# Cost of Sales

The following table sets forth the components of cost of sales for the period indicated.

<table><tr><td rowspan="4"></td><td colspan="6">For the year ended December 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2014</td><td colspan="2">2015</td></tr><tr><td>Amount</td><td>% of
total</td><td> Amount</td><td>% of
total</td><td> Amount</td><td>% of
total</td></tr><tr><td colspan="6">(RMB in thousands, except percentages)</td></tr><tr><td>Cost of software and hardware equipment .....</td><td>275,460</td><td>75.2</td><td>199,076</td><td>69.3</td><td>298,664</td><td>75.8</td></tr><tr><td>Emlpoyee compensation .................................</td><td>49,491</td><td>13.5</td><td>54,381</td><td>18.9</td><td>53,516</td><td>13.6</td></tr><tr><td>Installation costs ............................................</td><td>11,570</td><td>3.2</td><td>4,855</td><td>1.7</td><td>4,766</td><td>1.2</td></tr><tr><td>Amortization and depreciation........................</td><td>7,185</td><td>2.0</td><td>14,024</td><td>4.9</td><td>14,018</td><td>3.6</td></tr><tr><td>Traveling expenses.........................................</td><td>5,698</td><td>1.6</td><td>4,027</td><td>1.4</td><td>6,064</td><td>1.5</td></tr><tr><td>Business tax charged to operations.................</td><td>3,215</td><td>0.9</td><td>3,590</td><td>1.2</td><td>7,022</td><td>1.8</td></tr><tr><td>Others............................................................</td><td>13,657</td><td>3.7</td><td>7,410</td><td>2.6</td><td>9,762</td><td>2.5</td></tr><tr><td>Total cost of sales.........................................</td><td>366,276</td><td>100.0</td><td>287,363</td><td>100.0</td><td>393,812</td><td>100.0</td></tr></table>

Cost of software and hardware equipment primarily includes purchase fees for servers, workstations, memory modules, network equipments and third-party software from third-party suppliers for our in-house developed solutions and products, which we procure based on orders from our customers. During the Track Record Period, our cost of software and hardware equipment, representing the largest component of our cost of sales, fluctuated as a result of the fluctuation of our revenue. For more details, see “Financial Information—Results of Operations.”

# Gross Profit and Gross Profit Margin

The following table sets forth a breakdown of our gross profit and gross profit margin derived from each business line for the period indicated.

<table><tr><td rowspan="4"></td><td colspan="6">For the year ended December 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2014</td><td colspan="2">2015</td></tr><tr><td>Gross profit</td><td>Gross profit
marign (%)</td><td> Gross profit</td><td>Gross profit
marign (%)</td><td> Gross profit</td><td>Gross profit
marign (%)</td></tr><tr><td colspan="6">(RMB in thousands, except percentages)</td></tr><tr><td>Solutions ............................</td><td>79,632</td><td>20.7</td><td>71,303</td><td>23.5</td><td>125,342</td><td>27.6</td></tr><tr><td>Services ..............................</td><td>19,369</td><td>32.5</td><td>19,454</td><td>32.1</td><td>36,203</td><td>47.0</td></tr><tr><td>Products .............................</td><td>37,687</td><td>64.9</td><td>28,249</td><td>66.3</td><td>50,626</td><td>67.9</td></tr><tr><td>Total ..................................</td><td>136,688</td><td>27.2</td><td>119,006</td><td>29.3</td><td>212,171</td><td>35.0</td></tr></table>

During the Track Record Period, the general increase in our gross profit margin was mainly driven by our effective procurement management and increased economies of scale due to increased sales. For further details, see “Financial Information—Results of Operations.”

# Value-added Tax Refunds and Government Subsidies

We develop and update, if necessary, operating software incorporated in our solutions and products. In 2013, 2014 and 2015, we received value-added tax refunds in the amount of RMB19.7 million, RMB16.3 million and RMB23.9 million, respectively, representing 3.9%, 4.0% and 3.9%, respectively, of our revenue in these periods. We receive such refund of value-added tax on our sales of self-developed software products as part of the PRC government’s policy of encouraging software development. While sales of software products are generally subject to value-add tax of 17% in the PRC, companies that develop their own software products and have such products registered with the relevant tax authorities in the PRC are entitled to refund of value-add taxes equivalent to the excess over 3% of their value-added tax burden. CDV WFOE, as a registered software enterprise, is entitled to such 14% value-added tax refund based on the recurring sales of our solutions, services and

products. For further details, see “Risk Factors—Risks Relating to our Business and Industry—Receipt of value-added tax refunds has historically been important to our business, and we may not continue to receive such tax refunds in the future” and “Regulations—Tax—Value-Added Tax.”

