai Technology Center and Nam Tai Inno Valley, the subsidiary owning these projects has already possessed the qualifications for real estate development. Therefore, the above two projects may be subject to these restrictions.

Regulations on Establishment of a Real Estate Development Enterprise

Pursuant to Urban Real Estate Administration Law, real estate development enterprise means “an enterprise that engages in the development and sale of real estate for the purposes of making profits.”

Under the Regulations on Administration of Development and Operation of Urban Real Estate promulgated by the State Council on July 20, 1998 and amended on March 24, 2019, a real estate development enterprise must satisfy the following requirements:

 

it must have a registered capital of not less than RMB1.0 million; and

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it must have four or more full-time qualified real estate/construction professionals and two or more full-time qualified accountants.

To be a qualified real estate development enterprise, a property developer shall apply for registration with the Department of Administration of Industry and Commerce. A developer must also report its establishment to the relevant real estate administration authority within 30 days upon receipt of its business license.

Regulations on Foreign-Invested Real Estate Enterprise

Under the Catalogue of Industries for Guiding Foreign Investment (Revised in 2017), real estate development falls within the permitted category of industries. Certain of our PRC subsidiaries may apply for the real estate development enterprise qualification.

The Circular of Adjusting the Policies on the Market Access and Administration of Foreign Investment in the Real Estate Market jointly issued by MOHURD, MOFCOM, NDRC, PBOC, the PRC State Administration for Industry and Commerce, and SAFE on July 11, 2006, as amended on August 19, 2015, stipulates that real estate enterprises established by foreign investment shall meet the below minimum registered capital if the total amount of investment is more than $30 million: the registered capital shall account for at least one third of the total amount of investment, among which if the total amount of investment is less than $36 million , the registered capital shall not be less than $12 million. The current registered capital of our project subsidiary, which holds Nam Tai Technology Center and Nam Tai Inno Valley, is $170 million. We believe it to meet the requirement.

On May 23, 2007, MOFCOM and SAFE promulgated the Notice on Further Strengthening and Regulating the Approval and Supervision on Direct Foreign Investment on Real Estate, as amended on October 28, 2015, which provides:

 

to apply to establish a Real Estate Development Enterprise, one must obtain land use rights or ownership of the building, or must execute assignment or purchase contracts with the local land authorities, developers or the owner of the building; and

 

after being established, if a foreign-invested enterprise intends to broaden its business scope for land development and operation or operate or develop new real estate business, it must apply for relevant approvals according to laws and regulations on foreign investment.

In 2019 and 2020, the project subsidiaries which holds Nam Tai Technology Center, Nam Tai Inno Valley and Nam Tai • Longxi have been qualified as real estate development enterprises.

Regulations on Pre-sale of Units

According to the Urban Real Estate Administration Law, a commodity unit may be sold before completion if: (a) all payment under the land use right assignment contract has been paid and a land use rights certificate has been obtained; (b) the construction works planning permit and construction works commencement permit have been obtained; (c) the funds invested in the development of the commercial and residential buildings is more than 25% of the total investment in the project and the work progress and completion and delivery dates have been ascertained; and (d) the pre-sale has been registered and a pre-sale permit has been obtained. The pre-sale seller shall, report the pre-sale contracts for record-filing to real estate administration and land administration departments of the people’s government above the county level. The pre-sale proceeds of commodity units must be used to develop the relevant pre-sold project until the completion of the construction.

According to the Measures for the Management of Pre-Sale of Urban Commercial and Residential Buildings promulgated by Ministry of Construction on November 15, 1994 and as amended on August 15, 2001 and July 20, 2004, the term “pre-sale of commodity units” refers to the act of real estate development enterprises selling houses under construction to purchasers and the purchasers paying the earnest money or the prices of houses. The pre-sale of commodity units is subject to a licensing system where the real estate development enterprise shall apply to the real estate administrative department for pre-sale approval so as to obtain the pre-sale permit. Real estate development enterprises must register contracts of pre-sale of commercial and residential buildings with the competent real estate authority and the relevant land administration within 30 days after the date of execution of the contract and purchasers change the registration of the land use right and register their individual property ownership within 90 days after delivery of a pre-sold property to obtain the individual property ownership certificates.

As we have obtained a real estate development enterprise qualification for our project subsidiary, we may pre-sale Nam Tai Technology Center, Nam Tai Inno Valley and Nam Tai • Longxi after we satisfy the above pre-sale conditions. If we fail to obtain the pre-sale permit, we will not be permitted to pre-sell our units and will be permitted to sell our units only upon completion of construction.

