As filed with the Securities and Exchange Commission on August 27, 2010
Registration No. 333-166658

UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
 
 
CHINA OUMEI REAL ESTATE INC.
(Exact name of registrant as specified in its charter)

Cayman Islands 6552 N/A
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

Floor 28, Block C
Longhai Mingzhu Building,
No.182 Haier Road, Qingdao 266000
People’s Republic of China
(86) 532 8099 7969

(Address and telephone number of principal executive offices)
_________________________________________

Copies to:

Louis A. Bevilacqua, Esq. Joseph M. Lucosky, Esq.
Thomas M. Shoesmith, Esq. Anslow & Jaclin, LLP
Joseph R. Tiano, Jr., Esq. 195 Route 9 South
Pillsbury Winthrop Shaw Pittman LLP 2nd Floor
2300 N Street, N.W. Manalapan, NJ 07726
Washington, D.C. 20037 (732) 409-1212
(202) 663-8000  

(Names, addresses and telephone numbers of agents for service)
______________________________________

Approximate date of commencement of proposed sale to public: From time to time after the effective date of this Registration Statement, as determined by market conditions and other factors.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement the same offering. [  ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer," "accelerated filer,” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ] Accelerated filer [  ]
   
Non-accelerated filer [X] Smaller reporting company [  ]
(Do not check if a smaller reporting company)  


CALCULATION OF REGISTRATION FEE

          Proposed     Proposed        
          maximum     maximum        
    Amount to be     offering     aggregate     Amount of  
Title of securities to be registered   registered(1)     price per share     offering price     registration fee  
Primary Offering:                        

Ordinary Shares, $0.002112 par value per share

        $ 23,000,000 (2) $ 1,640 (3)

Underwriter’s Warrants to Purchase Ordinary Shares

          -     -(4 )

Ordinary Shares Underlying Underwriter’s Warrants, $0.002112 par value per share

            $ 1,250,000   $ 90 (3)
                 
Secondary Offering:                        

Ordinary Shares, $0.002112 par value per share

  765,000 (7) $ 4.00 (5) $ 3,060,000   $ 219  

Ordinary Shares Underlying 6% Convertible Preference Shares, $0.002112 par value per share

  2,774,700 (8) $ 4.00 (5) $ 11,098,800   $ 792  

Ordinary Shares Underlying Warrants, $0.002112 par value per share

  1,387,350 (9) $ 6.00 (6) $ 8,324,100   $ 594  

Ordinary Shares Underlying Warrants, $0.002112 par value per share

  138,735 (10) $ 5.00 (6) $ 693,675   $ 50  
TOTAL             $ 47,426,575   $ 3,385 (11)

(1) In accordance with Rule 416(a), the Registrant is also registering hereunder an indeterminate number of additional Ordinary Shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

(3) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

(4) No separate registration fee is required pursuant to Rule 457(g).

(5) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457, based on the last private sales price for ordinary shares of the Registrant as there is currently no public market price for the Registrant’s ordinary shares. Management considered the total number of shares outstanding post offering, the public offering of ordinary shares, estimated market capitalization, forward looking net income, the targeted price-to-earnings ratio and the effect of the current global economic crisis to determine the offering price per share. Accordingly, taking the foregoing factors into consideration, the Registrant arrived at the proposed offering price per share, which is the effective price per share paid by the investors in the Company’s April 2010 private placement.

(6) Calculated in accordance with Rule 457(g) based upon the exercise price of the Warrants held by selling stockholders named in this registration statement.

(7) Represents the Registrant’s ordinary shares being registered for resale that have been issued to the selling stockholders named in this registration statement.

(8) Represents ordinary shares underlying 6% convertible preference shares being registered for resale that have been issued to the selling stockholders named in this registration statement.

(9) Represents ordinary shares issuable upon exercise of five-year warrants to purchase ordinary shares held by certain selling stockholders named in this registration statement.

(10) Represents ordinary shares issuable upon exercise of three-year warrants to purchase ordinary shares held by certain selling stockholder named in this registration statement.

(11) Previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.


EXPLANATORY NOTE

This Registration Statement contains two prospectuses, as set forth below.

The Resale Prospectus is substantively identical to the Public Offering Prospectus, except for the following major items:

We have included in this Registration Statement, after the financial statements, a set of alternate pages to reflect the foregoing differences of the Resale Prospectus as compared to the Public Offering Prospectus.


The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. 

Subject to completion, dated August 27, 2010

________ Ordinary Shares

 ________________________________________

We are offering           ordinary shares.

Our ordinary shares are not currently listed or quoted for trading on any national securities exchange or national quotation system. We have applied to have our ordinary shares listed on the NASDAQ Global Market under the symbol “OMEI”. There can, however, be no assurance that our listing application will be accepted by the NASDAQ Global Market.

Investing in our ordinary shares involves a high degree of risk. See “Risk Factors” beginning on page 7.

    Per Share     Total  
Public offering price $     $    
Underwriting discount $     $  
Proceeds, before expenses, to China Oumei Real Estate Inc $     $  

We have granted the underwriters a 30-day option to purchase up to additional ordinary shares from us at the public offering price, less the underwriting discount and commissions.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The ordinary shares are expected to be delivered on or about __________, 2010.

_______________________

Brean Murray, Carret & Co.

_______________________

The date of this prospectus is _________, 2010.


TABLE OF CONTENTS

 

Page

PROSPECTUS SUMMARY 1
RISK FACTORS 7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 19
USE OF PROCEEDS 20
MARKET PRICE AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 21
DIVIDEND POLICY 21
CAPITALIZATION 22
DILUTION 23
EXCHANGE RATE INFORMATION 24
SELECTED CONSOLIDATED FINANCIAL DATA 25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 45
BUSINESS 46
HISTORY AND CORPORATE STRUCTURE 68
MANAGEMENT 72
EXECUTIVE COMPENSATION 78
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS; CORPORATE GOVERNANCE 82
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 84
DESCRIPTION OF SECURITIES 86
SHARES ELIGIBLE FOR FUTURE SALE 92
UNDERWRITING 93
LEGAL MATTERS 100
EXPERTS 100
ADDITIONAL INFORMATION 100
FINANCIAL STATEMENTS F-1
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS II-1

You should rely only on the information provided in this prospectus. Neither we nor the selling stockholders have authorized anyone to provide you with additional or different information. The selling stockholders are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should assume that the information in this prospectus is accurate only as of the date on the front of the document.

i


PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements, the notes thereto and matters set forth under “Risk Factors.”

Except as otherwise indicated by the context, references in this prospectus to “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of China Oumei Real Estate Inc., a Cayman Islands company, and its consolidated subsidiaries, Leewell, Oumei, Caoxian Industrial, Longhai Hotel, Longhai Real Estate, Qingdao Xudong, Weifang Longhai Industry, Weifang Longhai Properties, Weifang Qilu, Weihai Economic and Weihai Mingwei.

In addition, unless the context otherwise requires and for the purposes of this prospectus only:

In this prospectus we are relying on and we refer to information and statistics regarding the real estate industry in China that we have obtained from various cited public sources. Any such information is publicly available for free and has not been specifically prepared for us for use or incorporation in this prospectus or otherwise.

In addition, at present, there is no uniform standard to categorize the different types and sizes of cities in China. In this prospectus, we refer to Beijing, Shanghai, Guangzhou and Shenzhen as tier one cities, which are the most populous, affluent and competitive cities in the country. They also represent the highest standard and concentration of real estate development activities in China. Tier two cities are cities that generally meet the following criteria, excluding the four aforementioned tier one cities:

Tier three cities are the cities that do not meet one or more criteria listed above.

1


The Company

Overview of Our Business

We are one of the leading real estate development companies located in Qingdao, Shandong province, China. We began operations in 2001, and in 2008 we were recognized in the official City of Qingdao Commission of Development & Construction’s evaluation as one of the top ten real estate developers in Qingdao, measured by a combination of revenue, customer satisfaction, as well as several other factors.

We develop and sell residential and commercial properties, targeting middle and upper income customers in the coastal region of the Shandong peninsula (Greater Qingdao) located in northeastern China, including the cities of Qingdao, Weihai and Yantai, as well as other inland locations, such as Weifang.

Since our inception, we have completed 15 projects having a gross floor area, or GFA, of 1,191,722 square meters, of which approximately 92% has been sold. In addition, we have seven projects under construction with a total GFA of 735,274 square meters.

In fiscal year 2009, our total sales increased 22.4% to $94.3 million from $77.0 million in fiscal year 2008. Our gross profit increased 17.3% to $36.0 million in fiscal year 2009 from $30.7 million in fiscal year 2008, while our net income before extraordinary item increased 27.9% to $24.3 million in fiscal year 2009 from $19.0 million in fiscal year 2008.

Our Competitive Strengths

We believe the following strengths allow us to compete effectively in the Chinese real estate development industry:

2


Our Growth Strategy

We intend to increase our market share in the Shandong Province and in other provinces in China by pursuing the following strategies:

Our Corporate History and Background

We organized under the laws of the Cayman Islands on March 10, 2006 as a blank check development stage company formed for the purpose of acquiring an operating business, through a stock exchange, asset acquisition or similar business combination. From our inception until we completed our reverse acquisition of Leewell on April 14, 2010, our operations consisted entirely of identifying, investigating and conducting due diligence on potential businesses for acquisition.

On April 14, 2010, we completed a reverse acquisition transaction through a share exchange with Leewell whereby we acquired 100% of the issued and outstanding capital stock of Leewell. As a result of the reverse acquisition, Leewell became our wholly-owned subsidiary and Longhai Holdings Company Limited, or Longhai Holdings, the former shareholder of Leewell, became our controlling shareholder. The share exchange transaction with Leewell was treated as a reverse acquisition, with Leewell as the acquirer and China Oumei Real Estate Inc. as the acquired party.

On April 14, 2010, we also completed a private placement transaction with a group of accredited investors. Pursuant to a subscription agreement with the investors, or the Subscription Agreement, we issued to the investors an aggregate of 2,774,700 units, or the Units, for a purchase price of $11,098,800, or $4.00 per Unit. Each Unit consists of one Preference Share, and one warrant to purchase 0.5 ordinary shares, or the Warrants. The Warrants have a term of 5 years, bear an exercise price of $6.00 per share (subject to customary adjustments), are exercisable on a net exercise or cashless basis and are exercisable by investors at any time after the closing date. See “History and Corporate Structure” below for a detailed description of the reverse acquisition and the private placement transaction.

3


Our Corporate Structure

All of our business operations are conducted through our Chinese subsidiaries. The chart below presents our corporate structure:

 

Office Location

Our principal business office is located in China at Floor 28, Block C Longhai Mingzhu Building, No.182 Haier Road, Qingdao 266000. The telephone number at our executive offices is (86) 532 8099 7969. Our registered office is PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands and our registered agent is Maples Corporate Services Limited. We maintain a website at http://www.chinaoumeirealestate.com that contains information about our company, but that information is not part of this prospectus.

4


The Offering

Ordinary shares offered(1)

        shares, (         shares, if the underwriters exercise the overallotment option)

 

 

 

Ordinary shares outstanding immediately after the offering(2)

        shares, (        shares, if the underwriters exercise the overallotment option)

 

 

 

Offering price

 

$         per share

 

 

 

Use of proceeds

We intend to use the net proceeds from this offering for working capital and general corporate purposes. See “Use of Proceeds” on page 21 for more information on the use of proceeds.

 

 

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in our ordinary shares.

 

 

 

Proposed trading market and symbol

We have applied for the listing of our ordinary shares on the NASDAQ Global Market under symbol “OMEI”. There can, however, be no assurance that our ordinary shares will be accepted for listing on the NASDAQ Global Market.


(1) Excludes up to         ordinary shares underlying warrants to be received by the underwriters in this offering. We are also concurrently registering for resale under a separate Resale Prospectus 765,000 ordinary shares and 2,774,700 ordinary shares underlying the Preference Shares held by the selling stockholders named under such prospectus and 1,526,085 ordinary shares that have been or may be acquired upon the exercise of warrants that have been previously issued to the selling stockholders named in such prospectus. None of these securities registered under the Resale Prospectus are being offered by us and we will not receive any proceeds from the sale of these shares.

 

(2) Based on (i) 31,000,062 ordinary shares issued and outstanding as of the date of this prospectus and (ii)         ordinary shares issued in the public offering (excluding the underwriters’ warrants to purchase up to         ordinary shares and 1,526,085 ordinary shares underlying warrants that were issued on April 14, 2010).

5


Summary Consolidated Financial Information

The following selected historical financial information should be read in conjunction with our consolidated financial statements and related notes and the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. The selected consolidated statement of operations data and statement of cash flows data for the years ended December 25, 2007, 2008, and 2009 and the selected balance sheet data as of December 25, 2008 and 2009 are derived from the audited consolidated financial statements of Leewell included elsewhere in this prospectus. The selected balance sheet data as of December 25, 2007 are derived from the unaudited and unreviewed consolidated financial statements of Leewell not included in this prospectus. We derived our selected consolidated financial data as of June 25, 2010 and for the six months ended June 25, 2009 and 2010 from our unaudited consolidated financial statements included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that our management considers necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods presented.

The audited consolidated financial statements of Leewell for the fiscal years ended December 25, 2007, 2008, and 2009 and our unaudited consolidated financial statements for the six months ended June 25, 2009 and 2010 are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes contained elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.

      Fiscal Year Ended     Six Months Ended    
  U.S. dollars, except shares   December 25,     June 25,    
                   2007     2008     2009     2009     2010    
  Statements of Operations Data                     (Unaudited)     (Unaudited)    
  Total sales $  51,850,312   $  77,032,561   $  94,315,500   $  27,669,064   $  56,461,539    
  Total cost of sales   (36,243,778 )   (46,321,251 )   (58,296,408 )   (18,796,008 )   (40,146,847 )  
  Gross profit   15,606,534     30,711,310     36,019,092     8,873,056     16,314,692    
  Advertising expenses   (46,492 )   (112,263 )   (268,222 )   (172,015 )   (149,909    
  Commission expenses   (134,989 )   (574,262 )   (84,982 )   (84,958 )   0    
  Selling expenses   (2,187 )   (81,415 )   (49,800 )   (15,074 )   (31,280 )  
  Bad debt recovery (expense)   (245,243 )   (1,198,942 )   (207,523 )   509,345     180,833    
  General and administrative expenses   (807,589 )   (2,283,744 )   (4,655,596 )   (1,027,242 )   (3,779,215 )  
  Income from operations   14,370,034     26,460,684     30,752,969     8,083,112     12,535,121    
  Income before income taxes and extraordinary item   14,309,351     25,583,919     33,402,436     7,962,426     12,481,816    
  Income taxes   (5,090,161 )   (6,602,194 )   (9,058,226 )   (2,525,443 )   (4,436,498 )  
  Income before extraordinary item   9,219,190     18,981,725     24,344,210     5,436,983     8,045,318    
  Extraordinary item, net   -     12,635,872     -     -     -    
  Net income $  9,219,190   $  31,617,597   $  24,344,210   $  5,436,983   $  8,045,318    
  Earnings per common share basic $  921.92   $  0.31   $  0.24   $  0.18   $  0.26    
  Earnings per common share diluted $  921.92   $  0.31   $  0.24   $  0.18   $  0.25    
  Weighted average common shares outstanding basic   10,000     102,566,690     102,566,690     30,541,903     30,541,903    
  Weighted average common shares outstanding diluted   10,000     102,566,690     102,566,690     30,541,903     31,654,832    
                                   
            As of December 25,     As of    
                              June 25,    
            2007     2008     2009     2010    
  Balance Sheet Data                                
  Working capital       $  9,465,778   $  18,831,257   $  44,207,072   $  98,955,979    
  Total assets         87,822,788     178,648,355     196,332,843     217,417,751    
  Total liabilities         59,977,634     115,401,647     101,981,897     103,154,083    
  Stockholders’ equity         27,845,154     63,246,708     94,350,946     114,263,668    

6


RISK FACTORS

The ordinary shares being offered by us are highly speculative in nature, involve a high degree of risk and should be purchased only by persons who can afford to lose the entire amount invested in our ordinary shares. Before purchasing any of our ordinary shares, you should carefully consider the following factors relating to our business and prospects. You should pay particular attention to the fact that we conduct all of our operations in China and are governed by a legal and regulatory environment that in some respects differs significantly from the environment that may prevail in the U.S. and other countries. If any of the following risks actually occurs, our business, financial condition or operating results will suffer, the trading price of our ordinary shares could decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

The recent financial crisis could negatively affect our business, results of operations, and financial condition.

The recent credit crisis and turmoil in the global financial system may have an impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. Our business requires access to substantial financing. If we are not able to obtain adequate financing in a timely manner, our ability to complete existing projects and expand our business could be materially adversely affected. In addition, these economic conditions also impact levels of consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future. Real estate market generally declines during recessionary periods and other periods where disposable income is adversely affected. If demand for our products fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.

Our business is susceptible to fluctuations in the real estate market of China, especially in certain areas of eastern China where our operations are concentrated, which may adversely affect our sales and results of operations.

Our business depends substantially on the conditions of the PRC real estate market. Demand for real estate in China has grown rapidly in the recent decade but such growth is often coupled with volatility in market conditions and fluctuations in real estate prices. For example, the rapid expansion of the real estate market in major provinces and cities in China in the early 1990s, such as Shanghai, Beijing and Guangdong province, led to an oversupply in the mid-1990s and a corresponding fall in real estate values and rentals in the second half of the decade. Following a period of rising real estate prices and transaction volume in most major cities, the industry experienced a severe downturn in 2008, with transaction volume in many major cities declining by more than 40% compared to 2007.

Average selling prices also declined in many cities during 2008. Fluctuations of supply and demand in China’s real estate market are caused by economic, social, political and other factors. To the extent fluctuations in the real estate market adversely affect real estate transaction volumes or prices, our financial condition and results of operations may be materially and adversely affected.

