JOYY Annual Report 2016 | Quarterlytics

Plain-text annual report

YY INC. FORM 20-F (Annual and Transition Report (foreign private issuer)) Filed 04/20/17 for the Period Ending 12/31/16 Telephone 862029162000 CIK 0001530238 Symbol YY SIC Code Industry 7374 - Computer Processing and Data Preparation and Processing Services Internet Services Sector Technology http://www.edgar-online.com © Copyright 2017, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 20-F (Mark One) ¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934 OR xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016. OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report For the transition period from to Commission file number: 001-35729 YY INC. (Exact name of Registrant as specified in its charter) N/A (Translation of Registrant’s name into English) Cayman Islands (Jurisdiction of incorporation or organization) Building B-1, North Block of Wanda Plaza No. 79 Wanbo Er Road Nancun Town, Panyu District Guangzhou 511442 The People’s Republic of China (Address of principal executive offices) Eric He Chief Financial Officer Tel: +86 (20) 8212-0088 E-mail: eric@yy.com Fax: +86 (20) 8212-0887 Building B-1, North Block of Wanda Plaza No. 79 Wanbo Er Road Nancun Town, Panyu District Guangzhou 511442 The People’s Republic of China (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which RegisteredClass A common shares, par value US$0.00001 per share The NASDAQ Stock Market* *Not for trading, but only in connection with the listing on The NASDAQ Stock Market of the American depositary shares (“ADSs”). Currently, one ADSrepresents 20 Class A common shares. Securities registered or to be registered pursuant to Section 12(g) of the Act: None (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None (Title of Class) Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annualreport. 750,115,028 Class A common shares, par value US$0.00001 per share, and 359,557,976 Class B common shares, par value US$0.00001 per share,were outstanding as of December 31, 2016. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934. Yes ¨ No x 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 1934during 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 requirementsfor the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filerand large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer þAccelerated 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 electednot to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of theExchange Act. ¨ † The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its AccountingStandards Codification after April 5, 2012. Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP xInternational 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 tofollow. Item 17 ¨ Item 18 ¨ If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ Nox (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 SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No x TABLE OF CONTENTS Page INTRODUCTION1 FORWARD-LOOKING STATEMENTS1 PART I 3 ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS3ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE3ITEM 3.KEY INFORMATION3ITEM 4.INFORMATION ON THE COMPANY49ITEM 4A.UNRESOLVED STAFF COMMENTS79ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS79ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES105ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS117ITEM 8.FINANCIAL INFORMATION122ITEM 9.THE OFFER AND LISTING123ITEM 10.ADDITIONAL INFORMATION124ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK136ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES137 PART II 139 ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES139ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS139ITEM 15.CONTROLS AND PROCEDURES139ITEM 16.RESERVED140ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT140ITEM 16B.CODE OF ETHICS140ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES140ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES141ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS141ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT141ITEM 16G.CORPORATE GOVERNANCE141ITEM 16H.MINE SAFETY DISCLOSURE141 PART III 142 ITEM 17.FINANCIAL STATEMENTS142ITEM 18.FINANCIAL STATEMENTS142ITEM 19.EXHIBITS142 Exhibits Exhibit 1.2Second Amended and Restated Memorandum and Articles of Association of the Registrant, as amended by way of a special resolutionpassed on November 28, 2016Exhibit 8.1List of Principal Subsidiaries and Consolidated Affiliated EntitiesExhibit 12.1Certification by the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 12.2Certification by the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 13.1Certification by the Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 13.2Certification by the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 15.1Consent of Conyers Dill & PearmanExhibit 15.2Consent of Fangda PartnersExhibit 15.3Consent of Independent Registered Public Accounting Firm i INTRODUCTION Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to: ·“we,” “us,” “our company” and “our” refer to YY Inc., a Cayman Islands company, its subsidiaries and consolidated affiliated entities (also referredto as variable interest entities) and the subsidiaries of its consolidated affiliated entities, as the context may require; ·“active user” for any period means a registered user account that has logged onto our platforms at least once during such relevant period; ·“concurrent users” for any point in time means the total number of YY users that are simultaneously logged onto our platforms at such point in time; ·“paying user” for any period means a registered user account that has purchased virtual items or other products and services on our platforms at leastonce during the relevant period. A paying user is not necessarily a unique user, however, as a unique user may set up multiple paying user accountson our platforms; thus, the number of paying users referred to in this annual report may be higher than the number of unique users who arepurchasing virtual items or other products and services; ·“registered user account” means a user account that has downloaded, registered and logged onto our platforms at least once since registration. Wecalculate registered user accounts as the cumulative number of user accounts at the end of the relevant period that have logged onto our platforms atleast once after registration. Each individual user may have more than one registered user account, and consequently, the number of registered useraccounts we present in this annual report may overstate the number of unique individuals who are our registered users; and ·“unique visitor” to Duowan.com means a visitor to Duowan.com from a specific IP address. No subsequent visits from the same IP address during arelevant period are added to our total unique visitors count for that period. An individual who accesses Duowan.com from more than one IP addressis counted as a unique visitor for each IP address he or she uses. FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts areforward-looking statements. These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to bematerially different from those expressed or implied by the forward-looking statements. You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “is expected to,” “anticipate,” “aim,” “estimate,”“intend,” “plan,” “believe,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations andprojections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.These forward-looking statements include, but are not limited to, statements about: ·our growth strategies; ·our ability to retain and increase our user base and expand our product and service offerings; ·our ability to monetize our platforms; ·our future business development, results of operations and financial condition; 1 ·competition from companies in a number of industries, including internet companies that provide online voice and video communications services,social networking services and online games; ·expected changes in our revenues and certain cost or expense items; ·general economic and business condition in China and elsewhere; and ·assumptions underlying or related to any of the foregoing. You should thoroughly read this annual report and the documents that we refer to herein with the understanding that our actual future results may bematerially different from and/or worse than what we expect. Other sections of this annual report, including the Risk Factors and Operating and Financial Reviewand Prospects sections, discuss factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment.New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on ourbusiness or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-lookingstatements. We qualify all of our forward-looking statements by these cautionary statements. You should not rely upon forward-looking statements we make as predictions of future events. The forward-looking statements made in this annual reportrelate only to events or information as of the date on which the statements are made in this annual report. We undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. 2 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 for our company. The selected consolidated statements of operations data forthe three years ended December 31, 2014, 2015 and 2016 and the consolidated balance sheet data as of December 31, 2015 and 2016 have been derived from ouraudited consolidated financial statements, which are included in this annual report beginning on page F-1. Our selected consolidated statements of operation datafor the years ended December 31, 2012 and 2013 and our consolidated balance sheet data as of December 31, 2012, 2013 and 2014 have been derived from ouraudited consolidated financial statements not included in this annual report. Our consolidated financial statements are prepared and presented in accordance withaccounting principles generally accepted in the United States, or U.S. GAAP. Our historical results for any period are not necessarily indicative of results to beexpected for any future period. You should read the following selected financial information in conjunction with the consolidated financial statements and relatednotes and the information under “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. For the Year Ended December 31, 2012 2013 2014 2015 2016 RMB RMB RMB RMB RMB US$ (All amounts in thousands, except share, ADS, per share and per ADS data) Selected Consolidated Statements of OperationsData: Net Revenue (1) Live streaming 293,358 904,042 2,475,379 4,539,857 7,027,227 1,012,131 Online games 332,287 602,111 811,699 771,882 634,325 91,362 Membership 72,506 141,238 205,199 291,310 284,860 41,028 Others 121,880 176,077 186,091 294,200 257,638 37,108 Total net revenues 820,031 1,823,468 3,678,368 5,897,249 8,204,050 1,181,629 Cost of revenues (2) (416,133) (881,999) (1,849,149) (3,579,744) (5,103,430) (735,047)Gross profit 403,898 941,469 1,829,219 2,317,505 3,100,620 446,582 Operating expenses: (2) Research and development expenses (176,725) (267,005) (431,188) (548,799) (675,230) (97,253)Sales and marketing expenses (16,954) (24,955) (102,527) (312,870) (387,268) (55,778)General and administrative expenses (109,788) (200,554) (223,019) (358,474) (482,437) (69,485)Goodwill impairment — — — (310,124) (17,665) (2,544)Fair value change of contingent consideration — — — 292,471 — — Total operating expenses (303,467) (492,514) (756,734) (1,237,796) (1,562,600) (225,060)Gain on deconsolidation and disposal of subsidiaries — — — — 103,960 14,973 Operating income 102,896 476,033 1,078,804 1,162,009 1,771,484 255,147 Income before income tax expenses 118,061 565,809 1,214,480 1,162,512 1,783,811 256,923 Net income attributable to YY Inc. 89,177 477,727 1,064,472 1,033,243 1,523,918 219,491 Decretion to convertible redeemable preferred sharesredemption value 1,293,875 — — — — — Allocation of net income to participating preferredshareholders (478,754) — — — — — Net income attributable to common shareholders 904,298 1,064,472 1,033,243 1,523,918 219,491 3 For the Year Ended December 31, 2012 2013 2014 2015 2016 RMB RMB RMB RMB RMB US$ Weighted average number of ADS used incalculating net income per ADS: Basic 30,235,191 56,123,784 57,657,035 56,259,499 56,367,166 56,367,166 Diluted 49,623,442 59,056,065 59,927,174 57,541,558 60,805,566 60,805,566 Net income per ADS (3) Basic 29.91 8.51 18.46 18.37 27.04 3.89 Diluted 1.80 8.09 17.76 17.96 26.40 3.80 Weighted average number of common shares usedin calculating net income per common share: Basic 604,703,810 1,122,475,688 1,153,140,699 1,125,189,978 1,127,343,312 1,127,343,312 Diluted 992,468,836 1,181,121,297 1,198,543,473 1,150,831,163 1,216,111,329 1,216,111,329 Net income per common share (3) Basic 1.50 0.43 0.92 0.92 1.35 0.19 Diluted 0.09 0.40 0.89 0.90 1.32 0.19 (1)For the year ended December 31, 2016, revenue presentation has been changed to live streaming, online games, membership and others. We also haveretrospectively changed the revenue presentation for the year ended December 31, 2012, 2013, 2014 and 2015. (2)Share-based compensation was allocated in cost of revenues and operating expenses as follows: For the Year Ended December 31, 2012 2013 2014 2015 2016 RMB RMB RMB RMB RMB US$ (in thousands) Cost of revenues 8,407 9,860 18,037 23,963 15,894 2,289 Research and development expenses 35,441 39,587 54,141 70,951 78,816 11,352 Sales and marketing expenses 884 1,318 2,807 3,283 3,107 448 General and administrative expenses 55,619 66,331 59,647 87,175 59,469 8,565 Total 100,351 117,096 134,632 185,372 157,286 22,654 (3)Each ADS represents 20 Class A common shares. As of December 31, 2012 2013 2014 2015 2016 RMB RMB RMB RMB RMB US$ (in thousands) Selected Consolidated Statements of OperationsData: Cash and cash equivalents 504,702 729,598 475,028 928,934 1,579,743 227,530 Short-term deposits 897,698 1,432,863 4,214,576 1,894,946 3,751,519 540,331 Goodwill 1,604 1,577 300,382 151,638 14,300 2,060 Total assets* 1,696,189 2,597,947 6,820,519 7,302,754 9,785,792 1,409,447 Convertible bonds (current)** — — — — 2,768,469 398,742 Total current liabilities 366,417 701,313 1,090,558 1,384,414 4,690,448 675,565 Convertible bonds (non-current) — — 2,405,705 2,572,119 — — Long-term payable — — 183,000 — — — Total mezzanine equity — — — 61,833 9,272 1,335 Class A common shares (US$0.00001 par value;10,000,000,000 shares authorized, 179,400,000,622,658,738, 706,173,568, 728,227,848 and750,115,028 shares issued and outstanding as ofDecember 31, 2012, 2013, 2014, 2015, and 2016respectively) 11 38 43 43 44 6 4 As of December 31, 2012 2013 2014 2015 2016 RMB RMB RMB RMB RMB US$ (in thousands) Class B common shares (US$0.00001 par value;1,000,000,000 shares authorized, 907,833,224,485,831,386, 427,352,696, 369,557,976 and359,557,976 shares issued and outstanding as ofDecember 31, 2012, 2013, 2014, 2015, and 2016respectively) 60 34 30 27 26 4 (Accumulated deficits) Retained earnings (1,311,767) (874,697) 173,963 1,207,168 2,728,736 393,020 Total shareholders’ equity 1,323,285 1,887,209 3,090,164 3,246,819 5,052,555 727,719 *Effectively January 2016, ASU 2015-3 issued by FASB requires entities to present the issuance costs of bonds in the balance sheet as a direct deduction fromthe related bonds rather than assets. Accordingly, we retrospectively reclassified RMB42.3 million and RMB25.3 million of issuance cost of bonds from othernon-current assets into convertible bonds as of December 31, 2014 and December 31, 2015, respectively. **Convertible bonds classified in current liabilities represent convertible senior notes which may be redeemed within one year. Exchange Rate Information Our business is primarily conducted in China and most of our revenues are denominated in RMB. Unless otherwise noted, all translations from RMB toU.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.9430 to US$1.00, the exchange rate on December 30, 2016 as setforth in the H.10 statistical release published by the Federal Reserve Board. We make no representation that any RMB or U.S. dollar amounts could have been, orcould be, converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currencyreserves in part through direct regulation of the conversion of RMB into foreign currency and through restrictions on foreign exchange activities. On April 14,2017, the exchange rate, as set forth in the H.10 statistical release of the Federal Reserve Board, was RMB6.8835 to US$1.00. The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates areprovided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our otherperiodic reports or any other information to be provided to you. Noon Buying Rate Period Period End Average(1) High Low (RMB per US$1.00) 2012 6.2301 6.2990 6.3879 6.2221 2013 6.0537 6.1412 6.2438 6.0537 2014 6.2046 6.1704 6.2591 6.0402 2015 6. 4778 6.2830 6.4896 6.1870 2016 6.9430 6.6400 6.4480 6.9580 October 6.7735 6.7303 6.7819 6.6685 November 6.8837 6.8402 6.9195 6.7534 December 6.9430 6.9198 6.9580 6.8771 2017 January 6.8768 6.8907 6.9575 6.8360 February 6.8665 6.8694 6.8517 6.8821 March 6.8832 6.8940 6.9132 6.8687 April (through April 14, 2017) 6.8835 6.8899 6.8988 6.8832 (1)Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period. 5 B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors An investment in our capital stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the otherinformation included in this annual report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition orresults of operations could suffer. In that case, the trading price of our capital stock could decline, and you may lose all or part of your investment. Risks Related to Our Business Our business is based on a relatively new business model in a relatively new market in which user demand may change or decrease substantially. Many of the elements of our business are unique, evolving and relatively unproven. The markets for our technology, especially our live streamingtechnology, and products and services are relatively new and rapidly developing and are subject to significant challenges. Our business plan relies heavily uponincreased revenues from our live streaming, online games and membership services, as well as our ability to successfully monetize our user base and products andservices, and we may not succeed in any of these respects. As the online live streaming industry in China is relatively young and untested, there are few proven methods of projecting user demand or availableindustry standards on which we can rely. Further more, some of our current monetization methods are in a relatively preliminary stage. For example, if we fail toproperly manage the supply and timing of our in-game virtual items and the appropriate price points for these products and services, our users may be less likely topurchase in-game virtual items from us. For non-game virtual items, we consider industry standards and expected user demand in determining how to mosteffectively optimize virtual item merchandizing. We cannot assure you that our attempts to monetize our user base and products and services will continue to besuccessful, profitable or widely accepted, and therefore the future revenue and income potential of our business are difficult to evaluate. If we fail to effectively manage our growth or implement our business strategies, our business and results of operations may be materially and adverselyaffected. We have experienced a period of significant rapid growth and expansion that has placed, and continues to place, significant strain on our management andresources. We cannot assure you that this level of significant growth will be sustainable or achieved at all in the future. We believe that our continued growth willdepend on our ability to develop new sources of revenue, increase monetization, attract new users, retain and expand paying users, encourage additional purchasesby our paying users, continue developing innovative technologies in response to user demand, increase brand awareness through marketing and promotionalactivities, react to changes in user access to and use of the internet, expand into new market segments, integrate new devices, platforms and operating systems,develop new advertising and promotion methods, attract new advertisers and retain existing advertisers and take advantage of any growth in the relevant markets.We cannot assure you that we will achieve any of the above. To manage our growth and maintain profitability, we anticipate that we will need to continue to implement, from time to time, a variety of new andupgraded operational and financial systems, procedures and controls on an as-needed basis, including the continued improvement of our accounting and otherinternal management systems. We will also need to further expand, train, manage and motivate our workforce and manage our relationships with users, third partygame developers, advertisers and other business partners. All of these endeavors involve risks and will require substantial management efforts and skills andsignificant additional expenditures. We cannot assure you that we will be able to effectively manage our growth or implement our future business strategies, andfailure to do so may materially and adversely affect our business and results of operations. 6 We are a relatively young company, and you should consider our prospects in light of the risks and uncertainties which early-stage companies in evolvingindustries in China with limited operating histories may be exposed to or encounter, including possible volatility in the trading prices of our ADSs. We expect that we will continue to incur significant costs and expenses in many aspects of our business, such as research and development costs to updateexisting services and launch new services and rising bandwidth costs to support our video function, grow our user base and generally expand our businessoperations. We have been profitable since 2012 and achieved accumulated profitability since 2014, but we may not generate sufficient revenues to offset such coststo achieve or sustain profitability in the future. In addition, we expect to continue to invest heavily in our operations to maintain our current market position,support our anticipated future growth and meet our expanded reporting and compliance obligations as a public company. Our profitability is also affected by other factors beyond our control. The continued success of our business depends on our ability to identify whichservices will appeal to our user base and to offer such services on commercially acceptable terms. Our ability to finance our planned expansion also depends in parton our ability to convert active users into paying users and increase the average revenue per paying user, or ARPU, and successfully compete in a very competitivemarket. We have a limited operating history. We introduced YY Client in July 2008 and have experienced a high growth rate since then. As a result of ourrelatively short history, our historical results of operations may not provide a meaningful basis for evaluating our business, financial performance and futureprospects. We may not be able to achieve similar growth rates in future periods. Accordingly, you should not rely on our results of operations for any prior periodsas an indication of our future performance. We may again incur net losses in the future and you should consider our prospects in light of the risks and uncertaintieswhich early-stage companies in evolving industries in China with limited operating histories such as ours may be exposed to or encounter, including risksassociated with being a public company with business operations located mainly in China. See “—Risks Related to Our ADSs—The trading prices of our ADSsare likely to be volatile, which could result in substantial losses to investors.” Our business is heavily dependent on revenues from live streaming services. If our live streaming revenue declines in the future, our results of operations maybe materially and adversely affected. Historically, a majority of our revenues are from live streaming service, online games, and membership subscription fees. In the year ended December 31,2016, revenues from live streaming, online games and membership subscription fees constituted 96.9% of our total net revenue, with revenues from live streamingalone accounting for 85.7% of our total net revenue. We expect that our business will continue to be dependent on revenues from live streaming services in thefuture. Any decline in live streaming revenues may materially and adversely affect our results of operations. See “—The revenue model for each of our livestreaming and our membership program may not remain effective, which may affect our ability to retain existing users and attract new users and materially andadversely affect our business, financial condition and results of operations.” We may be held liable for information or content displayed on, retrieved from or linked to our platforms, or distributed to our users, and PRC authorities mayimpose legal sanctions on us, including, in serious cases, suspending or revoking the licenses necessary to operate our platforms. Our live stream platforms enable users to exchange information, generate content, advertise products and services, conduct business and engage in variousother online activities. However, our platforms do not require realname registration by our users and because a majority of the communications on our platforms isconducted in real time, we are unable to verify the sources of all information posted thereon or examine the content generated by users before they are posted.Therefore, it is possible that users may engage in illegal, obscene or incendiary conversations or activities, including the publishing of inappropriate or illegalcontent that may be deemed unlawful under PRC laws and regulations on our platforms. These issues exist on YY Client, YY.com, Huya.com, Duowan.com,100.com and our other websites and mobile applications. If any content on our platforms is deemed illegal, obscene or incendiary, or if appropriate licenses andthird party consents have not been obtained, claims may be brought against us for defamation, libel, negligence, copyright, patent or trademark infringement, otherunlawful activities or other theories and claims based on the nature and content of the information delivered on or otherwise accessed through our platforms. Forexample, we have occasionally received fines for certain inappropriate materials placed by third parties on our platforms, and may be subject to similar fines andpenalties in the future. We also may face liability for copyright or trademark infringement, fraud, and other claims based on the nature and content of the materialsthat are delivered, shared or otherwise accessed through or published on our platforms. Defending any such actions could be costly and involve significant time andattention of our management and other resources. In addition, if they find that we have not adequately managed the content on our platforms, PRC authorities mayimpose legal sanctions on us, including, in serious cases, suspending or revoking the licenses necessary to operate our platforms. See “Item 4. Information on theCompany—B. Business Overview—PRC Regulation—Information Security and Censorship” and “Item 4. Information on the Company—B. Business Overview—PRC Regulation—Intellectual Property Rights.” 7 The revenue model for each of our live streaming and our membership program may not remain effective, which may affect our ability to retain existing usersand attract new users and materially and adversely affect our business, financial condition and results of operations. We operate YY Live and Huya broadcasting, our live streaming platforms using a virtual items-based revenue model whereby users can listen to musicand access other forms of entertainment, participate in or watch online dating shows, watch shows that deliver financial news and information, and get access to thelive streaming of different game plays for free, and have the option of purchasing in-channel virtual items. We have generated, and expect to continue to generate,a substantial majority of our live streaming revenues using this revenue model. In 2016, revenues from live streaming contributed 85.7% of our total net revenues.Our live streaming business has experienced significant growth in recent years, but we cannot assure you that we will continue to achieve a similar growth rate inthe future, as the user demand for this service may change, decrease substantially or dissipate, or we may fail to anticipate and serve user demands effectively. We may not be able to continue to successfully implement the virtual items-based revenue model for live streaming, as popular performers, channelowners, famous professional game teams and commentators may leave our platforms and we may be unable to attract new talent that can attract users or cause suchusers to increase the amount of time spent engaging and money spent on purchasing in-channel virtual items on our platforms. In addition, certain content on ourlive streaming platforms, such as certain online games owned by or licensed to certain gaming companies or publishers, may not continue to be available to ourusers for live streaming purposes. Failure to keep our users engaged in the live streaming service may result in reducing ARPU and the number of paying users,which may adversely affect our financial condition and results of operations. Furthermore, under our current arrangements with certain popular performers, channel owners, famous professional game teams and commentators, weshare with them a portion of the revenues we derive from the sales of in-channel virtual items on our live streaming platform. We also cooperate with popularprofessional game teams and commentators to make their game play available on our platforms by paying them fixed sponsorship fees. In the future, the amountwe pay to these performers, channel owners famous professional game teams and commentators may increase or we may fail to reach mutually acceptable termswith these parties, which may adversely affect our revenues or cause these parties to leave our platforms. In turn, this may affect the user and revenue growth inthis business, which may materially and adversely affect our financial condition and results of operations. In addition, we have been a pioneer in offering an online concert platform to music performers and YY users. We also continue to focus on thedevelopment of professionally-curated user generated content, or PUGC, and professionally generated content, or PGC, as well as introduce more sports content onour platforms. However, if our users decide to access live streaming content provided by our current or future competitors, our business, financial condition andresults of operations could be materially and adversely affected. In our membership program, users pay a flat monthly subscription fee in order to become members, and in exchange, we give them access to variousprivileges and enhanced features on our channels, including additional video usage, priority entrance to certain live performances, and exclusive rights to accessVIP avatars, VIP ring-tones, VIP fonts and VIP emoticons. However, we may not be able to further build or maintain our membership base in the future for variousreasons—for example, if we fail to continue to provide innovative products and services that are attractive to members, we may not be able to retain them and ourbusiness, financial condition and results of operations could be adversely affected. 8 The revenue model we adopt for online games may not remain effective, causing us to lose game players, which may materially and adversely affect ourbusiness, financial condition and results of operations. We currently operate substantially all of our online games on YY using the virtual items-based revenue model, whereby players can play games for free,but have the option of purchasing in-game virtual items and in-game accessories. We have generated, and expect to continue to generate, a substantial majority ofour online game revenues using this revenue model. However, we may not be able to continue successfully implementing the virtual items-based revenue model aswe may not be able to develop, obtain or maintain the rights to host online games that attract game players or cause such game players to increase the amount oftime spent playing and the amount of money spent on purchasing in-game virtual items. The sale of virtual items requires us to closely track game players’ tastesand preferences and in-game consumption patterns. If we fail to offer popular virtual items, we may not be able to effectively convert our game player base intopaying users or encourage existing paying users to spend more on YY. In addition, PRC regulators have been implementing regulations designed to reduce the amount of time that youths in China spend playing online games.See “Item 4. Information on the Company—B. Business Overview—PRC Regulation—Anti-fatigue Compliance System and Real-name Registration System.” Arevenue model that does not charge for playing time may be viewed by the PRC regulators as inconsistent with this goal. If we were to start charging for playingtime, we may lose game players who may choose to play online games from other providers and on other platforms or choose to engage in other alternative formsof entertainment, including traditional offline personal computers, or PCs, or video games. We cannot assure you that the revenue model that we have adopted for any of our online games will continue to be suitable, or that we will not in thefuture need to change our revenue model or introduce a new revenue model. We may change the revenue model for some of our online games if we believe theexisting models are not generating adequate revenues. A change in revenue model could result in various adverse consequences, including disruptions of our onlinegame operations, criticism from game players who have invested time and money in a game, a decrease in the number of our game players and a decrease in therevenues we generate from our online games. Therefore, such a change in revenue model may materially and adversely affect our business, financial condition andresults of operations. We generate a significant portion of our revenues from a limited number of popular online games, most of which are PC-based online games. Due to theincreasing popularity of mobile online games, our online game business sector faces a weak PC-based online game market. If we cannot continue to offer popularPC-based online games that retain existing players or attract new players, if the PC-based online game market continues to remain weak or shrink, if we are unableto successfully develop or source new online games, in particular mobile online games, if the terms of the revenue-sharing or exclusive license arrangementsbecome less favorable, or if the number of our paying users for online games declines or ceases to grow for any reason, our revenues from online games maydecrease, and our financial condition and results of operations may be materially and adversely affected We generate a significant portion of our revenues from a limited number of popular online games on YY, primarily through selling of game tokens tousers for their purchase of in-game virtual items. In 2016, the five most popular online games contributed approximately 37.2% of our total online game revenues,as compared to 41.0% in 2015, representing a decrease in reliance on our top games. A majority of our popular online games are created by third party gamedevelopers under revenue-sharing arrangements that typically last one to two years, and which typically provide for automatic extension or renewal. A few of ouronline games are licensed to us by third party game developers under exclusive license arrangements. If we fail to maintain or renew these contracts on acceptableterms or at all, we may be unable to continue offering these popular online games, and our operating results will be adversely affected. For online games licensedto us under exclusive license arrangements, we also have to devote additional resources to promoting these games on our platforms or licensing such games to theappropriate third party operators. If our users decide to access any of our online games through our competitors, or if they prefer other online games hosted by ourcompetitors, our operating results could be materially and adversely affected. 9 Our revenues from online games accounted for 22.1%, 13.1% and 7.7% of our total net revenues in 2014, 2015 and 2016, respectively. We believe thatmost online games have a limited commercial lifespan. We must continually source new online games that appeal to our game players. Hence, we must maintaingood relationships with our third party game developers to have access to new popular games with reasonable revenue-sharing or exclusive licensing terms. Undermost of our current revenue-sharing and exclusive license arrangements, we retain a majority of the gross revenues generated from each particular game. In thefuture, we may not be able to achieve similarly attractive revenue-sharing or other commercial terms, which may adversely affect our net revenues. Additionally,we depend upon these third party game developers to provide the technical support necessary to operate their online games on our platforms and to developupdates and expansion packs to sustain player interest in a game. Most of our third party game developers have limited operating histories and financial resources,and the contracts we enter into with them do not clearly provide for remedies to us in the event they fail to deliver the games or the promised updates andexpansion packs as scheduled. If we are not successful in sourcing and providing popular new online games, our revenues from online games under revenue-sharing and exclusivelicensing arrangements and in-game virtual items may decrease. If this were to happen, our financial condition and results of operations may be materially andadversely affected. Our online education business is a challenging business line. If we fail to properly handle the issues we encounter in our operation, our revenues may beadversely affected. Competition in the education market in China is intense. Traditional offline education institutions and practitioners are still the mainstream that appeals tomost students. However, online education service providers have grown in number, size and popularity in the recent years, and are getting accepted by more andmore students. Many traditional offline education service providers are also trying to start their online business. If we cannot provide services differentiated fromthese competitors, we may not attract or retain sufficient users and our financial condition and results of operations could be adversely affected. We generate a portion of our revenues from online advertising and promotion. If we fail to attract more advertisers to our platforms or if advertisers are lesswilling to advertise with us, our revenues may be adversely affected. In 2014, 2015 and 2016, online advertising and promotion accounted for 4.0%, 1.1% and 0.5%, respectively, of our total net revenues. Although we havebecome less dependent upon online advertising and promotion revenues due to a shift in the majority of our revenues from online advertising and promotion to livestreaming service, our revenues still partly depend on the continual development of the online advertising industry in China and advertisers’ allocation of budgetsto internet advertising and promotion. In addition, companies that decide to advertise or promote online may utilize more established methods or channels foronline advertising and promotion, such as more established Chinese internet portals or search engines, over advertising and promotion on our platforms. If theonline advertising market size does not increase from current levels, or if we are unable to capture and retain a sufficient share of that market, our ability tomaintain or increase our current level of online advertising and promotion revenues and our profitability and prospects could be adversely affected. We offer advertising and promotion services substantially through contracts entered into with third party advertising agencies and by way of displayingadvertisement on our websites and platforms or providing promotion integrated in the programs, shows or other content offered on our live streaming platforms.We cannot assure you that we will be able to retain existing direct advertisers or advertising agencies or attract new direct advertisers and advertising agencies.Since our arrangements with third party advertising agencies typically involve one-year framework agreements, these advertising arrangements may be easilyamended or terminated without incurring liabilities. If we fail to retain existing advertisers and advertising agencies or attract new direct advertisers and directadvertising agencies or any of our current advertising methods or promotion activities becomes less effective, our business, financial condition and results ofoperations may be adversely affected. 10 We have granted employee stock options and other share-based awards in the past and are very likely to continue to do so in the future. We recognize share-based compensation expenses in our consolidated statements of operations in accordance with the relevant rules under U.S. GAAP, which have had and maycontinue to have a material and adverse effect on our results of operations. We have granted share-based compensation awards, including share options, restricted shares and restricted share units, to various employees, keypersonnel and other non-employees to incentivize performance and align their interests with ours. Under our 2009 employee equity incentive scheme, or the 2009Scheme, we are authorized to grant options or restricted shares to purchase a maximum of 120,020,001 common shares. Under our 2011 share incentive plan, orthe 2011 Plan, we are authorized to grant options, restricted shares or restricted share units to purchase a maximum of 43,000,000 common shares, plus an annualincrease of 20,000,000 common shares on the first day of each fiscal year, beginning from 2013, or such smaller number of Class A common shares as determinedby our board of directors. As of March 31, 2017, options to purchase 499,655 common shares, 8,370,112 restricted shares and 33,595,279 restricted share unitswere outstanding under the 2009 Scheme and the 2011 Plan. As a result of these grants and potential future grants, we had incurred in the past and expect tocontinue to incur significant share-based compensation expenses in the future. The amount of these expenses is based on the fair value of the share-based awards.We account for compensation costs for certain share-based compensation awards granted in the past using a graded-vesting method and recognize expenses in ourconsolidated statements of operations in accordance with the relevant rules under U.S. GAAP. The expenses associated with share-based compensation materiallyincreased our net losses or reduced our net income in the past, and may reduce our net income in the future. In addition, any additional securities issued undershare-based compensation schemes will dilute the ownership interests of our shareholders, including holders of our ADSs. However, if we limit the scope of theshare-based compensation schemes, we may not be able to attract or retain key personnel who expect to be compensated by options, restricted shares or restrictedshare units. The number of active users we have may fluctuate and we may fail to attract more paying users, which may materially and adversely affect our revenuesgrowth, results of operations and financial condition. The number of our average monthly active users increased by 23.2 million or 19.8% to 140.7 million for the three months ended December 31, 2015. Forthe three months ended December 31, 2016, the number of average monthly active users of our PC clients and our mobile clients were 96.1 million and 56.0million, respectively. We have experienced declines in growth rate of our average monthly active users, due to the increase in the base number of the averagemonthly active users, and despite that, we continued to attract higher levels of new monthly active users during such periods. However, the number of our monthly active users may substantially fluctuate from time to time. If we are unable to attract new users and retain them asactive users and convert non-paying active users into paying users, our revenues may fail to grow and our results of operations and financial condition may suffer. We may not be able to keep our users highly engaged, which may reduce our monetization opportunities and materially and adversely affect our revenues,profitability and prospects. Our success depends on our ability to maintain and grow our user base and keep our users highly engaged. In order to attract and retain users and remaincompetitive, we must continue to innovate our products and services, implement new technologies and functionalities and improve the features of our platforms inorder to entice users to use our products and services more frequently and for longer durations. The internet industry is characterized by constant changes, including rapid technological evolution, continual shifts in customer demands, frequentintroductions of new products and services and constant emergence of new industry standards and practices. Thus our success will depend, in part, on our ability torespond to these changes on a cost-effective and timely basis; failure to do so may cause our user base to shrink and user engagement level to decline and ourresults of operations would be materially and adversely affected. For example, our plan to more broadly support mobile-live broadcasting across our live streamingplatform and retain the ability to offer high quality delivery of voice and video data may cause us to incur significant additional costs and may not succeed. Due to the intensified competitions among live streaming platforms, users may leave us for competitors’ platforms more quickly than in other onlinesectors. A decrease in the number of active YY users may reduce the diversity and vibrancy of our platforms’ online ecosystem and affect our user-generatedchannels, which may in turn reduce our monetization opportunities and have a material and adverse effect on our business, financial condition and results ofoperations. We cannot assure you that our platforms will continue to be sufficiently popular with our users to offset the costs incurred to operate and expand it. Usersatisfaction is particularly difficult to predict as internet users in China may not be familiar with the concept of a live streaming platform such as ours which enableusers to interact in live online group activities through voice, text and video. We have historically relied on word of mouth referrals to increase user awareness ofour products and services and to expand our user base. If we decide to engage in more conventional advertising or marketing campaigns, our sales and marketingexpenses will increase, which could have an adverse effect on our results of operations. Failure to maintain or grow our user base in a cost-effective manner, or atall, and keep our users highly engaged would materially and negatively affect our results of operations. 11 We face competition in several major aspects of our business. If we fail to compete effectively, we may lose users and advertisers which could materially andadversely affect our business, financial condition and results of operations. We face competition in several major aspects of our business, particularly from companies that provide live streaming services and online games. Someof our competitors may have longer operating histories and significantly greater financial, technical and marketing resources than we do, and in turn may have anadvantage in attracting and retaining users and advertisers. In addition, competitors in some areas of our business may have significantly larger user bases and moreestablished brand names than we do and may be able to more effectively leverage their user bases and brand names to provide live streaming, internetcommunication, online games and other products and services, and thereby increase their respective market shares. We may also face potential competition fromglobal live streaming service providers that seek to enter the China market, whether independently or through the formation of alliances with, or acquisition of,PRC domestic internet companies. In relation to our live streaming business and our online advertising and promotion business, our competitors primarily include Momo,Yingke (Ingkee),DouyuTV.com, Huajiao, Youku’s Laifeng, Yizhibo, NetEase’s Bobo and Kuaishou. For online games, our competitors include other major internet companies thathost games, such as 37.com, 4399.com, Tencent, Qihoo 360 and other private companies. We also have various competitors in the online game media market inChina. Duowan.com’s primary competitor among game media websites is 17173.com. If we are not able to effectively compete in any of our lines of business, our overall user base and level of user engagement may decrease, which couldreduce our paying users or make us less attractive to advertisers. We may be required to spend additional resources to further increase our brand recognition andpromote our products and services, and such additional spending could adversely affect our profitability. Furthermore, if we are involved in disputes with any ofour competitors that result in negative publicity to us, such disputes, regardless of their veracity or outcome, may harm our reputation or brand image and in turnlead to reduced number of users and advertisers. Any legal proceedings or measures we take in response to such disputes may be expensive, time-consuming anddisruptive to our operations and divert our management’s attention. Our competitors may unilaterally decide to adopt a wide range of measures targeted at us, including possibly designing their products to negatively impactour operations, such as sending virus-like programs to attack elements of our platforms. Some competitors may also make their applications incompatible withours, effectively requiring users to either stop using our competitors’ products or uninstall our products, leading to a reduction in our number of users. For example,in a widely publicized dispute between two of the largest companies providing user-end software in China, one of the companies announced that it would disableits own software on computers that had installed its rival’s products. As a result, a significant number of users stopped using products from either or both of thesecompanies. Due to the large number of internet users that were affected, the Ministry of Industry and Information Technology of China, or the MIIT, ordered theparties to ensure the compatibility of the relevant products. Similar events may occur in the future between our competitors and us, which may reduce our marketshare, negatively affect our brand and reputation, and materially and adversely affect our business, financial condition and results of operations. Spammers and malicious applications may affect user experience, which could reduce our ability to attract users and advertisers and materially and adverselyaffect our business, financial condition and results of operations. Spammers may use YY to send targeted and untargeted spam messages to users, which may affect user experience. As a result, our users may use ourproducts and services less or stop using them altogether. In spamming activities, spammers typically create multiple user accounts for the purpose of sending spammessages. Although we attempt to identify and delete accounts created for spamming purposes, we may not be able to effectively eliminate all spam messagesfrom our platforms in a timely fashion. Any spamming activities could have a material and adverse effect on our business, financial condition and results ofoperations. 12 We use third party services and technologies in connection with our business, and any disruption to the provision of these services and technologies to us couldresult in adverse publicity and a slowdown in the growth of our users, which could materially and adversely affect our business, financial condition and resultsof operations. Our business depends upon services provided by, and relationships with, third parties. If we are unable to retain or attract popular talents such asperformers, channel managers, professional game players, commentators and hosts for our live streaming platform or if these talents cannot draw fans orparticipants, our results of operations may be adversely affected. Also, if channel owners are unable to reach or maintain mutually satisfactory cooperationarrangements with the performers on their channels on our live streaming platform, we may lose popular performers and our business and operations may beadversely affected. Furthermore, if we are unable to obtain or retain rights to host popular online games or popular in-game virtual items, or if we are required toshare a bigger portion of our revenues with third party game developers, we could be required to devote greater resources and time to obtain hosting rights for newgames and applications from other parties, and our results of operations may be impacted. In addition, some third party software we use in our operations arecurrently publicly available without charge. If the owner of any such software decides to charge users or no longer makes the software publicly available, we mayneed to incur significant cost to license the software, find replacement software or develop it on our own. If we are unable to find or develop replacement softwareat a reasonable cost, or at all, our business and operations may be adversely affected. Some of the games offered by us run on a complex network of servers located in and maintained by third party data centers throughout China and ouroverall network relies on broadband connections provided by third party operators. We expect this dependence on third parties to continue. The networksmaintained and services provided by such third parties are vulnerable to damage or interruption, which could impact our results of operations. See “—Systemfailure, interruptions and downtime can result in adverse publicity for our products and result in net revenue losses, a slowdown in the growth of our registered useraccounts and a decrease in the number of our active users. If any of these system disruptions occurs, our business, financial condition and results of operations maybe materially and adversely affected.” Furthermore, we generate substantially all of our online advertising revenues through agreements entered into with various third party advertisingagencies that represent advertisers. We do not have long-term cooperation agreements or exclusive arrangements with these agencies and they may elect to directbusiness opportunities to other advertising service providers. If we fail to retain and enhance our business relationships with these third party advertising agencies,we may suffer from a loss of advertisers and our business and results of operations may be materially and adversely affected. In addition, we sell a significant portion of our products and services through third party online payment systems. If any of these third party onlinepayment systems suffer from security breaches, users may lose confidence in such payment systems and refrain from purchasing our virtual items online, in whichcase our results of operations would be negatively impacted. See “—The security of operations of, and fees charged by, third party online payment platforms mayhave a material adverse effect on our business and results of operations.” We exercise no control over the third parties with whom we have business arrangements. If such third parties increase their prices, fail to provide theirservices effectively, terminate their service or agreements or discontinue their relationships with us, we could suffer service interruptions, reduced revenues orincreased costs, any of which may have a material adverse effect on our business, financial condition and results of operations. System failure, interruptions and downtime can result in adverse publicity for our products and result in net revenue losses, a slowdown in the growth of ourregistered user accounts and a decrease in the number of our active users. If any of these system disruptions occurs, our business, financial condition andresults of operations may be materially and adversely affected. Although we seek to reduce the possibility of disruptions or other outages, our services may be disrupted by problems with our own technology andsystem, such as malfunctions in our software or other facilities and network overload. Our systems may be vulnerable to damage or interruption fromtelecommunication failures, power loss, computer attacks or viruses, earthquakes, floods, fires, terrorist attacks and similar events. We have experienced systemfailures, including a partial system outage in 2009 caused by hackers hired by a competing business intending to maliciously overwhelm and clog our servers andour routing system. Those responsible were subsequently found guilty and penalized by the PRC courts and we have subsequently updated our system to make itmore difficult for similar attacks to succeed in the future, but we cannot assure you that there will be no similar failures in the future. Parts of our system are notfully redundant, and our disaster recovery planning is not sufficient for all eventualities. Despite any precaution we may take, the occurrence of a natural disaster orother unanticipated problems at our hosting facilities could result in lengthy interruptions in the availability of our products and services. Any interruption in theability of our users to use our products and services could reduce our future revenues, harm our future profits, subject us to regulatory scrutiny and lead users toseek alternative forms of online social interactions. 13 Our servers that process user payments experience some downtime on a regular basis, which may negatively affect our brand and user perception of thereliability of our systems. Any scheduled or unscheduled interruption in the ability of users to use our payment systems could result in an immediate, and possiblysubstantial, loss of revenues. Almost all internet access in China is maintained through state-owned telecommunication operators under the control and supervision of the MIIT, andwe use a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines andinternet data centers to host our servers. Internet data centers in China are generally owned by telecommunication service providers with their own broadbandnetworks and are leased to various customers through third party agents. These third party agents negotiate the terms of the leases, enter into lease agreements withend customers, handle customer interactions and manage the data centers on behalf of the data center owners. In the past, we signed data center lease agreementswith multiple third party agents. With the expansion of our business, we may be required to purchase more bandwidth and upgrade our technology andinfrastructure to keep up with the increasing traffic on our websites and increasing user levels on our platforms overall. We cannot assure you that thetelecommunications providers whose networks we lease or the third party agents that operate our data centers would be able to accommodate all of our requests formore bandwidth or upgraded infrastructure or network, or that the internet infrastructure and the fixed telecommunications networks in China will be able tosupport the demands associated with the continued growth in our internet usage. Our users may use our products or services for critical transactions and communications, especially business communications. As a result, any systemfailures could result in damage to such users’ businesses. These users could seek significant compensation from us for their losses. Even if unsuccessful, this typeof claim would likely be time consuming and costly for us to address. We have limited control over the prices of the services provided by telecommunication service providers and may have limited access to alternativenetworks or services. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adverselyaffected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed. 14 The respective number of our registered user accounts, active users, paying users and unique visitors may overstate the number of unique individuals whoregister to use our products and services, log on to our platforms, purchase virtual items or other products and services on our platforms or accessDuowan.com, respectively, and may therefore lead to an inaccurate interpretation of our average revenue per paying user metric and of our businessoperations by our management and by investors, and may affect advertisers’ decisions on the amount spent on advertising with us. We do not operate our platforms on a real-name basis and therefore we cannot and do not track the number of unique paying users. Instead, we track thenumber of registered user accounts, active users, paying users and unique visitors. We calculate certain operating metrics in the following ways: (a) the number ofregistered user accounts is the cumulative number of user accounts at the end of the relevant period that have logged onto our platforms at least once afterregistration, (b) the number of active users is the cumulative number of user accounts at the end of the relevant period that have signed onto our platforms at leastonce during the relevant period, (c) the number of paying users is the cumulative number of registered user accounts that have purchased virtual items or otherproducts and services on our platforms at least once during the relevant period, and (d) the number of unique visitors is the number of visits to Duowan.com fromspecific IP addresses for the relevant period, with each IP address counting as a separate unique visitor. The actual number of unique individual users, however, islikely to be lower than that of registered user accounts, active users, paying users and unique visitors, potentially significantly, for three primary reasons. First,each individual user may register more than once and therefore have more than one account, and sign onto each of these accounts during a given period. Forexample, a user may (a) create separate accounts for community and personal use and log onto each account at different times for different activities or (b) if he orshe lost his or her original username or password, he or she can simply register again and create an additional account. Second, we experience irregular registrationactivities such as the creation of a significant number of improper user accounts by a limited number of individuals, which may be in violation of our policies,including for the purpose of clogging our network or posting spam to our channels. We believe that some of these accounts may also be created for specificpurposes such as to increase the number of votes for certain performers in various contests, but the number of registered user accounts, paying users and activeusers do not exclude user accounts created for such purposes. We have limited ability to validate or confirm the accuracy of information provided during the userregistration process to ascertain whether a new user account created was actually created by an existing user who is registering duplicative accounts. Third, eachindividual user may access Duowan.com from more than one IP address; although subsequent visits from the same IP address do not add to our total uniquevisitors count, each new IP address used by an individual would be counted as a different unique visitor to Duowan.com. For example, a user would be counted asa unique visitor three times if he or she accessed Duowan.com from the user’s home computer, office computer and mobile phone. Thus, the respective number ofour registered user accounts, active users, paying users and unique visitors may overstate the number of unique individuals who register on our platforms, sign ontoour platforms, purchase virtual items or other products and services on our platforms and access Duowan.com, respectively which may lead to an inaccurateinterpretation of our average revenue per paying user metric. In addition, we may be unable to track whether we are successfully converting registered users or active users into paying users since we do not track thenumber of unique individuals or operate our platforms on a real-name basis. If the growth in the number of our registered user accounts, active users, paying usersor unique visitors is lower than the actual growth in the number of unique individual registered, active or paying users or unique visitors, our user engagementlevel, sales and our business may not grow as quickly as we expect, and advertisers may reduce the amount spent on advertising with us, which may harm ourbusiness, financial condition and results of operations. In addition, such overstatement may cause inaccurate evaluation of our business operations by ourmanagement and by investors, which may also materially and adversely affect our business and results of operations. If we are unable to continue to successfully capture and retain the growing number of users that access internet services through mobile devices orsuccessfully monetize mobile users, our business, financial condition and results of operations may be materially and adversely affected. An increasing number of users are accessing our platforms through mobile devices, and we consider the rise of mobile-based business to be a generaltrend. We have been taking measures to expand our success from PC-based products and services to the mobile platform. In 2010, we introduced Mobile YY, ourmusic and entertainment mobile application. In the second half of 2016, along with our transition into a live streaming platform, we rebrand Mobile YY into YYLive APP, a mobile application for our YY Live platform. We also have introduced Huya APP, a mobile application for our Huya broadcasting platform. Inaddition, we have launched several other mobile applications over the years, including, among others, Xunhuan for online dating shows and Zhiniu for financialnews and analysis. Our mobile applications in aggregate, have contributed 49.6% of the total revenue generated from our live streaming services in the fourthquarter of 2016, compared to 33.4% in the same period of 2015. The ARPU of our live streaming mobile applications has reached RMB292.7 (US$42.2) in thefourth quarter of 2016, compared to RMB428.6 (US$61.7), the average ARPU of our whole live streaming business. We have also developed numerous mobileapplications for other parts of our business. An important element of our strategy is to continue to develop and enhance mobile applications to capture a greatershare of the growing number of mobile users. Nevertheless, since the user experience and user habits on mobile devices are significantly different from those on PCs, there can be no assurance that wecan succeed in adapting our products and services to the expectation of mobile users. If we are unable to attract and retain the increasing number of mobile users,or if we are slower than our competitors in developing attractive services adaptable for mobile devices, we may fail to capture a significant share of an increasinglyimportant portion of the market or may lose existing users. In addition, even if we are able to retain the increasing number of mobile users, we may not be able tosuccessfully monetize them in the future. For example, because of the inherent limitations of mobile devices, such as a smaller display screen space as compared toPCs, we may not be able to provide as many kinds of virtual items on our mobile applications as we can on YY Client, which may limit the monetization potentialof mobile users. 15 Furthermore, as new mobile devices and operating systems are continually being released, it is difficult to predict the problems we may encounter indeveloping and updating versions of our products and services for use on these devices and operating systems, and we have devoted, and expect to continue todevote, significant resources to create, support and maintain these services. Devices providing access to our products and services are not manufactured and sold byus, and we cannot assure you that the companies manufacturing or selling these devices would always ensure that their devices perform reliably and are maximallycompatible with our systems. Any faulty connection between these devices and our products and services may result in consumer dissatisfaction with us, whichcould damage our brand and have a material and adverse effect on our financial results. In addition, the lower resolution, functionality and memory associated withsome mobile devices make the use of our products and services through such devices more difficult and the versions of our products and services we develop forthese devices may fail to attract users. Manufacturers or distributors may establish unique technical standards for their devices and, as a result, our mobileapplications may not work or be viewable on these devices. Meanwhile, new social platforms or services may emerge which are specifically created to function onmobile operating systems, whereas our platforms were originally designed to be accessed from PCs. Such new entrants may operate more effectively on mobiledevices than our mobile applications do. Due to the increasing importance of mobile-based business, any of the above may have a material adverse effect on our business, financial condition andresults of operations. The development of mobile technology and applications as a substitute for PC-based technology and applications may adversely affect our existing business,and in turn our revenues and financial performance. In recent years, the development of mobile technology and application, such as increased speed and stability of mobile network and enhancement ofmobile devices, allows performers, content providers and other users to broadcast simply with a mobile device instead of relying on PC-based or other morecomplicated devices. Due to the portability and affordability of mobile devices, mobile broadcasting is more diversified and spontaneous as compared to onlinebroadcasting on PC-based platforms. We believe that such innovation brings opportunities as well as challenges for our business. We launched our mobile broadcasting application, ME Live, in February 2016, which competes with a few other mobile broadcasting applications, suchas Yingke (Ingkee) released in 2015. Although we believe that our mobile application has some unique features and is competitive in the market, the industry isnew and we expect the competition to be intensive. Since mobile broadcasting is more diversified and spontaneous, our experience in content organization andinteraction on PC platforms may not satisfy the mobile users, we may hence fail to attract or retain such mobile users. There can be no assurance that we will beable to gain as significant a market share as we do on PC-based platform. Meanwhile, since the way to monetize mobile users is different from the way to monetizePC users, even if we are able to attract and retain a considerable number of mobile users, we may not generate as much revenue as we do on PCs. Although we believe that users, including performers, are unlikely to entirely migrate to mobile applications and cease to use YY through PCs and thatmost of our mobile users also access our platforms through PCs, we cannot assure you that the increasing usage of mobile application will not cause our users tocease accessing our platforms from PCs. If a significant number of users migrate to mobile applications as a substitute for accessing our platforms through PCs, oreven turn to use mobile applications developed by our competitors, our business, results of operations and financial condition would be negatively affected. 16 Concerns about collection and use of personal data could damage our reputation and deter current and potential users from using our products and services,which could lead to lower revenues. Concerns about our practices with regard to the collection, use or disclosure of personal information or other privacy-related matters, even if unfounded,could damage our reputation and operating results. We apply strict management and protection for any information provided by users and, under our privacypolicy, without our users’ prior consent, we will not provide any of our users’ personal information to any unrelated third party. While we strive to comply with ourprivacy guidelines as well as all applicable data protection laws and regulations, any failure or perceived failure to comply may result in proceedings or actionsagainst us by government entities or others, and could damage our reputation. User and regulatory attitudes towards privacy are evolving, and future regulatory oruser concerns about the extent to which personal information is used or shared with advertisers or others may adversely affect our ability to share certain data withadvertisers, which may limit certain methods of targeted advertising. Concerns about the security of personal data could also lead to a decline in general internetusage, which could lead to lower registered, active or paying user numbers on our platforms. For example, if the PRC government authorities require real-nameregistration for YY Client users or users of our mobile applications, the growth of our user numbers may slow and our business, financial condition and results ofoperations may be adversely affected. See “—Risks Related to Our Corporate Structure and Our Industry—We may be adversely affected by the complexity,uncertainties and changes in PRC regulation of internet business and companies.” A significant reduction in registered, active or paying user numbers could lead tolower revenues, which could have a material and adverse effect on our business, financial condition and results of operations. The security of operations of, and fees charged by, third party online payment platforms may have a material adverse effect on our business and results ofoperations. Currently, we sell almost all of our products and services to our users through third party online payment systems. We expect that an increasing amount ofour sales will be conducted over the internet as a result of the growing use of online payment systems. In all these online payment transactions, securedtransmission of confidential information such as customers’ credit card numbers and personal information over public networks is essential to maintain consumerconfidence. We do not have control over the security measures of our third party online payment vendors, and security breaches of the online payment systems thatwe use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage ourreputation and the perceived security of all of the online payment systems that we use. If a well-publicized internet or mobile network security breach were tooccur, users concerned about the security of their online financial transactions may become reluctant to purchase our virtual items even if the publicized breach didnot involve payment systems or methods used by us. In addition, there may be billing software errors that would damage customer confidence in these onlinepayment systems. If any of the above were to occur and damage our reputation or the perceived security of the online payment systems we use, we may lose payingusers and users may be discouraged from purchasing our services, which may have a material adverse effect on our business. In addition, there are currently only a limited number of third party online payment systems in China. If any of these major payment systems decides tocease to provide services to us, or significantly increase the percentage they charge us for using their payment systems for our virtual items and other services, ourresults of operations may be materially and adversely affected. Our core values of focusing on user experience and satisfaction first and acting for the long-term may conflict with the short-term operating results of ourbusiness, and also negatively impact our relationships with advertisers or other third parties. One of our core values is to focus on user experience and satisfaction, which we believe is essential to our success and serves the best, long-term interestsof our company and our shareholders. Therefore, we have made, and may make in the future, significant investments or changes in strategy that we think willbenefit our users, even if our decision negatively impacts our operating results in the short-term. For example, in order to provide users of YY Client withuninterrupted entertainment options, we do not place significant advertising on YY Client. While this decision adversely affects our operating results in the short-term, we believe it enables us to provide higher quality user experience on YY Client, which will help us expand and maintain our current large user base andcreate better monetizing potential in the long-term. In addition, this philosophy of putting our users first may also negatively impact our relationships withadvertisers or other third parties, and may not result in the long-term benefits that we expect, in which case the success of our business and operating results couldbe harmed. 17 Trademarks registered, internet search engine keywords purchased and domain names registered by third parties that are similar to our trademarks, brands orwebsites could cause confusion to our users, divert online customers away from our products and services or harm our reputation. Competitors and other third parties may purchase (a) trademarks that are similar to our trademarks and (b) keywords that are confusingly similar to ourbrands or websites in internet search engine advertising programs and in the header and text of the resulting sponsored links or advertisements in order to divertpotential customers from us to their websites. Preventing such unauthorized use is inherently difficult. If we are unable to prevent such unauthorized use,competitors and other third parties may continue to drive potential online customers away from our platforms to competing, irrelevant or potentially offensiveplatforms, which could harm our reputation and cause us to lose revenue. We may be subject to intellectual property infringement claims or other allegations, which could result in our payment of substantial damages, penalties andfines, removal of relevant content from our website or seeking license arrangements which may not be available on commercially reasonable terms. Third party owners or right holders of technology patents, copyrights, trademarks, trade secrets and website content may assert intellectual propertyinfringement or other claims against us. In addition, content generated through our platforms, including real-time content, may also potentially cause disputesregarding content ownership or intellectual property. For example, we could face copyright infringement claims with respect to songs performed live, recorded ormade accessible and online games being streamed live, recorded or made accessible on our live streaming platforms. We generated 85.7% of our total net revenuesin 2016 from live streaming services. The validity, enforceability and scope of protection of intellectual property rights in internet-related industries, particularly in China, are uncertain andstill evolving. As we face increasing competition and as litigation becomes a more common way to resolve disputes in China, we face a higher risk of being thesubject of intellectual property infringement claims. For example, Guangzhou NetEase Computer System Co., Ltd. has initiated a lawsuit against us in Guangzhouin October 2014, claiming the infringement of its rights of reproduction concerning the online game of Fantasy Westward Journey in the amount of RMB100million. Although we believe that the claim is unjustified and commercially motivated, if the outcome of the proceeding is unfavorable to us, we may sufferconsiderable damage to our financial position and reputation. Under relevant PRC laws and regulations, online service providers which provide storage space forusers to upload works or links to other services or content could be held liable for copyright infringement under various circumstances, including situations wherean online service provider knows or should reasonably have known that the relevant content uploaded or linked to on its platform infringes the copyrights of othersand the provider realizes economic benefits from such infringement activities. The “knows or should reasonably have known” element would be fulfilled undersome statutorily specified circumstances. For example, online service providers are subject to liability if they fail to take necessary measures, such as deletion,blocking or disconnection, after receiving notification from the legal right holders. In particular, there have been cases in China in which the courts have found anonline service provider to be liable for the copyrighted content posted by users which were accessible and stored on such provider’s servers. On the other hand, toour knowledge, there is currently no precedent or settled court practice which provides clear or potential guidance as to whether or to what extent a real-time onlineplatform such as YY would be held liable for the unauthorized posting or live performances of copyrighted content by our users. See “Item 4. Information on theCompany—B. Business Overview—PRC Regulation—Intellectual Property Rights.” We have implemented procedures to reduce the likelihood that we may use, develop or make available any content or applications without the properlicenses or necessary third party consents; such procedures include requiring performers, channel owners and users to acknowledge and agree that they would notperform or upload copyrighted content without proper authorization and that they will indemnify us for any relevant copyright infringement claims. However,these procedures may not be effective in preventing unauthorized posting or use of copyrighted content on our platforms or the infringement of other third partyrights. Specifically, such acknowledgments and agreements by performers, channel owners and users are not enforceable against third parties who maynevertheless file claims of copyright infringement against us. Furthermore, individual performers or channel owners who generate content that may infringe oncopyrights of third parties on our platforms may not be easily traceable, if at all, by a plaintiff who may then choose to file a claim against us, and these individualperformers and channel owners may not have resources to fully indemnify us, if at all, for any such claims. In addition, we have entered into revenue-sharingarrangements in the form of direct or indirect employment agreements with some of the popular singers, performers or channel owners on our platforms, and wecannot assure you that PRC courts will not view these singers, performers or channel owners as our employees or agents, deem us to have control over theiractivities on our platforms and the content they upload or otherwise make available on our platforms, determine that we have knowingly uploaded such infringingcontent on our platforms and hold us directly liable for their infringement activities on our platforms. Separately, as our business expands, the cost of carrying outthese procedures and obtaining authorization and licenses for the growing content on our platforms may increase, which may potentially have material and adverseeffects on our results of operations. 18 Although we have not been subject to claims or lawsuits outside China, we cannot assure you that we will not become subject to intellectual property lawsin other jurisdictions, such as the United States, by virtue of our ADSs being listed on the Nasdaq Global Market, the ability of users to access our platforms in theUnited States and other jurisdictions, the performance of songs and other content which are subject to copyright and other intellectual property laws of countriesoutside China, including the United States, the ownership of our ADSs by investors in the United States and other jurisdictions, or the extraterritorial application offoreign law by foreign courts or otherwise. In addition, as a publicly listed company, we may be exposed to increased risk of litigation. If an infringement claim brought against us in China, the United States or any other jurisdiction is successful, we may be required to pay substantialstatutory penalties or other damages and fines, remove relevant content from our platforms or enter into license agreements which may not be available oncommercially reasonable terms or at all. Litigation or other claims against us also subject us to adverse publicity which could harm our reputation and affect ourability to attract and retain users, including channel owners, singers and other performers, which could materially and adversely affect the popularity of ourplatforms and therefore, our business, financial condition, results of operations and prospects may be materially and adversely affected. We may not be able to successfully halt the operations of platforms that aggregate our data as well as data from other companies, including social networks, or“copycat” platforms that have misappropriated our data in the past or may misappropriate our data in the future. Those platforms may also lure away some ofour users or advertisers or reduce our market share, causing material and adverse effects on our business operations. From time to time, third parties have misappropriated our data through scraping our platforms, robots or other means and aggregated this data on theirplatforms with data from other companies. In addition, “copycat” platforms or client applications have misappropriated data on our platforms, implanted Trojanviruses in user PCs to steal user data from YY Client and attempted to imitate our brand or the functionality of our platforms. When we became aware of suchplatforms, we employed technological and legal measures in an attempt to halt their operations. However, we may not be able to detect all such platforms in atimely manner and, even if we could, technological and legal measures may be insufficient to stop their operations. In those cases, our available remedies may notbe adequate to protect us against such platforms. Regardless of whether we can successfully enforce our rights against these platforms, any measures that we maytake could require significant financial or other resources from us. Those platforms may also lure away some of our users or advertisers or reduce our market share,causing material and adverse effects to our business operations. We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position. We regard our trademarks, service marks, patents, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to oursuccess, and we rely on trademark and patent law, trade secret protection and confidentiality and license agreements with our employees and others to protect ourproprietary rights. As of December 31, 2016, we had registered 208 domain names, including YY.com, Huya.com, Zhiniu8.com, Duowan.com, 100.com andChinaduo.com, 286 software copyrights and other copyrights, 75 patents and 610 trademarks and service marks in China and overseas. In addition, as of December31, 2016, we had filed 816 patent applications covering certain of our proprietary technologies and 451 trademark applications in China and overseas. It is often difficult to create and enforce intellectual property rights in China. Patents, trademarks and service marks may also be invalidated,circumvented, or challenged. Trade secrets are difficult to protect, and our trade secrets may be leaked or otherwise become known or be independently discoveredby others. Confidentiality agreements may be breached, and we may not have adequate remedies for any breach. Even where adequate, relevant laws exist inChina, it may not be possible to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a court judgment or an arbitration awarddelivered in another jurisdiction, and accordingly, we may not be able to effectively protect our intellectual property rights or enforce agreements in China.Policing any unauthorized use of our intellectual property is difficult and costly and the steps we have taken may be inadequate to prevent the misappropriation ofour technologies. Given the potential cost, effort, risks and downsides of obtaining patent protection, in some cases we have not and do not plan to apply forpatents or other forms of formal intellectual property protection for certain key technologies. If some of these technologies are later proven to be important to ourbusiness and are used by third parties without our authorization, especially for commercial purposes, our business and competitive position may be harmed. 19 As our patents may expire and may not be extended, our patent applications may not be granted and our patent rights may be contested, circumvented,invalidated or limited in scope, our patent rights may not protect us effectively. In particular, we may not be able to prevent others from developing orexploiting competing technologies, which could have a material and adverse effect on our business operations, financial condition and results of operations. In China, the valid period of utility model patent right or design patent right is ten years and is not extendable. Currently, we have patent applicationspending in China, but we cannot assure you that we will be granted patents pursuant to our pending applications. Even if our patent applications succeed and weare issued patents in accordance with them, it is still uncertain whether these patents will be contested, circumvented or invalidated in the future. The rights grantedunder any issued patents may not provide us with proprietary protection or competitive advantages. Further, the claims under any patents that issue from our patentapplications may not be broad enough to prevent others from developing technologies that are similar or that achieve results similar to ours. It is also possible thatthe intellectual property rights of others will bar us from licensing and from exploiting any patents that issue from our pending applications. Numerous U.S. andforeign issued patents and pending patent applications owned by others exist in the fields in which we have developed and are developing our technology. Thesepatents and patent applications might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition tothose who may claim priority, any of our existing or pending patents may also be challenged by others on the basis that they are otherwise invalid orunenforceable. If we fail to maintain and enhance our brands, or if we incur excessive expenses in this effort, our business, results of operations and prospects may bematerially and adversely affected. We believe that maintaining and enhancing our brands is of significant importance to the success of our business. Well-recognized brands are important toincreasing the number of users and the level of engagement of our users and enhancing our attractiveness to advertisers. Since we operate in a highly competitivemarket, brand maintenance and enhancement directly affect our ability to maintain our market position. Although we have developed YY mostly through word of mouth referrals, as we expand, we may conduct various marketing and brand promotionactivities using various methods to continue promoting our brands. We cannot assure you, however, that these activities will be successful or that we will be able toachieve the brand promotion effect we expect. In addition, any negative publicity in relation to our products or services, regardless of its veracity, could harm ourbrands and reputation. We have sometimes received, and expect to continue to receive, complaints from users regarding the quality of the products and services we offer.Negative publicity or public complaints by users may harm our reputation and affect our ability to attract new users and retain existing users. If our users’complaints are not addressed to their satisfaction, our reputation and our market position could be significantly harmed, which may materially and adversely affectour business, results of operations and prospects. 20 Our business depends substantially on the continuing efforts of our executive officers and key employees, and our business operations may be severelydisrupted if we lose their services. Our future success depends substantially on the continued efforts of our executive officers and key employees. If one or more of our executive officers orkey employees were unable or unwilling to continue their services with us, we might not be able to replace them easily, in a timely manner, or at all. In addition,our executive officers and key employees hold the equity interests in Beijing Tuda Science and Technology Co., Ltd., or Beijing Tuda, Guangzhou HuaduoNetwork Technology Co., Ltd., or Guangzhou Huaduo, and Beijing Bilin Online Information Technology Co., Ltd., or Bilin Online, our PRC consolidatedaffiliated entities. In particular, Mr. David Xueling Li, our co-founder and chairman, owns 97.7% of Beijing Tuda’s equity interests and 99% of Bilin Online’sequity interests. Mr. Li and Beijing Tuda also own approximately 0.5% and 99.0% of Guangzhou Huaduo’s equity interests, respectively. If any of these executiveofficers and key employees terminates their services with us, we have the contractual right to appoint designees to hold the PRC consolidated affiliated entities’equity interests. However, our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected andwe may incur additional expenses to recruit, train and retain personnel. If any of our executive officers or key employees joins a competitor or forms a competingcompany, we may lose customers, know-how and key professionals and staff members. Each of our executive officers and key employees has entered into anemployment agreement and a non-compete agreement with us. However, as advised by our PRC counsel, Fangda Partners, certain provisions under the non-compete agreement may not be deemed valid or enforceable under PRC laws. If any dispute arises between our executive officers and key employees and us, wecannot assure you that we would be able to enforce these non-compete agreements in China, where these executive officers reside, in light of uncertainties withChina’s legal system. See “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulationscould limit the legal protections available to you and us.” If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected. Our future success depends, to a significant extent, on our ability to attract, train and retain qualified personnel, particularly management, technical andmarketing personnel with expertise in the internet industry; inability to do so may materially and adversely affect our business. Since the internet industry ischaracterized by high demand and intense competition for talent, we cannot assure you that we will be able to attract or retain qualified staff or other highly skilledemployees. As our company is relatively young, our ability to train and integrate new employees into our operations may not meet the growing demands of ourbusiness which may materially and adversely affect our ability to grow our business and hence our results of operations. Our results of operations are subject to substantial quarterly and annual fluctuations due to seasonality. We experience seasonality in our business, reflecting seasonal fluctuations in internet usage. As a result, comparing our operating results on a period-to-period basis may not be meaningful. For example, online user numbers tend to be lower during school holidays and certain parts of the school year, and advertisingrevenues tend to be lower during the Chinese New Year season, which negatively affects our cash flow for those periods. We may also experience a reduction inactive users in the third quarter of each year because a significant portion of our users are students, and as the new school year begins, student access to computersand the internet are affected. Internet usage and the rate of internet growth may also be expected to decline during the summer school holidays as some studentslose regular internet access. Furthermore, the number of paying users of our online music and entertainment platform correlates with the marketing campaigns andpromotional activities we conduct which coincide with popular western or Chinese festivals celebrated by young Chinese people, many of which are in the fourthquarter and ending with the Chinese New Year holidays which typically fall in the first quarter. As a result, our operating results in future quarters or years may fall below the expectations of securities analysts and investors. In such event, the tradingprice of our ADSs would likely be materially and adversely affected. See “Item 4. Information on the Company—B. Business Overview—Seasonality” foradditional details regarding the effects of seasonality on our cash flow, operating performance and financial results. Our business is sensitive to global economic conditions. A severe or prolonged downturn in the global or Chinese economy could materially and adverselyaffect our business, financial condition and results of operations. The global macroeconomic environment is facing challenges, including the escalation of the European sovereign debt crisis since 2011, the end ofquantitative easing by the U.S. Federal Reserve, the economic slowdown in the Eurozone in 2014 and the expected exit of The United Kingdom from the EuropeanUnion. The Chinese economy has slowed down since 2012 and such slowdown may continue. There is considerable uncertainty over the long-term effects of theexpansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the UnitedStates and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in volatility in oil andother markets, and over the conflicts involving Ukraine and Syria. There have also been concerns on the relationship among China and other Asian countries,which may result in or intensify potential conflicts in relation to territorial disputes. Economic conditions in China are sensitive to global economic conditions, aswell as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any sever or prolongedslowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition. In addition, continuedturbulence in the international markets may adversely affect our ability to access capital markets to meet liquidity needs. 21 Future strategic alliances or acquisitions may have a material and adverse effect on our business, reputation and results of operations. We may enter into strategic alliances, including joint ventures or minority equity investments, with various third parties to further our business purposefrom time to time. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by thethird party and increased expenses in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have limitedability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties suffers negative publicity or harm to theirreputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with any such thirdparty. In addition, although we have no current acquisition plans, if appropriate opportunities arise, we may acquire additional assets, products, technologies orbusinesses that are complementary to our existing business. Past and future acquisitions and the subsequent integration of new assets and businesses into our ownrequire significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverseeffect on our business operations. Acquired assets or businesses may not generate the financial results we expect. Acquisitions could result in the use of substantialamounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for otherintangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may besignificant. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant government authorities for theacquisitions and to comply with any applicable PRC laws and regulations, which could result in increased delay and costs. If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or preventfraud, and investor confidence in our company and the market price of our ADSs may be adversely affected. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring most public companies toinclude a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of theeffectiveness of the company’s internal control over financial reporting. In addition, when a company meets the SEC’s criteria, an independent registered publicaccounting firm must report on the effectiveness of the company’s internal control over financial reporting. Our management and independent registered public accounting firm have concluded that our internal control over financial reporting was effective as ofDecember 31, 2016. However, we cannot assure you that in the future our management or our independent registered public accounting firm will not identifymaterial weaknesses during the Section 404 of the Sarbanes-Oxley Act audit process or for other reasons. In addition, because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraudmay not be prevented or detected on a timely basis. As a result, if we fail to maintain effective internal control over financial reporting or should we be unable toprevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial statements, whichin turn could harm our business, results of operations and negatively impact the market price of our ADSs, and harm our reputation. Furthermore, we have incurredand expect to continue to incur considerable costs and to use significant management time and the other resources in an effort to comply with Section 404 andother requirements of the Sarbanes-Oxley Act. 22 Some of our users may make sales or purchases through unauthorized third party platforms of virtual items we offer for free on our platforms, which mayaffect our revenue-generating opportunities and exert downward pressure on the prices we charge for our virtual items. We, from time to time, offer virtual items free of charge to attract users or encourage user participation in channels. Some of our users may sell orpurchase such free virtual items through unauthorized third party sellers in exchange for real currency. For example, fans of a performer may pay other users tosend flowers or gifts the latter have accumulated on our platforms to the performer, in order to show support and raise the popularity ranking of the performer oftheir choice. These unauthorized transactions are usually arranged on third party platforms which we do not and are unable to track or monitor. Accordingly, theseunauthorized purchases and sales from third party sellers may affect our revenue-generating opportunities and may impede our revenue and profit growth by,among other things, reducing the revenues we could have generated and exerting downward pressure on the prices we charge for our virtual items. We have limited business insurance coverage, so that any uninsured occurrence of business disruption may result in substantial costs to us and the diversionof our resources, which could have an adverse effect on our results of operations and financial condition. Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed economies.We do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and thedifficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsuredoccurrence may disrupt our business operations, require us to incur substantial costs and divert our resources, which could have an adverse effect on our results ofoperations and financial condition. Risks Related to Our Corporate Structure and Our Industry If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC laws and regulations, or if these laws orregulations or interpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including the shutting down of ourplatforms and our business operations. Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC governmentregulates internet access, the distribution of online information and the conduct of online commerce through strict business licensing requirements and othergovernment regulations. These laws and regulations also limit foreign ownership in PRC companies that provide internet information distribution services.Specifically, foreign ownership in an internet information provider or other value-added telecommunication service providers may not exceed 50%. In addition,according to the Several Opinions on the Introduction of Foreign Investment in the Cultural Industry promulgated by the Ministry of Culture, or the MOC, theState Administration of Radio, Film and Television, or the SARFT, the General Administration of Press and Publication, or the GAPP, currently known as theState Administration of Press Publication, Radio, Film and Television after combination of SARFT and GAPP, the National Development and ReformCommission and the Ministry of Commerce, or the MOFCOM, in July 2005, foreign investors are prohibited from investing in or operating, among others, anyinternet cultural operating entities and from engaging in the business of transmitting audio-visual programs through information networks. We are a Cayman Islands company and our PRC subsidiaries, Guangzhou Huanju Shidai Information Technology Co., Ltd., or Guangzhou HuanjuShidai, and Huanju Shidai Technology (Beijing) Co., Ltd., or Beijing Huanju Shidai, are each considered a wholly foreign owned enterprise. We conduct ouroperations in China primarily through a series of contractual arrangements entered into among our PRC subsidiary, Beijing Huanju Shidai, our major PRCconsolidated affiliated entities, Guangzhou Huaduo and Beijing Tuda, and Guangzhou Huaduo and Beijing Tuda’s shareholders. As a result of these contractualarrangements, we exert control over our major PRC consolidated affiliated entities and consolidate each of their operating results in our financial statements underU.S. GAAP. All of the equity (net assets) or deficit (net liabilities) and net income (loss) of the consolidated affiliated entities are attributed to us. In addition, weconduct the Bilin business, a mobile instant communication application and its related business line, through contractual arrangements among our PRC subsidiary,Bilin Changxiang, our PRC consolidated affiliated entity, Bilin Online, and Bilin Online’s shareholder. For a detailed description of these contractualarrangements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party—Contractual Arrangements with Beijing Tuda.” 23 On September 28, 2009, the GAPP, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications,jointly issued a Notice on Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval ofImported Online Games, or Circular 13. Circular 13 restates that foreign investors are not permitted to invest in online game-operating businesses in China viawholly owned, equity joint venture or cooperative joint venture investments and expressly prohibits foreign investors from gaining control over or participating indomestic online game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangementssuch as the variable interest entity structural arrangements we adopted for our consolidated affiliated entities. We are not aware of any companies that have adopteda corporate structure that is the same as or similar to ours having been penalized or terminated under Circular 13 since the effective date of the circular.Furthermore, the enforcement of Circular 13 is still subject to substantial uncertainty, including possible subsequent joint actions by relevant authorities in charge,such as the MOC. The Regulation on Three Provisions stipulates that the MOC is authorized to regulate the online game industry, while the GAPP is authorized toapprove the publication of online games before their launch on the internet. The Interpretation on Three Provisions further provides that once an online game islaunched on the internet, it will be completely under the regulation of the MOC, and that if an online game is launched on the internet without obtaining priorapproval from the GAPP, the MOC, instead of the GAPP, is directly responsible for investigating the game. In the event that we, our PRC subsidiaries or PRCconsolidated affiliated entities are found to be in violation of the prohibition under Circular 13, the GAPP, in conjunction with the relevant regulatory authorities incharge, may impose applicable penalties, which in the most serious cases may include suspension or revocation of relevant licenses and registrations. In addition,various media sources have reported that the CSRC prepared a report proposing pre-approval by a competent central government authority of offshore listings byChina-based companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions. However, itis unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any such report provides. Furthermore, onJanuary 19, 2015, the MOFCOM issued a discussion draft of the proposed Foreign Investment Law, which may place restrictions on variable interest entitystructures adopted by us, but the enactment timetable, interpretation, implementation and influence thereof remain unclear. See “—Risks Related to DoingBusiness in China—Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign InvestmentLaw and how it may impact the viability of our current corporate structure, corporate governance and business operations.” Based on understanding of current PRC laws, rules and regulations of our PRC legal counsel, Fangda Partners, our current ownership structure for ourbusiness operations, the ownership structure of our PRC subsidiaries and our PRC consolidated affiliated entities, the contractual arrangements among our PRCsubsidiaries, our PRC consolidated affiliated entities and their shareholders, as described in this annual report on Form 20-F, are in compliance with existing PRClaws, rules and regulations. However, we were further advised by Fangda Partners that there is substantial uncertainty regarding the interpretation and applicationof current or future PRC laws and regulations and these laws or regulations or interpretations of these laws or regulations may change in the future. Furthermore,the relevant government authorities have broad discretion in interpreting these laws and regulations. Accordingly, we cannot assure you that PRC governmentauthorities will not ultimately take a view contrary to the opinion of our PRC legal counsel. If our ownership structure, contractual arrangements and businesses of our company, our PRC subsidiaries or our PRC consolidated affiliated entities arefound to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities would have broad discretion in dealing with suchviolation, including levying fines, confiscating our income or the income of our PRC subsidiaries or PRC consolidated affiliated entities, revoking or suspendingthe business licenses or operating licenses of our PRC subsidiaries or PRC consolidated affiliated entities, shutting down our servers or blocking our platforms,discontinuing or placing restrictions or onerous conditions on our operations, requiring us to discontinue our operations, requiring us to undergo a costly anddisruptive restructuring, restricting or prohibiting our use of proceeds from our initial public offering to finance our business and operations in China, and takingother regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operationsand severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. In addition, ifthe imposition of any of these penalties causes us to lose the rights to direct the activities of our PRC consolidated affiliated entities or our right to receive theireconomic benefits, we would no longer be able to consolidate such entities. Our PRC consolidated affiliated entities contributed substantially all of ourconsolidated net revenues in the years ended December 31, 2014, 2015 and 2016. 24 We rely on contractual arrangements with our PRC consolidated affiliated entities and their shareholders for the operation of our business, which may not beas effective as direct ownership. If our PRC consolidated affiliated entities and their shareholders fail to perform their obligations under these contractualarrangements, we may have to resort to litigation to enforce our rights, which may be time-consuming, unpredictable, expensive and damaging to ouroperations and reputation. Because of PRC restrictions on foreign ownership of internet-based businesses in China, we depend on contractual arrangements with our PRCconsolidated affiliated entities in which we have no ownership interest to conduct our business. These contractual arrangements are intended to provide us witheffective control over these entities and allow us to obtain economic benefits from them. Our PRC consolidated affiliated entities are owned directly by Mr. DavidXueling Li and certain other shareholders. For additional details on these ownership interests, see “—Risks Related to Our Business—Our business dependssubstantially on the continuing efforts of our executive officers and key employees, and our business operations may be severely disrupted if we lose theirservices” and “Item 4. Information on the Company—A. History and Development of the Company.” However, these contractual arrangements may not be aseffective in providing control as direct ownership. For example, each of our PRC consolidated affiliated entities and their shareholders could breach theircontractual arrangements with us by, among other things, failing to operate our business in an acceptable manner or taking other actions that are detrimental to ourinterests. If we were the controlling shareholder of these PRC consolidated affiliated entities with direct ownership, we would be able to exercise our rights asshareholders to effect changes to their board of directors, which in turn could implement changes at the management and operational level. However, under thecurrent contractual arrangements, as a legal matter, if our PRC consolidated affiliated entities or their shareholders fail to perform their obligations under thesecontractual arrangements, we may have to incur substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including contractremedies, which may not be sufficient or effective. In particular, the contractual arrangements provide that any dispute arising from these arrangements will besubmitted to the China International Economic and Trade Arbitration Commission for arbitration in Beijing, the ruling of which will be final and binding. The legalframework and system in China, particularly those relating to arbitration proceedings, is not as developed as other jurisdictions such as the United States. As aresult, significant uncertainties relating to the enforcement of legal rights through arbitration, litigation and other legal proceedings remain in China, which couldlimit our ability to enforce these contractual arrangements and exert effective control over our consolidated affiliated entities. If we are unable to enforce thesecontractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, our business andoperations could be severely disrupted, which could materially and adversely affect our results of operations and damage our reputation. See “—Risks Related toDoing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to youand us.” Our existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders,which may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium fortheir securities. As of March 31, 2017, our management group—including Mr. David Xueling Li, our co-founder and chairman, Mr. Zhou Chen, the chief executiveofficer of the Company, and Mr. Rongjie Dong, the chief executive officer of Huya broadcasting, one of our business units — and their respective affiliates, held82.6% of the total voting power. Mr. Li and Beijing Tuda together hold 99.5% of the equity interest in Guangzhou Huaduo and Mr. Li holds 97.7% of the equityinterest in Beijing Tuda. Guangzhou Huaduo and Beijing Tuda are our major variable interest entities. Our management group has substantial influence over ourbusiness, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significantcorporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders ofan opportunity to receive a premium for their shares as part of any contemplated sale of our company and may reduce the price of our ADSs. In addition, Messrs.Zhou Chen and Rongjie Dong could violate the terms of their non-compete or employment agreements with us or their legal duties by diverting businessopportunities from us, resulting in our loss of corporate opportunities. These actions may take place even if they are opposed by our other shareholders. 