Medlive Technology Co., Ltd. — Annual Report 2001

Apr 30, 2002

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

廣東科龍電器股份有限公司

(A joint stock limited company incorporated in the People's Republic of China with limited liability)

ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2001

Trading in the shares of Guangdong Kelon Electrical Holdings Company Limited ("Kelon" or the "Company") was suspended at the request of the Company with effect from 10:00 am on 25 April 2002 pending the publication of its results announcement. Application has been made to The Stock Exchange of Hong Kong Limited for the resumption of trading in the shares of the Company with effect from 10:00 am on 26 April 2002.

The Board of Directors of the Company announces the audited consolidated results of the Company and its subsidiaries (collectively the "Group") for the year ended 31 December 2001 together with the 2000 comparative figures, prepared in accordance with International Accounting Standards ("IAS"):

CONSOLIDATED INCOME STATEMENT

For the Year ended 31 December 2001

2001 2000

RMB'000 RMB'000

Note (Note 13)

Turnover 4 4,381,616 3,869,503

Cost of sales (3,574,714 ) (3,265,210 )

Gross profit 806,902 604,293

Other revenue 5 40,935 12,712

Distribution costs (1,206,014 ) (918,196 )

Administrative expenses (1,054,773 ) (636,106 )

Other operating expenses 6 (83,782 ) (13,987 )

Loss from operations (1,496,732 ) (951,284 )

Finance costs (86,689 ) (73,031 )

Share of (loss) profit of associates (611 ) 10,699

Loss before tax (1,584,032 ) (1,013,616 )

Taxation 7 - (7,825 )

Loss after tax (1,584,032 ) (1,021,441 )

Minority interests 12,995 175,324

Loss attributable to shareholders (1,571,037 ) (846,117 )

Retained earnings, beginning of year

• As previously reported 282,349 1,182,639

• Prior year adjustments 8 (158,116 ) -

• As restated 124,233 1,182,639

Profit appropriation - -

Dividends 9 - (212,289 )

(Accumulated losses) Retained earnings,

end of year (1,446,804 ) 124,233

Loss per share 10 RMB (1.58 ) RMB(0.85 )

CONSOLIDATED BALANCE SHEET

As of 31 December 2001

2001 2000

RMB'000 RMB'000

Note (Note 13)

ASSETS

Current assets

Cash and bank 778,191 838,710

Notes receivable 181,189 280,256

Accounts receivable 2 172,028 141,913

Inventories 3 1,225,839 1,736,641

Due from major shareholder 689,636 280,612

Due from related companies 200,808 162,762

Deposits, prepayments and other

receivables 198,438 184,824

Tax recoverable 157,627 186,842

Total current assets 3,603,756 3,812,560

Non-current assets

Leasehold land 303,984 313,970

Property, plant and equipment 2,267,723 2,519,714

Construction-in-progress 31,187 26,171

Investment in associates 284,259 275,737

Goodwill 911 59,381

Due from related companies,

long-term portion 92,140 34,000

Other assets 23,002 40,074

Total non-current assets 3,003,206 3,269,047

TOTAL ASSETS 6,606,962 7,081,607

LIABILITIES AND SHAREHOLERS' EQUITY

Current liabilities

Short-term bank loans 1,323,309 437,700

Long-term bank loans, current portion 204,959 19,777

Notes payable 678,710 216,355

Trade deposits from customers 434,494 530,957

Accounts payable 484,392 506,450

Accruals and other payables 526,607 626,777

Warranty provision 157,357 144,172

Due to related companies 12,907 148

Total current liabilities 3,822,735 2,482,336

Non-current liabilities

Long-term bank loans 29,962 237,306

Pension liabilities 109,094 117,148

Other long-term liabilities 7,398 -

Total non-current liabilities 146,454 354,454

TOTAL LIABILITIES 3,969,189 2,836,790

MINORITY INTERESTS 218,086 254,403

SHAREHOLDERS' EQUITY

Issued capital 992,007 992,007

Reserves 2,874,484 2,874,174

(Accumulated Losses) Retained earnings (1,446,804 ) 124,233

TOTAL SHAREHOLDERS' EQUITY 2,419,687 3,990,414

TOTAL LIABILITIES AND SHAREHOLDERS'

EQUITY 6,606,962 7,081,607

Notes:

1. BASIS OF PRESENTATION

The Group applied the same accounting policies in the financial statements as of 31 December 2001 as those applied in the audited financial statements as of 31 December 2000, except as disclosed in Note 8 below.