We are heavily dependent on the performance of the residential property market in China, which is at a relatively early development stage.

The residential property industry in the PRC is still in a relatively early stage of development. Although demand for residential property in the PRC has been growing rapidly in recent years, such growth is often coupled with volatility in market conditions and fluctuation in property prices. It is extremely difficult to predict how much and when demand will develop, as many social, political, economic, legal, and other factors, most of which are beyond our control, may affect the development of the market. The level of uncertainty is increased by the limited availability of accurate financial and market information and the overall low level of transparency in the PRC, especially in tier-two cities that have lagged in progress in these aspects when compared to tier-one cities.

The lack of a liquid secondary market for residential property may discourage investors from acquiring new properties. The limited amount of property mortgage financing available to PRC individuals may further inhibit demand for residential developments.

7


The PRC government has recently introduced certain policy and regulatory measures to control the rapid increase in housing prices and cool down the real estate market and our business may be materially and adversely affected by these government measures.

Since the second half of 2009, the PRC real estate market has experienced strong recovery from the financial crisis and housing prices rose rapidly in certain cities. In response to concerns over the scale of the increase in property investments, the PRC government has implemented measures and introduced policies to curtail property speculation and promote the healthy development of the real estate industry in China. On January 7, 2010, the PRC State Council issued a circular to control the rapid increase in housing prices and cool down the real estate market in China. It reiterated that the purchasers of a second residential property for their households must make down payments of no less than 40% of the purchase price and real estate developers must commence the sale within the mandated period as set forth in the pre-sale approvals and at the publicly announced prices. The circular also requested the local government to increase the effective supply of low-income housing and ordinary commodity housing and instructed the People's Bank of China, or PBOC, and the China Bank Regulatory Commission to tighten the supervision of the bank lending to the real estate sector and mortgage financing. On February 25, 2010, the PBOC increased the reserve requirement ratio for commercial banks by 0.5% to 16.5% and has further increased it from 16.5% to 17.0% effective May 10, 2010. Further, in order to implement the requirements set out in the State Council's circular, the Ministry of Land and Resources, or the MLR, issued a notice on March 8, 2010 in relation to increasing the supply of, and strengthening the supervision over, land for real estate development purposes. MLR's notice stipulated that the floor price of a parcel of land must not be lower than 70% of the benchmark land price set for the area in which the parcel is located, and that real estate developers participating in land auctions must pay a deposit equivalent to 20% of the land parcel's floor price. In April 2010, the PRC State Council issued a further circular, which provided as follows: purchasers of a first residential property for their households with a gross floor area of greater than 90 square meters must make down payments of no less than 30% of the purchase price; purchasers of a second residential property for their households must make down payments of no less than 50% of the purchase price and the interest rate of any mortgage for such property must equal at least the benchmark interest rate plus 10%; and for purchasers of a third residential property, both the minimum down payment amount and applied interest rate must be significantly higher than the relevant minimum down payment and interest rate which would have been applicable prior to the issuance of the circular (the specific figures shall be decided by the relevant bank on a case-by-case based on the principle of proper risk management). Moreover, the circular provided that banks can decline to provide mortgage financing to either a purchaser of a third residential property or a non-resident purchaser. It is possible that the government agencies may adopt further measures to implement the policies outlined in the January and April circulars. The full effect of the circulars on the real estate industry and our business will depend in large part on the implementation and interpretation of the circulars by governmental agencies, local governments and banks involved in the real estate industry. The PRC government's policies and regulatory measures on the PRC real estate sector could limit our access to required financing and other capital resources, adversely affect the property purchasers' ability to obtain mortgage financing or significantly increase the cost of mortgage financing, reduce market demand for our properties and increase our operating costs. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures or that agencies and banks will not adopt restrictive measures or practices in response to PRC governmental policies and regulations, which could substantially reduce pre-sales of our properties and cash flow from operations and substantially increase our financing needs, which would in turn materially and adversely affect our business, financial condition, results of operations and prospects.

Our sales will be affected if mortgage financing becomes more costly or otherwise becomes less attractive.

Substantially all purchasers of our residential properties rely on mortgages to fund their purchases. An increase in interest rates may significantly increase the cost of mortgage financing, thus affecting the affordability of residential properties. In 2008, PBOC changed the lending rates five times. The benchmark lending rate for loans with a term of over five years, which affects mortgage rates, was increased to 5.94% on December 31, 2008. The PRC government and commercial banks may also increase the down payment requirement, impose other conditions or otherwise change the regulatory framework in a manner that would make mortgage financing unavailable or unattractive to potential property purchasers. If the availability or attractiveness of mortgage financing is reduced or limited, many of our prospective customers may not be able to purchase our properties and, as a result, our business, liquidity and results of operations could be adversely affected.

If we are prevented from guaranteeing loans to prospective home purchasers, our sales and pre-sales may decline.

In line with industry practice, we provide guarantees to PRC banks with respect to loans procured by the purchasers of our properties, in the form of a transfer of 5% of the home purchasers’ loan amount from our bank account to a bank designated account, as collateral for the home purchasers’ timely debt service payments. The bank will release these deposits after construction is completed, final deliveries are made, and home purchasers have obtained the ownership documents necessary to secure a mortgage loan. If there are changes in laws, regulations, policies, and practices that would prohibit property developers from providing guarantees to banks in respect of mortgages offered to property purchasers and as a result, banks would not accept any alternative guarantees by third parties, or if no third party is available or willing in the market to provide such guarantees, it may become more difficult for property purchasers to obtain mortgages from banks and other financial institutions during sales and pre-sales of our properties. Such difficulties in financing could result in a substantially lower rate of sale and pre-sale of our properties, which would adversely affect our cash flow, financial condition, and results of operations. We are not aware of any impending changes in laws, regulations, policies, or practices that will prohibit such practice in China. However, there can be no assurance that such changes in laws, regulations, policies, or practices will not occur in China in the future.

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We may be unable to acquire land use rights from the government through Longhai Group as we currently do which could increase our cost of sales.

Our revenue depends on the completion and sale of our projects, which in turn depends on our ability to acquire land use rights for such projects. Our land use rights costs are a major component of our cost of real estate sales and increases in such costs could diminish our gross margin. From time to time, we acquire our land use rights through companies owned by Longhai Group, a company wholly-owned by Mr. Antoine Cheng, our Chairman. Longhai Group’s primary business is infrastructure and building construction. Through its infrastructure construction business, Longhai Group works with local governments and often finances (by agreeing to be paid sometime following the completion of construction instead of being paid as construction progresses) the government’s public infrastructure projects that can include old city relocation projects. In exchange for such financing, the local governments invite Longhai Group to bid for premium parcels of land for residential use at public auction as a preferred candidate or grant Longhai Group the right of first refusal to bid for industrial parcels for which the Longhai Group already has land use rights, but whose use has been changed to real estate development. Since Longhai Group does not have the necessary license to engage in residential development in China, it typically sold companies owning these land use rights to us so that we could develop these parcels using our real estate development license.

Although we believe that the aforementioned way in which Longhai Group obtains land use rights is consistent with the PRC government’s long-term policy to develop healthy real estate market, we cannot assure you that the local government will continue to provide Longhai Group land use rights in this way in the future. If this happens, we will have to acquire our land use rights primarily through a public tender, auction or listing-for-sale. Competition in these bidding processes can result in higher land use rights costs for us. In addition, we may not successfully obtain desired land use rights at commercially reasonable costs due to the increasingly intense competition in the bidding processes. We may also need to acquire land use rights through acquisition, which could increase our costs.

We have significant short-term debt obligations, which mature in less than one year. Failure to extend those maturities of, or to refinance, that debt could result in defaults, and in certain instances, foreclosures on our assets. Moreover, we may be unable to obtain financing to fund ongoing operations and future growth.

The real estate development industry is capital intensive, and development requires significant up-front expenditures to acquire land and begin development. Accordingly, we incur substantial indebtedness to finance our development activities.

At June 25, 2010, we had short-term bank loans outstanding of $1,693,103, long-term bank loans of $0 maturing within one year, long-term bank loans of $35,224,800 maturing in more than one year, and notes payable of $0, which were secured by our land use rights and projects under construction. Failure to obtain extensions of the maturity dates of, or to refinance, these obligations or to obtain additional equity financing to meet these debt obligations would result in an event of default with respect to such obligations and could result in the foreclosure on the collateral. The sale of such collateral at foreclosure would significantly disrupt our business, which could significantly lower our sales and profitability. We may be able to refinance or obtain extensions of the maturities of all or some of such debt only on terms that significantly restrict our ability to operate, including terms that place additional limitations on our ability to incur other indebtedness, to pay dividends, to use our assets as collateral for other financing, to sell assets or to make acquisitions or enter into other transactions. Such restrictions may adversely affect our ability to finance our future operations or to engage in other business activities. If we finance the repayment of our outstanding indebtedness by issuing additional equity or convertible debt securities, such issuances could result in substantial dilution to our stockholders.

While we believe that our revenue growth projections and our ongoing cost controls will allow us to generate cash and achieve profitability in the foreseeable future, there is no assurance as to when or if we will be able to achieve our projections. Our future cash flows from operations, combined with our accessibility to cash and credit, may not be sufficient to allow us to finance ongoing operations or to make required investments for future growth. We may need to seek additional credit or access capital markets for additional funds. There is no assurance that we would be successful in this regard.

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Our practice of pre-selling projects may expose us to substantial liabilities.

It is common practice by property developers in China, including us, to pre-sell properties (while still under construction), which involves certain risks. For example, we may fail to complete a property development that may have been fully or partially pre-sold, which would leave us liable to purchasers of pre-sold units for losses suffered by them without adequate resources to pay the liability if funds have been used on the project. In addition, if a pre-sold property development is not completed on time, the purchasers of pre-sold units may be entitled to compensation for late delivery. If the delay extends beyond a certain period, the purchasers may be entitled to terminate the pre-sale agreement and pursue a claim for damages that exceeds the amount paid and our ability to recoup the resulting liability from future sales.

We may not be able to successfully execute our strategy of expanding into new geographical markets in China, which could have a material adverse effect on our business and results of operations.

We plan to continue to expand our business into new geographical areas in China. Since China is a large and diverse market, consumer trends and demands may vary significantly by region and our experience in the markets in which we currently operate may not be applicable in other parts of China. As a result, we may not be able to leverage our experience to expand into other parts of China. When we enter new markets, we may face intense competition from companies with greater experience or an established presence in the targeted geographical areas or from other companies with similar expansion targets. Therefore, we may not be able to grow our sales in the new cities we enter due intense competitive pressures and or the substantial costs involved.

We are dependent on third-party subcontractors, manufacturers, and distributors for all architecture, engineering and construction services, and construction materials. A discontinued supply of such services and materials will adversely affect our projects.

We are dependent on third-party subcontractors, manufacturers, and distributors for all architecture, engineering and construction services, and construction materials. Services and materials purchased from our five largest subcontractors or suppliers accounted for 96.9% for the year ended December 25, 2009. A discontinued supply of such services and materials will adversely affect our construction projects and the success of the Company.

We are subject to extensive government regulation that could cause us to incur significant liabilities or restrict our business activities.

Regulatory requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to statutes and rules regulating, among other things, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations, such as building permit allocation ordinances and impact and other fees and taxes, that may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from government agencies to grant us necessary licenses, permits, and approvals could have an adverse effect on our operations.

We depend on the availability of additional human resources for future growth.

We are currently experiencing a period of significant growth in our sales volume. We believe that continued expansion is essential for us to remain competitive and to capitalize on the growth potential of our business. Such expansion may place a significant strain on our management and operations and financial resources. As our operations continue to grow, we will have to continually improve our management, operational, and financial systems, procedures and controls, and other resources infrastructure, and expand our workforce. There can be no assurance that our existing or future management, operating and financial systems, procedures, and controls will be adequate to support our operations, or that we will be able to recruit, retain, and motivate our employees. Further, there can be no assurance that we will be able to establish, develop, or maintain the business relationships beneficial to our operations, or to do so or to implement any of the above activities in a timely manner. Failure to manage our growth effectively could have a material adverse effect on our business and the results of our operations and financial condition.

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We may be adversely affected by the fluctuation in raw material prices and selling prices of our products.

The land and raw materials used in our projects have experienced significant price fluctuations in the past. There is no assurance that they will not be subject to future price fluctuations or pricing control. The land and raw materials used in our projects may experience price volatility caused by events such as market fluctuations or changes in governmental programs. The market price of land and raw materials may also experience significant upward adjustment, if, for instance, there is a material under-supply or over-demand in the market. These price changes may ultimately result in increases in the selling prices of our products, and may, in turn, adversely affect our sales volume, sales, operating income, and net income.

We face intense competition from other real estate developers.

The property industry in the PRC is highly competitive. In the tier-two cities we focus on, local and regional property developers are our major competitors, and an increasing number of large state-owned and private national property developers have started entering these markets. Many of our competitors, especially the state-owned and private national property developers, are well capitalized and have greater financial, marketing, and other resources than we have. Some also have larger land banks, greater economies of scale, broader name recognition, a longer track record, and more established relationships in certain markets. In addition, the PRC government’s recent measures designed to reduce land supply further increased competition for land among property developers.

Competition among property developers may result in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled contractors, oversupply of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which new property developments will be approved and/or reviewed by the relevant government authorities and an increase in administrative costs for hiring or retaining qualified personnel, any of which may adversely affect our business and financial condition. Furthermore, property developers that are better capitalized than we are may be more competitive in acquiring land through the auction process. If we cannot respond to changes in market conditions as promptly and effectively as our competitors, or effectively compete for land acquisition through the auction systems and acquire other factors of production, our business and financial condition will be adversely affected.

In addition, risk of property over-supply is increasing in parts of China, where property investment, trading and speculation have become overly active. We are exposed to the risk that in the event of actual or perceived over-supply, property prices may fall drastically, and our revenue and profitability will be adversely affected.

We may have to pay liquidated damages to our investors in the April 2010 private placement if the registration statement of which this prospectus is a part is not effective within the time periods specified.

In connection with the April 2010 private placement described above, we entered into a Subscription Agreement. Under the terms of the Subscription Agreement, if this registration statement is not declared effective by the SEC within the time periods specified in the Subscription Agreement, then we are required to pay the investors, as liquidated damages, 1.0% of the amount invested for each 30-day period during which such failure continues, for up to a maximum of 10% of each investor’s investment pursuant to the Subscription Agreement, except that we will not be obligated to pay any such fee if we are unable to fulfill our registration obligations as a result of rules, regulations, positions or releases issued or actions taken by the SEC with respect to Rule 415 of the Securities Act, so long as we register at such time the maximum number of securities permissible by the SEC. There can be no assurance that the registration statement of which this prospectus is a part will be declared effective by the SEC for the time periods necessary to avoid payment of liquidated damages.

We could be adversely affected by the occurrence of natural disasters.

From time to time, our developed sites may experience strong winds, storms, flooding and earth quakes. Natural disasters could impede operations, damage infrastructure necessary to our constructions and operations. The occurrence of natural disasters could adversely affect our business, the results of our operations, prospects and financial condition.

We have limited insurance coverage against damages or loss we might suffer.

The insurance industry in China is still in an early stage of development and business interruption insurance available in China offers limited coverage compared to that offered in many developed countries. We carry insurance for potential liabilities related to our vehicles, but we do not carry business interruption insurance and therefore any business disruption or natural disaster could result in substantial damages or losses to us. In addition, there are certain types of losses (such as losses from forces of nature) that are generally not insured because either they are uninsurable or insurance cannot be obtained on commercially reasonable terms. Should an uninsured loss or a loss in excess of insured limits occur, our business could be materially adversely affected. If we were to suffer any losses or damages to our properties, our business, financial condition and results of operations would be materially and adversely affected.

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Our operating subsidiaries must comply with environmental protection laws that could adversely affect our profitability.

We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of the PRC. Some of these regulations govern the level of fees payable to government entities providing environmental protection services and the prescribed standards relating to construction. Although our construction technologies allow us to efficiently control the level of pollution resulting from our construction process, due to the nature of our business, wastes are unavoidably generated in the processes. If we fail to comply with any of these environmental laws and regulations in the PRC, depending on the types and seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, or an order to close down our business operations and suspension of relevant permits.

Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lost their services.

Our future success heavily depends on the continued service of our senior executives and other key employees. In particular, we rely on the expertise and experience of Mr. Antoine Cheng, our Chairman, Mr. Weiqing Zhang, our Chief Executive Officer, Mr. Zhaohui John Liang, our Chief Financial Officer, and Mr. Yang Chen, our President. If one or more of our senior executives are unable or unwilling to continue to work for us in their present positions, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating the replacements into our operations, which would substantially divert management’s attention from our business and severely disrupt our business. This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior executives joins a competitor or forms a competing company, we may lose customers, suppliers, know-how, and key employees.

RISKS RELATED TO DOING BUSINESS IN CHINA

Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and all of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

You may have difficulty enforcing judgments against us.

Most of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law, has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

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The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Future inflation in China may inhibit our ability to conduct business in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.

Restrictions on currency exchange may limit our ability to receive and use our sales effectively.

The majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

Because our business transactions are denominated in RMB and our funding and results of operations will be denominated in USD, fluctuations in exchange rates between USD and RMB will affect our balance sheet and financial results. Since July 2005, RMB is no longer solely pegged to the USD but instead is pegged against a basket of currencies as a whole in order to keep a more stable exchange rate for international trading. With the very strong economic growth in China in the last few years, RMB is facing very high pressure to appreciate against USD. Such pressure could result more fluctuations in exchange rates and in turn our business would be suffered from higher exchange rate risk. There are very limited hedging tools available in China to hedge our exposure in exchange rate fluctuations. The hedging tools that are available are also ineffective in the sense that these hedges cannot be freely preformed in the PRC financial market, and more important, the frequent changes in PRC exchange control regulations would limit our hedging ability for RMB.

Restrictions under PRC law on our PRC subsidiaries' ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.

