Purchasers of automobiles to replace old vehicles may continue to use the previous license plates and are therefore not subject to the quota.

Under the Provisional Regulations on the Quantity Control of Small Passenger Vehicles and its Implementing Rules (Provisional Regulations), the issuance of new license plates in Beijing is subject to a quota that will be published annually by the Beijing municipal government. Such quota will be allocated 88% to first-time individual buyers and 12% to business buyers on a monthly basis through a lottery system.

The quota for 2011 is 240,000, or 20,000 per month. Other measures announced include increasing parking fees in certain city areas and capping of the total number of automobiles that can be purchased by Beijing municipal government agencies at 2010 levels.

The municipal government also indicated it may adopt additional measures to restrict the use of motor vehicles in main congested areas within the city during peak traffic times.

Even though the new measures came as a surprise to our industry and are expected to adversely affect the growth of the automobile retail market in Beijing, we remain optimistic about the automobile market potential. Based on the 2011 quota of 240,000 new licenses, we estimate that new car sales in Beijing in 2011 will be significantly lower than the record number of units sold of approximately 800,000 in 2010.

However, we believe a substantial amount of sales in 2011 will still be made to non-first-time buyers who purchase new cars to replace their old vehicles, which sales are not subject to the quota. Moreover, according to the Provisional Regulations, the purchase orders placed to dealerships before December 24, 2010 will not be affected by the quota.

We believe the consumers in Beijing have factored in this new development and stepped up their purchase activities in the several days prior to the publication of the new measures. Our dealerships have received a significantly higher number of orders in December of 2010, far exceeding the normal rate in previous periods. We believe our sales and results of operations in the first quarter of 2011 will not be negatively affected by the new policy as a result of the substantial increase of purchase orders in December of 2010.

Furthermore, the net effect of the new measures is raising the costs of car usage in Beijing, which will have a more direct adverse impact on the low-end automobile market. We expect the impact of the new policy on the mid-line to high-end automobile market, which our company focuses on, will be limited.

—Hetong Guo, the chairman of Lentuo, the largest non-state-owned automobile retailer in Beijing