25 Additionally, Mr. Jun Lei, our major shareholder who beneficially owned 15.5% of our outstanding shares as of March 31, 2017, has delegated the votingrights of the shares that he holds in our Company to Mr. Li. Mr. Lei is active in making investments in internet companies in China and currently holds direct andindirect interests in Xiaomi and iSpeak, which competes with certain of our lines of business, and other entities which may have businesses that compete with ours.Xiaomi is a mobile phone and smart appliances manufacturer and internet value-added service provider directly invested by Mr. Lei, which has started offeringonline performance and live broadcasting services recently. iSpeak is owned by Mr. Lei in part through Kingsoft Corporation Limited, which is engaged in theresearch, development operation and distribution of online games, mobile games, casual game services and internet software. Mr. Lei may, in the future, acquireadditional interests in businesses that directly or indirectly compete with some of our lines of business or that are our suppliers or customers. Furthermore, Mr. Leimay pursue acquisitions or make further investments in our industries which may conflict with our interests. For more information regarding the beneficialownership of our company by our principal shareholders, see “Item 6. Directors, Senior management and Employees—E. Share Ownership.” We may lose the ability to use and enjoy assets held by our PRC consolidated affiliated entities that are important to the operation of our business if suchentities go bankrupt or become subject to a dissolution or liquidation proceeding. As part of our contractual arrangements with our major PRC consolidated affiliated entities, Guangzhou Huaduo and Beijing Tuda, such entities holdcertain assets, such as patents for the proprietary technology that are essential to the operations of our platforms and important to the operation of our business. Ifeither Guangzhou Huaduo or Beijing Tuda goes bankrupt and all or part of its assets become subject to liens or rights of third party creditors, we may be unable tocontinue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. IfGuangzhou Huaduo or Beijing Tuda undergoes a voluntary or involuntary liquidation proceeding, the unrelated third party creditors may claim rights to some or allof these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results ofoperations. Our ability to enforce the equity pledge agreements between us and our PRC variable interest entities’ shareholders may be subject to limitations based on PRClaws and regulations. Pursuant to the equity interest pledge agreements between Beijing Huanju Shidai, our wholly owned subsidiary in China, and the shareholders ofGuangzhou Huaduo, Beijing Tuda and Bilin Online, our variable interest entities, or VIEs, each shareholders of each variable interest entities agrees to pledge itsequity interests in the VIE to our subsidiary to secure the relevant VIE’s performance of their obligations under the relevant contractual arrangements. The equityinterest pledges of shareholders of VIEs under these equity pledge agreements have been registered with the relevant local branch of the SAIC. In addition, in theregistration forms of the local branch of State Administration for Industry and Commerce for the pledges over the equity interests under the equity interest pledgeagreements, the aggregate amount of registered equity interests pledged to Beijing Huanju Shidai represents 100% of the registered capital of Guangzhou Huaduoand Beijing Tuda, and those pledged to Bilin Changxiang represents 100% of the registered capital of Bilin Online. The equity interest pledge agreements witheach of the VIEs’ shareholders provide that the pledged equity interest shall constitute continuing security for any and all of the indebtedness, obligations andliabilities under all of the principal service agreements and the scope of pledge shall not be limited by the amount of the registered capital of that VIE. However, itis possible that a PRC court may take the position that the amount listed on the equity pledge registration forms represents the full amount of the collateral that hasbeen registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity interest pledge agreements in excess of the amountlisted on the equity pledge registration forms could be determined by the PRC court as unsecured debt, which takes last priority among creditors. 26 Our contractual arrangements with our PRC consolidated affiliated entities may result in adverse tax consequences to us. As a result of our corporate structure and the contractual arrangements among our PRC subsidiaries, our PRC consolidated affiliated entities and theirshareholders, we are effectively subject to PRC turnover tax on revenues generated by our subsidiaries from our contractual arrangements with our PRCconsolidated affiliated entities. Such tax generally includes the PRC value added tax, or the VAT, at a rate of 6% or 17% along with related surcharges. Theapplicable turnover tax is determined by the nature of the transaction generating the revenues subject to taxation. The PRC enterprise income tax law requiresevery enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its affiliates or related parties to the relevanttax authorities. These transactions may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year during which thetransactions are conducted. We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between us and our PRCconsolidated affiliated entities were not on an arm’s length basis and therefore constitute a favorable transfer pricing arrangements. If this occurs, the PRC taxauthorities could request that either of our PRC consolidated affiliated entities adjust its taxable income upward for PRC tax purposes. Such a pricing adjustmentcould adversely affect us by reducing expense deductions recorded by either PRC consolidated affiliated entities and thereby increasing these entities’ taxliabilities, which could subject these entities to late payment fees and other penalties for the underpayment of taxes. Our consolidated net income may be materiallyand adversely affected if our PRC consolidated affiliated entities’ tax liabilities increase or if it becomes subject to late payment fees or other penalties. If our PRC consolidated affiliated entities fail to obtain and maintain the requisite licenses and approvals required under the complex regulatory environmentfor internet-based businesses in China, our business, financial condition and results of operations may be materially and adversely affected. The internet industry in China is highly regulated. See “Item 4. Information on the Company—B. Business Overview—PRC Regulation.” GuangzhouHuaduo and our other PRC consolidated affiliated entities are required to obtain and maintain applicable licenses or approvals from different regulatory authoritiesin order to provide their current services. For example, an internet information service provider shall obtain an operating license, or the ICP License, from MIIT orits local counterparts before engaging in any commercial internet information services. An online game operator must also obtain an Internet Culture OperationLicense from the MOC and an Internet Publishing License from the GAPP to distribute online games, in addition to filing its online games with the GAPP and theMOC. Prior to February 2016, an educational website operator shall obtain approvals from the local education authorities. Prior to July 2010, specific approvals ononline bulletin board services were also required for the provision of BBS services. Guangzhou Huaduo has obtained a valid ICP License for provision of internetand mobile network information services, an Internet Culture Operation License for online games and music products, and an Internet Publishing License forpublication of online games and mobile phone games. In addition, Guangzhou Huaduo holds a valid License for Online Transmission of Audio-Visual Programsunder the business classification of converging and play-on-demand service for certain kinds of internet audio-visual programs—literary, artistic and entertaining—as prescribed in the newly issued provisional categories. On October 8, 2011, Guangzhou Huaduo was granted a License for Production and Operation of Radioand TV Programs, covering the production, reproduction and publication of TV dramas, cartoons (excluding production), special subjects, special columns(excluding current political news category) and entertainment programs. On January 1, 2015, Guangzhou Huaduo was granted a License for surveying andmapping, covering online map service. On January 17, 2013 and January 16, 2014, we were granted permission by relevant authorities to provide online educationcontent on edu.YY.com and 100.com, respectively . In the fourth quarter of 2014, we acquired Beijing Huanqiu Xingxue Technology Development Co., Ltd., orBeijing Xingxue, and Beijing Huanqiu Chuangzhi Software Co., Ltd., or Beijing Chuangzhi, which operated Edu24oL.com, an online education website that is anonline vocational training and language training platform, and Beijing Xingxue held an ICP License and a Publication Operating License for the operation ofEdu24oL.com. In the fourth quarter of 2016, we sold majority equity interests in Beijing Xingxue and cease to consolidate financial results of Beijing Xingxue. Inaddition, Zhuhai Huanju Entertainment has obtained a valid ICP License for provision of internet information services, an Internet Culture Operation License foronline games and music products, and a License for Production and Operation of Radio and TV Programs, covering the production, reproduction and publicationof broadcasting plays, TV dramas, cartoons (excluding production), special subjects, special columns (excluding current political news category) and entertainmentprograms. These licenses or permits are essential to the operation of our business and are generally subject to annual government review. However, we cannotassure you that we can successfully renew these licenses annually or that these licenses are sufficient to conduct all of our present or future business. As we further develop and expand our video capabilities and functions, we will need to obtain additional qualifications, permits, approvals or licenses. Inaddition, with respect to specific services offered online, we or the service or content providers may be subject to additional separate qualifications, permits,approvals or licenses. For financial-related content offered on our channels, we are tightening our internal review of the relevant qualifications of the contentproviders as instructed by the competent authorities, while complying with other statutory requirements. We cannot assure you that we or the service or contentproviders will be granted such qualifications, permits, approvals or licenses in a timely manner or at all. Prior to the receipt of such qualifications, permits,approvals or licenses, we may be deemed as being in violation of relevant laws or regulations and be subject to penalties. 27 As the internet industry in China is still at a relatively early stage of development, new laws and regulations may be adopted from time to time to addressnew issues that come to the authorities’ attention. In the interpretation and implementation of existing and future laws and regulations governing our businessactivities, considerable uncertainties still exist. We cannot assure you that we will not be found in violation of any future laws and regulations or any of the lawsand regulations currently in effect due to changes in the relevant authorities’ interpretation of these laws and regulations. In addition, we may be required to obtainadditional license or approvals, and we cannot assure you that we will be able to timely obtain or maintain all the required licenses or approvals or make all thenecessary filings in the future. If we fail to obtain or maintain any of the required licenses or approvals or make the necessary filings, we may be subject to variouspenalties, such as confiscation of the net revenues that were generated through the unlicensed internet activities, the imposition of fines and the discontinuation orrestriction of our operations. Any such penalties may disrupt our business operations and materially and adversely affect our business, financial condition andresults of operations. The shareholders of our PRC variable interest entities may have potential conflicts of interest with us, and if any such conflicts of interest are not resolved inour favor, our business may be materially and adversely affected. Guangzhou Huaduo and Beijing Tuda are our major variable interest entities. Mr. David Xueling Li and Beijing Tuda, together hold 99.5% of the equityinterest in Guangzhou Huaduo and Mr. Li holds 97.7% of the equity interest in Beijing Tuda. Besides Guangzhou Huaduo and Beijing Tuda, Bilin Online is alsoour variable interest entity, which was acquired in August 2015 and is currently 99% held by Mr. Li. Mr. Li is a co-founder and shareholder of our company. Theinterests of Mr. Li as the controlling shareholder of the VIEs may differ from the interests of our company as a whole, as what is in the best interests of our VIEsmay not be in the best interests of our company. We cannot assure you that when conflicts of interest arise, Mr. Li will act in the best interests of our company orthat conflicts of interests will be resolved in our favor. In addition, Mr. Li may breach or cause Guangzhou Huaduo, Beijing Tuda and Bilin Online and theirrespective subsidiaries to breach or refuse to renew the existing contractual arrangements with us. Currently, we do not have existing arrangements to addresspotential conflicts of interest Mr. Li may encounter in his capacity as a shareholder or director of our VIEs, on the one hand, and as a beneficial owner or directorof our company, on the other hand; provided that we could, at all times, exercise our option under the exclusive option agreement with Mr. Li to cause him totransfer all of his equity ownership in Guangzhou Huaduo, Beijing Tuda or Bilin Online to a PRC entity or individual designated by us, and this new shareholderof Guangzhou Huaduo, Beijing Tuda or Bilin Online could then appoint a new director of Guangzhou Huaduo, Beijing Tuda or Bilin Online to replace the existingdirectors. In addition, if such conflicts of interest arise, Beijing Huanju Shidai, our wholly owned PRC subsidiary, could also, in the capacity of attorney-in-fact forMr. Li as provided under the relevant powers of attorney, directly appoint a new director of Guangzhou Huaduo or Beijing Tuda to replace the existing directors.The same mechanism is also applicable to Bilin Online. We rely on Mr. Li to comply with the laws of China, which protect contracts and provide that co-founderand chairman owe a duty of loyalty to our company and require him to avoid conflicts of interest and not to take advantage of his position for personal gains. Wealso rely on Mr. Li to abide by the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faithwith a view toward our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the eventof a conflict with another corporate governance regime. If we cannot resolve any conflicts of interest or disputes between us and Mr. Li, we would have to rely onlegal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings. 28 Implementation of the new labor laws and regulations in China may adversely affect our business and results of operations. Pursuant to the labor contract law that took effect in January 2008, its implementation rules that took effect in September 2008 and its amendment thattook effect in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining theterm of employees’ probation and unilaterally terminating labor contracts. Due to lack of detailed interpretative rules and uniform implementation practices andbroad discretion of the local competent authorities, it is uncertain as to how the labor contract law and its implementation rules will affect our current employmentpolicies and practices. Our employment policies and practices may violate the labor contract law or its implementation rules, and we may thus be subject to relatedpenalties, fines or legal fees. Compliance with the labor contract law and its implementation rules may increase our operating expenses, in particular our personnelexpenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the labor contract law and itsimplementation rules may also limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business andresults of operations. On October 28, 2010, the Standing Committee of the National People’s Congress promulgated the PRC Social Insurance Law, or the SocialInsurance Law, which became effective on July 1, 2011. According to the Social Insurance Law, employees must participate in pension insurance, work-relatedinjury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, paythe social insurance premiums for such employees. We expect our labor costs to increase due to the implementation of these new laws and regulations. As the interpretation and implementation of these newlaws and regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in full compliance with labor-related lawsand regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws andregulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could bematerially and adversely affected. Further, labor disputes, work stoppages or slowdowns at our laboratories, patient service centers or any of our clients or suppliers could significantlydisrupt our daily operation or our expansion plans and have a material adverse effect on our business. Currently there is no law or regulation specifically governing virtual asset property rights and therefore it is not clear what liabilities, if any, online gameoperators may have for virtual assets. While playing online games or participating on YY Client activities, players acquire and accumulate some virtual assets, such as special equipment andother accessories. Such virtual assets can be important to online game players and have monetary value and, in some cases, are sold for actual money. In practice,virtual assets can be lost for various reasons, often through unauthorized use of the game account of one user by other users and occasionally through data losscaused by a delay of network service, a network crash or hacking activities. Currently, there is no PRC law or regulation specifically governing virtual assetproperty rights. As a result, there is uncertainty as to who the legal owner of virtual assets is, whether and how the ownership of virtual assets is protected by law,and whether an operator of online games such as us would have any liability to game players or other interested parties (whether in contract, tort or otherwise) forloss of such virtual assets. Based on recent PRC court judgments, the courts have typically held online game operators liable for losses of virtual assets by gameplayers, and ordered online game operators to return the lost virtual items to game players or pay damages and losses. In case of a loss of virtual assets, we may besued by our game players or users and held liable for damages, which may negatively affect our reputation and business, financial condition and results ofoperations. Compliance with the laws or regulations governing virtual currency may result in us having to obtain additional approvals or licenses or change our currentbusiness model. The issuance and use of “virtual currency” in the PRC has been regulated since 2007 in response to the growth of the online game industry in China. OnJanuary 25, 2007, the Ministry of Public Security, the MOC, the MIIT and the GAPP jointly issued a circular regarding online gambling which has implications forthe use of virtual currency. To curtail online games that involve online gambling, as well as address concerns that virtual currency could be used for moneylaundering or illicit trade, the circular (a) prohibits online game operators from charging commissions in the form of virtual currency in relation to winning orlosing of games; (b) requires online game operators to impose limits on use of virtual currency in guessing and betting games; (c) bans the conversion of virtualcurrency into real currency or property; and (d) prohibits services that enable game players to transfer virtual currency to other players. On June 4, 2009, the MOCand the MOFCOM jointly issued a notice regarding strengthening the administration of online game virtual currency, or the Virtual Currency Notice. The MOCissued the Provisional Administrative Measures of Online Games, or the Online Games Measures, on June 3, 2010, which provides, among other things, thatvirtual currency issued by online game operators may be only used to exchange its own online game products and services and may not be used to pay for theproducts and services of other entities. 29 We issue virtual currency and prepaid game tokens to game players on our platforms for them to purchase various items to be used in online games andchannels, including music channels. We are in the process of adjusting the content of our platforms but we cannot assure you that our adjustments will be sufficientto comply with the Virtual Currency Notice. Moreover, although we believe we do not offer online game virtual currency transaction services, we cannot assureyou that the PRC regulatory authorities will not take a view contrary to ours. For example, certain virtual items we issue to users based on in-game milestones theyachieve or time spent playing games are transferable and exchangeable for our virtual currency or the other virtual items we issue to users. If the PRC regulatoryauthorities deem such transfer or exchange to be a virtual currency transaction, then in addition to being deemed to be engaging in the issuance of virtual currency,we may also be deemed to be providing transaction platform services that enable the trading of such virtual currency. Simultaneously engaging in both of theseactivities is prohibited under the Virtual Currency Notice. In that event, we may be required to cease either our virtual currency issuance activities or such deemed“transaction service” activities and may be subject to certain penalties, including mandatory corrective measures and fines. The occurrence of any of the foregoingcould have a material adverse effect on our business, financial condition and results of operations. In addition, the Virtual Currency Notice prohibits online game operators from setting game features that involve the direct payment of cash or virtualcurrency by players for the chance to win virtual items or virtual currency based on random selection through a lucky draw, wager or lottery. The notice alsoprohibits game operators from issuing currency to game players through means other than purchases with legal currency. It is unclear whether these restrictionswould apply to certain aspects of our online games. Although we believe that we have rectified and ceased such prohibited activities and have taken adequatemeasures to prevent any of the above-mentioned prohibited activities, we cannot assure you that the PRC regulatory authorities will not take a view contrary toours and deem such feature as prohibited by the Virtual Currency Notice, thereby subjecting us to penalties, including mandatory corrective measures and fines.For example, we were previously fined by a local authority in Guangzhou found that our games contained lucky draws. The occurrence of any of the foregoingcould materially and adversely affect our business and results of operations. Non-compliance on the part of third parties with which we conduct business could restrict our ability to maintain or increase our number of users or the levelof traffic to our platforms. Our third party game developers or other business partners may be subject to regulatory penalties or punishments because of their regulatory compliancefailures, which may disrupt our business. Although we conduct a rigid review of legal formalities and certifications before entering into contractual relationshipwith other businesses such as third party game developers and landlords, we cannot be certain whether such third party has or will infringe any third parties’ legalrights or violate any regulatory requirements. We regularly identify irregularities or noncompliance in the business practices of any parties with whom we pursueexisting or future cooperation and we cannot assure you that any of these irregularities will be corrected in a prompt and proper manner. The legal liabilities andregulatory actions on our commercial partners may affect our business activities and reputation and in turn, our results of operations. For example, according toPRC regulations, all lease agreements are required to be registered with the local housing authorities. We presently lease properties at approximately 17 differentlocations for daily operations and certain other properties serving as dormitories and canteens in China, and the landlords of some of these properties are stillcompleting the registration of their ownership rights or the registration of our leases with the relevant authorities. Failure to complete these required registrationsmay expose our landlords, lessors and us to potential monetary fines. Some of our lessors have not provided us with appropriate title certificates, which mayadversely affect the validity of the leases if the lessors do not have proper title. We cannot assure you that such certificates or registration will be obtained in atimely manner or at all, and in case of failures, we may be subject to monetary fines, have to relocate our offices and suffer economic losses. In addition, we allow providers of some online services, such as online education and financial services, to establish channels on our platforms. Theonline service providers and the producers of content on our platforms may be required to meet specific qualifying standards, evidenced by approvals, permits orcertificates, and to comply with various requirements when conducting business. We cannot predict if any noncompliance on the part of such commercial partnersmay cause potential liabilities to us and in turn disrupt our operations. 30 Intensified government regulation of the internet industry in China could restrict our ability to maintain or increase our user level or the level of user traffic toour platforms. The PRC government has, in recent years, intensified regulation on various aspects of the internet industry in China. For example, the PRC governmentadopted more stringent policies to monitor the online game industry due to adverse public reaction to perceived addiction to online games, particularly in childrenand minors. On April 15, 2007, eight PRC government authorities, including the GAPP, the Ministry of Education, the Ministry of Public Security and the MIITissued a notice requiring all Chinese online game operators to adopt an “anti-fatigue system” in an effort to curb addiction to online games by minors. To helpgame operators identify which game players are minors, online game players in China are now required to register their names and identity card numbers beforeplaying an online game, which information was to be submitted to and verified by the National Citizen Identity Information Center, a subordinate public institutionof the Ministry of Public Security, as of October 1, 2011. These restrictions could limit our ability to increase our online game business among minors. See “Item4. Information on the Company—B. Business Overview—PRC Regulation—Anti-fatigue Compliance System and Real-name Registration System.” In order tocomply with these anti-fatigue rules, we set up our system so that after three hours of playing our online games, minors only receive half of the virtual items orother in-game benefits they would otherwise earn, and after playing for more than five hours, receive no in-game benefits. Failure to implement these restrictions,if detected by the relevant government agencies, may result in fines and other penalties for us, including the shutting down of our online game operations andlicense revocation. Furthermore, if these restrictions were expanded to apply to adult game players in the future, our online game business could be materially andadversely affected. In addition, on February 15, 2007, 14 PRC regulatory authorities jointly promulgated a circular to further strengthen the oversight of internet cafes, one ofthe primary venues from which our platforms is accessed. In recent years, a large number of unlicensed internet cafes have been closed, and the PRC governmenthas imposed higher capital and facility requirements for the establishment of internet cafes. Governmental authorities may from time to time impose stricterrequirements on internet cafes, such as customer age limits and regulated hours of operation. Since a substantial portion of our users access our platforms frominternet cafes, any reduction in the number, or slowdown in the growth, of internet cafes in China, or any new regulatory restrictions on their operations, couldlimit our ability to maintain or increase our revenues. More stringent governmental regulations such as the ones outlined above may discourage game players from playing our games and have a material effecton our business operations. Risks Related to Doing Business in China Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us. The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Each of our PRC subsidiaries, BeijingHuanju Shidai and Guangzhou Huanju Shidai, is a foreign-invested enterprise and is subject to laws and regulations applicable to foreign-invested enterprises aswell as various Chinese laws and regulations generally applicable to companies incorporated in China. However, since these laws and regulations are relativelynew and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of theselaws, regulations and rules involves uncertainties. From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative andcourt authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome ofadministrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is basedin part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, wemay not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effectof our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability tocontinue our operations. 31 Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business, financial conditionand results of operations. Substantially all of our assets and almost all of our customers are located in China. Accordingly, our business, financial condition, results of operationsand prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth inChina as a whole. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level ofdevelopment, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing theutilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance inbusiness enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues toplay a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over theChinese economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providingpreferential treatment to particular industries or companies. While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among varioussectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some ofthese measures benefit the overall Chinese economy, but may also have a negative effect on us. The Chinese government has implemented certain measures tocontrol the pace of economic growth. These measures may cause decreased economic activity in China, which could in turn reduce the demand for our productsand services and adversely affect our business, financial condition and results of operations. We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet business and companies. The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to,companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involvesignificant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violations ofapplicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the internet business include, but are not limited to, the following: ·We only have contractual control over our platforms. Guangzhou Huaduo, our PRC consolidated affiliated entity, owns our platforms due to therestriction of foreign investment in businesses providing value-added telecommunication services in China, including internet content provisionservices. If Guangzhou Huaduo breaches its contractual arrangements with us and no longer remains under our control, this may significantly disruptour business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us. ·There are uncertainties relating to the regulation of the internet business in China, including evolving licensing practices and the requirement for real-name registrations. Permits, licenses or operations at some of our subsidiaries and PRC consolidated affiliated entities levels may be subject tochallenge, or we may fail to obtain permits or licenses that may be deemed necessary for our operations or we may not be able to obtain or renewcertain permits or licenses. See “—Risks Related to Our Corporate Structure and Our Industry—If our PRC consolidated affiliated entities fail toobtain and maintain the requisite licenses and approvals required under the complex regulatory environment for internet-based businesses in China,our business, financial condition and results of operations may be materially and adversely affected” and “Item 4. Information on the Company—B.Business Overview—PRC Regulation.” In addition, although we currently have a real-name registration system in place for our online games in strictcompliance with the relevant PRC regulations, we are currently not required by PRC law to ask users for their real name and personal informationwhen they register for a YY user account. We cannot assure you that PRC regulators would not require us to implement compulsory real-nameregistration on our platforms in the future. In late 2011, for example, the Beijing municipal government required microbloggers in China toimplement real-name registration for all of their registered users. If we were required to implement real-name registration on YY, we may lose largenumbers of registered user accounts for various reasons, because users may no longer maintain multiple accounts and users who dislike giving outtheir private information may cease to use our products and services altogether. 32 ·The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011,the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State CouncilInformation Office, or the SCIO, the MIIT and the Ministry of Public Security). The primary role of this new agency is to facilitate the policy-making and legislative development in this field to direct and coordinate with the relevant departments in connection with online contentadministration and to deal with cross-ministry regulatory matters in relation to the internet industry. We are unable to determine what policies thisnew agency or any new agencies to be established in the future may have or how they may interpret existing laws, regulations and policies and howthey may affect us. Further, new laws, regulations or policies may be promulgated or announced that will regulate internet activities, including onlinevideo and online advertising businesses. If these new laws, regulations or policies are promulgated, additional licenses may be required for ouroperations. If our operations do not comply with these new regulations after they become effective, or if we fail to obtain any licenses required underthese new laws and regulations, we could be subject to penalties. On July 13, 2006, the MIIT issued the Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services. This notice prohibits domestic telecommunication service providers from leasing, transferring or selling telecommunicationbusiness operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of atelecommunication business in China. According to this notice, either the holder of a value-added telecommunication business operating license or its shareholdersmust be the registered holders of the domain names or trademarks used by such license holders in their provision of value-added telecommunication services. Thenotice also requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in theregions covered by its license. Currently, all contracts with telecommunication carriers and other service providers to host the servers used in our business wereentered into by Guangzhou Huaduo, our PRC consolidated affiliated entity, and such arrangements are in compliance with this notice. Guangzhou Huaduo alsoowns the related domain names and trademarks, and holds the ICP License necessary to conduct our operations in China. On June 3, 2010, the MOC promulgated the Provisional Administration Measures of Online Games, or the Online Games Measures, which becameeffective on August 1, 2010. The Online Games Measures provide that any entity engaging in online game operation activities shall obtain the Internet CultureOperation License and must meet certain requirements such as minimum registered capital. Online game developers are generally involved in the purchase ofservers and bandwidth, the control and management of game data, the maintenance of game systems and certain other maintenance tasks in our operation of onlinegames. The Guangzhou branch of the MOC has confirmed that such outsourcing and cooperation activities are not considered conducting online game operationactivities, and that online game developers do not have to obtain the Internet Culture Operation License in accordance with the Online Games Measures. However,due to lack of detailed interpretative rules and uniform implementation practices and broad discretion of the local competent authorities, there are still uncertaintieson the MOC’s interpretation and implementation of these measures. If the MOC determines in the future that such qualifications or requirements apply to theonline game developers for their involvement in the online game operations, we may have to terminate our revenue-sharing arrangements with certain unqualifiedonline game developers and may even be subject to various penalties, which may negatively impact our results of operations and financial condition. The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internetindustry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internetbusinesses in China, including our business. There are also risks that we may be found to violate the existing or future laws and regulations given the uncertaintyand complexity of China’s regulation of internet business. 33 Content posted or displayed on our platforms may be found objectionable by PRC regulatory authorities and may subject us to penalties and other severeconsequences. The PRC government has adopted regulations governing internet access and the distribution of information over the internet. Under these regulations,internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC lawsand regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, fraudulent or defamatory. Furthermore, internet contentproviders are also prohibited from displaying content that may be deemed by relevant government authorities as “socially destabilizing” or leaking “state secrets”of the PRC. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, the closure of theconcerned platforms and reputational harm. The operator may also be held liable for such censored information displayed on or linked to their platform. For adetailed discussion, see “Item 4. Information on the Company—B. Business Overview—PRC Regulation.” We allow visitors to our portal websites to upload written materials, images, pictures, and other content on the forums on our websites, and also allowusers to share, link to and otherwise access audio, video, games and other content from third parties through our platforms. For a description of how content can beaccessed on or through our live streaming platform, and what measures we take to lessen the likelihood that we will be held liable for the nature of such content,see “Item 4. Information on the Company—B. Business Overview—Technology,” “Item 4. Information on the Company—B. Business Overview—IntellectualProperty,” and “—Risks Related to Our Business—We may be subject to intellectual property infringement claims or other allegations, which could result in ourpayment of substantial damages, penalties and fines, removal of relevant content from our website or seeking license arrangements which may not be available oncommercially reasonable terms.” Since our inception, we have worked closely with relevant government authorities to monitor the content on our platforms and to make the utmost effortin complying with relevant laws and regulations. However, it may not be possible to timely determine in all cases the types of content that could result in ourliability as an internet operator, and if any of our internet content is deemed by the PRC government to violate any content restrictions, we would not be able tocontinue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of requiredlicenses, which could materially and adversely affect our business, financial condition and results of operations. We may also be subject to potential liability forany unlawful actions of our users or third party service providers on our platforms or for content we distribute that is deemed inappropriate. For example, we havepreviously been subject to a few warnings and fines each of RMB43,000 or less for having inappropriate content on our platforms. Although we corrected thesenon-compliances and undertook measures to prevent the recurrence of such instances, it may be difficult to determine the type of content or actions that may resultin liability to us, and if we are found to be liable, we may be prevented from operating our business in China. Moreover, the costs of compliance with theseregulations may continue to increase as a result of more content being uploaded or made available by an increasing number of users and third party partners anddevelopers, which may adversely affect our results of operations. Although we have adopted internal procedures to monitor content uploaded to our website and toremove offending content once we become aware of any potential or alleged violation, we may not be able to identify all the content that may violate relevant lawsand regulations or third party intellectual property rights and even if we manage to identify and remove offending content, we may still be held liable for suchthird-party content. Users may upload content or images containing copyright violations and other illegal content and we may be subject to claims or becomeinvolved in litigation proceedings. As a result, our reputation, business and results of operations may be materially and adversely affected. Advertisements shown on our platforms may subject us to penalties and other administrative actions. Under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our platforms to ensure that such content istrue and accurate and in full compliance with applicable laws and regulations. In addition, where a special government review is required for specific types ofadvertisements prior to internet posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals,we are obligated to confirm that such review has been performed and approval has been obtained. Violation of these laws and regulations may subject us topenalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcementcorrecting the misleading information. In circumstances involving serious violations by us, PRC governmental authorities may force us to terminate our advertisingoperations or revoke our licenses. 34 While we have made significant efforts to ensure that the advertisements shown on our platforms are in full compliance with applicable PRC laws andregulations, we cannot assure you that all the content contained in such advertisements or offers is true and accurate as required by the advertising laws andregulations, especially given the uncertainty in the interpretation of these PRC laws and regulations. If we are found to be in violation of applicable PRCadvertising laws and regulations, we may be subject to penalties and our reputation may be harmed, which may have a material adverse effect on our business,financial condition, results of operations and prospects. Under the PRC enterprise income tax law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us andour shareholders and have a material adverse effect on our results of operations and the value of your investment. Under the PRC enterprise income tax law that became effective on January 1, 2008, an enterprise established outside the PRC with “de facto managementbodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise incometax rate on its worldwide income. On April 22, 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which providescertain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China.Further to SAT Circular 82, on August 3, 2011, the SAT issued the Administrative Measures of Enterprise Income Tax of Chinese-Controlled OffshoreIncorporated Resident Enterprises (Trial), or SAT Bulletin 45, which became effective on September 1, 2011, to provide more guidance on the implementation ofSAT Circular 82. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration and competent taxauthorities. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered as a PRCtax resident enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income onlyif all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have theirpresence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its majorassets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) more than half ofthe enterprise’s directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 further clarifies the resident status determination,post-determination administration, as well as competent tax authorities. It also specifies that when provided with a copy of Chinese tax resident determinationcertificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourceddividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groupinstead of those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect SAT’s general position on how the term “defacto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRCenterprises, individuals or foreigners. We do not meet all of the conditions above; therefore, we believe that we should not be treated as a “resident enterprise” for PRC tax purposes even if thestandards for “de facto management body” prescribed in the SAT Circular 82 are applicable to us. For example, our minutes and files of the resolutions of ourboard of directors and the resolutions of our shareholders are maintained outside the PRC. In addition, we are not aware of any offshore holding companies with acorporate structure similar to ours ever having been deemed to be a PRC “resident enterprise” by the PRC tax authorities. However, it is possible that the PRC tax authorities may take a different view. If the PRC tax authorities determine that our Cayman Islands holdingcompany is a PRC resident enterprise for PRC enterprise income tax purposes, then our world-wide income could be subject to PRC tax at a rate of 25%, whichcould materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. 35 Although dividends paid by one PRC tax resident to another PRC tax resident should qualify as “tax-exempt income” under the enterprise income taxlaw, we cannot assure you that dividends by our PRC subsidiaries to our Cayman Islands holding company will not be subject to a 10% withholding tax, as thePRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respectto the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Foreign ADS holders may also be subject to PRC withholding tax on dividends payable by us and gains realized on the sale or other disposition of ADSsor common shares, if such income is sourced from within the PRC. Although our holding company is incorporated in the Cayman Islands, it remains unclearwhether dividends received and gains realized by our foreign ADS holders will be regarded as income from sources within the PRC if we are classified as a PRCresident enterprise. Any such tax will reduce the returns on your investment in our ADSs. Finally, we face uncertainties on the reporting and consequences on private equity financing transactions, private share transfers and share exchangeinvolving the transfer of shares in our company by non-resident investors. According to the Notice on Strengthening Administration of Enterprise Income Tax forShare Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration of Taxation on December 10, 2009, with retroactive effect from January1, 2008, or SAT Circular 698, and the Notice on Several Issues Concerning Enterprise Income Tax for Indirect Share Transfer by Non-PRC Resident Enterprises,issued by the PRC State Administration of Taxation on February 3, 2015, or SAT Circular 7, an “indirect transfer” of assets of a PRC resident enterprise, includingequity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable properties, ifsuch transaction arrangement lacks reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC enterprise incometax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and tax filing or withholding obligations may be triggered,depending on the nature of the PRC taxable properties being transferred. According to SAT Circular 7, “PRC taxable properties” include assets of a PRCestablishment or place of business, real properties in the PRC, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by adirect holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining if there is a “reasonable commercialpurpose” of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshoreenterprise derives from PRC taxable properties; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or ifits income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable properties have realcommercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; thereplicability of the transaction by direct transfer of PRC taxable properties; and the tax situation of such indirect transfer and applicable tax treaties or similararrangements. In respect of an indirect offshore transfer of assets of a PRC establishment or place of business of a foreign enterprise, the resulting gain is to beincluded with the annual enterprise filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterpriseincome tax at a rate of 25%. Where the underlying transfer relates to PRC real properties or to equity investments in a PRC resident enterprise, which is not relatedto a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential taxtreatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Wherethe payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the competent tax authority by itself within the statutory time limit.Late payment of applicable tax will subject the transferor to default interest. Currently, neither SAT Circular 698 nor SAT Circular 7 applies to the sale of sharesby investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing and withholding or taxpayment obligations on the transferors and transferees, while our PRC subsidiaries may be requested to assist in the filing. Any PRC tax imposed on a transfer ofour shares or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in ourcompany. 36 If our preferential tax treatments are revoked or become unavailable or if the calculation of our tax liability is successfully challenged by the PRC taxauthorities, we may be required to pay tax, interest and penalties in excess of our tax provisions, and our financial condition and results of operations could bematerially and adversely affected. The Chinese government has provided various tax incentives to our subsidiaries in China. These incentives include reduced enterprise income tax rates.For example, under the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008 and subsequently amended on February 24,2017, the statutory enterprise income tax rate is 25%. However, Guangzhou Huaduo, our PRC consolidated affiliated entity in the PRC, renewed its qualification asa high and new technology enterprise, or HNTE, as of December 9, 2016 and, subject to the approval of an annual review by competent tax authorities inGuangdong, would be entitled to enjoy a preferential enterprise income tax rate of 15% for three years, from 2016 through 2018. In addition, Guangzhou HuanjuShidai has been recognized as a software enterprise since 2013, and is therefore entitled to a two-year exemption from enterprise income tax followed by threeyears at 50% of the standard enterprise income tax rate starting from 2014, the first profit-making year. However, if either Guangzhou Huaduo or GuangzhouHuanju Shidai fails to maintain its qualification for preferential tax treatments, its applicable enterprise income tax rate may increase to 25%, which couldmaterially and adversely affect our financial condition and results of operations. China’s M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of Chinese companies by foreign investors,which could make it more difficult for us to pursue growth through acquisitions in China. Six PRC regulatory agencies promulgated regulations effective on September 8, 2006, subsequently amended on June 22, 2009, that are commonlyreferred to as the M&A Rules. See “Item 4. Information on the Company—B. Business Overview—PRC Regulation—New M&A Regulations and OverseasListings.” The M&A Rules establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which aforeign investor takes control of a Chinese domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions onThresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council on August 3, 2008, are triggered. Moreover, the Anti-MonopolyLaw promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 which became effective on August 1, 2008 requires thattransactions which are deemed concentrations and involve parties with specified turnover thresholds (for example, during the previous fiscal year, (i) the totalglobal turnover of all operators participating in the transaction exceeds RMB10 billion (US$1.4 billion) and at least two of these operators each had a turnover ofmore than RMB400 million (US$57.6 million) within China, or (ii) the total turnover within China of all the operators participating in the concentration exceededRMB2 billion (US$0.3 billion) and at least two of these operators each had a turnover of more than RMB400 million (US$57.6 million) within China) must becleared by the MOFCOM before they can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice onEstablishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Circular No. 6, which officiallyestablished a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular No. 6, a security review is requiredfor mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors mayacquire the “de facto control” of domestic enterprises with “national security” concerns. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulationsand other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from theMOFCOM or its local counterparts, may delay or inhibit our ability to complete such transactions. It is unclear whether our business would be deemed to be in anindustry that raises “national defense and security” or “national security” concerns. However, MOFCOM or other government agencies may publish explanationsin the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC, including those by wayof entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain orexpand our market share through future acquisitions would as such be materially and adversely affected. 37 PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital ordistribute profits to us or otherwise expose us to liability and penalties under PRC law. The PRC State Administration of Foreign Exchange, or SAFE, has promulgated regulations, including the Notice on Relevant Issues Relating toDomestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, effective on July 4, 2014,and its appendixes, that require PRC residents, including PRC institutions and individuals, to register with local branches of SAFE in connection with their directestablishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets orequity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease ofcapital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interestsin a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from makingprofit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may berestricted in their ability to contribute additional capital into its PRC subsidiary. Further, failure to comply with the various SAFE registration requirementsdescribed above could result in liability under PRC law for foreign exchange evasion, including (i) the requirement by SAFE to return the foreign exchangeremitted overseas within a period specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted overseas and deemed to have beenevasive and (ii) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted foreign exchange deemedevasive. Furthermore, the persons-in-charge and other persons at our PRC subsidiaries who are held directly liable for the violations may be subject to criminalsanctions. Our PRC resident shareholders, Messrs. David Xueling Li and Jun Lei, had registered with the local SAFE branch in relation to our existing privateplacement financings by the end of 2011 as required by the SAFE regulations, and had subsequently filed amendments to update their registrations reflectingshareholding changes in our company resulting from our initial public offering in March 2015. Since SAFE Circular No. 37 was recently issued, there remainsuncertainty with respect to its interpretation and implementation, and we cannot predict how such SAFE regulations will affect our business operations. Forexample, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE regulations by our PRC resident shareholders. In addition, in some cases, we may havelittle control over either our present or prospective direct or indirect PRC resident shareholders or the outcome of such registration procedures. A failure by ourcurrent or future PRC resident shareholders to comply with the SAFE regulations, including but not limited to any delay in subsequent filings, could subject us tofines or other legal sanctions, restrict our cross-border investment activities, limit our subsidiary’s ability to make distributions or pay dividends or affect ourownership structure, which could adversely affect our business and prospects. On February 15, 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participatingin Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign ExchangeAdministration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issuedby SAFE on March 28, 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in anoverseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentiveplan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualifiedinstitution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of itsparticipants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchaseand sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stockincentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. We and ourPRC employees who have been granted stock options, restricted shares and restricted share units are subject to these regulations, and are preparing to completesuch SAFE registrations. Failure of our PRC stock option holders, restricted shareholders or restricted share units holders to complete their SAFE registrations maysubject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limited our PRCsubsidiaries’ ability to distribute dividends to us, or otherwise materially and adversely affect our business. 38 PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of our initialpublic offering to make additional capital contributions or loans to our PRC subsidiaries. We are an offshore holding company conducting our operations in China through our PRC subsidiaries and variable interest entities. We may make loansto our PRC subsidiaries and variable interest entities, or we may make additional capital contributions to our PRC subsidiaries. Any capital contributions or loans that we, as an offshore entity, make to our PRC subsidiaries, including from the proceeds of our initial public offering,are subject to PRC regulations. For example, none of our loans to a PRC subsidiary can exceed the difference between its total amount of investment and itsregistered capital approved under relevant PRC laws, and the loans must be registered with the local branch of SAFE. Our capital contributions to our PRCsubsidiaries must be approved by the MOFCOM or its local counterpart. In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment andSettlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise offoreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9,2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currencyregistered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority andmay not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted fromforeign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMBcapital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Since SAFE Circular 142 has been in place for more than five years, in 2014, SAFE decided to further reform the foreign exchange administration systemin order to satisfy and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning theLaunch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas on July 4,2014, or SAFE Circular 36. SAFE Circular 36 suspends the application of SAFE Circular 142 in certain areas and allows a foreign-invested enterprise registered insuch areas to use the RMB capital converted from foreign currency registered capital for equity investments within the scope of business, which will be regarded asthe reinvestment of foreign-invested enterprise. On March 30, 2015, SAFE issued the Circular on the Reforming of the Management Method of the Settlement ofForeign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 19, took effect on June 1, 2015, and replaced SAFE Circular 142 and SAFE Circular36. Under SAFE Circular 19, a foreign-invested enterprise, within the scope of business, may also choose to convert its registered capital from foreign currency toRMB on a discretionary basis, and the RMB capital so converted can be used for equity investments within PRC, which will be regarded as the reinvestment offoreign-invested enterprise. In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, wecannot assure you that we will be able to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete thenecessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiaries may be negatively affected, whichcould adversely affect our PRC subsidiaries’ liquidity and their ability to fund their working capital and expansion projects and meet their obligations andcommitments. 39 Our PRC subsidiaries and PRC consolidated affiliated entities are subject to restrictions on paying dividends or making other payments to us, which mayrestrict our ability to satisfy our liquidity requirements. We are a holding company incorporated in the Cayman Islands. We rely on dividends from our PRC subsidiaries as well as consulting and other fees paidto us by our PRC consolidated affiliated entities for our cash and financing requirements, such as the funds necessary to pay dividends and other cash distributionsto our shareholders, including holders of our ADSs, and service any debt we may incur. Current PRC regulations permit our PRC subsidiaries to pay dividends tous only out of their accumulated after-tax profits upon satisfaction of relevant statutory condition and procedures, if any, determined in accordance with Chineseaccounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its accumulated profits each year, if any, tofund certain reserve funds until the total amount set aside reaches 50% of its registered capital. As of December 31, 2016, appropriations to statutory reservesamounting to RMB58.9 million were made by eight of our PRC consolidated affiliated entities. These reserves are not distributable as cash dividends. Furthermore,if our PRC subsidiaries and PRC consolidated affiliated entities incur debt on their own behalf in the future, the instruments governing the debt may restrict theirability to pay dividends or make other payments to us, which may restrict our ability to satisfy our liquidity requirements. In addition, the EIT Law, and its implementation rules provide that withholding tax rate of 10% will be applicable to dividends payable by Chinesecompanies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government andgovernments of other countries or regions where the non-PRC-resident enterprises are incorporated. Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment. The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’sforeign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the U.S.dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation haltedand the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, attimes significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-yearreview of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determinedto be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the Britishpound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. Withthe development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalisation, the PRC government may inthe future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in valueagainst the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMBand the U.S. dollar in the future. There remains significant international pressure on the Chinese government to adopt a flexible currency policy to allow the Renminbi to appreciateagainst the U.S. dollar. Significant revaluation of the Renminbi may have a material adverse effect on your investment. Substantially all of our revenues and costsare denominated in Renminbi. Any significant revaluation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and thevalue of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars into RMB for capital expenditures andworking capital and other business purposes, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receivefrom the conversion. Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of ourearnings, which in turn could adversely affect the price of our ADSs, and if we decide to convert RMB into U.S. dollars for the purpose of making payments fordividends on our common shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB wouldhave a negative effect on the U.S. dollar amount available to us. Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedgingtransactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, theavailability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchangelosses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations inexchange rates may have a material adverse effect on your investment. 40 Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment. The PRC government imposes control on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out ofChina. We receive substantially all of our revenues in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, includingprofit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approvalby complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approvalfrom SAFE. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currencyand remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at itsdiscretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtainingsufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, includingholders of our ADSs. If the custodians or authorized users of controlling non-tangible assets of our company, including our corporate chops and seals, fail to fulfill theirresponsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected. Under PRC law, legal documents for corporate transactions, including contracts such as revenue-sharing contracts with online game developers which areimportant to our business, are executed using the chops or seal of the signing entity or with the signature of a legal representative whose designation is registeredand filed with the relevant branch of the Administration of Industry and Commerce. Although we usually utilize chops to enter into contracts, the designated legal representatives of each of our PRC subsidiaries and consolidated affiliatedentities have the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives of ourPRC subsidiaries and consolidated affiliated entities are members of our senior management team who have signed employment agreements with us or our PRCsubsidiaries and consolidated affiliated entities under which they agree to abide by various duties they owe to us. In order to maintain the physical security of ourchops and chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel in the legal or financedepartment of each of our subsidiaries and consolidated affiliated entities. Although we monitor such authorized personnel, there is no assurance such procedureswill prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we couldencounter difficulties in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal representativeobtains control of the chops in an effort to obtain control over any of our PRC subsidiaries or consolidated affiliated entities, we or our PRC subsidiary andconsolidated affiliated entity would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take legalaction to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’sfiduciary duties to us, which could involve significant time and resources and divert management attention away from our regular business. In addition, theaffected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relieson the apparent authority of the representative and acts in good faith. 41 Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public CompanyAccounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection. The independent registered public accounting firm that issues the audit reports included in this annual report, as an auditor of companies that are tradedpublicly in the United States and a firm registered with PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess itscompliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unableto conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, iscurrently not inspected by PCAOB. On May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperationwith the China Securities Regulatory Commission, or the CSRC, and the Ministry of Finance which establishes a cooperative framework between the parties forthe production and exchange of audit documents relevant to investigations in the United States and China. PCAOB continues to be in discussions with the CSRCand the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S.exchanges. Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality controlprocedures, and such deficiencies may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluatethe effectiveness of our auditor’s audit procedures or quality control procedures, and to the extent that such inspections might have facilitated improvements in ourauditor’s audit procedures and quality control procedures, investors may be deprived of such benefits. Additional remedial measures could be imposed on certain PRC-based accounting firms, including our independent registered public accounting firm, inadministrative proceedings instituted by the SEC, as a result of which our financial statements may be determined to not be in compliance with therequirements of the Exchange Act, if at all. In December 2012, the SEC brought administrative proceedings against the PRC-based affiliates of the Big Four accounting firms, including ourindependent registered public accounting firm, alleging that they had violated U.S. securities laws by failing to provide audit work papers and other documentsrelated to certain other PRC-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuringand suspending these accounting firms from practicing before the SEC for a period of six months. The decision was neither final nor legally effective untilreviewed and approved by the SEC, and on February 12, 2014, the PRC-based accounting firms appealed to the SEC against this decision. In February 2015, eachof the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice beforethe SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to such firms’ audit documents via the CSRC. Ifthe firms do not follow these procedures or if there is a failure in the process between the SEC and the CSRC, the SEC could impose penalties such as suspensions,or it could restart the administrative proceedings. In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with majorPRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements beingdetermined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedingsagainst these audit firms may cause investor uncertainty regarding PRC-based, United States-listed companies and the market price of our ADSs may be adverselyaffected. If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timelyfind another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be incompliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our common shares from the Nasdaq GlobalMarket or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States. 42 Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of the draft PRC Foreign Investment Law and how itmay impact the viability of our current corporate structure, corporate governance and business operations. The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio ofexisting laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint VentureEnterprise Law and the Wholly Foreign-invested Enterprise Law , together with their implementation rules and ancillary regulations. The draft Foreign InvestmentLaw embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and thelegislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOFCOM is currently soliciting comments on thisdraft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted asproposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” indetermining whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entitiesestablished in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, uponmarket entry clearance by the Ministry of Commerce, treated as a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens. Inthis connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% of more of the voting rights of thesubject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or otherequivalent decision making bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent decisionmaking bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters orother key aspects of business operations. Once an entity is determined to be an FIE and its investment amount exceeds certain thresholds or its business operationfalls within a “negative list,” to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts will berequired. Otherwise, all foreign investors may make investments on the same terms as domestic investors without being subject to additional approval from thegovernment authorities as mandated by the existing foreign investment legal regime. The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses andpermits in the industries that are currently subject to foreign investment restrictions in China. See “—Risks Relating to Our Corporate Structure—If the PRCgovernment finds that the structure we have adopted for our business operations does not comply with PRC laws and regulations, or if these laws or regulations orinterpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including the shutting down of our platform and ourbusiness operations”, “—Risks Relating to Our Corporate Structure—If our PRC consolidated affiliated entities fail to obtain and maintain the requisite licensesand approvals required under the complex regulatory environment for internet-based businesses in China, our business, financial condition and results of operationsmay be materially and adversely affected”, and “Item 4. Information on the Company—C. Organizational Structure.” Under the draft Foreign Investment Law,variable interest entities that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors.Therefore, for any companies with a VIE structure in an industry category that is on the “negative list,” the VIE structure may be deemed legitimate only if theultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreignnationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the “negative list” without market entryclearance may be considered as illegal. It is likely that we would be considered ultimately controlled by Chinese parties, as our management group, including Mr. David Xueling Li, our co-founder and chairman, Mr. Zhou Chen, the chief executive officier of the Company, Mr. Rongjie Dong, the chief executive officer of Huya broadcasting, one ofour business units, and their respective affiliates, together held 82.6% of the total voting power of our company as of March 31, 2017. However, the draft ForeignInvestment Law has not taken a position on what actions shall be taken with respect to the existing companies with a VIE structure, whether or not these companiesare controlled by Chinese parties, while it is soliciting comments from the public on this point. Moreover, it is uncertain whether the Internet content and otherInternet value-added service industry, in which our variable interest entities operate, will be subject to the foreign investment restrictions or prohibitions set forth inthe “negative list” to be issued. If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, such as MOFCOMmarket entry clearance, to be completed by companies with existing VIE structure like us, we face uncertainties as to whether such clearance can be timelyobtained, or at all, and our business and financial condition may be materially and adversely affected. 43 The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliancecosts. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and theapplicable FIEs. Aside from investment implementation report and investment amendment report that are required at each investment and alteration of investmentspecifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to benon-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directlyresponsible may be subject to criminal liabilities. Risks Related to Our ADSs The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors. The daily closing trading prices of our ADSs ranged from US$32.07 to US$63.53 in 2016. The trading price of our ADSs is likely to be volatile and couldfluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in themarket prices or the underperformance or deteriorating financial results of other similarly situated companies in China that have listed their securities in the UnitedStates in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in somecases, substantial price declines in the trading prices of their securities. The trading performances of these Chinese companies’ securities after their offerings,including companies in internet and social networking businesses, may affect the attitudes of investors toward Chinese companies listed in the United States, whichconsequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptionsabout inadequate corporate governance practices or fraudulent accounting or other practices at other Chinese companies may also negatively affect the attitudes ofinvestors towards Chinese companies in general, including us, regardless of whether we have engaged in such practices. Furthermore, securities markets may fromtime to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material adverse effect onthe market price of our ADSs. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile due to specific factors, including thefollowing: ·variations in our net revenues, earnings and cash flow; ·announcements of new investments, acquisitions, strategic partnerships, or joint ventures; ·announcements of new services and expansions by us or our competitors; ·changes in financial estimates by securities analysts; ·changes in the number of our registered or active users; ·fluctuations in the number of paying users or other operating metrics; ·failure on our part to realize monetization opportunities as expected; ·additions or departures of key personnel; ·release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; ·detrimental negative publicity about us, our competitors or our industry; and ·potential litigation or regulatory proceedings or changes. Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade. 44 If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding ourADSs, the market price for our ADSs and trading volume could decline. The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or moreanalysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail toregularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs todecline. The sale or availability for sale, or perceived sale or availability for sale, of substantial amounts of our ADSs could adversely affect their market price. Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price ofour ADSs and could materially impair our ability to raise capital through equity offerings in the future. Our ADSs are freely tradable by persons other than ouraffiliates without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholdersmay also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act. In addition, common shares subjectto our outstanding share-based awards, including options, restricted shares and restricted share units, are eligible for sale in the public market to the extentpermitted by the provisions of various vesting agreements, Rules 144 and 701 under the Securities Act. We may also issue additional options in the future whichmay be exercised for additional common shares and additional restricted shares and restricted share units which may vest. As of March 31, 2017, we had1,113,079,204 common shares outstanding. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any othershareholder or the availability of these securities for future sale will have on the market price of our ADSs. We may be classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes, which could subject United Statesholders of our ADSs or common shares to significant adverse United States income tax consequences. We will be classified as a “passive foreign investment company,” or “PFIC” for United States federal income tax purposes for any taxable year, if either(a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (asdetermined on the basis of fair market value) during such year produce or are held for the production of passive income. Although the law in this regard is unclear,we treat Guangzhou Huaduo, Beijing Tuda and Bilin Online as being owned by us for United States federal income tax purposes, not only because we exerciseeffective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidatetheir operating results in our consolidated financial statements. Assuming that we are treated as owning Guangzhou Huaduo, Beijing Tuda and Bilin Online for United States federal income tax purposes, we do notbelieve that we were a PFIC for United States federal income tax purposes for the taxable year ended December 31, 2016, and do not anticipate becoming a PFICin future taxable years. However, because PFIC status is a factual determination made annually after the close of each taxable year on the basis of the compositionof our income and assets, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. The value of our assets forpurposes of the PFIC test will generally be determined by reference to the market price of our ADSs. Accordingly, fluctuations in the market price of our ADSsmay cause us to become a PFIC for the current taxable year or future taxable years. The determination of whether we will be or become a PFIC will also beaffected by how, and how quickly, we use our liquid assets. Under circumstances where we determine not to deploy significant amounts of cash for active purposesour risk of being classified as a PFIC may substantially increase. It is also possible that the Internal Revenue Service may challenge our classification or valuationof our goodwill and other unbooked intangibles, which may result in our company being or, becoming classified as, a PFIC for the current or future taxable years.The determination of whether we will be or become a PFIC will also depend, in part, upon the nature of our income and assets over time, which are subject tochange from year to year. There can be no assurance our business plans will not change in a manner that will affect our PFIC status. 45 If we are classified as a PFIC in any taxable year, a U.S. holder (as defined in “Item 10. Additional Information—E. Taxation—United States FederalIncome Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs orcommon shares and on the receipt of distributions on the ADSs or common shares to the extent such gain or distribution is treated as an “excess distribution” underthe United States federal income tax rules. Further, if we are classified as a PFIC for any year during which a U.S. holder holds our ADSs or common shares, wegenerally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ADSs or common shares. Alternatively, U.S.holders of PFIC shares can sometimes avoid the rules described above by making certain elections, including a “mark-to-market” election or electing to treat aPFIC as a “qualified electing fund.” However, U.S. holders will not be able to make an election to treat us as a “qualified electing fund” because, even if we wereto be or become a PFIC, we do not intend to comply with the requirements necessary to permit U.S. holders to make such election. Each U.S. holder is urged toconsult its tax advisor concerning the United States federal income tax considerations relating to the ownership and disposition of our ADSs or common shares ifwe are treated as a PFIC for our current taxable year ending December 31, 2017 or any future taxable year (including the possibility of making a “mark-to-market”election and the unavailability of an election to treat us as a qualified electing fund). For more information see “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.” Our dual class common share structure with different voting rights will limit your ability to influence corporate matters and could discourage others frompursuing any change of control transactions that holders of our Class A common shares and ADSs may view as beneficial. Our common shares are divided into Class A common shares and Class B common shares. Holders of Class A common shares are entitled to one vote pershare, while holders of Class B common shares are entitled to ten votes per share, voting together as one class on all matters requiring a shareholders’ vote. EachClass B common share is convertible into one Class A common share at any time by the holder thereof. Class A common shares are not convertible into Class Bcommon shares under any circumstances. Upon any transfer of Class B common shares by a holder thereof to any person or entity that is not an affiliate of suchholder, such Class B common shares will be automatically and immediately converted into an equal number of Class A common shares. Due to the disparate voting powers attached to these two classes of common shares, as of March 31, 2017, Messrs. David Xueling Li, Zhou Chen andRongjie Dong and their respective affiliates, held 82.6% of the total voting power of our company and have considerable influence over all matters requiring ashareholders’ vote, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. This concentratedcontrol will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of controltransactions that holders of Class A common shares and ADSs may view as beneficial. Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our common shares and ADSs. Our articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-controltransactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market pricesby discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has theauthority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges,and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights,terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our common shares, in the form of ADSs orotherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of managementmore difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of ourcommon shares and ADSs may be materially and adversely affected. 46 You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporatedunder Cayman Islands law. We are a company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and restatedmemorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and the common law ofthe Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of ourdirectors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands isderived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts areof persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directorsunder Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. Inparticular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developedand judicially interpreted bodies of corporate law than the Cayman Islands. In addition, shareholders of a Cayman Islands company may not have standing toinitiate a shareholder derivative action in a federal court of the United States. Unlike many jurisdictions in the United States, Cayman Islands law does not generally provide for shareholder appraisal rights on an approvedarrangement and reconstruction of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger orconsolidation or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient. Moreover, holders of our ADSsare not entitled to appraisal rights under Cayman Islands law. ADS holders that wish to exercise their appraisal or dissentient rights must convert their ADSs intoour Class A common shares by surrendering their ADSs to the depositary and paying the ADS depositary fee. Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtaincopies of lists of shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether or not, and underwhat conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make itmore difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders inconnection with a proxy contest. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management,members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. Judgments obtained against us by our shareholders may not be enforceable in our home jurisdiction. We are a Cayman Islands company and all of our assets are located outside of the United States. Substantially all of our current operations are conductedin China. In addition, a significant majority of our current directors and officers are nationals and residents of countries other than the United States andsubstantially all of their assets are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or againstthese individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise.Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against ourassets or the assets of our directors and officers. There are uncertainties as to whether Cayman Islands courts would: ·recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and ·impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws thatare penal in nature. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will incertain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. 47 We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable toUnited States domestic public companies. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in theUnited States that are applicable to U.S. domestic issuers, including: ·the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; ·the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the ExchangeAct; ·the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profitfrom trades made in a short period of time; and ·the selective disclosure rules by issuers of material nonpublic information under Regulation FD. We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we publish our results on a quarterlybasis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material events are also befurnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC are less extensive and less timely as compared tothat required to be filed with the SEC by United States domestic issuers. As a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporategovernance listing standards. However, NSYE rules permit a foreign private issuer like us to follow certain corporate governance practices of its home country.Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listingstandards. We relied on the exemption available to foreign private issuers to the requirement that each member of the compensation committee be an independentdirector. Currently, the chairman of our compensation committee, Mr. David Xueling Li, is not an independent director. We may also continue to rely on this andother exemptions available to foreign private issuers in the future, and to the extent that we choose to do so in the future, our shareholders may be afforded lessprotection than they otherwise would under the NYSE corporate governance listing standards applicable to U.S. domestic issuers. As a result, you may not beafforded the same protections or information, which would be made available to you, were you investing in a United States domestic issuer. The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class Acommon shares. As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A common shares in accordance with theprovisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your votinginstructions, the depositary will vote the underlying Class A common shares in accordance with these instructions. You will not be able to directly exercise yourright to vote with respect to the underlying shares unless you withdraw the shares from the depositary. Under our second amended and restated memorandum andarticles of association, the minimum notice period required for convening a general meeting is at least ten clear days. When a general meeting is convened, youmay not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for yourinstructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receivethe voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible forfailing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right tovote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested. 48 The depositary for our ADSs will give us a discretionary proxy to vote our Class A common shares underlying your ADSs if you do not vote at shareholders’meetings, except in limited circumstances, which could adversely affect your interests. Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our Class A common sharesunderlying your ADSs at shareholders’ meetings unless: ·we have failed to timely provide the depositary with notice of meeting and related voting materials; ·we have instructed the depositary that we do not wish a discretionary proxy to be given; ·we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting; ·a matter to be voted on at the meeting would have a material adverse impact on shareholders; or ·the voting at the meeting is to be made on a show of hands. The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our Class A common shares underlying yourADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of ourcompany. Holders of our common shares are not subject to this discretionary proxy. You may not receive dividends or other distributions on our common shares and you may not receive any value for them, if it is illegal or impractical to makethem available to you. The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A common shares orother deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class Acommon shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available toany holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under theSecurities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is notfeasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, thedepositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, common shares, rights or othersecurities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, common shares, rights oranything else to holders of ADSs. This means that you may not receive distributions we make on our common shares or any value for them if it is illegal orimpractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs. You may be subject to limitations on transfer of your ADSs. Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deemsexpedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connectionwith corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specifiedperiod. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or registertransfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable todo so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason inaccordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to. ITEM 4.INFORMATION ON THE COMPANY A. History and Development of the Company We commenced operations in April 2005 with the establishment of Guangzhou Huaduo in China. Guangzhou Huaduo later became one of our PRCconsolidated affiliated entities through the contractual arrangements described below. 49 We established Dokhi Investments Limited in the British Virgin Islands, or BVI, in July 2006 and changed its name to Duowan Limited in September2006. In August 2006, we established Double Top Limited, which is wholly owned by Dokhi Investments Limited, in Hong Kong and changed its name toDuowan (Hong Kong) Limited in September 2006. In April 2007, we established Guangzhou Duowan Information Technology Co., Ltd., or Guangzhou Duowan,which was wholly owned by Duowan (Hong Kong) Limited. Guangzhou Duowan entered into a series of contractual arrangements with Guangzhou Huaduo andits shareholders, which were subsequently amended solely to reflect updated shareholder equity interests in Guangzhou Huaduo, through which GuangzhouDuowan exercised effective control over the operations of Guangzhou Huaduo. In November 2007, we established Duowan Entertainment Corporation, or Duowan BVI, in the BVI. In March 2008, we established Huanju ShidaiTechnology (Beijing) Co., Ltd., formerly known as Duowan Entertainment Information Technology (Beijing) Co., Ltd., or Beijing Huanju Shidai, which is whollyowned by Duowan BVI. Beijing Huanju Shidai purchased all the equity interests in Guangzhou Duowan from Duowan (Hong Kong) Limited in August 2008, andentered into a series of contractual arrangements with Guangzhou Huaduo and its shareholders through which Beijing Huanju Shidai exercises effective controlover the operations of Guangzhou Huaduo. Duowan (Hong Kong) Limited was deregistered as a company and ceased to operate in May 2010. In December 2008, Duowan BVI entered into an agreement with Morningside Technology Investments Limited and two individuals, through whichDuowan BVI purchased all the equity interests in NeoTasks Inc. from Morningside Technology Investments Limited. In March 2009, Beijing Huanju Shidai entered into an agreement with NeoTasks New Age International Media Technology (Beijing) Co., Ltd., orNeoTasks Beijing, through which NeoTasks Beijing was merged into Beijing Huanju Shidai. After the merger and additional capital contribution, Beijing HuanjuShidai became 96.5% held by Duowan BVI, and 3.5% held by NeoTasks Limited (formerly known as Enlight Online Entertainment Limited), a Hong Kongcompany, which in turn was the shareholder of NeoTasks Beijing before the merger. NeoTasks Limited is 100% owned by NeoTasks Inc., a Cayman Islandscompany. In August 2009, Guangzhou Duowan was renamed Zhuhai Duowan Information Technology Co., Ltd. In December 2009, Beijing Huanju Shidai entered into a series of contractual agreements with Beijing Tuda and its shareholders, which weresubsequently amended solely to reflect updated shareholder equity interests in Beijing Tuda, through which agreements Beijing Huanju Shidai exercises effectivecontrol over the operations of Beijing Tuda. In December 2010, we established Guangzhou Huanju Shidai, formerly known as Zhuhai Duowan Technology Co., Ltd., which is 100% directly ownedby Duowan BVI. Our current holding company, YY Inc., was incorporated in July 2011 as a limited liability company in the Cayman Islands. The corporate affairs of YYInc. are governed by the memorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the CaymanIslands and the common law of the Cayman Islands. Through a share exchange on September 6, 2011, the shareholders of Duowan BVI exchanged all of theiroutstanding common and preferred shares in Duowan BVI for common and preferred shares of YY Inc. on a pro rata basis. No additional consideration was paid inconnection with the share exchange. As a result, Duowan BVI became a wholly owned subsidiary of YY Inc. In October 2013, we established Guangzhou Juhui Information Technology Co., Ltd., which is 100% directly owned by Guangzhou Huaduo. In November 2013, we established Zhuhai Huanju Shidai, which is 100% directly owned by NeoTasks Limited.Zhuhai Huanju Shidai ceased to operate in2015 and was deregistered in March 2016. In April 2014, we established Guangzhou Huanju Media Co., Ltd., which is 100% directly owned by Guangzhou Huaduo. In September 2014, Guangzhou Huaduo acquired 100% of the equity interests in Guangzhou Zhuque Information Technology Co., Ltd., which engages inonline game development. 50 In the fourth quarter of 2014, Guangzhou Huaduo acquired 100% of the equity interests in both Beijing Huanqiu Xingxue Technology Development Co.,Ltd, or Beijing Xingxue, and Beijing Huanqiu Chuangzhi Software Co., Ltd., which operate the online education website Edu24oL.com, an online vocationaltraining and language training platform. In addition, we acquired 100% of the equity interests in both Zhengrenqiang and His Partners Education Technology(Beijing) Co., Ltd., which was later renamed 100-Online Education Technology (Beijing) Co., Ltd., or 100-Online, a company specializing in providingpreparation courses for the International English Language Testing System, or IELTS, which is an English language proficiency test, and Beijing DubookerCulture Communication Co., Ltd., or Dubooker, a language education publisher. In the fourth quarter of 2016, we sold majorty equity interests in Beijing Xingxuefollowing which we hold 33.14% of equity interests in Beijing Xingxue. We dissolved Dubooker and 100-Online in October 2016 and January 2017, respectively. In the first quarter of 2015, Guangzhou Huaduo acquired 70% of the equity interests in Shanghai Beifu Culture Communication Co., Ltd., or ShanghaiBeifu, which principally engages in providing e-commerce platform to professional game teams and commentators. Shanghai Beifu established two wholly-ownedsubsidiaries, Shanghai Lanyu Trading Co., Ltd. and Shanghai Fulan Electronic Technology Co., Ltd., in August 2015, to expand and assist the e-commercebusiness of Shanghai Beifu. In June 2016, we entered into an agreement to dispose of 60% equity interest in Shanghai Beifu, following which we hold 10% equityinterest in Shanghai Beifu. In the first quarter of 2015, Duowan BVI established and became a limited partner holding 93.5% equity interests of, Engage Capital Partners I, L.P.,which is a private equity fund registered in the Cayman Islands. In June 2015, as a limited partner holding 93.5% equity interests, Guangzhou Huaduo establishedShanghai Yilian Equity Investment Partnership (Limited Partnership), a private equity fund registered in China. In May 2015, we established Zhuhai Huanju Interactive Entertainment Technology Co., Ltd., which is 100% directly owned by Guangzhou Huaduo. In July 2015, we established Guangzhou Huanju Electronic Commerce Co., Ltd., which aims to engage in e-commerce business as a wholly ownedsubsidiary of Guangzhou Huaduo. In August 2015, Duowan BVI acquired 55.05% of the equity interests in BiLin Information Technology Co., Ltd., or BiLin Cayman, a companyincorporated in the Cayman Islands that develops and operates instant voice chatting applications for mobile devices. BiLin Cayman is the sole shareholder ofBiLin Information Technology Co., Limited, which is in turn the sole shareholder of Beijing Bilin Changxiang Information Technology Co., Ltd., or BilinChangxiang. Bilin Changxiang entered into a series of contractual arrangements with Beijing Bilin Online Information Technology Co., Ltd., or Bilin Online, andits shareholders, through which Bilin Changxiang exercises effective control over the operations of Bilin Online. In the second quarter of 2016, the percentage ofour shareholdings in BiLin Cayman was diluted to 53.02%. In January 2016, we established Guangzhou Huanju Microfinance Co., Ltd., which is 100% directly owned by Guangzhou Huaduo. In February 2016, we established Guangzhou Zhiniu Asset Management Co., Ltd., which is 100% directly owned by Guangzhou Huaduo. In April 2016, we established Guangzhou Sanrenxing 100-EducationTechnology Co., Ltd., which is 70% directly owned by Guangzhou Huaduo. In August 2016, we established Guangzhou Huya Information Technology Co., Ltd., which is 100% directly owned by Guangzhou Huaduo. In December 2016, we established Guangzhou WanheTechnology Co., Ltd., which is 100% directly owned by Guangzhou Huaduo. We currently own the domain names of YY.com, Huya.com, Zhiniu8.com, Duowan.com and 100.com. YY Inc. completed an initial public offering of 7,800,000 ADSs, representing 156,000,000 Class A common shares, in November 2012. On November 21,2012, our ADSs were listed on The NASDAQ Stock Market under the symbol “YY.” In December 2012, in connection with the initial public offering, we alsocompleted the over-allotment offering of an additional 1,170,000 ADSs, representing 23,400,000 Class A common shares. 51 In March 2014, we issued an aggregate of US$400 million 2.25% convertible senior notes due in 2019. Proceeds from the sale of the notes are expected tobe used for general corporate purposes, including working capital needs and potential acquisitions of complementary businesses. The notes were offered toqualified institutional buyers pursuant to Rule 144A under the Securities Act and certain non-U.S. persons in compliance with Regulation S under the SecuritiesAct. The notes will be convertible into our ADSs based on an initial conversion rate of 9.0334 of our ADSs per $1,000 principal amount of notes (which isequivalent to an initial conversion price of approximately US$110.7 per ADS and represents an approximately 35% conversion premium over the closing tradingprice of our ADSs on March 18, 2014, which was US$82.00 per ADS). The conversion rate is subject to adjustment upon the occurrence of certain events. Thenotes bear interest at a rate of 2.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. The notes willmature on April 1, 2019, unless earlier converted, redeemed for certain tax-related events or repurchased in accordance with their terms. On April 1, 2017, theCompany repurchased for cash the notes of an aggregate principal amount of US399.0 million. Following the settlement of the repurchase, US$1.0 millionaggregate principal amount of the notes remain outstanding and will be due in 2019. On March 5, 2015, our board of directors approved the 2015 Share Repurchase Plan, pursuant to which we may repurchase up to US$100 million in totalof the our outstanding ADSs for a period not exceeding twelve (12) months from the date of approval by board of directors. The 2015 Share Repurchase Planexpired on March 5, 2016. On June 15, 2016, our board of directors approved another share repurchase plan, or the 2016 Share Repurchase Plan. Under the termsof the 2016 Share Repurchase Plan, we may repurchase up to US$200 million worth of our outstanding shares (including shares represented by ADSs) and ourconvertible senior notes due in 2019 from time to time for a period not to exceed twelve (12) months. Our 2016 Share Repurchase Plan will expire on June 15,2017. For the year ended December 31, 2016, no share was repurchased under the 2015 Share Repurchase Plan and the 2016 Share Repurchase Plan. On July 9, 2015, our board of directors received a non-binding proposal letter from Mr. Jun Lei, and Mr. David Xueling Li, our chairman and director(together, the “Buyer Group”), proposing a “going-private” transaction to acquire all of our outstanding common shares not already beneficially owned by theBuyer Group for US$68.50 in cash per ADS. The proposed purchase price represents a premium of approximately 17.4% to the closing trading price of our ADSon July 8, 2015, the last trading day prior to the date of the going-private proposal. Our board of directors formed a special committee consisting of threeindependent and disinterested directors, Mr. Peter Andrew Schloss, Mr. David Tang and Mr. Peng Tsing Ong, to consider the “going-private” proposal. On June15, 2016, our board of directors received a letter from the Buyer Group stating that the Buyer Group had determined not to proceed with the going-private proposalwith immediate effect. Our principal executive offices locate at Building B-1, North Block of Wanda Plaza, No. 79 Wanbo Er Road, Nancun Town, Panyu District, Guangzhou511442, the People’s Republic of China. Our telephone number at this address is +(86 20) 8212 0000. Our registered office in the Cayman Islands is located atConyers Trust Company (Cayman) Limited of Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KYI-1111, Cayman Islands. Our agent for serviceof process in the United States is Law Debenture Corporate Services Inc., 801 2nd Avenue, Suite 403, New York, NY 10017. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a discussion of our capitalexpenditures and divestitures. B. Business Overview Overview YY is a live streaming platform that enables users to interact in live online group activities through voice, text and video. YY also empowers users tocreate and organize groups of varying sizes to discover and participate in a wide range of online activities, including music shows, online games, dating shows, livegame broadcasting and e-learning. With a capacity to support over one million participants concurrently, YY offers users a more immersive, enriching andengaging entertainment experience through its large live streaming platforms, primarily include YY Live and Huya broadcasting. YY attracted approximately 96.1million and 56.0 million average monthly active users with its PC clients and mobile clients, respectively, in the three months ended December 2016. Founded as an online game web portal in 2005, our company has transformed into a multifaceted live streaming platform in the past decade. In July 2008,YY launched its core product YY Client, a PC-based free software that allows users to create individual channels for any online live group activities that covers abroad range of interests and topics. To increase the accessibility and usage of YY Client, we introduced a mobile application, Mobile YY, in September 2010 and abrowser-based version of our services in October 2012. To accelerate the monetization of our mobile platform, we introduced virtual item purchase functions onMobile YY in October 2013. In February 2014, we expanded our original education business by launching a dedicated education platform, 100 Education. In thefourth quarter of 2014, we acquired two education businesses, respectively focusing on online professional training and English language test preparation, tofurther expand our educational services offerings. Since the beginning of 2015, we have been operating our live game broadcasting business under a stand-alonebrand, Huya, which includes Huya.com and its corresponding mobile application Huya Live. In August 2015, we launched a new brand, Zhiniu, with its owndomain name Zhiniu8.com and mobile application Zhiniu Finance, for the finance related contents on our platforms. In February 2016, we released our mobilebroadcasting application, ME Live, which allows users to perform and make broadcasts with a single mobile device. In the third quarter of 2016, we integrated ourlive streaming services under our two well-established live streaming platforms, YY Live and Huya broadcasting. We offer live streaming services through avariety of websites, PC clients and mobile applications. We also operate Duowan.com, a game media website that provides access to and interactive resources foronline games. 52 Our operations rely on proprietary technology and industry know-how. YY is supported by our highly scalable infrastructure throughout China and ourproprietary algorithms enabling low latency, low jitter and low loss rates in delivering voice and video data. While the basic use of our platforms is currently free, we mainly monetize our user base through sales of virtual items for live streaming and game tokenfor online games. We also generate revenues through our membership program whereby users pay a fixed fee to enjoy certain privileges and regular bonuspackages. We primarily generate online advertising and promotion revenues from sales of various forms of advertising and provision of promotion campaigns onour live streaming platforms by way of advertisement display or integrated promotion activities in shows and programs on our live stream platforms. We believethat we will be able to capitalize on the large and highly engaged user base of our platforms by exploring additional monetization opportunities and diversifyingour revenue sources. Our total net revenues were RMB3,678.4 million, RMB5,897.2 million and RMB8,204.1 million (US$1,181.6 million) in 2014, 2015 and 2016respectively. We had a net income of RMB1,064.5 million, RMB998.3 million and RMB1,511.6 million (US$217.7 million) in 2014, 2015 and 2016 respectively. Our Platforms We currently offer live streaming services primarily through our YY Live platform and Huya broadcasting platform. YY Live In June 2016, we revamped our online music and entertainment live streaming services to YY Live. With the increasing popularity of and growingcontents in YY Live, it has been transformed into an interactive and comprehensive live streaming platform. Users of YY Live may enjoy the live streamingservices on YY Live website, YY Client or YY Live APP and stream the content in various channels, including, among others, music and dance show, talk show,outdoor activities, sports, anime and games. Huya Broadcasting In November 2014, we launched Huya broadcasting, with a focus on livestream of game playthroughs. After years of coverage expansion and useraccumulation, Huya broadcasting has become a comprehensive live streaming platform covering online games, console games, mobile games, entertainments,sports and etc. Users of Huya broadcasting may access content on Huya through Huya website, YY Client or Huya APP, Huya’s dedicated mobile application. Our Products We offer our services primarily through our YY Live platform and Huya broadcasting platform. Users of our services could stream the contents on thosetwo platforms through (i) our PC client, YY Client, (ii) our websites, yy.com and Huya.com, and (iii) our mobile applications, including, among others, YY LiveAPP and Huya APP. YY Client Our core product, YY Client, enables users to engage in live streaming online, and we continue to develop and upgrade it to address evolving user needs.YY Client provides access to user-created online social activities groups, which we refer to as channels. YY Client is compatible with most internet-enabledsystems, including PCs and mobile interfaces. YY Client is available to download for free from YY.com, Duowan.com and other internet software downloadcenters. 