Substantially all of our sales are earned by our PRC subsidiaries. However, as discussed more fully under “Business – PRC Government Regulations – Dividend Distributions,” PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

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Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries' ability to distribute profits to us or otherwise materially adversely affect us.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75. Circular 75 and its implementing guidelines, issued in June 2007 (known as Notice 106), require PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China. See “Business – PRC Government Regulations – Circular 75” for a detailed discussion of Circular 75 and its implementation.

We have asked our shareholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 75 and Notice 106. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, 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 Circular 75 and Notice 106 by our PRC resident beneficial holders.

In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75 and Notice 106. We also have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident shareholders to comply with Circular 75 and Notice 106, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries' ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Oumei constitutes a Round-trip Investment without MOFCOM approval.

On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which regulate “Round-trip Investments,” defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). See “Business – PRC Government Regulations – Mergers and Acquisitions” for a detailed discussion of the 2006 M&A Rule.

Oumei was acquired in 2007 by Leewell, which was then owned and controlled by Mr. Li Zhou, a citizen of the Commonwealth of Australia. Mr. Zhou acted as a nominee of Mr. Weiqing Zhang and Ms. Xiaoyan Cheng, the daughter of Mr. Antoine Cheng. Mr. Cheng was a PRC citizen at the time but has since become a Philippine citizen. The acquisition was approved by the appropriate Chinese authorities. Mr. Zhou also founded Longhai Holdings, a BVI company. In September 2009, ownership of Longhai Holdings was transferred to Mr. Cheng, who became our Chairman. After Mr. Cheng acquired ownership of Longhai Holdings, Longhai Holdings acquired all of Mr. Zhou’s equity interest in Leewell. The PRC regulatory authorities may take the view that these transactions and the Share Exchange Agreement are part of an overall series of arrangements which constitute a Round-trip Investment, because at the end of the transactions, Mr. Cheng became a majority owner and effective controlling party of a foreign entity that acquired ownership of our Chinese subsidiaries. If the PRC regulatory authorities take this view, we cannot assure you we may be able to obtain the approval required from China’s Ministry of Commerce, or MOFCOM. It is also possible that the PRC regulatory authorities could invalidate our acquisition and ownership of our Chinese subsidiaries, and that these transactions require the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained.

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We believe that if these regulatory actions occur, we may be able to find a way to re-establish control of our Chinese subsidiaries’ business operations through a series of contractual arrangements rather than an outright purchase of our Chinese subsidiaries. But we cannot assure you that such contractual arrangements will be protected by PRC law or that the registrant can receive as complete or effective economic benefit and overall control of our Chinese subsidiaries’ business than if the Company had direct ownership of our Chinese subsidiaries. In addition, we cannot assure you that such contractual arrangements can be successfully effected under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of our Chinese subsidiaries, our business and financial performance will be materially adversely affected.

Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.

China passed a New Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. See “Business – PRC Government Regulations – Taxation” and “Business – PRC Government Regulations – Dividend Distributions” for a detailed discussion of the New EIT Law.

It remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practices Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

RISKS RELATED TO THIS OFFERING AND THE MARKET FOR OUR ORDINARY SHARES GENERALLY

There is no current trading market for our ordinary shares, and there is no assurance of an established public trading market, which would adversely affect the ability of our investors to sell their securities in the public market.

Our ordinary shares are not currently listed or quoted for trading on any national securities exchange or national quotation system. We have applied for the listing of our ordinary shares on the NASDAQ Global Market under the symbol “OMEI”. There is no guarantee that the NASDAQ Global Market, or any other exchange or quotation system, will permit our shares to be listed and traded. If we fail to obtain a listing on the NASDAQ Global Market, we may seek quotation on the OTC Bulletin Board. FINRA has enacted changes that limit quotations on the OTC Bulletin Board to securities of issuers that are current in their reports filed with the SEC. The effect on the OTC Bulletin Board of these rule changes and other proposed changes cannot be determined at this time. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Global Market. The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade our shares, could depress the trading price of our ordinary shares and could have a long-term adverse impact on our ability to raise capital in the future. 

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The price of our ordinary shares could be volatile and could decline following this offering at a time when you want to sell your holdings.

We have applied to have our ordinary shares listed on the NASDAQ Global Market under the symbol “OMEI” and the trading is expected to start upon the effectiveness of this registration statement. Although we believe that this offering and the NASDAQ listing will improve the liquidity for our ordinary shares, there is no assurance that the offering will improve volume, reduce volatility and stabilize our share price. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly. These factors include:

Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.

Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, from September 2008 until June 2009, securities markets in the United States, China and throughout the world experienced a historically large decline in share price. These market fluctuations may adversely affect the price of our ordinary shares and other interests in our company at a time when you want to sell your interest in us.

Future sales or perceived sales of our ordinary shares could depress our stock price.

In addition to the         ordinary shares offered in this offering, the registration statement of which this prospectus is a party also covers 765,000 ordinary shares and 2,774,700 ordinary shares underlying the Preference Shares and 1,526,085 ordinary shares underlying the Warrants issued in a private placement closed on April 14, 2010. Each selling stockholder named in the registration statement may sell or transfer any ordinary shares after the effective date of the registration statement.

Additionally, all of our executive officers and directors and certain of our shareholders have agreed not to sell shares of our ordinary shares for a period of 18 months starting on April 14, 2010. Ordinary shares subject to these lock-up agreements will become eligible for sale in the public market upon expiration of these lock-up agreements, subject to limitations imposed by Rule 144 under the Securities Act. See “Shares Eligible for Future Sale.” If the holders of these shares were to attempt to sell a substantial amount of their holdings at once, the market price of our ordinary shares could decline. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short the ordinary shares, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares of our ordinary shares being offered for sale to increase, our ordinary shares market price would likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. 

16


We may be subject to penny stock regulations and restrictions and you may have difficulty selling our ordinary shares.

The SEC has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our ordinary shares become a “penny stock”, we may become subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

There can be no assurance that our ordinary shares will qualify for exemption from the Penny Stock Rule. In any event, even if our ordinary shares were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock if the SEC finds that such a restriction would be in the public interest.

We may use these proceeds in ways with which you may not agree.

While we currently intend to use the proceeds from this offering for working capital and general corporate purposes, we have considerable discretion in the application of the proceeds. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used in a manner agreeable to you. You must rely on our judgment regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not immediately improve our profitability or increase the price of our shares.

We do not intend to pay dividends for the foreseeable future.

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our ordinary shares. Accordingly, investors must be prepared to rely on sales of their ordinary shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our ordinary shares. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.

Holders of our ordinary shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, and by the Companies Law (2010 Revision) and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, shareholders may have more difficulty in protecting their interests in the face of actions by our management or board of directors than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less developed nature of Cayman Islands law in this area.

 

17


Shareholders of Cayman Islands exempted companies have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of our shareholders. Our directors have discretion under our amended and restated memorandum and articles of association to determine whether and to what extent and at what times and places and under what conditions or regulations our accounts, books and documents, or any of them, shall be open to the inspection of shareholders not being directors, and no shareholder (not being a director) shall have any right of inspecting any account, book or document except as conferred by applicable law or the relevant code, rules and regulations of the exchange on which our shares are listed (if any), or authorized by our directors or by ordinary resolution of our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Provisions of our articles of association and Cayman Islands corporate law may impede a takeover or make it more difficult for shareholders to change the direction or management of the Company, which could reduce shareholders’ opportunity to influence management of the Company.

Our articles of association permit our board of directors to issue up to 20,000,000 preference shares from time to time, with such rights and preferences as they consider appropriate. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights and redemption rights provisions. The issuance of any preference shares could reduce the value of such ordinary shares. In addition, specific rights granted to future holders of preference shares could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the board of directors to issue preference shares could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent shareholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our ordinary shares.

18


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business”. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” above.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:

Also, forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus, or that we filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

19


USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $                million (approximately $                 million if the underwriters exercise their overallotment option in full), based on the public offering price of $                 ordinary share.

We have no specific plan for the offering proceeds except to generate funds for working capital and general corporate purposes, including to fund potential future acquisitions, and to create a public market for our common stock. As of the date of this prospectus, we have not entered into any purchase agreements, understandings or commitments with respect to any acquisitions.

We will have broad discretion in the way that we use the net proceeds of this offering. Pending the final application of the net proceeds of this offering, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. See “Risk Factors — Risks Related to this Offering and the Market for Our Ordinary Shares Generally — We may use these proceeds in ways with which you may not agree.”

20


MARKET PRICE AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information

There currently is no market for our ordinary shares. We have applied to list our ordinary shares on the NASDAQ Global Market as soon as practicable. However, we cannot assure you that we will be able to meet the initial listing standards of the NASDAQ Global Market, or that we will be able to maintain any such listing. If we determine that we will not be able to meet the initial listing standards of the NASDAQ Global Market, we may apply to have our ordinary shares listed on the NASDAQ Capital Market or another stock exchange or for a quotation on an over-the-counter quotation service. If we determine to apply for a quotation on an over-the-counter quotation service, however, an investor may find it difficult to obtain accurate quotations as to the market value of our ordinary shares and trading of our ordinary shares may be extremely sporadic. For example, several days may pass before any shares may be traded. A more active market for our ordinary shares may never develop. In addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our ordinary shares, which may further affect its liquidity and could make it more difficult for us to raise additional capital.

Holders

As of August 25, 2010 there were approximately 514 holders of record of our ordinary shares. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.

Securities Authorized for Issuance Under Equity Compensation Plans

We do not have in effect any compensation plans under which our equity securities are authorized for issuance and we do not have any outstanding stock options.

DIVIDEND POLICY

On December 10, 2008, our board of directors authorized a special dividend of $0.7174 per share to our shareholders of record. Two of our shareholders, Access America Fund, LP and Mid-Ocean Consulting Limited, did not accept the dividend, which resulted in a total dividend payment of $166,074.80.

Other than this dividend, we have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

21


CAPITALIZATION

The following table sets forth our capitalization (i) as of June 25, 2010 (unaudited) and (ii) on an adjusted basis to give effect to the receipt of estimated net proceeds of $ million from the sale of ordinary shares in this offering at the assumed public offering price of $ per ordinary share, and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us.

You should read this table in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements, including the related notes, contained elsewhere in this prospectus.

          June 25,  
    June 25,     2010  
    2010     (as adjusted)  
    (in thousands)  
Cash:            
           Cash and cash equivalents $  12,394   $    
           Restricted cash   2,592        
             
                             Total cash $  14,986   $    
             
Debt:            
           Short-term debt $  1,693   $    
           Long-term debt (including current portion)   35,225        
             
                             Total debt $  36,918   $    
             
Stockholders’ equity:            
           Preference shares, $0.002112 par value, 20,000,000 shares authorized, 2,774,700 issued and outstanding $ 6   $    

           Ordinary shares, par value $0.002112 per share, authorized 100,000,000 shares, 31,000,062 shares issued and outstanding and           shares issued and outstanding on an as adjusted basis

  66      
           Additional paid in capital   14,313        
           Warrants Outstanding   3,177        
           Appropriated retained earnings   12,446        
           Unappropriated retained earnings   77,225        
           Accumulated other comprehensive income   7,031        
             
                             Total shareholders’ equity $  114,264   $    
             
Total capitalization $  166,168   $    

22


DILUTION

Our net tangible book value on June 25, 2010 was approximately $56.6million, or $1.83 per ordinary share. “Net tangible book value” is total assets minus the sum of liabilities and intangible assets. “Net tangible book value per share” is net tangible book value divided by 31,000,062 ordinary shares issued and outstanding on June 25, 2010.

After giving effect to the sale by us of         ordinary shares in this offering at the assumed public offering price of $         per share and after deducting the underwriting discounts and commissions and estimated expenses related to this offering payable by us, our adjusted net tangible book value as of June 25, 2010 would have been $         million, or $         per ordinary share. This represents an immediate increase in net tangible book value of $         per share to our existing stockholders and an immediate decrease in the net tangible book value of $ per share to new investors. Dilution in the net tangible book value per share to new investors represents the difference between the offering price per share and the net tangible book value per ordinary share immediately after this offering. The following table illustrates this per share dilution:

Assumed public offering price $    
Net tangible book value as of June 25, 2010 $  1.83  
Increase in net tangible book value attributable to this offering      
As adjusted net tangible book value as of June 25, 2010 after giving effect to this offering      
Dilution in as adjusted net tangible book value to new investors in this offering $    

A $1.00 increase in the assumed public offering price of $         per share would increase our adjusted net tangible book value per share after this offering by $         per share and would increase the dilution per share to new investors in this offering by $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated expenses related to this offering payable by us.

If the underwriters exercise their over-allotment option to purchase up to         additional ordinary shares from us in full in this offering at the assumed public offering price of $         per share, the adjusted net tangible book value as of June 25, 2010 after giving effect to this offering would increase to $         per share, and dilution per share to new investors in this offering would be $         per share.

23


EXCHANGE RATE INFORMATION

Our business is primarily conducted in China, and the financial records of our PRC subsidiaries are maintained in RMB, their functional currency. However, we use the U.S. dollar as our reporting currency. The assets and liabilities of our PRC subsidiaries are translated from RMB into U.S. dollar at the exchange rates on the balance sheet date, shareholders’ equity is translated at the historical rates and the revenues and expenses are translated at the weighted average exchange rate for the period. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On August 26, 2010, the exchange rate was ¥6.8095 to $1.00.

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.

    Noon Buying Rate(1)  
Fiscal Year Ended December 25,   Year End(2)     Weighted Average(3)  
    (RMB per U.S. Dollar)  
2005   8.0762     8.1840  
2006   7.8153     7.9712  
2007   7.3475     7.5936  
2008   6.8355     6.9339  
2009   6.8271     6.8301  
2010            
     Through August 26, 2010   6.8095     6.8239  

(1) The exchange rates are based on the noon buying rate in the city of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York.
 
(2) All periods end December 25 of the stated year.
 
(3) Weighted averages for a period are calculated by using the average of the exchange rates on the end of each month during the period.

24


SELECTED CONSOLIDATED FINANCIAL DATA

The following selected historical financial information should be read in conjunction with our consolidated financial statements and related notes and the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

The selected consolidated statement of operations data and statement of cash flows data for the years ended December 25, 2007, 2008, and 2009 and the selected balance sheet data as of December 25, 2008 and 2009 are derived from the audited consolidated financial statements of Leewell included elsewhere in this prospectus. The selected consolidated financial data for the years ended December 25, 2005 and 2006 and the selected balance sheet data as of December 25, 2005, 2006 and 2007 are derived from the audited consolidated financial statements of Leewell not included in this prospectus.

We derived our selected consolidated financial data as of June 25, 2010 and for the six months ended June 25, 2009 and 2010 from our unaudited consolidated financial statements included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that our management considers necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods presented.

The audited consolidated financial statements of Leewell for the fiscal years ended December 25, 2007, 2008, and 2009 and our unaudited consolidated financial statements for the six months ended June 25, 2009 and 2010 are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes of Leewell contained elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.

U.S. dollars, except shares                                      
                                  Six Months Ended  
    Fiscal Year Ended December 25,     June 25,  
    2005     2006     2007     2008     2009     2009     2010  
Statements of                                 (Unaudited)     (Unaudited)  
Operations Data                                          
Total sales $  42,984,961   $  54,291,244   $  51,850,312   $  77,032,561   $  94,315,500   $  27,669,064 $     56,461,539  
Total cost of sales   (32,983,932 )   (33,703,168 )   (36,243,778 )   (46,321,251 )   (58,296,408 )   (18,796,008 )   (40,146,847 )
Gross profit   10,001,029     20,588,076     15,606,534     30,711,310     36,019,092     8,873,056     16,314,692  
Advertising expenses   (81,549 )   (47,051 )   (46,492 )   (112,263 )   (268,222 )   (172,015 )   (149,909 )
Commission expenses   (312,425 )   (789,497 )   (134,989 )   (574,262 )   (84,982 )   (84,958     -  
Selling expenses   (293 )   (6,192 )   (2,187 )   (81,415 )   (49,800 )   (15,074 )   (31,280 )
Bad debt recovery (expense)   -     (154,710 )   (245,243 )   (1,198,942 )   (207,523 )   509,345     180,833  
General and administrative expenses   (3,212.,010 )   (4,092,355 )   (807,589 )   (2,283,744 )   (4,655,596 )   (1,027,242 )   (3,779,215 )
Income from operations   6,394,752     15,498,271     14,370,034     26,460,684     30,752,969     8,083,112     12,535,121  
                                           
Gain on business acquisitions (bargain purchase)   -     -     -     -     3,188,924     499,065     -  
Miscellaneous income (expense)   (35,988 )   16,022     10,280     91,945     327,294     183,696     181,224  
Interest expense   (173,311 )   (121,597 )   (70,963 )   (968,710 )   (866,751 )   (803,447 )   (234,529 )
Income before income taxes and extraordinary item   6,185,453     15,392,696     14,309,351     25,583,919     33,402,436     7,962,426     12,481,816  
Income taxes   (2,089,048 )   (5,130,644 )   (5,090,161 )   (6,602,194 )   (9,058,226 )   2,525,443     4,436,498  
Income before extraordinary item   4,096,405     10,262,052     9,219,190     18,981,725     24,344,210     5,436,983     8,045,318  
Extraordinary item, net   -     -     -     12,635,872     -     -     -  

25


                                           
Net income   4,096,405     10,262,052     9,219,190     31,617,597     24,344,210     5,436,983     8,045,318  
                                           
Foreign currency translation adjustment   281,009     687,566     2,107,856     3,488,440     475,907     299,397     (9,925 )
Comprehensive income $  4,377,414   $  10,949,618   $  11,327,046   $  35,106,037   $  24,820,117   $  5,736,380   $  8,035,393  
                                           
Earnings per common share basic $  409.64   $  1,026.21   $  921.92   $  0.31   $  0.24   $  0.18   $  0.26  
Earnings per common share diluted $  409.64   $  1,026.21   $  921.92   $  0.31   $  0.24   $  0.18   $  0.25  
                                           
Weighted average common shares outstanding basic   10,000     10,000     10,000     102,566,690     102,566,690     30,541,903     30,541,903  
Weighted average common shares outstanding diluted   10,000     10,000     10,000     102,566,690     102,566,690     30,541,903     31,654,832  
                                           
Cash Flow Data                                          
Net cash provided by (used in) Operating Activities $  10,036,251   $  (5,953,059 ) $  1,212,951   $  61,015,081   $  11,250,820   $  14,851,041   $  6,584,162  
Investing Activities   (14,539 )   (59,164 )   (13,689,661 )   (58,521,630 )   234,814     386,150     (103,220 )
 Financing Activities   (13,067,679 )   5,759,286     14,167,583     (3,805,052 )   (9,866,408 )   (10,683,148 )   3,645,863  
Effect of exchange rate changes on cash   43,366     (57,807 )   9.891     16,518     6,573     1,186     2,891  
Net increase (decrease) in cash $  (3,002,601 ) $  (310,744 ) $  1,700,764   $  (1,295,083 ) $  1,625,799   $  4,554,229   $  10,129,696  
                                           
                As of December 25,           As of June  
          2005     2006     2007     2008     2009     25, 2010  
Balance Sheet Data                                          
Current assets       $  51,282,518   $  92,211,870   $  69,443,412   $  105,072,009   $  133,002,971   $  154,183,832  
Long-term assets         2,603,803     2,499,929     18,379,376     73,576,346     63,329,872     63,233,919  
Total assets       $  53,886,321   $  94,711,799   $  87,822,788   $  178,648,355   $  196,332,843   $  217,417,751  
                                           
Current liabilities       $  34,446,872   $  57,741,400   $  59,977,634   $  86,240,752   $  88,795,899   $  55,227,853  
Long-term liabilities         6,193,868     7.686,000     -     29,160,895     13,185,998     47,926,230  
Total liabilities         40,640,740     65,427,400     59,977,634     115,401,647     101,981,897     103,154,083  
Stockholders’ equity         13,245,581     29,284,399     27,845,154     63,246,708     94,350,946     114,263,668  

26


Quarterly Financial Results

The following table presents our unaudited and unreviewed quarterly consolidated statement of operations for the quarters presented, except for March 25, 2010 and 2009 and June 25, 2010 and 2009, which are unaudited. We believe that the historical quarterly information has been prepared substantially on the same basis as the audited consolidated financial statements, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to state fairly the unaudited quarterly results of operations data.