2. ACCOUNTS RECEIVABLE

There was no specific credit terms granted to the Group's customers. As of 31 December 2001, the age of accounts receivable was analysed as follows:

2001 2000

RMB'000 RMB'000

Within one year 180,660 219,961

More than one year but not exceeding two years 95,182 81,008

More than two years 49,962 -

325,804 300,969

Less: provision for doubtful accounts (153,776 ) (159,056 )

172,028 141,913

3. INVENTORIES

Inventories consisted of:

2001 2000

RMB'000 RMB'000

Raw materials 355,957 435,023

Work-in-progress 55,159 69,243

Finished goods 1,138,702 1,430,914

1,549,818 1,935,180

Less: provision for inventory obsolescence (323,979 ) (198,539 )

1,225,839 1,736,641

The cost of inventories (excluding provision for slow-moving and obsolete inventory) recognised as expense during the year ended 31 December 2001 amounted to approximately RMB 3,574,714,000 (2000: RMB 3,265,210,000). As of 31 December 2001, approximately RMB 823,124,000 (2000: RMB 721,063,000) of the inventories (mainly raw materials and finished goods) were recorded at net realisable value.

4. TURNOVER

Turnover represents gross invoiced sales (net of value-added tax) after deducting discounts and returns. The Group's turnover by products and their respective contributions to (loss) profit attributable to shareholders are as follows:

Contributions to (loss) profit

Turnover attributable to shareholders

2001 2000 2001 2000

RMB'000 RMB'000 RMB'000 RMB'000

Sales of refrigerators 2,164,254 2,149,213 (680,584 ) (204,501 )

Sales of air-Conditioners 2,177,207 1,574,493 (828,616 ) (666,089 )

Others 40,155 145,797 (61,837 ) 24,473

4,381,616 3,869,503 (1,571,037 ) (846,117 )

No segmental information by geographical location is presented because substantially all of the Group's activities are carried out in the PRC.

5. OTHER REVENUE

Other revenue consisted of:

2001 2000

RMB'000 RMB'000

Sales of scrap materials 22,233 12,537

Others 18,702 175

40,935 12,712

6. OTHER OPERATING EXPENSES

Other operating expenses consisted of:

2001 2000

RMB'000 RMB'000

Loss on devaluation of property, plant and

equipment 47,236 -

Loss on disposals of plant, property and

equipment, and other assets-properties for resale 16,334 5,544

Loss on disposal of subsidiary 11,090 -

Others 9,122 8,443

83,782 13,987

7. TAXATION

Taxation consisted of:

2001 2000

RMB'000 RMB'000

Company and subsidiaries

PRC enterprise income tax - 5,429

Hong Kong profits tax - -

Overseas tax - 65

• 5,494

Associates

PRC enterprise income tax - 2,331

• 7,825

The Company is subject to PRC enterprise income tax at preferential rate of 15% (2000: 15%). The Company's subsidiaries established in the PRC are subject to PRC enterprise income tax at rates applicable to each PRC subsidiary. The Company's subsidiaries in Hong Kong are subject to Hong Kong profits tax at a rate of 16% (2000: 16%). Overseas income tax was provided by subsidiaries with overseas operations at rates applicable in the countries in which the subsidiaries operate.

In year 2001, the Company and all its subsidiaries sustained loss and no income tax was provided.

8. PRIOR YEAR ADJUSTMENTS

As of 31 December 2000, accumulative losses applicable to the minority interest of one of the Group's subsidiary exceeded the minority interest in the equity of the subsidiary ("excess loss") by approximately RMB 158,116,000. Such excess loss was charged to the minority interest in the Group's 31 December 2000 consolidated financial statements with the belief that the minority interest would agree to absorb the excess loss through additional funding. During 2001, management considers that it is not probable that the minority shareholder will provide additional financial contribution to absorb any excess loss. Accordingly, the excess loss of RMB 158,116,000 is considered as a correction of accounting error and is charged to 2000 consolidated income statements.