In 2013, 2014 and 2015, we received government subsidy income in the amount of RMB17.9 million, RMB12.4 million and RMB15.3 million, respectively, representing 3.6%, 3.0% and 2.5%, respectively, of our revenue in these periods. Currently, various levels of the PRC government, including the central and municipal governments and their committees, provide subsidies to entities which engage in technology development under relevant government policies. As a technology-oriented company, we continuously allocate resources in our R&D activities. Therefore, we regularly apply for and receive cash subsidy grants from the PRC government, which may be granted unconditionally or with certain conditions, for our operating and R&D activities. Conditions on government subsidies generally include various minimum qualifications for grantees and restrictions on the use of such cash subsidies. For details, see “Risk Factors—Risks Relating to Our Business and Industry—We may not continue to receive sustainable government subsidies.”

Our Directors are of the view that we will continue to receive value-added tax (“VAT”) refunds and government grants, as we are not aware of any event or circumstance indicating that the laws and regulations governing VAT refunds and government grants might significantly change in the foreseeable future. Such rules have been enacted under a general policy of support for software development by the PRC government, and this supportive policy is intended to boost technology-oriented industries and improve the national economy. These policy directions have been reiterated several times in notices and guidance issued by various PRC governmental authorities, such as The Circular on Value-added Tax Policy on Software Products issued by the Ministry of Finance and SAT in 2011, and The Notice on Further Promoting Software and Integrated Circuit Development and The Notice on Promoting Software and Integrated Circuit Development issued by the State Council in 2011 and 2000, respectively. King & Wood Mallesons, our PRC legal advisors, confirm that they are not aware of any circumstances indicating that there will be material changes to PRC laws and regulations applicable to VAT refunds and government grants as of the date of this Prospectus. Han Kun Law Offices, PRC legal advisors to the Sponsor, concur with the view of King & Wood Mallesons. On that basis, and having discussed with both PRC legal advisors and the Company regarding the issue, the Sole Sponsor confirms that it is not aware of any circumstances that would cause it to disagree with the view of the Directors.

# Selected Line Items of Consolidated Statement of Financial Position

<table><tr><td rowspan="3"></td><td colspan="3">As of December 31,</td></tr><tr><td>2013</td><td>2014</td><td>2015</td></tr><tr><td colspan="3">(RMB in thousands)</td></tr><tr><td>Non-current assets ...............................................................</td><td>180,039</td><td>163,164</td><td>164,310</td></tr><tr><td>Current assets ......................................................................</td><td>568,222</td><td>549,872</td><td>640,399</td></tr><tr><td>Current liabilities.................................................................</td><td>(877,131)</td><td>(918,529)</td><td>(310,669)</td></tr><tr><td>Redeemable convertible preferred shares ..........................</td><td>(563,829)</td><td>(633,255)</td><td> —</td></tr><tr><td>Net current (liabilities)/assets...............................................</td><td>(308,909)</td><td>(368,657)</td><td>329,730</td></tr><tr><td>Total assets less current liabilities........................................</td><td>(128,870)</td><td>(205,493)</td><td>494,040</td></tr><tr><td>Non-current liabilities ..........................................................</td><td>(12,971)</td><td>(6,476)</td><td>(617,924)</td></tr><tr><td>Redeemable convertible preferred shares ..........................</td><td> (—)</td><td> (—)</td><td>(607,832)</td></tr><tr><td>Caildfipta eicenciy and net liabilites ....................................</td><td>(141,841)</td><td>(211,969)</td><td>(123,884)</td></tr></table>

As of December 31, 2015, redeemable convertible preferred shares of RMB607.8 million was classified as non-current liabilities upon the extension of redemption period to March 31, 2017 granted by the preferred shareholders in July 2015. As a result of such extension, we recognized a net current asset position as of December 31, 2015, but our non-current liabilities increased significantly as of that date. Furthermore, our Pre-IPO Investors have provided written confirmations to us that they would deem this Global Offering as a Qualified IPO. As a result, upon completion of a Qualified IPO, all redeemable convertible preferred shares will have been converted to Shares. Accordingly, upon conversion of the redeemable convertible preferred shares into Shares, the liabilities for the redeemable convertible preferred shares will be derecognized, and the fair value of the Shares issued