(All amounts in thousands of U.S. dollars)

    June 25,     Mar 25,     Dec 25,     Sep 25,     Jun 25,     Mar 25,     Dec 25,     Sep 25,     Jun 25,     Mar 25,  
       2010     2010      2009      2009      2009     2009      2008      2008      2008      2008  
Sales $ 28,241   $ 28,220   $ 54,106   $ 9,266   $ 10,848   $ 16,821   $ 46,046   $ 13,273   $ 17,006   $ 707  
Sales to related party   -     -     3,274     -     -     -     -     -     -     -  
Total sales   28,241     28,220     57,380     9,266     10,848     16,821     46,046     13,273     17,006     707  
Cost of sales   (18,935 )   (21,211 )   (35,266 )   (5,874 )   (6,144 )   (10,158 )   (27,177 )   (9,219 )   (9,657 )   (268 )
Cost of sales to related party   -     -     (854 )   -     -     -     -     -     -     -  
Total cost of sales   (18,935 )   (21,211 )   (36,120 )   (5,874 )   (6,144 )   (10,158 )   (27,177 )   (9,219 )   (9,657 )   (268 )
Gross profit   9,306     7,009     21,260     3,392     4,704     6,663     18,869     4,054     7,349     439  
                                                             
Advertising expenses   (62 )   (88 )   (16 )   (90 )   (4 )   (158 )   (79 )   (4 )   (7 )   (22 )
Commission expenses   -     -     -     -     (81 )   (4 )   (121 )   (45 )   (147 )   (261 )
Selling expenses   (13 )   (18 )   (19 )   (6 )   (16 )   (9 )   (50 )   (7 )   (14 )   (10 )
Bad debt expense   11     169     (207 )   -     -     -     (1,199 )   -     -     -  
General and administrative expenses   (2,938 )   (841 )   (2,351 )   (956 )   (815 )   (534 )   (193 )   (1,031 )   (473 )   (587 )
Total operating expenses   (3,002 )   (778 )   (2,593 )   (1,052 )   (916 )   (705 )   (1,642 )   (1,087 )   (641 )   (880 )
Income from operations   (6,304 )   6,231     18,667     2,340     3,788     5,958     17,227     2,967     6,708     (441 )
                                                             
Gain on business acquisition (bargain purchase)   -     -     3,189     -     -     -     -     -     -     -  
Miscellaneous income   195     (14 )   152     (9 )   (7 )   191     (11 )   61     34     8  
Interest expense   116     (155 )   (34 )   (29 )   (340 )   (464 )   (247 )   (386 )   (235 )   (101 )
Income before income taxes and extraordinary items   6,420     6,062     21,974     2,302     3,441     5,685     16,969     2,642     6,507     (534 )
Income taxes – current & deferred   (2,484 )   (1,953 )   (9,058 )   -     -     -     (6,602 )   -     -     -  
Income before extraordinary items   3,937     4,109     12,916     2,302     3,441     5,685     10,367     2,642     6,507     (534 )
Extraordinary items, net of income tax   -     -     -     -     -     -     12,636     -     -     -  
Net income $ 3,937   $ 4,109   $ 12,916   $ 2,302   $ 3,441   $ 5,685   $ 23,003   $ 2,642   $ 6,507   $ (534 )

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are one of the leading real estate development companies located in Qingdao, Shandong province, China. In 2008, we were recognized in the official City of Qingdao Commission of Development & Construction’s evaluation as one of the top ten real estate developers in Qingdao, measured by a combination of revenue, customer satisfaction, as well as several other factors.

Through our Chinese subsidiaries, we develop and sell residential and commercial properties, targeting middle and upper income customers in the coastal region of the Shandong peninsula (Greater Qingdao) located in northeastern China, including the cities of Qingdao, Weihai, and Yantai, as well as other inland locations, such as Weifang.

Since our inception, we have completed 15 projects having a GFA of 1,191,722 square meters, of which approximately 92% has been sold. In addition, we have seven projects under construction with a total GFA of 735,274 square meters.

In fiscal year 2009, our total sales increased 22.4% to $94.3 million from $77.0 million in fiscal year 2008. Our gross profit increased 17.3% to $36.0 million in fiscal year 2009 from $30.7 million in fiscal year 2008, while our net income before extraordinary item increased 27.9% to $24.3 million in fiscal year 2009 from $19.0 million in fiscal year 2008.

Our mission is to provide high-quality, comfortable, and convenient living space to middle and upper income customers, primarily in Shandong Province and in other provinces in China, while also earning for our shareholders an internal rate of return that exceeds our cost of capital. We expect to increase our market share through aggressive internal growth and prudent acquisitions in Shandong Province and in other provinces in China. Our goal is to be one of the top two real estate developers in Greater Qingdao in the next five years by capturing and exploiting the growth opportunities in Shandong Province and by providing the most desirable coastal and inland apartments to middle and upper income customers, as well as by increasing our development of commercial properties.

Recent Developments

On August 6, 2010, we changed our name from “Dragon Acquisition Corporation” to “China Oumei Real Estate Inc.” Please see our Current Report on Form 8-K filed with the SEC on August 6, 2010 for more information.

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

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Taxation

Cayman Islands

The Government of the Cayman Islands does not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon us or our shareholders. The Cayman Islands are not party to a double tax treaty with any country that is applicable to any payments made to or by us.

We have received an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, for a period of 20 years from April 2006 no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable (i) on or in respect of our shares, debentures or other obligations or (ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by us to our shareholders or a payment of principal or interest or other sums by us due under a debenture or other obligation.

29


Hong Kong

Our direct subsidiary, Leewell, was incorporated in Hong Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5%. No provision for Hong Kong Profits Tax has been made as Leewell has no taxable income.

China

Under the New EIT Law, Oumei and its subsidiaries are subject to an earned income tax of 25.0%. See “Business – PRC Government Regulations – Taxation” for a detailed description of the New EIT Law and tax regulations applicable to our Chinese subsidiaries.

Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments to determine if there will be any change in the statutory income tax rate.

Results of Operations

Comparison of Six Months Ended June 25, 2010 and June 25, 2009

The following table shows key components of our results of operations during the six months ended June 25, 2010 and 2009, in both dollars and as a percentage of our total sales.

    Six Months Ended     Six Months Ended  
U.S. dollars, except percentages   June 25, 2010     June 25, 2009  
          Percent of           Percent of  
    Dollars     Total Sales     Dollars     Total Sales  
Total Sales $  56,461,539     100.00%   $  27,669,064     100.00%  
Cost of sales   (40,146,847 )   -71.10%     (18,796,008 )   -67.93%  
Gross profit   16,314,692     28.90%     8,873,056     32.07%  
                         
Advertising expenses   (149,909 )   -0.26%     (172,015 )   -0.62%  
Commissions   -     -     (84,958     -0.31%  
Selling expenses   (31,280 )   -0.06%     (15,074 )   -0.05%  
Bad debt recovery   180,833     0.32%     509,345     1.84%  
General and administrative expenses   (3,779,215 )   -6.69%     (1,027,242 )   -3.71%  
Income from operations   12,535,121     22.21%     8,083,112     29.22%  
Gain on business acquisition   -     -     499,065     1.8%  
Miscellaneous income   181,224     0.32%     183,696     0.66%  
Interest expense and finance charges (net of interest income)   (234,529 )   -0.42%     (803,447 )   -2.90%  
Income before income taxes   12,481,816     22.11%     7,962,426     28.78%  
Income taxes   4,436,498     7.86%     2,525,443     9.13%  
Net income   8,045,318     14.25%     5,436,983     19.65%  
                         
Foreign currency translation adjustment   (9,925 )   -0.02%     299,397     1.08%  
Comprehensive income $  8,035,393     14.23%   $  5,736,380     20.73%  

Total Sales. Our total sales increased 104.1% to $56.5 million in the six months ended June 25, 2010 from $27.7 million in the same period last year, primarily as a result of our sales of new units in the Weihai International Plaza, Xingfu Renjia, Dongli Garden Phase 1, and Longhai Mingzhu projects in the first six months of 2010. No revenue was recognized for these projects in the same period of 2009.

30


We apply the percentage of completion method of accounting for revenue recognition of our development properties. See “Critical Accounting Policies – Revenue Recognition” below for a detailed discussion of how we recognize revenue under the percentage of completion method of accounting.

The following table sets forth for the six months ended June 25, 2010 and 2009 the aggregate GFA and the related revenues recognized by project:

          GFA Delivered     Percentage of        
          for Six Months     Total GFA        
          Ended     Delivered as of     Revenues recognized for  
    Total     June 25,     June 25, (2)     Six Months Ended June 25, (3)  
    GFA(1)     2010     2009     2010     2009     2010           2009        
                %     %     US$     %     US$     %  
Fuxiang Huayuan 1   52,830     -     -     -     -     71,567     0.13%     -     -  
Fuxiang Huayuan 2                                 -     -     3,285,689     11.87  
    18,392     -     -     -     -                       %  
Xingfu Renjia 1 85,546 - - - - 7,882,729 13.96 % - -
Oumei Complex 1   91,778     -     -     -     -     349,280     0.62%     2,538,056     9.17%  
Total   248,546     -     -     -     -     8,303,576           5,823,745        

(1) The amounts for “total GFA” in this table are the amounts of total saleable GFA and are derived on the following basis:

(2) Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA.

(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the percentage of completion, the percentage sold and related revenues for our projects for the six months ended June 25, 2010 and 2009.

                Percentage                          
          Percentage of     Sold –                          
          Completion     Accumulated                          
          as of     as of           Revenues recognized for        
    Total     June 25, (1)     June 25,(2)           Six Months Ended June 25,(3)        
    GFA     2010     2009     2010     2009     2010     2009        
        %     %     %     %     US$     %     US$     %  
Longhai Lidu 1 51,450 100% 100% 96% 95% 50,482 0.10% 0 0.00%
Longhai Lidu 2 79,308 100% 67% 81% 80% 3,616,500 6.40% 15,989,918 57.80%
Qilu Textile Centre (Comm) 139,510 99% 99% 79% 79% 42,772 0.10% 316,632 1.10%
Qilu Textile Centre (Residential) 71,456 93% 71% 84% 32% 350,421 0.60% 4,608,858 16.70%
Weihai International Plaza   54,818     60%     0%     11%     0%     4,152,721     7.40%     0     0.00%  
Dongli Garden 1   213,315     55%     0%     80%     0%     28,096,411     49.80%     0     0.00%  
Longhai Mingzhu   51,902     95%     60%     45%     0%     9,795,364     17.30%     0     0.00%  
Oumei Complex 2   70,587     0%     0%     0%     0%     0     0.00%     0     0.00%  
Total   732,346                             46,104,672           20,915,408        

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(1) This ratio of completion is determined by an independent third party hired by the Company.

(2) Percentage sold is calculated by dividing contracted sales value from property sales by total estimated sales value of the relevant project, estimated as of the time of preparation of our interim financial statements as of and for the applicable period.

(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the square meters sold and average selling price per square meter by each project on a consolidated basis for the six months ended June 25, 2010 and 2009.

    For Six Months Ended     For Six Months Ended  
    June 25, 2010     June 25, 2009  
          % of                             % of                    
          Revenue                             Revenue                    
          Recognized                             Recognized                    
          from           Square      Average            from           Square Average        
    Contract       Contract       Revenues       Meters       Selling      Contract     Contract       Revenues       Meters        Selling   
    sales     Sales        Recognized      sold     Price     sales     Sales     Recognized     sold      Price  
    US$     %     US$         US$/m²     US$     %     US$         US$/m²  
Fuxiang Huayuan 1 71,567 100% 71,567 - - - - - - -
Fuxiang Huayuan 2 - - - - - 4,693,842 70% 3,285,689 18,392 255
Xingfu Renjia 1   7,882,729     100%     7,882,729     27,293     289     -     -     -     -     -  
Oumei Complex 1   349,280     100%     349,280     1,186     295     3,322,828     76%     2,538,056     13,377     248  
Longhai Lidu 1   50,482     100%     50,482     123     410     -     -     -     -     -  
Longhai Lidu 2   20,011,355     18%     3,616,500     53,026     377     23,917,972     67%     15,989,918     63,664     376  
Qilu Textile Centre (Comm) 42,772 100% 42,772 123 348 316,632 100% 316,632 950 333
Qilu Textile Centre (Residential) 1,046,751 33% 350,421 3,565 294 6,182,686 75% 4,608,858 23,039 268
Weihai International Plaza 6,921,202 60% 4,152,721 6,281 1,102 - - - - -
Dongli Garden 1   28,096,411     100%     28,096,411     78,619     357     -     -     -     -     -  
Longhai Mingzhu   27,219,015     36%     9,795,364     23,530     1,157     -     -     -     -     -  
Oumei Complex 2   -     -     -     -     -     -     -     -     -     -  
Sales of Inventory(1) 2,053,290 100% 2,053,292 5,760 356 929,911 100% 929,911 2,314 402
Total   93,744,855           56,461,539     199,506     470     39,363,870           27,669,064     121,736     323  

(1) The sales of inventory are defined as the sale of unsold properties from projects completed prior to the applicable period.

Cost of sales. Our cost of sales increased 114% to $40.1 million in the six months ended June 25, 2010 from $18.8 million in the same period last year, mainly due to the increase in sales.

Gross profit and gross profit margin. Our gross profit increased 83.9% to $16.3 million in the six months ended June 25, 2010 from $8.9 million in the same period last year. The gross profit margin (gross profit as a percentage of total sales) was 28.9% for the six months ended June 25, 2010 and 32.1% for the six months ended June 25, 2009. The decline in the gross profit margin was primarily due to sales of new properties related to villager relocation efforts for our Dongli Garden project, which contributed approximately 49.9% of total sales in the 2010 period. The project was a joint effort between the Company and local government agencies, and Phase I of the project mainly involved relocating villagers previously residing on the parcel designated for Phase II. Therefore, as part of the government’s urban modernization initiatives, the government strictly regulated the selling prices of all Phase I units, which were on average considerably below would-be market prices and in turn resulted in a lower profit margin. Since Phase II will be entirely sold at market prices, the same experience will not occur again.

32


Advertising expenses. Advertising expenses decreased 12.9% to $0.15 million in the six months ended June 25, 2010 from $0.172 million in the same period last year, mainly due to the fact that most of the existing projects were completed by the end of 2009 and we reduced our advertising efforts in the first six months of 2010 on existing projects.

Commissions. We did not incur commission expenses in the six months ended June 25, 2010, compared to $84,958 incurred in the same period last year, due to the fact that all the sales were conducted through salaried internal salespersons this year, while during the same period last year we paid commissions to third-party agencies on residential projects in the initial sales period.

Selling expenses. Our selling expenses increased 107.5% to $0.031 million in the six months ended June 25, 2010 from $0.015 million in the same period last year, mainly due to selling expenses related to our Weihai International Plaza project. Most of our projects are residential projects. As a commercial/office project, our Weihai International Plaza project naturally involved more selling and marketing efforts and costs than a typical residential project, including rental and fit out of the sales center, production of posters, brochures and other media advertisement, and hiring and training of sales personnel.

Bad debt recovery. Our bad debt recovery decreased 64.5% in the six months ended June 25, 2010 from the same period last year, primarily due to the fact that our total amount of bad debt has decreased year-over-year, as management has been putting more effort in receivables collection during the past year

General and administrative expenses. General and administrative expenses increased 267.9% in the six months ended June 25, 2010 from the same period in 2009, primarily due to expenses related to new subsidiaries that we acquired since June 25, 2009, including Caoxian Industrial and Longhai Real Estate, and expenses related to the April 14, 2010 reverse acquisition and private placement transactions.