The effect of an correction of accounting error had been accounted for as prior year adjustments as follows:

2001 2000

RMB'000 RMB'000

Retroactive effect of correction of error on

beginning retained earnings (158,116 ) -

9. DIVIDENDS

Dividends consisted of:

2001 2000

RMB'000 RMB'000

1999 - Final dividends (RMB 0.214 per share) - 212,289

The Company declares dividends based on the lower of retained earnings as reported in the statutory accounts and the financial statements prepared under IFRS. As the statutory accounts have been prepared on an accounting basis other than IFRS, the retained earnings as reported in the statutory accounts are different from the amount reported in the accompanying consolidated income statement.

For the year ended 31 December 2001, the Group companies incurred losses and the directors resolved not to pay any dividend.

10. LOSS PER SHARE

The calculation of loss per share on a weighted average basis is based on the consolidated loss attributable to shareholders of approximately RMB 1,571,037,000 (2000: loss of RMB 846,117,000) and on the weighted average number of 992,007,000 shares (2000: 992,007,000 shares) in issue during the year.

The diluted loss per share is the same as loss per share as there was no diluted potential ordinary shares outstanding during the year.

1. DEPRECIATION

During the year ended 31 December 2001, the Group had depreciation expenses of approximately RMB 336,331,000 (2000: RMB 386,911,000) which were analysed as follows:

2001 2000

RMB'000 RMB'000

Depreciation expenses capitalised as cost

of inventories 238,366 275,413

Depreciation expenses included as distribution

costs 11,634 6,183

Depreciation expenses included as administrative

expenses 86,331 105,315

336,331 386,911

12. IMPACT OF IAS ADJUSTMENTS ON CONSOLIDATED NET LOSS/NET ASSETS

Consolidated net loss Consolidated net assets

for the year ended 31 December as of 31 December

2001 2000 2001 2000

RMB'000 RMB'000 RMB'000 RMB'000

As reported in management

accounts of the Group (1,555,573 ) (830,653 ) 2,402,617 3,957,879

Impact of IAS adjustments:

• Adjustments on fixed assets

revaluation surplus and

related depreciation (15,464 ) (15,464 ) 17,070 32,535

As restated for the Group (1,571,037 ) (846,117 ) 2,419,687 3,990,414

13. PRIOR YEAR COMPARATIVE FIGURES

Certain of the 2000 comparative figures have been modified by retroactive adjustments as disclosed in note 8 and other figures are reclassified to conform to the current year's presentation.

Management Discussion and Analysis

1. Market Review

China's Sustaining Economic Growth

In 2001, while the global economy slowed down, China's economy continued to grow rapidly. China's Gross National Product (GNP) recorded a 7.5% increase, reaching RMB9,593.3 billion. In addition, sales of consumer products in China's market grew 10.1% from 2000, amounting to RMB3,759.5 billion. With the continued expansion of the economy, the Chinese domestic appliances market remained a focus of the PRC's consumer products market.

Increased Competition in China's Domestic Appliances Market

In 2001, the domestic appliances market continued to experience intense competition. Both domestic and international household appliance companies strove their best to promote their products using various strategies: provision of quality after-sales services, comprehensive sales networks, strengthening of brand reputation, as well as mergers and acquisitions between enterprises. Among these strategies, price reduction was the primary strategy used by competing enterprises. The price war has adversely affected the market share of the top five domestic refrigerator manufacturers, which saw a decrease from 72.48% in the previous year to 65.95% in 2001.

With China's entry into the WTO, more foreign household appliances companies, including multinational corporations, will enter into the Chinese market, leveraging their advanced production technology, creative marketing strategies and established brand names to gain their market share in the Chinese market. At the same time, they are progressively merging with China's domestic appliances companies and the stronger players will gradually eliminate the weaker players in the market.

2. Results Review

In 2001, the Group recorded an annual turnover of RMB4.38 billion, representing an increase of 13.2% as compared with 2000. Loss attributable to shareholders was RMB1.57 billion while basic loss per share was RMB1.58.