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Measures on Property Price

Pursuant to the Measures on Supervision of Shenzhen Real Estate Market on July 9, 2010, as amended in May 2017, real estate development enterprises shall set a reasonable pre-sale price and file the detailed prices to the supervision authorities. The sale price of the commodity units shall be in line with the aforementioned filed price and be marked clearly, If the real estate enterprises need to adjust the reported price and the adjustment range is over 15%, they shall report to supervision authorities again. Failure to comply such measures may result in a penalty equal to RMB 100,000.

Major Taxes Applicable to Property Developers

Land Appreciation Tax

Under the PRC Interim Regulation on Land Appreciation Tax of 1994 and its implementation rules of 1995, as amended in 2011, LAT applies to both domestic and foreign investors in real properties in mainland China, irrespective of whether they are corporate entities or individuals. The tax is payable by a taxpayer on the appreciation value derived from the transfer of land use rights, buildings or other facilities on such land, after deducting the following “deductible items”:

 

payments made to acquire land use rights;

 

costs and charges incurred in connection with the land development, which costs include demolition fees, pre-project fees, construction and installation engineering fees, infrastructure fees, and indirect development costs such as organizing and management fees, employees’ salaries, office expenses, water and electricity charges and interior furnishing fees, as well as charges for marketing, operation, financial expenses including interest payments;

 

construction costs and charges, in the case of newly constructed buildings and facilities;

 

the assessed value in the case of old buildings and facilities;

 

taxes paid or payable in connection with the transfer of real property; and

 

other items allowed by the Ministry of Finance of PRC.

The tax rate is progressive and ranges from 30% to 60% of the appreciation value as compared to the “deductible items” as follows:

 

Appreciation value

 

LAT rate

Portion not exceeding 50% of deductible items

 

30%

Portion over 50% but not more than 100% of deductible items

 

40%

Portion over 100% but not more than 200% of deductible items

 

50%

Portion over 200% of deductible items

 

60%

In order to assist the local tax authorities in the collection of LAT, the Ministry of Finance, the State Taxation Administration, Ministry of Construction and State Land Administration Bureau separately and jointly issued several notices to reiterate that, after the assignments are signed, the taxpayers should declare the LAT to the local tax authorities where the real estate is located, and pay the LAT in accordance with the amount as calculated by the tax authority and within the time period as required. For those who fail to acquire proof as regards to the tax paid or the tax exemption from the tax authorities, the real estate administration authority will not process the relevant title change procedures and will not issue the property ownership certificates.

We will be subject to LAT if we choose to sell, instead of lease, our units.

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Value-Added Tax

Pursuant to the Circular on Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax, which was promulgated by the Ministry of Finance and the State Administration of Taxation on March 23, 2016 and became effective on May 1, 2016, the government will levy valued-added tax in lieu of business tax on a trial basis within the territory of the PRC. Interim Regulation of the People’s Republic of China on Value-Added Tax, amended on December 20, 2017, stipulates that all enterprises and individuals engaged in the sales of goods, provision of processing, repairs and replacement services, and the importation of goods within the territory of the PRC are taxpayers of value-added tax, and shall pay value-added tax. For taxpayers selling transportation, postal, basic telecommunication, construction, or real estate leasing services, selling real estate, transferring land use rights, or selling or importing low-tax goods, the value-added tax rate is 11%. For taxpayers selling or importing goods, or providing services, the tax rate shall be 17%.  For taxpayers selling or importing the goods, such as food grains and edible vegetable oils, the tax rate shall be 13%. The value-added tax rate for taxpayers exporting goods and domestic units and individuals selling services and intangible assets within the scope prescribed by the State Council shall be zero. In other cases, the tax rate applicable to taxpayers selling services and intangible assets is 6%.

Pursuant to the Notice on the Adjustments of Value-Added Tax Rates issued by the Ministry of Finance and the State Administration of Taxation on April 4, 2018 and implemented on May 1, 2018, the original value-added tax rates of 17% and 11% applicable to taxable sales of goods and services were adjusted to 16% and 10%, respectively.

Pursuant to the Announcement of the Ministry of Finance, the State Taxation Administration and the General Administration of the Customs on Relevant Politics for Deepening the Value-Added Tax Reform made on March 20, 2019 and effective on April 1, 2019, the authority further lowered the value-added tax rates of 16% and 10% applicable to taxable sales of goods and services to 13% and 9%, respectively.

Pursuant to the Interim Measures for the Collection of Value-Added Tax on the Sale of Self-Developed Real Estate Projects by Real Estate Developers issued on March 31, 2016 and implemented on May 1, 2016 by the State Administration of Taxation, in the event that a real estate developer recognized as an general taxpayer sells a self-developed real estate project, the general tax calculation method shall be adopted, and the total consideration and other charges after the deduction of the corresponding land price shall be the sales amount.

Enterprise Income Tax