Interest expense and finance charges (net of interest income). Interest expense decreased 70.8% to $0.23 million in the six months ended June 25, 2010 from $0.8 million in the same period in 2009, primarily due to the fact that the balance of the Company’s borrowings were less in the 2010 period, and a decrease in interest rates. Please refer to Notes 13 and 14 to the financial statements for detailed information on our short-term and long-term borrowings.

Income taxes. Income taxes increased 75.7% to $4.4 million in the six months ended June 25, 2010 from $2.5 million in the same period in 2009, mainly due to the higher income before taxes and the increase in effective tax rate resulting from permanent differences caused by non-deductible expenses.

Net income. Net income increased 48% to $8.0 million in the six months ended June 25, 2010 from $5.4 million in the same period last year, mainly due to the increase in total sales and increase in gross profit.

Comparison of Fiscal Years Ended December 25, 2009 and December 25, 2008

The following table shows key components of our results of operations during the fiscal years ended December 25, 2009 and 2008, in both dollars and as a percentage of our total sales.

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    Fiscal Year Ended     Fiscal Year Ended  
U.S. dollars, except percentages   December 25, 2009     December 25, 2008  
          Percent of           Percent of  
    Dollars     Total Sales     Dollars     Total Sales  
Sales $  91,041,042     96.5%   $  77,032,561     100.0%  
Sales to related party   3,274,458     3.5%     -     -  
Total sales   94,315,500     100.0%     77,032,561     100.0%  
                         
Cost of sales   (57,442,457 )   (60.9 )%   (46,321,251 )   (60.1 )%
Cost of sales to related party   (853,951 )   (0.9 )%   -     -  
Total cost of sales   (58,296,407 )   (61.8 )%   (46,321,251 )   (60.1 )%
Gross profit   36,019,092     38.2%     30,711,310     39.9%  
                         
Advertising expenses   (268,222 )   (0.3 )%   (112,263 )   (0.1 )%
Commission expenses   (84,982 )   (0.1 )%   (574,262 )   (0.7 )%
Selling expenses   (49,800 )   (0.1 )%   (81,415 )   (0.1 )%
Bad debt expense   (207,523 )   (0.2 )%   (1,198,942 )   (1.6 )%
General and administrative expenses   (4,655,596 )   (4.9 )%   (2,283,744 )   (3.0 )%
Income from operations   30,752,970     32.6%     26,460,684     34.4%  
                         
Gain on business acquisitions (bargain purchase)   3,188,924     3.4%     -     -  
Miscellaneous income   327,294     0.3%     91,945     0.1%  
Interest expense   (866,751 )   (0.9 )%   (968,710 )   (1.3 )%
Income before income taxes and extraordinary items   33,402,436     35.4%     25,583,919     33.2%  
Income taxes   (9,058,226 )   (9.6 )%   (6,602,194 )   (8.6 )%
Income before extraordinary items   24,344,210     25.8%     18,981,725     24.6%  
Extraordinary items, net   -     -     12,635,872     16.4%  
Net income   24,344,210     25.8%     31,617,597     41.0%  
                         
Foreign currency translation adjustment   475,907     0.5%     3,488,440     4.6%  
Comprehensive income $  24,820,117     26.3%   $  35,106,037     45.6%  

Sales. Our total sales increased 22.4% to $94.3 million in the fiscal year ended December 25, 2009 from $77.0 million in the fiscal year ended December 25, 2008, mainly due to sales by two project development companies that we acquired during this period, the completion and sales of the Xingfu Renjia project phase 1 and the Fuxiang Huayuan project phase 2, in addition to a higher average selling price per square meter for both residential and commercial properties delivered in fiscal year 2009 compared with fiscal year 2008.

Effective December 26, 2008, we adopted the percentage of completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than 12 months at that date. The full accrual method was used before that date for all of our residential and commercial projects. We changed to the percentage of completion method for contracts longer than one year because this method more accurately reflects how revenue is earned on these contracts, particularly for interim reporting purposes. ASC 250 requires retrospective application of a change in accounting principle unless impracticable. The change to the percentage of completion method had no effect on our December 25, 2008 financial statements and we found it was impracticable to determine the effect on the December 25, 2007 financial statements as no progress reports detailing the percentage of completion of our contracts were prepared for that year. See “–Critical Accounting Policies – Revenue Recognition” below for a detailed discussion of how we recognize revenue under the percentage of completion method of accounting.

The following table sets forth for the fiscal years ended December 25, 2009 and 2008 the aggregate GFA and the related revenues recognized by project:

          GFA Delivered     Percentage of        
          for Twelve     Total GFA        
          Months Ended     Delivered as of     Revenues recognized for  
    Total     Dec 25,     Dec 25,(2)     Twelve Months Ended Dec 25,(3)  
    GFA(1)     2009     2008     2009     2008     2009       2008  
                %     %     US$     %     US$     %  
Fuxiang Huayuan 1   52,830     -     52,830     -     100%     -     -     13,682,009     17.8%  
Fuxiang Huayuan 2   18,392     18,392     -     100%     -     5,530,847     5.9%     -     -  
Xingfu Renjia 1   85,546     85,546     -     100%     -     11,664,726     12.4%     -     -  
Oumei Complex 1   91,778     39,624     52,154     100%     57%     7,093,080     7.5%     9,421,360     12.2%  
Total   248,546     143,562     104,984                 24,288,653           23,103,369        

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(1) The amounts for “total GFA” in this table are the amounts of total saleable GFA and are derived on the following basis:

(2) Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA.

(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the percentage of completion, the percentage sold and related revenues for our projects for the fiscal years ended December 25, 2009 and 2008.

              Percentage                          
          Percentage of     Sold –                          
          Completion     Accumulated                          
          as of     as of     Revenues recognized for  
    Total     Dec 25, (1)     Dec 25, (2)     Twelve Months Ended Dec 25, (3)  
    GFA     2009     2008     2009     2008     2009     2008  
        %     %     %     %     US$     %     US$     %  
Longhai Lidu 1 51,450 100% 100% 96% 95% 192,788 0.20% 17,787,318 23.10%
Longhai Lidu 2 79,308 86% 67% 80% 0% 20,508,323 21.70% 0 0.00%
Qilu Textile Centre (Comm) 139,510 99% 98% 79% 78% 488,946 0.50% 25,720,880 33.40%
Qilu Textile Centre (Residential) 71,456 90% 37% 79% 37% 8,342,029 8.80% 7,049,269 9.20%
Weihai International Plaza 54,818 0% 0% 0% 0% 0 0.00% 0 0.00%
Dongli Garden 1 213,315 48% 0% 17% 0% 16,142,992 17.10% 0 0.00%
Longhai Mingzhu 51,902 80% 0% 40% 0% 21,961,665 23.30% 0.00%
Oumei Complex 2 70,587 0% 0% 0% 0% 0 0.00% 0 0.00%
Total   732,346                             67,636,743           50,557,467        

(1) This ratio of completion is determined by an independent third party hired by the Company.

(2) Percentage sold is calculated by dividing contracted sales value from property sales by total estimated sales value of the relevant project, estimated as of the time of preparation of our interim financial statements as of and for the applicable period.

(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the square meters sold and average selling price per square meter by each project on a consolidated basis for the fiscal years ended December 25, 2009 and 2008.

35


             
    For Twelve Months Ended     For Twelve Months Ended  
    December 25, 2009     December 25, 2008  
          % of                              % of                    
          Revenue                             Revenue                    
          Recognized                             Recognized                    
          from           Square     Average             from           Square     Average    
    Contract     Contract       Revenues       Meters       Selling       Contract     Contract       Revenues       Meters       Selling    
    sales     Sales     Recognized       sold       Price     sales     Sales     Recognized       sold       Price  
    US$     %     US$         US$/m²     US$     %     US$         US$/m²  
Fuxiang Huayuan 1   -     -     -     -     -     13,682,009     100%     13,682,010     52,830     258  
Fuxiang Huayuan 2   5,530,847     100%     5,530,848     18,392     301     -     -     -     -     -  
Xingfu Renjia 1   11,664,726     100%     11,664,726     43,810     266     -     -     -     -     -  
Oumei Complex 1   7,093,080     100%     7,093,081     35,346     201     9,421,360     100%     9,421,360     37,621     250  
Longhai Lidu 1   192,787     100%     192,788     577     333     17,787,317     100%     17,787,318     48,655     365  
Longhai Lidu 2   24,441,086     84%     20,508,323     63,640     384     -     -     -     -     -  
Qilu Textile Centre (Comm)   523,553     93%     488,946     1,404     372     25,720,990     100%     25,720,880     108,373     237  
Qilu Textile Centre (Residential)   8,582,890     97%     8,342,029     29,764     288     7,049,268     100%     7,049,268     26,426     266  
Weihai International Plaza   -     -     -     -     -     -     -     -     -     -  
Dongli Garden 1   16,142,991     100%     16,142,992     36,854     438     -     -     -     -     -  
Longhai Mingzhu   27,452,081     80%     21,961,666     20,532     1,337     -     -     -     -     -  
Oumei Complex 2   -     -     -     -     -     -     -     -     -     -  
Sales of Inventory(1)   2,390,101     100%     2,390,101     4,613     518     3,371,725     100%     3,371,725     9,039     373  
Total   104,014,142           94,315,500     254,932     408     77,032,667           77,032,561     282,944     272  

(1) The sales of inventory are defined as the sale of unsold properties from projects completed prior to the applicable period.

Cost of sales. Our total cost of sales increased 25.9% to $58.3 million in the fiscal year 2009 from $46.3 million in the fiscal year 2008, mainly in support of the increase in sales, plus higher costs in constructing high rise tower office buildings in fiscal year 2009, which are more expensive to construct than the low rise buildings completed in fiscal year 2008.

Gross profit and gross profit margin. Our gross profit increased 17.3% to $36.0 million in the fiscal year 2009 from $30.7 million in the fiscal year 2008. The gross profit margin (gross profit as a percentage of total sales) was 38.2% for the fiscal year 2009 and 39.9% for the fiscal year 2008. The decline in the gross margin was primarily due to the Fuxiang Garden Phase 2 and the Xingfu Renjia Phase 1 projects, both of which had lower than average selling prices. Additionally, the costs of construction of high rise office tower buildings in fiscal year 2009 are relatively higher than the projects sold in fiscal year 2008.

Advertising expenses. Advertising expenses increased 138.9% to $0.3 million in the fiscal year 2009 from $0.1 million in the fiscal year 2008, mainly due to our increased advertising efforts to create buyer awareness and interest in our newly available properties at our Qilu Textile Center and Weihai Longhai International Plaza projects, as well as in our Xingfu Renjia residential project.

Commission expenses. Commissions paid to independent sales agents decreased 85.2% between fiscal year 2009 and fiscal year 2008 since we used temporary independent sales agents to maximize our pre-sales in the first phase of sales for residential and commercial properties in 2008. In 2009, we did not rely as heavily on these temporary sales agents.

Selling expenses. Our selling expenses decreased 38.8% to $0.05 million in the fiscal year 2009 from $0.08 million in the fiscal year 2008, mainly due to the absence in 2009 of the sales and marketing materials purchased for the intense selling effort in the first phase of pre-sales for residential and commercial properties in 2008.

Bad debt expense. Our bad debt expense declined 82.7% in fiscal year 2009 from fiscal year 2008, primarily due to the write back of an allowance against other receivables which was recorded in 2008. This was partially offset by an additional provision for doubtful accounts receivable made in accordance with the Company’s bad debt allowance policy.

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General and administrative expenses. General and administrative expenses increased 103.9% in fiscal year 2009 from fiscal year 2008, primarily due to the increase in Land Appreciation Tax and the expenses incurred in anticipation of the reverse acquisition transaction with Leewell and related private placement.

Gain on business acquisitions (bargain purchases). In fiscal year 2009, a new accounting standard issued by the Financial Accounting Standards Board revised the recognition and presentation of gains on acquisitions in the statement of operations. Any such gains are no longer considered extraordinary items. The gain on business acquisitions (bargain purchase) of $3.2 million in 2009 represents the difference between the amounts paid for two companies and their market values. Please see Note 2 to the consolidated Financial Statements for further details.

Interest expense. Interest expense decreased 10.5% to $0.9 million in the fiscal year 2009 from $1.0 million in fiscal year 2008, primarily due to lower average borrowings in 2009.

Income taxes. Income taxes increased 37.2% to $9.1 million in the fiscal year 2009 from $6.6 million in the fiscal year 2008, mainly due to higher income before taxes. Please see “Taxation” above for more information.

Income before extraordinary items. Income before extraordinary items was up 28.3% to $24.3 million in the fiscal year 2009 compared with $19.0 million in 2008, as a result of the factors described above.

Extraordinary items, net. In fiscal year 2008, we acquired four project companies (Qingdao Xudong, Weifang Longhai Industry, Weifang Longhai Zhiye and Weifang Qilu) and recorded a gain of $12.6 million as an extraordinary item, based on the differences between our purchase prices and the estimated fair market values of the acquisitions.

Net income. Net income decreased 23.0% to $24.3 million in fiscal year 2009 from $31.6 million in 2008, primarily due the absence in fiscal year 2009 of a gain from extraordinary items that occurred in fiscal year 2008, and due to higher income taxes in 2009.

Comparison of Fiscal Years Ended December 25, 2008 and December 25, 2007

The following table shows key components of our results of operations during the fiscal years ended December 25, 2008 and 2007, both in dollars and as a percentage of our total sales.

    Fiscal Year Ended     Fiscal Year Ended  
U.S. dollars, except percentages   December 25, 2008     December 25, 2007  
          Percent of           Percent of  
             Dollars     Total Sales              Dollars     Total Sales  
Total sales $  77,032,561     100.0 % $  51,850,312     100.0%  
Cost of total sales   (46,321,251 )   (60.1 )%   (36,243,778 )   (69.9 )%
Gross profit   30,711,310     39.9 %   15,606,534     30.1 %
                         
Advertising expenses   (112,263 )   (0.1 )%   (46,492 )   (0.0 )%
Commission expenses   (574,262 )   (0.7 )%   (134,989 )   (0.3 )%
Selling expenses   (81,415 )   (0.1 )%   (2,187 )   (0.0 )%
Bad debt expense   (1,198,942 )   (1.6 )%   (245,243 )   (0.5 )%
General and administrative expenses   (2,283,744 )   (3.0 )%   (807,589 )   (1.6 )%
Income from operations   26,460,684     34.4 %   14,370,034     27.7 %
                         
Miscellaneous income   91,945     0.1 %   10,280     -  
Interest expense   (968,710 )   (1.3 )%   (70,963 )   (0.1 )%
Income before income taxes and extraordinary items   25,583,919     33.2 %   14,309,351     27.6 %
Income taxes   (6,602,194 )   (8.6 )%   (5,090,161 )   (9.8 )%
Income before extraordinary items   18,981,725     24.6 %   9,219,190     17.8 %
Extraordinary items, net   12,635,872     16.4 %   -     -  
Net income   31,617,597     41.0 %   9,219,190     17.8 %
                         
Foreign currency translation adjustment   3,488,440     4.6 %   2,107,856     4.0 %
Comprehensive income $ 35,106,037     45.6 % $ 11,327,046     21.8 %

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Sales. Total sales increased 48.6% to $77.0 million in the fiscal year 2008 from $51.9 million in the fiscal year 2007. The increase in sales was mainly due to the inclusion of seven project companies acquired as subsidiaries in 2008, which were not part of the company in 2007. Our internal growth, excluding the acquisitions in 2008, also contributed to the sales increase, mainly due to the completion of project buildings, as we expanded our operations into a wider geographic market.

Effective December 26, 2008, we adopted the percentage of completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than 12 months at that date. The full accrual method was used before that date for all of our residential and commercial projects. We changed to the percentage of completion method for contracts longer than one year because this method more accurately reflects how revenue is earned on these contracts, particularly for interim reporting purposes. ASC 250 requires retrospective application of a change in accounting principle unless impracticable. The change to the percentage of completion method had no effect on our December 25, 2008 financial statements and we found it was impracticable to determine the effect on the December 25, 2007 financial statements as no progress reports detailing the percentage of completion of our contracts were prepared for that year. See “–Critical Accounting Policies – Revenue Recognition” below for a detailed discussion of how we recognize revenue under the percentage of completion method of accounting.

The following table sets forth for the fiscal years ended December 25, 2008 and 2007 the aggregate GFA and the related revenues recognized by project:

          GFA Delivered     Percentage of                          
          for Twelve     Total GFA                          
          Months Ended     Delivered as of     Revenues recognized for  
    Total     Dec 25,     Dec 25, (2)     Twelve Months Ended Dec 25, (3)  
    GFA(1)     2008     2007     2008     2007     2008           2007        
                %     %     US$     %     US$     %  
Shanshui Long Yuan 257,762 - 257,762 - 100% 295,156 0.4% 18,565,474 35.8%
Longze Yuyuan   78,146     -     78,146     -     100%     4,489,366     5.8%     15,277,613     29.5%  
Shanghai Garden 3   16,055     -     16,055     -     100%     3,015,663     3.9%     3,297,194     6.4%  
Fuxiang Huayuan 1   52,700     52,700     -     100%     -     13,682,009     17.8%     -     -  
Total   404,663     52,700     351,963                 21,482,194           37,140,281        

(1) The amounts for “total GFA” in this table are the amounts of total saleable GFA and are derived on the following basis:

(2) Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA.

(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the percentage of completion, the percentage sold and related revenues for our projects for the fiscal years ended December 25, 2008 and 2007.