The board of directors does not recommend the payment of a final dividend to shareholders.(2000: no final dividend)

Although the 2001 results still reported a loss, the Group's overall operating performance has significantly improved from the previous year.

The operational improvement was mainly attributable to the following factors. Firstly, the total sales revenue of the Group recorded an increase of 13% as compared with the previous year, with the air-conditioner business experiencing a 38% growth. Secondly, domestic and overseas sales of refrigerators grew by 20%, maintaining its leading position in the Chinese market. Thirdly, there was a strong growth in overseas sales, where exports grew by nearly 400%, with export revenue increased accordingly. Fourthly, there was reduction in costs as the average costs of sale of refrigerators and air-conditioners have, compared to the previous year, decreased by 9% and 7% respectively, contributing to a reduction in expenditure and an increase in profit.

Despite the improvement of its operations, the Group has yet to make a profit. This was due to the following reasons: firstly, despite an increase in sales revenue and the reduction in the costs, the advertising expenditure was not shared with the Rongsheng Group, resulting in an increase in refrigerator and air-conditioner advertising expenditure of RMB280 million as compared with the previous year. Secondly, as a result of intense market competition and clearance of inventory at reduced prices, the average price of refrigerators recorded an 8% drop as compared with the corresponding period in the previous year, which caused downward pressure on the Group's profit. Thirdly, the existing sales channels are undergoing restructuring, shifting from a wholesale to a retail environment, which will take more time for its intended effect. Fourthly, the Group made provisions for the devaluation of its property in Japan and Hong Kong. Fifthly, the Group also made provisions for the devaluation of some of its investment projects, a one-off amortization of the balance of goodwill, and charging the excess loss to the minority interests in the consolidated financial statement. Finally, management costs remained as high as in the previous year and did not help reduce the Group's expenditure.

Turnover Structure Analysis

Market leader in the domestic refrigerator market

Domestic sales of refrigerators maintained its leading position among the competitors. Sales volumes were at about the same level as compared with 2000. However, sales revenue dropped 9% owing to intense market competition and the processing of the precipitating machines, therefore reducing the selling prices.

Strong growth in domestic air-conditioner sales

The Group recorded healthy growth in the domestic sales of air-conditioners. Sales volumes and sales revenue grew rapidly by 18% and 27% respectively as compared to 2000, despite the intense market competition.

Strong growth in exports

The Group recorded strong growth in exports as a result of its increasing efforts in developing the overseas markets. In 2001, export sales volumes and sales revenue for refrigerators amounted to 380,000 units and RMB250 million respectively, an increase of 6 times and 4 times respectively as compared to 2000. Furthermore, export sales volumes and sales revenue for air-conditioners reached 230,000 units and RMB380 million respectively, representing an increase of 3.9 times and 2.4 times respectively as compared to 2000.

Healthy Financial Fundamentals

During the year under review, the Group continued to implement stringent financial management, building on its strong foundations and maintaining a healthy financial standing. This is mainly reflected in the following areas:

For the year ended 31 December 2001, the Group's total assets exceeded RMB6.6 billion, with net assets at RMB2.4 billion. Bank deposits and cash amounted to RMB778 million.

During the year under review, the Group continued to exercise stringent control over credit risks. Accounts receivables turnover rate fell slightly from 28 days to 29 days. The accounts receivables turnover time is still considered as leading in the domestic appliances industry in China.

During the year under review, inventory management was substantially improved. Inventory turnover rate increased from 1.7 times in the previous year to 2.4 times. The ending inventory was reduced by about RMB400 million as compared to the previous year.

The new management has thoroughly reviewed the Group's long-term investment projects. For the non-profit making or less profitable investments, the management has strategically drawn back and wound down these investments, as well as made provisions for their devaluation. This would further improve the Group's asset operations and increase the return on assets.

3. Policies Implemented in 2001

Sales and Marketing Revolution

After a year of reforming and strengthening of the domestic and overseas networks, Kelon has established a stable and comprehensive sales network in 2001.