53 The first version of YY Client, launched in July 2008, had voice-enabled features that allowed online game players to communicate with large groups offellow gamers on a real-time basis. Game players typically organize various guilds for players to discuss gaming strategies and communicate with each other in ateam setting. Such online guilds, which can consist of up to thousands of players, built their own channels on YY Client to communicate with fellow guildmembers in real time when playing games online. Gradually, we further developed and tailored YY Client in response to the market need for a platform enablinglarge groups to gather, meet and socialize in real time online, and turned it into the rich communication social platform that it is today. We introduced live video-enabled channels beginning in late 2011 and have since applied video features to all our channels. All of the basic social interface features enabled by our YY Client, such as the ability to engage in multi-party voice- and video-enabled communications,are currently available to our users free of charge. In addition, some services are free to users up to a certain threshold. We currently earn revenues from YY Clientthrough sales of services paid through online third party payment systems. Game Center on YY Client The game center on YY Client currently primarily consists of a game lobby and VIP game access. The game lobby enables users to access various onlinegames without downloading any additional client software. The VIP game access provide our users with access to new games being developed or tested by thirdparty game developers, and afford game developers an opportunity to promote their games among our users as well as solicit user feedback on new games. We conduct market research regarding trends and demand for online games and various types of in-game virtual items, and often work with third partygame developers to develop and offer a wide range of in-game virtual items. We intend to continue to source popular online games to users on YY Client. Web-based YY We extended our platforms to web browsers in October 2012. Web-based YY enables users to conduct real-time interactions and watch live streamingcontent through web browsers without requiring any downloads or installations. Web-based YY optimizes YY technology for the web, transcending the limitationsof operational systems and enabling real-time communications and live streaming on the web by simply clicking on a link. To date, users can visit YY.com,Huya.com and Zhiniu8.com to browse and watch various categories of live broadcasts and other contents on our platforms. Mobile Applications We develop mobile applications to provide a variety of live streaming contents to our users through mobile operating systems and make live streamingservices available at finger tips. While we continue to develop and upgrade our platforms, we rebranded Mobile YY, our first and main mobile application, intoYY Live APP, which primarily provides users access to our live streaming content offered on our YY Live platform. To better accommodate the increasingdemands of our users to access more content on our YY Live platform, we developed a number of additional mobile applications, each of which dedicates to aspecific type of content — Xunhuan application for online dating in January 2015, Zhiniu Finance application for financial news and analysis in November 2015.Users can access contents on our YY Live platform through all these mobile applications, and retrieve contents most suitable to individual preferences andinterests. With the growth of users on our Huya broadcasting platform, we launched Huya APP, for live game broadcasting in 2014, which is now a mobileapplication for streaming comprehensive contents offered on our Huya broadcasting platform. In addition, we have introduced MCBox. MCBox is a mobile application offering a number of game supporting features for Minecraft, a popular mobilegame, such as game editing, mode creating and skin designing, to give players of Minecraft a better gaming experience. 54 We will continue to focus on developing enhanced features for our mobile applications going forward. Contents on Our Platforms We offer various contents on our live streaming platforms, which cover a broad range of interests and topics. Beginning in March 2011, we startedoffering various virtual items for sale on our platforms. Through our PC clients, websites and mobile applications, users can stream the below contents on our livestreaming platforms, YY Live and Huya broadcasting: ·Music, Dancing and Talk Shows. Users can watch music, dancing and talk shows on our live streaming platforms. Currently, music, dancing andtalk shows related content is the largest contributor to our total revenues. ·Game Broadcasting. Users livestream play-throughs of online games in a casual environment or during competitions. Professional game teams andcommentators often attract more viewers, who may show support and appreciation by purchasing and giving virtual items to the commentators. ·Dating Shows. Users host, participate or live stream dating shows through live video and audio communication, during which the participants and theaudience can purchase and give virtual gifts to the host or other participants. The format of our online dating is based on a popular dating TV show inChina. ·Finance. Users interested in finance and investment can stream finance shows hosted by financial experts, which cover investment-related topics,including stock market trends and investment basics. ·Outdoor Activities and Sports. Users can livestream outdoor activity shows, such as camping, hiking, travel and tourism, as well as professionalsports shows such as basketballs, footballs and snookers. Branding and Marketing Branding Strategy We consider the branding of our products and services a crucial task. We use YY as the general brand for our company and for our core product. At thesame time, we also set up stand-alone brands for those products and services which have good potential in their vertical area. Each of our stand-alone brands, suchas YY Live, Huya, and Zhiniu, has its dedicated branding team to promote the brand in a way most suitable to the related business. Marketing Activities Historically, we have incurred minimal marketing expenses for our platforms and have built a large community of users primarily through viralmarketing, with word of mouth referrals and repeat user visits ultimately driven by user experience. Nowadays, we employ a variety of marketing activities tofurther promote our platforms, including advertising on news and social network media, search engines and web portals, cooperating with application distributorsand hardware manufacturers, as well as participating and sponsoring offline exhibitions and industry summits. Seasonality Our results of operations of various products and services are subject to seasonal fluctuations. However, seasonal fluctuations have not posed materialoperational and financial challenges to us, as such periods tend to be brief and predictable. 55 Competition We face competition in several major aspects of our business, particularly from companies that provide online live streaming and online games. We alsocompete for online advertising and promotion revenues with other internet companies that sell online advertising services in China. Live streaming. In relation to our live streaming business and our online advertising and promotion business, our competitors primarily includeMomo,Yingke (Ingkee), DouyuTV.com, Huajiao, Youku’s Laifeng, Yizhibo, NetEase’s Bobo and Kuaishou. Online games. For online games, our competitors include other major internet companies that host games, such as 37.com, 4399.com, Tencent, Qihoo360 and other private companies. We also have various competitors in the online game media market in China. Duowan.com’s primary competitor among gamemedia websites is 17173.com. Technology We believe we are an industry leader in providing large-scale quality multi-user voice- and video-enabled online services in China, and we intend tocontinue to update our technology to maintain this leadership position. Features and Advantages QoS for online multi-media communications Quality of Service, or QoS, assurance is a key element of any high quality delivery of voice and video data over the internet. For live voice- or video-enabled communications, any data packet loss and jitter, or delay in transmission, is often immediately noticeable to users. We devote significant resources tomaintain and develop a creative combination of multiple voice- and voice-over internet protocol, or VOIP, quality assurance mechanisms to minimize data loss andjitter. The mechanisms we employ include but not limited to cloud-based intelligence routing, low-bitrate redundant solution, upstream-forward error correctionand adaptive jitter. A special intelligent routing algorithm we designed automatically seeks optimal ways of delivering voice and video data across our cloud-basednetwork, enabling us to provide better QoS even when the QoS levels are lower on certain routes. We employ computer programs and design and implement a standardized set of measurements to help monitor our service quality. Our systemperiodically collects, and our team of experts analyzes, data from each of our data centers to evaluate the voice- and video-quality for each user using a systematicstandard. We have set up formal procedures to handle different levels of server breakdowns and network-related emergencies, and our team can remotely discoverissues and access any server to promptly resolve issues. Large, dedicated cloud-based network infrastructure Our team of experts developed a cloud-based network infrastructure specifically designed to handle multi-party voice- and video-enabled real-time onlineinteractions. We own over 27,000 servers which are hosted in the data centers we lease from third parties throughout the country as of December 31, 2016. Ourcloud-based network infrastructure provides quality data delivery and allows multiple users to interact online from anywhere in China with ease and speed. Our system is designed for scalability and reliability to support growth in our user base. The number of our servers contributes significantly to our faststreaming speed and reliable services, and can be expanded with comparative ease, given the low cost of renting data centers to host additional servers in any hightraffic regions in our network. We believe that our current network facilities and broadband capacity provide us with sufficient capacity to carry out our currentoperations, and can be expanded to meet additional capacity relatively quickly. The amount of bandwidth we lease is continually expanded to reflect increasedpeak concurrent user numbers. 56 Content management and monitoring Our live streaming platforms and Duowan.com all contain user-generated content, which we are required to monitor for compliance with PRC laws andregulations. A team within our data security department helps in enforcing our internal procedures to ensure that the content in our system are in compliance withapplicable laws and regulations. They are aided by a program designed to periodically sweep our platforms and the data being conveyed in our system for sensitivekey words or questionable materials. Content that contains certain keywords are automatically filtered by our program and cannot be successfully posted on ourplatforms. Thus we are able to minimize offending materials on our platforms and to remove such materials promptly after they are discovered. See “Item 3. KeyInformation—D. Risk Factors—Risks Related to Our Business—We may be held liable for information or content displayed on, retrieved from or linked to ourplatforms, or distributed to our users, and PRC authorities may impose legal sanctions on us, including, in serious cases, suspending or revoking the licensesnecessary to operate our platforms.” Accumulated experience and data for a proprietary technology platform Significant time and efforts are required to build and operate an infrastructure such as ours. The technological difficulties which a platform that hosts10,000 concurrent users faces differ greatly from the difficulties a platform with 100,000 and 1,000,000 concurrent users faces, including many issues to beconsidered when programming for the platform and planning the infrastructure. Over the years, we have gradually developed an effective system to identify, studyand resolve issues that we encounter every day. In addition, our team members have been trained over the years to anticipate and resolve any issues, having gainedsignificant knowledge from building and maintaining our platforms over time. Research and Development Team We believe that our ability to develop internet and mobile online applications and services tailored to respond to the needs of our user base has been a keyfactor for the success of our business. As of December 31, 2016, our research and development team consisted of 1,700 members. All of our service programs aredesigned and developed internally, including various interactive technologies. We expect to continue to develop all of our core technologies in-house. Our research and development team currently works on both back-end and front-end development of our products and services, including (a) thecontinuous improvement of our core audio and video data processing and streaming technologies, (b) the enhancement of network and server structures, datadistribution and transfer technologies to achieve lower latency and reduce interruptions, and (c) the creation of new features and functions to meet the demand ofour users in various business lines, including but not limited to PC-desktop, web and mobile applications, channel templates and virtual items. Operation and Maintenance Team As of December 31, 2016, approximately 153 technicians are dedicated to monitoring and maintaining our network infrastructure 24 hours a day, sevendays a week. Our operation and maintenance team checks the voice and video data quality received by various users, the quality of user experience on ourplatforms and the proper functioning of our server equipment in our network, as well as contacting internet data center hosts to fix any issues located through suchchecks. Having launched more diversified and complex products and services for an increasing number of users, we raised new challenges to our operation andmaintenance team, and rely on them to continue to provide live streaming services and online real-time interactions to our users. Intellectual Property We regard our patents, trademarks, domain names, copyrights, trade secrets, proprietary technologies and similar intellectual property as critical to oursuccess. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret protection laws in the PRC andother jurisdictions, as well as through confidentiality agreements and procedures with our employees, partners and others. As of December 31, 2016, we hadregistered 208 domain names, including YY.com, Huya.com, Zhiniu8.com, Duowan.com, 100.com and Chinaduo.com, 286 software copyrights and othercopyrights, 75 patents and 610 trademarks and service marks in China and overseas. In addition, as of December 31, 2016, we had filed 816 patent applicationscovering certain of our proprietary technologies and 451 trademark applications in China and overseas. 57 PRC Regulation Certain areas related to the internet, such as telecommunications, internet information services, connections to the international information networks,internet information security and censorship and online game operations, are covered extensively by a number of existing laws and regulations issued by variousPRC governmental authorities, including: ·the Ministry of Industry and Information Technology, or the MIIT; ·the Ministry of Culture, or the MOC; ·the General Administration of Press and Publication, or the GAPP; ·the State Administration for Radio, Film and Television, or the SARFT; ·State Administration of Press, Publication, Radio, Film and Television of the People's Republic of China, or the SAPPRFT; ·the National Copyright Administration, or the NCA; ·the State Administration for Industry and Commerce, or the SAIC; ·the State Council Information Office, or the SCIO; ·the Ministry of Commerce, or the MOFCOM; ·the Bureau of Protection of State Secrets; ·the Ministry of Public Security; and ·the State Administration of Foreign Exchange, or the SAFE. As the online social platform and online game industries are still at an early stage of development in China, new laws and regulations may be adoptedfrom time to time to require new licenses and permits in addition to those we currently have. There are substantial uncertainties on the interpretation andimplementation of any current and future Chinese laws and regulations, including those applicable to the online social platform and online game industries. See “D.Risk Factors—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legalprotections available to you and us.” This section sets forth the most important laws and regulations that govern our current business activities in China and thataffect the dividends payment to our shareholders. Regulation on Telecommunications Services and Foreign Ownership Restrictions The Telecommunications Regulations, which became effective on September 25, 2000 and have been subsequently amended respectively on July 29,2014 and February 6, 2016, are the core regulations on telecommunications services in China. The Telecommunications Regulations set out basic guidelines ondifferent types of telecommunications business activities, including the distinction between “basic telecommunications services” and “value-addedtelecommunications services.” According to the Catalog of Telecommunications Business (2015 Amendment), implemented on March 1, 2016 attached to theTelecommunications Regulations, internet information services are deemed a type of value-added telecommunications services. The TelecommunicationsRegulations require the operators of value-added telecommunications services to obtain value-added telecommunications business operation licenses from MIIT orits provincial delegates prior to the commencement of such services. Under these regulations, if the value-added telecommunications services offered includemobile network information services, the operation license for value-added telecommunications business must include the provision of such services in its coveredscope. We currently, through Guangzhou Huaduo, our PRC consolidated affiliated entity, hold an ICP license, a sub-category of the value-addedtelecommunications business operation license, covering the provision of internet and mobile network information services, issued by the Guangdong branch of theMIIT on February 10, 2012. 58 The Regulations for the Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which took effect on January 1,2002 and were amended respectively on September 10, 2008 and February 6, 2016, are the key regulations that regulate foreign direct investment intelecommunications companies in China. The FITE Regulations stipulate that the foreign investor of a telecommunications enterprise is prohibited from holdingmore than 50% of the equity interest in a foreign-invested enterprise that provides value-added telecommunications services, including provision of internetcontent. Moreover, such foreign investor shall demonstrate a good track record and experience in operating value-added telecommunications services whenapplying for the value-added telecommunications business operation license from the MIIT. On July 13, 2006, the MIIT issued the Circular on Strengthening the Administration of Foreign Investment in Value-added Telecommunications Services,or the MIIT Circular 2006, which requires that (a) foreign investors can only operate a telecommunications business in China through establishing atelecommunications enterprise with a valid telecommunications business operation license; (b) domestic license holders are prohibited from leasing, transferring orselling telecommunications business operation licenses to foreign investors in any form, or providing any resource, sites or facilities to foreign investors tofacilitate the unlicensed operation of telecommunications business in China; (c) value-added telecommunications service providers or their shareholders mustdirectly own the domain names and registered trademarks they use in their daily operations; (d) each value-added telecommunications service provider must havethe necessary facilities for its approved business operations and maintain such facilities in the geographic regions covered by its license; and (e) all value-addedtelecommunications service providers should improve network and information security, enact relevant information safety administration regulations and set upemergency plans to ensure network and information safety. The provincial communications administration bureaus, as local authorities in charge of regulatingtelecommunications services, (a) are required to ensure that existing qualified value-added telecommunications service providers will conduct a self-assessment oftheir compliance with the MIIT Circular 2006 and submit status reports to the MIIT before November 1, 2006; and (b) may revoke the value-addedtelecommunications business operation licenses of those that fail to comply with the above requirements or fail to rectify such non-compliance within specifiedtime limits. Due to the lack of any additional interpretation from the regulatory authorities, it remains unclear what impact MIIT Circular 2006 will have on us orthe other PRC internet companies with similar corporate and contractual structures. To comply with such foreign ownership restrictions, we operate our online social platform and online game businesses in China through GuangzhouHuaduo, which is owned by several PRC citizens and Beijing Tuda. Beijing Tuda is owned by Mr. David Xueling Li. Guangzhou Huaduo and Beijing Tuda areboth controlled by Beijing Huanju Shidai through a series of contractual arrangements. Similarly, we operate our Bilin business through contractual arrangementamong Bilin Changxiang, Bilin Online and its shareholder. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements.” Moreover, Guangzhou Huaduo is the registered holder of a majority of the domain names, trademarks and facilities necessary for dailyoperations in compliance with the MIIT Circular 2006. Based on our PRC legal counsel Fangda Partners’ understanding of the current PRC laws, rules andregulations, our corporate structure complies with all existing PRC laws and regulations. However, we were further advised by our PRC legal counsel that there aresubstantial uncertainties with respect to the interpretation and application of existing or future PRC laws and regulations and thus there is no assurance that Chinesegovernmental authorities would take a view consistent with the opinions of our PRC legal counsel. Internet Information Services The Administrative Measures on Internet Information Services, or the ICP Measures, issued by the State Council on September 25, 2000 and amended onJanuary 8, 2011, regulate the provision of internet information services. According to the ICP Measures, “internet information services” refer to services thatprovide internet information to online users, and are categorized as either commercial services or non-commercial services. Pursuant to the ICP Measures, internetinformation commercial service providers shall obtain an ICP license, from the relevant local authorities before engaging in the providing of any commercialinternet information services in China. In addition, if the internet information services involve provision of news, publication, education, medicine, health,pharmaceuticals, medical equipment and other services that statutorily require approvals from other additional governmental authorities, such approvals must beobtained before applying for the ICP license. Guangzhou Huaduo presently holds the ICP license on internet and mobile network information services issued bythe Guangdong branch of the MIIT on February 10, 2012. 59 Besides, the ICP Measures and other relevant measures also ban the internet activities that constitute publication of any content that propagates obscenity,pornography, gambling and violence, incite the commission of crimes or infringe upon the lawful rights and interests of third parties, among others. If an internetinformation service provider detects information transmitted on their system that falls within the specifically prohibited scope, such provider must terminate suchtransmission, delete such information immediately, keep records and report to the governmental authorities in charge. Any provider’s violation of theseprescriptions will lead to the revocation of its ICP license and, in serious cases, the shutting down of its internet systems. Internet Publication and Cultural Products The Tentative Measures for Internet Publication Administration, or Internet Publication Measures, were jointly promulgated by the GAPP and the MIITon June 27, 2002 and became effective on August 1, 2002. The Internet Publication Measures imposed a license requirement for any company that engages ininternet publishing, which means any act by an internet information service provider to select, edit and process content or programs and to make such content orprograms publicly available on the internet. The provision of online games is deemed an internet publication activity; therefore, an online game operator must (i)obtain an Internet Publishing License so that it can directly offer its online games to the public in the PRC, or (ii) publish its online games through a qualified pressentity by entering into an entrustment agreement. Since the Internet Publication Measures has been in place for more than thirteen years, on February 4, 2016, the SAPPRFT and the MIIT decided tofurther regulate order in network publication services management, and issued the Measures for Network Publication Service Administration, or NetworkPublication Measures, which took effect on March 10, 2016 and replaced the Internet Publication Measures. According to the Network Publication Measures,engagement in network publication services must be approved by the competent administrative department for publications and a Network Publication ServicesPermit must be obtained. Pursuant to the Network Publication Measures, network publication services refer to the use of information networks to provide thepublic with network publications, and network publications refer to digital works provided to the public through the use of information networks that havecharacteristics of publication such as editing, creation, or processing. In addition, before online games are published to the public, an application must be putforward with the competent administrative departments for publication, and upon verification and consent, such online games are to be reported to the StateAdministration of Press, Publication, Radio, Film and Television. The Rules for the Administration of Electronic Publication, or the Electronic Publication Rules, was issued by the GAPP on February 21, 2008 andbecame effective on April 15, 2008. Under the Electronic Publication Rules and other regulations issued by the GAPP, online games are classified as a kind ofelectronic publication, and publishing of online games is required to be conducted by licensed electronic publishing entities that have been issued standardpublication codes. Pursuant to the Electronic Publication Rules, if a PRC company is contractually authorized to publish foreign electronic publications, it mustobtain the approval of, and register the copyright license contract with, the GAPP. We, through Guangzhou Huaduo, obtained an Internet Publishing License for the publication of online games and mobile phone games on November 7,2011. For more information on the pre-approval by the GAPP, see “—Regulation on Online Games and Foreign Ownership Restrictions.” Regulation on Online Games and Foreign Ownership Restrictions On June 3, 2010, the MOC promulgated the Provisional Administration Measures of Online Games, or the Online Game Measures, which came intoeffect on August 1, 2010. The Online Game Measures governs the research, development and operation of online games and the issuance and trading services ofvirtual currency. It specifies that the MOC is responsible for the censorship of imported online games and the filing of records of domestic online games. Theprocedures for the filing of records of domestic online games must be conducted with the MOC within 30 days after the commencement date of the onlineoperation of such online games or the occurrence date of any material alteration of such online games. 60 All operators of online games, issuers of virtual currencies and providers of virtual currency trading services, or Online Game Business Operators, arerequired to obtain Internet Culture Operation Licenses. An Internet Culture Operation License is valid for three years and in case of renewal, the renewalapplication should be submitted 30 days prior to the expiry date of such license. An Online Game Business Operator should request the valid identity certificate ofgame users for registration, and notify the public 60 days ahead of the termination of any online game operations or the transfer of online game operational rights.Online Game Business Operators are also prohibited from (a) setting compulsory matters in the online games without game users’ consent; (b) advertising orpromoting the online games that contain prohibited content, such as anything that compromise state security or divulges state secrets; and (c) inducing game usersto input legal currencies or virtual currencies to gain online game products or services, by way of random draw or other incidental means. It also states that the statecultural administration authorities will formulate the compulsory clauses of a standard online game service agreement, which have been promulgated on July 29,2010 and are required to be incorporated into the service agreement entered into between the Online Game Business Operators, with no conflicts with the rest ofclauses in such service agreements. Guangzhou Huaduo holds a valid Internet Culture Operation License that was last updated in August 2016. On July 11, 2008, the General Office of the State Council promulgated the Regulation on Main Functions, Internal Organization and Staffing of theGAPP, or the Regulation on Three Provisions. On September 7, 2009, the Central Organization Establishment Commission issued the correspondinginterpretations, or the Interpretations on Three Provisions. The Regulation on Three Provisions and the Interpretation on Three Provisions granted the MOC overalljurisdiction to regulate the online gaming industry, and granted the GAPP the authority to issue approvals for the internet publication of online games. Specifically,(a) the MOC is empowered to administrate online games (other than the pre-examination and approval before internet publication of online games); (b) subject tothe MOC’s overall administration, GAPP is responsible for the pre-examination and approval of the internet publication of online games; and (c) once an onlinegame is launched, the online game will be only administrated and regulated by the MOC. On July 11, 2013, the General Office of the State Council promulgatedthe Provisions on the Main Responsibilities, Internal Institutions and Staffing of SAPPRFT, or the Three-Decision Provisions, which reiterates the restrictionsstipulated in the Regulation on Three Provisions. On November 7, 2011, Guangzhou Huaduo obtained an Internet Publishing License for the publication of onlinegames and mobile phone games. The online games we currently offer are domestically produced games, and are published by third parties qualified to publishonline games. As of March 31, 2017, approximately 46.5% of the online games available on YY Client were filed with the GAPP as electronic publications, andthe others were still undergoing the filing process. On September 28, 2009, the GAPP, the NCA and the National Working Group to Eliminate Pornography and Illegal Publications jointly issued theCircular on Consistent Implementation of the Stipulation on the Three Determinations of the State Council and the Relevant Interpretations of the StateCommission for Public Sector Reform and the Further Strengthening of the Pre-approval of Online Games and the Approval and Examination of Imported OnlineGames, or Circular 13. Circular 13 explicitly prohibits foreign investors from directly or indirectly engaging in online gaming business in China, including throughvariable interest entity structures, or VIE Structures. Foreign investors are not allowed to indirectly control or participate in PRC operating companies’ online gameoperations, whether (a) by establishing other joint ventures, entering into contractual arrangements or providing technical support for such operating companies; or(b) in a disguised form such as by incorporating or directing user registration, user account management or game card consumption into online gaming platformsthat are ultimately controlled or owned by foreign companies. Circular 13 reiterates that the GAPP is responsible for the examination and approval of the importand publication of online games and states that downloading from the internet is considered a publication activity, which is subject to approval from the GAPP.Violations of Circular 13 will result in severe penalties. For detailed analysis, see “D. Risk Factors—Risks Related to Our Corporate Structure and Our Industry—We may be adversely affected by thecomplexity, uncertainties and changes in PRC regulation of internet business and companies.” Anti-fatigue Compliance System and Real-name Registration System On April 15, 2007, in order to curb addictive online game-playing by minors, eight PRC government authorities, including the GAPP, the Ministry ofEducation, the Ministry of Public Security and the MIIT, jointly issued a circular requiring the implementation of an anti-fatigue compliance system and a real-name registration system by all PRC online game operators. Under the anti-fatigue compliance system, three hours or less of continuous playing by minors, definedas game players under 18 years of age, is considered to be “healthy”, three to five hours is deemed “fatiguing”, and five hours or more is deemed “unhealthy.”Game operators are required to reduce the value of in-game benefits to a game player by half if it discovers that the amount of a time a game player spends onlinehas reached the “fatiguing” level, and to zero in the case of the “unhealthy” level. 61 To identify whether a game player is a minor and thus subject to the anti-fatigue compliance system, a real-name registration system should be adopted torequire online game players to register their real identity information before playing online games. Pursuant to a notice issued by the relevant eight governmentauthorities on July 1, 2011, online game operators must submit the identity information of game players to the National Citizen Identity Information Center, asubordinate public institution of the Ministry of Public Security, for verification as of October 1, 2011. We have developed and implemented an anti-fatigue and compulsory real-name registration system in all our online games, and will cooperate with theNational Citizen Identity Information Center to launch the identity verification system upon the issuance of relevant implementing rules. For game players who donot provide verified identity information, we assume that they are minors under 18 years of age. In order to comply with the anti-fatigue rules, we set up oursystem so that after three hours of playing our online games, minors only receive half of the virtual items or other in-game benefits they would otherwise earn, andafter playing for more than five hours, minors would receive no in-game benefits. These restrictions could limit our ability to increase our online games businessamong minors. Furthermore, if these restrictions were expanded to apply to adult game players in the future, our online games business could be materially andadversely affected. See “D. Risk Factors—Risks Related to Our Corporate Structure and Our Industry—Intensified” government regulation of the internet industryin China could restrict our ability to maintain or increase our user level or the level of user traffic to our platforms. Virtual Currency On January 25, 2007, the Ministry of Public Security, the MOC, the MIIT and the GAPP jointly issued a circular regarding online gambling which hasimplications for the issuance and use of virtual currency. To curtail online games that involve online gambling while addressing concerns that virtual currencymight be used for money laundering or illicit trade, the circular (a) prohibits online game operators from charging commissions in the form of virtual currency inconnection with winning or losing of games; (b) requires online game operators to impose limits on use of virtual currency in guessing and betting games; (c) bansthe conversion of virtual currency into real currency or property; and (d) prohibits services that enable game players to transfer virtual currency to other players. Tocomply with the relevant section of the circular that bans the conversion of virtual currency into real currency or property, in relation to online music andentertainment, our virtual currency currently can only be used by users to exchange into virtual items to be used to show support for performers or gain access toprivileges and special features in the channels which are services in nature instead of “real currency or property.” Once the virtual currency is exchanged by usersfor virtual items or the relevant privileged services, the conversion transaction is completed and we immediately cancel the virtual item in our internal system. Inthe case of virtual items used as gifts to performers, we cancel the virtual items and record corresponding points for the benefit of the performers and the channelowners, which are then used as basis for the revenue-sharing calculation pursuant to arrangements among us, certain popular performers and channel owners. In February 2007, 14 PRC regulatory authorities jointly issued a circular to further strengthen the oversight of internet cafes and online games. Inaccordance with the circular, the People’s Bank of China, or PBOC, has the authority to regulate virtual currency, including: (a) setting limits on the aggregateamount of virtual currency that can be issued by online game operators and the amount of virtual currency that can be purchased by an individual; (b) stipulatingthat virtual currency issued by online game operators can only be used for purchasing virtual products and services within the online games and not for purchasingtangible or physical products; (c) requiring that the price for redemption of virtual currency shall not exceed the respective original purchase price; and (d) banningthe trading of virtual currency. On June 4, 2009, the MOC and the MOFCOM jointly issued a notice to strengthen the administration of online game virtual currency. The VirtualCurrency Notice requires businesses that (a) issue online game virtual currency (in the form of prepaid cards and/or pre-payment or prepaid card points), or (b)offer online game virtual currency transaction services to apply for approval from the MOC through its provincial branches within three months after the issuanceof the notice. The Virtual Currency Notice prohibits businesses that issue online game virtual currency from providing services that would enable the trading ofsuch virtual currency. Any business that fails to submit the requisite application will be subject to sanctions, including, without limitation, mandatory correctivemeasures and fines. 62 Under the Virtual Currency Notice, an online game virtual currency transaction service provider means a business providing platform services relating totrading of online game virtual currency among game users. The Virtual Currency Notice further requires an online game virtual currency transaction serviceprovider to comply with relevant e-commerce regulations issued by the MOFCOM. According to the Guiding Opinions on Online Trading (Interim) issued by theMOFCOM on March 6, 2007, online platform services are trading services provided to online buyers and sellers through a computer information system operatedby the service provider. The Virtual Currency Notice regulates, among others, the amount of virtual currency a business can issue, the retention period of user records, thefunction of virtual currency and the return of unused virtual currency upon the termination of online services. It prohibits online game operators from distributingvirtual items or virtual currency to players based on random selection through lucky draw, wager or lottery which involves cash or virtual currency directly paid bythe players. The Virtual Currency Notice bans the issuance of virtual currency by game operators to game players through means other than purchases with legalcurrency. Any business that does not provide online game virtual currency transaction services is required to adopt technical measures to restrict the transfer ofonline game virtual currency among accounts of different game players. In addition, the Online Game Measures promulgated in June 2010 further provide that (i) virtual currency may only be used to purchase services andproducts provided by the online service provider that issues the currency; (ii) the purpose of issuing virtual currency shall not be malicious appropriation of theuser’s advance payment; (iii) the storage period of online gamers’ purchase record shall not be shorter than 180 days; (iv) the types, price and total amount ofvirtual currency shall be filed with the cultural administration department at the provincial level. The Online Game Measures stipulate that virtual currency serviceproviders may not provide virtual currency transaction services to minors or for online games that fail to obtain the necessary approval or filings, and that suchproviders should keep transaction records, accounting records and other relevant information for its users for at least 180 days. On December 1, 2016, MOCreleased the Notice on Regulating Online Game Operation and Strengthening Concurrent and Ex-Post Supervision, to be implemented from May 1, 2017, restateand introduce a series of regulatory requirements governing the online game operation, including clarifications on online game operation and operators, virtualitems rules, random-event rules, user protection measures, and reiteration of MOC’s approval and filing requirements. Online Music and Entertainment On November 20, 2006, the MOC issued Several Suggestions of the MOC on the Development and Administration of Internet Music, or the Suggestions,which became effective on the same date. The Suggestions, among other things, reiterate the requirement for an internet service provider to obtain an InternetCulture Operation License to carry out any business relating to internet music products. In addition, foreign investors are prohibited from operating internet culturebusinesses. However, the laws and regulations on internet music products are still evolving, and there have not been any provisions clarifying whether musicproducts will be regulated by the Suggestions or how such regulation would be carried out. On October 23, 2015, the MOC promulgated the Notice on Further Strengthening and Improving the Content Management of Online Music, whichstipulated that operating entities shall carry out self-examination in respect of the content management of online music, which shall be regulated by the culturaladministration departments in process or afterwards. Guangzhou Huaduo holds a valid Internet Culture Operation License covering our provision of online music. More than 99% of the music offered on ourwebsites is sung by grassroots performers along with recorded music. If any music provided through our platforms is found to lack necessary filings and/orapprovals, we could be requested to cease providing such music or be subject to claims from third parties or penalties from the MOC or its local branches. See “D.Risk Factors—Risks Related to Our Corporate Structure and Our Industry—If our PRC consolidated affiliated entities fail to obtain and maintain the requisitelicenses and approvals required under the complex regulatory environment for internet-based businesses in China, our business, financial condition and results ofoperations may be materially and adversely affected.” Moreover, the unauthorized posting of online music on our platforms by third parties may expose us to therisk of administrative penalties and intellectual property infringement lawsuits. See “D. Risk Factors—Risks Related to Our Business—We may be held liable forinformation or content displayed on, retrieved from or linked to our platforms, or distributed to our users, and PRC authorities may impose legal sanctions on us,including, in serious cases, suspending or revoking the licenses necessary to operate our platforms” and “PRC Regulation—Intellectual Property Rights—Copyright Law.” 63 In 2011, the MOC greatly intensified its regulation of the provision of online music products. According to the series of Notices on Clearing OnlineMusic Products that are in Violation of Relevant Regulations promulgated by the MOC since January 7, 2011, entities that provide any the following will besubject to relevant penalties or sanctions imposed by the MOC: (a) online music products or relevant services without obtaining corresponding qualifications, (b)imported online music products that have not passed the content review of the MOC or (c) domestically developed online music products that have not been filedwith the MOC. Thus far, we believe that we have eliminated from our platforms any online music products that may fall into the scope of those prohibited onlinemusic products thereunder. Online Transmission of Audio-Visual Programs The Administrative Provisions on Private Network and Targeted Publication of Audio-Visual Programs Services, or the Audio-Visual Provisions waspromulgated by the SAPPRFT on April 25, 2016 and put into effect on June 1, 2016. The Audio-Visual Provisions applies to the radio and TV program and otheraudio-visual program services with targeted audience through the targeted transmission channels, such as local area network, virtual private network, Internet andother information networks, and using TV and handheld electronic equipment as terminal recipients. Under the Audio-Visual Provisions, to engage in thetransmission and distribution of audio-visual programs, a License for the Online Transmission of Audio-Visual Programs is required. Foreign invested enterprisesare not allowed to carry out such business. In addition, the State Internet Information Office promulgated the Administrative Provisions on Internet Live-Streaming Services, or Internet Live-Streaming Services Provisions, on November 4, 2016, which came into effect on December 1, 2016. According to the Internet Live-Streaming Services Provisions,an Internet live-streaming service provider shall (a) establish a live-streaming content review platform; (b) conduct authentication registration of Internet live-streaming issuers based on their identity certificates, business licenses and organization code certificates, etc.; and (c) enter into a service agreement with Internetlive-streaming services user to specify both parties’ rights and obligations. On April 13, 2005, the State Council promulgated the Certain Decisions on the Entry of the Non-state-owned Capital into the Cultural Industry. On July6, 2005, five PRC governmental authorities, including the MOC, the SARFT, the GAPP, the CSRC and the MOFCOM, jointly adopted the Several Opinions onCanvassing Foreign Investment into the Cultural Sector. According to these regulations, non-state-owned capital and foreign investors are not allowed to engage inthe business of transmitting audio-visual programs through information networks. To further regulate the provision of audio-visual program services to the public via the internet, including through mobile networks, within the territory ofthe PRC, the SARFT and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual ProgramProvisions, on December 20, 2007, which came into effect on January 31, 2008 and subsequently amended on August 28, 2015. Providers of internet audio-visualprogram services are required to obtain a License for Online Transmission of Audio-Visual Programs issued by SARFT, or complete certain registrationprocedures with SARFT. In general, providers of internet audio-visual program services must be either state-owned or state-controlled entities, and the business tobe carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program service determined by SARFT. In a pressconference jointly held by SARFT and MIIT to answer questions relating to the Audio-Visual Program Provisions in February 2008, SARFT and MIIT clarifiedthat providers of internet audio-visual program services who engaged in such services prior to the promulgation of the Audio-Visual Program Provisions areeligible to register their business and continue their operation of internet audio-visual program services so long as those providers did not violate the relevant lawsand regulations in the past. On May 21, 2008, SARFT issued a Notice on Relevant Issues Concerning Application and Approval of License for the OnlineTransmission of Audio-Visual Programs, which further sets out detailed provisions concerning the application and approval process regarding the License forOnline Transmission of Audio-Visual Programs. The notice also states that providers of internet audio-visual program services that engaged in such services priorto the promulgation of the Audio-Visual Program Provisions are eligible to apply for the license so long as their violation of the laws and regulations is minor inscope and can be rectified in a timely manner and they have no records of violation during the last three months prior to the promulgation of the Audio-VisualProgram Provisions. Further, on March 31, 2009, SARFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio-VisualPrograms, which reiterates the pre-approval requirements for the audio-visual programs transmitted via the internet, including through mobile networks, whereapplicable, and prohibits certain types of internet audio-visual programs containing violence, pornography, gambling, terrorism, superstition or other similarlyprohibited elements. 64 On March 17, 2010, the SARFT issued the Internet Audio-visual Program Services Categories (Provisional), or the Provisional Categories, whichclassified internet audio-visual program services into four categories. In addition, the Notice concerning Strengthening the Administration of the BroadcastingService on Online Audio-Visual Programs promulgated by the SAPPRFT on September 2, 2016 emphasizes that, unless a specific license is granted, audio-visualprograms service provider is forbidden from engaging in online live broadcasting on major political, military, economic, social, cultural and sports events. Guangzhou Huaduo holds a valid License for Online Transmission of Audio-Visual Programs with the business classification of converging and play-on-demand service for certain kinds of audio-visual programs—literary, artistic and entertaining—as prescribed in the Provisional Categories. Production of Radio and Television Programs On July 19, 2004, the SARFT issued the Regulations on the Administration of Production of Radio and Television Programs, or the Radio and TVPrograms Regulations, which become effective on August 20, 2004. The Radio and TV Programs Regulations require any entities engaging in the production ofradio and television programs to obtain a license for such businesses from the SARFT or its provincial branches. Entities with the License for Production andOperation of Radio and TV Programs must conduct their business operations strictly in compliance with the approved scope of production and operations and theseentities (except radio and TV stations) must not produce radio and TV programs regarding current political news or similar subjects. Guangzhou Huaduo holds an effective License for Production and Operation of Radio and TV Programs, covering the production, reproduction andpublication of broadcasting plays, TV dramas, cartoons (excluding production), special subjects, special columns (excluding current political news category) andentertainment programs. Regulation on Internet Bulletin Board Services On November 6, 2000, the MIIT promulgated the Administrative Measures on Internet Bulletin Board Services, or BBS Measures, which requiredcommercial internet information service providers which provide bulletin boards, discussion forums, chat rooms or similar services, or BBS services, to obtainspecific approval from the competent telecommunications authorities. Commercial internet information service providers are also required to conspicuouslydisplay their ICP license numbers and the rules of the BBS and inform users of the possible legal liabilities and consequences for posting improper comments.Although the BBS Measures were abandoned in July 2010 by the State Council, certain telecommunication authorities still require online bulletin board services beitemized in ICP license if an ICP license holder intends to provide such services. Regulation on Advertising Business and Conditions on Foreign Investment The SAIC is the primary governmental authority regulating advertising activities in China. Regulations that apply to advertising business primarilyinclude: ·Advertisement Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s Congress on October 27,1994 and amended on April 24, 2015 and effective since September 1, 2015; ·Administrative Regulations for Advertising, promulgated by the State Council on October 26, 1987 and effective since December 1, 1987; and 65 ·Implementation Rules for the Administrative Regulations for Advertising, promulgated by the State Council on January 9, 1988 and amended onDecember 3, 1998, December 1, 2000, November 30, 2004 and December 12, 2011, respectively. According to the above regulations, companies that engage in advertising activities must each obtain, from the SAIC or its local branches, a businesslicense which specifically includes operating an advertising business in its business scope. An enterprise engaging in advertising business within the specificationsin its business scope does not need to apply for an advertising operation license, provided that such enterprise is not a radio station, television station, newspaper ormagazine publisher or any other entity otherwise specified in the relevant laws or administrative regulations. Enterprises conducting advertising activities withoutsuch a license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations. The business license of anadvertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant laws or regulations. PRC advertising laws and regulations set certain content requirements for advertisements in China, including, among other things, prohibitions on false ormisleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement ofthe public interest. Advertisers, advertising agencies, and advertising distributors are required to ensure that the content of the advertisements they prepare ordistribute is true and in complete compliance with applicable laws. In providing advertising services, advertising operators and advertising distributors must reviewthe supporting documents provided by advertisers for advertisements and verify that the content of the advertisements complies with applicable PRC laws andregulations. Prior to distributing advertisements that are subject to government censorship and approval, advertising distributors are obligated to verify that suchcensorship has been performed and approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertisingincome, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. Where seriousviolations occur, the SAIC or its local branches may revoke such offenders’ licenses or permits for their advertising business operations. On July 4, 2016, the SAIC issued the Interim Measures for the Administration of Internet Advertising, or the Internet Advertising Measures, whichbecome effective on September 1, 2016. According to the Internet Advertising Measures, Internet Advertising refers to the commercial advertising for direct orindirect marketing goods or services in the form of text, image, audio, video, or others means through websites, webpages, Internet applications, or other Internetmedia. The Internet Advertising Measures specifically sets out the following requirements: (a) advertisements must be identifiable and marked with the word“advertisement” enabling consumers to distinguish them from non-advertisement information; (b)sponsored search results must be clearly distinguished fromorganic search results; (c) it is forbidden to sent advertisements or advertisement links by email without the recipient’s permission or induce Internet users to clickon an advertisement in a deceptive manner; and (d) Internet information service providers who do not participate in the business activities of Internet advertisingare required to stop publishing illegal advertisement only if they know or should have known the advertising is illegal. Intellectual Property Rights Software Registration The State Council and the NCA have promulgated various rules and regulations relating to protection of software in China. According to these rules andregulations, software owners, licensees and transferees may register their rights in software with the SCB or its local branches and obtain software copyrightregistration certificates. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through theregistration process and registered software rights may be entitled to better protections. For the number of software programs for which we had registered rights asof December 31, 2016, see “Item 4. Information on the Company—B. Business Overview—Intellectual Property.” 66 Patents The National People’s Congress adopted the Patent Law of the People’s Republic of China in 1984 and amended it in 1992, 2000 and 2008, respectively.A patentable invention, utility model or design must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted forscientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained bymeans of nuclear transformation. The Patent Office under the State Intellectual Property Office is responsible for receiving, examining and approving patentapplications. A patent is valid for a twenty-year term for an invention and a ten-year term for a utility model or design, starting from the application date. Exceptunder certain specific circumstances provided by law, any third party user must obtain consent or a proper license from the patent owner to use the patent, or elsethe use will constitute an infringement of the rights of the patent holder. For the number of patents we had and the number of patent applications we made as ofDecember 31, 2016, see “Item 4. Information on the Company—B. Business Overview—Intellectual Property.” Copyright Law The Copyright Law of the People’s Republic of China, promulgated in 1990 and amended in 2001 and 2010, or the Copyright Law, and its relatedimplementing regulations, promulgated in 2002 and amended in 2013, are the principal laws and regulations governing the copyright related matters. The amendedCopyright law covers internet activities, products disseminated over the internet and software products, among the subjects entitled to copyright protections.Registration of copyright is voluntary, and is administrated by the China Copyright Protection Center. To further clarify some key internet copyright issues, on December 27, 2012, the PRC Supreme People’s Court promulgated the Regulation on SeveralIssues Concerning Applicable Laws on Trial of Civil Disputes over the Infringement of Information Network Transmission Right, or the 2013 Regulation. The2013 Regulation took effect on January 1, 2013, and replaced the Interpretations on Some Issues Concerning Applicable Laws for Trial of Disputes over InternetCopyright that was initially adopted in 2000 and subsequently amended in 2004 and 2006. Under the 2013 Regulation, where an internet information serviceprovider work in cooperation with others to jointly provide works, performances, audio and video products of which the right holders have information networktransmission right, such behavior will constitute joint infringement of third parties’ information network transmission right, and the PRC court shall order suchinternet information service provider to assume join liability for such infringement. If an internet information service provider can prove that it has only providednetwork services through automatic access, automatic transmission, data storage space, search functions, links, document sharing technology, etc., and therebyargues that it has not been involved in any alleged joint infringement, the PRC court shall find in favor of such internet information service provider. If an internetinformation service provider fails to delete, block, disconnect or take other necessary measures, or if it provides technological support or other aid when it knowsor should have known of the network user’s infringement on the information network transmission right, the PRC court shall find that such aid constitutescontributory infringement. The PRC court shall determine whether an internet information service provider is liable for abetting or contributory infringementaccording to its findings on the degree of fault of the internet information service provider. The fault of the internet information service provider is determinedaccording to various criteria, including situations where such provider knew or should have known of the network user’s infringement against third party’sinformation network transmission right. If an internet information service provider can prove it has adopted fairly reasonable and effective technological measures,and yet still finds it difficult to discover infringement against information network transmission conducted by the network user, the PRC court shall find suchprovider to be not at fault. Where an internet information service provider promotes popular video and films through setting up a list, directory, index, descriptiveparagraph, briefing or other means of recommendation, and the public can download, browse or acquire them through other methods directly from the internetinformation service provider’s webpage, the PRC court may find that such provider knew of the network user’s infringement on the information networktransmission right of others. Under the Copyright Law and its implementation rules, anyone infringing upon the copyrights of others is subject to various civil liabilities, whichinclude stopping the infringement, eliminating the damages, apologizing to the copyright owners and compensating the copyright owners for such owners’ actualand other losses resulting from such infringement. If the actual loss of the copyright owner is difficult to calculate, the income received by the offender as a resultof the copyright infringement shall be deemed to be the actual loss; or if such income is in itself difficult to calculate, the relevant PRC court may decide theamount of the actual loss up to RMB500,000 for each infringement. 67 To address the problem of copyright infringement related to content posted or transmitted on the internet, the PRC National Copyright Administration andMIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. These measures, which became effectiveon May 30, 2005, apply to acts of automatically providing services such as uploading, storing, linking or searching works, audio or video products, or othercontents through the internet based on the instructions of internet users who publish contents on the internet, or the Internet Content Providers, without editing,amending or selecting any stored or transmitted content. When imposing administrative penalties upon the act which infringes upon any users’ right ofcommunication through information networks, the Measures for Imposing Copyright Administrative Penalties, promulgated in 2009, shall be applied. Where a copyright holder finds that certain internet content infringes upon its copyright and sends a notice to the relevant internet information serviceoperator, the relevant internet information service operator is required to (i) immediately take measures to remove the relevant contents, and (ii) retain allinfringement notices for six months and to record the content, display time and IP addresses or the domain names related to the infringement for 60 days. After anycontent is removed by an internet information service operator according to the notice of a copyright holder, the content provider may deliver a counter-notice toboth the internet information service operator and the copyright holder, stating that the removed content does not infringe upon the copyright of other parties. Afterthe delivery of such counter-notice, the internet information service operator may immediately reinstate the removed contents and shall not bear administrativelegal liability for such reinstatement. An internet information service operator may be subject to cease-and-desist orders and other administrative penalties such as confiscation of illegalincome and fines, if it is clearly aware of a copyright infringement through the internet or, although not aware of such infringement, it fails to take measures toremove relevant content upon receipt of the copyright owner’s notice of infringement and, as a result, damages public interests. Where there is no evidence toindicate that an internet information service operator is clearly aware of the existence of copyright infringement, or the internet information service operator hastaken measures to remove relevant contents upon receipt of the copyright owner’s notice, the internet information service provider shall not bear the relevantadministrative legal liabilities. On May 18, 2006, the State Council issued the Protection of the Right of Communication through Information Network, which took effect on July 1,2006 and amended on January 30, 2013. Under this regulation, an internet information service provider may be exempt from indemnification liabilities under thefollowing circumstances: ·any internet information service provider that provides automatic internet access service upon instructions from its users or provides automatictransmission service for works, performances and audio-visual products provided by its users are not required to assume indemnification liabilities if(a) it has not chosen or altered the transmitted works, performance and audio-visual products and (b) it provides such works, performances and audio-visual products to the designated users and prevents any person other than such designated users from obtaining access. ·any internet information service provider that, for the sake of improving network transmission efficiency, automatically stores and provides to itsown users the relevant works, performances and audio-visual products obtained from any other internet information service providers, are notrequired to assume the indemnification liabilities if (a) it has not altered any of the works, performance or audio-visual products that areautomatically stored; (b) it has not affected such original internet information service provider in holding the information about where the usersobtain the relevant works, performance and audio-visual products; and (c) when the original internet information service provider revises, deletes orshields the works, performances and audio-visual products, it will automatically revise, delete or shield the same. ·any internet information service provider that provides its users with information memory space for such users to provide the works, performancesand audio-visual products to the general public via an informational network are not required to assume the indemnification liabilities if (a) it clearlyindicates that the information memory space is provided to the users and publicizes its own name, contact person and web address; (b) it has notaltered the works, performance and audio-visual products that are provided by the users; (c) it is not aware of or has no reason to know that theworks, performances and audio-visual products provided by the users infringe upon the copyrights of others; (d) it has not directly derived anyeconomic benefit from the providing of the works, performances and audio-visual products by its users; and (e) after receiving a notice from thecopyright holder, it promptly deletes the allegedly infringing works, performances and audio-visual products pursuant to the relevant regulation. 68 Since 2005, the NCA, together with certain other PRC governmental authorities, have jointly launched annual campaigns specifically aimed to crackdown on internet copyright infringement and piracy in China; these campaigns normally last for three to four months every year. According to the Notice of 2010Campaign to Crack Down on Internet Infringement and Piracy promulgated by the NCA, the Ministry of Public Security and the MIIT on July 19, 2010, the 2010campaign mainly targeted internet audio and video programs, literature websites, online games, animation, software and art works related to Shanghai World Expoand Guangzhou Asian Games. During the 2010 campaign, starting from late July to the end of October 2010, the local branches of NCA focused on popularmovies and TV series, newly published books, online games and animation, music and software and various illegal activities, including, for example, illegaluploading or transmission of a thirty party’s works without proper license or permission, sales of pirated audio-video and software through e-commerce platforms,providing search links, information storage, web hosting or internet access services for third parties engaging in copyright infringement or piracy of copyrightedworks and the infringement by use of mobile media. In serious cases, the operating permits of the websites engaging illegal activities were revoked, and suchwebsites were ordered to shut down. We have adopted measures to mitigate copyright infringement risks. For instance, we have established a routine reporting and registration system that isupdated on a monthly basis, and we require performers, channel owners and users to acknowledge and agree that (a) they would not perform or upload copyrightedcontent without proper authorization and (b) that they will indemnify us for any relevant copyright infringement claims in relation to their activities on ourplatforms. If, despite these precautions, such procedures fail to effectively prevent unauthorized posting or use of copyrighted content or the infringement of otherthird party rights on our platforms, and the PRC courts find that certain safe harbor exemptions under PRC laws are not applicable to us because, for instance, acourt finds that we knew or should have known about such infringement or that we have directly derived economic benefits from allowing such infringementactivities on our platforms, we may be held jointly and severally liable with the performers, channel owners or other infringement parties in lawsuits initiated bythe relevant third party copyright holders or authorized users. Moreover, we may be held directly liable for the infringement activities of such performers orchannel owners on our platforms, if the PRC courts view them as our employees or agents, deem us to have control over their activities on our platforms and thecontent they upload or otherwise make available on our platforms, and determine that we have knowingly uploaded such infringing contents on our platforms. See“D. Risk Factors—Risks Related to Our Business—We may be subject to intellectual property infringement claims or other allegations, which could result in ourpayment of substantial damages, penalties and fines, removal of relevant content from our website or seeking license arrangements which may not be available oncommercially reasonable terms.” Domain Name In September 2002, the CNNIC issued the Implementing Rules for Domain Name Registration setting forth detailed rules for registration of domainnames, which was amended on May 29, 2012. On November 5, 2004, the MIIT promulgated the Measures for Administration of Domain Names for the ChineseInternet, or the Domain Name Measures. The Domain Name Measures regulate the registration of domain names, such as the first tier domain name “.cn.” On May28, 2012, the CNNIC issued the Measures on Domain Name Dispute Resolution and relevant implementing rules, pursuant to which the CNNIC can authorize adomain name dispute resolution institution to decide disputes. For the number of domain names we registered as of December 31, 2016, see “Item 4. Informationon the Company—B. Business Overview—Intellectual Property.” Trademark The PRC Trademark Law, adopted in 1982 and amended in 1993, 2001 and 2013, with its implementation rules adopted in 2014, protects registeredtrademarks. The Trademark Office of the SAIC handles trademark registrations and grants a protection term of ten years to registered trademarks. Trademarklicense agreements must be filed with the Trademark Office for record. For the number of trademarks we had and trademark applications we had made as ofDecember 31, 2016, see “Item 4. Information on the Company—B. Business Overview—Intellectual Property.” 69 Internet Infringement On December 26, 2009, the Standing Committee of National People’s Congress promulgated the Tort Law of the People’s Republic of China, or the TortLaw, which became effective on July 1, 2010. Under the Tort Law, an internet user or an internet service provider that infringes upon the civil rights or interests ofothers through using the internet assumes tort liability. If an internet user infringes upon the civil rights or interests of another through using the internet, the personbeing infringed upon has the right to notify and request the internet service provider whose internet services are facilitating the infringement to take necessarymeasures including the deletion, blocking or disconnection of an internet link. If, after being notified, the internet service provider fails to take necessary measuresin a timely manner to end the infringement, it will be jointly and severally liable for any additional harm caused by its failure to act. According to the Tort Law,civil rights and interests include the personal rights and rights of property, such as the right to life, right to health, right to name, right to reputation, right to honor,right of portraiture, right of privacy, right of marital autonomy, right of guardianship, right to ownership, right to usufruct, right to security interests, copyright,patent right, exclusive right to use trademarks, right to discovery, right to equity interests and right of heritage, among others. Regulation of Internet Content The PRC government has promulgated measures relating to internet content through a number of governmental agencies, including the MIIT, the MOCand the GAPP. These measures specifically prohibit internet activities, such as the operation of online games, that result in the publication of any content which isfound to contain, among others, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, orcompromise state security or secrets. If an ICP license holder violates these measures, its ICP license may be revoked and its websites may be shut down by therelevant government agencies. Moreover, pursuant to the Notice on Enhancing the Content Review Work of Online Game Products promulgated by the MOC in 2004, imported onlinegames are subject to content review by the MOC prior to being offered to Chinese internet users. Information Security and Censorship Internet content in China is regulated and restricted from a state security standpoint. Internet companies in China are required to complete security filingprocedures and regularly update information security and censorship systems for their websites with local public security bureau. The PRC Law on Preservation ofState Secrets, which became effective on October 1, 2010 requires an internet information services providers to discontinue disseminating any information thatmay be deemed to be leaked state secrets and to report such incidents in a timely manner to the state security and public security authorities. Failure to do so in atimely and adequate manner may subject the internet information services providers to liability and certain penalties given by the Ministry of State Security, theMinistry of Public Security and/or the MIIT or their respective local branches. On December 13, 2005, the Ministry of Public Security promulgated Provisions on Technological Measures for Internet Security Protection, or theInternet Protection Measures, which took effect on March 1, 2006. The Internet Protection Measures requires all internet information services operators to takeproper measures including anti-virus, data back-up and other related measures, and keep records of certain information about their users (including user registrationinformation, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws andregulations. The National People’s Congress, China’s national legislative body, enacted the Decisions on the Maintenance of Internet Security on December 28, 2000and subsequently amended on August 27, 2009, that may subject persons to criminal liabilities in China for any attempt to: (i) gain improper entry to a computer orsystem of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information or (v) infringeupon intellectual property rights. The Internet Security Law of the People’s Republic of China, issued by the Standing Committee of the National People’sCongress on November 7, 2016 and will take effective on June 1, 2017, further emphasizes the implementation of classified protection with respect to Internetsecurity. According to the Internet Security Law, Internet operators shall fulfill relevant mandatory security protection obligations. 70 In 1997, the Ministry of Public Security issued the Administration Measures on the Security Protection of Computer Information Network withInternationally Connections (2011 amendment), which prohibit using the internet in ways which, among others, result in a leakage of state secrets or a spread ofsocially destabilizing content. The Ministry of Public Security has supervision and inspection powers in this regard, and relevant local security bureaus may alsohave jurisdiction. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites. On December 28, 2012, the Standing Committee of the National People’s Congress reiterated relevant rules on the protection of internet information byissuing the Decision on Strengthening the Protection of Network Information, or the 2012 Decision. The 2012 Decision distinctly clarified certain relevantobligations of the internet information service provider. For example, the 2012 Decision specifies that the internet information service provider should takerelevant technical measures and other necessary actions to prevent the leakage, damage or loss of each user’s personal information collected in the internetinformation service provider’s operation activities, and shall take remedial measures when the leakage, damage or loss of the citizen’s personal information occursor may possibly occur. Once it discovers any transmission or disclosure of information prohibited by the relevant laws and regulations, the internet informationservice provider shall stop transmission of such information, take measures such as elimination, keeping relevant record, and reporting to relevant authorities. To comply with the above laws and regulations, we have established an internet information security department to implement measures on informationfiltering. For example, we have adopted a voice monitor system, and installed on our platforms various alerts on sensitive words or abnormal activities of users,channels or groups. We also have a dedicated team that maintains 24-hour surveillance on the information posted on our platforms, with different categories formonitoring purposes, according to subject and content. We have also established and follow a strict review process and storage system of relevant records which,in combination with various information security measures, have effectively prevented the public dissemination of statutory prohibited information through ourwebsites in the past. We intend to continue to further update our measurements and system and work closely with relevant authorities to avoid any violation ofrelevant laws and regulations in the future. Privacy Protection PRC laws and regulations do not prohibit internet content providers from collecting and analyzing their users’ personal information if appropriateauthorizations are obtained. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. PRC laws andregulations prohibit internet content providers from disclosing any information transmitted by users through their networks to any third parties without theirauthorization unless otherwise permitted by law. If an internet content provider violates these regulations, the MIIT or its local bureaus may impose penalties andthe internet content provider may be liable for damages caused to its users. Regulation of Foreign Currency Exchange and Dividend Distribution Foreign Currency Exchange. The core regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations,as amended in August 2008, or the FEA Regulations. Under the FEA Regulations, the Renminbi is freely convertible for current account items, including thedistribution of dividends, interest payments, trade- and service-related foreign exchange transactions, but not for capital account items, such as direct investments,loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the SAFE is obtained and prior registration with theSAFE is made. On August 29, 2008, SAFE promulgated Circular 142 to regulate the conversion of foreign currency into Renminbi by a foreign-invested enterpriseby restricting the ways in which the converted Renminbi may be used. Circular 142 stipulates that the registered capital of a foreign-invested enterprise that hasbeen settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmentalauthority and cannot be used for equity investments within the PRC. Meanwhile, the SAFE strengthened its oversight of the flow and use of the registered capitalof a foreign-invested enterprise settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without the SAFE’sapproval, and may not in any case be repayment of Renminbi loans if the proceeds of such loans have not been used. 71 Since SAFE Circular 142 has been in place for more than five years, in 2014, SAFE decided to further reform the foreign exchange administration systemin order to satisfy and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning theLaunch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas on July 4,2014, or SAFE Circular 36. SAFE Circular 36 suspends the application of SAFE Circular 142 in certain areas and allows a foreign-invested enterprise registered insuch areas to use the RMB capital converted from foreign currency registered capital for equity investments within the scope of business, which will be regarded asthe reinvestment of foreign-invested enterprise. On March 30, 2015, SAFE issued the Circular on the Reforming of the Management Method of the Settlement ofForeign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect on June 1, 2015, and replaced SAFE Circular 142 and SAFECircular 36. Under SAFE Circular 19, a foreign-invested enterprise, within the scope of business, may also choose to convert its registered capital from foreigncurrency to RMB on a discretionary basis, and the RMB capital so converted can be used for equity investments within PRC, which will be regarded as thereinvestment of foreign-invested enterprise. Dividend Distribution. The Foreign Investment Enterprise Law, promulgated in 1986 and amended in 2000 and 2016, and the Administrative Rules underthe Foreign Investment Enterprise Law, promulgated in 2001 and 2014, are the key regulations governing distribution of dividends of foreign-invested enterprises. Under these regulations, a wholly foreign-invested enterprise in China, or a WFOE, may pay dividends only out of its accumulated profits, if any,determined in accordance with PRC accounting standards and regulations. In addition, a WFOE is required to allocate at least 10% of its accumulated profits eachyear, if any, to statutory reserve funds unless its reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cashdividends. The proportional ratio for withdrawal of rewards and welfare funds for employees shall be determined at the discretion of the WFOE. Profits of aWFOE shall not be distributed before the losses thereof before the previous accounting years have been made up. Any undistributed profit for the previousaccounting years may be distributed together with the distributable profit for the current accounting year. Circular 37. Pursuant to SAFE’s Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip Investmentthrough Special Purpose Vehicles, or SAFE Circular 37, issued and effective on July 4, 2014, and its appendixes, PRC residents, including PRC institutions andindividuals, must register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose ofoverseas investment and financing, with such PRC residents’ legally owned assets or equity interest in domestic enterprises or offshore assets or interests, referredto in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changeswith respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division orother material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries ofthat special purpose vehicle may be prohibited from making distributions of profit to the offshore parent and from carrying out subsequent cross-border foreignexchange activities and the special purpose vehicle may be restricted in their ability to contribute additional capital into its PRC subsidiary. Further, failure tocomply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion. These regulationsapply to our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions and share transfer that we make in the future if ourshares are issued to PRC residents. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulations relating tooffshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwiseexpose us to liability and penalties under PRC law.” We have completed the foreign exchange registration of PRC resident shareholders of Guangzhou Huaduo, as required by SAFE Circular 37, for ourfinancings that were completed before the end of 2010. The SAFE Circular 37 registration in relation to the issuance of common shares to Tiger Global Six YYHoldings was completed on February 6, 2012. Our PRC resident shareholders further updated their SAFE Circular 37 registrations in March 2015 to reflectshareholding changes in our company resulting from our initial public offering. 72 Stock Option Rules. The Administration Measures on Individual Foreign Exchange Control were promulgated by the PBOC on December 25, 2006, andtheir Implementation Rules, issued by the SAFE on January 5, 2007, became effective on February 1, 2007. Under these regulations, all foreign exchange mattersinvolved in employee stock ownership plans and stock option plans participated in by onshore individuals, among others, require approval from the SAFE or itsauthorized branch. Furthermore, the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock IncentivePlans of Overseas Publicly-Listed Companies, or the Stock Option Rules, were promulgated by SAFE on February 15, 2012, that replaced the ApplicationProcedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of OverseasPublicly-Listed Companies issued by SAFE on March 28, 2007. Pursuant to the Stock Option Rules, PRC residents who are granted shares or stock options bycompanies listed on overseas stock exchanges based on the stock incentive plans are required to register with SAFE or its local branches, and PRC residentsparticipating in the stock incentive plans of overseas listed companies shall retain a qualified PRC agent, which could be a PRC subsidiary of such overseaspublicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to thestock incentive plans on behalf of these participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with theirexercise of stock options, purchase and sale of corresponding stocks or interests, and fund transfer. In addition, the PRC agents are required to amend the SAFEregistration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agents or the overseas entrusted institutionor other material changes. The PRC agents shall, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or itslocal branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreignexchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listedcompanies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents. In addition, the PRC agentsshall file each quarter the form for record-filing of information of the Domestic Individuals Participating in the Stock Incentive Plans of Overseas ListedCompanies with SAFE or its local branches. We and our PRC citizen employees who have been granted share options, restricted shares or restricted share units, or PRC optionees, are subject to theStock Option Rules. If we or our PRC optionees fail to comply with the Individual Foreign Exchange Rule and the Stock Option Rules, we and/or our PRCoptionees may be subject to fines and other legal sanctions. See “D. Risk Factors—Risks Related to Doing Business in China—PRC regulations relating tooffshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwiseexpose us to liability and penalties under PRC law.” In addition, the State Administration for Taxation has issued circulars concerning employee share options, under which our employees working in thePRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee shareoptions with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or ifwe fail to withhold their income taxes as required by relevant laws and regulations, we may face sanctions imposed by the PRC tax authorities or other PRCgovernment authorities. Regulation on Tax PRC Enterprise Income Tax The PRC enterprise income tax is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules. OnMarch 16, 2007, the National People’s Congress of China enacted the New EIT Law, which became effective on January 1, 2008 and subsequently amended onFebruary 24, 2017. On December 6, 2007, the State Council promulgated the implementation rules to the New EIT Law, which also became effective on January 1,2008. The New EIT Law imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises anddomestic enterprises, unless they qualify for certain exceptions, and terminates most of the tax exemptions, reductions and preferential treatment available underthe previous tax laws and regulations. According to the New EIT Law and relevant regulations, subject to the approval of competent tax authorities, the income taxof an enterprise that has been determined to be a high and new technology enterprise shall be reduced to a preferential rate of 15%. 73 Moreover, under the New EIT Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” locatedwithin China may be considered PRC resident enterprises and are therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income.Though the implementation rules of the EIT Law define “de facto management bodies” as “establishments that carry out substantial and overall management andcontrol over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise,” the main guidance currently available for thedefinition of “de facto management body” as well as the determination of offshore incorporated PRC tax resident status and its administration are set forth in theNotice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De FactoManagement Bodies, or Circular 82, and the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated ResidentEnterprises (Trial) or SAT Bulletin No. 45, both issued by the SAT, which provide main guidance on the administration as well as determination of the taxresidency status of a Chinese-controlled offshore-incorporated enterprise, defined as an enterprise that is incorporated under the law of a foreign country orterritory and that has a PRC company or PRC corporate group as its primary controlling shareholder. According to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC tax resident by virtue of having its “de factomanagement body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions set forth in Circular 82are met: ·the primary location of the day-to-day operational management is in the PRC; ·decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in thePRC; ·the enterprise’s primary assets, accounting books and records, company seals and board and shareholder resolutions are located or maintained in thePRC; and ·50% or more of voting board members or senior executives habitually reside in the PRC. In addition, Bulletin No. 45 provides clarification on the resident status determination, post-determination administration, and competent tax authorities. Italso specifies that when provided with a copy of PRC resident determination certificate from a resident Chinese-controlled offshore-incorporated enterprise, thepayer should not withhold 10% income tax when paying certain PRC-sourced income such as dividends, interest and royalties to the Chinese-controlled offshore-incorporated enterprise. Although we do not believe that our company should be treated as a PRC resident enterprise for PRC tax purposes, substantial uncertainty exists as towhether we will be deemed to be such by the relevant authorities. In the event that we are considered a PRC resident enterprise, we would be subject to the PRCenterprise income tax at the rate of 25% on our worldwide income. See “D. Risk Factors—Risks Related to Doing Business in China—Under the PRC enterpriseincome tax law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders and have amaterial adverse effect on our results of operations and the value of your investment.” In addition, although the New EIT Law provides that dividend income between “qualified resident enterprises” is exempted income, and theImplementation Rules refer to “qualified resident enterprises” as enterprises with “direct equity interest”, it is unclear whether dividends we receive from our PRCsubsidiaries are eligible for exemption. 74 According to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by thePRC State Administration of Taxation on December 10, 2009, with retroactive effect from January 1, 2008, or SAT Circular 698, and the Notice on Several IssuesConcerning Enterprise Income Tax for Indirect Share Transfer by Non-PRC Resident Enterprises, issued by the PRC State Administration of Taxation on February3, 2015, or SAT Circular 7, an “indirect transfer” of assets of a PRC resident enterprise, including equity interests in a PRC resident enterprise, by non-PRCresident enterprises may be re-characterized and treated as a direct transfer of PRC taxable properties, if such transaction arrangement lacks of reasonablecommercial purpose and was established for the purpose of reducing, avoiding or deferring PRC enterprise income tax. As a result, gains derived from suchindirect transfer may be subject to PRC enterprise income tax, and tax filing or withholding obligations may be triggered, depending on the nature of the PRCtaxable properties being transferred. According to SAT Circular 7, “PRC taxable properties” include assets of a PRC establishment or place of business, realproperties in the PRC, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRCresident enterprise, would be subject to PRC enterprise income taxes. When determining if there is a “reasonable commercial purpose” of the transactionarrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRCtaxable properties; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derivesfrom China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable properties have real commercial nature which isevidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of thetransaction by direct transfer of PRC taxable properties; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respectof an indirect offshore transfer of assets of a PRC establishment or place of business of a foreign enterprise, the resulting gain is to be included with the annualenterprise filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%.Where the underlying transfer relates to PRC real properties or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment orplace of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable taxtreaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payor fails to withholdany or sufficient tax, the transferor shall declare and pay such tax to the competent tax authority by itself within the statutory time limit. Late payment of applicabletax will subject the transferor to default interest. Currently, neither SAT Circular 698 nor SAT Circular 7 applies to transactions of sale of shares by investorsthrough a public stock exchange where such shares were acquired from a transaction through a public stock exchange. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing and withholding or taxpayment obligations on the transferors and transferees, while our PRC subsidiaries may be requested to assist in the filing. Any PRC tax imposed on a transfer ofour shares or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in us. Value Added Tax On January 1, 2012, the State Administration of Taxation officially launched a pilot VAT reform program (“Pilot Program”), applicable to businesses inselected industries. Taxable income derived from the businesses in the Pilot Program is subject to VAT in lieu of business tax. The Pilot Program initially appliedonly to transportation industry and “modern service industries” (“Pilot Industries”) in Shanghai in 2011 and expanded to eight trial regions (including Beijing andGuangdong province) and nationwide progressively from August to December 2012. The Pilot Industries in Shanghai included industries involving the leasing oftangible movable property, transportation services, research and development and technical services, information technology services, cultural and creativeservices, logistics and ancillary services, certification and consulting services. Revenues generated by advertising services, a type of “cultural and creativeservices”, are subject to the VAT tax rate of 6%. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijinglaunched the same Pilot Program on September 1, 2012, and Guangdong province launched it on November 1, 2012. In addition, the Supplementary Notice onSeveral Tax Policies in Relation to the Scope of VAT-able and Other Matters in the Transportation and Selected Modern Service Sectors under the VAT ReformPilot Program, Caishui [2012] No. 86, or Circular 86, which was issued in December 2012, further defines the application scope of relevant industries and specifiesthat, starting from December 1, 2012, website operation services provided by website owners for non-self-owned online games are taxed as “Information SystemServices,” and therefore would also be subject to the VAT tax rate as 6%. Going forward, in Guangdong province, we will pay the pilot VAT instead of businesstaxes for our advertising activities, operating services for online games not owned by us and for any other parts of our business that are deemed by the competentstate tax authorities to be in the scope of the Pilot Industries. 75 On December 12, 2013, the Ministry of Finance and the SAT issued the Circular on Including the Railway Transportation and Postal Industries in thePilot Program of Replacing Business Tax with Value-Added Tax, or the Pilot Collection Circular. The scope of certain modern services industries under the PilotCollection Circular is expanded to cover research and development and technical services, cultural and creative services, and radio, film and television services. Inaddition, according to the Notice on Including the Telecommunications Industry in the Pilot Program of Levying Value-added Tax in Lieu of Business Tax, whichbecame effective on June 1, 2014, the scope of certain modern services industries under the Pilot Collection Circular is further expanded to cover thetelecommunications industry. On March 23, 2016, the Ministry of Finance and the SAT issued the Notice of Taxation on Implementing the Pilot Program ofReplacing Business Tax with Value-Added Tax in an All-round Manner, pursuant to which the pilot plan for the replacement of business tax with VAT wasexpanded to all regions and industries as of May 1, 2016. Live streaming revenues and membership revenues became subject to VAT from June 1, 2014, at a rateof 6%, while they were subject to business taxes at a rate of 3% prior to June 1, 2014. Online games revenues and other revenues, are subject to VAT for the yearsended December 31, 2014, 2015 and 2016. Cultural Development Fee According to applicable PRC tax regulations or rules, advertising service providers are generally required to pay a cultural development fee at the rate of3% on the revenues (a) which are generated from providing advertising services and (b) which are also subject to VAT after the VAT reform program. Dividends Withholding Tax Under the Old EIT Law that was effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises, such as dividendspaid to us by Beijing Huanju Shidai or Guangzhou Huanju Shidai, our PRC subsidiaries, were exempt from PRC withholding tax. We are a Cayman Islandsholding company and substantially all of our income may come from dividends we receive from our subsidiaries located in the PRC. Pursuant to the New EIT Lawand its implementation rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are subject to withholding tax at a rate of10%, unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries orregions where the non-PRC-resident holding enterprises are incorporated. As uncertainties remain regarding the interpretation and implementation of the New EIT Law and its implementation rules, we cannot assure you that, ifwe are deemed a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would not be subject to any PRCwithholding tax. See “D. Risk Factors—Risks Related to Doing Business in China—Under the PRC enterprise income tax law, we may be classified as a PRC“resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operationsand the value of your investment.” Labor Laws and Social Insurance The principle laws that govern employment include: ·Labor Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s Congress on July 5, 1994, effectivesince January 1, 1995 and amended on August 27, 2009; and ·Labor Contract Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s Congress on June 29, 2007and amended on December 28, 2012. According to the Labor Law and Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers mustcompensate their employees with wages equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety andsanitation, strictly comply with state rules and standards and provide employees with workplace safety training. Violations of the PRC Labor Contract Law and thePRC Labor Law may result in the imposition of fines and other administrative penalties. For serious violations, criminal liability may arise. In addition, employers in China are required to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternityinsurance, work-related injury insurance, medical insurance and housing funds. 76 We have caused all of our full-time employees to enter into written labor contracts with us and have provided and currently provide our employees withthe proper welfare and employment benefits. New M&A Regulations and Overseas Listings On August 8, 2006, six PRC governmental agencies jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises byForeign Investors, or the New M&A Rule, which became effective on September 8, 2006, and amended on June 22, 2009. The New M&A Rule requires offshorespecial purpose vehicles formed to pursue overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies orindividuals to obtain the approval of the Chinese Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’ssecurities on any stock exchange overseas. The application of the M&A Rules remains unclear. Based on the understanding on the current PRC laws, rules and regulations and the M&A Rules ofour PRC Legal Counsel, Fangda Partners, prior approval from the CSRC is not required under the M&A Rules for the listing and trading of our ADSs on theNasdaq Global Market because (a) our PRC subsidiaries, Beijing Huanju Shidai and Guangzhou Huanju Shidai, are foreign-invested enterprises established byforeign enterprises, (b) we did not acquire any equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under theM&A Rules, and (c) there is no provision that clearly classifies the contractual arrangements among our PRC subsidiary, Beijing Huanju Shidai, our PRCconsolidated affiliated entities and their shareholders as a transaction regulated by the M&A Rules. However, as there has been no official interpretation orclarification of the M&A Rules, we are also advised by our PRC legal counsel that there is uncertainty as to how this regulation will be interpreted or implemented. Considering the uncertainties that exist with respect to the issuance of new laws, regulations or interpretation and implementing rules, the opinion ofFangda Partners, summarized above, is subject to change. If the CSRC or another PRC regulatory agency subsequently determines that prior CSRC approval wasrequired, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. 77 C. Organizational Structure The following diagram illustrates our corporate structure as of the date of this annual report, including our principal subsidiaries and our variable interestentities and their principal subsidiaries: (1)Beijing Tuda is our PRC consolidated affiliated entity. Mr. David Xueling Li, our co-founder, chief executive officer and director, owns 97.7% of BeijingTuda’s equity interests, as of the date of this annual report. For a detailed description of the contractual arrangements, see “Item 7. Major Shareholders andRelated Party Transactions—B. Related Party Transactions—Contractual Arrangements with Beijing Tuda.” (2)Guangzhou Huaduo is our PRC consolidated affiliated entity. Mr. David Xueling Li and Beijing Tuda own approximately 0.5% and 99.0% of GuangzhouHuaduo’s equity interests, respectively, as of the date of this annual report. For a detailed description of the contractual arrangements, see “Item 7. MajorShareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Guangzhou Huaduo.” (3)Bilin Online is our PRC consolidated affiliated entity. Mr. David Xueling Li owns 99.0% of Bilin Online’s equity interests, as of the date of this annual report.For a detailed description of the contractual arrangements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Bilin Online.” (4)Duowan BVI and Guangzhou Huaduo is the limited partner of Engage L.P. and Shanghai Yilian, respectively. 78 D. Property and Equipment In November 2015, our principal executive offices were relocated to our previously purchased commercial premises in Panyu District, Guangzhou, China,which comprise approximately 30,574 square meters. This facility currently accommodates our management headquarters, principal development, engineering,sales and marketing, human resources and administrative activities. We also have a branch office in Beijing focusing on research and development, a branch officein Zhuhai focusing on games related businesses, and a representative office in Shanghai that handles advertising-related matters. We lease these relatively smallpremises under lease agreements from unrelated third parties, and we plan to renew these leases from time to time as needed. In August 2015, we acquired the use right of a parcel of land located at Pazhou, Haizhu District, Guangzhou, China. This land and its adjacent areas aredesignated by the Guangzhou municipal government to be a new center for e-commerce companies. We expect to use this land to support future development ofour company. Our servers are hosted in leased internet data centers in different geographic regions in China. The data centers in our network are owned and maintainedfor us by major domestic internet data center providers. We typically enter into leasing and hosting service agreements that are renewable annually. We believe that our existing facilities are sufficient for our current needs and we will obtain adequate facilities, principally through leasing, toaccommodate our future expansion plans. See Notes 11 and 12 to our financial statements for further information about our property and equipment and intangible assets. ITEM 4A.UNRESOLVED STAFF COMMENTS None. ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financialstatements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties.Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors,including those set forth under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report. A. Operating Results Overview We began our operations in 2005 by launching Duowan.com, a popular online web portal hosting game media content. We have grown significantly inrecent years, developing and introducing YY Client in 2008 and extending our services into mobile devices in September 2010 and onto web browsers in October2012. Our business has also expanded from focusing on providing voice communication services to becoming a a live streaming platform. We offer a variety oflive streaming content on our platforms, such as online music shows, live game playthrough streaming, online dating shows and online financial news and shows,which give our users a more diverse, immersive, engaging and enriching experience. We derive our revenues primarily from live streaming services, online games and membership subscriptions. We derived 95.0%, 95.0% and 96.9% of ourtotal net revenues from such services in 2014, 2015 and 2016, respectively, with online education revenue and online advertising and promotion revenueaccounting for the remainder of our revenues. Revenues from live streaming are primarily generated through YY Live platform and Huya broadcasting platform.Online game revenues are primarily generated from offering virtual items in online games by us. Membership revenues are primarily generated from ourmembership subscriptions. As we continue to expand our service offerings and our user engagement and spending levels increase, our revenue sharing fees andcontent costs have increased significantly in recent years, resulting in lower gross margin. We have been exploring additional monetization opportunities anddiversifying our revenue sources in order to capitalize on the large and highly engaged user base of our platforms. 79 An increasing number of users are accessing our platforms through mobile devices, and we consider the rise of mobile-based business to be a generaltrend. We have been taking measures to expand our success from PC-based products and services to the mobile platform. In 2010, we introduced Mobile YY, ourmusic and entertainment mobile application. In the second half of 2016, along with our transition into a live streaming platform, we rebrand Mobile YY into YYLive APP, a mobile application for our YY Live platform. We also have introduced Huya APP, a mobile application for our Huya broadcasting platform. We havealso developed numerous mobile applications for other parts of our business, including, among others, Xunhuan for online dating shows and Zhiniu for financialnews and analysis. Our mobile applications in aggregate, have contributed 49.6% of the total revenue generated from our live streaming services in the fourthquarter of 2016, compared to 33.4% in the same period of 2015. The ARPU of our live streaming mobile applications has reached RMB292.7 (US$42.2) in thefourth quarter of 2016, compared to RMB428.6 (US$61.7), the average ARPU of our whole live streaming business. An important element of our strategy is tocontinue to develop and enhance mobile applications to capture a greater share of the growing number of mobile users. Our total net revenues increased from RMB3,678.4 million in 2014 to RMB5,897.2 million in 2015 and to RMB8,204.1 million (US$1,181.6 million) in2016. We had a net income of RMB1,064.5 million, RMB998.3 million and RMB1,511.6 million (US$217.7 million) in 2014, 2015 and 2016, respectively. Discussion of Selected Statements of Operations Items Revenues In the years ended December 31, 2014, 2015 and 2016, we had derived our revenues from live streaming, online games and membership, and otherrevenues. Our live streaming revenues are primarily comprised of revenues from YY Live platform and Huya broadcasting platform. Our online games revenuesare primarily comprised of revenues from the online games developed by us or by third parties under revenue-sharing arrangements on our platforms. Ourmembership revenues are primarily comprised of revenues from our membership subscriptions. Other revenues, mainly include revenues from our online educationplatform, and online advertising and promotion revenues. We expect that in the future, as is the case in 2016, an increasing portion of our revenues will be derivedfrom live streaming revenues, including revenues from in-channel virtual items sold on our platforms, such as virtual flowers and gifts for use in various channels,as well as other online products and services. The following table sets forth the principal components of our total net revenues by amount and as a percentage of our total net revenues for the periodspresented. For the Year Ended December 31, 2014 2015 2016 RMB % of total net revenues RMB % of total net revenues RMB US$ % of total net revenues (in thousands, except for percentages) Total net revenues : (1)(2) Live streaming 2,475,379 67.3 4,539,857 77.0 7,027,227 1,012,131 85.7 Online games 811,699 22.1 771,882 13.1 634,325 91,362 7.7 Membership 205,199 5.6 291,310 4.9 284,860 41,028 3.5 Others 186,091 5.0 294,200 5.0 257,638 37,108 3.1 Total 3,678,368 100.0 5,897,249 100.0 8,204,050 1,181,629 100.0 (1)Revenues are presented net of rebates and discounts. (2)For the year ended December 31, 2016, we presented our revenue in four segments categories — live streaming, online games, membership and others . Wealso have retrospectively changed the revenue presentation for the year ended December 31, 2014 and 2015. Live streaming revenues. We generate live streaming revenues from the sales of in-channel virtual items used on our live streaming platforms, includingYY Live platform and Huya broadcasting platform. Users access content on our platforms free of charge, but are charged for purchases of virtual items. 