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                      Percentage                          
          Percentage of     Sold –                          
          Completion     Accumulated                          
          as of     as of     Revenues recognized for  
    Total     Dec 25,(1)     Dec 25,(2)     Twelve Months Ended Dec 25,(3)  
    GFA     2008     2007     2008     2007     2008     2007  
        %     %     %     %     US$     %     US$     %  
Longhai Lidu 1   51,450     100%     -     95.0%     -     17,787,317     23.1%     -     -  
Qilu Textile Centre (Comm)   142,499     100%     -     76.0%     -     25,720,879     33.4%     -     -  
Qilu Textile Centre (Residential)   71,456     100%     -     37.0%     -     7,049,268     9.2%     -     -  
Oumei Complex 1   91,788     57.0%     -     59.0%     -     9,421,360     12.2%     -     -  
Total   357,193                             59,978,824           -        

(1) This ratio of completion is determined by an independent third party hired by the Company.

(2) Percentage sold is calculated by dividing contracted sales value from property sales by total estimated sales value of the relevant project, estimated as of the time of preparation of our interim financial statements as of and for the applicable period.

(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the square meters sold and average selling price per square meter by each project on a consolidated basis for the fiscal years ended December 25, 2008 and 2007.

    For Twelve Months Ended     For Twelve Months Ended  
    December 25, 2008     December 25, 2007  
          % of                             % of                    
          Revenue                             Revenue                    
          Recognized                             Recognized                    
          from           Square     Average           from           Square Average  
    Contract     Contract       Revenues     Meters     Selling     Contract     Contract      Revenues     Meters     Selling  
    sales     Sales       Recognized      sold      Price     sales     Sales      Recognized       sold      Price  
    US$     %     US$         US$/m²     US$     %     US$         US$/m²  
Shanshui Long Yuan   295,159     100%     295,159     348     848     18,565,474     100%     18,565,474     74,742     248  
Longze Yuyuan   644,000     100%     644,000     1,917     336     15,277,613     100%     15,277,613     74,697     205  
Shanghai Garden 3   432,597     100%     432,597     1,086     398     3,297,194     100%     3,297,194     13,548     243  
Fuxiang Huayuan 1   13,682,009     100%     13,682,010     52,830     258     -     -     -     -     -  
Oumei Complex 1   9,421,360     100%     9,421,360     37,621     250     -     -     -     -     -  
Longhai Lidu 1   17,787,317     100%     17,787,318     48,655     365     -     -     -     -     -  
Qilu Textile Centre (Comm)   25,720,990     100%     25,720,880     108,373     237     -     -     -     -     -  
Qilu Textile Centre (Residential)   7,049,268     100%     7,049,268     26,426     266     -     -     -     -     -  
Sales of Inventory(1)   1,999,969     100%     1,999,969     5,688     352     14,710,031     100%     14,710,031     62,526     235  
Total   77,032,667           77,032,561     282,944     272     51,850,312           51,850,312     225,513     230  

(1) The sales of inventory are defined as the sale of unsold properties from projects completed prior to the applicable period.

Cost of sales. Total cost of sales increased 27.8% to $46.3 million in fiscal year 2008 from $36.2 million in fiscal year 2007, in support of the higher sales.

Gross profit and gross profit margin. Gross profit increased 96.8% to $30.7 million in fiscal year 2008 from $15.6 million in fiscal year 2007. The gross profit margin (gross profit as a percent of total sales) was 39.9% in 2008 compared with 30.1% in 2007, mainly due to a higher portion of sales in 2008 that were in higher-margin commercial and residential projects, compared with the lower-margin residential and commercial buildings completed in 2007. We also had higher selling prices in 2008 compared to 2007.

39


Advertising expenses. Advertising expenses increased 141.5% to $0.1 million in 2008 from $0.05 million in 2007, mainly due to an aggressive marketing campaign to attract potential customers at the start of the pre-sales periods.

Commissions. Commissions paid to independent professional sales representatives increased 325.4% to $0.6 million in the fiscal year 2008 from $0.1 million in the fiscal year 2007, due to the temporary use of independent sales representatives needed to grow sales rapidly in the beginning phase of the pre-sales of apartments in our buildings, which helps to create the sales momentum so that most apartments in the buildings will be sold as construction progresses.

Selling expenses. Our selling expenses increased 3,622.7% to $0.081 million in the fiscal year 2008 from $0.002 million in the fiscal year 2007, mainly due to a much greater effort to create pre-sales. Eight of our companies, including seven subsidiaries, were in the selling phase of construction in 2008, compared with only one company in 2007.

Bad debt expense. Our bad debt expense increased 388.9% in the fiscal year 2008 to $1.2 million from $0.2 million in the fiscal year 2007, primarily due to an expense of approximately $0.6 million for other receivables and an additional allowance for doubtful accounts receivable of approximately $0.6 million in accordance with the Company’s policy.

General and administrative expenses. General and administrative expenses increased 182.8% to $2.3 million in the fiscal year 2008 from $0.8 million in the fiscal year 2007, mainly due to the expansion of our operations by way of the acquisition of seven companies in 2008.

Interest expense. Interest expense increased 1,265.1% to $0.9 million in the fiscal year 2008 from $0.07 million in the fiscal year 2007, primarily due to higher average borrowings in 2008 compared with 2007. The consolidation of the seven subsidiaries acquired in 2008, with most having some amount of debt, was the primary cause of the higher interest expense in 2008.

Income taxes. Income taxes increased 29.7% to $6.6 million in the fiscal year 2008 from $5.1 million in the fiscal year 2007, mainly due to higher income before taxes.

Income before extraordinary items, net. Income before extraordinary items was up 105.9% to $19.0 million in the fiscal year 2008 compared with $9.2 million in the fiscal year 2007, as a result of the factors described above.

Extraordinary items, net. In fiscal year 2008, we acquired four project companies (Qingdao Xudong, Weifang Longhai Industry, Weifang Longhai Zhiye and Weifang Qilu) and recorded a gain of $12.6 million as an extraordinary item, based on the differences between our purchase prices and the estimated fair market values of the acquisitions. There were no extraordinary items in fiscal year 2007.

Net Income. Net income increased 243.0% to $31.6 million in fiscal year 2008 from $9.2 million in fiscal year 2007, primarily due higher sales and operating income, and the gain from extraordinary items in 2008, partly offset by higher interest expense, and a lower income tax rate.

Liquidity and Capital Resources

As of June 25, 2010, we had cash and cash equivalents of approximately $12.4 million. The following table provides a summary of our net cash flows from operating, investing, and financing activities. To date, we have financed our operations primarily through net cash flow from operations, augmented by short-term bank borrowings and equity contributions by our shareholders.

    Six Months Ended     Fiscal Year Ended  
U.S. Dollars   June 25,     December 25,  
    2010     2009     2009     2008     2007  
Net cash provided by operating activities $  6,584,162 $     14,851,041   $  11,250,820   $  61,015,081 $     1,212,951  
Net cash provided by (used in) investing activities   (103,220 )   386,150     234,814     (58,521,630 )   (13,689,661 )
Net cash provided by (used in) financing activities   3,645,863     (10,683,148 )   (9,866,408 )   (3,805,052 )   14,167,583  
Effects of exchange rate change in cash   2,891     1,186     6,573     16,518     9,891  
Net increase (decrease) in cash and cash equivalents   10,129,696     4,554,229     1,625,799     (1,295,083 )   1,700,764  
Cash and cash equivalents at beginning of the period   2,264,438     638,639     638,639     1,933,722     232,958  
Cash and cash equivalent at end of the period $  12,394,134   $  5,193,868   $  2,264,438   $  638,639   $  1,933,722  

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Net cash flow from operating activities

In accordance with Accounting Standards Codification, or ASC, 230, Statement of Cash Flows, cash flows from our operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Net cash provided by operating activities was $6.6 million in the six months ended June 25, 2010, compared with $14.9 million provided by operating activities in the same period last year. Net income after adjustment for noncash items was $13.6 million in the six months ended June 25, 2010. This increase was augmented by a reduction in inventories of $24.4 million, an increase in income recognized but not billed of $3.7 million, an increase in taxes incurred but not paid of $2.1 million, an increase of $2.2 million in deposits received from customers, and an increase of $0.2 million in restricted cash. This total increase of $32.6 million was offset by an increase of $7.2 million of loans to a related party, an increase of $3.2 million of other receivables, and a $27.3 million income recognized but where no payment was received.

Net cash provided by operating activities was $11.3 million in the fiscal year 2009, compared with $61.0 million provided by operating activities in the fiscal year 2008. Net income after adjustment for noncash items was $30.3 million in the fiscal year 2009. This increase was augmented by a reduction in inventories of $24.6 million, related party receivables collected of $7.3 million, expenditures made in previous years but expensed in the fiscal year 2009 of $2.3 million, and an increase in taxes incurred but not paid of $3.8 million. This total increase of $68.3 million was offset by a decrease in deposits received from customers of $38.0 million, income recognized of $10.7 million but either not billed or received in cash, and payments for accounts payable of $9.3 million.

Net cash provided by operating activities was $61.0 million in the fiscal year 2008 compared with $1.2 million in the fiscal year 2007. Net income after adjustment for noncash items was $21.7 million in the fiscal year 2008. This increase was augmented by a net collection from related parties of $58.5 million, a decrease in inventories of $26.0 million, an increase in taxes incurred but not paid of $9.9 million, collection of other receivables of $4.7 million, and collection of contracts receivable of $1.6 million. This total increase of $122.4 million was offset by a decrease in deposits received from customers of $56.5 million, expenditures made but not expensed in the fiscal year 2008 of $1.7 million, and payments for accounts payable of $1.3 million.

Net cash flow from investing activities

Net cash used in investing activities in the six months ended June 25, 2010 was $0.1 million, compared with $0.4 million provided by investing activities in the same period last year. The decrease was mainly due to the purchase of fixed assets in the first six months of 2010.

Net cash provided by investing activities in the fiscal year 2009 was $0.2 million, compared with $58.5 million net cash used in investing activities in the fiscal year 2008. The increase was mainly due to the absence in the fiscal year 2009 of the purchase of four subsidiaries acquired in the fiscal year 2008.

Net cash used in investing activities in the fiscal year 2008 was $58.5 million, compared with $13.7 million used in the fiscal year 2007. The increase in the net cash used in investing activities was mainly due to acquisition of four subsidiaries in the fiscal year 2008.

Net cash flow from financing activities

Net cash provided by financing activities in the six months ended June 25, 2010 was $3.6 million, compared with $10.7 million net cash used in financing activities in the same period in 2009. The increase in net cash provided by financing activities was mainly from cash proceeds from the April 14, 2010 private placement transaction.

41


Net cash used in financing activities in the fiscal year 2009 was $9.9 million, compared with $3.8 net cash used in financing activities in the fiscal year 2008. The increase was mainly due to repayments of long-term borrowings in the fiscal year 2009, partly offset by proceeds received from long-term borrowings in 2009.

Net cash used in financing activities in the fiscal year 2008 was $3.8 million, compared with $14.2 million of net cash provided by financing activities in the fiscal year 2007. The decrease was mainly due to a net reduction in short-term borrowing in 2008 and a net increase in short-term borrowing in 2007.

As of June 25, 2010, the amount, maturity date and term of each of our loans were as follows:

Lender Amount Outstanding Interest Rate Maturity Date Duration
Rural Credit Cooperatives Fangzi Branch RMB 9,000,000 (approximately $1,320,930) 9.08% January 13, 2011 1 year
Employee Loan (China Agricultural Bank Jimo Branch) RMB 1,872,568 (approximately $274,837) 5.82% December 25, 2010 1 year
Employee Loan (China Agricultural Bank Laixi Branch) RMB 663,190 (approximately $97,336) 9.37% December 25, 2010 1 year
China Industry and Commercial Bank Chengyang Branch RMB 200,000,000 (approximately $29,354,000) 7.43% November 2011 3 years
China Construction Bank Weihai Branch RMB 340,000,000 (approximately $5,870,800) 5.31% 75%, December 2011 and 25%, April 2010 2 years
TOTAL RMB 251,535,758 (approximately $36,917,903)

We do not intend to use the proceeds from the public offering disclosed in this prospectus to pay off our debt that is due within the next 12 months. As the majority of our outstanding loans are real estate development loans, we believe that our operating cash provided by general sales is sufficient to repay the portion of such loans that is due within the next 12 months. We also believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least the next twelve months. We may, however, in the future require additional cash resources due to changed business conditions, implementation of our strategy to expand our production capacity, or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

Obligations Under Material Contracts

The table below shows our contractual obligations as of June 25, 2010.

U.S. Dollars   Payments Due by Period  
          Less than                 More than  
Contractual Obligations   Total     1 year     1-3 years     3-5 years     5 years  
Long-term and short –term debt obligations $  36,917,903   $  1,693,103   $  35,224,800   $  -   $  -  
Interest expense obligations for outstanding debt   3,753,511     143,432     3,610,079     -     -  
Other obligations   -     -     -     -     -  
Total $  40,671,414   $  1,836,535   $  38,834,879   $  -   $  -  

Inflation

Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and the real estate industry and continually maintain effective cost controls in operations.

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Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

Seasonality

Our operating results and operating cash flows historically have not been subject to dramatic seasonal variations, although there is an increase in advertising and selling expenses when we begin pre-sales of new projects under construction. New market opportunities or new project introductions could change any perceived patterns, seasonal or operational.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:

Revenue Recognition

Real estate sales are reported in accordance with the provisions of ASC 360-20, Property, Plant and Equipment, Real Estate Sales, Sales Other Than Retail Land Sales. Revenue from the sales of development properties where the construction period is twelve months or less is recognized by the full accrual method when the sale is consummated. A sale is not considered consummated until (1) the parties are bound by the terms of a contract or agreement, (2) all consideration has been exchanged, (3) any permanent financing of which the seller is responsible has been arranged, (4) all conditions precedent to closing have been performed, (5) the seller does not have substantial continuing involvement with the property, and (6) the usual risks and rewards of ownership have been transferred to the buyer. Revenue recognized to date in excess of cash received from customers is classified as current assets under contracts receivable. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.

Effective December 26, 2008, the Company adopted the percentage-of-completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than twelve months at that date. The full accrual method was used before that date for all of our residential and commercial projects. The Company changed to the percentage-of-completion method for contracts longer than one year as this method more accurately reflects how revenue is earned on these contracts, particularly for interim reporting purposes.

ASC 250 requires retrospective application of a change in accounting principle unless impracticable. The change to the percentage-of-completion method had no effect on our December 25, 2008 financial statements and we found it was impracticable to determine the effect on the December 25, 2007 financial statements as no progress reports detailing the percentage-of-completion of our contracts were prepared for that year.

Revenue and profit from the sale of development properties where the construction period is more than twelve months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met: (1) construction is beyond a preliminary stage; (2) the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit; (3) sufficient units have already been sold to assure that the entire property will not revert to rental property; (4) sales prices are collectible and (5) aggregate sales proceeds and costs can be reasonably estimated. If any of these criteria are not met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.

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Under the percentage of completion method, revenues from units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of completion and applying that ratio to the contracted sales amounts. This ratio of completion is determined by an independent third party hired by the Company as the contractors employed by the Company request advance payments and do not specifically allocate these costs to the various projects. Cost of sales is recognized by multiplying the ratio by the total budgeted costs. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of cash received from customers is classified as current assets under revenue in excess of billings. Amounts received from customers in excess of revenue recognized to date are classified as current liabilities under customer deposits.

Any losses incurred or identified on real estate transaction are recognized in the period in which the transaction occurs.

Real Estate Capitalization and Cost Allocation

Properties under construction or held for sale consist of residential and commercial units under construction and units completed.

Properties under construction or held for sale are stated at cost or estimated net realizable value, whichever is lower. Costs include costs of land use rights, direct development costs, including predevelopment costs, interest on indebtedness, construction overhead and indirect project costs. Total estimated costs of multi-unit developments are allocated to individual units based upon specific identification methods. Costs of land use rights include land premiums and deed tax and are allocated to projects on the basis of acreage and GFA.

Allowance for Doubtful Accounts

The Company recognizes an allowance for doubtful accounts to ensure contracts receivable, related party receivables and other receivables are not overstated due to uncollectability. Bad debt reserves are maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer's or debtor's inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer's or debtor’s operating results or financial position. If circumstances related to customers or debtors change, estimates of the recoverability of receivables would be further adjusted.

Land Appreciation Tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures, including borrowings costs and all property development expenditures. The tax rules to implement the laws stipulate that the whole project must be completed before the LAT obligation can be assessed. Accordingly, the Company records the liability and the related expense at the completion of a project, unless the tax authorities impose an assessment at an earlier date. Deposits made against the eventual obligation are included in prepaid expenses.

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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans and long-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans, are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the six months ended June 25, 2010.

A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings as of June 25, 2010, would decrease net income before provision for income taxes by approximately $184,590 for the six months ended June 25, 2010. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

While our reporting currency is the U.S. Dollar, all of our consolidated sales and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for cash. As a result, we are exposed to foreign exchange risk as our sales and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If RMB depreciates against the U.S. Dollar, the value of our RMB sales, earnings and assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or Euro in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.

Inflation

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material effect on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

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BUSINESS

Business Overview

We are one of the leading real estate development companies located in Qingdao, Shandong province, China. We began operations in 2001, and in 2008 we were recognized in the official City of Qingdao Commission of Development & Construction’s evaluation as one of the top ten real estate developers in Qingdao, measured by a combination of revenue, customer satisfaction, as well as several other factors.

We develop and sell residential and commercial properties, targeting middle and upper income customers in the coastal region of the Shandong peninsula (Greater Qingdao) located in northeastern China, including the cities of Qingdao, Weihai and Yantai, as well as other inland locations, such as Weifang.

Since our inception, we have completed 15 projects having a GFA of 1,191,722 square meters, of which approximately 92% has been sold. In addition, we have seven projects under construction with a total GFA of 735,274 square meters.

In fiscal year 2009, our total sales increased 22.4% to $94.3 million from $77.0 million in fiscal year 2008. Our gross profit increased 17.3% to $36.0 million in fiscal year 2009 from $30.7 million in fiscal year 2008, while our net income before extraordinary item increased 27.9% to $24.3 million in fiscal year 2009 from $19.0 million in fiscal year 2008.