With regard to the management of sales network, the Group has established sales branches in 28 provinces in the country which are in full operation in 2001. The refrigerator business and the air-conditioner business launched their "500-5000 Project" and "Hundred-store Project" respectively. These fostered our working relationships with the PRC's hundreds of leading shopping malls, supermarkets, and chain stores located in cities having the strongest purchasing power. This increased the proportion of sales from end retailers and their sales efficiency, offering premier service network to meet customer needs. The Group also upgraded its overseas sales team of over 10 persons to an international sales department of close to 80 persons. Overseas sales branches were established or upgraded in the U.S.A., Europe, Japan and Hong Kong to effectively expand our sales network. The Group's products are now exported and distributed to 74 countries and regions around the world.

In 2001, the Group reaped fruitful results in establishing its sales network under the sales and marketing revolution. The number of contracted distributors increased substantially by 67% from 3,000 to 5,000, while the number of wholesalers increased 25% from 320 to 400. In the air-conditioner business, the Group successfully signed on 450 major retailers as direct distributors, a growth of 160% as compared to the previous year. The Group also signed wholesale cooperative agreements with more than 300 air-conditioner distributors. In addition, with the support of the wholesalers from the respective regions, the Group signed agreements with thousands of second-tier retailers, thereby ensuring that the Group's sales network covers the entire country's core distributors.

The expansion of overseas sales network brought about a significant growth in export volumes. In particular, the sales volumes for refrigerators and freezers reached 530,000 units, an increase of 67% in comparison with the corresponding period in the previous year. This represented 16.6% of the total export volumes of the industry.

The Group expects that through its established sales network, it will maintain its leading position in 2002, further expanding its wholesale and retail coverage. The Group will put more emphasis on the quality of the sales network, enhancing customer relationships from having existing trade relations to having mutually beneficial partnerships. The Group will further consolidate its sales network through timely communications of market information and strengthening of sales and marketing efforts.

Enhancement of Brand Value

In early 2001, Kelon officially launched its new corporate identity (CI), bringing a totally new corporate image to the customers. This new CI was awarded the "Ten Best Corporate Logos in China" in China's first corporate logo contest.

During the reporting period, the Group not only attained rejuvenated growth in its business results, it also increased its brand value. The "Kelon" and "Rongsheng" brands used by the Group were evaluated by an authoritative organization with significant growth in their values in 2001. In May 2001, according to the "PRC Urban Household Appliances Market Survey 2000" jointly released by the Institute of Market Economy under the Development Research Center of the State Council, the Department of Economic Operation of the Ministry of Information Industry, the Research and Development Department of the Information Center of the State and the PRC Home Appliances Trade Association, the Group's "Rongsheng" ("Kelon") refrigerators came first in four areas - "Most Frequently Mentioned Products", "Most Recognized Brand", "Market Share" and "Expected Purchase Rate". This helps maintain the Group's leading position in the market.

Product Technology Innovation

The Group has strong research capabilities, and leads the market with its innovative product designs. With respect to refrigerators, Kelon possesses 10 cutting-edge technologies: super energy-saving, automatic temperature sensor, automatic door-opening, four-level temperature adjustment and soft-cooling, network refrigerator, automatic ice-making, power voltage adjustment, super fresh retaining, super quiet, as well as computer-assisted intelligence control. Five of these technologies lead the world standards. In air-conditioners, the Group has undergone technological transformation including generalization, standardization and minimization to streamline the product series.

In 2001, Kelon successfully registered 173 product patents, a growth of 40% compared to the previous year. Among these product patents, one-fifth was invention patents, which is higher than the average industry standard. During the course of the year, the Group developed 149 types of new refrigerators, of which 58 types were for domestic sales and 91 types were for overseas sales and OEM products. For air-conditioners, newly developed products amounted to 156 types, of which 78 types were for domestic sales and another 78 types were for overseas sales and OEM products.

Service Quality Improvements

In June 2001, Kelon announced the setting up of the "Total Carefree" service brand name and the registration of the "Total Carefree" service trademark, being among one of the first batch of applicants registering for domestic appliances service brand names. In order to seek for joint development with partners, on one hand, Kelon's customer service system provides technical, components, and billing support to service partners, and carry out promotions for core service partners. On the other hand, Kelon actively establishes the "Total Carefree" service chain stores to foster closer relationships with its service partners.