80 The most significant factors that directly affect our live streaming revenues include the increase in the number of our paying users and ARPU: ·The number of paying users. We had approximately 3.4 million, 5.8 million and 11.0 million paying users in 2014, 2015 and 2016, respectively forour live streaming services. We calculate the number of paying users during a given period as the cumulative number of registered user accounts thathave purchased virtual items or other products and services on our live streaming platform at least once during the relevant period. We were able toachieve an increase in the number of paying users primarily due to a larger active user base and a higher conversion ratio of active users to payingusers, and we expect that the number of our paying users will continue to grow in the future as we expand our services and products offerings andfurther monetize our existing platform. ·ARPU. Our ARPU for live streaming was approximately RMB726.7, RMB780.5 and RMB637.8 (US$91.9) in 2014, 2015 and 2016, respectively.ARPU is calculated by dividing our total revenues from live streaming during a given period by the number of paying users for our live streamingservices for that period. As we begin to generate revenues from an increasing variety of live streaming services, our ARPU may fluctuate from periodto period due to the mix of live streaming services purchased by our paying users. Other significant factors that directly or indirectly affect our live streaming revenues include: ·our ability to increase our popularity by offering new and attractive contents, products and services that allow us to monetize our live streamingplatform; ·our ability to attract and retain a large and engaged user base; and ·our ability to attract and retain certain popular performers, channel owners, professional game playing team and commentators. We expect that the portion of our revenues from live streaming derived from the sales of virtual items and services will continue to increase as wecapitalize on monetization opportunities. We create and offer to users virtual items that can be used on various channels. Users can purchase consumable virtualitems from us to show support for their favorite performers or time-based virtual items that provide users with recognized status, such as priority speaking rights orspecial symbols on the music and entertainment channels. Online games revenues. We generate online games revenues from the sales of in-game virtual items used for games developed by us or by third partiesunder revenue-sharing arrangements on our platforms. Users play online games free of charge, but are charged for purchases of virtual items. The most significant factors that directly affect our online games revenues include the increase in the number of our paying users and ARPU: ·The number of paying users. We had approximately 1.6 million, 1.2 million and 1.2 million paying users in 2014, 2015 and 2016, respectively, forour online games. We calculate the number of paying users during a given period as the cumulative number of registered user accounts that havepurchased virtual items or other products and services in our online games at least once during the relevant period. We were able to achieve anincrease in the number of paying users primarily due to a larger active user base and a higher conversion ratio of active users to paying users, and weexpect that the number of our paying users will continue to grow in the future as we expand our online game offerings and further monetize ourexisting online games. ·ARPU. Our ARPU for online games was approximately RMB520.8, RMB635.8 and RMB533.6 (US$76.9) in 2014, 2015 and 2016, respectively.ARPU is calculated by dividing our total revenues from online games during a given period by the number of paying users for online games for thatperiod. As we begin to generate revenues from an increasing variety of online games, our ARPU may fluctuate from period to period due to the mixof online games offered by us. 81 Other significant factors that directly or indirectly affect our revenues include: ·our ability to increase our popularity by offering new and attractive online games that allow us to monetize our platforms; ·our ability to attract and retain a large and engaged player base; and ·our ability to attract and retain third party game developers, third party licensee operators and service providers. The online games we currently offer are primarily web games that can be run from an internet browser and require an internet connection to play. Wehave historically derived a significant portion of our revenues from a number of popular online games, primarily through selling in-game virtual items for thesegames. A majority of our popular online games are developed by third party game developers under revenue-sharing arrangements that typically last one to twoyears. We derive an increasingly lower percentage of our revenues from online games as a whole, as we expect to monetize other non-game aspects of the YY Liveplatform and Huya broadcasting platform. Membership revenues. We generated membership revenues from the membership subscription fees paid by our users. In our membership program, userspay a flat monthly subscription fee in order to become members, and in exchange, we give them access to various privileges and enhanced features on ourchannels, including additional video usage, priority entrance to certain live performances, and exclusive rights to access VIP avatars, VIP ring-tones, VIP fonts andVIP emoticons. Other revenues. We generated other revenues from our online education platform and online advertising and promotion revenues. Online educationservices consisted of vocational training courses, language training courses and K-12 afterschool education courses. Revenue is recognized over the period theonline course is available to the students, which generally is from the enrolment date to the completion of the relevant professional examination date. We enter intoadvertising contracts with both advertisers and advertising agencies. In 2014, 2015 and 2016, a vast majority of our online advertising and promotion revenueswere derived from pay-for-time arrangements under which we charge advertisers depending on the duration of display for an advertisement or a series ofadvertisements as well as promotion campaigns conducted by relevant channel owners. Cost of Revenues Cost of revenues consists primarily of (i) revenue sharing fees and content costs including payments to various channel owners and performers, andcontent providers, (ii) bandwidth costs, (iii) salary and welfare, (iv) depreciation and amortization expense for servers, other equipment and intangibles directlyrelated to operating the platform, (v) payment handling costs, (vi) business tax and surcharges, (vii) share-based compensation, and (viii) other costs. We anticipatethat revenue sharing fees and content costs paid to performers, channel owners and content providers will increasingly contribute to our cost of revenues. Weexpect that our cost of revenues will increase in absolute amount as we further grow our user base and expand our revenue-generating services. Revenue sharing fees and content costs. Our revenue sharing fees and content costs paid to performers, channel owners and content providers increasedfrom RMB1,134.0 million in 2014 to RMB2,343.2 million in 2015 and further increased to RMB3,790.6 million (US$546.0 million) in 2016. We expect ourrevenue sharing fees and content costs to continue to increase as we continue to expand our live streaming offerings, our user engagement and spending levelsincrease, as well as our investments in expanding the amount of new and innovative content provided to users. Bandwidth costs. Our bandwidth costs increased from RMB345.9 million in 2014, to RMB570.2 million in 2015 and further increased to RMB651.7million (US$93.9 million) in 2016. We expect bandwidth costs to continue to increase as of the continued user base expansion and video quality improvements, butbe partially offset by our improved efficiency and pricing terms. Salary and welfare. Our salary and welfare costs increased from RMB131.8 million in 2014 to RMB198.2 million in 2015, and further increased toRMB232.5 million (US$33.5 million) in 2016. We expect our salary and welfare costs to increase as we continue to hire additional employees in line with theexpansion of our business. 82 Depreciation and amortization. Our depreciation and amortization increased from RMB59.8 million in 2014 to RMB145.1 million in 2015, and furtherincreased to RMB173.0 million (US$24.9 million) in 2016. We expect depreciation and amortization to increase as we continue to expand our operations andpurchase servers and other equipment or intangibles directly related to the operating of our platforms and business. Payment handling costs. Our payment handling costs increased from RMB55.1 million in 2014 to RMB104.8 million in 2015, but decreased to RMB67.5million (US$9.7 million) in 2016. We expect payment handling costs to increase as we continue to grow our paying users base and expand our paid serviceofferings. Business tax and surcharges. Our business tax and surcharges decreased from RMB49.2 million in 2014 to RMB27.8 million in 2015, and increased toRMB44.7 million (US$6.4 million) in 2016. We expect the payment of surcharges to increase due to the expansion of our business. Share-based compensation. Our share-based compensation allocated to the cost of revenues increased from RMB18.0 million in 2014 to RMB24.0million in 2015 and decreased to RMB15.9 million (US$2.3 million) in 2016. Operating Expenses Our operating expenses consist of (i) research and development expenses, (ii) sales and marketing expenses, (iii) general and administrative expenses, (iv)goodwill impairment, and (v) fair value change of contingent consideration. The following table sets forth the components of our operating expenses for the yearsindicated, both in absolute amounts and as percentages of our total net revenues. We expect our operating expenses to generally increase in absolute amount anddecrease as percentage of total net revenues in the near future. For the Year Ended December 31, 2014 2015 2016 RMB % of total net revenues RMB % of total net revenues RMB US$ % of total net revenues (in thousands, except for percentages) Operating expenses: Research and development expenses 431,188 11.7 548,799 9.3 675,230 97,253 8.2 Sales and marketing expenses 102,527 2.8 312,870 5.3 387,268 55,778 4.7 General and administrative expenses 223,019 6.1 358,474 6.1 482,437 69,485 5.9 Goodwill impairment — — 310,124 5.3 17,665 2,544 0.2 Fair value change of contingentconsideration — — (292,471) (5.0) — — — Total operating expenses 756,734 20.6 1,237,796 21.0 1,562,600 225,060 19.0 Research and Development Expenses Research and development expenses consist primarily of salaries and benefits and share-based compensation expenses for research and developmentpersonnel and rental expenses and depreciation of office premises and servers utilized by the research and development personnel. Research and developmentexpenses generally increased in the past three years ended December 31, 2016, due to the need for additional research and development personnel to accommodatethe growth of our business. We expect our research and development expenses in absolute amount to increase as we intend to retain existing research anddevelopment personnel and also hire new ones to, among other things, develop new series of applications for our platforms, improve technology infrastructure tofurther enhance user experience, and further develop enhanced features for mobile devices to reach more users. However, we also expect to be able to leverage onthe expertise of our established research and development team and achieve better efficiency. Sales and Marketing Expenses Sales and marketing expenses consist primarily of (i) advertising and promotion expenses, (ii) salary and welfare for sales and marketing personnel, and(iii) rental expenses. Our sales and marketing expenses generally increased over the past three years ended December 31, 2016, primarily reflecting increasedmarketing and promotional activities and increased numbers of sales and marketing staff. We expect that our sales and marketing expenses will increase in absoluteamount in the near term as we expect to increase our spending on promotional activities, particularly relating to mobile applications and new business initiatives. 83 General and Administrative Expenses General and administrative expenses consist primarily of (i) salary and welfare general and administrative personnel, (ii) share based compensation formanagement and administrative personnel, and (iii) impairment charges of intangibles and other non-current assets. Our general and administrative expensesgenerally increased over the past three years ended December 31, 2016 as our business expanded, primarily due to the general growth of our business and anincrease in the investments impairment charge. We expect our general and administrative expenses generally increase in absolute amount and decrease aspercentage of total net revenues in the near future as our business grows. Goodwill impairment and Fair value change of contingent consideration We have noted further impairment indicator for 100 Online as well as impairment indicator for Bilin Online in 2016. Based on the result of theimpairment assessment, impairment charges of RMB17.7 million (US$2.5 million) were recognised. Share-based Compensation Expenses Our operating expenses include share-based compensation expenses as follows: For the Year Ended December 31, 2014 2015 2016 RMB RMB RMB US$ (in thousands, except for percentages) Research and development expenses 54,141 70,951 78,816 11,352 Sales and marketing expenses 2,807 3,283 3,107 448 General and administrative expenses 59,647 87,175 59,469 8,565 Total 116,595 161,409 141,392 20,365 We grant stock-based award such as, but not limited to, share options, restricted shares, restricted share units and warrants to eligible employees, officers,directors, and non-employee consultants. Awards granted to employees, officers, and directors are initially accounted for as equity-classified awards, which aremeasured at the grant date fair value of the award and are recognized using the graded vesting method, net of estimated forfeitures, over the requisite serviceperiod, which is generally the vesting period. Awards granted to non-employees are initially measured at fair value on the grant date and periodically re-measuredthereafter until the earlier of the performance commitment date or the date the service is completed and recognized over the period in which the service is provided. Operating Income Gain on deconsolidation and disposal of subsidiaries In June 2016, we disposed 60% equity interest of Shanghai Beifu for a total consideration of RMB3.5 million. After the disposal, we retained 10% equityinterest in Shanghai Beifu. A total loss of RMB23.5 million was recognized. In December 2016, we disposed 33.86% equity interest of Beijing Xingxue for a totalconsideration of RMB118.5 million. After the disposal, we retained 31.14% equity interest in Beijing Xingxue. A total income of RMB127.4 million wasrecognized. Other income Other income primarily consists of government grants in connection with our contributions to technology development, tax refund and investments inlocal business districts. These grants may not be recurring in nature. 84 Taxation Cayman Islands According to our Cayman Islands counsel, Conyers Dill & Pearman, Cayman Islands currently levies no taxes on individuals or corporations based uponprofits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to uslevied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within thejurisdiction of, the Cayman Islands. There are no exchange control regulations or currency restrictions in the Cayman Islands. The Cayman Islands are a party to a double tax treaty entered into with the United Kingdom in 2010 but otherwise is not party to any double tax treaties. Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Cabinet: (1)that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciations shall apply to us orour operations; and (2)that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable (i) on or in respect of our shares, debentures orother obligations, or (ii) by way of withholding in whole or in part of any relevant payment as defined in section 6(3) of the Tax Concessions Law(1999 Revision). The undertaking is for a period of twenty years from August 2, 2011. British Virgin Islands Duowan BVI is our wholly owned subsidiary. As Duowan BVI is a BVI business company subject to the provisions of the BVI Business Companies Act 2004 (as amended), it is exempt from allprovisions of the Income Tax Act of the BVI (including with respect to all dividends, interests, rents, royalties, compensation and other amounts payable byDuowan BVI to persons who are not persons resident in the BVI). Capital gains realized with respect to any shares, debt obligations or other securities of Duowan BVI by persons who are not persons resident in the BVIare also exempt from all provisions of the Income Tax Act of the BVI. No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect toany shares, debt obligations or other securities of Duowan BVI, save for interest payable to or for the benefit of an individual resident in the European Union. Hong Kong Our subsidiary registered in Hong Kong is subject to Hong Kong Profits Tax on the taxable income as reported in its respective statutory financialstatements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. PRC Current taxation primarily represented the provision for a state and local corporate income tax, or EIT, for subsidiaries and consolidated affiliated entitiesoperating in the PRC. Prior to January 1, 2008, companies established in the PRC were generally subject to EIT at statutory rates of 30% and 3% respectively. OnMarch 16, 2007, the PRC National People’s Congress promulgated the New EIT Law, which became effective on January 1, 2008. These subsidiaries and VIEs aresubject to new EIT on their taxable income as reported in their respective statutory financial statements adjusted in accordance with the relevant tax laws andregulations in the PRC. All our PRC entities are subject to EIT at a rate of 25%, with the exception of any preferential treatments they may receive, such as the15% preferential tax rate that Guangzhou Huaduo can enjoy for the periods reported as a result of its qualification as a high and new technology enterprise.Furthermore, Guangzhou Huanju Shidai has been qualified as a software enterprise since 2013, and is entitled to a two-year exemption from EIT followed by threeyears at 50% tax reduction starting from 2014, the first profit-making year. 85 According to a policy promulgated by the state tax bureau of the PRC and effective from 2008 onwards, enterprises engaged in research and developmentactivities are entitled to claim 150% of the research and development expenses so incurred in a year as tax deductible expenses in determining its tax assessableprofits for that year, or Super Deduction. Certain subsidiaries and VIEs have claimed such Super Deduction for the period reported. In addition, according to the New EIT Law and its implementation rules, foreign enterprises, which have no establishment or place in the PRC but derivedividends, interest, rents, royalties and other income (including capital gains) from sources in the PRC is subject to PRC withholding tax, or WHT, at 10% (afurther reduced WHT rate may be available according to the applicable double tax treaty or arrangement). The 10% WHT is applicable to any dividends to bedistributed from our PRC subsidiaries and consolidated affiliated entities to us and our subsidiaries outside the PRC. We do not have any present plan to pay outthe retained earnings in the PRC subsidiaries and PRC consolidated affiliated entities in the foreseeable future. We currently intend to retain our available fundsand any future earnings to operate and expand our business. Accordingly, no such WHT has been accrued. Our PRC subsidiaries and PRC consolidated affiliated entities are subject to value added tax and related surcharges. Our live streaming revenues becamesubject to VAT from June 1, 2014, at a rate of 6%, while they were subject to business taxes at a rate of 3% prior to June 1, 2014. Online games revenues and otherrevenues are subject to VAT for the year ended December 31, 2014, 2015 and 2016. Surcharges are calculated based on 12% of the monthly business taxes andVAT payable for 2014, 2015 and 2016. Business taxes and related surcharges during 2014, 2015 and 2016 were RMB49.2 million, RMB27.8 million andRMB44.7 million (US$6.4 million), respectively. For more information on PRC tax regulations, see “PRC Regulation—Regulation on Tax.” Critical Accounting Policies We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of,among other things, assets and liabilities, revenues and expenses. We regularly evaluate these estimates and assumptions based on the most recently availableinformation, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our financial reporting processinherently relies on the use of estimates and assumptions, our actual results could differ from these estimates. This is especially true with some accounting policiesthat require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our auditedconsolidated financial statements because they involve the greatest reliance on our management’s judgment. Revenue Recognition and Deferred Revenue For the year ended December 31, 2016, we presented our revenue in four categories — live streaming, online games, membership and others to betterreflect the way we generate revenues. The revenue for all previous financial years before 2016 presented in this annual report was also retrospectively changed tobe consistent with the revenue for the year ended December 31, 2016. For previous financial years before 2016 presented in this annual report, before the changes mentioned above were made, revenues had been originallypresented as internet value-added service, or IVAS, and other revenues. Under the category of IVAS, there were four sub-categories: online music andentertainment, online games, online dating and other IVAS. After the changes to our revenue presentation were made, revenues from online music andentertainment, online dating and other IVAS (excluding revenues from membership and certain minor revenue streams that do not meet the criteria of livestreaming), which are generated from our YY Live platform and Huya broadcasting platform, are categorized as live streaming revenues. Revenues from onlinegames and membership are presented separately. Other revenues and those revenues streams previously categorized in other IVAS that do not meet the criteria oflive streaming are categorized as “others”. The changes to our revenue presentation have no impact on the amount of our total net revenues. 86 We generate revenues from live streaming, online games, membership and others. Revenues from live streaming are generated from YY Live platformand Huya broadcasting platform. Revenues from online games are generated from our online game platform and the online games that we host. Revenue frommembership are generated from our membership subscription program which enhances user experience and provide certain privileges to users when they use YYClient. Other revenues mainly include online education revenue and advertising revenue. Online education services consist of vocational training and languagetraining courses. Online advertising revenues are primarily generated from sales of different forms of advertising on our platforms. Revenue is recognized whenpersuasive evidence of an arrangement exists, service has been rendered, the price is fixed or determinable and collection is reasonably assured. We operate a virtual currency system under which the users can directly purchase virtual currency on live streaming channels or pay membershipsubscription fees via online payment systems provided by third parties including payments using mobile phone, internet debit/credit card and other third partypayment systems. The virtual currency can be converted into game tokens that can be used to purchase virtual items in online games (both developed by thirdparties and self-developed), or used to pay membership subscription fees. Virtual currency sold but not yet consumed by the purchaser is recorded as “advancesfrom customers” and, upon conversion or being used, is recognized as revenue according to the respective prescribed revenue recognition policies addressed belowunless otherwise stated. Live Streaming We create and offer virtual items to be used by users on our live streaming channels that we operate and maintain. The virtual items are offered free ofcharge or sold to users at different specified prices as pre-determined by us. Live streaming revenue consists of sales of virtual items. Users purchase consumablevirtual items from us and present them to performers to show support for their favorite performers or time-based virtual items which provide users with recognizedstatus, such as priority speaking rights or special symbols on the music channels for a specific period of time. In order to attract user traffic, we share a portion ofthe revenues we derive from such in-channel virtual item sales on live streaming channels with certain popular performers and channel owners, who have enteredinto revenue sharing arrangements with us. We account for such shared revenues as cost of revenues. Performers and channel owners who do not have suchrevenue sharing arrangements with us are not entitled to share any revenue derived from the virtual items sold. We do not recognize any revenue from offering freevirtual items and do not share any revenue with performers or channel owners when free virtual items are presented to performers by our users. Accordingly, livestreaming revenue is recognized for the sale of virtual items sold in live streaming channels immediately if the virtual item is a consumable or, in the case of time-based virtual items, recognized ratably over the period each virtual item is made available to the user, which does not exceed one year. We do not have furtherobligations to the user after the virtual items are consumed. Virtual items may be sold individually or bundled into one arrangement. When our users purchasemultiple virtual items bundled within the same arrangement, we evaluate such arrangements under ASC 605-25 Multiple-Element Arrangements . We identifyindividual elements under the arrangement and determine if such elements meet the criteria to be accounted for as separate units of accounting. We allocate thearrangement consideration to separate units of accounting based on their relative selling price. The following hierarchy has been followed when determining therelative selling price for each element: (1) vendor specific objective evidence, or VSOE, (2) third party evidence, or TPE, and (3) best estimate of selling price, orBESP. Given that the VSOE of the selling price cannot be determined, we have adopted a policy to allocate the consideration of the whole arrangement to differentvirtual item elements based on the TPE of selling price or the BESP for each virtual item element. We determine the fair values of virtual items sold in a bundlebased on similar products sold separately on our platforms based on the TPE of selling price and determine the fair values of virtual items without similar productssold separately on our platform based on the BESP. The BESP is generally based on the selling prices of the various elements of a similar nature when they aresold to users on a stand-alone basis. The BESP may also be based on the estimated stand-alone pricing when the element has not previously been sold on a stand-alone basis. These estimates are generally determined based on pricing strategies, market factors and strategic objectives. We recognize revenue for each virtualitem element in accordance with the applicable revenue recognition method. 87 Online game revenue We generate revenues from offering virtual items in online games developed by third parties or our self-developed online games to game players.Historically, the majority of online games revenues for the three years ended December 31, 2014, 2015 and 2016 were derived from third party-developed games. Users play games through our platforms free of charge and are charged for purchases of virtual items including consumable and perpetual items, whichcan be utilized in the online games to enhance their game-playing experience. Consumable items represent virtual items that can be consumed by a specific userwithin a specified period of time. Perpetual items represent virtual items that are accessible to the users’ accounts over the life of the online games. We recognize revenue when recognition criteria defined under US GAAP are satisfied. For purposes of determining when the service has been providedto the paying player, we have determined that an implied obligation exists to the paying player to continue providing access to the games such that the users canutilize the virtual items purchased. Game players need to log on and access the games through our platforms because their game tokens, virtual items, and gamehistory are specific to our game accounts and non-transferable to other platforms. To purchase in-game virtual items, players can either charge their game accountsby purchasing game tokens or virtual currency from our platforms, which are convertible into game tokens based on a predetermined exchange rate agreed amongthe relevant game developers and us. The proceeds from the sales of our virtual currency is recorded as “advances from customers”, representing prepayments received from users in the formof our virtual currency not yet converted into game specific tokens. Upon the conversion into a game token from our virtual currency or upon the direct purchase ofa game token, whichever is applicable, the proceeds will be shared between the relevant game developer and us based on a predetermined contractual ratio. Gametokens are non-refundable and non-exchangeable among different games. Our portion, net of the game developer’s entitled consideration, is recorded as deferredrevenue and amortized according to the prescribed revenue recognition policies described below. Users typically do not convert the virtual currency into gametokens or purchase the game tokens unless they plan to purchase in-game virtual items soon. There are two types of third party-developed online games: ·Non-exclusive third party-developed games; and ·Exclusive third party-developed games Under the non-exclusive arrangement, game developers license the games to various platforms and we are only one of the platforms. Game developerswill receive only revenue shared from us pursuant to the mutually agreed sharing percentage. Under the exclusive arrangement, game developers only license the game to us as the exclusive licensee. We can sub-license the games to other platformsand receive a portion of revenue shared from sub-licensees. In addition to the revenue shared to the game developers, we also pay an exclusive license fee to thegame developers. Non-exclusive third party-developed games Pursuant to contracts signed between the game developers and us, revenues from the sale or conversion of game tokens for the purchase of in-gamevirtual items from online games developed by third parties are shared between the game developers and us based on a pre-agreed ratio for each game. Theserevenue-sharing contracts typically last one to two years. The third party-developed games under non-exclusive licensing contracts are maintained and updated by the game developers. We view the gamedevelopers to be our customers and consider our responsibilities under our agreements with the game developers to offer certain standard promotions that includeproviding access to the platform, announcing the new games to users on the platform, and occasional advertising on our platforms. The determination of whether torecord these revenues using gross or net method is based on an assessment of various factors. The primary factors are whether we are acting as the principal inoffering services to the game players or as the agent in the transaction, and the specific requirement of each contract. We determined that for third party-developedgames, the third party game developers are the principal given the game developers design and develop the online game services offered, have reasonable latitudeto establish prices of game tokens, and are responsible for maintaining and upgrading the game contents and virtual items. Accordingly, We record online gamesrevenue, net of the pre-agreed portion of sharing of the revenues with the game developers. 88 Given that third party-developed games under non-exclusive licensing contracts are managed and administered by the third party game developers, we donot have access to the data on the consumption details such as when the game token is spent on the virtual items or the types of virtual items (consumable orperpetual items) purchased by each individual game player. However, we maintain historical data on timing of the conversion of its virtual currency into gamespecific tokens and the amount of purchases of game tokens. We believe that our performance for, and obligation to, the game developers correspond to the gamedevelopers’ services to the users. We have adopted a policy to recognize revenues relating to game tokens for third party developed games over the estimated userrelationship period with us on a game-by-game basis, which is approximately one to six months for the periods presented. Future usage patterns may differ fromhistorical usage patterns and therefore the estimated user relationship period with us may change in the future. When we launch a new game, we estimate the user relationship period based on other similar types of games in the market until the new game establishesits own history. We consider the game’s profile, attributes, target audience, and its appeal to players of different demographics groups in estimating the userrelationship period. The estimated user relationship period is based on data collected from those users who have acquired game tokens. To estimate the user relationshipperiod, we maintain a system that captures the following information for each user: (a) the frequency that users log into each game via our platforms, and (b) theamount and the timing of when the users convert or charge his or her game tokens. We estimate the user relationship period for a particular game to be the date aplayer purchases or converts from virtual currency to a game token through the date we estimate the user plays the game for the last time. This computation isperformed on a user by user basis. Then, the results for all analyzed users are averaged to determine an estimated end user relationship period for each game.Revenues from in-game payments of each month are recognized over the user relationship period estimated for that game. The consideration of user relationship period with each online game is based on our best estimate that takes into account all known and relevantinformation at the time of assessment. We assess the estimated user relationships period for each game on a quarterly basis. Any adjustments arising from changesin the user relationship period as a result of new information will be accounted as a change in accounting estimate in accordance with ASC 250 AccountingChanges and Error Corrections. Exclusive third party developed games Under certain exclusive arrangements, we pay additional license fees to the game developers as we are entitled to an exclusive right to operate third partydeveloped games in specified geographic areas. Based on ASC 350, we have adopted an accounting policy to recognize the exclusive license fee as an intangibleasset upon the commercial launch of the related online games. This intangible asset is amortized on a straight-line basis over the shorter of the economic life orlicense period of the relevant online game. Pursuant to the exclusive licensing contracts signed between the third party game developers and us, our responsibilities in operating the licensed gamesvary for each game. The determination of whether to record these revenues using gross or net method is based on an assessment of various factors, including butnot limited to whether we (i) are the primary obligor in the arrangement; (ii) have latitude in establishing the selling price; (iii) change the product or performs partof the service, (iv) have involvement in the determination of product and service specifications. For the game license arrangements under which we take primary responsibilities of game operation, including determining distribution and paymentchannels, providing customer services, hosting game servers, if needed, and controlling game and services specifications and pricing, we consider ourselves to bethe principal in these arrangements. Accordingly, we record online games revenues from these third party licensed games on a gross basis. Commission fees paidto distribution channels and payment channels and content fees paid to third party game developers are recorded as cost of revenues. 89 For the game license arrangements under which our responsibilities are limited to publishing, providing payment solutions and game operating advice, weview the game developers to be our customers and consider ourselves to be the agent in the arrangements. Accordingly, we record online games revenues fromthese third party licensed games, net of fees paid to third parties upon the provision of service. Pursuant to the terms and conditions of certain online game exclusive license agreements entered into between game developers and us, we, as theexclusive licensee, could sublicense a non-exclusive, non-transferable and limited license to any third party without the prior formal consent of game developers.Under the non-exclusive and non-transferable limited license, the sub-licensee cannot further license the game to other platforms. We received monthly revenue-based royalty payments from all sub-licensees. We view the third-party sub-licensees operators as our customers and recognize revenues on a net basis, as we donot have the primary responsibility for fulfillment and acceptability of the game services. Similar to other online games, the exclusive third party developed games are free to play and players can pay for virtual items for better in-gameexperience. For exclusive third party games, the consumption details can be provided by third party developers or we have access to such data. Therefore, werecognize revenues based on item-based model: (1) for consumable items, the revenue is recognized immediately upon consumption; (2) for perpetual items, therevenue is recognized ratably over the user relationship period of a specific game as described. The determination of user relationship period is the same as what isdescribed in “Non-exclusive third party developed games” above. Self-developed games Revenues derived from self-developed games are recorded on a gross basis as we act as a principal to fulfill all obligations. Considering that revenuesderived from self-developed games were immaterial to us for the years presented, we do not maintain information on consumption details of in-game virtual items,and only maintains limited information related to the frequency of log-ons for our self-developed games. Given that certain historical data is not available, we usethe user relationship period of third party games with similar popularity, gaming experience and sales to determine the estimated period of user relationship for ourself-developed games. Membership We operate a membership subscription program where subscription members can have enhanced user privileges when using YY Client and live streamingchannels. The membership fee is collected up-front from subscribers. The receipt of the revenue is initially recorded as deferred revenue and revenue is recognizedratably over the period of the subscription when services are rendered. Unrecognized portion beyond 12 months from balance sheet date is classified as long-termdeferred revenue. Others Other revenues mainly include online education revenues and advertising revenues. Online education revenues Educational programs and services consist of vocational training and language training courses. The course fee is generally paid in advance and is initiallyrecorded as deferred revenue. Revenue for regular courses is recognized proportionately as the classes are attended, and is reported net of scholarships and coursefee refunds. Students are entitled to one trial class of the purchased course and course fee is fully refundable if a student decides not to take the remaining courseafter the trial class. No refund will be provided to a student who withdraws from a course after the trial period, and revenue is recognized for the amount collected.Course fee refunds were insignificant over the period presented. 90 In addition to regular courses, we also provide a package of several regular courses to students, which have individual fair value in the market. Pursuant tothe applicable accounting guidance, we have accounted for these course packages as a multiple-element arrangement because each individual course qualifies as asingle unit of accounting, and allocated the course fee from the course package to each individual course in the package based on its relative fair value. Werecognize revenue equal to the fair value allocated to individual courses proportionately as the classes are attended. Students are granted a right to retake the courses at a substantial discount in the circumstances where the students fail to achieve certain score targets forsome specific courses. The discount arrangement has a stand-alone value and qualifies as a separate unit of accounting under U.S. GAAP. Therefore, we haveaccounted for those courses as a multiple-element arrangement and allocated a portion of the initial course fee to the substantial discount based on a breakage rate.The breakage rate is determined based on our historical data. The amount allocated to the substantial discount is deferred and recognized as revenue upon theexpiration of the retaking right, which is generally six months after the end of the initial course term. We also sell pre-paid cards primarily to distributors. Pre-paid card sales represent prepaid service fees received from students for online courses. Theprepaid service fee is recorded as deferred revenue upon receiving the upfront cash payment. Revenue is recognised on a gross basis based on the selling price ofthe distributors to the students and is recognized over the period the online course is available to the students, which generally is from the enrolment date to thecompletion of the relevant professional examination date. Advertising revenues Advertising revenues are derived principally from sales of various forms of advertising and provision of promotion campaigns on our live streamingplatforms by way of advertisement display or integrated promotion activities in shows and programs on our live streaming platforms. Such formats generallyinclude but are not limited to banners, text-links, videos, logos, and buttons. Advertisements on our platforms are generally charged on the basis of duration, andadvertising contracts are signed to establish the fixed price and the advertising services to be provided. Where collectability is reasonably assured, advertisingrevenues from advertising contracts are recognized ratably over the contract period of display. We enter into advertising contracts directly with advertisers or third party advertising agencies that represent advertisers. Contract terms generally rangefrom 1 to 3 months. Both third party advertising agencies and direct advertisers are generally billed at the end of the display period and payments are due usuallywithin 6 months. Where our customers purchase multiple advertising spaces with different display periods in the same contract, we allocate the total consideration to thevarious advertising elements based on the relative selling price method and recognize revenue for the different elements over their respective display periods. Thefollowing hierarchy should be followed when determining the appropriate selling price for each element: (1) vendor specific objective evidence (“VSOE”), (2)third party evidence (“TPE”), and (3) best estimate of selling price (“BESP”). Given that the VSOE or TPE of the selling price cannot be determined, we haveadopted a policy to allocate the fair values of different advertising elements based on the best estimate selling prices of each advertisement within the contracttaking into consideration the standard price list and historical discounts granted. We recognize revenue on the elements delivered and defers the recognition ofrevenue for the fair value of the undelivered elements until the remaining obligations have been satisfied. Where all of the elements within an arrangement aredelivered uniformly over the agreement period, the revenues are recognized on a straight line basis over the contract period. Transactions with third party advertising agencies For contracts entered into with third party advertising agencies, the third party advertising agencies will in turn sell the advertising services to advertisers.Revenue is recognized ratably over the contract period of display based on the following criteria: ·there is persuasive evidence that an arrangement exists—we enter into framework and execution agreements with the advertising agencies, specifyingprice, advertising content, format and timing; ·price is fixed or determinable—the price charged to the advertising agencies are specified in the agreements, including relevant discount and rebaterates; 91 ·services are rendered—we recognize revenue ratably as the elements are delivered over the contract period of display; and ·collectability is reasonably assured—we assess the credit history of each advertising agency before entering into any framework and executionagreements. If the collectability from the agencies is assessed as not reasonably assured, we recognize revenue only when the cash is received and allthe other revenue criteria are met. We provide sales incentives in the forms of discounts and rebates to third party advertising agencies based on purchase volume. As the advertisingagencies are viewed as the customers in these transactions, revenue is recognized based on the price charged to the agencies, net of sales incentives provided to theagencies. Sales incentives are estimated and recorded at the time of revenue recognition based on the contracted rebate rates and estimated sales volume based onhistorical experience. Transactions with advertisers We also enter into advertisement contracts directly with advertisers. Similar to transactions with third party advertising agencies, we recognize revenueratably as the elements are delivered over the contract periods of display. The terms and conditions, including price, are fixed according to the contract between theadvertisers and us. We also perform a credit assessment of all advertisers prior to entering into contracts. Revenue is recognized based on the amount charged tothe advertisers, net of discounts. Advances from customers and deferred revenue Advances from customers primarily consist of prepayments from users in the form of our virtual currency that are not yet consumed or converted intogame tokens, and upon the consumption or conversion, are recognized as revenue according to the prescribed revenue recognition policies described above.Deferred revenue primarily consists of the unamortized game tokens, prepaid subscriptions under the membership program and unamortized revenue from virtualitems in our various channels on our platforms, where there is still an implied obligation to be provided by us which will be recognized as revenue when all of therevenue recognition criteria are met. Accounts receivable, net Accounts receivable are presented net of allowance for doubtful accounts. We use specific identification in providing for bad debts when facts andcircumstances indicate that collection is doubtful and a loss is probable and estimable. If the financial condition of its customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowance would be required. We maintain an allowance for doubtful accounts which reflects our best estimate of amounts that potentially will not be collected. We determine theallowance for doubtful accounts on an individual basis taking into consideration various factors, including, but not limited to, historical collection experience,credit-worthiness of the debtors and the age of the individual receivables balance. Additionally, we make specific bad debt provisions based on any specificknowledge we have acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require us to use substantialjudgment in assessing its collectability. Consolidation Our consolidated financial statements include the financial statements of our company, our subsidiaries, variable interest entities (“VIEs”) for which weor our subsidiaries are the primary beneficiaries. All transactions and balances among our company, subsidiaries and VIEs have been eliminated uponconsolidation. A subsidiary is an entity in which our company, directly or indirectly, controls more than one half of the voting power, has the power to appoint orremove the majority of the members of the board of directors or to cast a majority vote at each meeting of directors, or has the power to govern the financial andoperating policies of the investee under a statute or agreement among the entity’s shareholders or equity holders. 92 A VIE is an entity in which our company, or our subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normallyassociated with ownership of the entity, and therefore our company or our subsidiary is the primary beneficiary of the entity. In determining whether our companyor our subsidiaries are the primary beneficiary, we considered whether we have the power to direct activities that are significant to the VIE’s economicperformance, and also our obligation to absorb losses of the VIE that could potentially be significant to the VIEs or the right to receive benefits from the VIEs thatcould potentially be significant to the VIEs. Beijing Huanju Shidai, Bilin Changxiang and ultimately we hold all the variable interests of the VIEs and have beendetermined to be the primary beneficiary of the VIEs. Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. We conduct our operations inChina primarily through a series of contractual arrangements entered into among Beijing Huanju Shidai, our PRC subsidiary, Guangzhou Huaduo and BeijingTuda, as well as Guangzhou Huaduo and Beijing Tuda’s shareholders. Based on our evaluations of the relationships between us and Beijing Tuda and GuangzhouHuaduo, the economic benefit flow of contractual arrangements made with them, as well as the controls conferred to us through these contractual arrangementsenacted, we consider, through Beijing Huanju Shidai, we exercise effective control over Guangzhou Huaduo and Beijing Tuda, receive substantially all of theireconomic benefits and residual returns, and absorb substantially all the risks and expected losses from these two companies as if we were their sole shareholder.We also have an exclusive option to purchase all of the equity interests in each of Beijing Tuda and Guangzhou Huaduo when and if PRC law permits so and alsothe exclusive right to require any nominee shareholder of Beijing Tuda or Guangzhou Huaduo to transfer its interest in them to any person designated by us. Asimilar mechanism exists among Bilin Changxiang, Bilin Online and its shareholder. For a detailed description of these contractual arrangements, see “Item 7.Major Shareholders and Related Party Transactions—B. Related Party—Contractual Arrangements with Beijing Tuda.” Based on our evaluation, we consider eachof Beijing Tuda, Guangzhou Huaduo and Bilin Online to be our VIE. Beijing Huanju Shidai, our wholly owned subsidiary in China, is the primary beneficiary ofour VIEs, Beijing Tuda and Guangzhou Huaduo, while Bilin Changxiang is the primary beneficiary of Bilin Online; therefore, we consolidate the results of BeijingTuda and Guangzhou Huaduo in our consolidated financial statements under U.S. GAAP. As advised by our PRC counsel, Fangda Partners, the contractual arrangements among Beijing Huanju Shidai and Beijing Tuda and its shareholders, thecontractual arrangements among Beijing Huanju Shidai and Guangzhou Huaduo and its shareholders and the contractual arrangements among Bilin Changxiangand Bilin Online and its shareholder, governed by PRC law, are valid, binding and enforceable, and do not violate PRC laws currently in effect. However, asadvised by our PRC legal counsel, because of the substantial uncertainties involved, if such contracts are held to be unenforceable, or if there are changes in PRClaws and regulations that affect our ability to control Beijing Tuda, Guangzhou Huaduo and Bilin Online, we may be precluded from consolidating thesecompanies in the future. See “Item 3. Key Information—D. Risk Factors—Substantial uncertainties exist with respect to the enactment timetable, interpretation andimplementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and businessoperations.” We established two funds entities, namely Engage L.P. and Shanghai Yilian, (collectively, the “Funds”), in March and June 2015, respectively. We hold93.5% of interests in the Funds. We assesse that we exercise controls and are entitled to the various returns of the Funds and therefore the Funds have beenaccounted for as subsidiaries of and have been consolidated by us in accordance with ASC 810. We deconsolidates our subsidiaries in accordance with ASC 810 as of the date we cease to have a controlling financial interest in our subsidiaries. We account for the deconsolidation of our subsidiaries by recognizing a gain or loss in net income/loss attributable to us in accordance with ASC 810.This gain or loss is measured at the date our subsidiaries are deconsolidated as the difference between (a) the aggregate of the fair value of any considerationreceived, the fair value of any retained non-controlling interest in our subsidiaries being deconsolidated, and the carrying amount of any non-controlling interest inour subsidiaries being deconsolidated, including any accumulated other comprehensive income/loss attributable to the non-controlling interest, and (b) the carryingamount of the assets and liabilities of our subsidiaries being deconsolidated. 93 Share-based compensation We awarded a number of share-based compensation to our employees and non-employees (such as consultants), which include share options, restrictedshares and restricted share units granted to employees and non-employees, share-based awards granted to our chief executive officer and chairman and share-basedawards granted in relation to our acquisition of NeoTasks Inc. The details of these share-based awards and the respective terms and conditions are described in“Share-based compensation” in Note 23 to our audited consolidated financial statements for the years ended December 31, 2014, 2015 and 2016, which areincluded elsewhere in this annual report on Form 20-F. Share options Options were initially accounted for as equity-classified awards because there are no explicit repurchase rights specified in the award documents and thenumber of shares of our common shares issued under these awards are fixed and determined at the time of grants. All options to employees and non-employees aremeasured based on the grant date fair value of the award and recognized as compensation expense based on the graded-vesting method, net of estimated forfeitures,over the requisite service period, with a corresponding impact reflected in additional paid-in capital. The options to non-employees are re-measured at eachreporting date using the fair value as at each period end. The compensation expense is recognized using the graded-vesting method. Upon the completion of theinitial public offering, the share options granted to a non-employee were remeasured at the stock price of our common share. All share options granted to the non-employee were exercised in 2013. Restricted shares Restricted shares issued to our employees are measured based on the grant date fair value of the award and recognized as compensation expense based onthe graded-vesting method, net of estimated forfeitures, over the requisite service period, with a corresponding impact reflected in additional paid-in capital. Thefair value of restricted shares was based on the fair value of our underlying common shares on the grant date. We account for restricted shares issued to non-employees are measured at fair value at the date the services are completed. These awards are re-measuredat each reporting date using the fair value as at each period end until the measurement date. The compensation expenses is recognized using the graded vestingmethod. We are required to estimate forfeiture at the time of grant and revise those estimated in subsequent periods if actual forfeitures differ from those estimates.Historical data was used to estimate pre-vesting forfeitures and record share-based compensation expenses only for those awards that we expect to vest. The following table sets forth certain information regarding the restricted shares granted to our employees and non-employees at different dates. Grant Date Restricted Shares Granted Fair Value Per Common Share as of the Grant Date Type/Methodology of Valuation (US$) January 1, 2010 23,686,542 0.1590 Retrospective/ GTM (1)February 1, 2010 4,257,335 0.1875 Retrospective/ GTM (1)April 1, 2010 2,000,000 0.2721 Retrospective/ GTM (1)July 1, 2010 20,060,000 0.4666 Retrospective/ GTM (1)October 1, 2010 500,000 0.6988 Retrospective/ GTM (1)January 1, 2011 10,846,800 0.9362 Retrospective/ Backsolve (2) (1)GTM denotes the guideline transaction method under the market approach based on the enterprise value to revenue multiples of our own equity transactionsclose to the valuation date. (2)Backsolve denotes the back solve method under the market approach based on our own equity transactions as of the valuation date. Restricted share units Restricted share units issued to our employees are measured based on the grant date fair value of the award and recognized as compensation expensebased on the graded-vesting method, net of estimated forfeitures, over the requisite service period, with a corresponding impact reflected in additional paid-incapital. The fair value of restricted shares was based on the fair value of our underlying common shares on the grant date. 94 We are required to estimate forfeiture at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ with thoseestimates. Historical data was used to estimate pre-vesting forfeitures and record share-based compensation expenses only for those awards that we expect to vest. The following table sets forth certain information regarding the restricted share units granted to our employees in 2014, 2015 and 2016 with share and pershare information. Grant Date Restricted Shares Granted Fair Value Per Common Share as of the Grant Date Type/Methodology of Valuation (US$) February 1, 2014 330,000 3.1230 Contemporaneous/Stock price (1)April 1, 2014 660,000 4.0920 Contemporaneous/Stock price (1)April 30, 2014 220,000 2.8680 Contemporaneous/Stock price (1)May 1, 2014 800,000 3.0110 Contemporaneous/Stock price (1)June 16, 2014 292,500 3.5035 Contemporaneous/Stock price (1)June 20, 2014 6,009,695 3.5560 Contemporaneous/Stock price (1)October 30, 2014 1,600,400 3.9525 Contemporaneous/Stock price (1)April 30,2015 455,400 3.1780 Contemporaneous/Stock price (1)May 1, 2015 400,000 3.3665 Contemporaneous/Stock price (1)June 30, 2015 829,200 3.4760 Contemporaneous/Stock price (1)July 1, 2015 13,621,544 3.3515 Contemporaneous/Stock price (1)August 6, 2015 90,000 3.0620 Contemporaneous/Stock price (1)October 30, 2015 180,000 2.8470 Contemporaneous/Stock price (1)November 7, 2015 292,500 2.9180 Contemporaneous/Stock price (1)December 30, 2015 140,000 3.1465 Contemporaneous/Stock price (1)January 1, 2016 192,000 3.0350 Contemporaneous/Stock price (1)June 30, 2016 1,338,008 1.6935 Contemporaneous/Stock price (1) Upon the completion of the initial public offering, the fair values of restricted share units are based on stock price of our company. Acquisition We apply the purchase method of accounting to account for our acquisitions. We determine the acquisition date based on the date at which all requiredlicenses are transferred to us and we obtained control of the acquiree. Purchase consideration generally consists of cash, contingent consideration and equity securities. In estimating the fair value of equity compensation, weconsider both income and market approach and selected the methodology that is most indicative of our fair value in an orderly transaction between marketparticipants as of the measurement date. Under the market approach, we utilize publicly-traded comparable company information to determine the revenue andearnings multiples that are used to value our equity securities. Under the income approach, we determine the fair value of our equity securities based on theestimated future cash flow discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk and the rate of return anoutside investor would expect to earn. We base the cash flow projections on forecasted cash flows derived from the most recent annual financial forecast using aterminal value based on the perpetuity growth model. In estimating the fair value of the contingent consideration recognized on the acquisition date, we consider the trinomial tree model. Under this model, weperform a scenario analysis and calculate the fair value of the contingent consideration based on the net present value of the total contingent payments under eachscenario and the expected probability of each scenario. The identifiable assets acquired and liabilities and contingent liabilities assumed in a business acquisition are measured initially at the fair value at theacquisition date. The excess of the cost of acquisition over the fair value of the identifiable net assets acquired is recorded as goodwill. 95 We are responsible for determining the fair value of the equity issued, assets acquired, liabilities assumed and intangibles identified as of the relevantacquisition date. Post-acquisition expenses are charged to general and administrative expenses directly. Goodwill Goodwill represents the amount by which the cost of acquired net assets in a business acquisition exceeds the fair value of the net identifiable assets onthe date of purchase. Goodwill is carried at cost less accumulated impairment losses. Goodwill is allocated to the reporting units that are expected to benefit fromthe business combination in which the goodwill arises for the purpose of impairment testing. If the carrying value of the reporting unit exceeds its fair value, animpairment loss is recorded to the extent that the carrying value of goodwill exceeds its fair value. We have determined that the reporting units for testing goodwillimpairment are the operating segments that constitute a business for which discrete financial information is available and for which management regularly reviewsthe operating results. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being the discounted cash flow method. There areinherent limitations in any estimation technique and a minor change in the assumption could result in a significant change in its estimate of fair value, therebyincreasing or decreasing the amounts of our consolidated assets, shareholders’ equity and net income or loss. We perform an impairment test on October 1 of each year or whenever events or changes in circumstances indicate that the carrying value of the assetmay not be recoverable. RMB310.1 million and RMB17.7 million (US$2.5 million) of impairment of goodwill were recognized for the year ended December 31,2015 and 2016, respectively. Intangible assets Intangible assets that are acquired in business acquisitions are recognized apart from goodwill if the intangible assets arise from contractual or other legalrights, or are separately identifiable if the intangible assets do not arise from contractual or other legal rights. The costs of determinable-lived intangible assets are amortized to expense over their estimated life and stated at cost (fair value at acquisition) lessaccumulated amortization. The value of indefinite-lived intangible assets is not amortized, but tested for impairment annually on October 1 of each year, orwhenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We reassess indefinite-lived intangible assets ateach reporting period to determine whether events or circumstances continue to support an indefinite useful life. Impairment of investment, long-lived assets and intangible assets The carrying amounts of investment, long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carryingamount of assets to future undiscounted net cash flows expected to be generated by the assets. Such assets are considered to be impaired if the sum of the expectedundiscounted cash flow is less than carrying amount of the assets. The impairment to be recognized is measured by the amount by which the carrying amounts ofthe assets exceed the fair value of the assets. RMB4.0 million of impairment of an investment and RMB5.7 million of impairment of intangible assets wererecognized for the year ended December 31, 2014. RMB6.0 million of impairment of an investment and RMB57.2 million of impairment of intangible assets wererecognized for the year ended December 31, 2015. RMB80.1 million (US$11.5 million) of impairment of investments, RMB43.0 million (US$6.2 million) ofimpairment of prepayment to a game developer and RMB3.8 million (US$0.6 million) of impairment of intangible assets were recognized for the year endedDecember 31, 2016. 96 Taxation and uncertain tax positions Current income tax is provided on the basis of income for financial reporting purposes, adjusted for income and expense items which are not assessable ordeductible for income tax purposes. In accordance with the regulations of the relevant tax jurisdictions, deferred income taxes are accounted for using an asset andliability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory ratesapplicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of anasset or liability is the amount attributed to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in statement ofoperations and comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is consideredmore likely than not that some portion of, or all of the deferred tax assets will not be realized. We currently have deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, all of which are available toreduce future tax payable in our significant tax jurisdictions. The largest component of our deferred assets are the temporary differences generated by our PRCsubsidiary and VIE due to recognition of the deferred revenue. In assessing whether such deferred tax assets can be realized in the future, we need to makejudgments and estimates on the ability of each of our PRC subsidiary and VIE to generate taxable income in the future years. To the extent that we believe it ismore likely than not that some portion or the entire amount of deferred tax assets will not be realized, we established a total valuation allowance to offset thedeferred tax assets. As of December 31, 2014, 2015 and 2016, a total valuation allowance of RMB24.4 million, RMB53.3 million and RMB80.7 million (US$11.6million), respectively, was recognized against deferred tax assets. If we subsequently determine that all or a portion of the temporary differences are more like thannot to be realized, the valuation allowance will be released, which will result in a tax benefit in our consolidated statements of operations. We adopted the guidance on accounting for uncertainty in income taxes on January 1, 2008. The guidance prescribes a more likely than not threshold forfinancial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition ofincome tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with taxpositions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax positions anddetermining the relevant provision for income taxes. The adjustment to the opening balance of retained earnings as of January 1, 2008 as a result of theimplementation of the guidance was zero. The interest and penalties associated with tax positions for the years ended December 31, 2014, 2015 and 2016 was zero.As of December 31, 2014, 2015 and 2016, we had no significant unrecognized uncertain tax positions. Foreign currency We use Renminbi as our reporting currency. The functional currency of our company and our subsidiaries, incorporated in the Cayman Islands, BritishVirgin Islands and Hong Kong is U.S. dollars, while the functional currency of the other entities is Renminbi, which is their respective local currency. In theconsolidated financial statements, the financial information of our company and our subsidiaries which use U.S. dollars as their functional currency have beentranslated into Renminbi. Assets and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at historical exchangerates, and revenues, expenses, gains and losses are translated using the average rate for the period. Translation adjustments arising from these are reported asforeign currency translation adjustments and are shown as a component of other comprehensive income or loss in the statement of operations and comprehensiveincome. Foreign currency transactions denominated in currencies other than functional currency are translated into the functional currency using the exchangerates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at theapplicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting from the settlement of such transactions and from re-measurement atyear-end are recognized in foreign currency exchange gains (losses), net in the consolidated statements of operations and comprehensive income. Convertible Bonds In accordance with ASC subtopic 470-20, the convertible debts are initially carried at the principal amount of the convertible debts. Related debtsissuance cost, are subsequently amortized using effective interest method as adjustments to interest expense from the debt issuance date to its first put date.Convertible debts are classified as a current liability if they are or will be callable by us or puttable by the debt holders within one year from the balance sheet date,even though liquidation may not be expected within that period. 97 Results of Operations The following table sets forth a summary of our consolidated results of operations for the years indicated. Our business has grown rapidly since ourinception, and our limited operating history makes it difficult to predict future operating results. We believe that period-to-period comparisons of results ofoperations should not be relied upon as indicative of future performance. For the Year Ended December 31, 2014 2015 2016 RMB % of total net revenues RMB % of total net revenues RMB US$ % of total net revenues Total net revenues (1)(2) 3,678,368 100.0 5,897,249 100.0 8,204,050 1,181,629 100.0 Live streaming 2,475,379 67.3 4,539,857 77.0 7,027,227 1,012,131 85.7 Online games 811,699 22.1 771,882 13.1 634,325 91,362 7.7 Membership 205,199 5.6 291,310 4.9 284,860 41,028 3.5 Others 186,091 5.0 294,200 5.0 257,638 37,108 3.1 Cost of revenues (1,849,149) (50.3) (3,579,744) (60.7) (5,103,430) (735,047) (62.2)Gross profit 1,829,219 49.7 2,317,505 39.3 3,100,620 446,582 37.8 Operating expenses Research and development expenses (431,188) (11.7) (548,799) (9.3) (675,230) (97,253) (8.2)Sales and marketing expenses (102,527) (2.8) (312,870) (5.3) (387,268) (55,778) (4.7)General and administrative expenses (223,019) (6.1) (358,474) (6.1) (482,437) (69,485) (5.9)Goodwill impairment — — (310,124) (5.3) (17,665) (2,544) (0.2)Fair value change of contingent consideration — — 292,471 5.0 — — — Total operating expenses (756,734) (20.6) (1,237,796) (21.0) (1,562,600) (225,060) (19.0)Gain on deconsolidation and disposal of subsidiaries — — — — 103,960 14,973 1.3 Other income 6,319 0.2 82,300 1.4 129,504 18,652 1.6 Operating income 1,078,804 29.3 1,162,009 19.7 1,771,484 255,147 21.6 Other non-operating income/(expense) 36,714 1.0 (2,165) 0.0 — — — Gain on partial disposal of associates 999 0.0 — — 25,061 3,610 0.3 Foreign currency exchange (losses)/gains, net (10,399) (0.3) (38,099) (0.6) 1,158 167 0.0 Interest expense (56,607) (1.5) (97,125) (1.6) (81,085) (11,679) (1.0)Interest income 164,969 4.5 137,892 2.3 67,193 9,678 0.8 Income before income tax expenses 1,214,480 33.0 1,162,512 19.7 1,783,811 256,923 21.7 Income tax expenses (154,283) (4.2) (178,327) (3.0) (280,514) (40,402) (3.4)Income before share of income in equity methodinvestments, net of income taxes 1,060,197 28.8 984,185 16.7 1,503,297 216,521 18.3 Share of income in equity method investments, net ofincome taxes 4,275 0.1 14,120 0.2 8,279 1,192 0.1 Net income 1,064,472 28.9 998,305 16.9 1,511,576 217,713 18.4 Less: Net loss attributable to the non-controlling interestshareholders and the mezzanine classified non-controlling interest shareholders — — (34,938) (0.6) (12,342) (1,778) (0.2)Net income attributable to YY Inc. 1,064,472 28.9 1,033,243 17.5 1,523,918 219,491 18.6 (1)Net of rebates and discounts. (2)For the year ended December 31, 2016, we presented our revenue in four categories - live streaming, online games, membership and others. We also haveretrospectively changed the revenue presentation for the year ended December 31, 2015 and 2014. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Net Revenues. Our net revenues increased by 39.1% from RMB5,897.2 million in 2015 to RMB8,204.1 million (US$1,181.6 million) in 2016. Thisincrease was primarily driven by the increase in live streaming revenues. 98 Live streaming revenues. Our live streaming revenues, which consisted of revenues from YY Live platform and Huya broadcasting platform, increasedby 54.8% from RMB4,539.9 million in 2015 to RMB7,027.2 million (US$1,012.1 million) in 2016. The overall increase was primarily caused by an increase in thenumber of paying users from approximately 5.8 million in 2015 to 11.0 million in 2016, but was partially offset by ARPU decreased from RMB780.5 in 2015 toRMB637.8 (US$91.9) in 2016. The increase in paying users were primarily due to (a) our ability to offer new and attractive products and services that allow us tomonetize our platforms; (b) our ability to attract and retain a large and engaged user base through hosting an increasing number of events and activities; and (c) ourability to attract certain popular performers and channel owners. Online game revenues. Revenues from online games decreased by 17.8% from RMB771.9 million in 2015 to RMB634.3 million (US$91.4 million) in2016. This decline was primarily a result of the decrease in paying users and ARPU, which reflects the continued weakness in China’s web game market. Ourpaying users for online games decreased from approximately 1,214,000 for 2015 to 1,189,000 for 2016. Membership revenues. Our membership revenues, which consisted of membership subscription fees, decreased by 2.2% from RMB291.3 million in 2015to RMB284.9 million (US$41.0 million) in 2016. Other Revenues. Other revenues, which mainly include revenues from our online education platform and online advertising revenues, decreased by12.4% to RMB257.6 million (US$37.1 million) for 2016 from RMB294.2 million for 2015. Cost of Revenues. Our cost of revenues increased by 42.6% from RMB3,579.7 million in 2015 to RMB5,103.4million (US$735.0million) in 2016. Theincrease in our cost of revenues was due in large part to an increase in our revenue sharing fees and content costs, which consist of the payments to performers,channel owners and content providers, which amounted to RMB3,790.6 million (US$546.0 million) in 2016, representing a 61.8% increase from RMB2,343.2million in 2015. This increase in revenue sharing fees and content costs was in line with the increase in revenues and was primarily due to higher levels of userengagement and spending driven by promotional activities, as well as investments in expanding the amount of new and innovative content we provide to users.Bandwidth costs increased 14.3% from RMB570.2 million in 2015 to RMB651.7 million (US$93.9 million) in 2016, primarily reflecting the continued user baseexpansion and the video quality improvements. In addition, salary and welfare costs increased 17.3% from RMB198.2 million in 2015 to RMB232.5 million(US$33.5 million) in 2016, mainly due to our hiring of additional employees to serve our rapidly expanding user base as well as the raise of salary level. Operating Expenses. Our operating expenses increased by 26.2% from RMB1,237.8 million in 2015 to RMB1,562.6million (US$225.1million) in 2016,primarily due to an increase in research and development expenses, which was associated with our commitment to research and development and theadvancements in our technology development, and general and administrative expenses driven by our company’s overall business expansion, as well as sales andmarketing expenses, particularly in relation to mobile product promotion. Research and development expenses. Our research and development expenses increased by 23.0% from RMB548.8 million in 2015 to RMB675.2million (US$97.3 million) in 2016. This increase was primarily due to an increase in salary level and the number of our research and development staff, especiallyengineers, which accounts for approximately 50.7% of our total number of employees in 2016. Sales and marketing expenses. Our sales and marketing expenses increased by 23.8% from RMB312.9 million in 2015 to RMB387.3 million (US$55.8million) in 2016. This increase was primarily due to the promotion of mobile products. General and administrative expenses. Our general and administrative expenses increased by 34.6% from RMB358.5 million in 2015 to RMB482.4million (US$69.5 million) in 2016. This increase was associated with the general growth of our business and the increase in investments impairment from RMB6.0million in 2015 to RMB80.1 million in 2016. Foreign Currency Exchange Gains (Losses). We had net foreign currency exchange gains of RMB1.2 million (US$0.2 million) in 2016, compared to anet foreign currency exchange losses of RMB38.1 million in 2015. Such gains were mainly due to the appreciation of U.S. dollars as we converted certain offshoreRenminbi to U.S. dollars in 2016. 99 Interest Income. Our interest income decreased from RMB137.9 million in 2015 to RMB67.2 million (US$9.7 million) in 2016. This decrease wasprimarily due to lower levels of interest rate as official reductions of standard interest rates were announced by the PRC government. Income Tax Expenses. We recorded income tax expenses of RMB280.5 million (US$40.4 million) in 2016 compared to RMB178.3 million in 2015. Thisincrease was primarily due to the higher income before income tax expenses recorded by certain of our PRC subsidiaries and consolidated affiliated entities. Net Income. As a result of the foregoing, we had a net income of RMB1,523.9 million (US$219.5 million) in 2016 as compared to a net income ofRMB1,033.2 million in 2015. Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 Net Revenues. Our net revenues increased by 60.3% from RMB3,678.4 million in 2014 to RMB5,897.2 million in 2015. This increase was primarily dueto the increased contribution of revenues from online music and entertainment and our online dating revenues as well as other sources including Huya broadcastingand membership program, partially offset by a decrease in our online game revenues. Live streaming revenues. Our live streaming revenues, which consisted of revenues from YY Live platform and Huya broadcasting platform, increasedby 83.4% from RMB2,475.4 million in 2014 to RMB4,539.9 million in 2015. The overall increase primarily reflected an increase in the number of paying usersand, to a lesser extent, an increase in ARPU. Our number of paying users for our live streaming services increased from approximately 3.4 million in 2014 to 5.8million in 2015. Our ARPU for live streaming services increased from RMB726.7 in 2014 to RMB780.5 in 2015. The increase in paying users and ARPU wereprimarily due to (a) our ability to offer new and attractive products and services that allow us to monetize our platforms; (b) our ability to attract and retain a largeand engaged user base through hosting an increasing number of events and activities; and (c) our ability to attract certain popular performers and channel owners. Online game revenues. Revenues from online games decreased by 4.9% from RMB811.7 million in 2014 to RMB771.9 million in 2015. This decline wasprimarily a result of the decrease in paying users, which reflects the continued weakness in China’s web game market, partially offset by an 22.1% increase inARPU of online games. Our paying users for online games decreased from approximately 1,558,000 for 2014 to 1,214,000 for 2015. The number of online gameswe operated as of December 31, 2014 was 210 as compared to 293 as of December 31, 2016. Membership revenues. Our membership revenues, which consisted of membership subscription fees, increased by 42.0% from RMB205.2 million in2014 to RMB291.3 million in 2015. Other Revenues. Other revenues, which mainly include revenues from our online education platform, 100 Education, online advertising revenues andecommerce, increased by 58.1% to RMB294.2 million for 2015 from RMB186.1 million for 2014. Cost of Revenues. Our cost of revenues increased by 93.6% from RMB1,849.1 million in 2014 to RMB3,579.7 million in 2015. The increase in our costof revenues was due in large part to an increase in our revenue sharing fees and content costs, which consist of the payments to performers, channel owners andcontent providers, which amounted to RMB2,343.2 million in 2015, representing a 106.6% increase from RMB1,134.0 million in 2014. This increase in revenuesharing fees and content costs was in line with the increase in revenues and was primarily due to higher levels of user engagement and spending driven bypromotional activities, as well as investments in expanding the amount of new and innovative content we provide to users. Bandwidth costs increased 64.8% fromRMB345.9 million in 2014 to RMB570.2 million in 2015, primarily reflecting the continued user base expansion and the video quality improvements. In addition,salary and welfare costs increased 50.4% from RMB131.8 million in 2014 to RMB198.2 million in 2015, mainly due to our hiring of additional employees to serveour rapidly expanding user base. Operating Expenses. Our operating expenses increased by 63.6% from RMB756.7 million in 2014 to RMB1,237.8 million in 2015, primarily due to anincrease in sales and marketing expenses, particularly in relation to mobile product promotion, and general and administrative expenses driven by our company’soverall business expansion, as well as research and development expenses, which was associated with our commitment to research and development and theadvancements in our technology development. 100 Research and development expenses. Our research and development expenses increased by 27.3% from RMB431.2 million in 2014 to RMB548.8million in 2015. This increase was primarily due to an increase in the number of our research and development staff, especially engineers, which accounts forapproximately 52.4% of our total number of employees in 2015. Sales and marketing expenses. Our sales and marketing expenses increased by 205.2% from RMB102.5 million in 2014 to RMB312.9 million in 2015.This increase was primarily due to the promotion of mobile products. General and administrative expenses. Our general and administrative expenses increased by 60.8% from RMB223.0 million in 2014 to RMB358.5million in 2015. This increase was associated with the general growth of our business and the increase in intangible assets impairment charge from RMB5.7million in 2014 to RMB 57.2 million in 2015. Foreign Currency Exchange Gains (Losses). We had net foreign currency exchange losses of RMB38.1 million in 2015, compared to a net foreigncurrency exchange losses of RMB10.4 million in 2014. Such losses were mainly due to the depreciation of Renminbi when we converted our off-shore Renminbito U.S. dollars in the third quarter of 2015; bank charges incurred in relation to such conversion also contributed to our loss. Interest Income. Our interest income decreased from RMB165.0 million in 2014 to RMB137.9 million in 2015. This decrease was primarily due to lowerlevels of short-term deposits, partly as a result of cash used in repurchase of our common shares in the first quarter of 2015. Income Tax Expenses. We recorded income tax expenses of RMB178.3 million in 2015 compared to RMB154.3 million in 2014. This increase wasprimarily due to the higher income before income tax expenses recorded by certain of our PRC subsidiaries and consolidated affiliated entities. Net Income. As a result of the foregoing, we had a net income of RMB1,033.2 million in 2015 as compared to a net income of RMB1,064.5 million in2014. Inflation Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, theyear-over-year percent changes in the consumer price index for December 2014, 2015 and 2016 were increases of 1.5%, 1.6% and 2.1%, respectively. Although wehave not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future. Recently Issued Accounting Pronouncements The recently issued accounting pronouncements that are relevant to us are included in note 2(ll) to our audited consolidated financial statements, whichare included in this annual report. B.Liquidity and Capital Resources Cash Flows and Working Capital In recent years, we have financed our operations primarily through cash flows from operations, the proceeds from our initial public offering in November2012 and the proceeds from our convertible senior notes offering in March 2014. We expect to require cash to fund our ongoing operational needs, particularly ourrevenue sharing fees and content costs, salaries and benefits, bandwidth costs and potential acquisitions or strategic investments. We believe that our current cashand cash equivalents and the anticipated cash flow from operations will be sufficient to meet our anticipated working capital requirements and capital expendituresneeds for the next 12 months. However, we may require additional cash resources due to changing business conditions or other future developments, including anyinvestments or acquisitions we may decide to selectively pursue. If our existing cash resources are insufficient to meet our requirements, we may seek to sell equityor equity-linked securities, debt securities or borrow from banks. 101 In March 2014, we issued an aggregate of US$400.0 million 2.25% convertible senior notes due in 2019. The net proceeds from the sale of the notes wereUS$390.8 million and will be used for general corporate purposes. As of December 31, 2016, the total carrying value of these notes were US$398.7 million. Thenotes bear interest at a rate of 2.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, and such notes will mature on April 1, 2019unless earlier converted, redeem for certain tax-related events or repurchased in accordance with their terms. We are not subject to any financial covenants or othersignificant restrictions under the notes. We duly paid an interest of US$9.0 million and US$9.0 million on these convertible senior notes for 2015 and 2016,respectively, as such interest became due. On April 1, 2017, the Company repurchased for cash the notes of an aggregate principal amount of US399.0 million.Following the settlement of the repurchase, US$1.0 million aggregate principal amount of the notes remain outstanding. On May 4, 2014 and March 5, 2015, respectively, our board of directors approved two share repurchase plans, the 2014 Share Repurchase Plan and the2015 Share Repurchase Plan, respectively, pursuant to which we may repurchase from time to time at management’s discretion, at prevailing market prices in theopen market in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, up to US$100 million for each share repurchase plan in total of the ouroutstanding ADSs for a period not exceeding twelve (12) months from the date of approval by board of directors. The 2014 Share Repurchase Plan and 2015 ShareRepurchase Plan expired on May 4, 2015 and March 5, 2016, respectively. For the year ended December 31, 2016, no share was repurchased under the 2015 ShareRepurchase Plan. On January 19, 2017, we entered into a loan agreement with a bank, pursuant to which we borrowed a loan with a principal amount of US$30 million.The annualized interest rate of the loan is 3-month LIBOR plus 1.5%, accruing from draw-down. The draw-down of US30 million took place on March 8, 2017and shall be repaid before March 1, 2018. Term deposit of RMB500 million was pledged as collateral for the loan until March 13, 2018. On February 17, 2017, we entered into a loan agreement with a bank, pursuant to which we borrowed a loan with a total principal amount of US$60million. The annualized interest rate of the loan is 3-month LIBOR, accruing from draw-down. The first draw-down of US$45 million took place on March 21,2017 and the second draw-down of US$15 million took place on March 30, 2017. The loan shall be repaid before February 9, 2018. Term deposit of RMB500million was pledged as collateral for the loan until February 23, 2018. As of December 31, 2014, 2015 and 2016, we had RMB475.0 million, RMB928.9 million and RMB1,579.7 million (US$227.5 million), respectively, incash and cash equivalents. As of December 31, 2016, our subsidiaries, VIEs, and VIE’s subsidiaries located in the PRC held cash and cash equivalents in the amount of RMB1,531.1million (US$220.5 million). Aggregate undistributed earnings and reserves of our subsidiaries, VIEs, and VIE’s subsidiaries located in the PRC that are availablefor distribution to the Company as of December 31, 2016 are approximately RMB4,784.4 million. We would need to accrue and pay withholding taxes if we wereto distribute funds from our subsidiaries in the PRC to our offshore subsidiaries. We do not intend to repatriate such funds in the foreseeable future, as we plan touse existing cash balance in the PRC for general corporate purposes. The following table sets forth a summary of our cash flows for the years indicated: For the Year Ended December 31, 2014 2015 2016 RMB RMB RMB US$ (in thousands) Net cash provided by operating activities 1,301,351 1,823,442 2,421,135 348,715 Net cash used in investing activities (3,954,055) (1,048,022) (1,783,138) (256,824)Net cash provided/(used in) by financing activities 2,402,762 (337,143) 10,651 1,534 Net (decrease)/increase in cash and cash equivalents (249,942) 438,277 648,648 93,425 Cash and cash equivalents at the beginning of the year 729,598 475,028 928,934 133,794 Effect of exchange rates change on cash and cash equivalents (4,628) 15,629 2,161 311 Cash and cash equivalents at the end of the year 475,028 928,934 1,579,743 227,530 102 Operating Activities Net cash used in or generated from operating activities consists primarily of our net income mitigated by non-cash adjustments, such as share-basedcompensation, depreciation of property and equipment and deferred taxes, and adjusted by changes in operating assets and liabilities, such as accounts receivableand accrued liabilities, prepayments and other assets, account payables and deferred revenue. Net cash provided by operating activities amounted to RMB2,421.1 million (US$348.7 million) for the year ended December 31, 2016, primarilyresulting from RMB8,763.2 million (US$1,262.2 million) of cash revenues we received, partially offset by our sales-related cash outflow of RMB4,052.2 million(US$583.6 million), which mainly consisted of the amounts due to third party game developers under revenue sharing arrangements, distributions underarrangements with certain performers and channel owners, payment collection costs and business taxes, our employee salaries and welfare payments of RMB863.7million (US$124.4 million), our payments for the lease of bandwidth of RMB669.7 million (US$96.5 million) and our general operating costs of RMB756.5million (US$109.0 million). The increasing cash provided by operating activities was mainly due to the expansion of business. Net cash provided by operating activities amounted to RMB1,823.4 million for the year ended December 31, 2015, primarily resulting from RMB6,355.8million of cash revenues we received, partially offset by our sales-related cash outflow of RMB2,843.3 million, which mainly consisted of the amounts due to thirdparty game developers under revenue sharing arrangements, distributions under arrangements with certain performers and channel owners, payment collectioncosts and business taxes, our employee salaries and welfare payments of RMB753.4 million, our payments for the lease of bandwidth of RMB543.3 million andour general operating costs of RMB392.4 million. The increasing cash provided by operating activities was mainly due to the expansion of business. Net cash provided by operating activities amounted to RMB1,301.4 million for the year ended December 31, 2014, primarily resulting from RMB3,988.2million of cash revenues we received, partially offset by our sales-related cash outflow of RMB1,533.6 million, which mainly consisted of the amounts due to thirdparty game developers under revenue sharing arrangements, distributions under arrangements with certain performers and channel owners, payment collectioncosts and business taxes, our employee salaries and welfare payments of RMB651.5 million, our payments for the lease of bandwidth of RMB327.2 million andour general operating costs of RMB174.5 million. Investing Activities Net cash used in investing activities largely reflects placements of short-term deposits, purchases of property and equipment and other non-current assetsin connection with the expansion and upgrade of our technology infrastructure, and our acquisitions of and investments in certain companies. Net cash used in investing activities amounted to RMB1,783.1 million (US$256.8 million) in the year ended December 31, 2016. Net cash used ininvesting activities primarily resulted from the placement of short-term deposits of RMB8,027.3 million (US$1,156.2 million), payments of RMB162.4 million(US$23.4 million) for the purchase of property and equipment, which mainly consisted of the purchase of servers, and cash paid for certain acquisitions andstrategic investments of RMB199.2 million (US$28.7 million), partially offset by the maturity of short-term deposits and restricted short-term deposits in variousbanks in the amount of RMB6,714.1 million (US$967.0 million). The increase in cash used in investing activities was mainly due to the increase in investment inshort-term deposit. 103 Net cash used in investing activities amounted to RMB1,048.0 million in the year ended December 31, 2015. Net cash used in investing activitiesprimarily resulted from the placement of short-term deposits and restricted short-term deposits of RMB3,362.6 million, payments of an aggregate RMB1,926.2million for other non-current assets, mainly consisting of prepayments for purchasing land for future office space, payments of RMB219.8 million for the purchaseof property and equipment, which mainly consisted of the purchase of servers, and cash paid for certain acquisitions and strategic investments of RMB358.4million, partially offset by the maturity of short-term deposits and restricted short-term deposits in various banks in the amount of RMB4,780.6 million. Thedecrease in cash used in investing activities was mainly due to the decrease in investment in short-term deposit. Net cash used in investing activities amounted to RMB3,954.1 million in the year ended December 31, 2014. Net cash used in investing activitiesprimarily resulted from the placement of short-term deposits of RMB5,343.9 million, payments of an aggregate RMB 510.3 million for other non-current assets,mainly consisting of prepayments for certain floors of an office building, payments of RMB178.5 million for the purchase of property and equipment, whichmainly consisted of the purchase of servers, and cash paid for certain acquisitions and strategic investments of RMB259.4 million, partially offset by the maturityof short-term deposits in various banks in the amount of RMB2,550.1 million. Financing Activities Net cash provided by financing activities was RMB10.7 million (US$1.5 million) in 2016, primarily attributable to capital contributions from non-controlling interests. Net cash used in financing activities was RMB337.1 million in 2015, primarily attributable to the share repurchase of 3.1 million ADS for RMB1,041.7million, partially offset by net proceeds of RMB696.5 million from bank borrowings. Net cash provided by financing activities was RMB2,402.8 million in 2014, primarily attributable to the net proceeds of RMB2,402.6 million from theissuance of 2.25% convertible senior note due 2019, issued in March 2014. Capital Expenditures We made capital expenditures of RMB744.7 million, RMB2,197.0 million and RMB237.8 million (US$34.3 million) in 2014, 2015 and 2016,respectively. Our capital expenditures are primarily used to purchase office space, computers, servers, office furniture, operating rights for licensed games,software, domain names and other assets. C. Research and Development, Patents and Licenses, Etc. In order to support the kind of multi-user, real-time online voice and video communications on a scale necessary for our platforms, we build and developour own network infrastructure. See “Item 4. Information on the Company—B. Business Overview—Research and Development” for a description of the researchand development aspect of our business and “Item 4. Information on the Company—B. Business Overview—Intellectual Property” for a description of theprotection of our intellectual property. Research and development expenses consist primarily of salaries and benefits for research and development personnel and rental and depreciation ofoffice premises and servers utilized by the research and development personnel. Research and development expenses greatly increased in the past three years endedDecember 31, 2016, due to the need for additional research and development personnel to accommodate the rapid growth of our business. We expect our researchand development expenses in absolute amount to increase as we intend to retain existing research and development personnel and also hire new ones to, amongother things, develop new series of applications for our platforms, improve technology infrastructure to further enhance user experience, and further developenhanced features for our mobile applications to reach more users. We incurred RMB431.2 million, RMB548.8 million and RMB675.2 million (US$97.3 million)of research and development expenses in 2014, 2015 and 2016, respectively. 104 D. Trend Information Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since thebeginning of our fiscal year 2016 that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity or capitalresources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial condition. E. Off-Balance Sheet Arrangements We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not enteredinto any derivative contracts that are indexed to our shares and classified as shareholders’ (deficit)/equity, or that are not reflected in our consolidated financialstatements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity ormarket risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit supportto us or engages in leasing, hedging or research and development services with us. F. Tabular Disclosure of Contractual Obligations The following table sets forth our contractual obligations as of December 31, 2016: Payment Due by Period Total Less than 1 year 1-2 years 3-5 years More than 5 years (in thousands) Operating lease commitments (1) (in RMB) 72,503 41,848 28,335 1,984 336 Capital commitment (2) (in RMB) 144,301 144,301 - - - Convertible senior notes (3) (in US$) 404,500 404,500 - - - (1)Operating lease commitments refer to the lease of offices under operating lease agreements, where a significant portion of the risks and rewards of ownershipare retained by the lessor. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over theperiod of the lease, including any free lease periods. (2)Capital commitment refers to capital expenditure of a building. (3)The convertible senior notes were redeemable at the holders’ option on April 1, 2017. US$399,000,000 aggregate principal amount of the notes wereredeemed on April 1, 2017. We has accepted the repurchase and has forwarded cash in payment of the repurchase price to the paying agent for distribution tothe holders who had exercised the option. Following the repurchase, US$1,000,000 aggregate principal amount of the notes remains outstanding and will bedue in 2019. Our operating lease obligations decreased from December 31, 2015 to December 31, 2016 primarily because we gradually ceased to renew certain leasesfor office spaces when they expired as we have more self-owned office buildings available. Other than the obligations set forth above, we did not have any other long-term debt obligations, operating lease obligations, purchase obligations or otherlong-term liabilities as of December 31, 2016. G. Safe Harbor See “Forward Looking Statements” on page 2 of this annual report. ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management The following table sets forth information regarding our directors and executive officers as of the date of this annual report. There are no familyrelationships among any of the directors or executive officers of our company. 105 Directors and Executive Officers Age Position/TitleDavid Xueling Li 44 Chairman of the Board and DirectorQin Liu 46 DirectorJenny Hong Wei Lee 46 Independent DirectorPeter Andrew Schloss 56 Independent DirectorPeng T. Ong 55 Independent DirectorRichard Weidong Ji 51 Independent DirectorDavid Tang 64 Independent DirectorZhou Chen 41 Chief Executive OfficerRongjie Dong 42 Chief Executive Officer of Huya BroadcastingEric He 58 Chief Financial Officer Mr. David Xueling Li is our co-founder and has been our chairman since August 2016. Mr. Li served as our chief executive officer since our inception toAugust 2016. Mr. Li focuses on our broader corporate strategy and the development of new and emerging applications and products. Before founding ourcompany, Mr. Li worked at Netease.com, Inc. from July 2003 to April 2005 and served as its chief editor. In 2000, Mr. Li founded CFP.cn, a website that provideda copyright trading platform for journalists and amateur photographers. Mr. Li received a bachelor’s degree in philosophy from Renmin University of China in1997. Mr. Qin Liu has been a director of our company since June 2008. Mr. Liu has been a director of Morningside China TMT Fund I, L.P. since its formationin 2008, where he is primarily responsible for managing early-stage investments in the internet, wireless, media, entertainment and consumer services sectors inChina. He also serves as a director in several non-public portfolio companies of the fund. From 2000 through 2008, Mr. Liu worked at Morningside ITManagement Services (Shanghai) Co., Ltd. and established its print media business and served as publisher of The Bund, an upscale lifestyle weekly publication.Mr. Liu received a master’s degree in business administration, or MBA, from China Europe International Business School in 1999 and a bachelor’s degree inelectrical engineering from Beijing Science & Technology University in 1993. Ms. Jenny Hong Wei Lee has served as our director since December 2009. Ms. Lee is currently a director of Pactera Technology International Ltd., aleading China-based provider of outsourced information technology and research and development services, which was formerly listed on the NASDAQ GlobalSelect Market and subsequently privatized in 2014. She is also a director and a member of the audit committee of 21 Vianet Group, Inc., a leading China-basedcarrier-neutral Internet data center services provider, which is listed on the NASDAQ Global Select Market. In addition, Ms. Lee serves is a managing director ofGranite Global Ventures III L.L.C., which is a general partner of Granite Global Ventures III L.P. and GGV III Entrepreneurs Fund L.P. From 2002 to 2005, Ms.Lee served as a vice president of JAFCO Asia. Ms. Lee received her bachelor’s degree in electrical engineering in 1994 and master’s degree in engineering in 1995from Cornell University. Ms. Lee also has an MBA degree from Kellogg School of Management at Northwestern University in 2001. Mr. Peter Andrew Schloss has served as our independent director since November 20, 2012. Mr. Schloss is managing director and CEO of CastleHillPartners and a partner at Phoenix Media Fund. Since February 2016, Mr. Schloss has been an independent director of Zhaopin Limited (NYSE: ZPIN). PreviouslyMr. Schloss was an independent director and audit committee chairman of Giant Interactive Group Inc., a NYSE-listed company, from 2007 to 2015. From 2008 to2012, Mr. Schloss served as the chief executive officer of Allied Pacific Sports Network Limited, a leading internet and wireless provider of live and on-demandsports programs in Asia. Prior to joining Allied Pacific Sports Network Limited, Mr. Schloss worked at TOM Online Inc., serving as the chief financial officerfrom 2003 to 2005, as an executive director from 2004 to 2007 and as the chief legal officer from 2005 to 2007. Mr. Schloss received a bachelor’s degree inpolitical science and a juris doctor degree from Tulane University. Mr. Peng T. Ong has served as our independent director since November 20, 2012. Mr. Ong is a managing director of Monk’s Hill Ventures. Prior tofounding Monk’s Hill Ventures, he was a partner at GSR Ventures. Mr. Ong is a director of the Media Development Authority of Singapore. In addition, he is atrustee of the Singapore University of Technology and Design and sits on the strategic advisory board of the Chancellor of the University of Illinois. Mr. Ong wasan independent director of Singapore Telecommunications Limited through July 2013 and chairs SingTel’s group enterprise advisory committee. He was anindependent director of the National Research Foundation of Singapore from 2009 to 2013. He served as chairman of Infocomm Investments Pte Ltd, a venturecapital fund in Singapore, from 2006 to 2013. Mr. Ong founded Interwoven Inc. (acquired by Autonomy Corporation plc., now part of Hewlett-Packard) andserved as its president and chief executive officer from 1995 to 1997 and its chairman from 1995 to 2002. Mr. Ong also founded Encentuate Inc. which became thefoundation of the IBM Singapore Software Lab after being acquired by IBM. In addition, Mr. Ong co-founded Match.com (now part of IAC/InterActiveCorp) andserved in various engineering and management positions at Illustra Information Technologies, Inc. (now Informix Corporation, part of IBM), Sybase Inc. (nowSAP America, Inc.) and Gensym Corporation. Mr. Ong Peng received a bachelor’s degree in electrical engineering from University of Texas at Austin and amaster’s degree in computer science from University of Illinois at Urbana-Champaign. 106 Mr. Richard Weidong Ji has served as our independent director since May 2013. Mr. Ji is the cofounder and managing partner of All-Stars InvestmentLimited, which focuses on investing in Internet technology leaders and consumer brands that help enhance the lives of Chinese consumers. From 2005 to 2012, Mr.Ji served as managing director and head of Asia-Pacific Internet/media investment research at Morgan Stanley Asia Limited. During his time with Morgan Stanley,Mr. Ji was consistently rated as one of the top internet analysts covering the Chinese internet according to the Institutional Investor and Greenwich Associates’annual surveys. Over Mr. Ji’s career, he has received many awards from reputable publications and research groups including the Financial Times, South ChinaMorning Post, Asiamoney, Absolute Return & Alpha magazine and iResearch Consulting Group. Mr. Ji holds a doctor of sciences degree in biological sciencefrom Harvard University, an MBA from the Wharton School of Business at the University of Pennsylvania and a Bachelor of Science from Fudan University inChina. He also serves as an independent director of 58.com. Mr. David Tang has served as our independent director since May 2013. Mr. Tang currently serves as a managing director of Nokia Growth Partners, aglobal venture capital firm that specializes in investing in mobile technologies and mobile businesses. From 2011 to 2012, Mr. Tang was the vice president of theEuropean Union Chamber of Commerce in China, vice chairman of the China Association of Enterprises with Foreign Investments, and vice chairman of theBeijing International Chamber of Commerce. Mr. Tang has spent nearly a decade with the Nokia group, having served as the vice chairman of Nokia (China)Investment Co., Ltd. and chairman of Nokia Telecommunications Ltd. where he was responsible for government relations, strategic partnerships, corporatedevelopment, and sustainability. Prior to serving in those roles, he was the vice chairman and vice president of sales for Nokia in the greater China region from2005 to 2009. Mr. Tang has also held executive positions in other leading global technology firms such as Apple, AMD, 3Com, DEC, and AST. Mr. Tang receivedhis bachelor’s degree in Computer Science and Engineering from California State University at Long Beach and a master’s degree in Business from CaliforniaState University at Fullerton. Mr. Zhou Chen has been our chief executive officer since August 2016. He is primarily responsible for our overall management, major decision-makingand strategic planning. Mr. Chen served as the head of our music and entertainment business since 2011. Prior to joining us, he served as research and developmentdirector for POPO at NetEase from 2001 to 2007. Mr. Chen received his bachelor’s degree in computer science from Southwest Normal University in 1999. Mr. Rongjie Dong has been the president of the technology department of Guangzhou Huaduo since October 2006 and is currently the chief executiveofficer of Huya broadcasting, one of our business units. He serviced as our executive vice president from April 2013 to August 2016. Prior to joining us, he servedas product manager and head of the technology department of 163.com from 2000 to 2006. Mr. Dong received his bachelor’s degree in computer hardware fromBeijing Information Engineering Institute (now known as Beijing Information Science and Technology University) in 1999. Mr. Eric He has been our chief financial officer since August 2011. He currently also serves as an independent director of MOL Global, Inc. (NASDAQ:MOLG) and 51job (Nasdaq: JOBS). Prior to joining us, Mr. He served as the chief financial officer of Giant Interactive Group, Inc., an NYSE-listed company,from March 2007 to August 2011. He served as the chief strategy officer of Ninetowns Internet Technology Group from 2004 to 2007. From 2002 to 2004, heserved as a private equity investment director for AIG Global Investment Corp (Asia) Ltd. Mr. He received a bachelor’s degree in accounting from National TaipeiUniversity and an MBA degree from the Wharton School of Business at the University of Pennsylvania. Mr. He is a Certified Public Accountant and CharteredFinancial Analyst in the United States. 107 B. Compensation of Directors and Executive Officers For the fiscal year ended December 31, 2016, we paid an aggregate of RMB5.4 million (US$0.8 million) in cash, including salaries and bonuses, to ourdirectors and executive officers. For details on the share incentive grants to our directors and officers, see “—Share Incentive Plans.” For the fiscal year endedDecember 31, 2016, we made contributions for our directors and executive officers for their pension insurance, medical insurance, housing fund, unemploymentand other statutory benefits as required by PRC laws in an aggregate amount of RMB0.3 million (US$0.04 million ). We did not set aside or accrue any otherpension or retirement benefits for our directors and executive officers for the fiscal year ended December 31, 2016. Employment Agreements We have entered into employment agreements with our senior executive officers. We may terminate a senior executive officer’s employment for cause atany time without remuneration for certain acts of the officer, such as being convicted of any criminal conduct, any act of gross or willful misconduct or anyserious, willful, grossly negligent or persistent breach of any employment agreement provision, or engaging in any conduct which may make the continuedemployment of such officer detrimental to our company. We may also terminate a senior executive officer’s employment by giving three months’ prior writtennotice. A senior executive officer may terminate his or her employment at any time by giving three months’ written notice, provided that such notice may only begiven by the officer any time after the third anniversary of his or her employment. Each senior executive officer has agreed to hold all information, know-how and records in any way connected with the business of our company,including, without limitation, all formulae, designs, specifications, drawings, data, operations and testing procedures, manuals and instructions and all customerand supplier lists, sales information, business plans and forecasts and all technical or other expertise and all computer software of our company, in strict confidenceduring and after his or her employment. Each officer also agrees that we shall own all the intellectual property developed by such officer during his or heremployment. Share Incentive Plans We have adopted two share incentive plans, namely, the 2009 Scheme and the 2011 Plan. The purpose of these two share incentive plans is to attract andretain personnel by linking the personal interests of the members of the board, officers, employees and consultants to the success of our business and by providingsuch individuals with an incentive for outstanding performance. As of March 31, 2017, options to purchase 499,655 common shares, 8,370,112 restricted sharesand 33,595,279 restricted share units were outstanding under the 2009 Scheme and the 2011 Plan. 2009 Employee Equity Incentive Scheme We adopted the 2009 Scheme in December 2009. In September 2011, YY Inc. assumed all the rights and obligations of Duowan EntertainmentCorporation under all share-based compensation previously issued by Duowan Entertainment Corporation, including under the relevant award agreement andunder the 2009 Scheme, if applicable, and undertook to issue its own common shares upon the exercise of any share-based compensation awards previously issuedby Duowan Entertainment Corporation, subject to compliance with the terms and conditions of the relevant award agreements and the 2009 Scheme, if applicable. Under the 2009 Scheme, the maximum number of shares in respect of which options or restricted shares may be granted is 120,020,001. The following paragraphs summarize the terms of the 2009 Scheme. Types of Awards. The following briefly describe the principal features of the various awards that may be granted under the 2009 Scheme. ·Options. Options provide for the right to purchase a specified number of our common shares at a specified price and usually will become exercisableat the discretion of our plan administrator in one or more installments after the grant date. The option exercise price may be paid, subject to thediscretion of the plan administrator, in cash or check, in our common shares which have been held by the option holder for such period of time asmay be required to avoid adverse accounting consequences, in other property with value equal to the exercise price, through a broker-assistedcashless exercise, or by any combination of the foregoing. 108 ·Restricted Shares. A restricted share award is the grant of our common shares which are subject to certain restrictions and may be subject to risk offorfeiture. Unless otherwise determined by our plan administrator, a restricted share is nontransferable and may be forfeited or repurchased by usupon termination of employment or service during a restricted period. Our plan administrator may also impose other restrictions on the restrictedshares, such as limitations on the right to vote or the right to receive dividends. Plan Administration. Our board or a committee of one or more members of our board duly authorized for the purpose of the 2009 Scheme can act as theplan administrator. Award Agreement. Options or restricted shares granted under the 2009 Scheme are evidenced by an award agreement that sets forth the terms, conditionsand limitations for each grant. Option Exercise Price. The exercise price in respect of any option shall be fixed by reference to the date upon which the option (or the relevant partthereof) is granted, and shall be, at the election of the plan administrator, (a) the latest valuation price per share certified by a third party valuer prior to the date ofgrant of the relevant option (or relevant part thereof) or (b) the latest price per share at which we have issued any shares prior to the date of grant of the relevantoption (or relevant part thereof). Eligibility. We may grant awards to our employees, officers and directors or consultants to our members. Term of the Awards. The 2009 Scheme shall be valid and effective for a period of ten years from the date of effectiveness. The term of each option orrestricted share grant shall be ten years from the date of the grant. Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement. Transfer Restrictions. Awards for options or restricted shares may not be transferred in any manner by the award holders and may be exercised only bysuch holders, subject to limited exceptions. Restricted shares may not be transferred during the period of restriction. Termination. The plan administrator may at any time terminate the operation of the 2009 Scheme. Prior to the adoption of the 2009 Scheme, we granted certain share options to our employees pursuant to certain share option agreements which carriedsubstantially the same terms and conditions with those stipulated in the 2009 Scheme. 2011 Share Incentive Plan We adopted the 2011 Plan in September 2011. Under the 2011 Plan, the maximum number of common shares reserved for issuance under the plan is 43,000,000, plus an annual increase of 20,000,000on the first day of each fiscal year, beginning in 2013, or such smaller number of common shares as determined by our board of directors. The following paragraphs summarize the terms of the 2011 Plan. Types of Awards. The following briefly describe the principal features of the various awards that may be granted under the 2011 Plan. ·Options. Options provide for the right to purchase a specified number of our common shares at a specified price and usually will become exercisableat the discretion of our plan administrator in one or more installments after the grant date. The option exercise price may be paid, subject to thediscretion of the plan administrator, in cash or check, in our common shares which have been held by the option holder for such period of time asmay be required to avoid adverse accounting consequences, in other property with value equal to the exercise price, through a broker-assistedcashless exercise, or by any combination of the foregoing. 