Our mission is to provide high-quality, comfortable, and convenient living space to middle and upper income customers, primarily in Shandong Province and in other provinces in China, while also earning for our shareholders an internal rate of return that exceeds our cost of capital. We expect to increase our market share through aggressive internal growth and prudent acquisitions in Shandong Province and in other provinces in China. Our goal is to be one of the top two real estate developers in Greater Qingdao in the next five years by capturing and exploiting the growth opportunities in Shandong Province and by providing the most desirable coastal and inland apartments to middle and upper income customers, as well as by increasing our development of commercial properties.

Our Industry

The Real Estate Industry in China

China’s real estate sector is in the early stage of a long-term growth cycle, supported by growth in its gross domestic product, or GDP, rising demand for housing, and substantial structural changes.

China has experienced rapid economic growth in the last 20 years. According to the National Bureau of Statistics, China’s GDP achieved an annualized growth rate of 17.1% from 2004 to 2008. According to the National Bureau of Statistics of China, China’s GDP in 2009 was RMB 33.5 trillion, up 8.7% from 2008. The official per capita data for 2008 and 2009 is not yet available as of the date of this prospectus.

 

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Despite the recent global economic recession, China is expected to achieve relatively good economic growth in the next several years, compared to many other major economies in the world.

China’s real estate bull market began more than six years ago. Despite the moderations in growth caused by the global economic weakness in 2008 and 2009, we believe the structural forces in China support continuing good demand for real estate in China during the next 10 years. The two primary drivers for this long-term real estate demand in China are urbanization (which includes both the expansion and development of cities and the dramatic migration of people from rural to urban areas) and the rising disposable income per capita in the cities.

Increasing Urbanization

At the end of 2009, 621 million people were living in urban areas, accounting for 46.6% of total population of 1.33 billion, according to the National Bureau of Statistics of China. The Ministry of Housing and Urban-Rural Development of China estimated in 2007 that China’s urban population in 2015 would exceed 800 million people.

Another source, the United Nations’ State of World Population 2007, reported that approximately 18 million people in China are expected to migrate from rural to urban areas each year, and that the urban population would reach about 870 million people in the next 10 years.

 

The rural to urban migration is likely to continue, both because of the potential for higher income and greater wealth accumulation, and because of the evolution of China’s farming toward larger-scale and more efficient methods that require fewer people to do the agricultural work.

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With the substantial housing demand created by the structural shift of the migration, the urban real estate market has been thriving. That long-term trend is expected to continue.

Increasing Disposable Incomes

According to the 2009 annual report of the National Bureau of Statistics of China, disposable income per capita in urban areas between 2000 and 2008 has grown at a compound average annual growth rate of 12.2%, from RMB 6,280 (approximately $919) in 2000 to RMB 15,781 (approximately $2,311) in 2008. As disposable income per capital increases, urban residents have strong motivation to improve their living conditions by purchasing new or larger properties, demonstrated by urban living expenses per capita in the same years that have steadily increased at a compound annual growth rate of 10.7%, from RMB 4,998 (approximately $732) in 2000 to RMB 11,243 (approximately $1,646) in 2008, which is the most recent year available for this measurement.

Rural dwellers are drawn to cities primarily by the potential of higher incomes and greater wealth, because urban jobs generally pay higher wages and salaries.

The latest data from the National Bureau of Statistics of China shows that both disposable income and wealth accumulation are higher for urban dwellers and confirms the economic attractiveness of the migration from rural to urban areas.

Annual per capita disposable income and expenses (RMB)   2002     2003     2004     2005     2006     2007     2008  
Urban per capita                                          
Disposable income of urban households   7,703     8,472     9,422     10,493     11,760     13,786     15,781  
Consumption expenditures of urban households   6,030     6,511     7,182     7,943     8,697     9,998     11,243  
Net increase in wealth, urban   1,673     1,961     2,240     2,550     3,063     3,789     4,538  
Rural per capita                                          
Net income of rural households   2,476     2,622     2,936     3,255     3,587     4,140     4,761  
Living expenditures of rural households   1,834     1,943     2,185     2,555     2,829     3,224     3,661  
Net increase in wealth, rural   642     679     751     700     758     917     1,100  

Growth of the Chinese Real Estate Industry

The growth in China’s real estate industry is reflected in the growth of investment in real estate development, total GFA sold, and average home prices. According to the National Bureau of Statistics of China, total investment on real estate development in 2009 was RMB 4.307 trillion (approximately $630 billion), up 19.9% from 2008.

According to the National Bureau of Statistics of China, the total GFA of residential and commercial properties sold increased from 224.1 million square meters in 2001 to 937.1 million square meters in 2009, a compound annual growth rate of 19.6%.

 

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Rising disposable income in the second-tier cities has lured top luxury goods manufacturers, including LVMH Group (one of the world’s largest luxury goods companies), to expand aggressively into key second-tier cities. The Chinese government has also been instrumental in stimulating regional growth by designating certain second-tier regions as priority zones. These actions are benefitting the Greater Qingdao area, our primary market. According to the Qingdao Municipal Bureau of Statistics, between 2005 and 2009, Qingdao’s urban disposable income per capita grew by a compound annual growth rate of 12.1% to RMB 22,368.

Recent Efforts by the Chinese Government to Cool Down the Real Estate Industry

In response to concerns over the scale of the increase in property investments, the PRC government has implemented measures and introduced policies to curtail property speculation and promote the healthy development of the real estate industry in China. On January 7, 2010, the PRC State Council issued a circular to control the rapid increase in housing prices and cool down the real estate market in China. It reiterated that the purchasers of a second residential property for their households must make down payments of no less than 40% of the purchase price and real estate developers must commence the sale within the mandated period as set forth in the pre-sale approvals and at the publicly announced prices. The circular also requested the local government to increase the effective supply of low-income housing and ordinary commodity housing and instructed the PBOC and the China Bank Regulatory Commission to tighten the supervision of the bank lending to the real estate sector and mortgage financing.

On February 25, 2010, the PBOC increased the reserve requirement ratio for commercial banks by 0.5% to 16.5% and has further increased it from 16.5% to 17.0% effective May 10, 2010. Further, in order to implement the requirements set out in the State Council's circular, the MLR issued a notice on March 8, 2010 in relation to increasing the supply of, and strengthening the supervision over, land for real estate development purposes.

In April 2010, the PRC State Council issued a further circular, which provided as follows: purchasers of a first residential property for their households with a gross floor area of greater than 90 square meters must make down payments of no less than 30% of the purchase price; purchasers of a second residential property for their households must make down payments of no less than 50% of the purchase price and the interest rate of any mortgage for such property must equal at least the benchmark interest rate plus 10%; and for purchasers of a third residential property, both the minimum down payment amount and applied interest rate must be significantly higher than the relevant minimum down payment and interest rate which would have been applicable prior to the issuance of the circular (the specific figures shall be decided by the relevant bank on a case-by-case based on the principle of proper risk management). Moreover, the circular provided that banks can decline to provide mortgage financing to either a purchaser of a third residential property or a non-resident purchaser.

The purpose of these measures appears to be to curb price speculations in certain housing markets from two sides. On the demand side, the objective appears to be to constrain speculative trends by requiring tighter conditions and stricter bank loans for “second, third, fourth, or more” homes than are typical for primary home buyers. The policy makes it more difficult and more costly to purchase homes only for price speculation.

On the supply side, the government is endeavoring to push for a higher quantity of homes to meet the needs of low-income and middle-income buyers of primary homes.

In considering all the government’s housing policies, given (a) the supply of affordable housing is likely to increase in the next year, (b) the government regulation of loans to developers to reduce speculative building for speculative buyers, (c) pressures for supplying affordable housing for primary buyers, (d) possible competitive market pressures for lower pricing as speculative owners of existing but unoccupied homes try to sell before the market weakens, and (e) bank loan restrictions that reduce the cash available for non-primary homes, we believe that the likely result will be incentives for and market pressures on developers to supply affordable housing in higher volumes, while at the same time moderating or lowering both the prices and the number of housing units available in the speculative portion of the housing market.

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Shandong Province

We conduct most of our operations in Shandong Province, including the city of Qingdao and two other smaller cities, Weihai and Weifang. Shandong Province, which includes Greater Qingdao, is located in northeastern China, on the gulf called the Bohai Sea and on the Yellow Sea. It includes the Shandong peninsula in the east and a central hilly complex surrounded by part of the intensively cultivated northern China Plain. The flood-prone Yellow River crosses northern sections. Wheat and soybeans are the chief crops, and wild silk is important on the peninsula. Major resources are the Shengli petroleum fields in the north and extensive coal deposits at Zibo, Boshan, and Zaozhuang. Jinan, the capital, and the Qingdao and Zibo municipalities are major urban areas. Settled as early as the 3rd century BC, Shandong was part of China during the Shang dynasty and played a major role in ancient Chinese history. It was venerated as the birthplace of the philosophers Confucius and Mencius.

Shandong Province is approximately 153,300 square kilometers in area, with a population density of 1,859.9 people per square kilometer.

Greater Qingdao

Greater Qingdao includes the cities of Qingdao, Jimo, Laixi, Pingdu, and three smaller cities. Located in the China-Japan-Korea triangle, Qingdao is a one-hour flight from Seoul and a two-hour flight from Tokyo.

 

Qingdao is a major naval base, an industrial center, and a port on the Yellow Sea at the entrance to sheltered Jiaozhou Bay. The port, which rarely freezes over, serves the industrialized northern China Plain and was expanded in 1976 to include an oil terminal for large tankers on Huang Island.

The leading manufactured goods of the city include textiles, railroad equipment, rubber goods, fertilizer, and chemicals. Tsingtao beer, brewed here since Germany leased the Kiaochow territory (1898-1914), is sold around the world. Qingdao was transformed by the Germans from a small fishing village into a modern European-style industrial port in the early 20th century. As a result of the reform and industrial restructuring in the past two decades, major industries, including electronics and information technology, appliances, engineered materials, brewing, automobiles, and shipbuilding, have grown dramatically in Qingdao. The Shandong Oceanography College is also located here.

Qingdao is considered one of the most livable cities in China as reported by various Chinese media outlets including CCTV. As one of China’s top ten economically dynamic cities ranked by the National Bureau of Statistics of China, Qingdao has an excellent environment for investment and living. It offers fairly priced markets, good infrastructure facilities, comfortable living conditions, efficient government operations, sound public security, good personal and property safety, and glorious days in the city, at the beach, sailing, or hiking in the mountains.

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Economic Growth

Shandong has experienced rapid economic growth in the last 20 years. According to National Bureau of Statistics of China, Shandong’s GDP per capita increased from RMB 10,195 (approximately $1,492) in 2001 to 35,796 (approximately $5,232) in 2009, a compound annual growth rate of 17.0%.

Qingdao is the leading city in the Shandong peninsula, measured by GDP and the GDP growth rate. As one of China’s top ten economically dynamic cites, GDP per capita in Qingdao exceeded $8,000 in 2009, making it the seventh most economically competitive city in China, according to the Qingdao Municipal Commission of Development and Reform.

 

Compared to tier-one cities, we believe Qingdao will continue its growth momentum for quite a few years. Its strong economic fundamentals should provide a solid foundation for growth in the real estate sector.


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Qingdao hosted the sailing competitions of the Olympic and Paralympic Games in August and September 2008, which boosted the city’s economy due to the Olympic participants and visitors, as well as to the new fixed assets built to support the Olympic games and festivities, especially the Qingdao International Marina & Olympic Sailing Center. Built on the site of the former Beihai shipyard on Fushan Bay, the new Qingdao International Marina & Olympic Sailing Center covers a total area of 450,000 square meters, plus major and secondary breakwaters, an embankment, a quay, and the renovation of the shore wall. The facility serves as the home port of several sailing organizations. Qingdao hosted the Volvo Ocean Race 2008-2009 as the Chinese port city on the world circuit.

Economic Stimulus Plans

In response to the global financial and economic crisis, the Chinese government announced a RMB 4 trillion stimulus program on November 27, 2008. Subsequently, on March 6, 2009, the National Development and Reform Commission Director announced a reshaping of that economic stimulus package that retained the investment total of RMB 4 trillion but adjusted its focus. Within the RMB 4 trillion package, about RMB 400 billion will go toward civil works, including low-income housing and renovation, which we believe will benefit Shandong Province. Two additional categories (technology advances & industry restructuring for RMB 370 billion and infrastructure for RMB 1.5 trillion) are also expected to benefit industries in Qingdao, Weihai, Weifang, and the entire Shandong Province.

On February 26, 2009, China’s State Council reinforced China’s 2008 stimulus package by further measures to stimulate specific industries in 2009. The industries include automobile, iron and steel, textiles, equipment manufacturing, shipbuilding, electronics and information technology, petrochemicals, light industries, nonferrous metals, and logistics.

We believe China’s RMB 4 trillion stimulus package and its further efforts focused on 10 industries will improve Qingdao’s economy, further strengthen the region’s long-term competitive ability, and support the demand for middle and upper income housing, as well as the need for better commercial and office space, and a few world-class hotels. However, although individuals and governments around the world hope that government stimulus efforts will have the desired effects, the true benefit from these and perhaps additional stimulus efforts by local, provincial, and national governments in China, as well as by other countries, still remain uncertain.

The Qingdao Real Estate Market

Qingdao’s real estate market has experienced strong growth since 2001. The table below shows housing demand in Qingdao between 2003 and 2008. In 2009, GFA completed was 8.14 million square meters, and GFA sold was 12.62 million square meters, with an average price per square meter of RMB 5,576.

    2003     2004     2005     2006     2007     2008     2009     CAGR  
GFA completed (millions m2)   5.52     6.35     8.11     6.54     6.41     6.72     8.14     4.1%  
GFA sold (millions m2)   4.69     5.16     7.40     7.19     8.33     7.70     12.62     11.2%  
Average price per sq. meter (RMB)   2,392     2,967     3,604     4,249     5,202     5,096     5,576     16.6%  

Source: Qingdao Statistics Yearbook 2004-2008 & Qingdao Municipal Bureau of Statistics

Good demographic and economic factors, including emerging high-tech industries and increasing foreign capital inflow, bode well for Qingdao’s future growth.

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Growth factors include the transition of certain industries to higher value-added business (especially high-technology and services), rising GDP per capita, increasing foreign investment, and expanding foreign retailing and hotel operations. Between 2000 and 2008, Qingdao’s GDP per capita achieved a 16.1% compound annual growth rate, while Qingdao’s urban disposable income per capita grew at a point-to-point compound annual growth rate of 12.4% from 2000 to 2008.

In addition, efforts by Qingdao’s local government to create clear strategies, institute attractive policies, and invest in the necessary infrastructure are focused on creating favorable investment environments.

Qingdao is focused on expanding its three relatively new industries: its modernized seaport, tourism, and marine science. The city also continues to enlarge its traditional industries of electronics and home appliances; petrochemicals; automobile; locomotive; ship building; and engineered materials. With Qingdao’s base as a seaport, this robust city is also building a regional shipping center, a logistics center, a service center, a financial center, and a high-technology industry development center.

Qingdao’s thrust to expand its industries and its recent experience as the world’s host for the sailing events of the Olympics and Paralympics are combining to grow this energetic city as it increases its role in the global marketplace. Qingdao's development is based on the concept of "three-point layout," "one-line planning," and "group development strategy."

The "three-point layout" refers to the development of the Jiaozhou Bay region relying on the three basic points of the old urban districts of Qingdao, Huangdao, and Hongdao, and the construction of the new urban district by connecting the three points with a transoceanic bridge or undersea tunnel and the Jiaozhou Bay Expressway.

The "one-line planning" refers to building a coastal highway from Langyatai in Jiaonan to Tianhengdao Island in Jimo, which will connect all parts of the city to form a main urban development belt.

The "group development strategy" refers to the expansion of business groups on both sides of the coastal highway. There will be seven development groups respectively in Tianhengdao Island, Aoshan, Zhucheng, Hongdao, Huangdao, Jiaonan, and Langyatai, which will push forward the urbanization of the adjacent regions. To carry out the west coast development strategy and construct those seven areas, the municipal government will relocate ports to the western coast, and plans to establish an international port and an international transshipment port.

The Qingdao Economic and Technological Development Zone, or QETDZ, is one of the state-level economic and technological development zones approved by China’s State Council. The zone is located on the west coast of Jiaozhou Bay, which is connected to the Bohai Sea Economic Belt. It is in the center of the Greater Qingdao strategy that aims to create huge development potential. In the recent assessement report by the Department of Commerce of China, the Qingdao Economic Technology Development Zone was ranked fifth overall. The Qingdao Economic Technology Development Zone was regarded among the top ten in the areas of comprehensive competitiveness, infrastructure facilities, human resources supply, social and environment protection, and environment for technical innovation.

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According to the official website of the Qingdao Economic Technology Development Zone, so far, a total of more than RMB 30 billion has been invested in the construction of infrastructure facilities in the zone. The Qianwan international port, inside the QETDZ, has a 100 million ton capacity, is the largest modern container deep-water dock in China, and links with more than 100 shipping routes to all parts of the world.

With the approval of the Shandong Provincial Government, Qingdao has established six provincial-level economic and technological development zones, including the development zones in Jimo, Laixi, Pingdu, Jiaonan, and Jiaozhou, and the Coastal economic and technology development zone. These development zones have complete infrastructure facilities with beneficial investment policies and convenient transportation.

The Weihai Real Estate Market

According to the Weihai Bureau of Statistics, approximately 4.0 million square meters of GFA were sold in Weihai in 2007, up 57.5% from 2006; approximately 4.0 million square meters were sold in 2008, down 1.0% from 2007; and approximately 4.5 million square meters were sold in 2009, up 13.7% from 2008. The 2009 figure is an estimate based on 11 months actual that has been annualized. The actual numbers for the year 2009 are not yet available.