Currently, there are more than 3,000 service partners and 20,000 staff working directly for Kelon's after-sales services. In 2001, according to researches conducted with service partners and distributors, satisfaction levels of Kelon's after-sales services increased by 5.3% and 20% respectively, reaching good or excellent standards. Both "Kelon" and "Rongsheng" brands were elected as the "25 Best After-Sales Services Companies in China", and the "Rongsheng" brand was elected as one of the "Top Ten Best After-Sales Services Companies in China".

Resource Management System Improvements

In 2001, to establish an Enterprise Resource Planning (ERP) system, Kelon and a well-known consulting company joined hands to structure and design a new business flow and information system to provide the Group with effective management methods and enhanced operating efficiencies. The first phase of the project is expected to be completed by 2002, with the second phase commencing in 2003.

Employee Relations and Benefits

During the year under review, Kelon had a total of 7,400 staff, with 2,240 middle and senior technicians, representing 30% of the total staff. The Group acknowledges that professional talent is the key to a company's development. The Group has therefore developed diversified remuneration packages to reward its staff according to their achievements and performance. With respect to staff training, in order to meet the challenges brought about by China's entry into the WTO, the Group appointed a well-known training company in the U.S.A. from the second half of the year to provide managerial level training to its branch managers, aiming at raising their competitiveness. The Group will continue to recruit new talent into the company to create greater value for the Group.

4. Appointment of New Directors

On 29 October 2001, Mr. Gu Chu Jun, through a sale and purchase agreement between Greencool Enterprise Development Company Limited and Guangdong Kelon (Rongsheng) Group Company Limited, acquired the control of a 20.64% equity interest in the form of legal person shares at a final consideration of RMB348 million. The transfer procedures were completed on 18 April 2002, and Greencool Enterprise Development Company Limited, 90% owned by Mr. Gu Chu Jun, became the single largest shareholder of the Company.

During the Extraordinary General Meeting held on 23 December 2001, Mr. Gu Chu Jun, Mr. Liu Cong Meng, Mr. Zhang Hong, Mr. Fang Zhi Guo and Mr. Yan You Song were appointed as executive directors, and Mr. Chan Pei Cheong, Andy, Ms. Yu Xiaoyang and Mr. Chen Wen Hui were appointed as non-executive directors. Mr. Gu Chu Jun was elected by the Board of Directors as Chairman on the same day.

Mr. Xu Tie Feng, Mr. Qu Yunbo, Ms. Yu Chor Woon Carol, Mr. Cai Shi Er, Mr. Li Bao Guo, Dr. Philip Yu Hong Wong, Mr. Li Kwok Wing, Meocre and Mr. Zhang Xusheng resigned as directors on 23 December 2001.

5. Future Prospects

Looking ahead, in light of the PRC's booming economy, as well as the increasing domestic salaries and rising purchasing power, the domestic household appliances market will have tremendous room for expansion.

Technologically Led and Profitability Driven

In the coming year, Kelon is reviewing and devising a five-year development strategy, with the operating concept "Technologically Led and Profitability Driven". The Group is refocusing on realizing profits as the priority for its operations to sustain the momentum for corporate development. The Group is looking forward to consolidating and strengthening the Group's financial fundamentals to sustain the Group's success, bringing favorable returns to shareholders.

As such, the Group will focus on developing its core businesses - refrigerators and air-conditioners. The Group will leverage its strong technological fundamentals to create value-added features for its products, instead of adopting unhealthy price-cutting trends. The Group will innovate and launch new hi-tech, high value-added and high profit margin products. The Group will use its product attributes such as value-added high energy-saving features as the weapon for competition, and at the same time command a premium for the Group's product prices. The Group will also focus on satisfying consumer demand for product quality and efficiency, which will help maintain the sales volumes and profitability.

Innovative Products

In early 2002, the Group launched the industry's revolutionary products: refrigerators with "Independent Multi Cycling Refrigeration" (IMCR) technology and the "Shuang Xiao Wang" air-conditioners.