109 ·Restricted Shares. A restricted share award is the grant of our common shares which are subject to certain restrictions and may be subject to risk offorfeiture. Unless otherwise determined by our plan administrator, a restricted share is nontransferable and may be forfeited or repurchased by usupon termination of employment or service during a restricted period. Our plan administrator may also impose other restrictions on the restrictedshares, such as limitations on the right to vote or the right to receive dividends. ·Restricted Share Units. A restricted share unit award is the grant of the right to receive a common share at a future date and may be subject toforfeiture. Our plan administrator has the discretion to set performance objectives or other vesting criteria that will determine the number or value ofrestricted share units to be granted. Unless otherwise determined by our plan administrator, a restricted share unit is nontransferable and may beforfeited or repurchased by us upon termination of employment or service during a restricted period. Our plan administrator, at the time of grant,specifies the dates on which the restricted share units become fully vested. Plan Administration. Our board or a committee of one or more members of our board duly authorized for the purpose of the 2011 Plan can act as the planadministrator. Award Agreement. Options, restricted shares or restricted shares units granted under the 2011 Plan are evidenced by an award agreement that sets forththe terms, conditions and limitations for each grant. Option Exercise Price. The exercise price in respect of any option shall be determined by the plan administrator and set forth in the award agreementwhich may be a fixed or variable price related to the fair market value of the shares. The exercise price per share subject to an option may be amended or adjustedin the absolute discretion of the plan administrator, the determination of which shall be final, binding and conclusive. Eligibility. We may grant awards to our employees, consultants or directors. Term of the Awards. The 2011 Plan shall be valid and effective for a period of ten years from the date of effectiveness. The term of each option grantshall not exceed ten years from the date of the grant. Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement. Transfer Restrictions. Awards for options, restricted shares or restricted share units may not be transferred in any manner by the award holders and maybe exercised only by such holders, subject to limited exceptions. Restricted shares may not be transferred during the period of restriction. Termination. The plan administrator may at any time terminate the operation of the 2011 Plan. The following table summarizes, as of March 31, 2017, the outstanding options granted to our executive officers, directors and other individuals as agroup. Common Shares Underlying Options Awarded Exercise Price (US$/Share) Date of Grant Date of ExpirationOther Individuals as a Group 10 — January 1, 2008 December 31, 2015 51 0.005510 January 1, 2008 December 31, 2017 499,594 0.006735 January 1, 2009 December 31, 2018Total 499,655 *The aggregate number of common shares underlying the outstanding options held by this individual is less than 1% of our total outstanding shares. 110 The following table summarizes, as of March 31, 2017, the outstanding restricted shares granted to our executive officers, directors and other individualsas a group. Name Restricted Shares Granted Date of GrantOther Individuals as a Group 3,989,838 January 1, 2010 425,734 February 1, 2010 2,930,600 July 1, 2010 250,000 October 1, 2010 773,940 January 1, 2011Total 8,370,112 *The aggregate number of common shares underlying the outstanding restricted shares held by each of these individuals is less than 1% of our total outstandingshares. The following table summarizes, as of March 31, 2017, the outstanding restricted share units granted to our executive officers, directors and otherindividuals as a group. Name Common Shares Underlying Restricted Share Units Granted Date of Grant David Xueling Li * April 30, 2013 * June 20, 2014 Jenny Hong Wei Lee * November 7, 2012 * June 16, 2014 * November 7, 2015 Peter Andrew Schloss * November 7, 2012 * June 16, 2014 * November 7, 2015 Peng T. Ong * November 7, 2012 * June 16, 2014 * November 7, 2015 Richard Weidong Ji * May 23, 2013 * June 16, 2014David Tang * May 23, 2013 * June 16, 2014 Eric He * September 16, 2011 * November 21, 2012 111 Name Common Shares Underlying Restricted Share Units Granted Date of Grant * April 30, 2013 Rongjie Dong * April 30, 2013 * July 19, 2013 * June 20, 2014 * June 30, 2015 Qin Liu * August 6, 2015 Zhou Chen * April 30, 2013 Other Individuals as a Group 3,800 January 1, 2011 1,260,690 September 16, 2011 233,220 January 1, 2012 264,259 March 31, 2012 122,280 July 15, 2012 1,464,080 September 1, 2012 7,180 September 30, 2012 93,750 March 31, 2013 7,589 April 18, 2013 7,124,860 April 30, 2013 607,120 July 19, 2013 11,540 October 1, 2013 40,000 November 1, 2013 120,000 February 1, 2014 180,000 April 1, 2014 80,000 April 30, 2014 220,000 May 1, 2014 2,345,543 June 20, 2014 361,333 October 30, 2014 225,980 April 30, 2015 49,180 May 1, 2015 9,353,477 July 1, 2015 140,000 October 30, 2015 20,000 December 30, 2015 152,000 January 1, 2016 1,125,008 June 30, 2016 1,045,000 March 22,2017Total 33,595,279 *The aggregate number of common shares underlying the outstanding restricted share units, or RSUs, held by each of these individuals is less than 1% of ourtotal outstanding shares. C. Board Practices Our board of directors currently consists of seven directors. A director is not required to hold any shares in our company to qualify to serve as a director.A director may vote with respect to any contract, proposed contract, or arrangement in which he or she is materially interested. A director may exercise all thepowers of the company to borrow money, mortgage its business, property and uncalled capital, and issue debentures or other securities whenever money isborrowed or as security for any obligation of the company or of any third party. See “Item 6. Directors, Senior Management and Employees—B. Compensation ofDirectors and Executive Officers” for a description of the employment agreements we have entered into with our senior executive officers. 112 Committees of the Board of Directors We have established an audit committee, a compensation committee and a corporate governance and nominating committee under the board of directors.We have adopted a charter for each of the three committees. Each committee’s members and functions are described below. Audit Committee. Our audit committee consists of Mr. Peter Andrew Schloss, Mr. Peng T. Ong and Mr. Richard Weidong Ji, and is chaired by Mr.Schloss. We have determined that each of Mr. Schloss, Mr. Ong and Mr. Ji satisfies the “independence” requirements of Rule 5605(c)(2) of the Listing Rules ofthe Nasdaq Global Market and meet the independence standards under Rule 10A-3 under the Securities Exchange Act of 1934, as amended. We have determinedthat Mr. Schloss qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the auditsof the financial statements of our company. The audit committee is responsible for, among other things: ·selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed bythe independent registered public accounting firm; ·reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s response; ·reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act; ·discussing the annual audited financial statements with management and the independent registered public accounting firm; ·reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of any material control deficiencies; ·annually reviewing and reassessing the adequacy of our audit committee charter; ·meeting separately and periodically with management and the independent registered public accounting firm; and ·reporting regularly to the board. Compensation Committee. Our compensation committee consists of Mr. David Xueling Li, Ms. Jenny Hong Wei Lee and Mr. David Tang, and is chairedby Mr. David Xueling Li. We have determined that each of Ms. Lee and Mr. Tang satisfies the “independence” requirements of Rule 5605(c)(2) of the ListingRules of the Nasdaq Global Market. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms ofcompensation, relating to our directors and executive officers. Our directors may not be present at any committee meeting during which their compensation isdeliberated upon. The compensation committee is responsible for, among other things: ·reviewing the total compensation package for our executive officers and making recommendations to the board with respect to it; ·approving and overseeing the total compensation package for our executives other than the three most senior executives; ·reviewing the compensation of our directors and making recommendations to the board with respect to it; 113 ·periodically reviewing and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, andemployee pension and welfare benefit plans; and ·selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’sindependence from management. Corporate Governance and Nominating Committee. Our nominating committee consists of Mr. Peng T. Ong, Mr. Qin Liu and Mr. Peter AndrewSchloss, and is chaired by Mr. Ong. We have determined that each of Mr. Ong and Mr. Schloss satisfies the “independence” requirements of Rule 5605(c)(2) of theListing Rules of the Nasdaq Global Market. The nominating committee assists the board in selecting individuals qualified to become our directors and indetermining the composition of the board and its committees. The nominating committee is responsible for, among other things: ·recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy on the board; ·reviewing annually with the board the current composition of the board with regards to characteristics such as independence, age, skills, experienceand availability of service to us; ·selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, aswell as of the nominating committee itself; and ·monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensureproper compliance. Investment Committee. Our investment committee consists of Mr. Xueling Li, Ms. Jenny Hong Wei Lee and Mr. Qin Liu. The investment committee isresponsible for negotiating and determining the nature, timing, amount and other terms of an investment if such investment amount ranges from US$10 million toUS$30 million. Independent Committee . In July 2015, our board of directors formed a special committee of independent directors consisting of Messrs. Peter AndrewSchloss, David Tang, and Peng Tsing Ong in response to a preliminary non-binding proposal letter from the Buyer Group notifying our board of directors of theirinterest in acquiring all of our outstanding shares not already beneficially owned by them in a proposed going private transaction. Duties of Directors Under Cayman Islands law, our directors have a common law duty of loyalty to act honestly in good faith with a view to our best interests. Our directorsalso have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparablecircumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. Terms of Directors and Officers Our officers are elected by and serve at the discretion of the board. Our directors are not subject to a term of office and hold office until such time as theyare removed from office by special resolution of all shareholders. A director will be removed from office automatically if, among other things, the director (1)becomes bankrupt or makes any arrangement or composition with his creditors; or (2) dies or is found by our company to be of unsound mind. D. Employees The following table sets forth the numbers of our employees, categorized by function, as of December 31, 2016: Functions Number of Employees Management 15 Customer services and operations 1,013 Engineering and maintenance 153 Research and development 1,700 Sales and marketing 227 General and administration 247 Total 3,355 114 We had a total of 2,889, 3,317 and 3,355 employees as of December 31, 2014, 2015 and 2016, respectively. We have developed a corporate culture that encourages initiative, technical superiority and self-development. In addition, we periodically evaluate ouremployees’ performance and provide them with training sessions tailored to each job function to enhance performance and service quality. As required by regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments,including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required underPRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to amaximum amount specified by the local government from time to time. We believe that we maintain a good working relationship with our employees and we havenot experienced any significant labor disputes. E. Share Ownership Class A Common Shares As of March 31, 2017, we had 765,096,228 Class A common shares outstanding. In addition, as of March 31, 2017, we have granted, and haveoutstanding, options to purchase a total of 499,655 Class A common shares, 8,370,112 restricted shares and 33,595,279 restricted share units to our directors,executive officers, other employees and consultants. For information regarding the Share Incentive Plans, see “Item 6.B. Compensation of Directors and ExecutiveOfficers.” Class B Common Shares As of March 31, 2017, we had 347,982,976 Class B common shares outstanding. Beneficial Ownership The following table sets forth information concerning the beneficial ownership of our common shares as of March 31, 2017, by: ·each of our directors and executive officers; and ·each person known to us to beneficially own more than 5% of our common shares. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by aperson and the percentage ownership of that person, we have included shares that the person has the right to acquire or that would become unrestricted shareswithin 60 days after March 31, 2017, the most recent practicable date, including through the exercise of any option, warrant, or other right or the conversion of anyother security. These shares, however, are not included in the computation of the percentage ownership of any other person. The calculations in the table below assume that there were 765,096,228 Class A common shares outstanding and 347,982,976 Class B common shares asof March 31, 2017. 115 Class A Common Shares Beneficially Owned (1) Class B Common Shares Beneficially Owned (2) Total Common Shares Beneficially Owned Total Voting Power (5) Number % Number % Number (3) % (4) % Directors and Executive Officers:* David Xueling Li (6) 19,111,615 2.5 175.241,483 50.4 194,353,098 17.4 82.4 Jenny Hong Wei Lee (7) 11,419,300 1.5 - - 11,419,300 1.0 0.3 Zhou Chen ** ** - - ** ** ** Rongjie Dong ** ** - - ** ** ** Eric He ** ** - - ** ** ** Peter Andrew Schloss ** ** - - ** ** ** Peng T. Ong ** ** - - ** ** ** Richard Weidong Ji ** ** - - ** ** ** David Tang ** ** - - ** ** ** Qin Liu ** ** - - ** ** ** All directors and executive officers as a group 40,379,290 5.2 175,241,483 50.4 215,620,773 19.3 82.8 Principal Shareholders: Top Brand Holdings Limited (8) - - 172,741,483 49.6 172,741,483 15.5 - YYME Limited (9) 16,000,010 2.1 175,241,483 50.4 191,241,493 17.2 41.7 Notes: *Except for Ms. Jenny Hong Wei Lee, Mr. Peter Andrew Schloss, Mr. Peng T. Ong, Mr. Richard Weidong Ji, Mr. David Tang and Mr. Qin Liu, the businessaddress of our directors and executive officers is c/o Building B-1, North Block of Wanda Plaza No. 79 Wanbo Er Road Nancun Town, Panyu District,Guangzhou, 511442, PRC. **The aggregate number of common shares beneficially owned by each of these individuals is less than 1% of our total outstanding shares. (1)For each person and group included in this column, percentage ownership is calculated by dividing the number of Class A common shares beneficially ownedby such person or group, including shares that such person or group has the right to acquire within 60 days of March 31, 2017, by the sum of (i) 765,096,228,which is the total number of Class A common shares outstanding as of March 31, 2017, and (ii) the number of Class A common shares that such person orgroup has the right to acquire within 60 days of March 31, 2017. (2)For each person and group included in this column, percentage ownership is calculated by dividing the number of Class B common shares beneficially ownedby such person or group by 347,982,976, being the total number of Class B common shares outstanding as of March 31, 2017. (3)Represents the sum of Class A and Class B common shares beneficially owned by such person or group. (4)For each person and group included in this column, percentage ownership is calculated by dividing the number of total common shares beneficially owned bysuch person or group, by the sum of the number of common shares outstanding and the number of common shares such person or group has the right toacquire upon exercise of the stock options or warrants within 60 days after March 31, 2017. (5)For each person or group included in this column, the percentage of total voting power represents voting power based on both Class A and Class B commonshares held by such person or group with respect to all of our outstanding Class A and Class B common shares as one class. Each holder of Class A commonshares is entitled to one vote per share. Each holder of our Class B common shares is entitled to ten votes per share on all matters requiring a shareholders’vote. Our Class B common shares are convertible at any time by the holder into Class A common shares on a one-for-one basis, whereas Class A commonshares are not convertible into Class B common shares under any circumstances. (6)Representing (i) 16,000,000 Class A common shares represented by ADSs, (ii) 10 Class A common shares, (iii) 175,241,483 Class B common shares held byYYME Limited, a BVI company wholly owned and controlled by Mr. David Xueling Li and (iv) 3,111,605 Class A common shares underlying the optionsand restricted shares granted to Mr. David Xueling Li that have been fully vested or are to be vested in 60 days. In August 2016, Mr. Jun Lei, who beneficiallyowned 172,741,482 Class B common shares as of March 31, 2017, delegated the voting rights of such shares to Mr. David Xueling Li. (7)Representing (i) 11,103,620 Class A common shares represented by ADSs held by Granite Global Ventures III L.P., (ii) 180,680 Class A common sharesrepresented by ADSs held by GGV III Entrepreneurs Fund L.P. and (iii) 135,000 restricted share units granted to Ms. Jenny Hong Wei Lee that have beenfully vested and to be vested within 60 days. The business address of Ms. Lee is Unit 3501-3504, Two IFC, 8 Century Avenue, Pudong District, Shanghai200120, PRC. (8)Representing 172,741,483 Class B common shares held by Top Brand Holdings Limited, a BVI company wholly owned and controlled by Mr. Jun Lei. Thevoting rights of such 172,741,483 Class B common shares were delegated to Mr. David Xueling Li in August 2016.The business address of Top BrandHoldings Limited is c/o Jun Lei, 19E, Huating Jiayuan, No.6 of Middle Beisihuan Road, Chaoyang District, Beijing 100102, PRC. (9)Representing (i) 16,000,000 Class A common shares represented by ADSs, (ii) 10 Class A common shares and (iii) 175,241,483 Class B common shares heldby YYME Limited, a BVI company wholly owned and controlled by Mr. David Xueling Li. The business address of YYME Limited is c/o David Xueling Li,Building B-1, North Block of Wanda Plaza No. 79 Wanbo Er Road Nancun Town, Panyu District, Guangzhou, 511442, PRC. 116 As of March 31, 2017, 1,113,079,204 of our common shares were issued and outstanding, including 347,982,976 Class B common shares and765,096,228 Class A common shares. Based on a review of the register of members maintained by our Cayman Islands corporate administrator, we believe that asof March 31, 2017, 765,096,228 Class A common shares (excluding shares being held in reserve by our depositary for the exercise/vesting of the share incentiveawards we issue) representing approximately 68.7% of our total outstanding shares were held by three record holders in the United States; all of the 765,096,228Class A common shares were held of record by Deutsche Bank Trust Company Americas, the depositary of our ADS program. The number of beneficial owners ofour ADSs in the United States is likely to be much larger than the number of record holders of our common shares in the United States. None of our existingshareholders have different voting rights from other shareholders in the same class. See “Item 6. Directors, Senior Management and Employees—B. Compensationof Directors and Executive Officers—Employee Agreements” for a description of the employment agreements we have entered into with our senior executiveofficers. Our common shares are divided into Class A common shares and Class B common shares. Holders of Class A common shares are entitled to one vote pershare, while holders of Class B common shares are entitled to ten votes per share. We are not aware of any arrangement that may, at a subsequent date, result in achange of control of our company. ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.” B. Related Party Transactions Contractual Arrangements The PRC government extensively regulates foreign ownership of, and the licensing and permit requirements pertaining to, companies that provideinternet-based services such as our platforms. To comply with these restrictions, we conduct our operations primarily through Beijing Huanju Shidai’s contractualarrangements with Beijing Tuda, Guangzhou Huaduo and their respective shareholders. As to Bilin business, there is also a similar contractual arrangement amongBilin Changxiang, Bilin Online and its shareholder. Contractual Arrangements with Beijing Tuda The following is a summary of the currently effective contracts among our subsidiary, Beijing Huanju Shidai, our PRC consolidated affiliated entity,Beijing Tuda, and the shareholders of Beijing Tuda. Agreements that transfer economic benefits to us Exclusive Business Cooperation Agreement Under the exclusive business cooperation agreement between Beijing Huanju Shidai and Beijing Tuda, as amended, Beijing Huanju Shidai has theexclusive right to provide to Beijing Tuda technology support, business support and consulting services related to Beijing Tuda’s business, the scope of which is tobe determined by Beijing Huanju Shidai from time to time. Beijing Huanju Shidai owns the exclusive intellectual property rights created as a result of theperformance of this agreement. The service fee payable by Beijing Tuda to Beijing Huanju Shidai is up to 100% of the net profit of Beijing Tuda, and the timingand amount of the fee payments shall be determined at the sole discretion of Beijing Huanju Shidai. The term of this agreement will expire in 2039 and may beextended with Beijing Huanju Shidai’s written confirmation prior to the expiration date. Beijing Huanju Shidai has sole discretion to terminate the agreement atany time by providing 30 days’ prior written notice to Beijing Tuda, while neither Beijing Tuda nor its shareholders are entitled to terminate the agreement. Exclusive Technology Support and Technology Services Agreement Under the exclusive technology support and technology services agreement between Beijing Huanju Shidai and Beijing Tuda, as amended, BeijingHuanju Shidai has the exclusive right to provide to Beijing Tuda technology support and technology services related to all technologies needed for its business.Beijing Huanju Shidai owns the exclusive intellectual property rights created as a result of the performance of this agreement. The service fee payable by BeijingTuda to Beijing Huanju Shidai is 10% of Beijing Tuda’s gross revenues. The term of this agreement will expire in 2029 and may be extended with Beijing HuanjuShidai’s written confirmation prior to the expiration date. Beijing Huanju Shidai has sole discretion to terminate the agreement at any time by providing 30 days’prior written notice to Beijing Tuda, while neither Beijing Tuda nor its shareholders are entitled to terminate the agreement. 117 Agreements that provide us effective control over Beijing Tuda Powers of Attorney Under the irrevocable powers of attorney executed by each shareholder of Beijing Tuda, each such shareholder appointed Beijing Huanju Shidai as itsattorney-in-fact to exercise such shareholders’ rights in Beijing Tuda, including, without limitation, the power to vote on its behalf on all matters of Beijing Tudarequiring shareholder approval under PRC laws and regulations and the articles of association of Beijing Tuda. Each power of attorney will remain in force untilthe shareholder ceases to hold any equity interest in Beijing Tuda. Exclusive Option Agreement Under the exclusive option agreement between Beijing Huanju Shidai, each of the shareholders of Beijing Tuda and Beijing Tuda, each of theshareholders irrevocably granted Beijing Huanju Shidai or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law,all or part of his or its equity interests in Beijing Tuda. Beijing Huanju Shidai or its designated representative(s) have sole discretion as to when to exercise suchoptions, either in part or in full. Without Beijing Huanju Shidai’s prior written consent, Beijing Tuda’s shareholders shall not sell, transfer, mortgage or otherwisedispose their equity interests in Beijing Tuda. The term of this agreement is ten years and may be extended at Beijing Huanju Shidai’s sole discretion. Equity Interest Pledge Agreement Under the equity interest pledge agreement between Beijing Huanju Shidai and the shareholders of Beijing Tuda, the shareholders of Beijing Tuda havepledged all of their equity interests in Beijing Tuda to Beijing Huanju Shidai to guarantee the performance by Beijing Tuda and its shareholders’ performance oftheir respective obligations under the exclusive business cooperation agreement, exclusive option agreement, exclusive technology support and technology servicesagreement and powers of attorney. If Beijing Tuda or its shareholders breach their contractual obligations under those agreements, Beijing Huanju Shidai, as thepledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. This pledge became effective on the date the pledged equityinterests were registered with the competent administration for industry and commerce and will remain effective until the pledgors are no longer the shareholdersof Beijing Tuda. Contractual Arrangements with Guangzhou Huaduo In 2016, we received service fees of RMB305.8 million (US$44.0 million) from Guangzhou Huaduo. The following is a summary of the currentlyeffective contracts among Beijing Huanju Shidai, Guangzhou Huaduo and the shareholders of Guangzhou Huaduo. Agreements that transfer economic benefits to us Exclusive Business Cooperation Agreement Under the exclusive business cooperation agreement between Beijing Huanju Shidai and Guangzhou Huaduo, as amended, Beijing Huanju Shidai has theexclusive right to provide to Guangzhou Huaduo technology support, business support and consulting services related to Guangzhou Huaduo’s business, the scopeof which is to be determined by Beijing Huanju Shidai from time to time. Beijing Huanju Shidai owns the exclusive intellectual property rights created as a resultof the performance of this agreement. The service fee payable by Guangzhou Huaduo to Beijing Huanju Shidai is up to 100% of the net profit of GuangzhouHuaduo, and the timing and amount of the fee payments will be determined at the sole discretion of Beijing Huanju Shidai. The term of this agreement will expirein 2038 and may be extended with Beijing Huanju Shidai’s written confirmation prior to the expiration date. Beijing Huanju Shidai has sole discretion to terminatethe agreement at any time by providing 30 days’ prior written notice to Guangzhou Huaduo, while neither Guangzhou Huaduo nor its shareholders are entitled toterminate the agreement. 118 Exclusive Technology Support and Technology Services Agreement Under the exclusive technology support and technology services agreement between Beijing Huanju Shidai and Guangzhou Huaduo, as amended, BeijingHuanju Shidai has the exclusive right to provide to Guangzhou Huaduo technology support and technology services related to all technologies needed for itsbusiness. Beijing Huanju Shidai owns the exclusive intellectual property rights created as a result of the performance of this agreement. The service fee payable byGuangzhou Huaduo to Beijing Huanju Shidai is 10% of Guangzhou Huaduo’s gross revenues. The term of this agreement will expire in 2028 and may be extendedwith Beijing Huanju Shidai’s written confirmation prior to the expiration date. Beijing Huanju Shidai has sole discretion to terminate the agreement at any time byproviding 30 days’ prior written notice to Guangzhou Huaduo, while neither Guangzhou Huaduo nor its shareholders are entitled to terminate the agreement. Agreements that provide us effective control over Guangzhou Huaduo Powers of Attorney Under the irrevocable powers of attorney executed by each shareholder of Guangzhou Huaduo, each such shareholder appointed Beijing Huanju Shidai asits attorney-in-fact to exercise such shareholders’ rights in Guangzhou Huaduo, including, without limitation, the power to vote on its behalf on all matters ofGuangzhou Huaduo requiring shareholder approval under PRC laws and regulations and the articles of association of Guangzhou Huaduo. Each power of attorneywill remain in force until the shareholder ceases to hold any equity interest in Guangzhou Huaduo. Exclusive Option Agreement Under the exclusive option agreement between Beijing Huanju Shidai, each of the shareholders of Guangzhou Huaduo and Guangzhou Huaduo, each ofthe shareholders irrevocably granted Beijing Huanju Shidai or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRClaw, all or part of his or its equity interests in Guangzhou Huaduo. Beijing Huanju Shidai or its designated representative(s) have sole discretion as to when toexercise such options, either in part or in full. Without Beijing Huanju Shidai’s prior written consent, Guangzhou Huaduo’s shareholders shall not sell, transfer,mortgage or otherwise dispose their equity interests in Guangzhou Huaduo. The term of this agreement is ten years and may be extended at Beijing HuanjuShidai’s sole discretion. Equity Interest Pledge Agreement Under the equity interest pledge agreement between Beijing Huanju Shidai and the shareholders of Guangzhou Huaduo, the shareholders of GuangzhouHuaduo have pledged all of their equity interests in Guangzhou Huaduo to Beijing Huanju Shidai to guarantee the performance by Guangzhou Huaduo and itsshareholders’ performance of their respective obligations under the exclusive business cooperation agreement, exclusive option agreement, exclusive technologysupport and technology services agreement and powers of attorney. If Guangzhou Huaduo and/or its shareholders breach their contractual obligations under thoseagreements, Beijing Huanju Shidai, as the pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The pledge becameeffective on the date the pledged equity interests were registered with the competent administration for industry and commerce and will remain effective until thepledgors are no longer the shareholders of Guangzhou Huaduo. Contractual Arrangements with Bilin Online In August 2015, we acquired Bilin business, a mobile instant communication application and its relevant business line, by purchasing 55.05% of theequity interests in its holding company BiLin Cayman. The Bilin entities had a complete VIE structure. Upon the consummation of the acquisition, BilinChangxiang, Bilin Online and its shareholder entered into a series of agreements, which is similar to the contractual arrangements with Beijing Tuda andGuangzhou Huaduo, to reestablish the VIE structure. The agreements and related instruments include an Exclusive Business Cooperation Agreement, a Powers ofAttorney, an Exclusive Option Agreement, an Exclusive Assets Purchase Agreement, and an Equity Interest Pledge Agreement. This arrangement ensures thetransfer of economic benefits to us, and our effective control over Bilin Online. 119 Transactions with Affiliates Guangzhou Huaduo holds 36% equity interest in Zhuhai Daren. Guangzhou Huaduo and Zhuhai Daren had entered into a series of cooperationagreements, under which Guangzhou Huaduo and Zhuhai Daren agreed to cooperate with respect to the operation of certain online games developed by ZhuhaiDaren. In the years ended December 31, 2014, 2015 and 2016, the aggregate online game revenues shared from Zhuhai Daren was RMB25.6 million, RMB25.5million and RMB29.7 million (US$4.3 million), respectively. In December 2015, Guangzhou Huaduo entered into an intangible assets purchasing agreement withZhuhai Daren to acquire operating rights for licensed games from Zhuhai Daren for RMB5.7 million. In 2010 and 2011, Guangzhou Huaduo and Guangzhou Shanghang Information Technical Co., Ltd., or Guangzhou Shanghang, entered into certain serverco-location agreements, under which Guangzhou Shanghang provides Guangzhou Huaduo with bandwidth and server co-location services in different cities inChina. In addition, Guangzhou Huaduo and Guangzhou Shanghang entered into two content delivery network acceleration service agreements, under whichGuangzhou Shanghang provides content delivery network acceleration services to Guangzhou Huaduo. Guangzhou Shanghang is 24.3% owned by Mr. Jun Lei,our major shareholder, including approximately 7% beneficially owned by Mr. David Xueling Li, our chairman, and 6.4% owned by Shanghai Yilian, respectively.In the years ended December 31, 2014, 2015 and 2016, the bandwidth service that Guangzhou Huaduo received from Guangzhou Shanghang amounted toRMB42.5 million, RMB74.7 million and RMB96.2 million (US$13.9 million), respectively. Kingsoft Corporation, or Kingsoft, through third party advertising agencies, has in the past placed advertisements on Duowan.com and YY Client. Weindirectly derived revenues through such third party advertising agencies from Kingsoft in 2014, which amounted to RMB0.4 million. Mr. Jun Lei, our majorshareholder, is currently chairman, non-executive director and minority shareholder of Kingsoft. In March 2012 and 2013, Beijing Tuda invested RMB1.0 million and RMB1.0 million respectively, and then held a 86.96% equity interest in total in,Zhuhai Lequ Technology Co., Ltd., or Zhuhai Lequ. We had reduced our equity holding in Zhuhai Lequ to 13.33% by transferring 73.63% of equity interest weheld to its founders as of December 31, 2013. We had further reduced our equity holding in Zhuhai Lequ to 10.57% by the disposal of 2.76% of the equity interestto Chengdu Xishanju Entertainment Technology Co., Ltd., a subsidiary of Kingsoft, for a cash consideration of RMB1.6 million in September, 2014. In 2013,Guangzhou Huaduo and Zhuhai Lequ entered into a cooperation agreement, under which Guangzhou Huaduo and Zhuhai Lequ agreed to cooperate with respect tothe operation of certain online games developed by Zhuhai Lequ and the aggregate online game revenues shared from Zhuhai Lequ was RMB2.6 million, RMB0.3million and nil in 2014, 2015 and 2016, respectively. In 2015, Guangzhou Huaduo and Xiaomi Corporation entered into certain promotion arrangements where Guangzhou Huaduo placed promotion onXiaomi platform amounting to RMB2.6 million. Mr. Lei Jun, our major shareholder, is currently the chairman of Xiaomi Corporation. In November 2013 and March 2014, Guangzhou Huaduo invested RMB7.0 million and RMB15.0 million respectively, in Guangzhou Kuyou InformationTechnology Co., Ltd., or Guangzhou Kuyou, subsequent to which, Guangzhou Huaduo held 20% equity interest in Guangzhou Kuyou. In 2014, GuangzhouHuaduo and Guangzhou Kuyou entered into a series of cooperation agreements, under which Guangzhou Huaduo and Guangzhou Kuyou agreed to cooperate withrespect to the exclusive operation of certain online games developed by Guangzhou Kuyou. In September 2016, the percentage of quity interest held by GuangzhouHuaduo in Guangzhou Kuyou was diluted to 16% due to the options granted by Guangzhou Kuyou to its management and employees. The aggregate online gamerevenues shared from Guangzhou Kuyou was RMB37.0 million, RMB134.5 million and RMB8.6 million (US$1.2 million) in 2014, 2015 and 2016, respectively,and the purchase of operating rights for licensed games was RMB6.8 million, RMB3.4 million and nil in 2014, 2015 and 2016, respectively. In September 2014, Guangzhou Huaduo invested RMB6.0 million in Shenzhen Qingdou Network Technology Co., Ltd., or Shenzhen Qingdou.Guangzhou Huaduo holds 12% equity interest in Shenzhen Qingdou with significant influence over its management and operating policies. Shenzhen Qingdouborrowed RMB1.0 million in 2014 from Guangzhou Huaduo. As of December 31, 2014, Shenzhen Qingdou had repaid the loan in full. In September 2014, Guangzhou Huaduo invested RMB3.0 million in Guangzhou Muyou Network Technology Co., Ltd., or Guangzhou Muyou.Guangzhou Huaduo holds 15% equity interest in Guangzhou Muyou with significant influence over its management and operating policies. Guangzhou Muyouborrowed RMB0.5 million in 2014 from Guangzhou Huaduo, and had repaid the loan in full as of December 31, 2014. 120 In October 2014, we entered into an agreement to inject our free voice-over IP service, Weihui, into Bigo Inc. or Bigo, a company set up and which wasthen controlled by Mr. David Xueling Li. Following two independent third-party valuation assessments and a capital injection from other investors of Bigo,including Mr. Li, we retained a 27.8% ownership stake in Bigo. We had paid daily operating expenses of RMB61.0 million, RMB95.3 million and 53.6 million(US$7.7 million) on behalf of Bigo in 2014, 2015 and 2016, respectively. Bigo borrowed RMB155.0 million and RMB25.0 million (US$ 3.6 million) fromGuangzhou Huaduo in 2015 and 2016, respectively. Bigo had repaid the abovementioned amount in full as of December 31, 2015 and 2016, respectively. In April2015, Guangzhou Huaduo entered into a sale of equipment agreement with Bigo amounting to 12.1 million. In February 2015, Guangzhou Huaduo invested RMB30.0 million in Shanghai Yaoyu Culture Media Co., Ltd., or Shanghai Yaoyu. Guangzhou Huaduoholds 10% equity interest in Shanghai Yaoyu with significant influence over its management and operating policies. In January 2015, Guangzhou Huaduo enteredinto an intangible assets purchasing agreement with Shanghai Yaoyu to acquire operating rights for game broadcasting amounting to RMB11.5 million. In March 2015, Guangzhou huaduo and Shanghai Jiazuo Internet and Technology Co., Ltd., or Shanghai Jiazuo, which is the wholly-owned subsidiary ofGuangzhou Kuyou, entered into a series of cooperation agreements, under which Guangzhou Huaduo and Shanghai Jiazuo agreed to cooperate with respect to theoperation of certain online games developed by Shanghai Jiazuo. The aggregate online game revenues shared from Shanghai Jiazuo was RMB20.9 million andRMB48.4 million (US$7.0 million) in 2015 and 2016, respectively, and the purchase of operating rights for licensed games was RMB6.8 million, RMB3.4 millionand nil in 2014, 2015 and 2016, respectively. In February and November 2015, Guangzhou Huaduo invested RMB10.0 million and RMB10.0 million, respectively, and then held 45.0% equity interestin total in, Shanghai Rongyi Culture Development Co., Ltd., or Shanghai Rongyi. Shanghai Rongyi borrowed RMB13.0 million (US$1.9 million) in 2016 fromGuangzhou Huaduo. Registration Rights We have granted certain registration rights to our shareholders. Set forth below is a description of the registration rights granted under the agreement. Demand Registration Rights. At any time following May 20, 2013, upon a written request from the holders of at least 25% of the registrable securitiesheld by our then preferred shareholders, we shall file a registration statement on a form other than Form F-3 covering the offer and sale of the registrable securitiesheld by the requesting shareholders and other holders of registrable securities who choose to participate in the offering, if the offering covers at least 20% of thethen outstanding registrable securities or if the reasonable anticipated offering price to the public, net of selling expenses, would exceed US$10.0 million.Registrable securities include, among others, our common shares not previously sold to the public and common shares issued or issued upon conversion of thepreferred shares. However, we are not obligated to proceed with a demand registration if we have, within any six-month period, already effected a registration under theSecurities Act pursuant to the exercise of the holders’ demand registration rights. We have the right to defer filing of a registration statement for up to 90 days ifour board of directors determines in good faith that the filing of a registration statement would be materially detrimental to us, but we cannot exercise the deferralright more than once in any 12-month period. Form F-3 Registration Rights. When we are eligible for registration on Form F-3, upon a written request from any holders of the registrable securitiesheld by our then preferred shareholders, we shall file a registration statement on Form F-3 covering the offer and sale of the registrable securities. 121 We are not obligated to effect a Form F-3 registration, among other things, if we have, within any six-month period, already effected a registration underthe Securities Act pursuant to the exercise of the holders’ Form F-3 registration rights, or the dollar amount of securities to be sold is of an aggregate price to thepublic of less than US$1.0 million. We have the right to defer filing of a registration statement for up to 90 days if our board of directors, including a majority ofthe directors appointed by the preferred shareholders and Tiger Global Six YY Holdings, determines in good faith that the filing of a registration statement wouldbe materially detrimental to us, but we cannot exercise the deferral right more than once in any 12-month period. Piggyback Registration Rights. If we propose to file a registration statement for a public offering of our common shares on a form that would be suitableonly for registrable securities, we must offer holders of registrable securities an opportunity to include in that registration all or any part of their registrablesecurities. The underwriters of any underwritten offering have the right to limit the number of shares with registration rights to be included in the registrationstatement, subject to certain limitations. Expenses of Registration. We will pay all expenses relating to any demand, Form F-3, or piggyback registration. Termination of Obligations. We shall have no obligation to effect any demand, Form F-3, or piggyback registration (a) five years after our initial publicoffering, (b) if, in the opinion of counsel to us satisfactory to the holder, all such registrable securities proposed to be sold by a holder may then be sold under Rule144 or another similar exemption under the Securities Act in one transaction without exceeding the volume limitations thereunder or (c) upon a liquidation event. Employment Agreements See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Employee Agreements” for adescription of the employment agreements we have entered into with our senior executive officers. Share Incentives See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers” for a description of share-basedcompensation awards we have granted to our directors, officers and other individuals as a group. See Note 25 to our financial statements for further information about our related party transactions. C. Interests of Experts and Counsel Not applicable. ITEM 8.FINANCIAL INFORMATION A. Consolidated Statements and Other Financial Information See “Item 18. Financial Statements.” Legal Proceedings Guangzhou NetEase Computer System Co., Ltd. has initiated a lawsuit against us in Guangzhou in October 2014, claiming infringement of its rights ofreproduction concerning the online game of Fantasy Westward Journey in an amount of RMB100 million. Although we believe that the claim is unjustified andcommercially motivated, if the outcome of the proceeding is unfavorable to us, we may suffer considerable damage to our financial position and reputation. In April 2015, we initiated a litigation on antitrust and unfair competition against Guangzhou NetEase Computer System Co., Ltd. in the amount ofRMB10 million. In September 2015, we initiated three actions against three game commentators who have breached their exclusive live broadcasting obligationsowed to us, each in an amount of RMB15 million. In July 2016, we initiated a litigation against Shenzhen Yinghua Xunfang Communication Technology Co., Ltd.which owned us payment in the amount of RMB11.6 million under a series of cooperation agreements. 122 Apart from the aforesaid lawsuits, we are not currently a party to any pending material litigation or other material legal proceeding and are not aware ofany pending or threatened litigation or other legal proceeding that may have a material adverse impact on our business or operations. However, we may be subjectto various legal proceedings and claims that are incidental to our ordinary course of business. Regardless of the outcome, legal or administrative proceedings orclaims may have an adverse impact on us because of defense and settlement costs, diversion of management attention and other factors. Dividend Policy We have not paid dividend in the past and do not have any present plan to pay any dividend in the foreseeable future. We currently intend to retain most,if not all, of our available funds and any future earnings to operate and expand our business. We are a holding company incorporated in the Cayman Islands. We may receive dividends from our PRC subsidiary for our cash requirements, includingany payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See “Item 3. Key information—D. Risk Factors—Risks Related to Our Corporate Structure and Our Industry—Our PRC subsidiaries and PRC consolidated affiliated entities are subject torestrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements” and “Item 4. Information onthe Company—B. Business Overview—PRC Regulation—Regulation of Foreign Currency Exchange and Dividend Distribution.” Our board of directors has complete discretion on whether to distribute dividends, subject to the approval of our shareholders. Even if our board ofdirectors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, generalfinancial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holdersto the same extent as holders of our Class A common shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See“Item 12. Description of Securities Other than Equity Securities—D. American Depositary Shares.” Cash dividends on our Class A common shares, if any, will bepaid in U.S. dollars. B. Significant Changes Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financialstatements included in this annual report. ITEM 9.THE OFFER AND LISTING A. Offering and Listing Details See “—C. Markets” and “Item 12. Description of Securities other than Equity Securities—D. American Depositary Shares.” We have a dual-classcommon share structure in which Class A common shares have different voting rights from Class B common shares. Class B common shares are each entitled toten votes, whereas Class A common shares are each entitled to one vote. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs—Our dualclass common share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing anychange of control transactions that holders of our Class A common shares and ADSs may view as beneficial.” B. Plan of Distribution Not applicable. 123 C. Markets Our ADSs, each representing twenty Class A common shares, have been listed on the Nasdaq Global Market since November 21, 2012 and trade underthe symbol “YY”. The following table provides the high and low trading prices for our ADSs on the NASDAQ Global Market for the periods indicated. Trading Price High Low US$ US$ Annual Highs and Lows Fiscal Year 2014 96.39 50.00 Fiscal Year 2015 81.70 50.52 Fiscal Year 2016 63.96 31.07 Quarterly Highs and Lows First Fiscal Quarter of 2014 90.93 50.00 Second Fiscal Quarter of 2014 82.54 51.08 Third Fiscal Quarter of 2014 96.39 67.50 Fourth Fiscal Quarter of 2014 86.00 60.18 First Fiscal Quarter of 2015 73.04 50.52 Second Fiscal Quarter of 2015 81.70 54.16 Third Fiscal Quarter of 2015 69.68 51.02 Fourth Fiscal Quarter of 2015 65.53 53.34 First Fiscal Quarter of 2016 62.79 42.35 Second Fiscal Quarter of 2016 63.96 31.07 Third Fiscal Quarter of 2016 56.11 32.75 Fourth Fiscal Quarter of 2016 57.22 39.24 Monthly Highs and Lows October 2016 57.22 48.00 November 2016 49.03 41.18 December 2016 44.94 39.24 January 2017 45.65 37.81 February 2017 49.90 40.28 March 2017 51.84 44.00 April 2017 (through April 19, 2017) 47.80 42.90 D.Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. ITEM 10.ADDITIONAL INFORMATION A. Share Capital Not applicable. B. Memorandum and Articles of Association We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association and the Companies Law, Cap. 22 (Law 3of 1961, as consolidated and revised) of the Cayman Islands, referred to as the Companies Law below. The following are summaries of certain provisions of ourmemorandum and articles of association in effect as of the date of this annual report insofar as they relate to the material terms of our common shares. 124 Registered Office and Objects Our registered office in the Cayman Islands is located at Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681,Grand Cayman, KYI-1111, Cayman Islands. The memorandum of association provides, inter alia, that the liability of the members of our company is limited to theamount, if any, for the time being unpaid on the common shares. The objects for which our company is established are unrestricted (including acting as aninvestment company), and we shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of corporate benefit, asprovided in Section 27(2) of the Companies Law and in view of the fact that we are an exempted Company, we will not trade in the Cayman Islands with anyperson, firm or corporation except in furtherance of our business carried on outside the Cayman Islands. Board of Directors See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Duties of Directors” and “—Terms of Directors and Officers.” Common Shares General Our common shares are divided into Class A common shares and Class B common shares. Holders of Class A common shares and Class B commonshares will have the same rights except for voting and conversion rights. The holders of ADSs will not be treated as our shareholders and will be required tosurrender their ADSs for cancellation and withdrawal from the depositary facility in which the Class A common shares are held in accordance with the provisionsof the deposit agreement in order to exercise shareholders’ rights in respect of the Class A common shares. The depositary will agree, so far as it is practical, tovote or cause to be voted the amount of Class A common shares represented by ADSs in accordance with the non-discretionary written instructions of the holdersof such ADSs. All of our outstanding common shares are fully paid and non-assessable. Certificates representing our common shares are issued in the registered form.Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their common shares. Meetings Shareholders’ meetings may be convened by a majority of our board of directors or the chairman. Advance notice in writing of at least ten clear days isrequired for the convening of our annual general meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholdersconsists of at least one or more shareholders present in person or by proxy, or (in the case of a shareholder being a corporation) by its duly authorizedrepresentative representing not less than one-third in nominal value of the total issued voting shares in our company present throughout the meeting. Notwithstanding that a meeting is called by shorter notice than that mentioned above, but, subject to the Companies Law, it will be deemed to have beenduly called, if it is so agreed (a) in the case of a meeting called as an annual general meeting by all of our shareholders entitled to attend and vote at the meeting;and (b) in the case of any other meeting, by a majority in number of the shareholders having the right to attend and vote at the meeting, being a majority togetherholding not less than 95% in nominal value of the issued shares giving that right. No business other than the appointment of a chairman may be transacted at any general meeting unless a quorum is present at the commencement ofbusiness. However, the absence of a quorum will not preclude the appointment of a chairman. If present, the chairman of our board of directors shall be thechairman presiding at any shareholders’ meetings. A corporation being a shareholder shall be deemed for the purpose of our articles of association to be present in person if represented by its dulyauthorized representative being the person appointed by resolution of the directors or other governing body of such corporation to act as its representative at therelevant general meeting or at any relevant general meeting of any class of our shareholders. Such duly authorized representative shall be entitled to exercise thesame powers on behalf of the corporation that he represents as that corporation could exercise if it were our individual shareholder. 125 The quorum for a separate general meeting of the holders of a separate class of shares is described in “—Modification of Rights” below. Our articles of association do not allow our shareholders to approve matters to be determined at shareholders’ meetings by way of written resolutionswithout a meeting. Voting Rights In respect of all matters requiring a shareholders’ vote, each Class A common share is entitled to one vote, and each Class B common share is entitled toten votes, voting together as one class. At any shareholders’ meeting, on a show of hands, every shareholder present in person or by proxy (or, in the case of ashareholder being a corporation, by its duly authorized representative) shall have one vote and on a poll, every shareholder present in person or by proxy, or in thecase of a shareholder being a corporation, by its duly authorized representative shall have one vote for each fully paid share of which such shareholder is theholder. No shareholder shall, unless the Board otherwise determines, be entitled to vote or be reckoned in a quorum, in respect of any share, unless suchshareholder is duly registered as our shareholder and all calls or installments due by such shareholder to us have been paid. If a clearing house (or its nominee(s)) or a central depositary entity, being a corporation, is a shareholder, it may authorize such person or persons as itthinks fit to act as its representative(s) at any meeting or at any meeting of any class of shareholders, provided that the authorization shall specify the number andclass of shares in respect of which each such person is so authorized. A person so authorized is entitled to exercise the same rights and powers on behalf of theclearing house or central depositary entity (or its nominee(s)) as if such person was the registered holder of our shares held by the clearing house or centraldepositary entity (or its nominee(s)) including the right to vote individually on a show of hands. While there is nothing under the laws of the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for theelection of directors of our company, it is not a concept that is accepted as a common practice in the Cayman Islands, and our company has made no provisions inour articles of association to allow cumulative voting for such elections. Conversion Each Class B common share is convertible into one Class A common share at any time by the holder thereof. Class A common shares are not convertibleinto Class B common shares under any circumstances. Upon any transfer of Class B common shares by a holder to any person or entity which is not an affiliate ofsuch holder and which is not any of our founders or any affiliates of our founders, such Class B common shares shall be automatically and immediately convertedinto the equivalent number of Class A common shares. In addition, if at any time, Messrs. David Xueling Li, Jun Lei and their affiliates collectively beneficiallyown less than 5% of the total number of the issued and outstanding Class B common shares, each issued and outstanding Class B common share will beautomatically and immediately converted into one Class A common share, and we will not issue any Class B common shares thereafter. Furthermore, if at any timemore than 50% of the ultimate beneficial ownership of any holder of Class B common shares (other than our founders or our founders’ affiliates) changes, eachsuch Class B common share will be automatically and immediately converted into one Class A common share. Calls on Shares and Forfeiture of Shares Subject to our memorandum and articles of association, our directors may from time to time make such calls upon the members in respect of any amountsunpaid on the shares held by them. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture. 126 Protection of Minority Shareholders In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company because as a general rule a derivative action may not bebrought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, theCayman Islands court can be expected to apply and follow the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) whichpermit a minority shareholder to commence a class action against, or derivative actions in the name of, a company to challenge the following: (i)an acts which is illegal or ultra vires; (ii)an act which, although not ultra vires, could only be effected duly if authorized by a special or qualified majority vote that has not been obtained; and (iii)an act which constitutes a fraud on the minority where the wrongdoers are themselves in control of the company. In the case of a company (not being a bank) having its share capital divided into shares, the Grand Court of the Cayman Islands may, on the application ofmembers holding not less than one fifth of the shares of the company in issue, appoint an inspector to examine the affairs of the company and to report thereon insuch manner as the Grand Court of the Cayman Islands shall direct. Any of our shareholders may petition the Grand Court of the Cayman Islands which may make a winding up order if the Grand Court of the CaymanIslands is of the opinion that it is just and equitable that we should be wound up or, as an alternative to a winding up order, (a) an order regulating the conduct ofour affairs in the future, (b) an order requiring us to refrain from doing or continuing an act complained of by the shareholder petitioner or to do an act which theshareholder petitioner has complained we have omitted to do, (c) an order authorizing civil proceedings to be brought in our name and on our behalf by theshareholder petitioner on such terms as the Grand Court of the Cayman Islands may direct, or (d) an order providing for the purchase of the shares of any of ourshareholders by other shareholders or us and, in the case of a purchase by us, a reduction of our capital accordingly. Generally, claims against us must be based on the general laws of contract or tort applicable in the Cayman Islands or individual rights as shareholders asestablished by our articles of association. Pre-Emption Rights There are no pre-emption rights applicable to the issue of new shares of our company under either Cayman Islands law or our memorandum and articlesof association. Liquidation Rights Subject to any class or classes of shares or future shares which are issued with specific rights, privileges or restrictions as to the distribution of availablesurplus assets on liquidation, (a) if we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay the whole ofthe capital paid up at the commencement of the winding up, the excess shall be distributed pari passu among those shareholders in proportion to the amount paidup at the commencement of the winding up on the shares held by them, respectively, and (b) if we are wound up and the assets available for distribution among theshareholders as such are insufficient to repay the whole of the paid-up capital, those assets shall be distributed so that, as nearly as may be, the losses shall be borneby the shareholders in proportion to the capital paid up at the commencement of the winding up on the shares held by them, respectively. If we are wound up (whether the liquidation is voluntary or by the court), the liquidator may with the sanction of our special resolution and any othersanction required by the Companies Law, divide among our shareholders in specie or kind the whole or any part of our assets (whether or not they shall consist ofproperty of the same kind) and may, for such purpose, set such value as the liquidator deems fair upon any property to be divided and may determine how suchdivision shall be carried out as between the shareholders or different classes of shareholders. The liquidator may also vest the whole or any part of these assets intrustees upon such trusts for the benefit of the shareholders as the liquidator shall think fit, but so that no shareholder will be compelled to accept any assets, sharesor other securities upon which there is a liability. The consideration received by each holder of a Class A common share and a holder of a Class B common share will be the same in any liquidation event. 127 Variation of Rights Alterations to our memorandum and articles of association may only be made by special resolution, meaning a majority of not less than two-thirds ofvotes cast at a shareholders’ meeting. If at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any class of shares may, subject to theprovisions of the Companies Law, be varied with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.Consequently, the rights of any class of shares cannot be detrimentally altered without a majority of two-thirds of the vote of all of the shares in that class. Theprovisions of our articles of association relating to general meetings shall apply similarly to every such separate general meeting, but so that the quorum for thepurposes of any such separate general meeting or at the adjourned meeting shall be a person or persons together holding (or represented by proxy) on the date ofthe relevant meeting not less than one-third in nominal value of the issued shares of that class, that every holder of shares of the class shall be entitled on a poll toone vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll. The rights conferred upon the holders of the shares of any class issued with special rights shall not, unless otherwise expressly provided by the terms ofissue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares. Alteration of Capital We may from time to time by ordinary resolution in accordance with the Companies Law alter the conditions of our memorandum of association to: ·increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe; ·consolidate and divide all or any of our share capital into shares of larger amounts than our existing shares; ·cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person, and diminish the amountof its share capital by the amount of the shares so cancelled subject to the provisions of the Companies Law; ·sub-divide our shares or any of them into shares of smaller amount than is fixed by our memorandum of association, subject nevertheless to theCompanies Law, so that the resolution whereby any share is sub-divided may determine that, as between the holders of the shares resulting from suchsubdivision, one or more of the shares may have any such preferred or other special rights over, or may have such deferred rights or be subject to anysuch restrictions as compared with the others, as we have power to attach to unissued or new shares; and ·divide shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares, attach to theshares respectively any preferential, deferred, qualified or special rights, privileges, conditions or such restrictions that in the absence of any suchdetermination in a general meeting may be determined by our directors. We may, by special resolution, subject to any confirmation or consent required by the Companies Law, reduce our share capital or any capital redemptionreserve in any manner authorized by law. Transfer of Shares Subject to any applicable restrictions set forth in our articles of association, including, for example, the board of directors’ discretion to refuse to register atransfer of any share (not being a fully paid up share) to a person of whom it does not approve, or any share issued under share incentive plans for employees uponwhich a restriction on transfer imposed thereby still subsists, or a transfer of any share to more than four joint holders, any of our shareholders may transfer all orany of his or her shares by an instrument of transfer in the usual or common form or in a form prescribed by the Nasdaq Global Market or in another form that ourdirectors may approve. 128 Our directors may decline to register any transfer of any share which is not paid up or on which we have a lien. Our directors may also decline to registerany transfer of any share unless: ·the instrument of transfer is lodged with us and is accompanied by the certificate for the shares to which it relates and such other evidence as ourdirectors may reasonably require to show the right of the transferor to make the transfer; ·the instrument of transfer is in respect of only one class of share; ·the instrument of transfer is properly stamped (in circumstances where stamping is required); and ·fee of such maximum sum as the Nasdaq Global Market may determine to be payable or such lesser sum as our directors may from time to timerequire is paid to us in respect thereof. If our directors refuse to register a transfer, they shall, within three months after the date on which the instrument of transfer was lodged, send to each ofthe transferor and the transferee notice of such refusal. The registration of transfers may, after compliance with any notice requirement of the Nasdaq Global Market, be suspended and the register closed at suchtimes and for such periods as our directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended nor theregister closed for more than 30 days in any year as our directors may determine. Register of Members In accordance with Section 48 of the Companies Law, the register of members is prima facie evidence of the registered holder or member of shares of acompany. Therefore, a person becomes a registered holder or member of shares of the company only upon entry being made in the register of members. Ourdirectors will maintain one register of members, at the office of Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681,Grand Cayman, KY1-1111, Cayman Islands, which provides us with corporate administrative services. We will perform the procedures necessary to register theshares in the register of members as required in “PART III—Distribution of Capital and Liability of Members of Companies and Associations” of the CompaniesLaw, and will ensure that the entries on the register of members are made without any delay. The depositary will be included in our register of members as the only holder of the Class A common shares underlying the ADSs. The shares underlyingthe ADSs are not shares in bearer form, but are in registered form and are “non-negotiable” or “registered” shares in which case the shares underlying the ADSscan only be transferred on the books of the company in accordance with Section 166 of the Companies Law. In the event that we fail to update our register of members, the recourse of investors is directly to the depositary under the terms of the deposit agreement,which is governed by New York law. The depositary will have recourse against us under the terms of the deposit agreement, and also will hold a share certificateevidencing the depositary as the registered holder of shares underlying the ADSs. Further, Section 46 of the Companies Law provides for recourse to be availableto our investors in case we fail to update our register of members. In the event we fail to update our register of members, the depositary, as the aggrieved party,may apply for an order with the courts of the Cayman Islands for the rectification of the register of members. Share Repurchases We are empowered by the Companies Law and our articles of association to purchase our own shares, subject to certain restrictions. Our directors mayonly exercise this power on our behalf, subject to the Companies Law, our memorandum and articles of association and to any applicable requirements imposedfrom time to time by the Nasdaq Global Market, the U.S. Securities and Exchange Commission, or by any other recognized stock exchange on which our securitiesare listed. 129 Dividends Subject to the Companies Law, our company in a general meeting or our directors may declare dividends in any currency to be paid to our shareholders.Dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our directors determine is no longerneeded. Our board of directors may also declare and pay dividends out of the share premium account or any other fund or account that can be authorized for thispurpose in accordance with the Companies Law. Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provides, (a) all dividends shall be declared and paid according tothe amounts paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for this purpose aspaid up on that share and (b) all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions ofthe period in respect of which the dividend is paid. Our directors may also pay interim dividends, whenever our financial position, in the opinion of our directors, justifies such payment. Our directors may deduct from any dividend or bonus payable to any shareholder all sums of money (if any) presently payable by such shareholder to uson account of calls or otherwise. No dividend or other money payable by us on or in respect of any share shall bear interest against us. In respect of any dividend proposed to be paid or declared on our share capital, our directors may resolve and direct that (a) such dividend be satisfiedwholly or in part in the form of an allotment of shares credited as fully paid up, provided that our shareholders entitled thereto will be entitled to elect to receivesuch dividend (or part thereof if our directors so determine) in cash in lieu of such allotment or (b) the shareholders entitled to such dividend will be entitled toelect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as our directors may think fit. Our shareholdersmay, upon the recommendation of our directors, by ordinary resolution resolve in respect of any particular dividend that, notwithstanding the foregoing, a dividendmay be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders to elect to receive such dividend incash in lieu of such allotment. Any dividend interest or other sum payable in cash to the holder of shares may be paid by check or warrant sent by mail addressed to the holder at hisregistered address, or addressed to such person and at such addresses as the holder may direct. Every check or warrant shall, unless the holder or joint holdersotherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the register inrespect of such shares, and shall be sent at his or their risk and payment of the check or warrant by the bank on which it is drawn shall constitute a good dischargeto us. All dividends unclaimed for one year after having been declared may be invested or otherwise made use of by our board of directors for the benefit of ourcompany until claimed. Any dividend unclaimed after a period of six years from the date of declaration of such dividend shall be forfeited and reverted to us. Whenever our directors have resolved that a dividend be paid or declared, our directors may further resolve that such dividend be satisfied wholly or inpart by the distribution of specific assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe for our securities or securities of anyother company. Where any difficulty arises with regard to such distribution, our directors may settle it as they think expedient. In particular, our directors mayissue fractional certificates, ignore fractions altogether or round the same up or down, fix the value for distribution purposes of any such specific assets, determinethat cash payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of the parties, vest any such specificassets in trustees as may seem expedient to our directors, and appoint any person to sign any requisite instruments of transfer and other documents on behalf of thepersons entitled to the dividend, which appointment shall be effective and binding on our shareholders. 130 Untraceable Shareholders We are entitled to sell any shares of a shareholder who is untraceable, provided that no such sale shall be made unless: ·all checks or warrants in respect of dividends of such shares, not being less than three in number, for any sums payable in cash to the holder of suchshares have remained un-cashed for a period of 12 years prior to the publication of the advertisement and during the three months referred to in thethird bullet point below; ·we have not during that time received any indication of the whereabouts or existence of the shareholder or person entitled to such shares by death,bankruptcy or operation of law; and ·we, if so required by the rules of the Nasdaq Global Market, have caused an advertisement to be published in newspapers in accordance with suchapplicable rules giving notice of our intention to sell these shares, and a period of three months (or such shorter period as permitted under theapplicable rules) has elapsed since such advertisement. The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for anamount equal to such net proceeds. Inspection of Books and Records Holders of our common shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporaterecords. However, we will provide our shareholders with annual audited financial statements. C.Material Contracts We have not entered into any material contracts other than in the ordinary course of business and other than those described elsewhere in “Item 4.Information on the Company—B. Business Overview,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” orelsewhere in this annual report. D. Exchange Controls See “Item 4. Information on the Company—B. Business Overview—PRC Regulation—Regulation of Foreign Currency Exchange and DividendDistribution.” E. Taxation Cayman Islands Taxation See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Discussion of Selected Statements of Operations Items—Taxation—Cayman Islands.” People’s Republic of China Taxation Under the existing tax laws in the PRC, we are qualified as a non-resident enterprise. We are a holding company incorporated in the Cayman Islands; ourholding company indirectly holds 100% of the equity interests in our PRC subsidiaries through Duowan BVI, NeoTasks Cayman, NeoTasks HK and BiLinCayman. Our business operations are principally conducted through our PRC subsidiaries and our PRC consolidated affiliated entities. The PRC Enterprise IncomeTax Law and its implementation rules, both of which became effective on January 1, 2008, provide that China-sourced income of foreign enterprises, such asdividends paid by a PRC subsidiary to its overseas parent that is not a PRC resident enterprise and has no establishment in the PRC, will normally be subject toPRC withholding tax at a rate of 10% (a further reduced WHT rate may be available according to the applicable double tax treaty or arrangement). 131 If the PRC tax authorities determine that YY Inc., our Cayman Islands holding company, is a PRC resident enterprise for enterprise income tax purposes,our world-wide income could be subject to PRC tax at a rate of 25%, which could materially reduce our net income. In addition, we will also be subject to PRCenterprise income tax reporting obligations. Furthermore, although dividends paid by one PRC tax resident to another PRC tax resident should qualify as “tax-exempt income” under the PRC Enterprise Income Tax Law, we cannot assure you that dividends by our PRC subsidiaries to our Cayman holding company willnot be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC taxauthorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterpriseincome tax purposes. In addition, ADS holders may be subject to PRC withholding tax on dividends payable by us and gains realized on the sale or otherdisposition of ADSs or common shares, if the PRC tax authorities determine that our Cayman Islands holding company is a PRC resident enterprise for enterpriseincome tax purposes. See “Risk Factors—Risks Related to Doing Business in China—Under the PRC enterprise income tax law, we may be classified as a PRC“resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operationsand the value of your investment.” United States Federal Income Tax Considerations The following is a summary of certain United States federal income tax considerations relating to the ownership and disposition of our ADSs or commonshares by a U.S. holder (as defined below) that holds our ADSs or common shares as “capital assets” (generally, property held for investment) under the UnitedStates Internal Revenue Code of 1986, as amended (the “Code”). This summary is based upon existing United States federal income tax law, which is subject todiffering interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation that may beimportant to particular holders in light of their particular circumstances, including holders subject to special tax rules (for example, banks and other financialinstitutions, insurance companies, broker-dealers, pension plans, cooperatives, real estate investment trusts, regulated investment companies, traders in securitiesthat have elected the mark-to-market method of accounting for their securities, partnerships and their partners, and tax-exempt organizations (including privatefoundations)), holders who are not U.S. holders, holders who own (directly, indirectly, or constructively) 10% or more of our voting stock, holders that hold theirADSs or common shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes,persons who acquired ADSs or common shares pursuant to the exercise of any employee share option or otherwise as compensation, or holders that have afunctional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition,except to the extent described below, this summary does not discuss any state, local or non-United States tax considerations, Medicare tax, the alternativeminimum tax or any non-income tax (such as the United States federal estate or gift tax) considerations. Each U.S. holder is urged to consult its tax advisorregarding the United States federal, state, local, and non-United States income and other tax considerations relating to the ownership and disposition of our ADSsor common shares. General For purposes of this summary, a “U.S. holder” is a beneficial owner of our ADSs or common shares that is, for United States federal income tax purposes,(i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income taxpurposes) created in, or organized under the law of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which isincludible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to theprimary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of thetrust or (B) that has otherwise elected to be treated as a United States person. If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ADSs or commonshares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnershipsholding our ADSs or common shares and partners in such partnerships are urged to consult their tax advisors regarding the ownership and disposition of our ADSsor common shares. It is generally expected that a holder of ADSs should be treated, for United States federal income tax purposes, as the beneficial owner of the underlyingshares represented by the ADSs. The remainder of this discussion assumes that a holder of ADSs will be treated in this manner. Predicated upon such treatment,deposits or withdrawals of common shares for ADSs will not be subject to United States federal income tax. 132 Passive Foreign Investment Company Considerations A non-United States corporation, such as our company, will be classified as a “passive foreign investment company,” or “PFIC”, for United States federalincome tax purposes, for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% ormore of its average quarterly assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income. Forthis purpose, cash and assets readily convertible into cash are categorized as passive assets and the company’s unbooked intangibles are taken into account fordetermining the value of its assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of anyother corporation in which we own, directly or indirectly, more than 25% (by value) of the stock. Although the law in this regard is unclear, we treat Guangzhou Huaduo, Beijing Tuda and Bilin Online as being owned by us for United States federalincome tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of theireconomic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. Assuming that we own Guangzhou Huaduo, Beijing Tuda and Bilin Online for United States federal income tax purposes, we do not believe that we werea PFIC, for United States federal income tax purposes, for the taxable year ended December 31, 2016, and do not anticipate becoming a PFIC in future taxableyears. However, because PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our incomeand assets, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. The value of our assets, for purposes of thePFIC test, will generally be determined by reference to the market price of our ADSs and common shares. Accordingly, fluctuations in the market price of ourADSs and common shares may cause us to become a PFIC for the current taxable year or future taxable years. It is also possible that the Internal Revenue Servicemay challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our company being or, becoming classified as, aPFIC for the current or future taxable years. The determination of whether we will be or become a PFIC will also depend, in part, upon the nature of our incomeand assets over time, which are subject to change from year to year. There can be no assurance our business plans will not change in a manner that will affect ourPFIC status. The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Common Shares” is written on the basis that we will not be classifiedas a PFIC for United States federal income tax purposes. The United States federal income tax rules that apply if we are classified as a PFIC for the current taxableyear or any subsequent taxable year are generally discussed below under “Passive Foreign Investment Company Rules.” Dividends Subject to the PFIC rules discussed below, any cash distributions (including the amount of any taxes withheld) paid on our ADSs or common shares outof our current or accumulated earnings and profits, as determined under United States federal income tax principles, will generally be includible in the grossincome of a U.S. holder as dividend income on the day actually or constructively received by the U.S. holder, in the case of common shares, or by the Depositary,in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distributionpaid will generally be reported as a “dividend” for United States federal income tax purposes. A non-corporate recipient of dividend income will generally besubject to tax on dividend income from a “qualified foreign corporation” at a reduced United States federal tax rate rather than the marginal tax rates generallyapplicable to ordinary income provided that certain holding period requirements are met. A non-United States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the precedingtaxable year) will generally be considered to be a qualified foreign corporation with respect to any dividend it pays on stock (or ADSs in respect of such stock)which is readily tradable on an established securities market in the United States or, in the event that the company is deemed to be a PRC resident under the PRCEnterprise Income Tax Law, the company is eligible for the benefits of the United States-PRC treaty. Although no assurances may be given, our ADSs areexpected to be readily tradable on the Nasdaq Global Market, which is an established securities market in the United States. Since we do not expect that ourcommon shares will be listed on established securities markets, it is unclear whether dividends that we pay on our common shares that are not backed by ADSscurrently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an establishedsecurities market in the current taxable year or future taxable years. 133 Dividends received on the ADSs or common shares are not expected to be eligible for the dividends received deduction allowed to corporations. EachU.S. holder is advised to consult its tax advisor regarding the rate of tax that will apply to such holder with respect to dividend distributions, if any, received fromus. Dividends generally will be treated as income from foreign sources for United States foreign tax credit purposes and generally will constitute passivecategory income. A U.S. holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholdingtaxes imposed on dividends received on ADSs or common shares. A U.S. holder who does not elect to claim a foreign tax credit for foreign tax withheld, mayinstead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such U.S. holder elects to doso for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. Each U.S. holder is advised to consult its tax advisor regardingthe availability of the foreign tax credit under their particular circumstances. Sale or Other Disposition of ADSs or Common Shares Subject to the PFIC rules discussed below, a U.S. holder generally will recognize capital gain or loss upon the sale or other disposition of ADSs orcommon shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. holder’s adjusted tax basis in such ADSs orcommon shares. Any capital gain or loss will be long-term if the ADSs or common shares have been held for more than one year and will generally be UnitedStates source gain or loss for United States foreign tax credit purposes. The deductibility of a capital loss may be subject to limitations. Each U.S. holder is advisedto consult its tax advisor regarding the tax consequences if a foreign tax is imposed on a disposition of our ADSs or common shares, including the availability ofthe foreign tax credit under their particular circumstances. Passive Foreign Investment Company Rules If we are classified as a PFIC for any taxable year during which a U.S. holder holds our ADSs or common shares, and unless the U.S. holder makes amark-to-market election (as described below), the U.S. holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether weremain a PFIC, on (i) any excess distribution that we make to the U.S. holder (which generally means any distribution paid during a taxable year to a U.S. holderthat is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. holder’s holding period for the ADSsor common shares), and (ii) any gain realized on the sale or other disposition, including, under certain circumstances, a pledge, of ADSs or common shares. Underthe PFIC rules: ·such excess distribution and/or gain will be allocated ratably over the U.S. holder’s holding period for the ADSs or common shares; ·such amount allocated to the current taxable year and any taxable years in the U.S. holder’s holding period prior to the first taxable year in which weare classified as a PFIC, or pre-PFIC year, will be taxable as ordinary income; ·such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect applicable to theU.S. holder for that year; and ·an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC year. If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or common shares and any of our non-United States subsidiaries is alsoa PFIC, such U.S. holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and would be subject to the rulesdescribed above on certain distributions by a lower-tier PFIC and a disposition of shares of a lower-tier PFIC even though such U.S. holder would not receive theproceeds of those distributions or dispositions. Each U.S. holder is advised to consult its tax advisor regarding the application of the PFIC rules to any of oursubsidiaries. 134 As an alternative to the foregoing rules, a U.S. holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for suchstock to elect out of the tax treatment discussed above. The mark-to-market election is available only for “marketable stock,” which is stock that is traded in otherthan de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market, as defined in applicableUnited States Treasury regulations. Our ADSs are listed on the NASDAQ, which is a qualified exchange or market for these purposes. We anticipate that ourADSs should qualify as being regularly traded, but no assurances may be given in this regard. Because a mark-to-market election cannot be made for equityinterests in any lower-tier PFICs that we own, a U.S. holder may continue to be subject to the PFIC rules with respect to its indirect interest in any investments heldby us that are treated as an equity interest in a PFIC for United States federal income tax purposes. If a mark-to-market election is made, the U.S. holder willgenerally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxableyear over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market valueof such ADSs held at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.The U.S. holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC,the U.S. holder will not be required to take into account the mark-to-market gain or loss described above during any period that such corporation is not classified asa PFIC. We do not intend to provide information necessary for U.S. holders to make qualified electing fund elections, which, if available, would result in taxtreatment different from (and generally less adverse than) the general tax treatment for PFICs described above. If a U.S. holder owns our ADSs or common shares during any taxable year that we are a PFIC, such holder is required to file an annual report containingsuch information as the United States Treasury Department may require and may be required to file an annual IRS Form 8621. Each U.S. holder is advised toconsult its tax advisors regarding the potential tax consequences to such holder if we are or become classified as a PFIC, including the possibility of making amark-to-market election. Information Reporting U.S. holders may be subject to information reporting to the Internal Revenue Service with respect to dividends on and proceeds from the sale or otherdisposition of our ADSs or common shares. Each U.S. holder is advised to consult with its tax advisor regarding the application of the United States informationreporting rules to their particular circumstances. An individual U.S. holder and certain entities may be required to submit to the United States Internal Revenue Service certain information with respect tohis or her beneficial ownership of the ADSs or common shares, if such ADSs or common shares are not held on his or her behalf by a U.S. financial institution.This law also imposes penalties if an individual U.S. holder is required to submit such information to the United States Internal Revenue Service and fails to do soin a timely manner. Each U.S. holder is urged to consult its tax advisor as to any such reporting requirements. F. Dividends and Paying Agents Not applicable. G. Statement by Experts Not applicable. H. Documents on Display We previously filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to our initial public offering of our Class Acommon shares represented by ADSs. 135 We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934 or the Exchange Act. Under theExchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four monthsafter the end of each fiscal year which is December 31. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, andother information regarding registrants that make electronic filings with the SEC using its EDGAR system. Copies of reports and other information, when filed,may also be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxystatements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 ofthe Exchange Act. We will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operationsand annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports andcommunications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders ofADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositaryfrom us. I. Subsidiary Information For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.” ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk The revenues and expenses of our subsidiaries and PRC consolidated affiliated entities are generally denominated in Renminbi and their assets andliabilities are denominated in Renminbi. Our financing activities are denominated in U.S. dollars. To date, we have not entered into hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. Although our exposure toforeign exchange risks is generally limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and theRenminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars. The Renminbi is not freely convertible into foreign currencies. Remittances of foreign currencies into the PRC and exchange of foreign currencies intoRenminbi require approval by foreign exchange administrative authorities and certain supporting documentation. The State Administration for Foreign Exchange,under the authority of the People’s Bank of China, controls the conversion of Renminbi into other currencies. The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’sforeign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the U.S.dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation haltedand the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, attimes significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-yearreview of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determinedto be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the Britishpound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. Withthe development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalisation, the PRC government may inthe future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in valueagainst the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMBand the U.S. dollar in the future. To the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations,appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if wedecide to convert the Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or ADSs or for other business purposes,appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us. 136 Interest Rate Risk Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits.Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changesin market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates. A hypothetical one percentagepoint decrease in interest rates would have resulted in a decrease of approximately US$4.7 million in our interest income for the year ended December 31, 2016. ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES A. Debt Securities Not applicable. B. Warrants and Rights Not applicable. C. Other Securities Not applicable. D. American Depositary Shares Fees and Charges Our ADS holders May Have to Pay As an ADS holder, you will be required to pay the following service fees to the depositary bank: Service Fees● Issuance of ADSs, including issuances resulting from a distribution ofshares or rights or other property Up to $0.05 per ADS issued● Cancellation of ADSs, including the case of termination of the depositagreement Up to $0.05 per ADS cancelled● Distribution of cash dividends or other cash distributions Up to $0.05 per ADS held● Distribution of ADSs pursuant to share dividends, free share distributionsor exercise of rights Up to $0.05 per ADS held● Distribution of securities other than ADSs or rights to purchase additionalADSs A fee equivalent to the fee that would be payable if securities distributed toyou had been Class A common shares and the Class A common shares hadbeen deposited for issuance of ADSs● Depositary services Up to $0.05 per ADS held on the applicable record date(s) established by thedepositary bank● Transfer of ADSs $1.50 per certificate presented for transfer As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmentalcharges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs),such as: 137 ·Fees for the transfer and registration of Class A common shares charged by the registrar and transfer agent for the Class A common shares in theCayman Islands (i.e., upon deposit and withdrawal of Class A common shares). ·Expenses incurred for converting foreign currency into U.S. dollars. ·Expenses for cable, telex and fax transmissions and for delivery of securities. ·Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e., whenClass A common shares are deposited or withdrawn from deposit). ·Fees and expenses incurred in connection with the delivery or servicing of Class A common shares on deposit. ·Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable to Class Acommon shares, deposited securities, ADSs and ADRs. ·Any applicable fees and penalties thereon. The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of theirclients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank forcancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders andthe depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributable propertyto pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS record dateholders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), thedepositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositarybank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers andcustodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accountsthe amount of the fees paid to the depositary banks. In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service untilpayment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder. Fees and Other Payments Made by the Depositary to Us Deutsche Bank Trust Company Americas, as our depositary, has agreed to reimburse us for a portion of certain expenses we incur that are related toestablishment and maintenance of the ADS program, including investor relations expenses. There are limits on the amount of expenses for which the depositarywill reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects from investors. Further, thedepositary has agreed to reimburse us certain fees payable to the depositary by holders of ADSs. For the year ended December 31, 2016, we have received US$0.3million from the depositary as reimbursement for our expenses incurred in connection with the establishment and maintenance of our ADS program. 138 PART II ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged. The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-184414) for our initialpublic offering of 8,970,000 ADSs, representing 179,400,000 Class A common shares, which registration statement was declared effective by the SEC onNovember 20, 2012. We received net proceeds of US$82.8 million from our initial public offering. For the period from the effective date to December 31, 2016, we did not use a substantial portion of the net proceeds received from our initial publicoffering. ITEM 15.CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15(b) under the Exchange Act, our management, including our chief executive officer, and our chief financial officer, performedan evaluation of the effectiveness of our disclosure controls and procedures, as that term is defined in Rules 13a-15(e) of the Exchange Act, as of the end of theperiod covered by this annual report. Based on that evaluation, our management has concluded that our disclosure controls and procedures as of December 31,2016, were effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded,processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in thereports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chieffinancial officer, to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with Generally AcceptedAccounting Principles (GAAP) in the United States of America and includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of our company arebeing made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timelydetection of the unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the consolidated financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate. Our management conducted an evaluation of the effectiveness of our company’s internal control over financial reporting as of December 31, 2016 basedon the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basedon this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2016. 139 PricewaterhouseCoopers Zhong Tian LLP, our independent registered public accounting firm, audited the effectiveness of our company’s internal controlover financial reporting as of December 31, 2016, as stated in its report, which appears on page F-2 of this Form 20-F. Changes in Internal Control Over Financial Reporting As required by Rule 13a-15(d), under the Exchange Act, our management, including our chief executive officer and our chief financial officer, alsoconducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the period covered by this report havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, it has been determined thatthere has been no such change during the period covered by this annual report. ITEM 16.RESERVED ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Mr. Peter Andrew Schloss is our audit committee financial expert, who is an independent director under thestandards set forth in Nasdaq Stock Market Rule 5605(a)(2) and Rule 10A-3 of the Exchange Act. Mr. Schloss is the chairman of our audit committee. ITEM 16B.CODE OF ETHICS Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions thatspecifically apply to our chief executive officers, chief financial officer, chief operating officer, vice presidents and any other persons who perform similarfunctions for us. We filed our code of business conduct and ethics as Exhibit 99.1 to our registration statement on Form F-1, as amended, which was originallyfiled with the SEC on October 15, 2012 and subsequently amended and filed with this annual report. We have posted a copy of our code of business conduct andethics on our website at http://investors.yy.com/governance.cfm. ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the aggregate fees in connection with certain professional services rendered by PricewaterhouseCoopers Zhong Tian LLP,our independent registered public accounting firm, for the years indicated. We did not pay any other fees to our independent registered public accounting firmduring the periods other than those indicated below. For the Year Ended December 31, 2015 2016 (in RMB thousands) Audit fees (1) 10,551 10,523 Tax fees (2) 312 51 (1)“Audit fees” means the aggregate fees billed for professional services rendered by our independent registered public accounting firm for the annual audit andthe quarterly review of our consolidated financial statement. For 2015 and 2016, the audit refers to the audit of our annual consolidated financial statementsand our internal controls over financial reporting. (2)“Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for tax service. The policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers Zhong Tian LLP, includingaudit services, audit-related services, tax services and other services, other than those for de minimis services which are approved by the audit committee prior tothe completion of the audit. Our audit committee has approved all of our audit and non-audit fees for the year ended December 31, 2016. 140 ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS On March 5, 2015, our board of directors approved a share repurchase plan, or the 2015 Share Repurchase Plan. Under the terms of the 2015 ShareRepurchase Plan, we may repurchase up to US$100 million worth of its outstanding ADSs from time to time for a period not to exceed twelve (12) months. The2015 Share Repurchase Plan expired on March 5, 2016. On June 15, 2016, our board of directors approved another share repurchase plan, or the 2016 Share Repurchase Plan. Under the terms of the 2016 ShareRepurchase Plan, we may repurchase up to US$200 million worth of our outstanding shares (including shares represented by ADSs) and our convertible seniornotes due in 2019 from time to time for a period not to exceed twelve (12) months. Our 2016 Share Repurchase Plan will expire on June 15, 2017. For the year ended December 31, 2016, no share was repurchased by the Company. ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT Not applicable. ITEM 16G.CORPORATE GOVERNANCE As a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, NYSE rules permit aforeign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands,which is our home country, may differ significantly from the NYSE corporate governance listing standards. We relied on the exemption available to foreign private issuers to the requirement that each member of the compensation committee be an independentdirector. Currently, the chairman of our compensation committee, Mr. David Xueling Li, is not an independent director. If we continue to rely on this and otherexemptions available to foreign private issuers in the future, our shareholders may be afforded less protection than they otherwise would under the NYSE corporategovernance listing standards applicable to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our ADSs—We are a foreignprivate issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domesticpublic companies.” ITEM 16H.MINE SAFETY DISCLOSURE Not applicable. 141 PART III ITEM 17.FINANCIAL STATEMENTS We have elected to provide financial statements pursuant to Item 18. ITEM 18.FINANCIAL STATEMENTS The consolidated financial statements of YY Inc. are included at the end of this annual report. ITEM 19.EXHIBITS Exhibit Number Description of Document 1.1 Second Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference to Exhibit 3.2 to theregistration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October15, 2012) 1.2* Second Amended and Restated Memorandum and Articles of Association of the Registrant, as amended by way of a special resolution passed onNovember 28, 2016 2.1 Registrant’s Specimen American Depositary Receipt (incorporated herein by reference to Exhibit 4.1 to the registration statement on Form F-1, asamended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 2.2 Registrant’s Specimen Certificate for Common Shares (incorporated herein by reference to Exhibit 4.2 to the registration statement on Form F-1,as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 2.3 Form of Deposit Agreement, among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated herein byreference to Exhibit 4.3 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities andExchange Commission on October 15, 2012) 2.4 Investors’ Rights Agreement dated September 6, 2011 among the Registrant and other parties named therein (incorporated herein by reference toExhibit 4.4 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and ExchangeCommission on October 15, 2012) 2.6 Share Exchange Agreement dated September 6, 2011, relating to Duowan Entertainment Corporation (incorporated herein by reference to Exhibit4.6 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission onOctober 15, 2012) 4.1 2009 Employee Equity Incentive Scheme of the Registrant, as amended and restated. (incorporated herein by reference to Exhibit 10.1 to theregistration statement on Form F-1, as amended (File. No. 333-184414), initially filed with the Securities and Exchange Commission on October15, 2012) 4.2 2011 Share Incentive Plan and Amendment No. 1 to the 2011 Share Incentive Plan of the Registrant (incorporated herein by reference to Exhibit10.2 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission onOctober 15, 2012) 4.3 Form of Indemnification Agreement with the Registrant’s directors and officers (incorporated herein by reference to Exhibit 10.3 to theregistration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October15, 2012) 142 Exhibit Number Description of Document 4.4 Form of Employment Agreement between the Registrant and an executive officer of the Registrant (incorporated herein by reference to Exhibit10.4 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission onOctober 15, 2012) 4.5 English translation of Exclusive Business Cooperation Agreement dated August 12, 2008 between Huanju Shidai (formerly known as DuowanEntertainment Information Technology (Beijing) Co., Ltd.) and Guangzhou Huaduo (incorporated herein by reference to Exhibit 10.5 to theregistration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October15, 2012) 4.6 English translation of Supplementary Agreement dated November 10, 2011 to Exclusive Business Cooperation Agreement between Huanju Shidaiand Guangzhou Huaduo (incorporated herein by reference to Exhibit 10.6 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 4.7 English translation of Confirmation Letter dated November 10, 2011 to Exclusive Business Cooperation Agreement between Huanju Shidai andGuangzhou Huaduo (incorporated herein by reference to Exhibit 10.7 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 4.8 English translation of Exclusive Technology Support and Technology Services Agreement dated August 12, 2008 between Huanju Shidai andGuangzhou Huaduo (incorporated herein by reference to Exhibit 10.8 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 4.9 English translation of Supplementary Agreement dated November 10, 2011 to Exclusive Technology Support and Technology ServicesAgreement between Huanju Shidai and Guangzhou Huaduo (incorporated herein by reference to Exhibit 10.9 to the registration statement on FormF-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 4.10 English translation of Confirmation letter dated November 10, 2011 to Exclusive Technology Support and Technology Services Agreementbetween Huanju Shidai and Guangzhou Huaduo (incorporated herein by reference to Exhibit 10.10 to the registration statement on Form F-1, asamended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 4.11 English translation of Powers of Attorney dated September 16, 2011 issued to Huanju Shidai by each of the shareholders of Guangzhou Huaduo(incorporated herein by reference to Exhibit 10.11 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filedwith the Securities and Exchange Commission on October 15, 2012) 4.12 English translation of Exclusive Option Agreements dated September 16, 2011 among Huanju Shidai, Guangzhou Huaduo and each of theshareholders of Guangzhou Huaduo (incorporated herein by reference to Exhibit 10.12 to the registration statement on Form F-1, as amended (FileNo. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 4.13 English translation of Equity Interest Pledge Agreements dated September 16, 2011 between Huanju Shidai and each of the shareholders ofGuangzhou Huaduo (incorporated herein by reference to Exhibit 10.11 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 143 Exhibit Number Description of Document 4.14 English translation of Consent Letter dated November 10, 2011 issued by the shareholders of Guangzhou Huaduo (incorporated herein byreference to Exhibit 10.11 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities andExchange Commission on October 15, 2012) 4.15 English translation of Exclusive Business Cooperation Agreement dated December 3, 2009 between Huanju Shidai and Beijing Tuda (incorporatedherein by reference to Exhibit 10.15 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with theSecurities and Exchange Commission on October 15, 2012) 4.16 English translation of Supplementary Agreement dated November 10, 2011 to Exclusive Business Cooperation Agreement between Huanju Shidaiand Beijing Tuda (incorporated herein by reference to Exhibit 10.16 to the registration statement on Form F-1, as amended (File No. 333-184414),initially filed with the Securities and Exchange Commission on October 15, 2012) 4.17 English translation of Confirmation Letter dated November 10, 2011 to Exclusive Business Cooperation Agreement between Huanju Shidai andBeijing Tuda (incorporated herein by reference to Exhibit 10.17 to the registration statement on Form F-1, as amended (File No. 333-184414),initially filed with the Securities and Exchange Commission on October 15, 2012) 4.18 English translation of Exclusive Technology Support and Technology Services Agreement dated December 3, 2009 between Huanju Shidai andBeijing Tuda (incorporated herein by reference to Exhibit 10.18 to the registration statement on Form F-1, as amended (File No. 333-184414),initially filed with the Securities and Exchange Commission on October 15, 2012) 4.19 English translation of Supplementary Agreement dated November 10, 2011 to Exclusive Technology Support and Technology ServicesAgreement between Huanju Shidai and Beijing Tuda (incorporated herein by reference to Exhibit 10.19 to the registration statement on Form F-1,as amended (File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 4.20 English translation of Confirmation Letter dated November 10, 2011 to Exclusive Technology Support and Technology Services Agreementbetween Huanju Shidai and Beijing Tuda (incorporated herein by reference to Exhibit 10.20 to the registration statement on Form F-1, as amended(File No. 333-184414), initially filed with the Securities and Exchange Commission on October 15, 2012) 4.21 English translation of Powers of Attorney dated May 27, 2011 issued to Huanju Shidai by each of the shareholders of Beijing Tuda (incorporatedherein by reference to Exhibit 10.21 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with theSecurities and Exchange Commission on October 15, 2012) 4.22 English translation of Exclusive Option Agreements dated May 27, 2011 among Huanju Shidai, Beijing Tuda and each of the shareholders ofBeijing Tuda (incorporated herein by reference to Exhibit 10.22 to the registration statement on Form F-1, as amended (File No. 333-184414),initially filed with the Securities and Exchange Commission on October 15, 2012) 4.23 English translation of Equity Interest Pledge Agreements dated July 1, 2011 between Huanju Shidai and each of the shareholders of Beijing Tuda(incorporated herein by reference to Exhibit 10.23 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filedwith the Securities and Exchange Commission on October 15, 2012) 4.24 English translation of Consent Letter dated November 10, 2011 issued by the shareholders of Beijing Tuda (incorporated herein by reference toExhibit 10.24 to the registration statement on Form F-1, as amended (File No. 333-184414), initially filed with the Securities and ExchangeCommission on October 15, 2012) 144 Exhibit Number Description of Document 4.25 Indenture, dated March 24, 2014, constituting US$400 million 2.25% Convertible Senior Notes due 2019 (incorporated herein by reference toExhibit 4.25 from our annual report on Form 20-F (File No. 001-35729), filed with the Securities and Exchange Commission on April 21, 2015) 4.26 English summary of Panyu Land Purchase Agreement, dated August 7, 2014, by and among Guangzhou Huanju Shidai Information TechnologyCo., Ltd. and Guangzhou Panyu Information Technology Investment Development Co., Ltd. (incorporated herein by reference to Exhibit 4.25from our annual report on Form 20-F (File No. 001-35729), filed with the Securities and Exchange Commission on April 21, 2015) 4.27 English summary of Contract for State-owned Construction Land Use Rights Assignment, dated August 20, 2015, by and between GuangzhouLand Resources and Real Estate Administration Bureau and Guangzhou Huaduo (incorporated herein by reference to Exhibit 4.27 from our annualreport on Form 20-F (File No. 001-35729), filed with the Securities and Exchange Commission on April 28, 2016) 4.28 English translation of Exclusive Business Cooperation Agreement dated August 25, 2015 between Bilin online and Bilin Changxiang(incorporated herein by reference to Exhibit 4.28 from our annual report on Form 20-F (File No. 001-35729), filed with the Securities andExchange Commission on April 28, 2016) 4.29 English translation of Exclusive Option Agreement dated August 25, 2015 among David Xueling Li, Bilin Online and Bilin Changxiang(incorporated herein by reference to Exhibit 4.29 from our annual report on Form 20-F (File No. 001-35729), filed with the Securities andExchange Commission on April 28, 2016) 4.30 English translation of Exclusive Assets Purchase Agreement dated August 25, 2015 among David Xueling Li, Bilin Online and Bilin Changxiang(incorporated herein by reference to Exhibit 4.30 from our annual report on Form 20-F (File No. 001-35729), filed with the Securities andExchange Commission on April 28, 2016) 4.31 English translation of Equity Interest Pledge Agreement dated August 25, 2015 among David Xueling Li, Bilin Online and Bilin Changxiang(incorporated herein by reference to Exhibit 4.31 from our annual report on Form 20-F (File No. 001-35729), filed with the Securities andExchange Commission on April 28, 2016) 4.32 English translation of Power of Attorney dated August 25, 2015 issued to Bilin Changxiang by David Xueling Li (incorporated herein by referenceto Exhibit 4.32 from our annual report on Form 20-F (File No. 001-35729), filed with the Securities and Exchange Commission on April 28, 2016) 4.33 The loan agreement made on January 19, 2017 by the Company as the evidence for the Industrial and Commercial Bank of China (Thai) PublicCompany Limited (incorporated herein by reference to Exhibit (b) from our Amendment No. 1 to Schedule TO (File No. 005-87080), filed withthe Securities and Exchange Commission on March 13, 2017) 8.1* List of Principal Subsidiaries and Consolidated Affiliated Entities 11.1 Amended Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 11.1 to the annual report on Form20-F (File No. 001-35729) filed with the Securities and Exchange Commission on April 26, 2013) 12.1* Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 145 Exhibit Number Description of Document 12.2* Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 13.1** Certification by Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 13.2** Certification by Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 15.1* Consent of Conyers Dill & Pearman 15.2* Consent of Fangda Partners 15.3* Consent of Independent Registered Public Accounting Firm 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Labels Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document *Filed with this annual report on Form 20-F **Furnished with this annual report on Form 20-F 146 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned tosign this annual report on its behalf. Date: April 20, 2017 YY INC. By:/s/ Zhou Chen Name:Zhou Chen Title:Chief Executive Officer YY INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ContentsPage Report of Independent Registered Public Accounting FirmF-2 Consolidated Balance Sheets as of December 31, 2015 and 2016F-3 Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2014, 2015 and 2016F-5 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2014, 2015 and 2016F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2015 and 2016F-10 Notes to Consolidated Financial StatementsF-12 F - 1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of YY Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of changes inshareholders’ equity and of cash flows, present fairly, in all material respects, the financial position of YY Inc. (the “Company”) and its subsidiaries as ofDecember 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements,for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included inManagement’s Report on Internal Control over Financial Report appearing under Item 15 of the accompanying Form 20-F. Our responsibility is to expressopinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing therisk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits alsoincluded performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for ouropinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate. /s/ PricewaterhouseCoopers Zhong Tian LLPGuangzhou, the People’s Republic of China April 20, 2017 F - 2 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2016(All amounts in thousands, except share, ADS, per share and per ADS data) As of December 31, Notes 2015 2016 2016 RMB RMB US$ (Note2(e)) Assets Current assets Cash and cash equivalents 5 928,934 1,579,743 227,530 Short-term deposits 6 1,894,946 3,751,519 540,331 Restricted short-term deposits 7 389,221 - - Accounts receivable, net 8 132,353 169,571 24,423 Inventory 14,385 2,266 326 Amounts due from related parties 24 5,297 135,245 19,479 Prepayments and other current assets 9 147,823 224,732 32,369 Deferred tax assets 20 116,921 107,309 15,456 Total current assets 3,629,880 5,970,385 859,914 Non-current assets Deferred tax assets 20 3,363 10,502 1,513 Investments 10 567,557 918,602 132,306 Property and equipment, net 11 843,449 838,750 120,805 Land use right, net 12 - 1,872,394 269,681 Intangible assets, net 13 146,437 58,926 8,487 Goodwill 14 151,638 14,300 2,060 Other non-current assets 1,960,430 101,933 14,681 Total non-current assets 3,672,874 3,815,407 549,533 Total assets 7,302,754 9,785,792 1,409,447 Liabilities, mezzanine equity and shareholders’ equity Current liabilities Convertible bonds (including convertible bonds of the consolidated variableinterest entity without recourse to the Company of nil and nil as ofDecember 31, 2015 and 2016, respectively) (1) 17 - 2,768,469 398,742 Accounts payable (including accounts payable of the consolidated variableinterest entity without recourse to the Company of RMB108,500 andRMB117,917 as of December 31, 2015 and 2016, respectively) 129,819 137,107 19,748 Deferred revenue (including deferred revenue of the consolidated variableinterest entity without recourse to the Company of RMB385,300 andRMB429,883 as of December 31, 2015 and 2016, respectively) 15 385,300 430,683 62,031 Advances from customers (including advances from customers of theconsolidated variable interest entity without recourse to the Company ofRMB 45,189 and RMB56,108 as of December 31, 2015 and 2016,respectively) 55,086 56,152 8,088 Income taxes payable (including income taxes payable of the consolidatedvariable interest entity without recourse to the Company of RMB80,978 andRMB112,779 as of December 31, 2015 and 2016, respectively) 107,403 140,754 20,273 Accrued liabilities and other current liabilities (including accrued liabilities andother current liabilities of the consolidated variable interest entity withoutrecourse to the Company of RMB579,760 and RMB988,911 as ofDecember 31, 2015 and 2016, respectively) 16 681,889 1,066,038 153,541 Amounts due to related parties (including amounts due to related parties of theconsolidated variable interest entity without recourse to the Company ofRMB23,684 and RMB91,245 as of December 31, 2015 and 2016,respectively) 24 24,917 91,245 13,142 Total current liabilities 1,384,414 4,690,448 675,565 Non-current liabilities Convertible bonds (including convertible bonds of the consolidated variableinterest entity without recourse to the Company of nil and nil as ofDecember 31, 2015 and 2016, respectively) (2) 17 2,572,119 - - Deferred revenue(including deferred revenue of the consolidated variableinterest entity without recourse to the Company of RMB20,752 andRMB19,125 as of December 31, 2015 and 2016, respectively) 15 20,752 25,459 3,667 Deferred tax liabilities (including deferred tax liabilities of the consolidatedvariable interest entity without recourse to the Company of RMB12,592 andRMB4,777 as of December 31, 2015 and 2016, respectively) 20 16,817 8,058 1,161 Total non-current liabilities 2,609,688 33,517 4,828 Total liabilities 3,994,102 4,723,965 680,393 Commitments and contingencies 26 F - 3 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2016 (CONTINUED)(All amounts in thousands, except share, ADS, per share and per ADS data) As of December 31, Notes 2015 2016 2016 RMB RMB US$ (Note 2(e)) Mezzanine equity 61,833 9,272 1,335 Shareholders’ equity Class A common shares (US$0.00001 par value; 10,000,000,000 shares authorized,728,227,848 shares issued and outstanding as of December 31, 2015 and750,115,028 shares issued and outstanding as of December 31, 2016) 21 43 44 6 Class B common shares (US$0.00001 par value; 1,000,000,000 shares authorized,369,557,976 shares issued and outstanding as of December 31, 2015 and359,557,976 shares issued and outstanding as of December 31, 2016) 21 27 26 4 Additional paid-in capital 2,011,799 2,165,766 311,935 Statutory reserves 2(ff) 56,507 58,857 8,477 Retained earnings 1,207,168 2,728,736 393,020 Accumulated other comprehensive (loss)/income (36,385) 93,066 13,404 Total YY Inc.’s shareholders’ equity 3,239,159 5,046,495 726,846 Non-controlling interests 7,660 6,060 873 Total shareholders’ equity 3,246,819 5,052,555 727,719 Total liabilities, mezzanine equity and shareholders’ equity 7,302,754 9,785,792 1,409,447 (1) Convertible bonds classified in current liabilities represent Convertible Senior Notes which may be redeemed within one year. (2) Effectively January 2016, ASU 2015-3 issued by FASB requires entities to present the issuance costs of bonds in the balance sheet as a direct deduction fromthe related bonds rather than assets. Accordingly, the Company retrospectively reclassified RMB25.3 million of issuance cost of bonds from other non-currentassets into convertible bonds as of December 31, 2015. The accompanying notes are an integral part of these consolidated financial statements. F - 4 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014, 2015AND 2016(All amounts in thousands, except share, ADS, per share and per ADS data) For the year ended December 31, Note 2014 2015 2016 2016 RMB RMB RMB US$ (Note2(e)) Net revenues (1) Live streaming 2,475,379 4,539,857 7,027,227 1,012,131 Online games 811,699 771,882 634,325 91,362 Membership 205,199 291,310 284,860 41,028 Others 186,091 294,200 257,638 37,108 Total net revenues 3,678,368 5,897,249 8,204,050 1,181,629 Cost of revenues (2) 18 (1,849,149) (3,579,744) (5,103,430) (735,047) Gross profit 1,829,219 2,317,505 3,100,620 446,582 Operating expenses (2) Research and development expenses (431,188) (548,799) (675,230) (97,253)Sales and marketing expenses (102,527) (312,870) (387,268) (55,778)General and administrative expenses (223,019) (358,474) (482,437) (69,485)Goodwill impairment 14 - (310,124) (17,665) (2,544)Fair value change of contingent consideration 14 - 292,471 - - Total operating expenses (756,734) (1,237,796) (1,562,600) (225,060)Gain on deconsolidation and disposal of subsidiaries - - 103,960 14,973 Other income 19 6,319 82,300 129,504 18,652 Operating income 1,078,804 1,162,009 1,771,484 255,147 Gain on partial disposal of associates 999 - 25,061 3,610 Interest expense (56,607) (97,125) (81,085) (11,679)Interest income 164,969 137,892 67,193 9,678 Foreign currency exchange (losses) / gains, net (10,399) (38,099) 1,158 167 Other non-operating income / (expenses) 36,714 (2,165) - - Income before income tax expenses 1,214,480 1,162,512 1,783,811 256,923 Income tax expenses 20 (154,283) (178,327) (280,514) (40,402) Income before share of income in equity methodinvestments, net of income taxes 1,060,197 984,185 1,503,297 216,521 Share of income in equity method investments, net of incometaxes 4,275 14,120 8,279 1,192 Net income 1,064,472 998,305 1,511,576 217,713 Less: Net loss attributable to the non-controlling interestshareholders and the mezzanine classified non-controllinginterest shareholders - (34,938) (12,342) (1,778) Net income attributable to YY Inc. 1,064,472 1,033,243 1,523,918 219,491 Other comprehensive income / (loss): Unrealized gain of available-for-sale securities, net of niltax - - 134,768 19,411 Foreign currency translation adjustments, net of nil tax 3,638 4,414 (5,317) (766) Comprehensive income attributable to YY Inc. 1,068,110 1,037,657 1,653,369 238,136 F - 5 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014, 2015AND 2016 (CONTINUED)(All amounts in thousands, except share, ADS, per share and per ADS data) For the year ended December 31, Note 2014 2015 2016 2016 RMB RMB RMB US$ (Note2(e)) Net income per ADS* —Basic 23 18.46 18.37 27.04 3.89 —Diluted 23 17.76 17.96 26.40 3.80 Weighted average number of ADS used in calculating netincome per ADS —Basic 23 57,657,035 56,259,499 56,367,166 56,367,166 —Diluted 23 59,927,174 57,541,558 60,805,566 60,805,566 Net income per common share* —Basic 23 0.92 0.92 1.35 0.19 —Diluted 23 0.89 0.90 1.32 0.19 Weighted average number of common shares used incalculating net income per common share —Basic 23 1,153,140,699 1,125,189,978 1,127,343,312 1,127,343,312 —Diluted 23 1,198,543,473 1,150,831,163 1,216,111,329 1,216,111,329 *Each ADS represents 20 Class A common shares. (1)For the year ended December 31, 2016, revenue presentation has been changed to live streaming, online games, membership and others, and the revenuepresentation for the year ended December 31, 2015 and 2014 has also been retrospectively changed. (2)Share-based compensation was allocated in cost of revenues and operating expenses as follows: For the year ended December 31, Note 2014 2015 2016 2016 RMB RMB RMB US$ (Note2(e)) Cost of revenues 18,037 23,963 15,894 2,289 Research and development expenses 54,141 70,951 78,816 11,352 Sales and marketing expenses 2,807 3,283 3,107 448 General and administrative expenses 59,647 87,175 59,469 8,565 The accompanying notes are an integral part of these consolidated financial statements. F - 6 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016(All amounts in thousands, except share, ADS, per share and per ADS data) Class A common shares Class B Common shares Additional (Accumulated deficits) Accumulated other Total Notes Number of shares Amount Number of shares Amount paid-in capital Statutory reserves / Retained Earnings comprehensive loss shareholders’ equity RMB RMB RMB RMB RMB RMB RMB Balance as of December 31, 2013 622,658,738 38 485,831,386 34 2,765,614 40,657 (874,697) (44,437) 1,887,209 Issuance of common shares forexercised share options 21 5,841,660 - - - 213 - - - 213 Issuance of common shares forvested restricted shares andrestricted share units 21 19,194,480 1 - - (1) - - - - Class B common shares converted toClass A common shares 21 58,478,690 4 (58,478,690) (4) - - - - - Share based compensation- restrictedshares 22 - - - - 3,771 - - - 3,771 Share based compensation- restrictedshare units 22 - - - - 130,718 - - - 130,718 Share based compensation - restrictedshares to the founder of asubsidiary of a variable interestentity 22 - - - - 143 - - - 143 Appropriation to statutory reserves 2(ff) - - - - - 15,812 (15,812) - - Components of comprehensiveincome Net income - - - - - - 1,064,472 - 1,064,472 Foreign currency translationadjustment, net of nil tax - - - - - - - 3,638 3,638 Balance as of December 31, 2014 706,173,568 43 427,352,696 30 2,900,458 56,469 173,963 (40,799) 3,090,164 F - 7 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016(CONTINUED)(All amounts in thousands, except share, ADS, per share and per ADS data) Class Acommon shares Class BCommon shares Additional Accumulated other Total Notes Number of shares Amount Number of shares Amount paid-in capital Statutoryreserves Retainedearnings comprehensive loss Total YY Inc.’s shareholders’ equity Non-controlling interests shareholders’ equity RMB RMB RMB RMB RMB RMB RMB RMB RMB Balance as ofDecember 31,2014 706,173,568 43 427,352,696 30 2,900,458 56,469 173,963 (40,799) 3,090,164 - 3,090,164 Issuance ofcommon sharesfor exercisedshare options 21 6,611,970 - - - 245 - - - 245 - 245 Issuance ofcommon sharesfor vestedrestricted sharesand restrictedshare units 21 19,498,710 1 - - (1) - - - - - - Class B commonshares convertedto Class Acommon shares 21 57,794,720 3 (57,794,720) (3) - - - - - - - Repurchase ofClass A commonshares 21 (61,851,120) (4) - - (1,041,682) - - - (1,041,686) - (1,041,686)Share basedcompensation-restricted shareunits 22 - - - - 152,205 - - - 152,205 - 152,205 Share basedcompensation -restricted sharesto the founder ofa subsidiary of avariable interestentity 22 - - - - 574 - - - 574 - 574 Appropriation tostatutoryreserves 2(ff) - - - - - 38 (38) - - - - Set-up subsidiarieswith non-controllinginterestshareholders - - - - - - - - - 7,798 7,798 Components ofcomprehensiveincome Net income /(loss)attributableto YY Inc.and non-controllinginterestshareholders - - - - - - 1,033,243 - 1,033,243 (138) 1,033,105 Foreigncurrencytranslationadjustment,net of nil tax - - - - - - - 4,414 4,414 - 4,414 Balance as ofDecember 31,2015 728,227,848 43 369,557,976 27 2,011,799 56,507 1,207,168 (36,385) 3,239,159 7,660 3,246,819 F - 8 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016(CONTINUED)(All amounts in thousands, except share, ADS, per share and per ADS data) Class A common shares Class B Common shares Additional Accumulated other Total Notes Number of shares Amount Number of shares Amount paid-in capital Statutory reserves Retained earnings comprehensive (loss)/income Total YY Inc.’s shareholders’ equity Non-controlling interests shareholders’ equity RMB RMB RMB RMB RMB RMB RMB RMB RMB Balance as ofDecember 31,2015 728,227,848 43 369,557,976 27 2,011,799 56,507 1,207,168 (36,385) 3,239,159 7,660 3,246,819 Issuance ofcommon sharesfor exercisedshare options 21 234,720 - - - 9 - - - 9 - 9 Issuance ofcommon sharesfor vestedrestricted sharesand restrictedshare units 21 11,652,460 - - - - - - - - - - Class B commonshares convertedto Class Acommon shares 21 10,000,000 1 (10,000,000) (1) - - - - - - - Deemed disposalof partial interestin a subsidiaryarising fromconversion ofliability - - - - 5,718 - - - 5,718 - 5,718 Share basedcompensation-restricted shareunits 22 - - - - 143,350 - - - 143,350 - 143,350 Share basedcompensation -restricted sharesto the founder ofa subsidiary of avariable interestentity 22 - - - - 572 - - - 572 - 572 Other change inequity in anequityinvestment 4,800 4,800 4,800 Partial disposal ofan equityinvestment - - - - (482) - - - (482) - (482)Appropriation tostatutoryreserves 2(ff) - - - - - 2,350 (2,350) - - - - Set-up ofsubsidiaries withnon-controllinginterestshareholders - - - - - - - - - 6,500 6,500 Acquisition ofsubsidiaries withnon-controllinginterestshareholders - - - - - - - - - 291 291 Capital injection insubsidiariesfrom non-controllinginterestshareholders - - - - - - - - - 4,142 4,142 Components ofcomprehensiveincome - - - - - - - - - - - Net income /(loss)attributableto YY Inc.and non-controllinginterestshareholders - - - - - - 1,523,918 - 1,523,918 (12,533) 1,511,385 Unrealizedgain ofavailable-for-salessecurities - - - - - - - 134,768 134,768 - 134,768 Foreigncurrencytranslationadjustment,net of nil tax - - - - - - - (5,317) (5,317) - (5,317) Balance as ofDecember 31,2016 750,115,028 44 359,557,976 26 2,165,766 58,857 2,728,736 93,066 5,046,495 6,060 5,052,555 The accompanying notes are an integral part of these consolidated financial statements. F - 9 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016(All amounts in thousands) For the year ended December 31, Note 2014 2015 2016 2016 RMB RMB RMB US$ (Note2(e)) Cash flows from operating activities Net income 1,064,472 998,305 1,511,576 217,713 Adjustments to reconcile net income to net cash provided byoperating activities Depreciation of property and equipment 11 68,035 122,098 173,625 25,007 Amortization of acquired intangible assets and land useright 12,13 12,598 64,201 100,892 14,531 Allowance for doubtful accounts 28,120 4,167 45,914 6,613 Loss on disposal of property and equipment 61 3,759 891 128 Impairment of investments 10 4,000 6,000 80,104 11,537 Impairment of intangible assets 13 5,697 57,199 3,828 551 Impairment of goodwill 14 - 310,124 17,665 2,544 Fair value change of contingent consideration 14 - (292,471) - - Share based compensation 22 134,632 185,372 157,286 22,654 Share of income in equity method investments, net ofincome taxes (4,275) (14,120) (8,279) (1,192)Gain on partial disposal of associates (999) - (25,061) (3,610)Gain on deconsolidation and disposal of subsidiaries 4 - - (103,960) (14,973)Deferred income taxes, net 20 (45,751) (25,039) (7,768) (1,119)Foreign currency exchange (gains) / losses, net 10,399 38,099 (1,158) (167)Other non-operating (income) /expense (36,714) 2,165 - - Changes in operating assets and liabilities, net of businessacquisition and disposal of subsidiaries Accounts receivable, net (183,527) 123,634 (34,293) (4,939)Prepayments and other assets (90,924) 45,128 (97,888) (14,099)Amounts due from related parties - (1,323) 1,839 265 Inventory - (11,080) 680 98 Amounts due to related parties 28,252 (13,743) 66,328 9,553 Accounts payable 23,166 (22,654) 36,888 5,313 Deferred revenue 54,343 25,519 81,513 11,740 Advances from customers 14,578 20,959 10,783 1,553 Income taxes payable 11,054 18,242 33,351 4,804 Accrued liabilities and other current liabilities 204,134 178,901 376,379 54,210 Net cash provided by operating activities 1,301,351 1,823,442 2,421,135 348,715 Cash flows from investing activities Placements of short-term deposits (5,343,934) (1,869,789) (8,027,325) (1,156,175)Maturities of short-term deposits 2,550,059 4,257,609 6,324,897 910,975 Placements of restricted short-term deposits (155,000) (1,492,799) - - Maturities of restricted short-term deposits 55,000 522,981 389,221 56,059 Purchase of property and equipment (178,470) (219,843) (162,395) (23,390)Purchase of intangible assets and land use right (21,757) (50,931) (70,029) (10,086)Purchase of other non-current assets (510,341) (1,926,224) (5,403) (778)Cash paid for equity investments 10 (15,000) (500) (107,010) (15,413)Cash paid for cost investments 10 (73,402) (351,800) (90,234) (12,996)Acquisition of an available-for-sale security 10 - (6,117) - - Cash received from disposal of investments 1,563 - 22,608 3,256 Cash dividend received from an equity investee - 2,400 6,720 968 Acquisition of businesses, net of cash and cash equivalentsacquired (170,950) 5,553 (1,946) (280)Deconsolidation and disposal of subsidiaries, net of cashdisposed - - (5,370) (773)Payment on behalf of related parties, net of repayment (1) 24 (61,000) 60,870 (10,699) (1,541)Loans to related parties 24 (1,500) (159,000) (44,500) (6,409)Repayment of loans from related parties 24 1,500 160,000 - - Loans to employees and third parties (35,512) (6,037) (6,605) (951)Repayment of loans from employees and third parties 4,531 13,237 4,751 684 Proceeds from disposal of property and equipment 158 12,368 181 26 Net cash used in investing activities (3,954,055) (1,048,022) (1,783,138) (256,824) F - 10 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016 (CONTINUED)(All amounts in thousands) For the year ended December 31, Note 2014 2015 2016 2016 RMB RMB RMB US$ (Note2(e)) Cash flows from financing activities Proceeds from exercise of vested share options 213 245 9 1 Repurchase of common shares 21 - (1,041,686) - - Capital contributions from the non-controlling interests - 7,798 10,642 1,533 Proceeds from bank borrowings - 1,148,500 - - Repayment of bank borrowings - (452,000) - - Proceeds from issuance of convertible bonds, net of issuance costs 17 2,402,549 - - - Net cash provided / (used in) by financing activities 2,402,762 (337,143) 10,651 1,534 Net (decrease) / increase in cash and cash equivalents (249,942) 438,277 648,648 93,425 Cash and cash equivalents at the beginning of the year 729,598 475,028 928,934 133,794 Effect of exchange rate changes on cash and cash equivalents (4,628) 15,629 2,161 311 Cash and cash equivalents at the end of the year 475,028 928,934 1,579,743 227,530 For the year ended December 31, Note 2014 2015 2016 2016 RMB RMB RMB US$ (Note2(e)) Supplemental disclosure of cash flows information: —Cash paid for interest, net of amounts capitalized (28,769) (78,186) (59,884) (8,625)—Acquisition of property and equipment in form of accounts payable 25,514 66,673 37,649 5,423 —Income taxes paid (188,979) (185,124) (254,931) (36,718) (1)For the year ended December 31, 2016, payment on behalf of related parties has been changed to be presented net of repayment. The presentation for the yearended December 31, 2015 and 2014 has also been changed to be consistent with the presentation for 2016. The accompanying notes are an integral part of these consolidated financial statements. F - 11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 1.Organization and principal activities(a)Principal activities YY Inc. (the "Company"), through its subsidiaries, its variable interest entities ("VIEs", also refer to VIEs and their subsidiaries as a whole, where appropriate)(collectively, the "Group") is principally engaged in operating a live streaming platform in the People's Republic of China (the "PRC" or "China") through itsplatform, YY Client and through its websites YY.com, Huya.com, Zhiniu8.com, Duowan.com, and 100.com.(b)Reorganization The Company was incorporated in the Cayman Islands on July 22, 2011. The Group began its operations in the PRC in April 2005 through its PRC domestic company, Guangzhou Huaduo Network Technology Co., Ltd.(“Guangzhou Huaduo”). Guangzhou Huaduo holds the licenses and approvals to operate internet-related businesses in the PRC. For the period between July 2006 and April 2007, the Group undertook a reorganization (the “First Reorganization”) and established Duowan Limited(“Duowan Limited”), an investment holding company under the laws of the British Virgin Islands (the “BVI”), Duowan (Hong Kong) Limited (“Duowan(Hong Kong)”), a Hong Kong incorporated company wholly owned by Duowan Limited, and Guangzhou Duowan Information Technology Co., Ltd.(“Guangzhou Duowan”), a wholly-owned foreign enterprise (“WOFE”) in the PRC owned by Duowan (Hong Kong) (collectively “Duowan Limited GroupStructure”). The First Reorganization was necessary to comply with PRC laws and regulations which prohibit or restrict foreign ownership of companies thatprovide internet content services in the PRC where licenses are required. By entering into a series of agreements among Guangzhou Huaduo, founders of Guangzhou Huaduo and Guangzhou Duowan (collectively, “First VIEagreements”), Guangzhou Huaduo became a VIE of Guangzhou Duowan. Guangzhou Duowan became the primary beneficiary of Guangzhou Huaduo. In November 2007, Duowan Entertainment Corporation (“Duowan BVI”) was incorporated in the BVI. In March 2008, Duowan BVI established DuowanEntertainment Information Technology (Beijing) Co., Ltd. (“Duowan Entertainment”), as a WOFE in the PRC and a wholly-owned subsidiary of DuowanBVI. The Group undertook a second reorganization (the “Second Reorganization”) whereby the First VIE agreements among Guangzhou Huaduo, founders ofGuangzhou Huaduo and Guangzhou Duowan were terminated and a new series of VIE agreements (collectively, “Second VIE agreements”) were signedamong Guangzhou Huaduo, founders of Guangzhou Huaduo and Duowan Entertainment, through which Duowan Entertainment became the primarybeneficiary and exercised effective control over the operations of Guangzhou Huaduo. Duowan BVI became the then holding company of the Group. In August 2008, Duowan Entertainment purchased all the equity interests in Guangzhou Duowan from Duowan (Hong Kong). In December 2008, the Group undertook another reorganization (the “Third Reorganization”) and acquired all of the equity interests of NeoTasks Inc.(“NeoTasks”), a Cayman Islands company, together with its wholly-owned subsidiary, NeoTasks Limited, its WOFE, NeoTasks International MediaTechnology (Beijing) Co., Ltd. (“NeoTasks Beijing”), and its VIE, Beijing Tuda Science and Technology Co., Limited (“Beijing Tuda”). In July 2009, Guangzhou Duowan was renamed as Zhuhai Duowan Information Technology Co., Ltd. (“Zhuhai Duowan”). F - 12 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 1.Organization and principal activities (continued) (b)Reorganization (continued) In December 2009, another series of VIE agreements (collectively, “Third VIE agreements”) were entered into amongst the legal shareholders of Beijing Tudaand Duowan Entertainment and thus completing the Third Reorganization. Through the aforementioned activities, Beijing Tuda became a VIE, whose primarybeneficiary is Duowan Entertainment. In December 2010, Duowan BVI established Zhuhai Duowan Technology Co., Ltd. (“Zhuhai Duowan Technology”), which is directly 100% owned byDuowan BVI. On September 6, 2011, pursuant to a share swap agreement, all the then existing shareholders of Duowan BVI exchanged their respective shares, including theSeries A, Series B, Series C-1 and Series C-2 Preferred Shares, of Duowan BVI for equivalent classes of shares of the Company on a 1 for 1 basis (the “ShareSwap”). The Company became the holding company of the Group. In May 2012, Duowan Entertainment was renamed as Huanju Shidai Technology (Beijing) Co., Ltd. (“Beijing Huanju Shidai”). In September 2012, Zhuhai Duowan Technology was renamed as Guangzhou Huanju Shidai Information Technology Co., Ltd. (“Guangzhou Huanju Shidai”). The First Reorganization, the Second Reorganization, the Third Reorganization and the Share Swap were all reorganization of entities under common controland have been accounted for in a manner akin to a pooling of interest as if the Company, through its wholly owned subsidiaries, had been in existence andbeen the primary beneficiary of the VIEs throughout the periods presented in the consolidated financial statements. As a result of these arrangements, theCompany, through its wholly owned subsidiaries, is considered the primary beneficiary of two VIEs, Guangzhou Huaduo and Beijing Tuda, and accordingly,their results of operation and financial conditions are consolidated in the financial statements of the Group.(c)Initial Public Offering The Company completed its initial public offering (“IPO”) on November 21, 2012 on the NASDAQ Global Market and the underwriters subsequentlyexercised their over-allotment option on December 5, 2012. The Company issued and sold a total of 8,970,000 American Depositary Shares (“ADSs”) in thesetransactions, representing 179,400,000 Class A common shares. Each ADS represents twenty Class A common shares. The net proceeds received by theCompany, after deducting commissions and offering expenses, amounted to approximately US$82,055. Upon the completion of the IPO, all of the Company’s359,424,310 outstanding preferred shares and 548,408,914 outstanding common shares were converted into Class B common shares immediately as of thesame date. F - 13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 1.Organization and principal activities (continued) (d)Principal subsidiaries and VIEs The details of the principal subsidiaries and VIEs through which the Company conducts its business operations as of December 31, 2016 are set out below: Name Place of incorporation Date of incorporation or acquisition % of direct or indirect economic ownership Principal activities Principal subsidiaries Duowan Entertainment Corporation (“Duowan BVI”) BVI November 6, 2007 100% Investment holding Huanju Shidai Technology (Beijing) Co., Ltd. (“BeijingHuanju Shidai” or “Duowan Entertainment”) PRC March 19, 2008 100% Investment holding Zhuhai Duowan Information Technology Co., Ltd. (“ZhuhaiDuowan” or “Guangzhou Duowan”) PRC April 9, 2007 100% Online advertising and softwaredevelopment Guangzhou Huanju Shidai Information Technology Co., Ltd.(“Guangzhou Huanju Shidai”) PRC December 2, 2010 100% Software development Engage Capital Partners I, L.P. (“Engage L.P.”) Cayman Islands March 23, 2015 93.5% Investment Principal VIEs Guangzhou Huaduo Network Technology Co., Ltd.(“Guangzhou Huaduo”) PRC April 11, 2005 100% Holder of internet content providerlicenses and internet value addedservices Zhuhai Huanju Huyu Technology Co., Ltd. PRC May 4, 2015 100% Software development Shanghai Yilian Equity Investment Partnership(LP)(“Shanghai Yilian”) PRC June 23, 2015 93.5% Investment Guangzhou Huya Technology Co., Ltd. PRC August 10, 2016 100% Software development F - 14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 1.Organization and principal activities (continued) (e)Variable Interest Entities To comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provide internet-content, the Group conducts itsoperations primarily through its principal VIE Guangzhou Huaduo, which holds the internet value-added service license and approvals to provide such internetservices in the PRC. Beijing Huanju Shidai entered into a series of contractual agreements among Beijing Huanju Shidai, Guangzhou Huaduo and its legalshareholders. The Company’s relationships with Guangzhou Huaduo and its shareholders are governed by the following contractual arrangements: •Exclusive Technology Support and Technology Services Agreement Under the exclusive technology support and technology services agreement between Beijing Huanju Shidai and Guangzhou Huaduo, Beijing Huanju Shidaihas the exclusive right to provide to Guangzhou Huaduo technology support and technology services related to all technologies needed for its business.Beijing Huanju Shidai owns the exclusive intellectual property rights created as a result of the performance of this agreement. The service fee payable byGuangzhou Huaduo to Beijing Huanju Shidai is determined by various factors, including the expenses Beijing Huanju Shidai incurs for providing suchservices and Guangzhou Huaduo’s revenues. The term of this agreement will expire in 2028 and may be extended with Beijing Huanju Shidai’s writtenconfirmation prior to the expiration date. Beijing Huanju Shidai is entitled to terminate the agreement at any time by providing 30 days’ prior written notice toGuangzhou Huaduo. •Exclusive Business Cooperation Agreement Under the exclusive business cooperation agreement between Beijing Huanju Shidai and Guangzhou Huaduo, Beijing Huanju Shidai has the exclusive right toprovide to Guangzhou Huaduo technology support, business support and consulting services related to the services provided by Guangzhou Huaduo, the scopeof which is to be determined by Beijing Huanju Shidai from time to time. Beijing Huanju Shidai owns the exclusive intellectual property rights created as aresult of the performance of this agreement. The service fee payable by Guangzhou Huaduo to Beijing Huanju Shidai is a certain percentage of its earnings.The term of this agreement will expire in 2039 and may be extended with Beijing Huanju Shidai’s written confirmation prior to the expiration date. BeijingHuanju Shidai is entitled to terminate the agreement at any time by providing 30 days’ prior written notice to Guangzhou Huaduo. •Exclusive Option Agreement The parties to the exclusive option agreement are Beijing Huanju Shidai, Guangzhou Huaduo and each of the shareholders of Guangzhou Huaduo. Under theexclusive option agreement, each of the shareholders of Guangzhou Huaduo irrevocably granted Beijing Huanju Shidai or its designated representative(s) anexclusive option to purchase, to the extent permitted under PRC law, all or part of his or its equity interests in Guangzhou Huaduo. Beijing Huanju Shidai orits designated representative(s) have sole discretion as to when to exercise such options, either in part or in full. Without Beijing Huanju Shidai’s prior writtenconsent, Guangzhou Huaduo’s shareholders shall not sell, transfer, mortgage or otherwise dispose their equity interests in Guangzhou Huaduo. The term ofthis agreement is ten years and may be extended at Beijing Huanju Shidai’s sole discretion. F - 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 1.Organization and principal activities (continued) (e)Variable Interest Entities (continued) •Powers of Attorney Pursuant to the irrevocable power of attorney executed by each shareholder of Guangzhou Huaduo, each such shareholder appointed Beijing Huanju Shidai asits attorney-in-fact to exercise such shareholders’ rights in Guangzhou Huaduo, including, without limitation, the power to vote on its behalf on all matters ofGuangzhou Huaduo requiring shareholder approval under PRC laws and regulations and the articles of association of Guangzhou Huaduo. Each power ofattorney will remain in force until the shareholder ceases to hold any equity interest in Guangzhou Huaduo. •Share Pledge Agreement Pursuant to the share pledge agreement between Beijing Huanju Shidai and the shareholders of Guangzhou Huaduo, the shareholders of Guangzhou Huaduohave pledged all of their equity interests in Guangzhou Huaduo to Beijing Huanju Shidai to guarantee the performance by Guangzhou Huaduo and itsshareholders’ performance of their respective obligations under the exclusive business cooperation agreement, exclusive option agreement, exclusivetechnology support and technology services agreement and powers of attorney. If Guangzhou Huaduo and/or its shareholders breach their contractualobligations under those agreements, Beijing Huanju Shidai, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. Through the aforementioned contractual agreements, Guangzhou Huaduo is considered a VIE in accordance with Generally Accepted Accounting Principlesin the United States (“U.S. GAAP”) because the Company, through Beijing Huanju Shidai, has the ability to: •exercise effective control over Guangzhou Huaduo; •receive substantially all of the economic benefits and residual returns, and absorb substantially all the risks and expected losses from VIEs as if it weretheir sole shareholder; and •have an exclusive option to purchase all of the equity interests in the VIEs. In addition to the aforementioned contractual agreements between Beijing Huanju Shidai and Guangzhou Huaduo, Beijing Huanju Shidai also entered intosimilar contractual agreements with Beijing Tuda Science and Technology Co., Ltd. ("Beijing Tuda"). Beijing Bilin Changxiang Information Technology Co.,Ltd. (“Bilin Changxiang”), a subsidiary of the Company, also entered into similar contractual agreements with Beijing Bilin Online Information TechnologyCo., Ltd. ("Bilin Online"). Through these contractual agreements, Beijing Tuda and Bilin Online are considered VIEs of the Group. F - 16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 1.Organization and principal activities (continued) (e)Variable Interest Entities (continued) In accordance with the aforementioned agreements, the Company has power to direct activities of the VIEs, and can have assets transferred out of the VIEs.Therefore the Company considers that there is no asset in the VIEs that can be used only to settle obligations of the VIEs, except for registered capital andPRC statutory reserves of the VIEs amounting to RMB2,580,160 as of December 31, 2016. As the VIEs were incorporated as limited liability companiesunder the PRC Company Law, the creditors do not have recourse to the general credit of the Company for all the liabilities of the VIEs. Currently there is no contractual arrangement that could require the Company to provide additional financial support to the VIEs. As the Company isconducting its PRC internet value-added services business through the VIEs, the Company will, if needed, provide such support on a discretional basis in thefuture, which could expose the Company to a loss. There is no VIE where the Company has variable interest but is not the primary beneficiary. Please refer to Note 3(a) for the consolidated financial information of the Group’s VIEs as of December 31, 2016. 2.Principal accounting policies (a)Basis of presentation The consolidated financial statements have been prepared in accordance with the U.S. GAAP to reflect the financial position and results of operations of theGroup. (b)Consolidation The Group’s consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs for which the Company or itssubsidiary is the primary beneficiary. All transactions and balances among the Company, its subsidiaries and VIEs have been eliminated upon consolidation. A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting powers; or has the power to appoint or removethe majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial andoperating policies of the investee under a statute or agreement among the shareholders or equity holders. A VIE is an entity in which the Company, or its subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associatedwith ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity. In determining whether the Company or itssubsidiaries are the primary beneficiary, the Company considered whether it has the power to direct activities that are significant to the VIEs economicperformance, and also the Company’s obligation to absorb losses of the VIEs that could potentially be significant to the VIEs or the right to receive benefitsfrom the VIEs that could potentially be significant to the VIEs. Beijing Huanju Shidai, Bilin Changxiang and ultimately the Company hold all the variableinterests of the VIEs and has been determined to be the primary beneficiary of the VIEs. F - 17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (b)Consolidation (continued) The Company established two funds entities, namely Engage L.P. and Shanghai Yilian, (collectively, the “Funds”), in March and June 2015, respectively. TheCompany holds 93.5% of interests in the Funds. The Company assesses that the Company exercises controls and is entitled to the various returns of the Fundsand therefore the Funds have been accounted for as subsidiaries of and has been consolidated by the Company in accordance with ASC 810. The Company deconsolidates its subsidiaries in accordance with ASC 810 as of the date the Company ceased to have a controlling financial interest in thesubsidiaries. The Company accounts for the deconsolidation of its subsidiaries by recognizing a gain or loss in net income/loss attributable to the Company in accordancewith ASC 810. This gain or loss is measured at the date the subsidiaries are deconsolidated as the difference between (a) the aggregate of the fair value of anyconsideration received, the fair value of any retained non-controlling interest in the subsidiaries being deconsolidated, and the carrying amount of any non-controlling interest in the subsidiaries being deconsolidated, including any accumulated other comprehensive income/loss attributable to the non-controllinginterest, and (b) the carrying amount of the assets and liabilities of the subsidiaries being deconsolidated. (c)Use of estimates The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, mezzanine equity and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from such estimates. The Companybelieves that the user relationship period related to online games revenue, assessment of whether the Group acts as a principal or an agent in different revenuestreams, classification of perpetual items versus consumable items under item-based model, the determination of estimated selling prices of multiple elementrevenue contracts, income taxes, allowances for doubtful accounts, determination of share based compensation expenses, impairment assessment of goodwill,long-lived assets and intangible assets, tax considerations for earnings retained in the Group’s VIEs, fair value determination related to the accounting forbusiness combinations and subsequent measurement of contingent consideration following business combinations, assessment on the probability ofexercisability of the put option related to business combinations, assessment on the probability of performance condition affiliated in equity-classified awardunder ASC 718 that affect vesting, represent critical accounting policies that reflect more significant judgments and estimates used in the preparation of itsconsolidated financial statements. Management bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form thebasis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates. (d)Foreign currency translation The Group uses Renminbi (“RMB”) as its reporting currency. The functional currency of the Company and its subsidiaries incorporated in the CaymanIslands, British Virgin Islands, and Hong Kong is United States dollar (“US$”), while the functional currency of the other entities and VIEs in the Group isRMB, which is their respective local currency. In the consolidated financial statements, the financial information of the Company and its subsidiaries, whichuse US$ as their functional currency, have been translated into RMB. Assets and liabilities are translated at the exchange rates on the balance sheet date,equity amounts are translated at historical exchange rates, and revenues, expenses, gains, and losses are translated using the average exchange rate for theperiod. Translation adjustments arising from these are reported as foreign currency translation adjustments and are shown as a component of othercomprehensive income or loss in the statement of operations and comprehensive income. Foreign currency transactions denominated in currencies other than functional currency are translated into the functional currency using the exchange ratesprevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are remeasured at theapplicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting from the settlement of such transactions and fromremeasurement at year-end are recognized in foreign currency exchange gains/losses, net in the consolidated statement of operations. F - 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (e)Convenience translation Translations of amounts from RMB into US$ for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB 6.9430 onDecember 31, 2016 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could havebeen, or could be, converted into US$ at such rate. (f)Fair value of financial instruments U.S. GAAP establishes a three-tier hierarchy to prioritize the inputs used in the valuation methodologies in measuring the fair value of financial instruments.This hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Thethree-tier fair value hierarchy is: Level 1—observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2—other inputs that are directly or indirectly observable in the marketplace.Level 3—unobservable inputs which are supported by little or no market activity. The carrying values of cash and cash equivalents, short-term deposits, restricted short-term deposits, accounts receivable, other receivables, amounts due from(to) related parties, accounts payable, and other payables approximate their fair values because of their generally short maturities, and the carrying value ofconvertible bonds also approximates their fair value, as they bear interest at rates determined based on prevailing interest rates in the market. The fair value of the contingent consideration recognized on the acquisition date was measured using unobservable input (level 3). Trinomial Tree model wasapplied in determining the fair value of the contingent consideration. Under this model, the Group performs scenario analysis and calculates the fair value ofthe contingent consideration based on the net present value of the total contingent payments under each scenario and the expected probability of each scenario.Contingent consideration is remeasured at fair value at each reporting date since initial recognition. The Group recorded two of its investments as available-for-sale securities and subsequently measured at its fair value (Note 10). One of the available-for-salesecurities was classified within Level 1 and valued based on observable inputs that reflected quoted prices (unadjusted) for identical assets or liabilities inactive markets. The other one of the available-for-sale securities was classified within Level 3 and valued based on a model utilizing unobservable inputswhich required management judgment and estimation. There was no significant change in fair value of the investment classified within Level 3 from the initialinvestment date to December 31, 2016. (g)Cash and cash equivalents Cash includes currency on hand and deposits held by financial institutions that can be added to or withdrawn without limitation. Cash equivalents representshort-term and highly liquid investments placed with banks, which have both of the following characteristics: i)Readily convertible to known amounts of cash throughout the maturity period;ii)So near their maturity that they present insignificant risk of changes in value because of changes in interest rates. (h)Short-term deposits Short-term deposits represent time deposits placed with banks with original maturities of less than one year. Interest earned is recorded as interest income inthe consolidated statements of operations during the periods presented. F - 19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (i)Accounts receivable Accounts receivable are presented net of allowance for doubtful accounts. The Group uses specific identification in providing for bad debts when facts andcircumstances indicate that collection is doubtful and a loss is probable and estimable. If the financial conditions of its customers were to deteriorate, resultingin an impairment of their ability to make payments, additional allowance may be required. The Company maintains an allowance for doubtful accounts which reflects its best estimate of amounts that potentially will not be collected. The Companydetermines the allowance for doubtful accounts on an individual basis taking into consideration various factors including but not limited to historical collectionexperience and credit-worthiness of the debtors as well as the age of the individual receivables balance. Additionally, the Company makes specific bad debtprovisions based on any specific knowledge the Company has acquired that might indicate that an account is uncollectible. The facts and circumstances ofeach account may require the Company to use substantial judgment in assessing its collectability. (j)Equity investment The equity investment is comprised of investments in privately-held entities. The Group accounts for its equity investment over which it has significantinfluence but does not own a majority equity interest or otherwise control using the equity method. The Group adjusts the carrying amount of the investmentand recognizes investment income or loss for share of the earnings or loss of the investee after the date of investment. The Group assesses its equityinvestment for other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, operatingperformance of the entities, including current earnings trends and undiscounted cash flows, and other entity-specific information. The fair value determination,particularly for investment in privately-held entities, requires judgment to determine appropriate estimates and assumptions. Changes in these estimates andassumptions could affect the calculation of the fair value of the investment and determination of whether any identified impairment is other-than-temporary. (k)Cost investment The cost investment is comprised of investments in privately-held entities. The Group accounts for cost investment which has no readily determinable fairvalue using the cost method. Under the cost method, the investment is measured initially at cost. The investment carried at cost should recognize income whendividends are received from the distribution of the investee’s earnings. The Group periodically evaluates the carrying value of investments accounted for underthe cost method of accounting and any impairment is included in the consolidated statements of operations. (l)Available-for-sale investment The Group classifies its investments in debt and equity securities into one of three categories and accounts for these as follows: (i) debt securities that theGroup has the positive intent and the ability to hold to maturity are classified as “held to maturity” and reported at amortized cost; (ii) debt and equitysecurities that are bought and held principally for the purpose of selling them in the near term are classified as “trading securities” with unrealized holdinggains and losses included in earnings; (iii) debt and equity securities not classified as held to maturity or as trading securities are classified as “available-for-sale” and reported at fair value. The Group has designated its investments in redeemable preferred shares of one company and common shares of one listedcompany as available-for-sale securities in accordance with ASC 320 (Note 10). Unrealized gains and losses on available-for-sale securities are excluded fromearnings and reported as accumulated other comprehensive income/loss, net of tax. Realized gains or losses upon disposal are charged to earnings during theperiod in which the gains or losses are realized. An impairment loss on the available-for-sale securities is recognized in the consolidated statements ofoperations and comprehensive income when the decline in value is determined to be other-than-temporary. F - 20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (m)Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and impairment loss, if any. Depreciation is calculated using the straight-line method over their estimated useful lives. Residual rate is determined based on the economic value of the property and equipment at the end of theestimated useful lives as a percentage of the original cost. Estimated useful lives Residual rate Buildings 40 years 0%Servers, computers and equipment 3 years 0%-5%Leasehold improvements Shorter of lease term or 5 years 0%Decoration of buildings 10 years 0%Motor vehicles 4 years 5%Furniture, fixture and office equipment 5 years 0%-5% Expenditures for maintenance and repairs are expensed as incurred. The gain or loss on the disposal of property and equipment is the difference between thenet sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations. All direct and indirect costs that are related to the construction of property and equipment and incurred before the assets are ready for their intended use arecapitalized as construction in progress. Construction in progress is transferred to specific property and equipment items and depreciation of these assetscommences when they are ready for their intended use. (n)Business combinations Business combinations are recorded using the purchase method of accounting, and the cost of an acquisition is measured as the aggregate of the fair values atthe date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractualcontingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingentliabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests.The excess of (i) the total of consideration of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously heldequity interest in the subsidiary acquired over (ii) the fair value of the identifiable net assets of the subsidiary acquired is recorded as goodwill. If theconsideration of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidatedstatements of operations and comprehensive income. F - 21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (o)Intangible assets Intangible assets mainly consist of brand names, operating rights for licensed games, software, operating rights for game broadcasting, domain names andtechnology. Identifiable intangible assets are carried at acquisition cost less accumulated amortization and impairment loss, if any. Finite-lived intangibleassets are tested for impairment if impairment indicators arise. Amortization of finite-lived intangible assets is computed using the straight-line method overtheir estimated useful lives, which are as follows: Estimated useful lives Brand names1-15 yearsOperating rights for game broadcastingOver the contract termsOperating rights for licensed gamesShorter of the economic life or license period of relevant online gameSoftware3 -5 yearsDomain names15 yearsTechnology5 yearsOthers3-5 years (p)Land use right Land use right is carried at cost less accumulated amortization. Amortization of the land use right is made on straight-line basis over 40 years from the datewhen the Group first obtained the land use right certificate from the local authorities. (q)Impairment of long-lived assets For long-lived assets other than investments and goodwill whose impairment is discussed elsewhere in the financial statements, the Group evaluates forimpairment whenever events or changes (triggering events) indicate that the carrying amount of an asset may no longer be recoverable. The Group assessesthe recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected toreceive from use of the assets and their eventual disposition. Such assets are considered to be impaired if the sum of the expected undiscounted cash flows isless than the carrying amount of the assets. The impairment to be recognized is measured by the amount by which the carrying amount of the assets exceedsthe fair value of the assets. The Group tests impairment of long-lived assets at the reporting unit level when impairment indicator appeared and recognizesimpairment in the event that the carrying value exceeds the fair value of each reporting unit. The impairment charges of intangible assets recorded in general and administrative expenses for the years ended December 31, 2014, 2015 and 2016 wereamounting to RMB5,697, RMB57,199 and RMB3,828, respectively. (r)Goodwill Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of anacquired business. F - 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (s)Annual test for impairment of goodwill Goodwill assessment for impairment is performed on at least an annual basis on October 1 or whenever events or changes in circumstances indicate that thecarrying value of the asset may not be recoverable. The Group performs a two-step goodwill impairment test. The first step compares the fair values of eachreporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impairedand the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of theaffected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting fora business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess ofthe fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is onlyperformed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss isrecognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. The judgment in estimating the fair value of reportingunits includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptionscould materially affect the determination of the fair value of each reporting unit. (t)Convertible bonds The Group determines the appropriate accounting treatment of its convertible bonds in accordance with the terms in relation to the conversion feature, call andput options, and beneficial conversion feature. After considering the impact of such features, the Group may account for such instrument as a liability in itsentirety, or separate the instrument into debt and equity components following the respective guidance described under ASC 815 Derivatives and Hedging andASC 470 Debt. The debt discount, if any, together with related issuance cost are subsequently amortized as interest expense, using the effective interestmethod, from the issuance date to the earliest conversion date. Interest expenses are recognized in profit or loss in the period in which they are incurred. (u)Mezzanine equity and non-controlling interest Mezzanine equity Mezzanine equity consists of non-controlling interests in certain subsidiaries with put option pursuant to which the non-controlling shareholders had the rightto put their equity interests in certain subsidiaries to the Group at fair value if certain subsidiaries achieved specified performance milestones and met otherpre-determined conditions before the expiry of the put option. Since the occurrence of the put was not solely within the Group’s control, the Group classifiesthe non-controlling interests as mezzanine equity instead of permanent equity in the Group’s consolidated financial statements. In accordance with ASC subtopic 480-10, the Group calculated, on an accumulative basis from the acquisition date, (i) the amount of accretion that wouldincrease the balance of non-controlling interests to their estimated redemption value over the period from the date of acquisition to the earliest redemption dateof the non-controlling interests and (ii) the amount of net (loss) / profit attributable to non-controlling shareholders of certain subsidiaries based on theirownership percentage. The carrying value of the non-controlling interests as mezzanine equity was adjusted by an accumulative amount equal to the higher of(i) and (ii). Non-controlling interest Non-controlling interests are recognized to reflect the portion of the equity of majority-owned subsidiaries and VIEs which is not attributable, directly orindirectly, to the controlling shareholder. Currently, the non-controlling interests in the Group’s consolidated financial statements consist primarily of non-controlling interests for Engage L.P. and Shanghai Yilian. F - 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (v)Revenue recognition For the year ended December 31, 2016, revenue presentation has been changed to live streaming, online games, membership and others to better reflect theway the Company generates revenues. The revenue presentation for the year ended December 31, 2015 and 2014 are also retrospectively changed to beconsistent with the year ended December 31, 2016. For the years ended December 31, 2015 and 2014, revenues were originally presented as internet value-added service (“IVAS”) and other revenues. In the category of IVAS, there were four sub-categories: online music and entertainment, online games, onlinedating and other IVAS. In the new presentation, revenues from online music and entertainment, online dating and other IVAS (excluding revenues frommembership and a few minor revenue streams that do not meet the criteria of live streaming), which are under YY Live platform and Huya broadcastingplatform, are categorized as live streaming revenues. Revenues from online games and membership are presented separately. Other revenues and thoserevenues streams previously categorized in other IVAS that do not meet the criteria of live streaming are categorized as “others”. The change in revenuepresentation has no impact on the amount of total net revenues. The Group generates revenues from live streaming, online games, membership and others. Revenues from live streaming are generated from YY Liveplatform and Huya broadcasting platform. Revenues from online games are generated from providing online game platform and access of the games for thegame players. Membership subscription program enhanced user privileges when using YY Client. Other revenues mainly include online education revenueand advertising revenue. Online education services consist of vocational training and language training courses. Online advertising revenues are primarilygenerated from sales of different forms of advertising on the Group’s platforms. Revenue is recognized when persuasive evidence of an arrangement exists,service has been rendered, the price is fixed or determinable and collection is reasonably assured. The Group operates a virtual currency system, under which, the users can directly purchase virtual currency on live streaming channels or pay membershipsubscription fees via online payment systems provided by third parties including payments using mobile phone, internet debit/credit card payment and otherthird party payment systems. The virtual currency can be converted into game tokens that can be used to purchase virtual items on live streaming channels, orused to purchase virtual items in online games (both developed by third parties and self-developed), or used to pay membership subscription fees. Virtualcurrency sold but not yet consumed by the purchasers is recorded as “Advances from customers” and upon conversion or being used, is recognized as revenueaccording to the respective prescribed revenue recognition policies addressed below unless otherwise stated. (i) Live streaming Live streaming mainly consists of YY Live platform and Huya broadcasting platform. The Group creates and offers virtual items to be used by users on livestreaming channels, which the Group operates and maintains. The virtual items are offered free of charge or sold to users at different specified prices as pre-determined by the Company. Live streaming revenue consists of sales of virtual items. Users purchase consumable virtual items from the Group and presentthem to performers to show support for their favorite performers or time-based virtual items, which provide users with recognized status, such as priorityspeaking rights or special symbols on the channels for a specific period of time. In order to attract user traffic, the Group shares revenues with certain popularperformers and channel owners in accordance with the revenue sharing arrangements with the Group. The portion of the revenues shared with the performersand channel owners are accounted for as cost of revenues by the Group. Performers and channel owners, who do not have revenue sharing arrangements withthe Group, are not entitled to share any revenue derived from the virtual items sold. The Group does not recognize any revenue from offering free virtual itemsnor share any revenue with performers or channel owners when free virtual items are presented to performers by the users. Accordingly, live streamingrevenue is recognized for the sale of virtual items in live streaming channels immediately if the virtual item is a consumable or, in the case of time-basedvirtual items, recognized ratably over the period when the virtual item is made available to the user, which does not exceed one year. The Group does not havefurther obligations to the user after the virtual items are consumed. Virtual items may be sold individually or bundled into one arrangement. When the Group’susers purchase multiple virtual items bundled within the same arrangement, the Group evaluates such arrangements under ASC 605-25 Multiple-ElementArrangements. The Group identifies individual elements under the arrangement and determines if such elements meet the criteria to be accounted for asseparate units of accounting. The Group allocates the arrangement consideration to the separate units of accounting based on their relative selling price. F - 24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (v)Revenue recognition (continued) (i) Live streaming (continued) The following hierarchy has been followed when determining the relative selling price for each element: (1) vendor specific objective evidence (“VSOE”),(2) third party evidence (“TPE”), and (3) best estimate of selling price (“BESP”). Given that the VSOE of the selling price cannot be determined, the Grouphas adopted a policy to allocate the consideration of the whole arrangement to different virtual item elements based on the TPE of selling price or the BESPfor each virtual item element. The Group determines the fair values of virtual items sold in a bundle based on similar products sold separately on the YY Liveplatform and Huya broadcasting platform based on the TPE of the selling price and determines the fair values of virtual items without similar products soldseparately on the YY Live platform and Huya broadcasting platform based on the BESP. The BESP is generally based on the selling prices of the variouselements of a similar nature when they are sold to users on a stand-alone basis. The BESP may also be based on an estimated stand-alone pricing when theelement has not previously been sold on a stand-alone basis. These estimates are generally determined based on pricing strategies, market factors and strategic objectives. The Group recognizes revenue for each virtualitem element in accordance with the applicable revenue recognition method. (ii) Online games revenue The Group generates revenues from offering virtual items in online games developed by third parties or the Group itself to gaming players. Historically, themajority of online games revenues for the three years ended December 31, 2014, 2015 and 2016 were derived from third parties developed games. Users play games through the Group’s platform free of charge and are charged for purchases of virtual items including consumable and perpetual items, whichcan be utilized in the online games to enhance their game-playing experience. Consumable items represent virtual items that can be consumed by a specificuser within a specified period of time. Perpetual items represent virtual items that are accessible to the users’ account over the life of the online games. The Group recognizes revenue when recognition criteria defined under U.S. GAAP are satisfied. For purposes of determining when the service has beenprovided to the paying player, the Group has determined that an implied obligation exists to the paying player to continue providing access to the games suchthat the users can utilize the virtual items purchased. Game players need to log on and access the games through the Group’s platform because their gametokens, virtual items, and game history are specific to the Group’s game accounts and non-transferable to other platforms. To purchase in-game virtual items,players can either charge their game accounts by purchasing game tokens or virtual currency from the Group’s platform, which is convertible into game tokensbased on a predetermined exchange rate agreed among the Group and the relevant game developers. The proceeds from the sales of the Group’s virtual currency is recorded as “advances from customers”, representing prepayments received from users in theform of the Group’s virtual currency not yet converted into game specific tokens. Upon the conversion into a game token from the Group’s virtual currency orupon the direct purchase of a game token, whichever is applicable, the proceeds will be shared between the Group and the relevant game developer based on apredetermined contractual ratio. Game tokens are non-refundable and non-exchangeable among different games. The Group’s portion, net of the gamedeveloper’s entitled consideration, is recorded as deferred revenue and amortized according to the prescribed revenue recognition policies described below.Users typically do not convert the virtual currency into game tokens or purchase the game tokens unless they plan to purchase in-game virtual items soon. F - 25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (v)Revenue recognition (continued) (ii) Online games revenue (continued) There are two types of third party developed online games: -Non-exclusive third party developed games-Exclusive third party developed games Under the non-exclusive arrangement, game developers license the games to various platforms and the Group is only one of the platforms. Game developerswill receive only revenue shared from the Group pursuant to the mutually agreed sharing percentage. Under the exclusive arrangement, game developers only license the game to the Group as the exclusive licensee. The Group can sub-license the games to otherplatforms and receive a portion of revenue sharing from sub-licensees. In addition to the revenue shared to the game developers, the Group should also pay anexclusive license fee to the game developers. -Non-exclusive third party developed games Pursuant to contracts signed between the Group and the respective game developers, revenues from the sale or conversion of game tokens for the purchase ofin-game virtual items from online games developed by third parties are shared between the Group and the game developers based on a pre-agreed ratio foreach game. These revenue-sharing contracts typically last for one to two years. The third party developed games under non-exclusive licensing contracts are maintained and updated by the game developers. The Group views the gamedevelopers to be the Group’s customers and considers the Group’s responsibilities under the agreements with the game developers to offer certain standardpromotions that include providing access to the platform, announcing the new games to users on the platform, and occasional advertising on the Group’splatforms. The determination of whether to record these revenues using gross or net method is based on an assessment of various factors. The primary factorsare whether the Group is acting as the principal in offering services to the game players or as agent in the transaction, and the specific requirement of eachcontract. The Group determined that for third party developed games, the third party game developers are the principals given the game developers design anddevelop the online game services offered, have reasonable latitude to establish prices of game tokens, and are responsible for maintaining and upgrading thegame contents and virtual items. Accordingly, the Group records online games revenue, net of the pre-agreed portion of sharing of the revenues with the gamedevelopers. Given that third party developed games under non-exclusive licensing contracts are managed and administered by the third party game developers, the Groupdoes not have access to the data on the consumption details such as when the game token is spent on the virtual items or the types of virtual items (consumableor perpetual items) purchased by each individual game player. However, the Group maintains historical data on timing of the conversion of its virtual currencyinto game specific tokens and the amount of purchases of game tokens. The Group believes that its performance for, and obligation to, the game developerscorrespond to the game developers’ services to the users. The Group has adopted a policy to recognize revenues relating to game tokens for third partydeveloped games over the estimated user relationship period with the Group on a game-by-game basis, which is approximately one to six months for theperiods presented. Future usage patterns may differ from historical usage patterns and therefore the estimated user relationship period with the Group maychange in the future. F - 26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (v)Revenue recognition (continued) (ii) Online games revenue (continued) -Non-exclusive third party developed games (continued) When the Group launches a new game, it estimates the user relationship period based on other similar types of games in the market until the new gameestablishes its own history. The Group considers the game’s profile, attributes, target audience, and its appeal to players of different demographics groups inestimating the user relationship period. The estimated user relationship period is based on data collected from those users who have acquired game tokens. To estimate the user relationship period,the Group maintains a system that captures the following information for each user: (a) the frequency that users log into each game via the Group’s platform,and (b) the amount and the timing of when the users convert or charge his or her game tokens. The Group estimates the user relationship period for a particulargame to be the date a player purchases or converts from virtual currency to a game token through the date the Group estimates the user plays the game for thelast time. This computation is performed on a user by user basis. Then, the results for all analyzed users are averaged to determine an estimated end userrelationship period for each game. Revenues from in-game payments of each month are recognized over the user relationship period estimated for that game. The consideration of user relationship period with each online game is based on the Group’s best estimate that takes into account all known and relevantinformation at the time of assessment. The Group assesses the estimated user relationship period for each game on a quarterly basis. Any adjustments arisingfrom changes in the user relationship period as a result of new information will be accounted as a change in accounting estimate in accordance with ASC 250Accounting Changes and Error Corrections. -Exclusive third party developed games Under certain exclusive arrangements, the Group pays additional license fees to the game developers as the Group is entitled to an exclusive right to operatethird party developed games in specified geographic areas. Based on ASC 350, the Group has adopted an accounting policy to recognize the exclusive licensefee as an intangible asset upon the commercial launch of the related online games. This intangible asset is amortized on a straight-line basis over the shorter ofthe economic life or license period of the relevant online game. Pursuant to the exclusive licensing contracts signed between the Group and the third party game developers, the Group’s responsibilities in operating thelicensed games vary for each game. The determination of whether to record these revenues using gross or net method is based on an assessment of variousfactors, including but not limited to whether the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii)changes the product or performs part of the service, (iv) has involvement in the determination of product and service specifications. For the game license arrangements under which the Group takes primary responsibilities of game operation, including determining distribution and paymentchannels, providing customer services, hosting game servers, if needed, and controlling game and services specifications and pricing, the Group considereditself to be the principal in these arrangements. Accordingly, the Group records online games revenues from these third party licensed games on a gross basis.Commission fees paid to distribution channels and payment channels and content fees paid to third party game developers are recorded as cost of revenues. F - 27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (v)Revenue recognition (continued) (ii) Online games revenue (continued) -Exclusive third party developed games (continued) For the game license arrangements under which the Group’s responsibilities are limited to publishing, providing payment solutions and game operatingadvice, the Group views the game developers to be its customers and considers itself to be the agent in the arrangements. Accordingly, the Group recordsonline games revenues from these third party licensed games, net of fees paid to third parties upon the provision of service. Pursuant to the terms and conditions of certain online game exclusive license agreements entered into between game developers and the Group, the Group, asthe exclusive licensee, could sublicense a non-exclusive, non-transferable and limited license to any third party without the prior formal consent of gamedevelopers. Under the non-exclusive and non-transferable limited license, the sub-licensee cannot further license the game to other platforms. The Groupreceived monthly revenue-based royalty payments from all sub-licensees. The Group views the third-party sub-licensees operators as its customers andrecognizes revenues on a net basis, as the Group does not have the primary responsibility for fulfillment and acceptability of the game services. Similar to other online games, the exclusive third party developed games are free to play and players can pay for virtual items for better in-game experience.For exclusive third party games, the consumption details can be provided by third party developers or the Group has access to such data. Therefore, the Grouprecognizes revenues based on item-based model: (1) for consumable items, the revenue is recognized immediately upon consumption; (2) for perpetual items,the revenue is recognized ratably over the user relationship period of a specific game as described. The determination of user relationship period is the same aswhat is described in “ Non-exclusive third party developed games ” above. -Self-developed games Revenues derived from self-developed games are recorded on a gross basis as the Group acts as a principal to fulfill all obligations. Considering that revenuesderived from self-developed games were immaterial to the Group for the years presented, the Group does not maintain information on consumption details ofin-game virtual items, and only maintains limited information related to the frequency of log-ons for its self-developed games. Given that certain historicaldata is not available, the Group uses the user relationship period of third party games with similar popularity, gaming experience and sales to determine theestimated period of user relationship for its self-developed games. (iii) Membership The Group operates a membership subscription program where subscription members can have enhanced user privileges when using YY Client and livestreaming channels. The membership fee is collected up-front from subscribers. The receipt of the revenue is initially recorded as deferred revenue andrevenue is recognized ratably over the period of the subscription when services are rendered. Unrecognized portion beyond 12 months from balance sheet dateis classified as long-term deferred revenue. F - 28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (v)Revenue recognition (continued) (iv) Others Other revenues mainly include online education revenues and advertising revenues. (1) Online education revenues Educational programs and services consist of vocational training and language training courses. The course fee is generally paid in advance and is initiallyrecorded as deferred revenue. Revenue for regular courses is recognized proportionately as the classes are attended, and is reported net of scholarships andcourse fee refunds. Students are entitled to one trial class of the purchased course and course fee is fully refundable if a student decides not to take theremaining course after the trial class. No refund will be provided to a student who withdraws from a course after the trial period, and revenue is recognized forthe amount collected. Course fee refunds were insignificant over the period presented. In addition to regular courses, the Company also provides a package of several regular courses to students, which has individual fair value in the market.Pursuant to the applicable accounting guidance, the Company has accounted for these course packages as a multiple-element arrangement because eachindividual course qualifies as a single unit of accounting, and allocated the course fee from the course package to each individual course in the package basedon its relative fair value. The Company recognizes revenue equal to the fair value allocated to individual courses proportionately as the classes are attended. Students are granted a right to retake the courses at a substantial discount in the circumstances where the students fail to achieve certain score targets for somespecific courses. The discount arrangement has a stand-alone value and qualifies as a separate unit of accounting under U.S. GAAP. Therefore, the Companyhas accounted for those courses as a multiple-element arrangement and allocated a portion of the initial course fee to the substantial discount based on abreakage rate. The breakage rate is determined based on our historical data. The amount allocated to the substantial discount is deferred and recognized asrevenue upon the expiration of the retaking right, which is generally six months after the end of the initial course term. The Company also sells pre-paid cards primarily to distributors. Pre-paid card sales represent prepaid service fees received from students for online courses.The prepaid service fee is recorded as deferred revenue upon receiving the upfront cash payment. Revenue is recognised on a gross basis based on the sellingprice of the distributors to the students and is recognized over the period the online course is available to the students, which generally is from the enrolmentdate to the completion of the relevant professional examination date. F - 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (v)Revenue recognition (continued) (iv) Others (continued) (2) Advertising revenues The Group primarily generate advertising revenues from sales of various forms of advertising and provision of promotion campaigns on the live streamingplatforms by way of advertisement display or integrated promotion activities in shows and programs on the live streaming platforms. Advertisements on theGroup’s platforms are generally charged on the basis of duration, and advertising contracts are signed to establish the fixed price and the advertising servicesto be provided. Where collectability is reasonably assured, advertising revenues from advertising contracts are recognized ratably over the contract period ofdisplay. The Group enters into advertising contracts directly with advertisers or third party advertising agencies that represent advertisers. Contract terms generallyrange from 1 to 3 months. Both third party advertising agencies and direct advertisers are generally billed at the end of the display period and payments aredue usually within 6 months. Where customers purchase multiple advertising spaces with different display periods in the same contract, the Group allocates the total consideration to thevarious advertising elements based on the relative selling price method and recognizes revenue for the different elements over their respective display periods.The following hierarchy should be followed when determining the appropriate selling price for each element: (1) vendor specific objective evidence(“VSOE”), (2) third party evidence (“TPE”), and (3) best estimate of selling price (“BESP”). Given that the VSOE or TPE of the selling price cannot bedetermined, the Group has adopted a policy to allocate the fair values of different advertising elements based on the best estimate selling prices of eachadvertisement within the contract taking into consideration the standard price list and historical discounts granted. The Group recognizes revenue on theelements delivered and defers the recognition of revenue for the fair value of the undelivered elements until the remaining obligations have been satisfied.Where all of the elements within an arrangement are delivered uniformly over the agreement period, the revenues are recognized on a straight line basis overthe contract period. Transactions with third party advertising agencies For contracts entered into with third party advertising agencies, the third party advertising agencies will in turn sell the advertising services to advertisers.Revenue is recognized ratably over the contract period of display based on the following criteria: •There is persuasive evidence that an arrangement exists—the Group will enter into framework and execution agreements with the advertising agencies,specifying price, advertising content, format and timing. •Price is fixed or determinable—price charged to the advertising agencies are specified in the agreements, including relevant discount and rebate rates. •Services are rendered—the Group recognizes revenue ratably as the element are delivered over the contract period of display. •Collectability is reasonably assured—the Group assesses credit history of each advertising agency before entering into any framework and executionagreements. If the collectability from the agencies is assessed as not reasonably assured, the Group recognizes revenue only when the cash is received andall the other revenue criteria are met. The Group provides sales incentives in the forms of discounts and rebates to third party advertising agencies based on purchase volume. As the advertisingagencies are viewed as the customers in these transactions, revenue is recognized based on the price charged to the agencies, net of sales incentives providedto the agencies. Sales incentives are estimated and recorded at the time of revenue recognition based on the contracted rebate rates and estimated sales volumebased on historical experience. F - 30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (v)Revenue recognition (continued) (iv) Others (continued) (2) Advertising revenues (continued) Transactions with advertisers The Group also enters into advertisement contracts directly with advertisers. Similar to transactions with third party advertising agencies, the Grouprecognizes revenue ratably as the elements are delivered over the contract period of display. The terms and conditions, including price, are fixed according tothe contract between the Group and the advertisers. The Group also performs a credit assessment of all advertisers prior to entering into contracts. Revenue isrecognized based on the amount charged to the advertisers, net of discounts. (w)Advances from customers and deferred revenue Advances from customers primarily consist of prepayments from users in the form of the Group’s virtual currency that are not yet consumed or converted intogame tokens, and upon the consumption or conversion, are recognized as revenue according to the prescribed revenue recognition policies described above. Deferred revenue primarily consists of the unamortized game tokens, prepaid subscriptions under the membership program and unamortized revenue fromvirtual items in various channels in the Group’s platforms, where there is still an implied obligation to be provided by the Group, which will be recognized asrevenue when all of the revenue recognition criteria are met. (x)Cost of revenues Amounts recorded as cost of revenue relate to direct expenses incurred in order to generate revenue. Such costs are recorded as incurred. Cost of revenuesconsists primarily of (i) revenue sharing fees and content costs, including payments to various channel owners and performers, and content providers,(ii) bandwidth costs, (iii) salary and welfare, (iv) depreciation and amortization expense for servers, other equipment and intangibles directly related tooperating the platform, (v) payment handling cost, (vi) business taxes and surcharges, (vii) share based compensation, and (viii) other costs. In the PRC, business taxes were imposed by the government on revenues reported by any selling entity for the provision of taxable services in the PRC. Thebusiness tax rate varied depending on the nature of the revenues. The Group was also subject to cultural development fee at a tax rate of 3% on service incomefrom provision of advertising services in the PRC. Except for online games revenues, the Group’s live streaming revenues and membership revenues became subject to VAT from June 1, 2014, at a rate of 6%,while they were subject to business taxes at a rate of 3% prior to June 1, 2014. Other revenues of the Group, including online games revenues, are subject toVAT for all the periods presented. The Group is subject to surcharges of business taxes and VAT, which are calculated based on 12% of the business taxes and VAT paid for the years endedDecember 31, 2014, 2015 and 2016. F - 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (x)Cost of revenues (continued) The Group reported business taxes and surcharges, and cultural development fees in cost of revenues. Based on the Group’s corporate structure and the contractual arrangements among the Group’s PRC subsidiaries, the Group’s VIEs and their shareholders, theGroup is effectively subject to 6% or 17% VAT and related surcharges on revenues generated by the Group’s subsidiaries based on the Group’s contractualarrangements entered into with the Group’s VIEs. (y)Research and development expenses Research and development expenses consist primarily of (i) salary and welfare for research and development personnel, (ii) share based compensation forresearch and development personnel, (iii) rental expenses and (iv) depreciation of office premise and servers utilized by research and development personnel.Costs incurred during the research stage are expensed as incurred. Costs incurred in the development stage, prior to the establishment of technologicalfeasibility, which is when a working model is available, are expensed when incurred. The Company recognizes internal use software development costs in accordance with guidance on intangible assets and internal use software. This requirescapitalization of qualifying costs incurred during the software’s application development stage and to expense costs as they are incurred during the preliminaryproject and post implementation/operation stages. The Company has not capitalized any costs related to internal use software during the years endedDecember 31, 2014, 2015 and 2016, respectively. (z)Sales and marketing expenses Sales and marketing expenses consist primarily of (i) advertising and market promotion expenses, (ii) salary and welfare for sales and marketing personnel,and (iii) rental expenses. The advertising and market promotion expenses amounted to approximately RMB76,192, RMB253,210 and RMB298,681 during theyears ended December 31, 2014, 2015 and 2016, respectively. (aa)General and administrative expenses General and administrative expenses consist primarily of (i) salary and welfare for general and administrative personnel, (ii) share based compensation formanagement and administrative personnel, and (iii) impairment charges of intangible assets and other non-current assets. (bb)Employee social security and welfare benefits Employees of the Group in the PRC are entitled to staff welfare benefits including pension, work-related injury benefits, maternity insurance, medicalinsurance, unemployment benefit and housing fund plans through a PRC government-mandated multi-employer defined contribution plan. The Group isrequired to accrue for these benefits based on certain percentages of the employees’ salaries, up to a maximum amount specified by the local government. TheGroup is required to make contributions to the plans out of the amounts accrued. The PRC government is responsible for the medical benefits and the pensionliability to be paid to these employees and the Group’s obligations are limited to the amounts contributed and no legal obligation beyond the contributionsmade. Employee social security and welfare benefits included as expenses in the accompanying statements of operations amounted to RMB115,012,RMB171,349 and RMB206,704 for the years ended December 31, 2014, 2015 and 2016, respectively. F - 32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (cc)Share based compensation The Company grants stock-based award, such as, but not limited to, share options, restricted shares, and restricted share units to eligible employees, officers,directors, and non-employee consultants. Awards granted to employees, officers, and directors are initially accounted for as equity-classified awards. The related share based compensation expensesare measured at the grant date fair value of the award and are recognized using the graded vesting method, net of estimated forfeiture rates, over the requisiteservice period, which is generally the vesting period. Forfeitures are estimated at the time of grant based on historical forfeiture rates and will be revised in thesubsequent periods if actual forfeitures differ from those estimates. Duowan BVI also granted share options, restricted shares and restricted share units to non-employees, which are also initially accounted for as equity-classified awards. Awards granted to non-employees are initially measured at fair value on thegrant date and periodically re-measured thereafter until the earlier of the performance commitment date or the date the service is completed and recognizedover the period the service is provided. Awards are re-measured at each reporting date using the fair value as at each period end until the measurement date,generally when the services are completed and share based awards are vested. Changes in fair value between the interim reporting dates are recorded inconsistent with the method used in recognizing the original compensation costs. Following the listing of the Company, the grant date fair value of share based awards is based on stock price of the Company in the NASDAQ Global Market. For an award with a performance and/or service condition that affects vesting, the performance and/or service condition is not considered in determining theaward’s fair value on the grant date. Performance and service conditions should be considered when the Company is estimating the quantity of awards thatwill vest. Compensation cost will reflect the number of awards that are expected to vest and will be adjusted to reflect those awards that do ultimately vest.The Group recognizes compensation cost for awards with performance conditions if and when the Group concludes that it is probable that the performancecondition will be achieved, net of an estimate of pre-vesting forfeitures over the requisite service period. The Group reassesses the probability of vesting ateach reporting period for awards with performance conditions and adjusts compensation cost based on its probability assessment, unless on certain situations,the Group may not be able to determine that it is probable that a performance condition will be satisfied until the event occurs. (dd)Other income Other income primarily consists of government grants which represent cash subsidies received from the PRC government by the Group entities. Governmentgrants are originally recorded as deferred revenue when received upfront. After all of the conditions specified in the grants have been met, the grants arerecognized as operating income. F - 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (ee)Income taxes Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessableor deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes are accounted for using anasset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enactedstatutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates isrecognized in statement of operations and comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferredtax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized. Uncertain tax positions The guidance on accounting for uncertainties in income taxes prescribes a more likely than not threshold for financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition of income tax assets and liabilities, classificationof current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes ininterim periods, and income tax disclosures. Significant judgment is required in evaluating the Group’s uncertain tax positions and determining its provisionfor income taxes. The Group recognizes interests and penalties, if any, under accrued expenses and other current liabilities on its balance sheet and under otherexpenses in its statements of operations. The Group did not recognize any significant interest and penalties associated with uncertain tax positions for the yearsended December 31, 2014, 2015 and 2016. As of December 31, 2015 and 2016, the Group did not have any significant unrecognized uncertain tax positions. (ff)Statutory reserves The Group’s subsidiaries and VIEs established in the PRC are required to make appropriations to certain non-distributable reserve funds. In accordance with the laws applicable to China’s Foreign Investment Enterprises, the Group’s subsidiaries registered as wholly-owned foreign enterpriseshave to make appropriations from its after-tax profit (as determined under the Accounting Standards for Business Enterprises as promulgated by the Ministryof Finance of the People’s Republic of China (“PRC GAAP”)) to reserve funds including general reserve fund, and staff bonus and welfare fund. Theappropriation to the general reserve fund must be at least 10% of the after-tax profits calculated in accordance with PRC GAAP. Appropriation is not requiredif the reserve fund has reached 50% of the registered capital of the company. Appropriation to the staff bonus and welfare fund is at the company’s discretion. In addition, in accordance with the Company Laws of the PRC, the VIEs of the Company registered as PRC domestic companies must make appropriationsfrom its after-tax profit as determined under the PRC GAAP to non-distributable reserve funds including a statutory surplus fund and a discretionary surplusfund. The appropriation to the statutory surplus fund must be at least 10% of the after-tax profits as determined under the PRC GAAP. Appropriation is notrequired if the surplus fund has reached 50% of the registered capital of the company. Appropriation to the discretionary surplus fund is made at the discretionof the company. The use of the general reserve fund, statutory surplus fund and discretionary surplus fund are restricted to the off-setting of losses or increasing capital of therespective company. The staff bonus and welfare fund is a liability in nature and is restricted to fund payments of special bonus to staff and for the collectivewelfare of employees. All these reserves are not allowed to be transferred to the Company in terms of cash dividends, loans or advances, nor can they bedistributed except under liquidation. During the year ended December 31, 2014, 2015 and 2016, appropriations to general reserve fund and statutory surplus fund amounted to RMB15,812,RMB38 and RMB2,350, respectively. F - 34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (gg)Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the otherparty in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influence, suchas a family member or relative, shareholder, or a related corporation. (hh)Dividends Dividends are recognized when declared. No dividends were declared for the years ended December 31, 2014, 2015 and 2016, respectively. The Group doesnot have any present plan to pay any dividends on common shares in the foreseeable future. The Group currently intends to retain the available funds and anyfuture earnings to operate and expand its business. (ii)Income per share Basic income per share is computed on the basis of the weighted-average number of common shares outstanding during the period under measurement.Diluted income per share is based on the weighted-average number of common shares outstanding and potential common shares. Potential common sharesresult from the assumed exercise of outstanding share options, RSs and RSUs or other potentially dilutive equity instruments, when they are dilutive under thetreasury stock method or the if-converted method. (jj)Comprehensive income Comprehensive income is defined as the change in equity of the Company during a period arising from transactions and other events and circumstancesexcluding transactions resulting from investments by shareholders and distributions to shareholders. Comprehensive income is reported in the consolidatedstatements of operations and comprehensive income. Accumulated other comprehensive income/loss of the Group includes the unrealized gain of available-for-sale securities and the foreign currency translation adjustments. (kk)Segment reporting Operating segments are defined as components of an enterprise engaging in businesses activities for which separate financial information is available that isregularly evaluated by the Group’s chief operating decision makers (“CODM”) in deciding how to allocate resources and assess performance. The Group’schief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocatingresources and assessing performance of the Group. (ll)Recently issued accounting pronouncements In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606) which will replace requirements in U.S. GAAP. The coreprinciple of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount thatreflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will be effective for annualreporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard will be effective for the first quarterof 2018. The Company has set up a team and started the assessment of each revenue stream in accordance with the new revenue standard to determine theimpact to the consolidated financial statements, if any. F - 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (ll)Recently issued accounting pronouncements (continued) In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies thepresentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The amendments inthis update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annualperiods. Early adoption is permitted. Additionally, the new guidance may be applied either prospectively to all deferred tax liabilities and assets orretrospectively to all periods presented. The Company will apply this guidance retrospectively to all period presented. Following the adoption of this guidancein 2017, RMB107,309 of current deferred tax assets as of December 31, 2016 will be reclassified to non-current assets. In January 2016, the FASB issued ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Updatemake targeted improvements to generally accepted accounting principles (GAAP) as follows: 1) Require equity investments (except those accounted for underthe equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in netincome. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plusor minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. 2) Simplify theimpairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When aqualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclosethe fair value of financial instruments measured at amortized cost for entities that are not public business entities. 4) Eliminate the requirement for publicbusiness entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instrumentsmeasured at amortized cost on the balance sheet. 5) Require public business entities to use the exit price notion when measuring the fair value of financialinstruments for disclosure purposes. 6) Require an entity to present separately in other comprehensive income the portion of the total change in the fair valueof a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance withthe fair value option for financial instruments. 7) Require separate presentation of financial assets and financial liabilities by measurement category and formof financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 8) Clarify that anentity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s otherdeferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, includinginterim periods within those fiscal years. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements. In February 2016, the FASB issued ASU 2016-02: Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets andliabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements ofFinancial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did notrequire lease assets and lease liabilities to be recognized for most leases. For public business entities, the amendments in this Update are effective for fiscalyears beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of thestandard on its consolidated financial statements. In March 2016, the FASB issued ASU 2016-09 (“ASU 2016-09”): Compensation – Stock Compensation: Improvements to Employee Share-Based PaymentAccounting, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-basedpayment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on thestatement of cash flows; (d) accounting for forfeitures of share-based payments. This standard will be effective for fiscal years beginning after December 15,2016, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the standard on its consolidated financialstatements. F - 36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 2.Principal accounting policies (continued) (ll)Recently issued accounting pronouncements (continued) In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13: Financial Instruments-Credit Losses (Topic 326), which requires entities tomeasure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable andsupportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured atamortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early applicationwill be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in theprocess of evaluating the impact of the standard on its consolidated financial statements. In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15: Statement of Cash Flows – Classification of Certain Cash Receipts andCash Payments, which clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This guidance iseffective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption ispermitted. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements. In November 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. Theguidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described asrestricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included withcash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard iseffective for fiscal years beginning after December 15, 2017, and interim period within those fiscal years. Early adoption is permitted, including adoption in aninterim period. The standard should be applied using a retrospective transition method to each period presented. The Company is in the process of evaluatingthe impact of the standard on its consolidated financial statements. In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of aBusiness, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should beaccounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, includinginterim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively on or after the effective date. TheCompany is in the process of evaluating the impact of the standard on its consolidated financial statements. In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04: Simplifying the Test for Goodwill Impairment. The guidance removesStep 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which areporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basisfor the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwillimpairment tests performed on testing dates after January 1, 2017. The Company is in the process of evaluating the impact of the standard on its consolidatedfinancial statements. F - 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 3.Certain risks and concentration (a)PRC regulations Foreign ownership of internet-based businesses is subject to significant restrictions under the current PRC laws and regulations. The PRC governmentregulates internet access, the distribution of online information and the conduct of online commerce through strict business licensing requirements and othergovernment regulations. These laws and regulations also limit foreign ownership in PRC companies that provide internet information distribution services.Specifically, foreign ownership in an internet information provider or other value-added telecommunication service providers may not exceed 50%. Foreignersor foreign invested enterprises are currently not able to apply for the required licenses for operating online games in the PRC. The Company is incorporated inthe Cayman Islands and accordingly, the Company is considered as a foreign invested enterprise under PRC law. As mentioned in Note 1(e), in order to comply with the PRC laws restricting foreign ownership in the online business in China, the Group operates the onlinebusiness in China through contractual arrangements with its principal VIE, namely Guangzhou Huaduo. As of December 31, 2016, Beijing Tuda ownsmajority equity interests of Guangzhou Huaduo’s. Guangzhou Huaduo holds the licenses and permits necessary to conduct its internet value-added services and online advertising in the PRC. If the Companyhad direct ownership of the VIE, it would be able to exercise its rights as a shareholder to effect changes in the board of directors, which in turn could affectchanges at the management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements, it relies on the VIEand its shareholders’ performance of their contractual obligations to exercise effective control. In addition, the Group’s contractual agreements have termsrange from 10 to 30 years, which are subject to Beijing Huanju Shidai’s unilateral termination right. Under the respective service agreements, Beijing HuanjuShidai will provide services including technology support, technology services, business support and consulting services to Guangzhou Huaduo in exchangefor service fees. The amount of service fees payable is determined by various factors, including (a) a percentage of Guangzhou Huaduo’s revenues or earnings,and (b) the expenses that Beijing Huanju Shidai incurs for providing such services. Beijing Huanju Shidai may charge up to 100% of the income inGuangzhou Huaduo and a multiple of the expenses incurred for providing such services, as determined by Beijing Huanju Shidai from time to time. Theservice fees payable by Guangzhou Huaduo to Beijing Huanju Shidai are determined to be up to 100% of the profits of Guangzhou Huaduo, with the timing ofsuch payment to be determined at the sole discretion of Beijing Huanju Shidai. If fees were incurred, it would be significant to the Company and the operatingcompanies’ economic performance because it will be incurred and paid at up to 100% of the earnings of the VIE. Fees incurred would be remitted, subject tofurther PRC restrictions. None of the VIEs or their shareholders are entitled to terminate the contracts prior to the expiration date, unless under remotecircumstances such as a material breach of agreement or bankruptcy as it pertains to the service and business operation agreements and their amendment. Forthe years ended December 31, 2014, 2015 and 2016, Guangzhou Huanju Shidai and Beijing Huanju Shidai determined that service fees of RMB363,117 ,RMB274,285 and RMB305,792 were charged to Guangzhou Huaduo. The service fees are typically determined based on the costs and expenses that WOFEsincurs for providing relevant technology support to Guangzhou Huaduo, as well as the consideration of Guangzhou Huaduo’s future business developmentplan and its increasingly growing and diverse operational needs. As of December 31, 2016, Beijing Tuda and Bilin Online, as the Group’s VIEs, still have no substantial business operation. Therefore no service fees werecharged by Beijing Huanju Shidai and Bilin Changxiang respectively for the periods presented as both of the two VIEs have accumulated losses sinceinception. F - 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 3.Certain risks and concentration (continued) (a)PRC regulations (continued) Further, the Group believes that the contractual arrangements among Beijing Huanju Shidai and Bilin Changxiang, the VIEs, and their shareholders are incompliance with PRC law and are legally enforceable. However, the PRC government may issue from time to time new laws or new interpretations onexisting laws to regulate this industry. Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws, and the Group’s legalstructure and scope of operations in the PRC, which could be subject to further restrictions resulting in limitations on the Company’s ability to conductbusiness in the PRC. The PRC government may also require the Group to restructure the Group’s operations entirely if it finds that its contractualarrangements do not comply with applicable laws and regulations. Furthermore, it could revoke the Group’s business and operating licenses, require it todiscontinue or restrict its operations, restrict its right to collect revenues, block its website, require it to restructure its operations, impose additional conditionsor requirements with which the Group may not be able to comply, or take other regulatory or enforcement actions against the Group that could be harmful toits business. The imposition of any of these penalties may result in a material and adverse effect on the Group’s ability to conduct the Group’s business. Inaddition, if the imposition of any of these penalties causes the Group to lose the rights to direct the activities of the VIEs or the right to receive their economicbenefits, the Group would no longer be able to consolidate the VIEs. The Group does not believe that any penalties imposed or actions taken by the PRCgovernment would result in the liquidation of the Company, Beijing Huanju Shidai and Bilin Changxiang, and the VIEs. On January 19, 2015, the Ministry of Commerce of the PRC, or (the “MOFCOM”) released on its Website for public comment a proposed PRC law (the“Draft FIE Law”) that appears to include VIEs within the scope of entities that could be considered to be foreign invested enterprises (or “FIEs”) that would besubject to restrictions under existing PRC law on foreign investment in certain categories of industry. Specifically, the Draft FIE Law introduces the conceptof “actual control” for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect ownership or equity, the DraftFIE Law includes control through contractual arrangements within the definition of “actual control.” If the Draft FIE Law is passed by the People’s Congressof the PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed to reach theGroup’s VIE arrangements, and as a result the Group’s VIEs could become explicitly subject to the current restrictions on foreign investment in certaincategories of industry. The Draft FIE Law includes provisions that would exempt from the definition of foreign invested enterprises entities where the ultimatecontrolling shareholders are either entities organized under PRC law or individuals who are PRC citizens. The Draft FIE Law does not make clear how“control” would be determined for such purpose, and is silent as to what type of enforcement action might be taken against existing VIEs that operate inrestricted industries and are not controlled by entities organized under PRC law or individuals who are PRC citizens. If a finding were made by PRCauthorities, under existing law and regulations or under the Draft FIE Law if it becomes effective, that the Group’s operation of certain of its businessesthrough VIEs violates the Draft FIE Law, regulatory authorities with jurisdiction over the licensing and operation of such operations and businesses mayrequire the Group to take various actions as discussed in the paragraph above. The Group’s management considers the possibility of such a finding by PRCregulatory authorities under the Draft FIE Law, if it becomes effective, to be remote. F - 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 3.Certain risks and concentration (continued) (a)PRC regulations (continued) The following consolidated financial information of the Group’s VIEs excluding the intercompany items with the Group’s subsidiaries was included in theaccompanying consolidated financial statements as of and for the years ended: December 31, 2015 2016 RMB RMB Assets Current assets Cash and cash equivalents 403,722 1,397,738 Short-term deposits 250,000 1,235,000 Restricted short-term deposits 110,000 - Accounts receivable, net 127,365 165,971 Inventory 14,385 2,266 Amounts due from related parties 5,164 135,245 Prepayments and other current assets 117,536 207,245 Deferred tax assets 87,492 83,242 Total current assets 1,115,664 3,226,707 Non-current assets Deferred tax assets 3,363 10,502 Investments 285,292 496,870 Property and equipment, net 292,340 261,915 Intangible assets, net 110,214 27,241 Land use right, net - 1,872,394 Goodwill 136,066 2,527 Other non-current assets 1,932,356 85,583 Total non-current assets 2,759,631 2,757,032 Total assets 3,875,295 5,983,739 Liabilities Current liabilities Accounts payable 108,500 117,917 Deferred revenue 385,300 429,883 Advances from customers 45,189 56,108 Income taxes payable 80,978 112,779 Accrued liabilities and other current liabilities 579,760 988,911 Amounts due to related parties 23,684 91,245 Total current liabilities 1,223,411 1,796,843 Non-current liabilities Deferred revenue 20,752 19,125 Deferred tax liabilities 12,592 4,777 Total non-current liabilities 33,344 23,902 Total liabilities 1,256,755 1,820,745 F - 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 3.Certain risks and concentration (continued) (a)PRC regulations (continued) For the year ended December 31, 2014 2015 2016 RMB RMB RMB Net revenues 3,543,994 5,821,305 8,164,100 Net income 1,136,570 1,267,111 1,874,435 For the year ended December 31, 2014 2015 2016 RMB RMB RMB Net cash provided by operating activities 1,313,521 2,164,953 2,538,836 Net cash used in investing activities (994,574) (2,251,207) (1,313,002)Net cash provided by financing activities - 704,298 8,508 318,947 618,044 1,234,342 (b)Foreign exchange risk The revenues and expenses of the Group’s subsidiaries and VIEs in the PRC are generally denominated in RMB and their assets and liabilities aredenominated in RMB. The Group’s financing activities are denominated in U.S. dollars. The RMB is not freely convertible into foreign currencies.Remittances of foreign currencies into the PRC or remittances of RMB out of the PRC as well as exchange between RMB and foreign currencies requireapproval by foreign exchange administrative authorities and certain supporting documentation. The State Administration for Foreign Exchange, under theauthority of the People’s Bank of China, controls the conversion of RMB into other currencies. (c)Concentration risk (i)Concentration of revenue No individual customer accounted for more than 10% of net revenues for the years ended December 31, 2014, 2015 and 2016. (ii)Concentration of accounts receivable The Group collects accounts receivable from payment platforms, external game platforms and advertising customers. The Group depends on payments from alimited number of payment platforms. The top 10 accounts receivable accounted for 82% and 75% of the total accounts receivable as of December 31, 2015and 2016, respectively. The following table summarizes the percentage of accounts receivable from payment platforms with over 10% of total accountsreceivable: December 31, 2015 2016 RMB RMB Payment platforms B1 35% 19%B2 * 17% *Less than 10% F - 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 3.Certain risks and concentration (continued) (d)Credit risk As of December 31, 2015 and 2016, substantially all of the Group’s cash and cash equivalents and short-term deposits were placed with the PRC andinternational financial institutions. Management chooses these institutions because of their reputations and track records for stability, and their known largecash reserves, and management periodically reviews these institutions’ reputations, track records, and reported reserves. Management expects that anyadditional institutions that the Group uses for its cash and bank deposits will be chosen with similar criteria for soundness. Nevertheless under the PRC law, itis required that a commercial bank in the PRC that holds third party cash deposits should maintain a certain percentage of total customer deposits taken in astatutory reserve fund for protecting the depositors’ rights over their interests in deposited money. PRC banks are subject to a series of risk control regulatorystandards; PRC bank regulatory authorities are empowered to take over the operation and management of any PRC bank that faces a material credit crisis. TheGroup believes that it is not exposed to unusual risks as these financial institutions are either PRC banks or international banks with high credit quality. TheGroup had not experienced any losses on its deposits of cash and cash equivalents and term deposits during the years ended December 31, 2014, 2015 and2016 and believes that its credit risk to be minimal. 