The table below shows Weihai’s recent GFA completed, GFA sold, and average price per square meter for all commercial and residential property transactions in the city. The 2009 figures are estimates based on 11 months actual that have been annualized. GFA completed in 2009 is not yet available, GFA sold was 4.5 million square meters, and average price per square meter was RMB 3,434, all based on the annualized 11 months of 2009.

    2003     2004     2005     2006     2007     2008     2009*     CAGR*  
GFA completed (millions m2)   1.73     1.55     2.39     2.66     3.91     4.06     na     18.6%  
GFA sold (millions m2)   1.64     1.96     2.25     2.55     4.02     3.98     4.52     19.4%  
Average price (RMB)   1,590     1,800     2,028     2,301     2,915     2,993     3,434     13.5%  

* 2009 data is estimated based on annualizing the 11 months of 2009, as defined in the text above. The compound annual growth rate is for 2003-2008; 2009 was not used since it is an estimate based on annualizing the 11 months of 2009.

Source: Weihai Statistical Yearbooks 2004 to 2008 & Weihai Municipal Bureau of Statistics

As reflected in the above chart, supply and demand have been almost matched in Weihai’s property market and both have increased over the last five years.

With total GFA sold of about 4.0 million square meters in 2008, the Weihai housing market has grown at a compound annual growth rate of 19.4% in the six years between 2003 and 2009.

Our Competitive Strengths

We believe the following strengths allow us to compete effectively in the Chinese real estate development industry:

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Our Growth Strategy

We intend to increase our market share through aggressive internal growth and prudent acquisitions that are primarily focused on outstanding land or projects in the Shandong Province and in other provinces in China. We intend to achieve this objective by pursuing the following strategies:

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Project Development Process

We have adopted a systematic approach to real estate development that includes land rights acquisition, site planning and development, architecture and engineering, construction, marketing and pre-sales.

We acquire land rights by (1) participating in public tender, auction, and listing for sales of land; (2) mergers or acquisitions of companies, including related companies, owning land use rights; and (3) purchasing distressed projects that have not been completed. After we have obtained the development rights for land, we usually are required to pay a land premium to acquire the land rights, in accordance with laws and regulations.

In addition, we acquire many of our land rights from companies owned by Longhai Group, a company wholly-owned by Mr. Antoine Cheng, our Chairman. Longhai Holdings and Longhai Group are under common control, but do not have any other relationship. Longhai Group’s primary business is infrastructure and building construction. Through its infrastructure construction business, Longhai Group works with local governments and often finances (by agreeing to be paid sometime following the completion of construction instead of being paid as construction progresses) the government’s public infrastructure projects that can include old city relocation projects. In exchange for such financing, the local governments invite Longhai Group to bid for premium parcels of land for residential use at public auction or grant Longhai Group the right of first refusal to bid for industrial parcels for which Longhai Group already has land use rights, but whose use has been changed to real estate development. Such rights are provided to Longhai Group on a continuous basis by local governments, which is consistent with the government’s long-term policy. Since Longhai Group does not have the necessary license to engage in residential development in China, it often sells companies owning these land use rights to us so that we may develop these parcels using our real estate development license. Our projects that utilize or utilized land from this source include: Dongli Garden Phase 1 and Phase 2 (Qingdao), Fuxiang Huayuan 1 & 2 (Weifang), Xingfu Renjia 1 & 2 (Caoxian), and Longhai Mingzhu (Qingdao). See Note 2, Acquisition of Subsidiaries, to the Consolidated Financial Statements for the years ended December 25, 2009, 2008 and 2007 for detailed description of these transactions. In some cases, because Longhai Group does not have the necessary license to engage in residential development in China, and we hold the Level 1 Certificate of the Qualifications of Real Property Development Enterprises, Longhai Group allows us to directly participate in these auctions on its behalf as a related party under common control. Our projects that utilize or utilized land use rights that we won from this source include: Jiangnan Garden 1, 2, 3, 6 & 7 (Jimo), Decorative Materials Center (Jomo), Shanghai Garden 1-3 (Laixi), Fenglin Oasis (Laixi), Yuyuan Fengjing (Laixi), Longze Yuyuan (Laixi), Jiangshan Dijing (Laixi), and Shanshui Longyuan (Pingdu).

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The government’s long term policy is to engage in on-going cooperation relationships with trusted and qualified contractors, such as Longhai Group, who has a proven track record in public projects, in order to meet the local municipalities’ long-term urban development, redevelopment and revitalization needs. Typically, the public projects involved are large-scale urban development, redevelopment, relocation, or revitalization undertakings that include land development, build-out of major highway systems, bridges and other infrastructure networks, and major public/governmental buildings. As part of these projects’ master planning, a portion of the land in the overall projects is zoned for real estate development uses. Due to insufficient governmental/public funding resources, many local governments enter into agreements with selected contractors, such as Longhai Group and its subsidiaries, in which the contractors agree to receive deferred payments for the development costs of the public portion. As the public portion of the projects is completed, the government proceeds to an auction process on the land use rights in connection with the land zoned for development uses. In Longhai Group’s case, the local governments invite Longhai to bid for parcels of land as a preferred candidate or grant Longhai Group the right of first refusal to bid for industrial parcels for which the Longhai Group already has land use rights, but whose use has been changed to real estate development. Very often we participate in these auctions on behalf of Longhai Group as a related party under common control. Regardless of who wins the auction, part of the governments’ proceeds from the auction is returned to Longhai to repay its pre-paid development costs. As long as these needs exist, and as long as Longhai Group provides financial benefit, we believe that the government will continue to consider Longhai Group and us preferred candidates in the bidding process of land parcels. Currently, Longhai Group’s subsidiaries continue to be engaged by local governments in on-going infrastructure projects. Longhai Group sometimes has to compete with other contractors and developers to participate in the development of public portions of development and redevelopment plans, however, in many cases it is very competitive and selected by local governments because of its long-term track record and deep experience in cooperating with the government in public projects, as well as its rare financial capability in providing financing to local governments from its own resources.

Based upon our experience in the market in which we operate, while the government previously allowed land to be transferred from the government to private holders by agreement, regulations now provide that all land use rights are granted by way of a public auction, held by the land bureau of the relevant local government. A public invitation to bid is published in major newspapers and a deadline is set. The land bureau then appoints a project-specific task team to evaluate qualifications and bids submitted by developers. Qualification credentials examined by the government typically include: track record of development activity, financial strength, development qualification level under Certificates of the Qualifications of Real Property Development Enterprises issued by the Ministry of Housing and Urban-Rural Development (levels are 1-4), and experience/history in cooperating with the government in public projects. There is typically a comprehensive ranking system with points assigned to each qualification category. Bidders who do not meet all of the qualification requirements are disqualified. Both the bid amount and the overall points received in the ranking system are used to select which bidder is to be granted the land use rights. In many cases we are one of very few bidders who meet all the requirements and score very high in the ranking system. This along with Longhai Group’s long-term track record with local governments enables us to be treated as a preferred candidate. The successful bidder will be asked to enter into a written contract providing for the grant of the land use rights. Upon signing the contract, the grantee is required to pay the land premium and the contract is submitted to the local bureau, which then issues the land use right certificate.

We usually finance our real estate development projects through a combination of four sources: company cash, capital from investors, bank loans, and cash paid by customers when they sign pre-sales purchase agreements for their apartments. The proportion of the funding sources varies by project.

First, we select the site, acquire the land use rights, and cover the preliminary development costs using our own cash and capital from investors.

We next obtain loans from commercial banks and/or from investors to continue the project.

As our construction progresses, we reach the stage where we are permitted to begin selling the apartments and to complete pre-sales agreements with our customers. Our customers, in most cases, pay 100% of the apartment price in cash (including their mortgage financing, if needed) when they sign the purchase agreement. We have access to 95% of that cash, with 5% of the price retained by the bank until the apartment ownership is transferred to the buyer. The cash payments by our customers provide the remaining cash needed to complete the project.

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The net proceeds from the sales of the properties are used to compensate investors and to add to our retained earnings. The cash cycle then begins again with the selection of new sites and the acquisition of the development and land rights.

Projects

Since our inception, we have completed 15 projects having a GFA of 1,191,722 square meters, of which approximately 92% has been sold. All of our housing projects have featured secured parking, cable TV access, hot water, heating systems, and access to natural gas. Sales from those 15 projects have totaled $250 million.

We have seven residential and commercial project phases under construction with a total GFA of 735,274 square meters and expected sales of $266.2 million.

We have significant land use rights, consisting of six properties with a total land area of 387,127 square meters. On these properties, we plan to construct, among others, a luxury high-rise beach hotel, high-rise residential and commercial buildings, residential villas, and a high-rise office building.

We classify our projects into three categories:

Projects in Planning

Our projects in planning, including land reserves, total five properties with a land area of 329,276 square meters.

The table below titled “Projects in Planning” shows estimates of our total sales, estimated total profit, and estimated net profit margin for each project currently in planning. The estimates are based on typical selling prices and costs per square meter, which are reasonably predictable in China’s current economy, as well as based on our experience in projects completed and under construction.

Estimated total sales, total profit, and net profit margin shown in projects in planning assume that 100% of the total available gross floor area will be sold during the project’s selling period, which typically extends up to two years or so after construction has been completed, although in some cases we may further extend the selling period until all units are sold. In some cases, after most of the apartments or commercial space have been sold, a few units will remain unsold, at which point we typically lease out the space to have it generate revenue while still keeping the unit listed as available for sale but under lease. After some period of leasing, we typically will sell the unit at a large discount to complete the sales of all the units.

Our projections are subject to a number of limitations. Our projects in planning do not yet have specific dates for the commencement and completion of construction. These dates are primarily determined by the availability of funds to initiate and complete the projects. The projects typically take from 1.5 to 3.5 years to complete, depending mainly on the square meters to be constructed, height of the buildings, number of buildings, and complexity of the projects. Our Longhai Hotel project is also subject to securing a luxury global hotel company that would be the building’s long-term tenant. The hotel’s design, construction, fittings, and finish would be jointly made final by the global hotel company and the Company before construction begins. This long-term tenant has not yet been secured.

Because the dates of the commencement and completion of construction for the projects in planning have not yet been determined and we do not know the number of ordinary shares that would be outstanding in the future years when the projects may be under construction and reach completion, we have not provided potential or estimated earnings per share contributions for each project because they are unlikely to be accurate and could be misleading. The Company did not retain an outside firm to review the projections. The numbers shown are single best estimates. The Company expects to update the data in the Projects in Planning table at least annually in its earnings news release, related Current Report on Form 8-K and its Annual Report on Form 10-K. If the projects in planning change materially during the year, the Company expects to update the table in its quarterly earnings news release, its related Current Report on Form 8-K, and in its Quarterly Report on Form 10-Q.

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Projects in Planning
 U.S. dollars in millions         Estimated
          Total Total Net profit
      Land GFA sales profit margin
Project Name Location Type sq. m. sq. m. $ $ %
1. Longhai Hotel Qingdao Hotel 7,572 80,000 400.0 180.0 45.0
2. Weihai Beach Resort Weihai Villas 127,082 81,200 190.3 56.5 29.7
3. Dongli Garden Phase 2 Qingdao Residences 67,700 245,900 204.9 40.2 19.6
4. Xingfu Renjia Phase 2 Caoxian Residences 99,234 100,000 23.7 7.1 30.0
5. Jiangshan Dijing Laixi Residences 27,688 70,687 25.9 7.5 29.0
      329,276 577,787 844.8 291.3 34.5

Land reserves are essential for our future developments. Currently we have in inventory six parcels for which we own the land use rights. Those land use rights were acquired mainly through our purchase in 2008 of our project companies and subsidiaries that already owned the rights. The registration of those land use rights was completed in August 2008. Some of the land has been selected for specific projects while the projects for the other parcels are to be determined. The following table lists the land rights we own.

Our land reserves shown below include some of the projects in planning shown in the table above.

Land Reserves for Projects in Planning
 U.S. dollars in millions          
        Land Land Cost (1)
Land or Project Name Location Type Date Acquired sq. m. $
1. Longhai Hotel Qingdao Hotel November 2006 7,572 25.5
2. Weihai Beach Resort Weihai Villas May 2000 127,082 40.1
3. Dongli Garden Phase 2 Qingdao Residences October 2002 67,700 58.6
4. Xingfu Renjia Phase 2 Caoxian Residences July 2006 99,234 2.1
5. Jiangshan Dijing Laixi Residences April 2003 27,688 0.5
6. Huashan Town Jimo Residences April 2007 57,851 12.9
        387,127 139.7

__________
(1) Land cost reflects the price (historical cost or book value) we paid at the time of purchase of the land.

Projects Under Construction

We have seven residential and commercial project phases under construction with a total GFA of 735,274 square meters and expected sales of $266.2 million.

The table below titled “Projects Under Construction” includes our estimated total sales, estimated total profit, and estimated net profit margin for each project currently under construction.

The estimates are based on the following factors: At the time construction starts, the costs per square meter for each project under construction are reasonably predictable because the construction costs are generally specified in the construction contracts. The selling prices per square meter are estimated using a combination of (1) a selection from a typical range of estimated percentage markups from the estimated costs per square meter, (2) the selling prices per square meter for comparable properties currently selling in the market, and (3) the estimated potential change in the selling prices during the period in which the apartments are being sold. The period of sales for each project can range from six months to approximately six years. We estimate that approximately 80 percent of the units will be sold in the first three years and the remaining 20 percent will be sold in years four through six. Typically, projects with a longer construction/sales period are often those constructed in sequential phases, such as Longhai Lidu 1 & 2. Additionally, in China, apartments are generally pre-sold during construction, unlike in the United States where apartments are usually sold only after the construction has been completed. This sales method often accounts for the higher percentage of sales in the earlier years of the multi-phase projects.

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In estimating potential changes in selling prices during construction and prior to sales, we also consider our estimate of the direction and magnitude for the economy in China and in the local geographic region where each project is located, the change in consumers’ buying power that result from potential economic changes, and potential changes in taxation, available purchase financing, and government policies that influence housing and commercial property purchases, as well as likely changes in the market inventory of apartments or commercial space to be sold. We also consider our experience in selling prices and construction costs for projects that have been recently completed and for our other projects currently under construction.

Estimated total sales, total profit, and net profit margin shown in projects under construction assume that 100% of the total available gross floor area will be sold during the project’s selling period, which can extend up to two years or so after construction has been completed. In some cases, after most of the apartments or commercial space have been sold, a few units will remain unsold, at which point we typically lease out the space to have it generate revenue while still keeping the unit listed as available for sale but under lease. After a period of leasing, we typically will sell the unit at a large discount to complete the sales of all the units.

Because the estimated net profit for projects under construction is subject to changes in selling prices, market demand, and the other factors listed above, and because we do not know the number of ordinary shares that would be outstanding in the future years when the projects under construction may reach completion, we have not provided potential or estimated earnings per share contributions for each project because they are unlikely to be accurate and could be misleading. The Company did not retain an outside firm to review the projections. The numbers shown are single best estimates. The Company expects to update the data in the Projects Under Construction table at least annually in its earnings news release, related Current Report on Form 8-K and its Annual Report on Form 10-K. If the Projects Under Construction change materially during the year, the Company expects to update the table in its quarterly earnings news release, its related Current Report on Form 8-K, and in its Quarterly Report on Form 10-Q.

Projects Under Construction
U.S. dollars in millions            

  Estimated

                Total  Total  Net profit
        Land GFA Total  Units  sales   profit margin
Project Name Location Start Finish sq. m. sq. m. units  sold $ $ %
1. Longhai Lidu 1 & 2 Weihai 2006.06 2012.06 120,170 130,698 1,572 1,303 45.9 20.0 43.6
2. Qilu Textile Centre commercial Weifang 2005.08 2010.12 128,924 142,499 1,371 1,142 30.1 9.9 33.0
3. Qilu Textile Centre residential Weifang 2007.03 2010.06 72,056 71,456 740 288 16.3 5.6 34.2
4. Weihai International Plaza Weihai 2009.09 2011.06 9,058 54,817 430 - 51.9 15.1 29.0
5. Oumei Complex 2 Weifang 2010.03 2012.12 42,544 70,587 566 - 18.6 6.1 32.7
6. Dongli Garden Phase 1 Qingdao 2008.12 2010.12 175,508 213,315 2274 1317 58.6 14.7 25.0
7. Longhai Mingzhu Qingdao 2006.09 2010.05 9,700 51,902 340 163 44.8 13.9 31.0
        557,960 735,274 7,293 4,213 266.2 85.3 32.0

Completed Projects

Since our inception, we had completed 15 projects having a total GFA of 1,191,722 square meters, of which approximately 92% has been sold. Sales from those projects totaled $250 million, net profit was $88.6 million, and the projects earned a consolidated return on investment of 113%.

Although our typical selling period lasts no more than 2 years after the completion of construction, which is evidenced by the selling history of the majority of our completed projects, we have extended the selling period of the Fenglin Oasis, Yuyuan Fengjing, Longze Yuyuan, and Shanghai Garden 3 projects. The remaining GFA for these projects still remains in the prolonged selling period as of June 25, 2010, and the selling period will end as soon as they are sold.

All projects have included secured parking, cable TV, hot water, heating systems, and access to natural gas.

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Completed Projects
U.S. dollars in millions                                 Sources of funding
                      Total  Net  Total  Pre     
            GFA GFA   Total     Total    net   profit   capital  sale Bank  Oumei 
Project       Land GFA  sold    remaining   Total      cost   sales  profit   margin  required   cash  loans  cash
Name City Type Finish sq. m. sq. m. % sq. m. units $ $ $ % $ $ $ $
1. Jiangnan Garden 1, 2 & 3 Jimo Apts 2004.11 61,230 91,539 100 - 762 13.8 20.9 7.1 34.0 13.8 3.0 4.4 6.4
2. Decorative Materials Center Jimo Apts 2004.12 75,466 38,868 100 - 223 7.6 11.7 4.1 35.0 7.6 3.4 - 4.2
3. Jiangnan Garden 6 Jimo Apts 2005.05 11,773 109,094 100 - </