4.Business combination and disposal of subsidiaries Acquisition and disposal of Shanghai Beifu Culture Communication Co., Ltd. (“Beifu”) In February 2015, the Group acquired 70% of the equity interests of Beifu from the founders of Beifu for a fixed cash consideration of RMB39 million, plusadditional variable cash consideration that is contingent upon the achievement of pre-established performance metrics for years 2015 through 2017. Beifu isprimarily engaged in the operation of E-commerce, which is based on YY’s existing user base. The purpose of the acquisition was to integrate the Group'stechnology and huge user base together with Beifu's successful experience in the operation of E-commerce area. On the acquisition date, the allocation of theconsideration of the assets acquired and liabilities assumed based on their fair value was as follows: RMB Cash consideration 39,200 Contingent consideration 107,306 Total consideration 146,506 Net assets acquired 31,994 Identifiable intangible assets acquired 12,900 Goodwill 147,388 Deferred tax liabilities (3,225)Non-controlling interest (42,551)Total 146,506 The agreements for the acquisition of Beifu included a contingent consideration arrangement that required additional consideration to be paid by the Groupbased on the achievement of pre-established performance metrics as stipulated in the agreements for years 2015 through 2017. The undiscounted amounts theGroup shall pay when Beifu achieves 100% of the performance metrics from 2015 through 2017 is RMB219 million. The actual contingent payments wouldbe adjusted based on the degree of how the actual revenue and net profit are higher or lower than the performance metrics from 2015 through 2017. The fairvalue of the contingent consideration recognized on the acquisition date of RMB107 million was determined by the Group using the Trinomial Tree model.Under this model, the Group performed scenario analysis by assuming different scenarios under which Beifu achieved different performance for years 2015through 2017. Under different scenarios, the amount of contingent consideration differed according to the stipulation in the agreements. The Group thencalculated the fair value of the contingent consideration based on the net present value of the total contingent consideration under different scenarios and theexpected probability of each scenario. Please refer to note 25 for the key parameters adopted in the valuation. F - 42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 4.Business combination and disposal of subsidiaries (continued) Acquisition and disposal of Beifu (continued) The fair value of non-controlling interest in Beifu was determined mainly based on the number of shares held by non-controlling shareholders and the equityvalue close to the acquisition date, taking into consideration of other factors, as appropriate. If Beifu achieved specified performance metrics and did notcomplete an initial public offering, and the founders of Beifu remained being employed by the Group, the non-controlling shareholders had the right to puttheir equity interests in Beifu to the Group at the fair value (“the put option”). The Group considered the probability of the exercise of the put option andbelieved that the exercise of the put option was not probable upon the acquisition date and as of December 31, 2015. Pursuant to ASC 480, considering the non-controlling interests were redeemable upon the occurrence of an event that was not solely within the control of theGroup, the Group classified the non-controlling interests with the written put option as mezzanine equity in the Company’s consolidated financial statements.The aforementioned put option of Beifu has been cancelled upon the date of disposal. The business combination was completed on February 3, 2015. The excess of the purchase price over tangible assets, identifiable intangible assets acquired,and liabilities assumed and fair value of the non-controlling interest was recorded as goodwill. The acquired identifiable intangible assets were valued byvarious approaches, including the income approach and the replacement cost approach, as appropriate. Acquisition related costs were immaterial and wereincluded in general and administrative expenses for the year ended December 31, 2015. Pro forma results of operations related to the acquisition have not been presented because they were not material to the Group’s consolidated statements ofoperations and comprehensive income. There were no indemnification assets involved. Total identifiable intangible assets acquired upon acquisition mainly included cooperation agreements withonline game hosts and non-compete agreements, which had an estimated useful life of three and seven years, respectively. Total goodwill of RMB147 millionprimarily represented the expected synergies from combining operations of Beifu with those of the Group, which were expected to be complementary to eachother. In accordance with ASC350, goodwill has not been amortized but tested for impairment and was not deductible for tax purposes. In the 2015 annual goodwill impairment assessment, the Group has noted impairment indicator for Beifu and recognised an impairment charge ofRMB128,035 against the goodwill related to the acquisition of Beifu (Note 14). In June 2016, the Group disposed 60% equity interest of Beifu for a total consideration of RMB3,500. After the disposal, the Group retained 10% equityinterest of Beifu and accounted for the investment in Beifu as an equity investment as the Group still had significant influence over Beifu. As a result, Beifuceased to be a subsidiary of the Group. A total loss of RMB23,474 was recognised, which is the difference between (a) the aggregate of the fair value ofconsideration received, the fair value of the retained non-controlling interests and the carrying amount of non-controlling interests being deconsolidated,amounting to RMB13,236 collectively and (b) the carrying amount of the assets and liabilities being deconsolidated, amounting to RMB36,710. As part of thetotal loss recognized, the loss related to the remeasurement of the retained non-controlling investment to fair value was RMB3,088. Disposal of Beijing Huanqiu Xingxue Technology Development Co., Ltd. (“Xingxue”) Xingxue, a company engaged in online vocational education, was acquired by the Group in 2014. In December 2016, the Group disposed 33.86% equity interest of Xingxue for a total consideration of RMB118,500. After the disposal, the Group retained31.14% equity interest of Xingxue. As a result, Xingxue ceased to be a subsidiary of the Group. A total income of RMB127,434 was recognised, which is thedifference between (a) the aggregate of the fair value of consideration received, the fair value of the retained non-controlling interests and the carrying amountof non-controlling interests being deconsolidated, amounting to RMB282,433 collectively and (b) the carrying amount of the assets and liabilities beingdeconsolidated, amounting to RMB154,999. As part of the total loss recognized, the gain related to the remeasurement of the retained non-controllinginvestment to fair value was RMB57,791. F - 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 5.Cash and cash equivalents Cash and cash equivalents represent cash on hand and demand deposits placed with banks or other financial institutions. Cash and cash equivalents balance asof December 31, 2015 and 2016 primarily consist of the following currencies: December 31, 2015 December 31, 2016 Amount RMBequivalent Amount RMBequivalent RMB 450,802 450,802 1,536,947 1,536,947 US$ 73,632 478,132 6,171 42,796 Total 928,934 1,579,743 6.Short-term deposits Short-term deposits represent time deposits placed with banks with original maturities of less than one year. Short-term deposits balance as of December 31,2015 and 2016 primarily consist of the following currencies: December 31, 2015 December 31, 2016 Amount RMBequivalent Amount RMBequivalent RMB 250,000 250,000 1,235,000 1,235,000 US$ 253,322 1,644,946 362,882 2,516,519 Total 1,894,946 3,751,519 F - 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 7.Restricted short-term deposits December 31, 2015 2016 RMB RMB Pledge short-term deposits for one pending litigation (i) 110,000 - Pledge short-term deposits for bank borrowing facilities (ii) 279,221 - Total 389,221 - (i) As of December 31, 2015, the Group had restricted short-term deposits balance of RMB110 million representing pledged deposit for one pending litigationin which the Group was the claimant and had applied to the court to freeze the assets of the defendant. Pursuant to relevant PRC laws and regulations, theGroup had to deposit a certain amount of cash as pledged deposit in order to submit the application to the court requesting to freeze the defendant’s assets. As of December 31, 2016, the pledged deposits has been unfrozen due to the settlement of the litigation. (ii) As of December 31, 2015, the Company had offshore restricted short-term deposits balance set aside for a period of 12 months or less of approximatelyRMB279 million for bank borrowing facilities. 8.Accounts receivable, net December 31, 2015 2016 RMB RMB Accounts receivable, gross 191,144 224,791 Less: allowance for doubtful receivables (58,791) (55,220) Accounts receivable, net 132,353 169,571 The following table summarized the details of the Company’s allowance for doubtful accounts: For the year ended December 31, 2014 2015 2016 RMB RMB RMB Balance at beginning of the year (31,214) (57,342) (58,791)(Additions)/reversals charged to general and administrative expenses, net (26,246) (1,449) 3,571 Write-off during the year 118 - - Balance at end of the year (57,342) (58,791) (55,220) F - 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 9.Prepayments and other current assets December 31, 2015 2016 RMB RMB Receivables from disposal of a subsidiary - 95,166 Prepayments and deposits to vendors and content providers 71,354 70,347 Interests receivable 41,220 17,050 Rental and other deposits 12,111 13,015 Employee advances 12,484 12,245 Rental prepayments 1,333 6,462 Others 9,321 10,447 Total 147,823 224,732 10.Investments December 31, 2015 2016 RMB RMB Cost investments (i) 516,446 477,733 Equity investments(ii) 44,994 252,272 Available-for-sale securities (iii) 6,117 188,597 Total 567,557 918,602 (i)In 2015 and 2016, the Group entered into agreements to acquire minority stake of a number of privately-held entities with total consideration ofRMB351,800 and RMB90,234 respectively. The investments are not investment in common stock or in-substance common stock and therefore have beenprecluded from applying the equity method of accounting. They have been accounted for as investments under cost method, since all of these equitysecurities do not have a readily determinable fair value. (ii)In 2016, the Group acquired minority stake of a number of privately-held entities with total consideration of RMB107,010. Investments have beenaccounted for under the equity method where the Group has significant influence in these investments and the investments are considered as in substanceordinary shares. In 2016, following the deconsolidation and disposal of Xingxue (Note 4), the Group reclassified the remaining 31.14% equity interest of Xingxue as anequity investment, as the Group still can exercise significant influence over Xingxue. (iii)In 2015, the Group entered into share purchase agreements to acquire 4.25% equity stake of a company with a total consideration of RMB6,117. TheGroup recorded this investment as an available-for-sale debt security since the preferred shares purchased by the Group are redeemable at the option ofthe Group. Subsequent to initial recognition, the available-for-sale debt security is measured at fair value at every period end. There was no significantchange in fair value of the investment from the investment date to December 31, 2016. In 2016, one of the Group's investees became listed on NASDAQ Global Market. As the investment has readily determinable fair value upon listing, theGroup reclassified this investment as an available-for-sale security upon its listing and recorded the investment at fair value with unrealized holding gainor loss recognized in other comprehensive income under ASC 320. (iv)The Group assesses the existence of indicators for other-than-temporary impairment of the investments by considering factors including, but not limitedto, current economic and market conditions, the operating performance of the entities including current earnings trends and other entity-specificinformation. In 2014, 2015 and 2016, based on the Group's assessment, an impairment charge of RMB4,000, RMB6,000 and RMB80,104 was recognizedin general and administrative expenses, respectively, against the carrying value of the investments due to significant deterioration in earnings orunexpected changes in business prospects of the investees as compared to the original investment plans. F - 46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 11.Property and equipment, net Property and equipment consists of the following: December 31, 2015 2016 RMB RMB Gross carrying amount Buildings 482,387 482,333 Servers, computers and equipment 453,441 565,786 Leasehold improvements 69,929 80,812 Decoration of buildings 66,140 68,981 Motor vehicles 12,835 24,016 Furniture, fixture and office equipment 26,098 23,259 Construction in progress 1,937 5,586 Total 1,112,767 1,250,773 Less: accumulated depreciation (269,318) (412,023) Property and equipment, net 843,449 838,750 Depreciation expense for the years ended December 31, 2014, 2015 and 2016 were RMB68,035, RMB122,098 and RMB 173,625, respectively. 12.Land use right, net Land use right consists of the following: December 31, 2016 RMB Gross carrying amount 1,916,309 Less: accumulated amortization (43,915) Land use right, net 1,872,394 Land use right was acquired in 2016 and amortization expense for the year ended December 31, 2016 was RMB43,915. F - 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 13.Intangible assets, net The following table summarizes the Group’s intangible assets: December 31, 2015 2016 RMB RMB Gross carrying amount Brand names 102,654 59,034 Operating rights for game broadcasting 35,071 58,655 Operating rights for licensed games 46,879 40,274 Software 38,307 30,632 Domain names 25,902 27,311 Technology 17,621 18,282 Others 31,200 18,300 Total of gross carrying amount 297,634 252,488 Less: accumulated amortization Brand names (20,294) (21,810)Operating rights for game broadcasting (23,278) (46,855)Operating rights for licensed games (15,010) (30,804)Software (9,464) (13,110)Domain names (6,249) (8,449)Technology (7,712) (9,457)Others (5,478) (3,592) Total accumulated amortization (87,485) (134,077) Less: accumulated impairment (63,712) (59,485) Intangible assets, net 146,437 58,926 In 2015, the Group performed interim and annual goodwill impairment test for the goodwill generated from the acquisition of 100 Online EducationTechnology (Beijing) Co., Ltd. (“100 Online”) and Beifu, due to the poor financial performance of these two VIEs (Note 14), and recognized impairment lossof intangible assets of RMB48,814 and RMB8,385, respectively, which was mainly made against the carrying amount of the brand names. In 2016, the Group performed goodwill impairment test for the goodwill generated from the acquisition of 100 Online due to the poor financial performance of100 Online. The recognized impairment loss of intangible assets of RMB3,828 was mainly made against the carrying amount of the brand name due to thegoodwill impairment. Income approach was adopted in the above impairment assessments for the determination of fair value of the intangible assets. Amortization expense for the years ended December 31, 2014, 2015 and 2016 were RMB12,598, RMB64,201 and RMB 56,977, respectively. F - 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 13.Intangible assets, net (continued) The estimated amortization expenses for each of the following five years are as follows: Amortization expense of intangible assets 2017 25,606 2018 10,453 2019 6,032 2020 4,708 2021 1,925 The weighted average amortization periods of intangible assets as of December 31, 2015 and 2016 are as below: December 31, 2015 2016 Domain names 15 years 15 yearsTechnology 5 years 5 yearsSoftware 5 years 5 yearsOperating rights for licensed games 3 years 2 yearsOperating rights for game broadcasting 1 year 1 yearBrand names 10 years Not applicableOthers 3-5 years Not applicable 14.Goodwill The changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2016 are as follows: YY Live 100 Education Total RMB RMB RMB Balance as of December 31, 2014 4,107 296,275 300,382 Increase in goodwill related to acquisition (i) 161,326 - 161,326 Impairment charges (iii) (128,035) (182,089) (310,124)Foreign currency translation adjustment 54 - 54 Balance as of December 31, 2015 37,452 114,186 151,638 Decrease in goodwill related to disposal(ii) (19,354) (100,382) (119,736)Impairment charges (iii) (3,861) (13,804) (17,665)Foreign currency translation adjustment 63 - 63 Balance as of December 31, 2016 14,300 - 14,300 F - 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 14.Goodwill (continued) (i) In February 2015, the Group purchased 70% equity interest of Beifu. Goodwill of RMB147,388 was recognized in the segment of YY Live from thisbusiness acquisition (Note 4). Goodwill represented the synergy effects of the business combination. (ii) In June 2016, the Group disposed 60% equity interest of Beifu and ceased to consolidate Beifu as a subsidiary. Goodwill of RMB19,354 was derecognizedin the segment of YY Live (Note 4). In December 2016, the Group disposed 33.86% equity interest of Xingxue and ceased to consolidate Xingxue as a subsidiary. Goodwill of RMB100,382 wasderecognized in the segment of 100 Education upon this disposal (Note 4). (iii) The Group performs its annual goodwill impairment test of each reporting unit as of October 1, or more frequently, if certain events or circumstanceswarrant. Events or changes in circumstances which might indicate potential impairment in goodwill include the entity-specific factors, including, but notlimited to, stock price volatility, market capitalization relative to net book value, and projected revenue, market growth and operating results. In June 2015, it was noted that 100 Online’s financial and operational performance in the first half year of 2015 was behind the original budget resulting fromunexpected fierce market competition and the resignation of a number of key personnel in 100 Online. Accordingly, the Group performed an interimassessment on the goodwill impairment related to 100 Online and recognized an estimated goodwill impairment charge of RMB110,699. Correspondingly,long-term payable amounting to RMB111,547 in relation to the contingent consideration was reversed. The unobservable inputs used in the assessmentincluded risk free rate, discount rate and etc. The risk free rate and discount rate were 4.07% and 21.5%, respectively. In the 2015 annual goodwill impairment assessment, the Group has noted further impairment indicator for 100 Online as well as impairment indicator forBeifu as certain key personnel of 100 Online and Beifu resigned in the third quarter of 2015. Based on the result of the annual impairment assessment for 100Online, an impairment charge of RMB71,390 was recognised and correspondingly, long-term payable amounting to RMB73,618 in relation to the contingentconsideration was reversed; For Beifu, an impairment charge of RMB128,035 was recognised and correspondingly, long-term payable amounting to RMB107,306 in relation to the contingent consideration was reversed. As of December 31, 2015, balance of long-term payable in relation of the contingentconsideration was 0. The unobservable inputs used in the assessment, included the risk free rate, discount rate and etc. For the goodwill impairmentassessment of 100 Online and Beifu, the risk free rate were both 3.85% and the discount rate were 23% and 24.5%, respectively. In December 2016, the Group has identified further impairment indicator for 100 Online as well as impairment indicator for Bilin Online. Based on the resultsof the impairment assessment, an impairment charge of RMB13,804 for 100 Online and an impairment charge of RMB3,861 for Bilin Online were recognized,respectively. The above goodwill impairment assessments on 100 Online, Beifu and Bilin Online adopted the income approach and considered a combination of factors,including, but not limited to, market conditions, expected future cash flows, growth rates and discount rates, which required the Group to make certainestimates and assumptions regarding industry economic factors and future profitability of the business. F - 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 15.Deferred revenue December 31, 2015 2016 RMB RMB Deferred revenue, current: Live streaming 187,930 308,545 Online games 81,054 61,589 Membership 87,483 47,532 Others 28,833 13,017 Total current deferred revenue 385,300 430,683 Deferred revenue, non-current: Live streaming 8,757 12,002 Membership 11,328 6,273 Others 667 7,184 Total non-current deferred revenue 20,752 25,459 16.Accrued liabilities and other current liabilities December 31, 2015 2016 RMB RMB Accrued revenue sharing fees 298,805 521,654 Accrued salaries and welfare 169,041 200,606 Accrued bandwidth costs 71,507 86,186 Market promotion expenses 29,358 68,243 Value added taxes payable 16,010 38,161 License fees 10,000 22,725 Deposits from content providers and suppliers 16,531 18,779 Other taxes payable 14,370 18,516 Interests payable 14,795 15,800 Others 41,472 75,368 Total 681,889 1,066,038 F - 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 17.Convertible bonds December 31, 2015 2016 RMB RMB Convertible Bond, current 2019 Convertible Senior Notes - 2,773,925 Less: issuance cost - (5,456) - 2,768,469 Convertible Bond, non-current 2019 Convertible Senior Notes 2,597,403 - Less: issuance cost (25,284) - 2,572,119 - On March 18, 2014, the Company issued Convertible Senior Notes due 2019 with principal amount of US$400 million (the "Notes"). The Notes bear interestat a rate of 2.25% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. The Notes will mature onApril 1, 2019. Holders may convert their Notes at their option at any time prior to the close of business on the second business day immediately preceding thematurity date. Upon conversion, the Company will deliver, for each US$1,000 dollars principal amount of converted Notes, a number of ADSs, each representing twentyClass A common shares of YY Inc., par value of US$0.00001 per share, equal to the conversion rate. The conversion rate will initially be 9.0334 ADSs per US$1,000 dollars principal amount of Notes (equivalent to an initial conversion price of approximatelyUS$110.70 per ADS). The net proceeds to the Company from the issuance of the Notes were US$390.8 million. Debt issuance costs were US$9.2 million which are being deferredand amortized to interest expense from the issuance date (March 18, 2014) to the first put date of the Notes (April 1, 2017). The Notes are general senior unsecured obligations and rank (1) senior in right of payment to any of the Company’s future indebtedness that is expresslysubordinated in right of payment to the Notes, (2) equal in right of payment to any of the Company’s future unsecured indebtedness of the Company that is notso subordinated, (3) junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing suchindebtedness and (4) structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries and VIEs . The value of the Notes is initially measured by the cash received and is subsequently stated at amortized cost. As of December 31, 2015 and 2016, RMB2.6billion (US$397 million) and RMB 2.8 billion (US$399 million) has been accounted for as the value of the Notes in non-current liabilities and currentliabilities respectively. F - 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 17.Convertible bonds (continued) The key terms of the Notes are as follows: Redemption The Notes are not redeemable prior to the maturity date of April 1, 2019, except as described below. The holders of the Notes (the “Holders”) have a non-contingent option to require the Company to repurchase for cash all or any portion of their Notes on April 1, 2017. The repurchase price will equal 100% ofthe principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. If a fundamental change(as defined in the Indenture of the 2019 Convertible Senior Notes) occurs prior to the maturity date, the Holders may require the Company to purchase forcash all or any portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, ifany, to, but excluding, the fundamental change purchase date. The Holders have the option to require the Company to repurchase the Notes, in whole or inpart, in the event of a fundamental change for an amount equal to the 100% of the principal amount and any accrued and unpaid interest in the event offundamental changes. The Company believes that the likelihood of occurrence of events of a fundamental change is remote. The contingent redemption option is assessed in accordance with ASC 815. The contingent redemption option is considered clearly and closely related to itsdebt host and does not meet the requirement for bifurcation as the Notes were issued at par and the repurchase feature requires the issuer to settle the option bydelivering par plus accrued and unpaid interest, the Notes holder would recover all of their initial investment. Additionally, since the Notes holder can onlyrecover its initial investment upon exercise of its option, there are no interest rate scenarios under which the embedded derivative would at least double theinvestor’s initial rate of return. Conversion The Holders may convert their Notes in integral multiples of US$1,000 dollars principle amount at an initial conversion rate of 9.0334 ADS, at any time priorto the maturity date of April 1, 2019. Upon conversion of the Notes, the Company will deliver shares of the Company’s ADS. The conversion rate is subject toadjustment in certain events, including, but not limited to, the issuance of certain share dividends on the Class A common shares, the issuance of certain rightsor warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers (asdefined in the Indenture of the 2019 Convertible Senior Notes). In addition, upon a make-whole fundamental change (as defined in the Indenture of the 2019Convertible Senior Notes), the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notesin connection with such make-whole fundamental change. In accordance with ASC 815, the conversion option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is notrequired as the scope exception prescribed in ASC 815 is met as the conversion option is considered indexed to the entity’s own stock and classified inshareholders’ equity. Assessment of Beneficial Conversion Feature and Contingent Beneficial Conversion Feature: As the conversion options are not bifurcated, the Company has assessed the beneficial conversion feature (“BCF”), as of commitment date as defined in ASC470. There was no BCF attributed to the Notes as the set conversion price for the Notes was greater than the fair value of the common share price on the dateof issuance. F - 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 17.Convertible bonds (continued) Assessment of Beneficial Conversion Feature and Contingent Beneficial Conversion Feature: (Continued) The Holders have the option to convert upon a fundamental change, if Holders decide to convert in connection with a fundamental change, the number ofshares issuable upon conversion will be increased. Upon occurrence of such adjustment, the Company will have to assess the contingent BCF using ameasurement date upon issuance of the Notes. The settlement of the conversion is based on a make-whole provision resulting from a fundamental change, thisfeature is consistent with ASC 815, and therefore the Company concludes that this feature is also considered indexed to its own shares. Accounting for Debt Issuance Costs: The debt issuance costs were recorded as reduction to the convertible bonds and are amortized as interest expense, using the effective interest method, over theterm of the Notes pursuant to ASC 835. Interest expense recognized during the years ended December 31, 2015 and 2016 was RMB74,786 and RMB81,085. 18.Cost of revenues For the year ended December 31, 2014 2015 2016 RMB RMB RMB Revenue sharing fees and content costs 1,133,984 2,343,224 3,790,624 Bandwidth costs 345,913 570,169 651,652 Salary and welfare 131,773 198,153 232,497 Depreciation and amortization 59,817 145,135 173,048 Payment handling costs 55,101 104,849 67,474 Business tax and surcharges 49,233 27,794 44,659 Share based compensation 18,037 23,963 15,894 Other costs 55,291 166,457 127,582 Total 1,849,149 3,579,744 5,103,430 19.Other income For the year ended December 31, 2014 2015 2016 RMB RMB RMB Government grants 5,570 79,541 128,550 Others 749 2,759 954 Total 6,319 82,300 129,504 F - 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 20.Income tax (i) Cayman Islands (“Cayman”) Under the current tax laws of Cayman Islands, the Company and its subsidiaries are not subject to tax on income or capital gains. Besides, upon payment ofdividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed. (ii) BVI Duowan BVI is exempted from income tax on its foreign-derived income in the BVI. There are no withholding taxes in the BVI. (iii) Hong Kong profits tax Entities incorporated in Hong Kong are subject to Hong Kong profits tax at a rate of 16.5% on the estimated assessable profit for the years endedDecember 31, 2014, 2015 and 2016. (iv) PRC Enterprise Income Tax (“EIT”) The Company’s subsidiaries and VIEs in China are governed by the Enterprise Income Tax Law (“EIT Law”), which became effective on January 1, 2008.Pursuant to the EIT Law and its implementation rules, enterprises in China are generally subject to tax at a statutory rate of 25%. Certified High and NewTechnology Enterprises (“HNTE”) are entitled to a favorable statutory tax rate of 15%, and qualified software enterprises can enjoy an income tax exemptionfor two years beginning with their first profitable year and a 50% tax reduction to the applicable tax rate for the subsequent three years. The Group’s PRC entities provided for enterprise income tax as follows: ·From 2014 to 2016, Guangzhou Huaduo accrued the EIT at a tax rate of 15% as a result of HNTE status.·Guangzhou Huanju Shidai reported tax loss from 2010 to 2013. On December 31, 2013, Guangzhou Huanju Shidai was granted the qualification as asoftware enterprise and started to enjoy the zero preferential tax rate beginning from 2014 and 12.5% preferential tax rate beginning from 2016.·Other PRC subsidiaries and VIEs were subject to 25% EIT for the periods reported. According to a policy promulgated by the State Tax Bureau of the PRC and effective from 2008 onwards, enterprises engaged in research and developmentactivities are entitled to claim 150% of the research and development expenses so incurred in a year as tax deductible expenses in determining its taxassessable profits for that year (“Super Deduction”). Certain subsidiaries and VIEs of the Group successfully claimed the Super Deduction in ascertaining thetax assessable profits for the periods reported. In addition, according to the New EIT Law and its implementation rules, foreign enterprises, which have no establishment or place in the PRC but derivedividends, interest, rents, royalties and other income (including capital gains) from sources in the PRC shall be subject to PRC withholding tax (“WHT”) at10% (a further reduced WHT rate may be available according to the applicable double tax treaty or arrangement). The 10% WHT is applicable to anydividends to be distributed from the Group’s PRC subsidiaries and VIEs to the Group’s oversea companies. Aggregate undistributed earnings and reserves of the Group entities located in the PRC that are available for distribution to the Company as of December 31,2015 and 2016 are approximately RMB3,090,721 and RMB4,784,432, respectively. The undistributed earnings and reserves of the Group entities located inthe PRC are considered to be indefinitely reinvested, because the Group does not have any present plan to pay any cash dividends on its common shares in theforeseeable future and intends to retain most of its available funds and any future earnings for use in the operation and expansion of its business. Accordingly,no deferred tax liability on 10% WHT of aggregate undistributed earnings and reserves of the Company’s subsidiaries located in the PRC has been accruedthat would be payable upon the distribution of those amounts to the Company as of December 31, 2015 and 2016. F - 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 20.Income tax (continued) Composition of income tax expense The current and deferred portions of income tax expense included in the consolidated statements of operations are as follows: For the year ended December 31, 2014 2015 2016 RMB RMB RMB Current income tax expenses (200,034) (203,366) (288,282)Deferred income tax benefits 45,751 25,039 7,768 Income tax expense for the year (154,283) (178,327) (280,514) Reconciliation of the differences between statutory tax rate and the effective tax rate The reconciliation of total tax expense computed by applying the respective statutory income tax rate to pre-tax income is as follows: For the year ended December 31, 2014 2015 2016 RMB RMB RMB PRC Statutory income tax rate (25.0)% (25.0)% (25.0)%Effect of preferential tax rate 13.1% 14.0% 11.6%Effect of tax-exempt entities 1.1% (1.6)% (1.7)%Effect of change in tax rate - 0.5% - Permanent differences (i) (3.5)% (3.8)% (1.1)%Change in valuation allowance (0.4)% (1.7)% (1.5)%Effect of Super Deduction available to the Group 2.0% 2.3% 2.0%Effective income tax rate (12.7)% (15.3)% (15.7)% (i) Permanent differences mainly arise from expenses not deductible for tax purposes including primarily share based compensation costs and expensesincurred by subsidiaries and VIEs. F - 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 20.Income tax (continued) Deferred tax assets and liabilities Deferred taxes are measured using the enacted tax rates for the periods in which they are expected to be reversed. The tax effects of temporary differences thatgive rise to the deferred tax asset balances as of December 31, 2015 and 2016 are as follows: December 31, 2015 2016 RMB RMB Deferred tax assets, current: Deferred revenue 46,830 55,484 Allowance for doubtful accounts receivable, accrued expense and others not currently deductible for taxpurposes 83,503 65,721 Valuation allowance (13,412) (13,896)Total current deferred tax assets, net 116,921 107,309 Deferred tax assets, non-current: Tax loss carried forward 39,904 66,816 Deferred revenue 1,414 1,800 Impairment of investment 1,698 7,949 Others 251 753 Valuation allowance (i) (39,904) (66,816)Total non-current deferred tax assets, net 3,363 10,502 Deferred tax liabilities, non-current: Related to acquired intangible assets 16,817 3,281 Others - 4,777 Total non-current deferred tax liabilities, net 16,817 8,058 (i)Valuation allowance is provided against deferred tax assets when the Group determines that it is more likely than not that the deferred tax assets will not beutilized in the future. In making such determination, the Group considered factors including future taxable income exclusive of reversing temporarydifferences and tax loss carry forwards. Valuation allowance was provided for net operating loss carry forward because it was more likely than not that suchdeferred tax assets would not be realized based on the Group’s estimate of its future taxable income. If events occur in the future that allow the Group torealize more of its deferred income tax than the presently recorded amounts, an adjustment to the valuation allowances will result in a decrease in tax expensewhen those events occur. Tax loss carry forwards As of December 31, 2016, the Group had tax loss carry forwards of approximately RMB295,238, which can be carried forward to offset future taxableincome. The net operating tax loss carry forwards will begin to expire as follows: Amount RMB 2017 - 2018 9,428 2019 28,373 2020 78,713 2021 178,724 Total 295,238 In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to claw backunderpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitationon the tax years open for investigation. Accordingly, the PRC entities’ tax years from 2010 to 2016 remain subject to examination by the tax authorities. Therewere no ongoing examinations by tax authorities as of December 31, 2016. F - 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 21.Common shares During the year ended December 31, 2014, 25,036,140 Class A common shares were issued for the exercised share options, vested restricted shares andrestricted share units and 58,478,690 Class B common shares were converted to Class A common shares. As of December 31, 2014, 10,000,000,000 Class A common shares and 1,000,000,000 Class B common shares had been authorized, 706,173,568 Class Acommon shares and 427,352,696 Class B common shares had been issued and outstanding, respectively. On May 4, 2014 and March 5, 2015, the Company’s board of directors approved two share repurchase programs (the “Share Repurchase Program”)respectively, pursuant to which the Company may repurchase from time to time at management’s discretion, at prevailing market prices in the open market inaccordance with Rule 10b-18 under the Securities Exchange Act of 1934, up to US$200 million in total of the Company’s outstanding ADSs for a period notto exceed twelve (12) months from the date of approval by board of directors. For the year ended December 31, 2015, the Company had repurchased under theShare Repurchase Program an aggregate of 3,092,556 ADSs, representing 61,851,120 Class A common shares at an average price of US$54.82 per ADS, orUS$2.74 per Class A common share, for aggregate consideration of US$169.5 million. Pursuant to ASC 505, since the shares were repurchased forconstructive retirement, the excess of repurchase price over par value was recorded as deduction of additional paid-in capital upon the repurchase date. During the year ended December 31, 2015, 26,110,680 Class A common shares were issued for the exercised share options, vested restricted shares andrestricted share units and 57,794,720 Class B common shares were converted to Class A common shares. As of December 31, 2015, 10,000,000,000 Class A common shares and 1,000,000,000 Class B common shares had been authorized, 728,227,848 Class Acommon shares and 369,557,976 Class B common shares had been issued and outstanding, respectively. During the year ended December 31, 2016, 11,887,180 Class A common shares were issued for the exercised share options, vested restricted shares andrestricted share units and 10,000,000 Class B common shares were converted to Class A common shares. As of December 31, 2016, 10,000,000,000 Class A common shares and 1,000,000,000 Class B common shares had been authorized, 750,115,028 Class Acommon shares and 359,557,976 Class B common shares had been issued and outstanding, respectively. F - 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 22.Share based compensation (a)Share options Pre-2009 Scheme Options Grant of options Before the adoption of the Employee Equity Incentive Scheme (the “2009 Incentive Scheme”), 12,705,700 and 8,499,050 share options were granted toemployees through individually signed share option agreements, to acquire common shares of Duowan BVI on a one-to-one basis on January 1, 2008 and2009 respectively. In addition, on January 1, 2008, 3,832,290 share options were granted to one non-employee for the provision of consulting services to theGroup (collectively defined as “Pre-2009 Scheme Options”). Vesting of options These Pre-2009 Scheme Options will vest over a four years’ service period, with 25% of the options vesting after the first anniversary of the vesting inceptiondate and the remaining 75% in six equal installments over the following 36 months. The options may be exercised provided that both the service conditionsand a performance condition are met. The performance condition is defined to be i) an initial public offering, ii) completion of a financing meeting certaincriteria, iii) an internal reorganization, or iv) a voluntary winding up of Duowan BVI. The performance condition that is tied to completion of a financingfulfilling certain criteria was met in June 2008 or November 2009. The following table summarizes the activities of the Pre-2009 Scheme Options for employees and non-employee for the years ended December 31, 2014, 2015and 2016: Number of options Weighted average exercise price (US$) Weighted average remaining contractual life (years) Aggregate intrinsic value (US$) Outstanding, vested and exercisable, December 31, 2013 13,222,005 0.0059 4.40 33,162 Exercised (5,841,660) 0.0057 3.24 Outstanding, vested and exercisable, December 31, 2014 7,380,345 0.0061 3.52 22,959 Exercised (6,611,970) 0.0061 2.46 Outstanding, vested and exercisable, December 31, 2015 768,375 0.0067 2.99 2,395 Exercised (234,720) 0.0067 2.00 Outstanding, vested and exercisable, December 31, 2016 533,655 0.0067 1.98 1,048 F - 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 22.Share based compensation (continued) (a)Share options (continued) Forfeitures are estimated at the time of grant. If necessary, forfeitures are revised in subsequent periods if actual forfeitures differ from those estimates. The aggregate intrinsic value in the table above represents the difference between the Company’s common shares as of December 31, 2014, 2015 and 2016and the exercise price. Upon the completion of the IPO, the fair value of share options granted to a non-employee with nil exercise price was assessed to be equivalent to the fairvalue of the Company’s common share. These share options were remeasured at the stock price of the Company’s common share as of December 31, 2015and 2016. The total intrinsic value of options exercised during the year ended December 31, 2014, 2015 and 2016 amounted to RMB134,844, RMB122,956 andRMB3,270, respectively. Since all the share options have been vested, no share based compensation expense related to share options were incurred for theyears ended December 31, 2014, 2015 and 2016. F - 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 22.Share based compensation (continued) (b)Restricted shares Since January 1, 2010, Duowan BVI granted 61,250,677 restricted shares to employees and 100,000 restricted shares to a non-employee pursuant to the 2009Incentive Scheme. As of December 31, 2015, the restricted shares granted to employees and the non-employee were fully vested . Vesting of restricted shares The restricted shares have vesting conditions and will vest 50% after 24 months of the grant date and the remaining 50% will vest in two equal installmentsover the next 24 months. Under the restricted shares agreement, no shares may be sold or transferred prior to the occurrence of an exit event, as defined in therespective restricted share agreements as: i) a listing on any recognized stock exchange, ii) a sale by Duowan BVI of all or substantially all of its assets, iii) asale of all of the issued capital of Duowan BVI, or iv) passing for court order of winding up of Duowan BVI. If the employee terminates employment, the service vested portion of the restricted shares may be subject to: (i) repurchase (subject to Company’s solediscretion) by Duowan BVI at fair value of common shares of Duowan BVI which is assessed by the Company with the assistance of an independent valuationfirm; or (ii) be held by a person who is an existing employee of the Group and is designated by the leaving restricted share holder according to a properlysigned escrow agreement to hold such shares for and on his/her behalf. If the leaving employee fails to deliver a properly signed agreement to Duowan BVIwithin 30 days from receipt of the notification from Duowan BVI, such service vested shares shall automatically lapse and expire. The following table summarizes the restricted shares activity for the years ended December 31, 2014, 2015 and 2016: Number of restricted shares Weighted averagegrant-date fair value (US$) Outstanding, December 31, 2013 4,673,725 0.6144 Forfeited (159,410) 0.9362 Vested (4,514,315) 0.6030 Outstanding, December 31, 2014, 2015 and 2016 - - Forfeitures are estimated at the time of grant. If necessary, forfeitures are revised in subsequent periods if actual forfeitures differ from those estimates. For the years ended December 31, 2014, 2015 and 2016, the Company recorded share based compensation of RMB3,771 , nil and nil, respectively, using thegraded-vesting method for employees and non-employee. F - 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 22.Share based compensation (continued) (c)Restricted Share Units On September 16, 2011, the board of directors of the Company approved the 2011 Share Incentive Scheme. In October 2012, the board of directors of theCompany resolved that the maximum aggregate number of Class A common shares which may be issued pursuant to all awards under the 2011 ShareIncentive Scheme shall be 43,000,000 plus an annual increase of 20,000,000 on the first day of each fiscal year, or such lesser amount of Class A commonshares as determined by the board of directors of the Company. Prior to December 31, 2013, the Company granted 57,310,210 restricted share units to employees and 48,000 restricted share units to non-employee pursuantto the 2011 Share Incentive Plan. During the years ended December 31, 2014, 2015 and 2016, the Company granted restricted share units to employees of 9,912,595, 16,012,644 and 1,530,008respectively pursuant to the 2011 Share Incentive Plan. No restricted share units were granted to non-employees during the year ended December 31, 2014, 2015 and 2016. The following table summarizes the restricted share units activity for the years ended December 31, 2014, 2015 and 2016: Number of restricted shares Weighted averagegrant-date fair value (US$) Outstanding, December 31, 2013 44,302,600 0.9639 Granted 9,912,595 3.5805 Forfeited (3,125,430) 1.1859 Vested (12,283,670) 1.0144 Outstanding, December 31, 2014 38,806,095 1.5984 Granted 16,012,644 3.3358 Forfeited (7,312,548) 1.8920 Vested (11,222,589) 1.4374 Outstanding, December 31, 2015 36,283,602 2.3535 Granted 1,530,008 1.8618 Forfeited (4,628,202) 2.7386 Vested (12,229,688) 2.0151 Outstanding, December 31, 2016 20,955,720 2.4320 Expected to vest at December 31, 2016 20,568,083 2.4312 F - 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 22.Share based compensation (continued) (c)Restricted Share Units (continued) For the years ended December 31, 2014, 2015 and 2016, the Company recorded share based compensation of RMB130,718 , RMB152,205 and RMB143,350,using the graded-vesting attribution method. As of December 31, 2016, total unrecognized compensation expense relating to the restricted share units was RMB127,905. The expense is expected to berecognized over a weighted average period of 0.96 years using the graded-vesting attribution method. (d)Share based awards granted to an employee of a subsidiary The Company completed a business combination in 2014 by acquiring 100% of equity interests in two vocational training companies, namely Xingxue andBeijing Huanqiu Chuangzhi Software Co., Ltd.. In 2015, the Company granted share based awards of Xingxue to one of Xingxue's key employee (the“Employee”). Under the arrangements entered into by the Company and the Employee, the Employee was granted 20% of Xingxue’s equity interests with immediate effectand entitled to purchase additional equity interests of Xingxue subject to the achievement of certain financial performance metrics of Xingxue (“call option”).These awards were regarded as share based awards with performance conditions. The Company would recognize compensation cost for awards withperformance conditions if and when the Company concluded that it was probable that the performance condition would be achieved. In 2015 and 2016, the Company recorded share based compensation of RMB32,593 and RMB13,364 respectively for the share based awards granted to theEmployee. (e)Other share based compensation For the years ended December 31, 2014, 2015 and 2016, the Company recorded share based compensation of RMB143, RMB574 and RMB572 for restrictedshares to the founder of a subsidiary of a variable interest entity. F - 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 23.Basic and diluted net income per share Basic and diluted net income per share for the years ended December 31, 2014, 2015 and 2016 are calculated as follows: For the year ended December 31, 2014 2015 2016 RMB RMB RMB Numerator: Net income attributable to the Company 1,064,472 1,033,243 1,523,918 Interest expenses of convertible notes - - 81,085 Numerator for diluted income per share 1,064,472 1,033,243 1,605,003 Denominator: Denominator for basic calculation—weighted average number of Class A andClass B common shares outstanding 1,153,140,699 1,125,189,978 1,127,343,312 Dilutive effect of share options 10,372,442 2,711,486 684,455 Dilutive effect of restricted shares 2,604,789 - - Dilutive effect of restricted share units 32,425,543 22,929,699 15,816,362 Dilutive effect of convertible bonds - - 72,267,200 Denominator for diluted calculation 1,198,543,473 1,150,831,163 1,216,111,329 Basic net income per Class A and Class B common share 0.92 0.92 1.35 Diluted net income per Class A and Class B common share 0.89 0.90 1.32 Basic net income per ADS* 18.46 18.37 27.04 Diluted net income per ADS* 17.76 17.96 26.40 *Each ADS represents 20 Class A common shares. The weighted average number of common shares outstanding which could potentially dilute basic earnings per share in the future related to the 2019Convertible Senior Notes was 72,267,200 and 72,267,200 for the years ended December 31, 2015 and 2016 respectively. The 2019 Convertible Senior Noteswere included in the computation of diluted earnings per share in 2016 because the inclusion of such instrument would be dilutive, while it was excluded in2015 and 2014 because the inclusion of such instrument would be anti-dilutive. F - 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 24.Related party transactions The table below sets forth the major related parties and their relationships with the Group: Major related parties Relationship with the Group Guangzhou Shanghang Information Technology Co., Ltd. (“Guangzhou Shanghang”) Controlled by a principal shareholder of the CompanyGuangzhou Chenjun Equity Investment Limited Partnership (“Guangzhou Chenjun”) Equity investmentBigo Inc. (“Bigo”) Significant influence exercised by Mr. David Xueling Li(the “Chairman”)Shanghai Yaoyu Culture Media Co., Ltd.(“Shanghai Yaoyu”) Cost investment with significant influenceShanghai Rongyi Culture Development Co., Ltd.(“Shanghai Rongyi”) Cost investment with significant influenceGuangzhou Kuyou Information Technology Co., Ltd.(“Guangzhou Kuyou”) Equity investmentXingxue (1) Equity investment (1) Xingxue became the Group’s equity investment in December 2016. F - 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 24.Related party transactions (continued) During the years ended December 31, 2014, 2015 and 2016, significant related party transactions are as follows: For the year ended December 31, 2014 2015 2016 RMB RMB RMB Online games revenue shared from related parties 65,247 163,912 100,078 Bandwidth service provided by Guangzhou Shanghang 42,470 74,661 96,224 Loan to related parties 1,500 159,000 44,500 Partial disposal of an equity investment to Guangzhou Chenjun - - 33,750 Partial disposal of a subsidiary to Guangzhou Chenjun - - 24,394 Payment on behalf of related parties, net of repayments 61,000 (60,870) 10,699 Repayment of loans from related parties 1,500 160,000 - Sales of equipment to Bigo - 12,058 - Purchase of operating rights for game broadcasting from Shanghai Yaoyu - 11,486 - Purchase of operating rights for licensed games from related parties 6,836 10,022 - Others 1,563 9,095 13,573 As of December 31, 2015 and 2016, the amounts due from/to related parties are as follows: December 31, 2015 2016 RMB RMB Amounts due from related parties Due from Guangzhou Chenjun - 58,144 Due from Bigo - 31,528 Due from Xingxue - 20,000 Due from Shanghai Rongyi - 13,000 Others 5,297 12,573 Total 5,297 135,245 Amounts due to related parties Due to Xingxue - 42,128 Due to Guangzhou Kuyou 9,017 30,996 Due to Shanghang 10,167 10,925 Others 5,733 7,196 Total 24,917 91,245 The other receivables/payables from/to related parties are unsecured and payable on demand. F - 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 25.Fair value measurements Fair value reflects the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants atthe measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Groupconsiders the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing theassets or liabilities. The Group applies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fairvalue measurement. This guidance specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique areobservable or unobservable. The hierarchy is as follows: Level 1—Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to theassets or liabilities being measured. Level 2—Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets orliabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets thatare not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2valuation techniques. Level 3—Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuationtechnique inputs that reflect the Group’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The fair value guidance describes three main approaches to measure the fair value of assets and liabilities: (1) market approach; (2) income approach and(3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparableassets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based onthe value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required toreplace an asset. When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Groupwill measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interestrates and currency rates. The Group did not have any other financial instruments that were required to be measured at fair value on a recurring basis as ofDecember 31, 2016 except for two available-for-sale investments and contingent consideration. F - 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 25.Fair value measurements (continued) The following table summarizes the Company’s assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy asof December 31, 2015 and December 31, 2016: As of December 31, 2015 Level 1 Level 2 Level 3 Total Assets Investments: Available-for-sale securities - - 6,117 6,117 As of December 31, 2016 Level 1 Level 2 Level 3 Total Assets Investments: Available-for-sale securities 182,480 - 6,117 188,597 The available-for-sale security classified in level 3 represented investment in the redeemable preferred shares of a private company. There was no significantchanges in fair value of the investment from the investment date to December 31, 2016. The following table presents the changes in level 3 instruments (except for the available-for-sale security classified in level 3, which had no significantchanges in fair value) for the years ended 31 December, 2015 and 2016. Contingent consideration in relation to business acquisitions RMB Balance as of December 31, 2014 183,000 Acquisition of Beifu in 2015 (Note 4) 107,306 Fair value change of contingent consideration in 2015 (290,306)Balance as of December 31, 2015 and 2016 - As for contingent consideration in relation to business acquisitions, the Company used the Trinomial Tree model in determining the fair value of thecontingent consideration. In applying this model, the Company performed scenario analysis and the fair value of the contingent consideration was determinedbased on present value of the total contingent consideration under different scenarios and the probability of each scenario. The following table summarizes thefactors that the Company used to discount the contingent consideration in relation to acquisition in future years to its present value upon the acquisition date, Initial recognition of contingent consideration in relation to business acquisitions Risk free interest rate Discount rate Acquisition of Beifu 3.81% 18% F - 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 25.Fair value measurements (continued) Pursuant to ASC 805, subsequent measurement for changes in the fair value of contingent consideration after the acquisition date can be divided into twocategories. i.Additional information about facts and circumstances that existed at the acquisition date that the acquirer obtained after that date;ii.Changes resulting from events after the acquisition date. According to the relevant acquisition agreements, actual financial performance in specific years may result in subsequent changes to the contingentconsideration. Unless the change is due to additional information about facts already existed at the acquisition date, these changes should be regarded asresulting from events after the acquisition date and do not constitute measurement period adjustments. Therefore, the second category will be applied to theCompany. The Company will re-measure the fair value of the liability recognized for the contingent consideration at each reporting date until the contingencyis resolved. For the year ended December 31, 2015 and 2016, the Company recorded a change in fair value of the contingent consideration of RMB290,306and nil in other expense pursuant to ASC 805. Apart from the contingent consideration in relation to business acquisitions and available-for-sale investment, the Company’s other financial instrumentsconsist principally of cash, short-term deposits, accounts receivable, amounts due to/from related parties, accounts payable, certain accrued expenses andconvertible bonds. The recorded values of cash, accounts receivable, amounts due to/from related parties, accounts payable, certain accrued expenses andconvertible bonds are recorded at cost which approximates fair value. The fair value of convertible bonds is within level 2 of the fair value hierarchy. 26.Commitments and contingencies (a)Operating lease commitments The Group leases facilities in the PRC under non-cancellable operating leases expiring on different dates. Payments under operating leases are expensed on astraight-line basis over the periods of the respective leases. Total office rental expenses under all operating leases were RMB28,144, RMB53,674 and RMB76,753 for the years ended December 31, 2014, 2015 and2016, respectively. As of December 31, 2016, future minimum payments under non-cancellable operating leases consist of the following: Office rental RMB 2017 41,848 2018 28,335 2019 1,876 2020 and after 444 72,503 (b)Capital commitment As of December 31, 2016, the Group had outstanding capital commitments totaling RMB144,301, which consisted of capital expenditures. (c)Litigation In October 2014, Guangzhou NetEase Computer System Co., Ltd. (“NetEase”) brought a copyright infringement claim against the Group in the IntermediatePeople’s Court of Guangzhou, alleging that the Group’s live game broadcasting program has infringed the copyright of one of their online games calledFantasy Westward Journey. The claimant is seeking RMB100 million for their potential damages, requesting YY to cease the copyright infringement practicesand apologize publicly. Up to the date of this report, there has been no judgement from the court yet. The Group is not able to make a reliable estimate of thepotential loss, if any, at this stage. F - 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 27.Subsequent events (a)Repurchase of the Notes The Notes were redeemable at the holders’ option on April 1, 2017 (Note 17). US$399 million aggregate principal amount of the Notes are redeemed on April1, 2017. The Company has accepted the repurchase and forwarded cash in payment of the repurchase price to the paying agent for distribution to the holderswho had exercised the option. Following the repurchase, US$1 million aggregate principal amount of the Notes remains outstanding and will be due in 2019. (b)Change in segment reporting Considering that the online education business is becoming insignificant to the Group, the Company decided that the financial performance of 100 Educationwill no longer be presented for CODM's review separately in the Group's internal reporting from the first quarter of 2017. As a result, 100 Education willcease to be a separate operating segment starting from the first quarter of 2017. (c)Loan agreements On January 19, 2017, the Group entered into a loan agreement with a bank, pursuant to which the Group borrowed a loan with a principal amount of US$30million within a credit facility of US$80 million. The annualized interest rate of the loan is 3-month LIBOR plus 1.5%, accruing from draw-down. The draw-down of US$30 million took place on March 8, 2017 and shall be repaid before March 1, 2018. Term deposit of RMB500 million was pledged as collateral forthe loan until March 13, 2018. On February 17, 2017, the Group entered into a loan agreement with a bank, pursuant to which the Group borrowed a loan with a total principal amount ofUS$60 million within a credit facility of US$80 million. The annualized interest rate of the loan is 3-month LIBOR plus 0.85%, accruing from draw-down.The first draw-down of US$45 million took place on March 21, 2017 and the second draw-down of US$15 million took place on March 30, 2017. The loanshall be repaid before February 9, 2018. Term deposit of RMB500 million was pledged as collateral for the loan until February 23, 2018. 28.Restricted net assets Relevant PRC laws and regulations permit payments of dividends by the Group’s subsidiaries and VIEs incorporated in the PRC only out of their retainedearnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the Company’s subsidiaries and VIEs in the PRCare required to annually appropriate 10% of their net after-tax income to the statutory general reserve fund prior to payment of any dividends, unless suchreserve funds have reached 50% of their respective registered capital. As a result of these and other restrictions under PRC laws and regulations, the Group’ssubsidiaries and VIEs incorporated in the PRC are restricted in their ability to transfer a portion of their net assets to the Company either in the form ofdividends, loans or advances, which restricted portion as calculated under U.S. GAAP amounted to approximately RMB2,685,373 and RMB2,678,921 as ofDecember 31, 2015 and 2016, respectively. There are no differences between U.S. GAAP and PRC accounting standards in connection with the reported netassets of the legally owned subsidiaries in the PRC and the VIEs. Even though the Company currently does not require any such dividends, loans or advancesfrom the PRC entities for working capital and other funding purposes, the Company may in the future require additional cash resources from them due tochanges in business conditions, to fund future acquisitions and development, or merely to declare and pay dividends or distributions to our shareholders.Except for the above, there is no other restriction on use of proceeds generated by the Group’s subsidiaries and VIEs to satisfy any obligations of theCompany. The Company performed a test on the restricted net assets of subsidiaries and VIEs in accordance with Securities and Exchange Commission Regulation S-XRule 4-08 (e) (3), “General Notes to Financial Statements” and concluded that the restricted net assets exceeded 25% of the consolidated net assets of theCompany as of December 31, 2016 and the condensed financial information of the Company are required to be presented (Note 30). F - 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 29.Segment Reporting Prior to 2015, the Group’s internal reporting to the CODM had not distinguish cost and expenses among segments. Hence, the Group had only one operatingsegment prior to 2015. Starting from the first quarter of 2015, in order to better evaluate the Group’s business performance and better allocate resources the CODM began to reviewYY IVAS and others, Huya broadcasting, and 100 Education separately. In June 2016, the Group revamped the branding from YY IVAS to YY Live. Therefore, the segment of “YY IVAS and others” was renamed as “YY Live”.For the year ended December 31, 2015 and 2014, net revenues of “YY IVAS” and “others” were presented to the CODM’s review separately. Following therevamp of the branding, net revenues of “YY Live” as a whole are presented to the CODM’s review. Segment presentation for the year ended December 31,2015 and 2014 have been updated to be consistent with the segment presentation for the year ended December 31, 2016. The CODM assesses the performance of the operating segments mainly based on net revenues, gross profit/loss, operating income/loss of each reportingsegment. Net revenues, gross profit/loss and operating income/loss of YY Live, Huya broadcasting and 100 education are presented for the CODM’s reviewseparately. Segmental information for prior periods was prepared and presented on the same basis as 2016 for comparative information purpose. As the Group’s long-lived assets and revenue are substantially located in and derived from the PRC, no geographical segments are presented. The Group currently does not allocate assets to all of its segments, as its CODM does not use such information to allocate resources or evaluate theperformance of the operating segments. F - 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 29.Segment Reporting (continued) The following table presents summary information by segment: For the year ended December 31, 2016: YY Live Huya broadcasting 100 Education Total RMB RMB RMB RMB Net revenues Live streaming 6,235,249 791,978 - 7,027,227 Online games 634,325 - - 634,325 Membership 284,860 - - 284,860 Others 91,985 4,926 160,727 257,638 Total net revenues 7,246,419 796,904 160,727 8,204,050 Cost of revenues (1) (3,942,201) (1,053,257) (107,972) (5,103,430) Gross profit / (loss) 3,304,218 (256,353) 52,755 3,100,620 Operating expenses (1) Research and development expenses (519,401) (125,308) (30,521) (675,230)Sales and marketing expenses (278,296) (49,490) (59,482) (387,268)General and administrative expenses (402,072) (45,211) (35,154) (482,437)Goodwill impairment (3,861) - (13,804) (17,665)Fair value change of contingent consideration - - - - Total operating expenses (1,203,630) (220,009) (138,961) (1,562,600) Gain on deconsolidation and disposal of subsidiaries 103,960 - - 103,960 Other income 129,504 - - 129,504 Operating income / (loss) 2,334,052 (476,362) (86,206) 1,771,484 (1) Share based compensation was allocated in cost of revenues and operating expenses as follows: YY Live Huya broadcasting 100 Education Total RMB RMB RMB RMB Cost of revenues 11,367 4,203 324 15,894 Research and development expenses 58,271 14,352 6,193 78,816 Sales and marketing expenses 2,826 281 - 3,107 General and administrative expenses 32,888 13,192 13,389 59,469 Share based compensation expenses 105,352 32,028 19,906 157,286 F - 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 29.Segment Reporting (continued) For the year ended December 31, 2015: YY Live Huya broadcasting 100 Education Total RMB RMB RMB RMB Net revenues Live streaming 4,183,533 356,324 - 4,539,857 Online games 771,882 - - 771,882 Membership 291,310 - - 291,310 Others 170,426 - 123,774 294,200 Total net revenues 5,417,151 356,324 123,774 5,897,249 Cost of revenues (1) (2,798,064) (655,066) (126,614) (3,579,744) Gross profit / (loss) 2,619,087 (298,742) (2,840) 2,317,505 Operating expenses (1) Research and development expenses (445,411) (66,538) (36,850) (548,799)Sales and marketing expenses (253,129) (24,469) (35,272) (312,870)General and administrative expenses (240,536) (25,869) (92,069) (358,474)Goodwill impairment (128,034) - (182,090) (310,124)Fair value change of contingent consideration 107,306 - 185,165 292,471 Total operating expenses (959,804) (116,876) (161,116) (1,237,796)Other income 82,300 - - 82,300 Operating income / (loss) 1,741,583 (415,618) (163,956) 1,162,009 (1) Share based compensation was allocated in cost of revenues and operating expenses as follows: YY Live Huya broadcasting 100 Education Total RMB RMB RMB RMB Cost of revenues 22,077 1,497 389 23,963 Research and development expenses 59,400 4,754 6,797 70,951 Sales and marketing expenses 3,119 164 - 3,283 General and administrative expenses 51,260 3,302 32,613 87,175 Share based compensation expenses 135,856 9,717 39,799 185,372 F - 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 29.Segment Reporting (continued) For the year ended December 31, 2014: YY Live Huya broadcasting 100 Education Total RMB RMB RMB RMB Net revenues Live streaming 2,322,008 153,371 - 2,475,379 Online games 811,699 - - 811,699 Membership 205,199 - - 205,199 Others 185,141 - 950 186,091 Total net revenues 3,524,047 153,371 950 3,678,368 Cost of revenues (1) (1,586,933) (248,154) (14,062) (1,849,149) Gross profit / (loss) 1,937,114 (94,783) (13,112) 1,829,219 Operating expenses (1) Research and development expenses (362,352) (47,765) (21,071) (431,188)Sales and marketing expenses (97,983) (4,399) (145) (102,527)General and administrative expenses (200,535) (20,954) (1,530) (223,019) Total operating expenses (660,870) (73,118) (22,746) (756,734) Other income 6,319 - - 6,319 Operating income / (loss) 1,282,563 (167,901) (35,858) 1,078,804 (1) Share based compensation was allocated in cost of revenues and operating expenses as follows: YY Live Huya broadcasting 100 Education Total RMB RMB RMB RMB Cost of revenues 16,552 1,185 300 18,037 Research and development expenses 47,315 1,895 4,931 54,141 Sales and marketing expenses 2,803 4 - 2,807 General and administrative expenses 57,938 1,660 49 59,647 Share based compensation expenses 124,608 4,744 5,280 134,632 F - 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 30.Additional information – condensed financial statements The condensed financial statements of YY Inc. have been prepared in accordance with SEC Regulation S-X Rule 5-04 and Rule 12-04. The Company records its investments in subsidiaries under the equity method of accounting. Such investments to subsidiaries are presented on the balancesheet as “Interests in subsidiaries and VIEs” and the profit of the subsidiaries is presented as “Share of profit of subsidiaries and VIEs” in the statement ofoperations and comprehensive income. For the VIEs, where the Company is the primary beneficiary, the amount of the Company’s investment is included in the balance sheet as “Interests insubsidiaries and VIEs” and the profit of the VIEs is included in “Share of profit of subsidiaries and VIEs” in the statement of operations and comprehensiveincome. The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these financial statements should be read inconjunction with the notes to the Consolidated Financial Statements of the Company. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with U.S. GAAP have been condensed or omitted. As of December 31, 2015 and 2016, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company,except for those, if any, which have been separately disclosed in the consolidated financial statements. F - 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 30.Additional information – condensed financial statements (continued) (a)Condensed balance sheets of YY Inc. as of December 31, 2015 and 2016 As of December 31, 2015 2016 2016 RMB RMB US$ (Note 2(e)) Assets Current assets Amounts due from a subsidiary 1,881,616 1,947,080 280,438 Non-current assets Interests in subsidiaries and VIEs 3,944,457 5,883,684 847,426 Total non-current assets 3,944,457 5,883,684 847,426 Total assets 5,826,073 7,830,764 1,127,864 Liabilities and shareholders’ equity Current liabilities Interests payable 14,795 15,800 2,276 Convertible bonds (1) - 2,768,469 398,742 Non-current liabilities Convertible bonds (2) 2,572,119 - - Total liabilities 2,586,914 2,784,269 401,018 Shareholders’ equity Class A common shares (US$0.00001 par value; 10,000,000,000 shares authorized,728,227,848 shares issued and outstanding as of December 31, 2015 and 750,115,028shares issued and outstanding as of December 31, 2016) 43 44 6 Class B common shares (US$0.00001 par value; 1,000,000,000 shares authorized,369,557,976 shares issued and outstanding as of December 31, 2015 and 359,557,976shares issued and outstanding as of December 31, 2016) 27 26 4 Additional paid-in capital 2,011,799 2,165,766 311,935 Retained earnings 1,263,675 2,787,593 401,497 Accumulated other comprehensive (loss)/income (36,385) 93,066 13,404 Total shareholders’ equity 3,239,159 5,046,495 726,846 Total liabilities and shareholders’ equity 5,826,073 7,830,764 1,127,864 (1) Convertible bonds classified in current liabilities represent Convertible Senior Notes which may be redeemed within one year. (2) Effectively January 2016, ASU 2015-3 issued by FASB requires entities to present the issuance costs of bonds in the balance sheet as a direct deduction fromthe related bonds rather than assets. Accordingly, the Company retrospectively reclassified RMB25.3 million of issuance cost of bonds from other non-currentassets into convertible bonds as of December 31, 2015. F - 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(All amount in thousands, except share and per share data, unless otherwise stated) 30.Additional information – condensed financial statements (continued) (b) Condensed statements of operations and comprehensive income of YY Inc. for the years ended December 31, 2014, 2015 and 2016 For the year ended December 31, 2014 2015 2016 2016 RMB RMB RMB US$ (Note2(e)) Share of profit of subsidiaries and VIEs 1,121,079 1,108,029 1,605,003 231,170 Interest expense (56,607) (74,786) (81,085) (11,679) Income before income tax expenses 1,064,472 1,033,243 1,523,918 219,491 Net income 1,064,472 1,033,243 1,523,918 219,491 Other comprehensive income/(loss) : Unrealized gain of available-for-sales securities - - 134,768 19,411 Foreign currency translation adjustments, net of nil tax 3,638 4,414 (5,317) (766) Comprehensive income 1,068,110 1,037,657 1,653,369 238,136 (c)Condensed statements of cash flows of YY Inc. for the years ended December 31, 2014, 2015 and 2016 For the year ended December 31, 2014 2015 2016 2016 RMB RMB RMB US$ (Note2(e)) Cash flows from investing activities Loan to a subsidiary (2,412,290) - - - Net cash used in investing activities (2,412,290) - - - Cash flows from financing activities Proceeds from issuance of convertible bonds 2,412,290 - - - Net cash provided by financing activities 2,412,290 - - - Net increase in cash and cash equivalents - - - - Cash and cash equivalents at the beginning of the year - - - - Cash and cash equivalents at the end of the year - - - - F - 77 Exhibit 1.2 The Companies Law (Revised) Company Limited by Shares THE SECOND AMENDED AND RESTATED ARTICLES OF ASSOCIATION, AS AMENDED OF YY Inc.(Adopted by way of a special resolutionpassed on October 12, 2012, effective immediately upon the completion of the Company’s initial public offering ofits Class ACommon Shares represented by American Depositary Shares on the NASDAQ Global Market and amended by wayof a special resolution passed on November 28, 2016) I N D E X SUBJECT Article No.Table A 1Interpretation 2Share Capital 3Alteration Of Capital 4-7Share Rights 8-10Variation Of Rights 11Shares 12-15Share Certificates 16-21Lien 22-24Calls On Shares 25-33Forfeiture Of Shares 34-42Register Of Members 43-44Record Dates 45Transfer Of Shares 46-51Transmission Of Shares 52-54Untraceable Members 55General Meetings 56-58Notice Of General Meetings 59-60Proceedings At General Meetings 61-65Voting 66-77Proxies 78-83Corporations Acting By Representatives 84Board Of Directors 86Disqualification Of Directors 87Executive Directors 88-89Alternate Directors 90-93Directors’ Fees And Expenses 94-96Directors’ Interests 97-100General Powers Of The Directors 101-106Borrowing Powers 107-110Proceedings Of The Directors 111-120 Audit Committee 121-123Officers 124-127Register of Directors and Officers 128Minutes 129Seal 130Authentication Of Documents 131Destruction Of Documents 132Dividends And Other Payments 133-142Reserves 143Capitalisation 144-145Subscription Rights Reserve 146Accounting Records 147-151Audit 152-157Notices 158-160Signatures 161Winding Up 162-163Indemnity 164Amendment To Memorandum and Articles of Association And Name of Company 165Information 166 INTERPRETATIONTABLE A 1. The regulations in Table A in the Schedule to the Companies Law (Revised) do not apply to the Company. INTERPRETATION 2. (1) In these Articles, unless the context otherwise requires, the words standing in the first column of the following table shall bear the meaning set opposite themrespectively in the second column. WORDMEANING “Audit Committee”the audit committee of the Company formed by the Board pursuant to Article 124) hereof, or anysuccessor audit committee. “Auditor”the independent auditor of the Company which shall be an internationally recognized firm ofindependent accountants. “Articles”these Articles in their present form or as supplemented or amended or substituted from time to time. “Board” or “Directors”the board of directors of the Company or the directors present at a meeting of directors of theCompany at which a quorum is present. “capital”the share capital from time to time of the Company. “Class A Common Share”a class A common share of par value US$0.00001 each in the share capital of the Company havingthe rights set out in these Articles. “Class B Common Share”a class B common share of par value US$0.00001 each in the share capital of the Company havingthe rights set out in these Articles. “Common Shares”the Class A Common Shares and Class B Common Shares, collectively. “clear days”in relation to the period of a notice, that period excluding the day when the notice is given or deemedto be given and the day for which it is given or on which it is to take effect. 2 “clearing house”a clearing house recognised by the laws of the jurisdiction in which the shares of the Company (ordepositary receipts therefor) are listed or quoted on a stock exchange or interdealer quotation systemin such jurisdiction. “Company”YY Inc. “competent regulatory authority”a competent regulatory authority in the territory where the shares of the Company (or depositaryreceipts therefor) are listed or quoted on a stock exchange or interdealer quotation system in suchterritory. “debenture” and “debenture holder”include debenture stock and debenture stockholder respectively. “Designated Stock Exchange”the National Market of The Nasdaq Stock Market, Inc. “dollars” and “$”dollars, the legal currency of the United States of America. “Exchange Act”the Securities Exchange Act of 1934, as amended. “head office”such office of the Company as the Directors may from time to time determine to be the principaloffice of the Company. “Law”The Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands. “Member”a duly registered holder from time to time of the shares in the capital of the Company. “month”a calendar month. “NASD”National Association of Securities Dealers. “NASD Rules”the rules set forth in the NASD Manual. “Notice”written notice unless otherwise specifically stated and as further defined in these Articles. “Office”the registered office of the Company for the time being. “ordinary resolution”a resolution shall be an ordinary resolution when it has been passed by a simple majority of votescast by such Members as, being entitled so to do, vote in person or, in the case of any Member beinga corporation, by its duly authorised representative or, where proxies are allowed, by proxy at ageneral meeting of which not less than ten (10) clear days’ Notice has been duly given; “paid up”paid up or credited as paid up. “Register”the principal register and where applicable, any branch register of Members of the Company to bemaintained at such place within or outside the Cayman Islands as the Board shall determine fromtime to time. “Registration Office”in respect of any class of share capital such place as the Board may from time to time determine tokeep a branch register of Members in respect of that class of share capital and where (except in caseswhere the Board otherwise directs) the transfers or other documents of title for such class of sharecapital are to be lodged for registration and are to be registered. 3 “SEC”the United States Securities and Exchange Commission. “Seal”common seal or any one or more duplicate seals of the Company (including a securities seal) for usein the Cayman Islands or in any place outside the Cayman Islands. “Secretary”any person, firm or corporation appointed by the Board to perform any of the duties of secretary ofthe Company and includes any assistant, deputy, temporary or acting secretary. “special resolution”a resolution shall be a special resolution when it has been passed by a majority of not less than two-thirds of votes cast by such Members as, being entitled so to do, vote in person or, in the case of suchMembers as are corporations, by their respective duly authorised representative or, where proxies areallowed, by proxy at a general meeting of which not less than ten (10) clear days’ Notice, specifying(without prejudice to the power contained in these Articles to amend the same) the intention topropose the resolution as a special resolution, has been duly given. Provided that, except in the caseof an annual general meeting, if it is so agreed by a majority in number of the Members having theright to attend and vote at any such meeting, being a majority together holding not less than ninety-five (95) per cent. in nominal value of the shares giving that right and in the case of an annualgeneral meeting, if it is so agreed by all Members entitled to attend and vote thereat, a resolution maybe proposed and passed as a special resolution at a meeting of which less than ten (10) clear days’Notice has been given; a special resolution shall be effective for any purpose for which an ordinary resolution is expressedto be required under any provision of these Articles or the Statutes. “Statutes”the Law and every other law of the Legislature of the Cayman Islands for the time being in forceapplying to or affecting the Company, its Memorandum of Association and/or these Articles. “year”a calendar year. (2) In these Articles, unless there be something within the subject or context inconsistent with such construction: (a)words importing the singular include the plural and vice versa; (b)words importing a gender include both gender and the neuter; (c)words importing persons include companies, associations and bodies of persons whether corporate or not; (d)the words: (i)“may” shall be construed as permissive; (ii)“shall” or “will” shall be construed as imperative; (e)expressions referring to writing shall, unless the contrary intention appears, be construed as including printing, lithography, photography and othermodes of representing words or figures in a visible form, and including where the representation takes the form of electronic display, provided thatboth the mode of service of the relevant document or notice and the Member’s election comply with all applicable Statutes, rules and regulations; 4 (f)references to any law, ordinance, statute or statutory provision shall be interpreted as relating to any statutory modification or re-enactment thereof forthe time being in force; (g)save as aforesaid words and expressions defined in the Statutes shall bear the same meanings in these Articles if not inconsistent with the subject inthe context; (h)references to a document being executed include references to it being executed under hand or under seal or by electronic signature or by any othermethod and references to a notice or document include a notice or document recorded or stored in any digital, electronic, electrical, magnetic or otherretrievable form or medium and information in visible form whether having physical substance or not; (i)Section 8 of the Electronic Transactions Law (2003) of the Cayman Islands, as amended from time to time, shall not apply to these Articles to theextent it imposes obligations or requirements in addition to those set out in these Articles. SHARE CAPITAL 3. (1) The share capital of the Company at the date on which these Articles come into effect shall be divided into (a) 10,000,000,000 Class A Common Sharesof a par value of $0.00001 each and (b) 1,000,000,000 Class B Common Shares of a par value of $0.00001 each. (2) Subject to the Law, the Company’s Memorandum and Articles of Association and, where applicable, the rules of the Designated Stock Exchange and/orany competent regulatory authority, any power of the Company to purchase or otherwise acquire its own shares shall be exercisable by the Board in such manner,upon such terms and subject to such conditions as it thinks fit. (3) No share shall be issued to bearer. ALTERATION OF CAPITAL 4. The Company may from time to time by ordinary resolution in accordance with the Law alter the conditions of its Memorandum of Association to: (a)increase its capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe; (b)consolidate and divide all or any of its capital into shares of larger amount than its existing shares; (c)without prejudice to the powers of the Board under Article 12, divide its shares into several classes and without prejudice to any special rightspreviously conferred on the holders of existing shares attach thereto respectively any preferential, deferred, qualified or special rights, privileges,conditions or such restrictions which in the absence of any such determination by the Company in general meeting, as the Directors may determineprovided always that, for the avoidance of doubt, where a class of shares has been authorized by the Company, no resolution of the Company ingeneral meeting is required for the issuance of shares of that class and the Directors may issue shares of that class and determine such rights,privileges, conditions or restrictions attaching thereto as aforesaid, and further provided that where the Company issues shares which do not carryvoting rights, the words “non-voting” shall appear in the designation of such shares and where the equity capital includes shares with different votingrights, the designation of each class of shares, other than those with the most favourable voting rights, must include the words “restricted voting” or“limited voting”; (d)sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum of Association (subject, nevertheless, to theLaw), and may by such resolution determine that, as between the holders of the shares resulting from such sub-division, one or more of the shares mayhave any such preferred, deferred or other rights or be subject to any such restrictions as compared with the other or others as the Company has powerto attach to unissued or new shares; 5 (e)cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person, and diminish theamount of its capital by the amount of the shares so cancelled or, in the case of shares, without par value, diminish the number of shares into which itscapital is divided. 5. The Board may settle as it considers expedient any difficulty which arises in relation to any consolidation and division under the last preceding Article and inparticular but without prejudice to the generality of the foregoing may issue certificates in respect of fractions of shares or arrange for the sale of the sharesrepresenting fractions and the distribution of the net proceeds of sale (after deduction of the expenses of such sale) in due proportion amongst the Members whowould have been entitled to the fractions, and for this purpose the Board may authorise some person to transfer the shares representing fractions to their purchaseror resolve that such net proceeds be paid to the Company for the Company’s benefit. Such purchaser will not be bound to see to the application of the purchasemoney nor will his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. 6. The Company may from time to time by special resolution, subject to any confirmation or consent required by the Law, reduce its share capital or any capitalredemption reserve in any manner permitted by law. 7. Except so far as otherwise provided by the conditions of issue, or by these Articles, any capital raised by the creation of new shares shall be treated as if itformed part of the original capital of the Company, and such shares shall be subject to the provisions contained in these Articles with reference to the payment ofcalls and instalments, transfer and transmission, forfeiture, lien, cancellation, surrender, voting and otherwise. SHARE RIGHTS 8. Subject to the provisions of the Law, the rules of the Designated Stock Exchange and the Memorandum and Articles of Association and to any special rightsconferred on the holders of any shares or class of shares, and without prejudice to Article 12 hereof, any share in the Company (whether forming part of the presentcapital or not) may be issued with or have attached thereto such rights or restrictions whether in regard to dividend, voting, return of capital or otherwise as theBoard may determine, including without limitation on terms that they may be, or at the option of the Company or the holder are, liable to be redeemed on suchterms and in such manner, including out of capital, as the Board may deem fit. 9. Subject to the Law, any preferred shares may be issued or converted into shares that, at a determinable date or at the option of the Company or the holder if soauthorised by its Memorandum of Association, are liable to be redeemed on such terms and in such manner as the Company before the issue or conversion may byordinary resolution of the Members determine. Where the Company purchases for redemption a redeemable share, purchases not made through the market or bytender shall be limited to a maximum price as may from time to time be determined by the Board, either generally or with regard to specific purchases. If purchasesare by tender, tenders shall comply with applicable laws. 10. The rights and restrictions attaching to the Common Shares are as follows: (a)Income. Holders of Common Shares shall be entitled to such dividends as the Directors may in their absolute discretion lawfully declare from time to time. (b)Capital Holders of Common Shares shall be entitled to a return of capital on liquidation, dissolution or winding-up of the Company (other than on aconversion, redemption or purchase of shares, or an equity financing or series of financings that do not constitute the sale of all or substantially all ofthe shares of the Company). (c)Attendance at General Meetings and Voting Holders of Common Shares have the right to receive notice of, attend, speak and vote at general meetings of the Company. Holders of shares ofClass A Common Shares and Class B Common Shares shall, at all times, vote together as one class on all matters submitted to a vote for Members’consent. Each share of Class A Common Share shall be entitled to one (1) vote on all matters subject to the vote at general meetings of the Company,and each share of Class B Common Share shall be entitled to ten (10) votes on all matters subject to the vote at general meetings of the Company. 6 (d)Conversion (i) Each share of Class B Common Share is convertible into one (1) share of Class A Common Share at any time by the holder thereof. In no eventshall Class A Common Shares be convertible into Class B Common Shares. (ii) If at any time Mr. David Xueling Li, Mr. Jun Lei, Mr. Tony Bin Zhao and Mr. Jin Cao (the “Founders”), together with their Affiliates,collectively own less than 5% of the total number of the issued and outstanding Class B Common Shares of the Company, each issued andoutstanding share of Class B Common Share shall be automatically and immediately converted into one share of Class A Common Share, and noClass B Common Shares shall be issued by the Company thereafter. (iii) Upon any sale, transfer, assignment or disposition of Class B Common Shares by a holder thereof to any person or entity which is not anAffiliate of such holder, such Class B Common Shares shall be automatically and immediately converted into an equal number of Class ACommon Shares; provided that, except as set forth in Article 10(d)(iv) below, a change in the beneficial ownership of Class B Common Sharesfrom a holder of Class B Common Shares to an Affiliate of such holder shall not cause a conversion under this Article 10(d)(iii). In addition, if atany time more than fifty percent (50%) of the ultimate beneficial ownership of any holder of Class B Common Shares (other than the Founders orthe Founders’ Affiliates) changes, each such Class B Common Share shall be automatically and immediately converted into one Class A CommonShare. For the avoidance of doubt, (a) the transfer, assignment or disposition of Class B Common Shares by a holder thereof to any of thefollowing shall be exempt from, and not trigger, the automatic conversion contemplated under this Article 10(d)(iii): (i) a Founder or a Founder’sAffiliate or (ii) to a limited partner or a shareholder of such holder; and (b) the creation of any pledge, charge, encumbrance or other third partyright of whatever description on any Class B Common Shares to secure a holder’s contractual or legal obligations shall not be deemed as a sale,transfer, assignment or disposition unless and until any such pledge, charge, encumbrance or other third party right is enforced and results in thethird party holding legal title to the related Class B Common Shares, in which case all the related Class B Common Shares shall be automaticallyconverted into the same number of Class A Common Shares. (iv) For the avoidance of doubt, a transfer shall be effective upon the Company’s registration of such transfer in its register of Members. Forpurposes of Article 10(d)(iii) and Article 10(d)(iv), “beneficial ownership” shall have the meaning defined in Rule 13d-3 under the U.S. SecuritiesExchange Act of 1934, as amended. (v) Any conversion of Class B Common Shares into Class A Common Shares pursuant to this Article 10 shall be effected by means of the re-designation and re-classification of the relevant Class B Common Share as a Class A Common Share together with such rights and restrictions andwhich shall rank pari passu in all respects with the Class A Common Shares then in issue. Such conversion shall become effective forthwith uponentries being made in the Register of Members to record the re-designation and re-classification of the relevant Class B Common Shares asClass A Common Shares. (vi) Upon conversion, the Company shall allot and issue the relevant Class A Common Shares to the converting Member, enter or procure theentry of the name of the relevant holder of Class B Common Shares as the holder of the relevant number of Class A Common Shares resultingfrom the conversion of the Class B Common Shares in, and make any other necessary and consequential changes to, the Register of Members andshall procure that certificates in respect of the relevant Class A Common Shares, together with a new certificate for any unconverted Class BCommon Shares comprised in the certificate(s) surrendered by the holder of the Class B Common Shares, are issued to the holders of the Class ACommon Shares and Class B Common Shares, as the case may be. 7 (vi) Save and except for voting rights and conversion rights as set out in this Article 10(c) and (d), the Class A Commons Shares and the Class BCommon Shares shall rank pari passu and shall have the same rights, preferences, privileges and restrictions. VARIATION OF RIGHTS 11. Subject to the Law and without prejudice to Article 8, all or any of the special rights for the time being attached to the shares or any class of shares may, unlessotherwise provided by the terms of issue of the shares of that class, from time to time (whether or not the Company is being wound up) be varied, modified orabrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. To every such separate generalmeeting all the provisions of these Articles relating to general meetings of the Company shall, mutatis mutandis, apply, but so that: (a)separate general meetings of the holders of a class or series of shares may be called only by (i) the Chairman of the Board, or (ii) a majority of theentire Board of Directors (unless otherwise specifically provided by the terms of issue of the shares of such class or series). Nothing in this Article 11shall be deemed to give any Member or Members the right to call a class or series meeting; (b)the necessary quorum (whether at a separate general meeting or at its adjourned meeting) shall be a person or persons (or in the case of a Memberbeing a corporation, its duly authorized representative) together holding or representing by proxy not less than one-third in nominal value of the issuedshares of that class; (c)every holder of shares of the class shall be entitled on a poll to one vote for every such share held by him; and (d)any holder of shares of the class present in person or by proxy or authorised representative may demand a poll. The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to orthe terms of issue of such shares, be deemed to be varied, modified or abrogated by the creation or issue of further shares ranking pari passu therewith. SHARES 12. (1) Subject to the Law, these Articles and, where applicable, the rules of the Designated Stock Exchange and without prejudice to any special rights orrestrictions for the time being attached to any shares or any class of shares, the unissued shares of the Company (whether forming part of the original or anyincreased capital) shall be at the disposal of the Board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times andfor such consideration and upon such terms and conditions as the Board may in its absolute discretion determine but so that no shares shall be issued at a discount.In particular and without prejudice to the generality of the foregoing, the Board is hereby empowered to authorize by resolution or resolutions from time to time theissuance of one or more classes or series of preferred shares and to fix the designations, powers, preferences and relative, participating, optional and other rights, ifany, and the qualifications, limitations and restrictions thereof, if any, including, without limitation, the number of shares constituting each such class or series,dividend rights, conversion rights, redemption privileges, voting powers, full or limited or no voting powers, and liquidation preferences, and to increase ordecrease the size of any such class or series (but not below the number of shares of any class or series of preferred shares then outstanding) to the extent permittedby Law. Without limiting the generality of the foregoing, the resolution or resolutions providing for the establishment of any class or series of preferred sharesmay, to the extent permitted by law, provide that such class or series shall be superior to, rank equally with or be junior to the preferred shares of any other class orseries. (2) Neither the Company nor the Board shall be obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, ormake available, any such allotment, offer, option or shares to Members or others with registered addresses in any particular territory or territories being a territoryor territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the Board, be unlawful orimpracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever.Except as otherwise expressly provided in the resolution or resolutions providing for the establishment of any class or series of preferred shares, no vote of theholders of preferred shares of or ordinary shares shall be a prerequisite to the issuance of any shares of any class or series of the preferred shares authorized by andcomplying with the conditions of the Memorandum and Articles of Association. 8 (3) The Board may issue options, warrants or convertible securities or securities of similar nature conferring the right upon the holders thereof to subscribefor, purchase or receive any class of shares or securities in the capital of the Company on such terms as it may from time to time determine. 13. The Company may in connection with the issue of any shares exercise all powers of paying commission and brokerage conferred or permitted by the Law.Subject to the Law, the commission may be satisfied by the payment of cash or by the allotment of fully or partly paid shares or partly in one and partly in theother. 14. Except as required by law, no person shall be recognised by the Company as holding any share upon any trust and the Company shall not be bound by orrequired in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any fractional part of a shareor (except only as otherwise provided by these Articles or by law) any other rights in respect of any share except an absolute right to the entirety thereof in theregistered holder. 15. Subject to the Law and these Articles, the Board may at any time after the allotment of shares but before any person has been entered in the Register as theholder, recognise a renunciation thereof by the allottee in favour of some other person and may accord to any allottee of a share a right to effect such renunciationupon and subject to such terms and conditions as the Board considers fit to impose. SHARE CERTIFICATES 16. Every share certificate shall be issued under the Seal or a facsimile thereof and shall specify the number and class and distinguishing numbers (if any) of theshares to which it relates, and the amount paid up thereon and may otherwise be in such form as the Directors may from time to time determine. No certificate shallbe issued representing shares of more than one class. The Board may by resolution determine, either generally or in any particular case or cases, that any signatureson any such certificates (or certificates in respect of other securities) need not be autographic but may be affixed to such certificates by some mechanical means ormay be printed thereon. 17. (1) In the case of a share held jointly by several persons, the Company shall not be bound to issue more than one certificate therefor and delivery of a certificateto one of several joint holders shall be sufficient delivery to all such holders. (2) Where a share stands in the names of two or more persons, the person first named in the Register shall as regards service of notices and, subject to theprovisions of these Articles, all or any other matters connected with the Company, except the transfer of the shares, be deemed the sole holder thereof. 18. Every person whose name is entered, upon an allotment of shares, as a Member in the Register shall be entitled, without payment, to receive one certificate forall such shares of any one class or several certificates each for one or more of such shares of such class upon payment for every certificate after the first of suchreasonable out-of-pocket expenses as the Board from time to time determines. 9 19. Share certificates shall be issued within the relevant time limit as prescribed by the Law or as the Designated Stock Exchange may from time to time determine,whichever is the shorter, after allotment or, except in the case of a transfer which the Company is for the time being entitled to refuse to register and does notregister, after lodgment of a transfer with the Company. 20. (1) Upon every transfer of shares the certificate held by the transferor shall be given up to be cancelled, and shall forthwith be cancelled accordingly, and a newcertificate shall be issued to the transferee in respect of the shares transferred to him at such fee as is provided in paragraph (2) of this Article. If any of the sharesincluded in the certificate so given up shall be retained by the transferor a new certificate for the balance shall be issued to him at the aforesaid fee payable by thetransferor to the Company in respect thereof. (2) The fee referred to in paragraph (1) above shall be an amount not exceeding the relevant maximum amount as the Designated Stock Exchange may fromtime to time determine provided that the Board may at any time determine a lower amount for such fee. 21. If a share certificate shall be damaged or defaced or alleged to have been lost, stolen or destroyed a new certificate representing the same shares may be issuedto the relevant Member upon request and on payment of such fee as the Company may determine and, subject to compliance with such terms (if any) as toevidence and indemnity and to payment of the costs and reasonable out-of-pocket expenses of the Company in investigating such evidence and preparing suchindemnity as the Board may think fit and, in case of damage or defacement, on delivery of the old certificate to the Company provided always that where sharewarrants have been issued, no new share warrant shall be issued to replace one that has been lost unless the Board has determined that the original has beendestroyed. LIEN 22. The Company shall have a first and paramount lien on every share (not being a fully paid share) for all moneys (whether presently payable or not) called orpayable at a fixed time in respect of that share. The Company shall also have a first and paramount lien on every share (not being a fully paid share) registered inthe name of a Member (whether or not jointly with other Members) for all amounts of money presently payable by such Member or his estate to the Companywhether the same shall have been incurred before or after notice to the Company of any equitable or other interest of any person other than such member, andwhether the period for the payment or discharge of the same shall have actually arrived or not, and notwithstanding that the same are joint debts or liabilities ofsuch Member or his estate and any other person, whether a Member of the Company or not. The Company’s lien on a share shall extend to all dividends or othermoneys payable thereon or in respect thereof. The Board may at any time, generally or in any particular case, waive any lien that has arisen or declare any shareexempt in whole or in part, from the provisions of this Article. 23. Subject to these Articles, the Company may sell in such manner as the Board determines any share on which the Company has a lien, but no sale shall be madeunless some sum in respect of which the lien exists is presently payable, or the liability or engagement in respect of which such lien exists is liable to be presentlyfulfilled or discharged nor until the expiration of fourteen (14) clear days after a notice in writing, stating and demanding payment of the sum presently payable, orspecifying the liability or engagement and demanding fulfilment or discharge thereof and giving notice of the intention to sell in default, has been served on theregistered holder for the time being of the share or the person entitled thereto by reason of his death or bankruptcy. 24. The net proceeds of the sale shall be received by the Company and applied in or towards payment or discharge of the debt or liability in respect of which thelien exists, so far as the same is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the shareprior to the sale) be paid to the person entitled to the share at the time of the sale. To give effect to any such sale the Board may authorise some person to transferthe shares sold to the purchaser thereof. The purchaser shall be registered as the holder of the shares so transferred and he shall not be bound to see to theapplication of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. CALLS ON SHARES 25. Subject to these Articles and to the terms of allotment, the Board may from time to time make calls upon the Members in respect of any moneys unpaid on theirshares (whether on account of the nominal value of the shares or by way of premium), and each Member shall (subject to being given at least fourteen (14) cleardays’ Notice specifying the time and place of payment) pay to the Company as required by such notice the amount called on his shares. A call may be extended,postponed or revoked in whole or in part as the Board determines but no member shall be entitled to any such extension, postponement or revocation except as amatter of grace and favour. 26. A call shall be deemed to have been made at the time when the resolution of the Board authorising the call was passed and may be made payable either in onelump sum or by instalments. 27. A person upon whom a call is made shall remain liable for calls made upon him notwithstanding the subsequent transfer of the shares in respect of which thecall was made. The joint holders of a share shall be jointly and severally liable to pay all calls and instalments due in respect thereof or other moneys due in respectthereof. 28. If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest onthe amount unpaid from the day appointed for payment thereof to the time of actual payment at such rate (not exceeding twenty per cent. (20%) per annum) as theBoard may determine, but the Board may in its absolute discretion waive payment of such interest wholly or in part. 10 29. No Member shall be entitled to receive any dividend or bonus or to be present and vote (save as proxy for another Member) at any general meeting eitherpersonally or by proxy, or be reckoned in a quorum, or exercise any other privilege as a Member until all calls or instalments due by him to the Company, whetheralone or jointly with any other person, together with interest and expenses (if any) shall have been paid. 30. On the trial or hearing of any action or other proceedings for the recovery of any money due for any call, it shall be sufficient to prove that the name of theMember sued is entered in the Register as the holder, or one of the holders, of the shares in respect of which such debt accrued, that the resolution making the callis duly recorded in the minute book, and that notice of such call was duly given to the Member sued, in pursuance of these Articles; and it shall not be necessary toprove the appointment of the Directors who made such call, nor any other matters whatsoever, but the proof of the matters aforesaid shall be conclusive evidenceof the debt. 31. Any amount payable in respect of a share upon allotment or at any fixed date, whether in respect of nominal value or premium or as an instalment of a call,shall be deemed to be a call duly made and payable on the date fixed for payment and if it is not paid the provisions of these Articles shall apply as if that amounthad become due and payable by virtue of a call duly made and notified. 32. On the issue of shares the Board may differentiate between the allottees or holders as to the amount of calls to be paid and the times of payment. 33. The Board may, if it thinks fit, receive from any Member willing to advance the same, and either in money or money’s worth, all or any part of the moneysuncalled and unpaid or instalments payable upon any shares held by him and upon all or any of the moneys so advanced (until the same would, but for suchadvance, become presently payable) pay interest at such rate (if any) as the Board may decide. The Board may at any time repay the amount so advanced upongiving to such Member not less than one month’s Notice of its intention in that behalf, unless before the expiration of such notice the amount so advanced shallhave been called up on the shares in respect of which it was advanced. Such payment in advance shall not entitle the holder of such share or shares to participate inrespect thereof in a dividend subsequently declared. FORFEITURE OF SHARES 34. (1) If a call remains unpaid after it has become due and payable the Board may give to the person from whom it is due not less than fourteen (14) clear days’Notice: (a)requiring payment of the amount unpaid together with any interest which may have accrued and which may still accrue up to the date of actualpayment; and (b)stating that if the Notice is not complied with the shares on which the call was made will be liable to be forfeited. (2) If the requirements of any such Notice are not complied with, any share in respect of which such Notice has been given may at any time thereafter, beforepayment of all calls and interest due in respect thereof has been made, be forfeited by a resolution of the Board to that effect, and such forfeiture shall include alldividends and bonuses declared in respect of the forfeited share but not actually paid before the forfeiture. 35. When any share has been forfeited, notice of the forfeiture shall be served upon the person who was before forfeiture the holder of the share. No forfeiture shallbe invalidated by any omission or neglect to give such Notice. 36. The Board may accept the surrender of any share liable to be forfeited hereunder and, in such case, references in these Articles to forfeiture will includesurrender. 37. Any share so forfeited shall be deemed the property of the Company and may be sold, re-allotted or otherwise disposed of to such person, upon such terms andin such manner as the Board determines, and at any time before a sale, re-allotment or disposition the forfeiture may be annulled by the Board on such terms as theBoard determines. 11 38. A person whose shares have been forfeited shall cease to be a Member in respect of the forfeited shares but nevertheless shall remain liable to pay theCompany all moneys which at the date of forfeiture were presently payable by him to the Company in respect of the shares, with (if the Directors shall in theirdiscretion so require) interest thereon from the date of forfeiture until payment at such rate (not exceeding twenty per cent. (20%) per annum) as the Boarddetermines. The Board may enforce payment thereof if it thinks fit, and without any deduction or allowance for the value of the forfeited shares, at the date offorfeiture, but his liability shall cease if and when the Company shall have received payment in full of all such moneys in respect of the shares. For the purposes ofthis Article any sum which, by the terms of issue of a share, is payable thereon at a fixed time which is subsequent to the date of forfeiture, whether on account ofthe nominal value of the share or by way of premium, shall notwithstanding that time has not yet arrived be deemed to be payable at the date of forfeiture, and thesame shall become due and payable immediately upon the forfeiture, but interest thereon shall only be payable in respect of any period between the said fixed timeand the date of actual payment. 39. A declaration by a Director or the Secretary that a share has been forfeited on a specified date shall be conclusive evidence of the facts therein stated as againstall persons claiming to be entitled to the share, and such declaration shall (subject to the execution of an instrument of transfer by the Company if necessary)constitute a good title to the share, and the person to whom the share is disposed of shall be registered as the holder of the share and shall not be bound to see to theapplication of the consideration (if any), nor shall his title to the share be affected by any irregularity in or invalidity of the proceedings in reference to theforfeiture, sale or disposal of the share. When any share shall have been forfeited, notice of the declaration shall be given to the Member in whose name it stoodimmediately prior to the forfeiture, and an entry of the forfeiture, with the date thereof, shall forthwith be made in the register, but no forfeiture shall be in anymanner invalidated by any omission or neglect to give such notice or make any such entry. 40. Notwithstanding any such forfeiture as aforesaid the Board may at any time, before any shares so forfeited shall have been sold, re-allotted or otherwisedisposed of, permit the shares forfeited to be bought back upon the terms of payment of all calls and interest due upon and expenses incurred in respect of theshare, and upon such further terms (if any) as it thinks fit. 41. The forfeiture of a share shall not prejudice the right of the Company to any call already made or instalment payable thereon. 42. The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at afixed time, whether on account of the nominal value of the share or by way of premium, as if the same had been payable by virtue of a call duly made and notified. REGISTER OF MEMBERS 43. (1) The Company shall keep in one or more books a Register of its Members and shall enter therein the following particulars, that is to say: (a)the name and address of each Member, the number and class of shares held by him and the amount paid or agreed to be considered as paid on suchshares; (b)the date on which each person was entered in the Register; and (c)the date on which any person ceased to be a Member. (2) The Company may keep an overseas or local or other branch register of Members resident in any place, and the Board may make and vary suchregulations as it determines in respect of the keeping of any such register and maintaining a Registration Office in connection therewith. 44. The Register and branch register of Members, as the case may be, shall be open to inspection for such times and on such days as the Board shall determine byMembers without charge or by any other person, upon a maximum payment of $2.50 or such other sum specified by the Board, at the Office or Registration Officeor such other place at which the Register is kept in accordance with the Law. The Register including any overseas or local or other branch register of Membersmay, after compliance with any notice requirement of the Designated Stock Exchange , be closed at such times or for such periods not exceeding in the wholethirty (30) days in each year as the Board may determine and either generally or in respect of any class of shares. 12 RECORD DATES 45. For the purpose of determining the Members entitled to notice of or to vote at any general meeting, or any adjournment thereof, or entitled to express consent tocorporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exerciseany rights in respect of any change, conversion or exchange of shares or for the purpose of any other lawful action, the Board may fix, in advance, a date as therecord date for any such determination of Members, which date shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting,nor more than sixty (60) days prior to any other such action. If the Board does not fix a record date for any general meeting, the record date for determining the Members entitled to a notice of or to vote at such meetingshall be at the close of business on the day next preceding the day on which notice is given, or, if in accordance with these Articles notice is waived, at the close ofbusiness on the day next preceding the day on which the meeting is held. If corporate action without a general meeting is to be taken, the record date fordetermining the Members entitled to express consent to such corporate action in writing, when no prior action by the Board is necessary, shall be the first date onwhich a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company by delivery to its head office. The record date fordetermining the Members for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of the Members of record entitled to notice of or to vote at a meeting of the Members shall apply to any adjournment of the meeting;provided, however, that the Board may fix a new record date for the adjourned meeting. TRANSFER OF SHARES 46. Subject to these Articles, any Member may transfer all or any of his shares by an instrument of transfer in the usual or common form or in a form prescribed bythe Designated Stock Exchange or in any other form approved by the Board and may be under hand or, if the transferor or transferee is a clearing house or a centraldepository house or its nominee(s), by hand or by machine imprinted signature or by such other manner of execution as the Board may approve from time to time. 47. The instrument of transfer shall be executed by or on behalf of the transferor and the transferee provided that the Board may dispense with the execution of theinstrument of transfer by the transferee in any case which it thinks fit in its discretion to do so. Without prejudice to the last preceding Article, the Board may alsoresolve, either generally or in any particular case, upon request by either the transferor or transferee, to accept mechanically executed transfers. The transferor shallbe deemed to remain the holder of the share until the name of the transferee is entered in the Register in respect thereof. Nothing in these Articles shall preclude theBoard from recognising a renunciation of the allotment or provisional allotment of any share by the allottee in favour of some other person. 48. (1) The Board may, in its absolute discretion, and without giving any reason therefor, refuse to register a transfer of any share (not being a fully paid up share)to a person of whom it does not approve, or any share issued under any share incentive scheme for employees upon which a restriction on transfer imposed therebystill subsists, and it may also, without prejudice to the foregoing generality, refuse to register a transfer of any share to more than four joint holders or a transfer ofany share (not being a fully paid up share) on which the Company has a lien. (2) The Board in so far as permitted by any applicable law may, in its absolute discretion, at any time and from time to time transfer any share upon theRegister to any branch register or any share on any branch register to the Register or any other branch register. In the event of any such transfer, the shareholderrequesting such transfer shall bear the cost of effecting the transfer unless the Board otherwise determines. (3) Unless the Board otherwise agrees (which agreement may be on such terms and subject to such conditions as the Board in its absolute discretion mayfrom time to time determine, and which agreement the Board shall, without giving any reason therefor, be entitled in its absolute discretion to give or withhold), noshares upon the Register shall be transferred to any branch register nor shall shares on any branch register be transferred to the Register or any other branch registerand all transfers and other documents of title shall be lodged for registration, and registered, in the case of any shares on a branch register, at the relevantRegistration Office, and, in the case of any shares on the Register, at the Office or such other place at which the Register is kept in accordance with the Law. 13 49. Without limiting the generality of the last preceding Article, the Board may decline to recognise any instrument of transfer unless:- (a)a fee of such maximum sum as the Designated Stock Exchange may determine to be payable or such lesser sum as the Board may from time to timerequire is paid to the Company in respect thereof; (b)the instrument of transfer is in respect of only one class of share; (c)the instrument of transfer is lodged at the Office or such other place at which the Register is kept in accordance with the Law or the RegistrationOffice (as the case may be) accompanied by the relevant share certificate(s) and such other evidence as the Board may reasonably require to show theright of the transferor to make the transfer (and, if the instrument of transfer is executed by some other person on his behalf, the authority of thatperson so to do); and (d)if applicable, the instrument of transfer is duly and properly stamped. 50. If the Board refuses to register a transfer of any share, it shall, within three months after the date on which the transfer was lodged with the Company, send toeach of the transferor and transferee notice of the refusal. 51. The registration of transfers of shares or of any class of shares may, after compliance with any notice requirement of the Designated Stock Exchange, besuspended at such times and for such periods (not exceeding in the whole thirty (30) days in any year) as the Board may determine. TRANSMISSION OF SHARES 52. If a Member dies, the survivor or survivors where the deceased was a joint holder, and his legal personal representatives where he was a sole or only survivingholder, will be the only persons recognised by the Company as having any title to his interest in the shares; but nothing in this Article will release the estate of adeceased Member (whether sole or joint) from any liability in respect of any share which had been solely or jointly held by him. 53. Any person becoming entitled to a share in consequence of the death or bankruptcy or winding-up of a Member may, upon such evidence as to his title beingproduced as may be required by the Board, elect either to become the holder of the share or to have some person nominated by him registered as the transfereethereof. If he elects to become the holder he shall notify the Company in writing either at the Registration Office or Office, as the case may be, to that effect. If heelects to have another person registered he shall execute a transfer of the share in favour of that person. The provisions of these Articles relating to the transfer andregistration of transfers of shares shall apply to such notice or transfer as aforesaid as if the death or bankruptcy of the Member had not occurred and the notice ortransfer were a transfer signed by such Member. 54. A person becoming entitled to a share by reason of the death or bankruptcy or winding-up of a Member shall be entitled to the same dividends and otheradvantages to which he would be entitled if he were the registered holder of the share. However, the Board may, if it thinks fit, withhold the payment of anydividend payable or other advantages in respect of such share until such person shall become the registered holder of the share or shall have effectually transferredsuch share, but, subject to the requirements of Article 75(2) being met, such a person may vote at meetings. UNTRACEABLE MEMBERS 55. (1) Without prejudice to the rights of the Company under paragraph (2) of this Article, the Company may cease sending cheques for dividend entitlements ordividend warrants by post if such cheques or warrants have been left uncashed on two consecutive occasions. However, the Company may exercise the power tocease sending cheques for dividend entitlements or dividend warrants after the first occasion on which such a cheque or warrant is returned undelivered. 14 (2) The Company shall have the power to sell, in such manner as the Board thinks fit, any shares of a Member who is untraceable, but no such sale shall bemade unless: (a)all cheques or warrants in respect of dividends of the shares in question, being not less than three in total number, for any sum payable in cash to theholder of such shares in respect of them sent during the relevant period in the manner authorised by the Articles of the Company have remaineduncashed; (b)so far as it is aware at the end of the relevant period, the Company has not at any time during the relevant period received any indication of theexistence of the Member who is the holder of such shares or of a person entitled to such shares by death, bankruptcy or operation of law; and (c)the Company, if so required by the rules governing the listing of shares on the Designated Stock Exchange, has given notice to, and causedadvertisement in newspapers to be made in accordance with the requirements of, the Designated Stock Exchange of its intention to sell such shares inthe manner required by the Designated Stock Exchange, and a period of three months or such shorter period as may be allowed by the DesignatedStock Exchange has elapsed since the date of such advertisement. For the purpose of the foregoing, the “relevant period” means the period commencing twelve (12) years before the date of publication of theadvertisement referred to in paragraph (c) of this Article and ending at the expiry of the period referred to in that paragraph. (3) To give effect to any such sale the Board may authorise some person to transfer the said shares and an instrument of transfer signed or otherwise executedby or on behalf of such person shall be as effective as if it had been executed by the registered holder or the person entitled by transmission to such shares, and thepurchaser shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in theproceedings relating to the sale. The net proceeds of the sale will belong to the Company and upon receipt by the Company of such net proceeds it shall becomeindebted to the former Member for an amount equal to such net proceeds. No trust shall be created in respect of such debt and no interest shall be payable inrespect of it and the Company shall not be required to account for any money earned from the net proceeds which may be employed in the business of theCompany or as it thinks fit. Any sale under this Article shall be valid and effective notwithstanding that the Member holding the shares sold is dead, bankrupt orotherwise under any legal disability or incapacity. GENERAL MEETINGS 56. An annual general meeting of the Company shall be held in each year other than the year in which these Articles were adopted at such time and place as may bedetermined by the Board. 57. Each general meeting, other than an annual general meeting, shall be called an extraordinary general meeting. General meetings may be held at such times andin any location in the world as may be determined by the Board. 58. Only a majority of the Board or the Chairman of the Board may call extraordinary general meetings, which extraordinary general meetings shall be held at suchtimes and locations (as permitted hereby) as such person or persons shall determine. NOTICE OF GENERAL MEETINGS 59. (1) An annual general meeting and any extraordinary general meeting may be called by not less than ten (10) clear days’ Notice but a general meeting may becalled by shorter notice, subject to the Law, if it is so agreed: (a)in the case of a meeting called as an annual general meeting, by all the Members entitled to attend and vote thereat; and (b)in the case of any other meeting, by a majority in number of the Members having the right to attend and vote at the meeting, being a majority togetherholding not less than ninety-five per cent. (95%) in nominal value of the issued shares giving that right. 15 (2) The notice shall specify the time and place of the meeting and, in case of special business, the general nature of the business. The notice convening anannual general meeting shall specify the meeting as such. Notice of every general meeting shall be given to all Members other than to such Members as, under theprovisions of these Articles or the terms of issue of the shares they hold, are not entitled to receive such notices from the Company, to all persons entitled to a sharein consequence of the death or bankruptcy or winding-up of a Member and to each of the Directors and the Auditors. 60. The accidental omission to give Notice of a meeting or (in cases where instruments of proxy are sent out with the Notice) to send such instrument of proxy to,or the non-receipt of such Notice or such instrument of proxy by, any person entitled to receive such Notice shall not invalidate any resolution passed or theproceedings at that meeting. PROCEEDINGS AT GENERAL MEETINGS 61. (1) All business shall be deemed special that is transacted at an extraordinary general meeting, and also all business that is transacted at an annual generalmeeting, with the exception of: (a)the declaration and sanctioning of dividends; (b)consideration and adoption of the accounts and balance sheet and the reports of the Directors and Auditors and other documents required to beannexed to the balance sheet; (c)the election of Directors; (d)appointment of Auditors (where special notice of the intention for such appointment is not required by the Law) and other officers; and (e)the fixing of the remuneration of the Auditors, and the voting of remuneration or extra remuneration to the Directors. (2) No business other than the appointment of a chairman of a meeting shall be transacted at any general meeting unless a quorum is present at thecommencement of the business. At any general meeting of the Company, one or more Members entitled to vote and present in person or by proxy or (in the case ofa Member being a corporation) by its duly authorised representative representing not less than one-third in nominal value of the total issued voting shares in theCompany throughout the meeting shall form a quorum for all purposes. 62. If within thirty (30) minutes (or such longer time not exceeding one hour as the chairman of the meeting may determine to wait) after the time appointed for themeeting a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place or to such time and place as theBoard may determine. If at such adjourned meeting a quorum is not present within half an hour from the time appointed for holding the meeting, the meeting shallbe dissolved. 63. The chairman of the Company shall preside as chairman at every general meeting. If at any meeting the chairman is not present within fifteen (15) minutesafter the time appointed for holding the meeting, or is not willing to act as chairman, the Directors present shall choose one of their number to act, or if oneDirector only is present he shall preside as chairman if willing to act. If no Director is present, or if each of the Directors present declines to take the chair, or if thechairman chosen shall retire from the chair, the Members present in person or by proxy and entitled to vote shall elect one of their number to be chairman. 64. The chairman may adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than thebusiness which might lawfully have been transacted at the meeting had the adjournment not taken place. When a meeting is adjourned for fourteen (14) days ormore, at least seven (7) clear days’ notice of the adjourned meeting shall be given specifying the time and place of the adjourned meeting but it shall not benecessary to specify in such notice the nature of the business to be transacted at the adjourned meeting and the general nature of the business to be transacted. Saveas aforesaid, it shall be unnecessary to give notice of an adjournment. 65. If an amendment is proposed to any resolution under consideration but is in good faith ruled out of order by the chairman of the meeting, the proceedings onthe substantive resolution shall not be invalidated by any error in such ruling. In the case of a resolution duly proposed as a special resolution, no amendmentthereto (other than a mere clerical amendment to correct a patent error) may in any event be considered or voted upon. 16 VOTING 66. Subject to any special rights or restrictions as to voting for the time being attached to any shares by or in accordance with these Articles, at any general meetingon a show of hands every Member present in person (or being a corporation, is present by a duly authorised representative), or by proxy shall have one vote and ona poll every Member present in person or by proxy or, in the case of a Member being a corporation, by its duly authorised representative shall have one vote forevery fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share in advance of calls or instalments is treated for theforegoing purposes as paid up on the share. Notwithstanding anything contained in these Articles, where more than one proxy is appointed by a Member which is aclearing house or a central depository house (or its nominee(s)), each such proxy shall have one vote on a show of hands. A resolution put to the vote of a meetingshall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) apoll is demanded by the chairman of such meeting or by any one Member present in person or in the case of a Member being a corporation by its duly authorisedrepresentative or by proxy for the time being entitled to vote at the meeting. A demand by a person as proxy for a Member or in the case of a Member being acorporation by its duly authorised representative shall be deemed to be the same as a demand by a Member. 67. Unless a poll is duly demanded and the demand is not withdrawn, a declaration by the chairman that a resolution has been carried, or carried unanimously, orby a particular majority, or not carried by a particular majority, or lost, and an entry to that effect made in the minute book of the Company, shall be conclusiveevidence of the facts without proof of the number or proportion of the votes recorded for or against the resolution. 68. If a poll is duly demanded the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. There shall be norequirement for the chairman to disclose the voting figures on a poll. 69. A poll demanded on the election of a chairman, or on a question of adjournment, shall be taken forthwith. A poll demanded on any other question shall betaken in such manner (including the use of ballot or voting papers or tickets) and either forthwith or at such time (being not later than thirty (30) days after the dateof the demand) and place as the chairman directs. It shall not be necessary (unless the chairman otherwise directs) for notice to be given of a poll not takenimmediately. 70. The demand for a poll shall not prevent the continuance of a meeting or the transaction of any business other than the question on which the poll has beendemanded, and, with the consent of the chairman, it may be withdrawn at any time before the close of the meeting or the taking of the poll, whichever is theearlier. 71. On a poll votes may be given either personally or by proxy. 72. A person entitled to more than one vote on a poll need not use all his votes or cast all the votes he uses in the same way. 73. All questions submitted to a meeting shall be decided by a simple majority of votes except where a greater majority is required by these Articles or by the Law.In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of such meeting shall be entitled to a second or casting vote in addition toany other vote he may have. 74. Where there are joint holders of any share any one of such joint holder may vote, either in person or by proxy, in respect of such share as if he were solelyentitled thereto, but if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shallbe accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in theRegister in respect of the joint holding. Several executors or administrators of a deceased Member in whose name any share stands shall for the purposes of thisArticle be deemed joint holders thereof. 75. (1) A Member who is a patient for any purpose relating to mental health or in respect of whom an order has been made by any court having jurisdiction for theprotection or management of the affairs of persons incapable of managing their own affairs may vote, whether on a show of hands or on a poll, by his receiver,committee, curator bonis or other person in the nature of a receiver, committee or curator bonis appointed by such court, and such receiver, committee, curatorbonis or other person may vote on a poll by proxy, and may otherwise act and be treated as if he were the registered holder of such shares for the purposes ofgeneral meetings, provided that such evidence as the Board may require of the authority of the person claiming to vote shall have been deposited at the Office,head office or Registration Office, as appropriate, not less than forty-eight (48) hours before the time appointed for holding the meeting, or adjourned meeting orpoll, as the case may be. 17 (2) Any person entitled under Article 53 to be registered as the holder of any shares may vote at any general meeting in respect thereof in the same manner asif he were the registered holder of such shares, provided that forty-eight (48) hours at least before the time of the holding of the meeting or adjourned meeting, asthe case may be, at which he proposes to vote, he shall satisfy the Board of his entitlement to such shares, or the Board shall have previously admitted his right tovote at such meeting in respect thereof. 76. No Member shall, unless the Board otherwise determines, be entitled to attend and vote and to be reckoned in a quorum at any general meeting unless he isduly registered and all calls or other sums presently payable by him in respect of shares in the Company have been paid. 77. If: (a)any objection shall be raised to the qualification of any voter; or (b)any votes have been counted which ought not to have been counted or which might have been rejected; or (c)any votes are not counted which ought to have been counted; the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless the same is raised or pointed out at themeeting or, as the case may be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shallbe referred to the chairman of the meeting and shall only vitiate the decision of the meeting on any resolution if the chairman decides that the same may haveaffected the decision of the meeting. The decision of the chairman on such matters shall be final and conclusive. PROXIES 78. Any Member entitled to attend and vote at a meeting of the Company shall be entitled to appoint another person as his proxy to attend and vote instead of him.A Member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Companyor at a class meeting. A proxy need not be a Member. In addition, a proxy or proxies representing either a Member who is an individual or a Member which is acorporation shall be entitled to exercise the same powers on behalf of the Member which he or they represent as such Member could exercise. 79. The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is acorporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same. In the case of an instrument of proxypurporting to be signed on behalf of a corporation by an officer thereof it shall be assumed, unless the contrary appears, that such officer was duly authorised tosign such instrument of proxy on behalf of the corporation without further evidence of the facts. 80. The instrument appointing a proxy and (if required by the Board) the power of attorney or other authority (if any) under which it is signed, or a certified copyof such power or authority, shall be delivered to such place or one of such places (if any) as may be specified for that purpose in or by way of note to or in anydocument accompanying the notice convening the meeting (or, if no place is so specified at the Registration Office or the Office, as may be appropriate) not lessthan forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to voteor, in the case of a poll taken subsequently to the date of a meeting or adjourned meeting, not less than twenty-four (24) hours before the time appointed for thetaking of the poll and in default the instrument of proxy shall not be treated as valid. No instrument appointing a proxy shall be valid after the expiration of twelve(12) months from the date named in it as the date of its execution, except at an adjourned meeting or on a poll demanded at a meeting or an adjourned meeting incases where the meeting was originally held within twelve (12) months from such date. Delivery of an instrument appointing a proxy shall not preclude a Memberfrom attending and voting in person at the meeting convened and in such event, the instrument appointing a proxy shall be deemed to be revoked. 18 81. Instruments of proxy shall be in any common form or in such other form as the Board may approve (provided that this shall not preclude the use of the two-way form) and the Board may, if it thinks fit, send out with the notice of any meeting forms of instrument of proxy for use at the meeting. The instrument of proxyshall be deemed to confer authority to demand or join in demanding a poll and to vote on any amendment of a resolution put to the meeting for which it is given asthe proxy thinks fit. The instrument of proxy shall, unless the contrary is stated therein, be valid as well for any adjournment of the meeting as for the meeting towhich it relates. 82. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocationof the instrument of proxy or of the authority under which it was executed, provided that no intimation in writing of such death, insanity or revocation shall havebeen received by the Company at the Office or the Registration Office (or such other place as may be specified for the delivery of instruments of proxy in thenotice convening the meeting or other document sent therewith) two hours at least before the commencement of the meeting or adjourned meeting, or the taking ofthe poll, at which the instrument of proxy is used. 83. Anything which under these Articles a Member may do by proxy he may likewise do by his duly appointed attorney and the provisions of these Articlesrelating to proxies and instruments appointing proxies shall apply mutatis mutandis in relation to any such attorney and the instrument under which such attorney isappointed. CORPORATIONS ACTING BY REPRESENTATIVES 84. (1) Any corporation which is a Member may by resolution of its directors or other governing body authorise such person as it thinks fit to act as itsrepresentative at any meeting of the Company or at any meeting of any class of Members. The person so authorised shall be entitled to exercise the same powerson behalf of such corporation as the corporation could exercise if it were an individual Member and such corporation shall for the purposes of these Articles bedeemed to be present in person at any such meeting if a person so authorised is present thereat. (2) If a clearing house (or its nominee(s)) or a central depository entity, being a corporation, is a Member, it may authorise such persons as it thinks fit to actas its representatives at any meeting of the Company or at any meeting of any class of Members provided that the authorisation shall specify the number and classof shares in respect of which each such representative is so authorised. Each person so authorised under the provisions of this Article shall be deemed to have beenduly authorised without further evidence of the facts and be entitled to exercise the same rights and powers on behalf of the clearing house or central depositoryentity (or its nominee(s)) as if such person was the registered holder of the shares of the Company held by the clearing house or a central depository entity (or itsnominee(s)) including the right to vote individually on a show of hands. (3) Any reference in these Articles to a duly authorised representative of a Member being a corporation shall mean a representative authorised under theprovisions of this Article. BOARD OF DIRECTORS 86. (1) Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than two (2). There shall be no maximumnumber of Directors unless otherwise determined from time to time by the Members in general meeting. The Directors shall be elected or appointed in the firstplace by the subscribers to the Memorandum of Association or by a majority of them and shall hold office until their successors are elected or appointed. (2) Subject to the Articles and the Law, the Company may by ordinary resolution elect any person to be a Director either to fill a casual vacancy or as anaddition to the existing Board. (3) The Directors shall have the power from time to time and at any time to appoint any person as a Director to fill a casual vacancy on the Board or as anaddition to the existing Board. Each Director shall hold office until the expiration of his term and until his successor shall have been elected and qualified. 19 (4) No Director shall be required to hold any shares of the Company by way of qualification and a Director who is not a Member shall be entitled to receivenotice of and to attend and speak at any general meeting of the Company and of all classes of shares of the Company. (5) Subject to any provision to the contrary in these Articles, a Director may be removed by special resolution of the Members at any time before theexpiration of his period of office notwithstanding anything in these Articles or in any agreement between the Company and such Director (but without prejudice toany claim for damages under any such agreement). (6) A vacancy on the Board created by the removal of a Director under the provisions of subparagraph (5) above may be filled by the election or appointmentby ordinary resolution of the Members at the meeting at which such Director is removed or by the affirmative vote of a simple majority of the remaining Directorspresent and voting at a Board meeting. (7) The Company may from time to time in general meeting by ordinary resolution increase or reduce the number of Directors but so that the number ofDirectors shall never be less than two (2). DISQUALIFICATION OF DIRECTORS 87. The office of a Director shall be vacated if the Director: (1) resigns his office by notice in writing delivered to the Company at the Office or tendered at a meeting of the Board; (2) becomes of unsound mind or dies; (3) without special leave of absence from the Board, is absent from meetings of the Board for six consecutive months and the Board resolves that his officebe vacated; or (4) becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors; (5) is prohibited by law from being a Director; or (6) ceases to be a Director by virtue of any provision of the Statutes or is removed from office pursuant to these Articles. EXECUTIVE DIRECTORS 88. The Board may from time to time appoint any one or more of its body to be a managing director, joint managing director or deputy managing director or tohold any other employment or executive office with the Company for such period (subject to their continuance as Directors) and upon such terms as the Board maydetermine and the Board may revoke or terminate any of such appointments. Any such revocation or termination as aforesaid shall be without prejudice to anyclaim for damages that such Director may have against the Company or the Company may have against such Director. A Director appointed to an office under thisArticle shall be subject to the same provisions as to removal as the other Directors of the Company, and he shall (subject to the provisions of any contract betweenhim and the Company) ipso facto and immediately cease to hold such office if he shall cease to hold the office of Director for any cause. 89. Notwithstanding Articles 94, 95 and 96, an executive director appointed to an office under Article 88 hereof shall receive such remuneration (whether by wayof salary, commission, participation in profits or otherwise or by all or any of those modes) and such other benefits (including pension and/or gratuity and/or otherbenefits on retirement) and allowances as the Board may from time to time determine, and either in addition to or in lieu of his remuneration as a Director. 20 ALTERNATE DIRECTORS 90. Any Director may at any time by Notice delivered to the Office or head office or at a meeting of the Directors appoint any person (including another Director)to be his alternate Director. Any person so appointed shall have all the rights and powers of the Director or Directors for whom such person is appointed in thealternative provided that such person shall not be counted more than once in determining whether or not a quorum is present. An alternate Director may beremoved at any time by the body which appointed him and, subject thereto, the office of alternate Director shall continue until the happening of any event which, ifwe were a Director, would cause him to vacate such office or if his appointer ceases for any reason to be a Director. Any appointment or removal of an alternateDirector shall be effected by Notice signed by the appointor and delivered to the Office or head office or tendered at a meeting of the Board. An alternate Directormay also be a Director in his own right and may act as alternate to more than one Director. An alternate Director shall, if his appointor so requests, be entitled toreceive notices of meetings of the Board or of committees of the Board to the same extent as, but in lieu of, the Director appointing him and shall be entitled tosuch extent to attend and vote as a Director at any such meeting at which the Director appointing him is not personally present and generally at such meeting toexercise and discharge all the functions, powers and duties of his appointor as a Director and for the purposes of the proceedings at such meeting the provisions ofthese Articles shall apply as if he were a Director save that as an alternate for more than one Director his voting rights shall be cumulative. 91. An alternate Director shall only be a Director for the purposes of the Law and shall only be subject to the provisions of the Law insofar as they relate to theduties and obligations of a Director when performing the functions of the Director for whom he is appointed in the alternative and shall alone be responsible to theCompany for his acts and defaults and shall not be deemed to be the agent of or for the Director appointing him. An alternate Director shall be entitled to contractand be interested in and benefit from contracts or arrangements or transactions and to be repaid expenses and to be indemnified by the Company to the same extentmutatis mutandis as if he were a Director but he shall not be entitled to receive from the Company any fee in his capacity as an alternate Director except only suchpart, if any, of the remuneration otherwise payable to his appointor as such appointor may by Notice to the Company from time to time direct. 92. Every person acting as an alternate Director shall have one vote for each Director for whom he acts as alternate (in addition to his own vote if he is also aDirector). If his appointor is for the time being absent from the People’s Republic of China or otherwise not available or unable to act, the signature of an alternateDirector to any resolution in writing of the Board or a committee of the Board of which his appointor is a member shall, unless the notice of his appointmentprovides to the contrary, be as effective as the signature of his appointor. 93. An alternate Director shall ipso facto cease to be an alternate Director if his appointor ceases for any reason to be a Director, however, such alternate Directoror any other person may be re-appointed by the Directors to serve as an alternate Director PROVIDED always that, if at any meeting any Director retires but is re-elected at the same meeting, any appointment of such alternate Director pursuant to these Articles which was in force immediately before his retirement shallremain in force as though he had not retired. DIRECTORS’ FEES AND EXPENSES 94. The Directors shall receive such remuneration as the Board may from time to time determine. Each Director shall be entitled to be repaid or prepaid alltraveling, hotel and incidental expenses reasonably incurred or expected to be incurred by him in attending meetings of the Board or committees of the board orgeneral meetings or separate meetings of any class of shares or of debenture of the Company or otherwise in connection with the discharge of his duties as aDirector. 95. Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the Board go beyondthe ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the Boardmay determine and such extra remuneration shall be in addition to or in substitution for any ordinary remuneration provided for by or pursuant to any other Article. 96. The Board shall from time to time determine the amount and terms payment to any Director or past Director of the Company by way of compensation for lossof office, or as consideration for or in connection with his retirement from office (not being payment to which the Director is contractually entitled). 21 DIRECTORS’ INTERESTS 97. A Director may: (a)hold any other office or place of profit with the Company (except that of Auditor) in conjunction with his office of Director for such period and uponsuch terms as the Board may determine. Any remuneration (whether by way of salary, commission, participation in profits or otherwise) paid to anyDirector in respect of any such other office or place of profit shall be in addition to any remuneration provided for by or pursuant to any other Article; (b)act by himself or his firm in a professional capacity for the Company (otherwise than as Auditor) and he or his firm may be remunerated forprofessional services as if he were not a Director; (c)continue to be or become a director, managing director, joint managing director, deputy managing director, executive director, manager or otherofficer or member of any other company promoted by the Company or in which the Company may be interested as a vendor, shareholder or otherwiseand (unless otherwise agreed) no such Director shall be accountable for any remuneration, profits or other benefits received by him as a director,managing director, joint managing director, deputy managing director, executive director, manager or other officer or member of or from his interestsin any such other company. Subject as otherwise provided by these Articles the Directors may exercise or cause to be exercised the voting powersconferred by the shares in any other company held or owned by the Company, or exercisable by them as Directors of such other company in suchmanner in all respects as they think fit (including the exercise thereof in favour of any resolution appointing themselves or any of them directors,managing directors, joint managing directors, deputy managing directors, executive directors, managers or other officers of such company) or votingor providing for the payment of remuneration to the director, managing director, joint managing director, deputy managing director, executivedirector, manager or other officers of such other company and any Director may vote in favour of the exercise of such voting rights in manneraforesaid notwithstanding that he may be, or about to be, appointed a director, managing director, joint managing director, deputy managing director,executive director, manager or other officer of such a company, and that as such he is or may become interested in the exercise of such voting rights inmanner aforesaid. Notwithstanding the foregoing, no “Independent Director” as defined in NASD Rules or in Rule 10A-3 under the Exchange Act, and with respect ofwhom the Board has determined constitutes an “Independent Director” for purposes of compliance with applicable law or the Company’s listing requirements,shall without the consent of the Audit Committee take any of the foregoing actions or any other action that would reasonably be likely to affect such Director’sstatus as an “Independent Director” of the Company. 98. Subject to the Law and to these Articles, no Director or proposed or intending Director shall be disqualified by his office from contracting with the Company,either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatever, nor shall any such contract or any othercontract or arrangement in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liableto account to the Company or the Members for any remuneration, profit or other benefits realised by any such contract or arrangement by reason of such Directorholding that office or of the fiduciary relationship thereby established provided that such Director shall disclose the nature of his interest in any contract orarrangement in which he is interested in accordance with Article 102 herein. Any such transaction that would reasonably be likely to affect a Director’s status as an“Independent Director”, or that would constitute a “related party transaction” as defined by Item 7.N of Form 20F promulgated by the SEC, shall require theapproval of the Audit Committee. 99. A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement withthe Company shall declare the nature of his interest at the meeting of the Board at which the question of entering into the contract or arrangement is firstconsidered, if he knows his interest then exists, or in any other case at the first meeting of the Board after he knows that he is or has become so interested. For thepurposes of this Article, a general Notice to the Board by a Director to the effect that: (a)he is a member or officer of a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date ofthe Notice be made with that company or firm; or (b)he is to be regarded as interested in any contract or arrangement which may after the date of the Notice be made with a specified person who isconnected with him; 22 shall be deemed to be a sufficient declaration of interest under this Article in relation to any such contract or arrangement, provided that no suchNotice shall be effective unless either it is given at a meeting of the Board or the Director takes reasonable steps to secure that it is brought up and read at the nextBoard meeting after it is given. 100. Following a declaration being made pursuant to the last preceding two Articles, subject to any separate requirement for Audit Committee approval underapplicable law or the listing rules of the Company’s Designated Stock Exchange, and unless disqualified by the chairman of the relevant Board meeting, a Directormay vote in respect of any contract or proposed contract or arrangement in which such Director is interested and may be counted in the quorum at such meeting. GENERAL POWERS OF THE DIRECTORS 101. (1) The business of the Company shall be managed and conducted by the Board, which may pay all expenses incurred in forming and registering theCompany and may exercise all powers of the Company (whether relating to the management of the business of the Company or otherwise) which are not by theStatutes or by these Articles required to be exercised by the Company in general meeting, subject nevertheless to the provisions of the Statutes and of these Articlesand to such regulations being not inconsistent with such provisions, as may be prescribed by the Company in general meeting, but no regulations made by theCompany in general meeting shall invalidate any prior act of the Board which would have been valid if such regulations had not been made. The general powersgiven by this Article shall not be limited or restricted by any special authority or power given to the Board by any other Article. (2) Any person contracting or dealing with the Company in the ordinary course of business shall be entitled to rely on any written or oral contract oragreement or deed, document or instrument entered into or executed as the case may be by any two of the Directors acting jointly on behalf of the Company andthe same shall be deemed to be validly entered into or executed by the Company as the case may be and shall, subject to any rule of law, be binding on theCompany. (3) Without prejudice to the general powers conferred by these Articles it is hereby expressly declared that the Board shall have the following powers: (a)To give to any person the right or option of requiring at a future date that an allotment shall be made to him of any share at par or at such premium asmay be agreed. (b)To give to any Directors, officers or employees of the Company an interest in any particular business or transaction or participation in the profitsthereof or in the general profits of the Company either in addition to or in substitution for a salary or other remuneration. (c)To resolve that the Company be deregistered in the Cayman Islands and continued in a named jurisdiction outside the Cayman Islands subject to theprovisions of the Law. 102. The Board may establish any regional or local boards or agencies for managing any of the affairs of the Company in any place, and may appoint any personsto be members of such local boards, or any managers or agents, and may fix their remuneration (either by way of salary or by commission or by conferring theright to participation in the profits of the Company or by a combination of two or more of these modes) and pay the working expenses of any staff employed bythem upon the business of the Company. The Board may delegate to any regional or local board, manager or agent any of the powers, authorities and discretionsvested in or exercisable by the Board (other than its powers to make calls and forfeit shares), with power to sub-delegate, and may authorise the members of any ofthem to fill any vacancies therein and to act notwithstanding vacancies. Any such appointment or delegation may be made upon such terms and subject to suchconditions as the Board may think fit, and the Board may remove any person appointed as aforesaid, and may revoke or vary such delegation, but no persondealing in good faith and without notice of any such revocation or variation shall be affected thereby. 103. The Board may by power of attorney appoint any company, firm or person or any fluctuating body of persons, whether nominated directly or indirectly by theBoard, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in orexercisable by the Board under these Articles) and for such period and subject to such conditions as it may think fit, and any such power of attorney may containsuch provisions for the protection and convenience of persons dealing with any such attorney as the Board may think fit, and may also authorise any such attorneyto sub-delegate all or any of the powers, authorities and discretions vested in him. Such attorney or attorneys may, if so authorised under the Seal of the Company,execute any deed or instrument under their personal seal with the same effect as the affixation of the Company’s Seal. 23 104. The Board may entrust to and confer upon a managing director, joint managing director, deputy managing director, an executive director or any Director anyof the powers exercisable by it upon such terms and conditions and with such restrictions as it thinks fit, and either collaterally with, or to the exclusion of, its ownpowers, and may from time to time revoke or vary all or any of such powers but no person dealing in good faith and without notice of such revocation or variationshall be affected thereby. 105. All cheques, promissory notes, drafts, bills of exchange and other instruments, whether negotiable or transferable or not, and all receipts for moneys paid tothe Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time byresolution determine. The Company’s banking accounts shall be kept with such banker or bankers as the Board shall from time to time determine. 106. (1) The Board may establish or concur or join with other companies (being subsidiary companies of the Company or companies with which it is associated inbusiness) in establishing and making contributions out of the Company’s moneys to any schemes or funds for providing pensions, sickness or compassionateallowances, life assurance or other benefits for employees (which expression as used in this and the following paragraph shall include any Director or ex-Directorwho may hold or have held any executive office or any office of profit under the Company or any of its subsidiary companies) and ex-employees of the Companyand their dependants or any class or classes of such person. (2) The Board may pay, enter into agreements to pay or make grants of revocable or irrevocable pensions or other benefits to employees and ex-employeesand their dependants, or to any of such persons, including pensions or benefits additional to those, if any, to which such employees or ex-employees or theirdependants are or may become entitled under any such scheme or fund as mentioned in the last preceding paragraph. Any such pension or benefit may, as theBoard considers desirable, be granted to an employee either before and in anticipation of or upon or at any time after his actual retirement, and may be subject ornot subject to any terms or conditions as the Board may determine. BORROWING POWERS 107. The Board may exercise all the powers of the Company to raise or borrow money and to mortgage or charge all or any part of the undertaking, property andassets (present and future) and uncalled capital of the Company and, subject to the Law, to issue debentures, bonds and other securities, whether outright or ascollateral security for any debt, liability or obligation of the Company or of any third party. 108. Debentures, bonds and other securities may be made assignable free from any equities between the Company and the person to whom the same may be issued. 109. Any debentures, bonds or other securities may be issued at a discount (other than shares), premium or otherwise and with any special privileges as toredemption, surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of Directors and otherwise. 110. (1) Where any uncalled capital of the Company is charged, all persons taking any subsequent charge thereon shall take the same subject to such prior charge,and shall not be entitled, by notice to the Members or otherwise, to obtain priority over such prior charge. (2) The Board shall cause a proper register to be kept, in accordance with the provisions of the Law, of all charges specifically affecting the property of theCompany and of any series of debentures issued by the Company and shall duly comply with the requirements of the Law in regard to the registration of chargesand debentures therein specified and otherwise. 24 PROCEEDINGS OF THE DIRECTORS 111. The Board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it considers appropriate. Questions arising at any meetingshall be determined by a majority of votes. In the case of any equality of votes the chairman of the meeting shall have an additional or casting vote. 112. A meeting of the Board may be convened by the Secretary on request of a Director or by any Director. The Secretary shall convene a meeting of the Board ofwhich notice may be given in writing or by telephone or in such other manner as the Board may from time to time determine whenever he shall be required so todo by the president or chairman, as the case may be, or any Director. 113. (1) The quorum necessary for the transaction of the business of the Board may be fixed by the Board and, unless so fixed at any other number, shall be themajority of the Board. An alternate Director shall be counted in a quorum in the case of the absence of a Director for whom he is the alternate provided that heshall not be counted more than once for the purpose of determining whether or not a quorum is present. (2) Directors may participate in any meeting of the Board by means of a conference telephone or other communications equipment through which all personsparticipating in the meeting can communicate with each other simultaneously and instantaneously and, for the purpose of counting a quorum, such participationshall constitute presence at a meeting as if those participating were present in person. (3) Any Director who ceases to be a Director at a Board meeting may continue to be present and to act as a Director and be counted in the quorum until thetermination of such Board meeting if no other Director objects and if otherwise a quorum of Directors would not be present. 114. The continuing Directors or a sole continuing Director may act notwithstanding any vacancy in the Board but, if and so long as the number of Directors isreduced below the minimum number fixed by or in accordance with these Articles, the continuing Directors or Director, notwithstanding that the number ofDirectors is below the number fixed by or in accordance with these Articles as the quorum or that there is only one continuing Director, may act for the purpose offilling vacancies in the Board or of summoning general meetings of the Company but not for any other purpose. 115. The Chairman of the Board shall be the chairman of all meetings of the Board. If the Chairman of the Board is not present at any meeting within five(5) minutes after the time appointed for holding the same, the Directors present may choose one of their number to be chairman of the meeting. 116. A meeting of the Board at which a quorum is present shall be competent to exercise all the powers, authorities and discretions for the time being vested in orexercisable by the Board. 117. (1) The Board may delegate any of its powers, authorities and discretions to committees (including, without limitation, the Audit Committee), consisting ofsuch Director or Directors and other persons as it thinks fit, and they may, from time to time, revoke such delegation or revoke the appointment of and dischargeany such committees either wholly or in part, and either as to persons or purposes. Any committee so formed shall, in the exercise of the powers, authorities anddiscretions so delegated, conform to any regulations which may be imposed on it by the Board. (2) All acts done by any such committee in conformity with such regulations, and in fulfilment of the purposes for which it was appointed, but not otherwise,shall have like force and effect as if done by the Board, and the Board (or if the Board delegates such power, the committee) shall have power to remunerate themembers of any such committee, and charge such remuneration to the current expenses of the Company. 118. The meetings and proceedings of any committee consisting of two or more members shall be governed by the provisions contained in these Articles forregulating the meetings and proceedings of the Board so far as the same are applicable and are not superseded by any regulations imposed by the Board under thelast preceding Article, indicating, without limitation, any committee charter adopted by the Board for purposes or in respect of any such committee. 25 119. A resolution in writing signed by all the Directors except such as are temporarily unable to act through ill-health or disability shall (provided that such numberis sufficient to constitute a quorum and further provided that a copy of such resolution has been given or the contents thereof communicated to all the Directors forthe time being entitled to receive notices of Board meetings in the same manner as notices of meetings are required to be given by these Articles) be as valid andeffectual as if a resolution had been passed at a meeting of the Board duly convened and held. Such resolution may be contained in one document or in severaldocuments in like form each signed by one or more of the Directors and for this purpose a facsimile signature of a Director shall be treated as valid. 120. All acts bona fide done by the Board or by any committee or by any person acting as a Director or members of a committee, shall, notwithstanding that it isafterwards discovered that there was some defect in the appointment of any member of the Board or such committee or person acting as aforesaid or that they orany of them were disqualified or had vacated office, be as valid as if every such person had been duly appointed and was qualified and had continued to be aDirector or member of such committee. AUDIT COMMITTEE 121. Without prejudice to the freedom of the Directors to establish any other committees, for so long as the shares of the Company (or depositary receipts therefor)are listed or quoted on the Designated Stock Exchange, the Board shall establish and maintain an Audit Committee as a committee of the Board, the compositionand responsibilities of which shall comply with the NASD Rules and the rules and regulations of the SEC. 122. (1) The Board shall adopt a formal written audit committee charter and review and assess the adequacy of the formal written charter on an annual basis. (2) The Audit Committee shall meet at least once every financial quarter, or more frequently as circumstances dictate. 123. For so long as the shares of the Company (or depositary receipts therefor) are listed or quoted on the Designated Stock Exchange, the Company shall conductan appropriate review of all related party transactions on an ongoing basis and shall utilize the Audit Committee for the review and approval of potential conflictsof interest. Specially, the Audit Committee shall approve any transaction or transactions between the Company and any f the following parties: (i) any shareholderowning an interest in the voting power of the Company or any subsidiary of the Company that gives such shareholder significant influence over the Company orany subsidiary of the Company, (ii) any director or executive officer of the Company or any subsidiary of the Company and any relative of such director orexecutive officer, (iii) any person in which a substantial interest in the voting power of the Company is owned, directly or indirectly, by any person described in(i) or (ii) or over which such a person is able to exercise significant influence, and (iv) any affiliate (other than a subsidiary) of the Company. OFFICERS 124. (1) The officers of the Company shall consist of the Chairman of the Board, the Directors and Secretary and such additional officers (who may or may not beDirectors) as the Board may from time to time determine, all of whom shall be deemed to be officers for the purposes of the Law and these Articles. (2) The Directors shall, as soon as may be after each appointment or election of Directors, elect amongst the Directors a chairman and if more than oneDirector is proposed for this office, the election to such office shall take place in such manner as the Directors may determine. (3) The officers shall receive such remuneration as the Directors may from time to time determine. 125. (1) The Secretary and additional officers, if any, shall be appointed by the Board and shall hold office on such terms and for such period as the Board maydetermine. If thought fit, two or more persons may be appointed as joint Secretaries. The Board may also appoint from time to time on such terms as it thinks fitone or more assistant or deputy Secretaries. 26 (2) The Secretary shall attend all meetings of the Members and shall keep correct minutes of such meetings and enter the same in the proper books providedfor the purpose. He shall perform such other duties as are prescribed by the Law or these Articles or as may be prescribed by the Board. 126. The officers of the Company shall have such powers and perform such duties in the management, business and affairs of the Company as may be delegated tothem by the Directors from time to time. 127. A provision of the Law or of these Articles requiring or authorising a thing to be done by or to a Director and the Secretary shall not be satisfied by its beingdone by or to the same person acting both as Director and as or in place of the Secretary. REGISTER OF DIRECTORS AND OFFICERS 128. The Company shall cause to be kept in one or more books at its Office a Register of Directors and Officers in which there shall be entered the full names andaddresses of the Directors and Officers and such other particulars as required by the Law or as the Directors may determine. The Company shall send to theRegistrar of Companies in the Cayman Islands a copy of such register, and shall from time to time notify to the said Registrar of any change that takes place inrelation to such Directors and Officers as required by the Law. MINUTES 129.(1) The Board shall cause minutes to be duly entered in books provided for the purpose: (a)of all elections and appointments of officers; (b)of the names of the Directors present at each meeting of the Directors and of any committee of the Directors; (c)of all resolutions and proceedings of each general meeting of the Members, meetings of the Board and meetings of committees of the Board andwhere there are managers, of all proceedings of meetings of the managers. (2) Minutes shall be kept by the Secretary at the Office. SEAL 130. (1) The Company shall have one or more Seals, as the Board may determine. For the purpose of sealing documents creating or evidencing securities issued bythe Company, the Company may have a securities seal which is a facsimile of the Seal of the Company with the addition of the word “Securities” on its face or insuch other form as the Board may approve. The Board shall provide for the custody of each Seal and no Seal shall be used without the authority of the Board or ofa committee of the Board authorised by the Board in that behalf. Subject as otherwise provided in these Articles, any instrument to which a Seal is affixed shall besigned autographically by one Director and the Secretary or by two Directors or by such other person (including a Director) or persons as the Board may appoint,either generally or in any particular case, save that as regards any certificates for shares or debentures or other securities of the Company the Board may byresolution determine that such signatures or either of them shall be dispensed with or affixed by some method or system of mechanical signature. Every instrumentexecuted in manner provided by this Article shall be deemed to be sealed and executed with the authority of the Board previously given. (2) Where the Company has a Seal for use abroad, the Board may by writing under the Seal appoint any agent or committee abroad to be the duly authorisedagent of the Company for the purpose of affixing and using such Seal and the Board may impose restrictions on the use thereof as may be thought fit. Wherever inthese Articles reference is made to the Seal, the reference shall, when and so far as may be applicable, be deemed to include any such other Seal as aforesaid. 27 AUTHENTICATION OF DOCUMENTS 131. Any Director or the Secretary or any person appointed by the Board for the purpose may authenticate any documents affecting the constitution of theCompany and any resolution passed by the Company or the Board or any committee, and any books, records, documents and accounts relating to the business ofthe Company, and to certify copies thereof or extracts therefrom as true copies or extracts, and if any books, records, documents or accounts are elsewhere than atthe Office or the head office the local manager or other officer of the Company having the custody thereof shall be deemed to be a person so appointed by theBoard. A document purporting to be a copy of a resolution, or an extract from the minutes of a meeting, of the Company or of the Board or any committee which isso certified shall be conclusive evidence in favour of all persons dealing with the Company upon the faith thereof that such resolution has been duly passed or, asthe case may be, that such minutes or extract is a true and accurate record of proceedings at a duly constituted meeting. DESTRUCTION OF DOCUMENTS 132. (1) The Company shall be entitled to destroy the following documents at the following times: (a)any share certificate which has been cancelled at any time after the expiry of one (1) year from the date of such cancellation; (b)any dividend mandate or any variation or cancellation thereof or any notification of change of name or address at any time after the expiry of two(2) years from the date such mandate variation cancellation or notification was recorded by the Company; (c)any instrument of transfer of shares which has been registered at any time after the expiry of seven (7) years from the date of registration; (d)any allotment letters after the expiry of seven (7) years from the date of issue thereof; and (e)copies of powers of attorney, grants of probate and letters of administration at any time after the expiry of seven (7) years after the account to whichthe relevant power of attorney, grant of probate or letters of administration related has been closed; and it shall conclusively be presumed in favour of the Company that every entry in the Register purporting to be made on the basis of any suchdocuments so destroyed was duly and properly made and every share certificate so destroyed was a valid certificate duly and properly cancelled and that everyinstrument of transfer so destroyed was a valid and effective instrument duly and properly registered and that every other document destroyed hereunder was avalid and effective document in accordance with the recorded particulars thereof in the books or records of the Company. Provided always that: (1) the foregoingprovisions of this Article shall apply only to the destruction of a document in good faith and without express notice to the Company that the preservation of suchdocument was relevant to a claim; (2) nothing contained in this Article shall be construed as imposing upon the Company any liability in respect of the destructionof any such document earlier than as aforesaid or in any case where the conditions of proviso (1) above are not fulfilled; and (3) references in this Article to thedestruction of any document include references to its disposal in any manner. (2) Notwithstanding any provision contained in these Articles, the Directors may, if permitted by applicable law, authorise the destruction of documents setout in sub-paragraphs (a) to (e) of paragraph (1) of this Article and any other documents in relation to share registration which have been microfilmed orelectronically stored by the Company or by the share registrar on its behalf provided always that this Article shall apply only to the destruction of a document ingood faith and without express notice to the Company and its share registrar that the preservation of such document was relevant to a claim. DIVIDENDS AND OTHER PAYMENTS 133. Subject to the Law, the Company in general meeting or the Board may from time to time declare dividends in any currency to be paid to the Members but nodividend shall be declared in excess of the amount recommended by the Board. 134. Dividends may be declared and paid out of the profits of the Company, realised or unrealised, or from any reserve set aside from profits which the Directorsdetermine is no longer needed. The Board may also declare and pay dividends out of share premium account or any other fund or account which can be authorisedfor this purpose in accordance with the Law. 28 135.Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provide: (a)all dividends shall be declared and paid according to the amounts paid up on the shares in respect of which the dividend is paid, but no amount paid upon a share in advance of calls shall be treated for the purposes of this Article as paid up on the share; and (b)all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period inrespect of which the dividend is paid. 136. The Board, and only the Board, may from time to time declare to pay to the Members such interim dividends as appear to the Board to be justified by theprofits of the Company and in particular (but without prejudice to the generality of the foregoing) if at any time the share capital of the Company is divided intodifferent classes, the Board may pay such interim dividends in respect of those shares in the capital of the Company which confer on the holders thereof deferred ornon-preferential rights as well as in respect of those shares which confer on the holders thereof preferential rights with regard to dividend and provided that theBoard acts bona fide the Board shall not incur any responsibility to the holders of shares conferring any preference for any damage that they may suffer by reasonof the payment of an interim dividend on any shares having deferred or non-preferential rights and may also pay any fixed dividend which is payable on any sharesof the Company half-yearly or on any other dates, whenever such profits, in the opinion of the Board, justifies such payment. 137. The Board may deduct from any dividend or other moneys payable to a Member by the Company on or in respect of any shares all sums of money (if any)presently payable by him to the Company on account of calls or otherwise. 138. No dividend or other moneys payable by the Company on or in respect of any share shall bear interest against the Company. 139. Any dividend, interest or other sum payable in cash to the holder of shares may be paid by cheque or warrant sent through the post addressed to the holder athis registered address or, in the case of joint holders, addressed to the holder whose name stands first in the Register in respect of the shares at his address asappearing in the Register or addressed to such person and at such address as the holder or joint holders may in writing direct. Every such cheque or warrant shall,unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose namestands first on the Register in respect of such shares, and shall be sent at his or their risk and payment of the cheque or warrant by the bank on which it is drawnshall constitute a good discharge to the Company notwithstanding that it may subsequently appear that the same has been stolen or that any endorsement thereonhas been forged. Any one of two or more joint holders may give effectual receipts for any dividends or other moneys payable or property distributable in respect ofthe shares held by such joint holders. 140. All dividends or bonuses unclaimed for one (1) year after having been declared may be invested or otherwise made use of by the Board for the benefit of theCompany until claimed. Any dividend or bonuses unclaimed after a period of six (6) years from the date of declaration shall be forfeited and shall revert to theCompany. The payment by the Board of any unclaimed dividend or other sums payable on or in respect of a share into a separate account shall not constitute theCompany a trustee in respect thereof. 141. Whenever the Board or the Company in general meeting has resolved that a dividend be paid or declared, the Board may further resolve that such dividend besatisfied wholly or in part by the distribution of specific assets of any kind and in particular of paid up shares, debentures or warrants to subscribe securities of theCompany or any other company, or in any one or more of such ways, and where any difficulty arises in regard to the distribution the Board may settle the same asit thinks expedient, and in particular may issue certificates in respect of fractions of shares, disregard fractional entitlements or round the same up or down, andmay fix the value for distribution of such specific assets, or any part thereof, and may determine that cash payments shall be made to any Members upon thefooting of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to the Board andmay appoint any person to sign any requisite instruments of transfer and other documents on behalf of the persons entitled to the dividend, and such appointmentshall be effective and binding on the Members. The Board may resolve that no such assets shall be made available to Members with registered addresses in anyparticular territory or territories where, in the absence of a registration statement or other special formalities, such distribution of assets would or might, in theopinion of the Board, be unlawful or impracticable and in such event the only entitlement of the Members aforesaid shall be to receive cash payments as aforesaid.Members affected as a result of the foregoing sentence shall not be or be deemed to be a separate class of Members for any purpose whatsoever. 29 142.(1) Whenever the Board or the Company in general meeting has resolved that a dividend be paid or declared on any class of the share capital of the Company,the Board may further resolve either: (a)that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that the Members entitledthereto will be entitled to elect to receive such dividend (or part thereof if the Board so determines) in cash in lieu of such allotment. In such case, thefollowing provisions shall apply: (i)the basis of any such allotment shall be determined by the Board; (ii)the Board, after determining the basis of allotment, shall give not less than ten (10) days’ Notice to the holders of the relevant shares of theright of election accorded to them and shall send with such notice forms of election and specify the procedure to be followed and the place atwhich and the latest date and time by which duly completed forms of election must be lodged in order to be effective; (iii)the right of election may be exercised in respect of the whole or part of that portion of the dividend in respect of which the right of electionhas been accorded; and (iv)the dividend (or that part of the dividend to be satisfied by the allotment of shares as aforesaid) shall not be payable in cash on shares inrespect whereof the cash election has not been duly exercised (“the non-elected shares”) and in satisfaction thereof shares of the relevant classshall be allotted credited as fully paid up to the holders of the non-elected shares on the basis of allotment determined as aforesaid and forsuch purpose the Board shall capitalise and apply out of any part of the undivided profits of the Company (including profits carried andstanding to the credit of any reserves or other special account, share premium account, capital redemption reserve other than the SubscriptionRights Reserve) as the Board may determine, such sum as may be required to pay up in full the appropriate number of shares of the relevantclass for allotment and distribution to and amongst the holders of the non-elected shares on such basis; or (b)that the Members entitled to such dividend shall be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole orsuch part of the dividend as the Board may think fit. In such case, the following provisions shall apply: (i)the basis of any such allotment shall be determined by the Board; (ii)the Board, after determining the basis of allotment, shall give not less than ten (10) days’ Notice to the holders of the relevant shares of theright of election accorded to them and shall send with such notice forms of election and specify the procedure to be followed and the place atwhich and the latest date and time by which duly completed forms of election must be lodged in order to be effective; (iii)the right of election may be exercised in respect of the whole or part of that portion of the dividend in respect of which the right of electionhas been accorded; and (iv)the dividend (or that part of the dividend in respect of which a right of election has been accorded) shall not be payable in cash on shares inrespect whereof the share election has been duly exercised (“the elected shares”) and in lieu thereof shares of the relevant class shall beallotted credited as fully paid up to the holders of the elected shares on the basis of allotment determined as aforesaid and for such purpose theBoard shall capitalise and apply out of any part of the undivided profits of the Company (including profits carried and standing to the credit ofany reserves or other special account, share premium account, capital redemption reserve other than the Subscription Rights Reserve) as theBoard may determine, such sum as may be required to pay up in full the appropriate number of shares of the relevant class for allotment anddistribution to and amongst the holders of the elected shares on such basis. 30 (2) (a) The shares allotted pursuant to the provisions of paragraph (1) of this Article shall rank pari passu in all respects with shares of the same class (ifany) then in issue save only as regards participation in the relevant dividend or in any other distributions, bonuses or rights paid, made, declared orannounced prior to or contemporaneously with the payment or declaration of the relevant dividend unless, contemporaneously with theannouncement by the Board of their proposal to apply the provisions of sub-paragraph (a) or (b) of paragraph (2) of this Article in relation to therelevant dividend or contemporaneously with their announcement of the distribution, bonus or rights in question, the Board shall specify that theshares to be allotted pursuant to the provisions of paragraph (1) of this Article shall rank for participation in such distribution, bonus or rights. (b) The Board may do all acts and things considered necessary or expedient to give effect to any capitalisation pursuant to the provisions of paragraph(1) of this Article, with full power to the Board to make such provisions as it thinks fit in the case of shares becoming distributable in fractions(including provisions whereby, in whole or in part, fractional entitlements are aggregated and sold and the net proceeds distributed to those entitled, orare disregarded or rounded up or down or whereby the benefit of fractional entitlements accrues to the Company rather than to the Membersconcerned). The Board may authorise any person to enter into on behalf of all Members interested, an agreement with the Company providing forsuch capitalisation and matters incidental thereto and any agreement made pursuant to such authority shall be effective and binding on all concerned. (3) The Company may upon the recommendation of the Board by ordinary resolution resolve in respect of any one particular dividend of the Company thatnotwithstanding the provisions of paragraph (1) of this Article a dividend may be satisfied wholly in the form of an allotment of shares credited as fully paid upwithout offering any right to shareholders to elect to receive such dividend in cash in lieu of such allotment. (4) The Board may on any occasion determine that rights of election and the allotment of shares under paragraph (1) of this Article shall not be madeavailable or made to any shareholders with registered addresses in any territory where, in the absence of a registration statement or other special formalities, thecirculation of an offer of such rights of election or the allotment of shares would or might, in the opinion of the Board, be unlawful or impracticable, and in suchevent the provisions aforesaid shall be read and construed subject to such determination. Members affected as a result of the foregoing sentence shall not be or bedeemed to be a separate class of Members for any purpose whatsoever. (5) Any resolution declaring a dividend on shares of any class, whether a resolution of the Company in general meeting or a resolution of the Board, mayspecify that the same shall be payable or distributable to the persons registered as the holders of such shares at the close of business on a particular date,notwithstanding that it may be a date prior to that on which the resolution is passed, and thereupon the dividend shall be payable or distributable to them inaccordance with their respective holdings so registered, but without prejudice to the rights inter se in respect of such dividend of transferors and transferees of anysuch shares. The provisions of this Article shall mutatis mutandis apply to bonuses, capitalisation issues, distributions of realised capital profits or offers or grantsmade by the Company to the Members. RESERVES 143. (1) The Board shall establish an account to be called the share premium account and shall carry to the credit of such account from time to time a sum equal tothe amount or value of the premium paid on the issue of any share in the Company. Unless otherwise provided by the provisions of these Articles, the Board mayapply the share premium account in any manner permitted by the Law. The Company shall at all times comply with the provisions of the Law in relation to theshare premium account. (2) Before recommending any dividend, the Board may set aside out of the profits of the Company such sums as it determines as reserves which shall, at thediscretion of the Board, be applicable for any purpose to which the profits of the Company may be properly applied and pending such application may, also at suchdiscretion, either be employed in the business of the Company or be invested in such investments as the Board may from time to time think fit and so that it shallnot be necessary to keep any investments constituting the reserve or reserves separate or distinct from any other investments of the Company. The Board may alsowithout placing the same to reserve carry forward any profits which it may think prudent not to distribute. 31 CAPITALISATION 144. The Company may, upon the recommendation of the Board, at any time and from time to time pass an ordinary resolution to the effect that it is desirable tocapitalise all or any part of any amount for the time being standing to the credit of any reserve or fund (including a share premium account and capital redemptionreserve and the profit and loss account) whether or not the same is available for distribution and accordingly that such amount be set free for distribution among theMembers or any class of Members who would be entitled thereto if it were distributed by way of dividend and in the same proportions, on the footing that the sameis not paid in cash but is applied either in or towards paying up the amounts for the time being unpaid on any shares in the Company held by such Membersrespectively or in paying up in full unissued shares, debentures or other obligations of the Company, to be allotted and distributed credited as fully paid up amongsuch Members, or partly in one way and partly in the other, and the Board shall give effect to such resolution provided that, for the purposes of this Article, a sharepremium account and any capital redemption reserve or fund representing unrealised profits, may be applied only in paying up in full unissued shares of theCompany to be allotted to such Members credited as fully paid. 145. The Board may settle, as it considers appropriate, any difficulty arising in regard to any distribution under the last preceding Article and in particular mayissue certificates in respect of fractions of shares or authorise any person to sell and transfer any fractions or may resolve that the distribution should be as nearly asmay be practicable in the correct proportion but not exactly so or may ignore fractions altogether, and may determine that cash payments shall be made to anyMembers in order to adjust the rights of all parties, as may seem expedient to the Board. The Board may appoint any person to sign on behalf of the personsentitled to participate in the distribution any contract necessary or desirable for giving effect thereto and such appointment shall be effective and binding upon theMembers. SUBSCRIPTION RIGHTS RESERVE 146. The following provisions shall have effect to the extent that they are not prohibited by and are in compliance with the Law: (1)If, so long as any of the rights attached to any warrants issued by the Company to subscribe for shares of the Company shall remain exercisable, theCompany does any act or engages in any transaction which, as a result of any adjustments to the subscription price in accordance with the provisionsof the conditions of the warrants, would reduce the subscription price to below the par value of a share, then the following provisions shall apply: (a)as from the date of such act or transaction the Company shall establish and thereafter (subject as provided in this Article) maintain in accordance withthe provisions of this Article a reserve (the “Subscription Rights Reserve”) the amount of which shall at no time be less than the sum which for thetime being would be required to be capitalised and applied in paying up in full the nominal amount of the additional shares required to be issued andallotted credited as fully paid pursuant to sub-paragraph (c) below on the exercise in full of all the subscription rights outstanding and shall apply theSubscription Rights Reserve in paying up such additional shares in full as and when the same are allotted; (b)the Subscription Rights Reserve shall not be used for any purpose other than that specified above unless all other reserves of the Company (other thanshare premium account) have been extinguished and will then only be used to make good losses of the Company if and so far as is required by law; (c)upon the exercise of all or any of the subscription rights represented by any warrant, the relevant subscription rights shall be exercisable in respect of anominal amount of shares equal to the amount in cash which the holder of such warrant is required to pay on exercise of the subscription rightsrepresented thereby (or, as the case may be the relevant portion thereof in the event of a partial exercise of the subscription rights) and, in addition,there shall be allotted in respect of such subscription rights to the exercising warrantholder, credited as fully paid, such additional nominal amount ofshares as is equal to the difference between: (i)the said amount in cash which the holder of such warrant is required to pay on exercise of the subscription rights represented thereby (or, asthe case may be, the relevant portion thereof in the event of a partial exercise of the subscription rights); and 32 (ii)the nominal amount of shares in respect of which such subscription rights would have been exercisable having regard to the provisions of theconditions of the warrants, had it been possible for such subscription rights to represent the right to subscribe for shares at less than par andimmediately upon such exercise so much of the sum standing to the credit of the Subscription Rights Reserve as is required to pay up in fullsuch additional nominal amount of shares shall be capitalised and applied in paying up in full such additional nominal amount of shares whichshall forthwith be allotted credited as fully paid to the exercising warrantholders; and (d)if, upon the exercise of the subscription rights represented by any warrant, the amount standing to the credit of the Subscription Rights Reserve is notsufficient to pay up in full such additional nominal amount of shares equal to such difference as aforesaid to which the exercising warrantholder isentitled, the Board shall apply any profits or reserves then or thereafter becoming available (including, to the extent permitted by law, share premiumaccount) for such purpose until such additional nominal amount of shares is paid up and allotted as aforesaid and until then no dividend or otherdistribution shall be paid or made on the fully paid shares of the Company then in issue. Pending such payment and allotment, the exercisingwarrantholder shall be issued by the Company with a certificate evidencing his right to the allotment of such additional nominal amount of shares. Therights represented by any such certificate shall be in registered form and shall be transferable in whole or in part in units of one share in the likemanner as the shares for the time being are transferable, and the Company shall make such arrangements in relation to the maintenance of a registertherefor and other matters in relation thereto as the Board may think fit and adequate particulars thereof shall be made known to each relevantexercising warrantholder upon the issue of such certificate. (2) Shares allotted pursuant to the provisions of this Article shall rank pari passu in all respects with the other shares allotted on the relevant exercise of thesubscription rights represented by the warrant concerned. Notwithstanding anything contained in paragraph (1) of this Article, no fraction of any share shall beallotted on exercise of the subscription rights. (3) The provision of this Article as to the establishment and maintenance of the Subscription Rights Reserve shall not be altered or added to in any waywhich would vary or abrogate, or which would have the effect of varying or abrogating the provisions for the benefit of any warrantholder or class ofwarrantholders under this Article without the sanction of a special resolution of such warrantholders or class of warrantholders. (4) A certificate or report by the auditors for the time being of the Company as to whether or not the Subscription Rights Reserve is required to beestablished and maintained and if so the amount thereof so required to be established and maintained, as to the purposes for which the Subscription Rights Reservehas been used, as to the extent to which it has been used to make good losses of the Company, as to the additional nominal amount of shares required to be allottedto exercising warrantholders credited as fully paid, and as to any other matter concerning the Subscription Rights Reserve shall (in the absence of manifest error)be conclusive and binding upon the Company and all warrantholders and shareholders. ACCOUNTING RECORDS 147. The Board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receiptand expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the Law or necessary to give atrue and fair view of the Company’s affairs and to explain its transactions. 148. The accounting records shall be kept at the Office or, at such other place or places as the Board decides and shall always be open to inspection by theDirectors. No Member (other than a Director) shall have any right of inspecting any accounting record or book or document of the Company except as conferredby law or authorised by the Board or the Company in general meeting. 149. Subject to Article 150, a printed copy of the Directors’ report, accompanied by the balance sheet and profit and loss account, including every documentrequired by law to be annexed thereto, made up to the end of the applicable financial year and containing a summary of the assets and liabilities of the Companyunder convenient heads and a statement of income and expenditure, together with a copy of the Auditors’ report, shall be sent to each person entitled thereto atleast ten (10) days before the date of the general meeting and laid before the Company at the annual general meeting held in accordance with Article 56 providedthat this Article shall not require a copy of those documents to be sent to any person whose address the Company is not aware or to more than one of the jointholders of any shares or debentures. 33 150. Subject to due compliance with all applicable Statutes, rules and regulations, including, without limitation, the rules of the Designated Stock Exchange, and toobtaining all necessary consents, if any, required thereunder, the requirements of Article 152 shall be deemed satisfied in relation to any person by sending to theperson in any manner not prohibited by the Statutes, a summary financial statement derived from the Company’s annual accounts and the directors’ report whichshall be in the form and containing the information required by applicable laws and regulations, provided that any person who is otherwise entitled to the annualfinancial statements of the Company and the directors’ report thereon may, if he so requires by notice in writing served on the Company, demand that the Companysends to him, in addition to a summary financial statement, a complete printed copy of the Company’s annual financial statement and the directors’ report thereon. 151. The requirement to send to a person referred to in Article 149 the documents referred to in that article or a summary financial report in accordance withArticle 153 shall be deemed satisfied where, in accordance with all applicable Statutes, rules and regulations, including, without limitation, the rules of theDesignated Stock Exchange, the Company publishes copies of the documents referred to in Article 149 and, if applicable, a summary financial report complyingwith Article 150, on the Company’s computer network or in any other permitted manner (including by sending any form of electronic communication), and thatperson has agreed or is deemed to have agreed to treat the publication or receipt of such documents in such manner as discharging the Company’s obligation tosend to him a copy of such documents. AUDIT 152.Subject to applicable law and rules of the Designated Stock Exchange: (1) The Board shall appoint an auditor to audit the accounts of the Company and such auditor shall hold office until the Board appoints another auditor. Suchauditor may be a Member but no Director or officer or employee of the Company shall, during his continuance in office, be eligible to act as an auditor of theCompany. (2) The Board may remove the Auditor at any time before the expiration of his term of office and shall by ordinary resolution at that meeting appoint anotherAuditor in his stead for the remainder of his term. 153. Subject to the Law the accounts of the Company shall be audited at least once in every year. 154. The remuneration of the Auditor shall be fixed by the Board. 155. If the office of auditor becomes vacant by the resignation or death of the Auditor, or by his becoming incapable of acting by reason of illness or otherdisability at a time when his services are required, the Directors shall fill the vacancy and determine the remuneration of such Auditor. 156. The Auditor shall at all reasonable times have access to all books kept by the Company and to all accounts and vouchers relating thereto; and he may call onthe Directors or officers of the Company for any information in their possession relating to the books or affairs of the Company. 157. The statement of income and expenditure and the balance sheet provided for by these Articles shall be examined by the Auditor and compared by him with thebooks, accounts and vouchers relating thereto; and he shall make a written report thereon stating whether such statement and balance sheet are drawn up so as topresent fairly the financial position of the Company and the results of its operations for the period under review and, in case information shall have been called forfrom Directors or officers of the Company, whether the same has been furnished and has been satisfactory. The financial statements of the Company shall beaudited by the Auditor in accordance with generally accepted auditing standards. The Auditor shall make a written report thereon in accordance with generallyaccepted auditing standards and the report of the Auditor shall be submitted to the Members in general meeting. The generally accepted auditing standards referredto herein may be those of a country or jurisdiction other than the Cayman Islands. If so, the financial statements and the report of the Auditor should disclose thisact and name such country or jurisdiction. 34 NOTICES 158. Any Notice or document, whether or not, to be given or issued under these Articles from the Company to a Member shall be in writing or by cable, telex orfacsimile transmission message or other form of electronic transmission or communication and any such Notice and document may be served or delivered by theCompany on or to any Member either personally or by sending it through the post in a prepaid envelope addressed to such Member at his registered address asappearing in the Register or at any other address supplied by him to the Company for the purpose or, as the case may be, by transmitting it to any such address ortransmitting it to any telex or facsimile transmission number or electronic number or address or website supplied by him to the Company for the giving of Notice tohim or which the person transmitting the notice reasonably and bona fide believes at the relevant time will result in the Notice being duly received by the Memberor may also be served by advertisement in appropriate newspapers in accordance with the requirements of the Designated Stock Exchange or, to the extentpermitted by the applicable laws, by placing it on the Company’s website and giving to the member a notice stating that the notice or other document is availablethere (a “notice of availability”). The notice of availability may be given to the Member by any of the means set out above. In the case of joint holders of a share allnotices shall be given to that one of the joint holders whose name stands first in the Register and notice so given shall be deemed a sufficient service on or deliveryto all the joint holders. 159.Any Notice or other document: (a)if served or delivered by post, shall where appropriate be sent by airmail and shall be deemed to have been served or delivered on the day followingthat on which the envelope containing the same, properly prepaid and addressed, is put into the post; in proving such service or delivery it shall besufficient to prove that the envelope or wrapper containing the notice or document was properly addressed and put into the post and a certificate inwriting signed by the Secretary or other officer of the Company or other person appointed by the Board that the envelope or wrapper containing thenotice or other document was so addressed and put into the post shall be conclusive evidence thereof; (b)if sent by electronic communication, shall be deemed to be given on the day on which it is transmitted from the server of the Company or its agent. Anotice placed on the Company’s website is deemed given by the Company to a Member on the day following that on which a notice of availability isdeemed served on the Member; (c)if served or delivered in any other manner contemplated by these Articles, shall be deemed to have been served or delivered at the time of personalservice or delivery or, as the case may be, at the time of the relevant despatch or transmission; and in proving such service or delivery a certificate inwriting signed by the Secretary or other officer of the Company or other person appointed by the Board as to the act and time of such service,delivery, despatch or transmission shall be conclusive evidence thereof; and (d)may be given to a Member in the English language or such other language as may be approved by the Directors, subject to due compliance with allapplicable Statutes, rules and regulations. 160.(1) Any Notice or other document delivered or sent by post to or left at the registered address of any Member in pursuance of these Articles shall,notwithstanding that such Member is then dead or bankrupt or that any other event has occurred, and whether or not the Company has notice of the death orbankruptcy or other event, be deemed to have been duly served or delivered in respect of any share registered in the name of such Member as sole or joint holderunless his name shall, at the time of the service or delivery of the notice or document, have been removed from the Register as the holder of the share, and suchservice or delivery shall for all purposes be deemed a sufficient service or delivery of such Notice or document on all persons interested (whether jointly with or asclaiming through or under him) in the share. (2) A notice may be given by the Company to the person entitled to a share in consequence of the death, mental disorder or bankruptcy of a Member bysending it through the post in a prepaid letter, envelope or wrapper addressed to him by name, or by the title of representative of the deceased, or trustee of thebankrupt, or by any like description, at the address, if any, supplied for the purpose by the person claiming to be so entitled, or (until such an address has been sosupplied) by giving the notice in any manner in which the same might have been given if the death, mental disorder or bankruptcy had not occurred. 35 (3) Any person who by operation of law, transfer or other means whatsoever shall become entitled to any share shall be bound by every notice in respect ofsuch share which prior to his name and address being entered on the Register shall have been duly given to the person from whom he derives his title to such share. SIGNATURES 161. For the purposes of these Articles, a cable or telex or facsimile or electronic transmission message purporting to come from a holder of shares or, as the casemay be, a Director, or, in the case of a corporation which is a holder of shares from a director or the secretary thereof or a duly appointed attorney or dulyauthorised representative thereof for it and on its behalf, shall in the absence of express evidence to the contrary available to the person relying thereon at therelevant time be deemed to be a document or instrument in writing signed by such holder or Director in the terms in which it is received. WINDING UP 162.(1) The Board shall have power in the name and on behalf of the Company to present a petition to the court for the Company to be wound up. (2) A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution. 163.(1) Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any classor classes of shares (i) if the Company shall be wound up and the assets available for distribution amongst the Members of the Company shall be more thansufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst such members inproportion to the amount paid up on the shares held by them respectively and (ii) if the Company shall be wound up and the assets available for distributionamongst the Members as such shall be insufficient to repay the whole of the paid-up capital such assets shall be distributed so that, a nearly as may be, the lossesshall be borne by the Members in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the sharesheld by them respectively. (2) If the Company shall be wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution andany other sanction required by the Law, divide among the Members in specie or kind the whole or any part of the assets of the Company and whether or not theassets shall consist of properties of one kind or shall consist of properties to be divided as aforesaid of different kinds, and may for such purpose set such value ashe deems fair upon any one or more class or classes of property and may determine how such division shall be carried out as between the Members or differentclasses of Members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of the Members as theliquidator with the like authority shall think fit, and the liquidation of the Company may be closed and the Company dissolved, but so that no contributory shall becompelled to accept any shares or other property in respect of which there is a liability. INDEMNITY 164.(1) The Directors, Secretary and other officers for the time being of the Company and the liquidator or trustees (if any) for the time being acting in relation toany of the affairs of the Company and everyone of them, and everyone of their heirs, executors and administrators, shall be indemnified and secured harmless outof the assets and profits of the Company from and against all actions, costs, charges, losses, damages and expenses which they or any of them, their or any of theirheirs, executors or administrators, shall or may incur or sustain by or by reason of any act done, concurred in or omitted in or about the execution of their duty, orsupposed duty, in their respective offices or trusts; and none of them shall be answerable for the acts, receipts, neglects or defaults of the other or others of them orfor joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the Company shall or maybe lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the Company shall be placedout on or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto;PROVIDED THAT this indemnity shall not extend to any matter in respect of any fraud or dishonesty which may attach to any of said persons. 36 (2) Each Member agrees to waive any claim or right of action he might have, whether individually or by or in the right of the Company, against any Directoron account of any action taken by such Director, or the failure of such Director to take any action in the performance of his duties with or for the Company;PROVIDED THAT such waiver shall not extend to any matter in respect of any fraud or dishonesty which may attach to such Director. AMENDMENT TO MEMORANDUM AND ARTICLES OF ASSOCIATIONAND NAME OF COMPANY 165. No Article shall be rescinded, altered or amended and no new Article shall be made until the same has been approved by a special resolution of the Members.A special resolution shall be required to alter the provisions of the Memorandum of Association or to change the name of the Company. INFORMATION 166. No Member shall be entitled to require discovery of or any information respecting any detail of the Company’s trading or any matter which is or may be in thenature of a trade secret or secret process which may relate to the conduct of the business of the Company and which in the opinion of the Directors it will beinexpedient in the interests of the members of the Company to communicate to the public. 37 Exhibit 8.1 List of Principal Subsidiaries and Consolidated Affiliated Entities of YY Inc. Place of Incorporation Subsidiaries Duowan Entertainment Corporation BVINeoTasks Inc. Cayman IslandsNeoTasks Limited Hong KongGuangzhou Huanju Shidai Information Technology Co., Ltd. PRCHuanju Shidai Technology (Beijing) Co., Ltd. PRCZhuhai Duowan Information Technology Co., Ltd. PRCEngage Capital Partners I.L.P. Cayman IslandsBiLin Information Technology Co., Ltd. Cayman IslandsBiLin Information Technology Co., Limited Hong KongBeijing Bilin Changxiang Information Technology Co., Ltd. PRC Consolidated Affiliated Entities Beijing Tuda Science and Technology Co., Ltd. PRCGuangzhou Huaduo Network Technology Co., Ltd. PRCGuangzhou Juhui Information Technology Co., Ltd.* PRCGuangzhou Huanju Media Co., Ltd.* PRC100-Online Education Technology (Beijing) Co., Ltd.* PRCBeijing Yunke Online Technology Development Co., Ltd. PRCGuangzhou Zhuque Information Technology Co., Ltd.* PRCGuangzhou Huanju Electronic Commerce Co., Ltd.* PRCZhuhai Huanju Interactive Entertainment Technology Co., Ltd.* PRCGuangzhou Huanju Microfinance Co., Ltd.* PRCGuangzhou Zhiniu Asset Management Co., Ltd.* PRCBeijing Bilin Online Information Technology Co., Ltd. PRCGuangzhou Huya Information Technology Co.,Ltd.* PRCGuangzhou WanheTechnology Co., Ltd.* PRCGuangzhou Sanrenxing 100-EducationTechnology Co., Ltd. PRCShanghai Yilian Equity Investment Partnership(LP) PRC * Wholly owned subsidiaries of Guangzhou Huaduo Network Technology Co., Ltd.. Exhibit 12.1 Certification by the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Zhou Chen, certify that: 1.I have reviewed this annual report on Form 20-F of YY Inc. (the "Company"); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4.The Company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the Company and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered by thisannual report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5.The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theCompany's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controlover financial reporting. Date:April 20 , 2017 By:/s/ Zhou Chen Name:Zhou Chen Title:Chief Executive Officer Exhibit 12.2 Certification by the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Eric He, certify that: 1.I have reviewed this annual report on Form 20-F of YY Inc. (the "Company"); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4.The Company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the Company and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered by thisannual report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5.The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theCompany's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controlover financial reporting. Date:April 20 , 2017 By:/s/ Eric He Name:Eric He Title:Chief Financial Officer Exhibit 13.1 Certification by the Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of YY Inc. (the "Company") on Form 20-F for the year ended December 31, 2016 as filed with the Securities and ExchangeCommission on the date hereof (the "Report"), I, Zhou Chen, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date:April 20 , 2017 By:/s/ Zhou Chen Name:Zhou Chen Title:Chief Executive Officer Exhibit 13.2 Certification by the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of YY Inc. (the "Company") on Form 20-F for the year ended December 31, 2016 as filed with the Securities and ExchangeCommission on the date hereof (the "Report"), I, Eric He, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date:April 20 , 2017 By:/s/ Eric He Name:Eric He Title:Chief Financial Officer Exhibit 15.1 April 20 , 2017 Matter No.:824258 Doc Ref:103274550v1 +852 2842 9551 Paul.lim@conyersdill.com The DirectorsYY Inc.Building B-1, North Block of Wanda PlazaNo. 79 Wanbo Er RoadNancun Town, Panyu DistrictGuangzhou 511442The People's Republic of China Dear Sirs, Re: YY Inc. ( the "Company") We refer to the annual report of the Company for the fiscal year ended 31 December, 2016 on Form 20-F filed pursuant to Section 13 or 15(D) of the U.S.Securities Exchange Act of 1934 on or about 20 April, 2017 (the “ Form 20-F ”). We consent to the filing of this letter as an exhibit to the annual report of the Company on Form 20-F with the U.S. Securities Exchange Commission and to theinclusion therein of the reference to our name on page 85 of the annual report under the heading “Taxation – Cayman Islands” in the form and context in whichthey appear, and further consent to the incorporation by reference of the summary of our opinion under this heading (“Taxation – Cayman Islands”) in the form andcontext in which they appear in the Company's registration statement on Form S-8 (No. 333-187074) that was filed on March 6, 2013 and the Company'sregistration statement on Form S-8 (No. 333-215742) that was filed on January 26, 2017. In giving such consent, we do not hereby admit that we are experts within the meaning of Section 11 of the U.S. Securities Act, 1933 or that we are in the categoryof persons whose consent is required under Section 7 of the Securities Act, 1933 or the Rules and Regulations of the U.S. Securities Exchange Commissionpromulgated thereunder. Yours faithfully,/s/ Conyers Dill & Pearman Conyers Dill & Pearman Exhibit 15.2 FANGDA PARTNERS Shanghai · Beijing · Shenzhen · Hong Konghttp://www.fangdalaw.com E-mail:email@fangdalaw.comTel.:86-21-2208-1166Fax:86-21-5298-5599Ref.:17GC0052 32/F, Plaza 66 Tower 11266 Nan Jing West RoadShanghai 200040, PRC To: YY Inc.Building B-1, North Block of Wanda PlazaNo. 79 Wanbo Er RoadNancun Town, Panyu DistrictGuangzhou 511442The People's Republic of China April 20 , 2017 Re: 2016 Annual Report on Form 20-F of YY Inc. Dear Sirs, We consent to the reference to our firm under the headings "Item 3. Key Information—D. Risk Factors," "Item 4. Information on the Company—B. BusinessOverview—PRC Regulation," and "Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies" in YY Inc.'sAnnual Report on Form 20-F for the year ended December 31, 2016, which will be filed with the Securities and Exchange Commission (the " SEC ") in the monthof April, 2017, and further consent to the incorporation by reference of the summaries of our opinions under these captions into the Company's registrationstatement on Form S-8 (No. 333-187074) that was filed on March 6, 2013 and the Company's registration statement on Form S-8 (No. 333-215742) that was filedon January 26, 2017. We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report on Form 20-F for the year endedDecember 31, 2016. Yours sincerely, /s/ Fangda Partners Fangda Partners Exhibit 15.3 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-187074 and No. 333-215742) of YY Inc. of our reportdated April 20 , 2017 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 20-F. /s/ PricewaterhouseCoopers Zhong Tian LLP PricewaterhouseCoopers Zhong Tian LLP Guangzhou, the People's Republic of China April 20 , 2017

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