Refrigerators with IMCR technology broke traditional concepts for refrigerators with individual cooling and freezing compartments. In this refrigerator, the functions of cooling and freezing are operated independently. Through independent control of the cooling and freezing operations, temperature controls in cooling and freezing can be precisely achieved, bringing the refrigerator's energy-saving level to new heights and perfecting the precise temperature control capability. This emergence of technology from Kelon will strengthen the competitiveness of the "Kelon" and "Rongsheng" brands in the domestic and overseas markets, raising the technological added value and establishing the foundation for the Group to achieve profits this year.

The "Shuang Xiao Wang" air-conditioner is a new product adopting and optimizing with the highly efficient, energy-saving, and environmentally friendly "Greencool Refrigerant", which enables high and sustained cooling and heating efficiencies. Apart from its high cooling and heating efficiencies, its most significant characteristic is its energy-savings. The current cooling efficiency of domestic air-conditioners is between 2.4-3.2, while the heating efficiency is between 2.5-3.3. "Shuang Xiao Wang" air-conditioners have now attained a cooling efficiency of 3.8 and a heating efficiency at a world record breaking level of 4.2.

Exports and OEM Business Development

To keep in closer contact with overseas markets and customers, the Group plans to set up two more offices (or branches) in the U.S.A. and Europe in 2002. In addition, the Group will look into establishing close partnerships with the world's famous electrical appliances manufacturers and distributors to form a strong network base to facilitate the Group's future development.

In 2002, the Group targets to meet the market demands of developed countries such as the U.S.A. and Europe for a wider range of air-conditioners, small refrigerators and medium-sized two-door refrigerators. For dehumidifiers with its key market in North America, the Group will not only offer strong support to the product technology development, it will also aggressively expand market coverage of dehumidifiers into the emerging markets.

With regard to overseas marketing communications, the Group will actively participate in and capitalize on professional household appliance exhibitions to strengthen its presence in professional household appliance magazines and websites, and to enhance the promotion of the "Kelon" brand in countries and regions with high market potential. The Group also has initial plans to penetrate Europe, the U.S.A. and Asia Pacific regions through the acquisition of controlling stakes in enterprises with overseas distribution networks, paving the way for Kelon to enter international markets and to raise sales performance.

Stringent Cost Controls

The Group will continue to adopt the open tender procurement system which was commenced in 2001, perfecting the pricing information system, adjusting the procurement process, and introducing higher quality, low-price, strong and reliable suppliers. This will improve procurement quality and efficiency, and thus reduce cost margins. In addition, the Group will try to save costs by strengthening its budget control and management plan, and ensuring the implementation of cost-savings in phases.

The Group will further adjust its investment strategies by winding down short-term non-profit making investments. The Group will also streamline the management team by changing the organizational structure.

Brand Promotion

The Group will launch a series of consecutive promotional activities to market its innovative products and enhance its brand image. In particular, the Group has purchased prime time on CCTV to air its TV commercials at a low price for advertising during the peak seasons from March to June 2002 and from November to December 2002.

Human Resources Motivation

In 2002, the Group will further strengthen its human resources reform by boosting, nurturing and retaining talent as its mission.

Firstly, the salary incentive system will be further rationalized to boost staff enthusiasm. Secondly, more internal and external specialists will be brought in to provide training to all staff to enhance their competitive advantages. In addition, the Group will recruit more qualified and experienced talent, especially in sales and marketing, to train and transform the conventional sales team into contemporary sales and marketing professionals, conversant with multi-knowledge and skills in logistics, brand and distribution, to enhance their value.

Future Prospects

Following the shareholding and management changes, new atmosphere and dynamics have been injected into the Group. The corporate development direction is also clearly set. The new management's experience and professional expertise in the refrigeration industry, together with their vision and insight, will effectively open a new chapter in the development of Kelon's business.

Kelon is set to meet market challenges and opportunities with its advanced technologies, innovative products, excellent after-sales services, effective domestic and international sales and marketing practices, as well as talented professionals. Kelon will be heading to a new milestone in its history, reinstating its advantages to become a stronger and successful presence in the domestic appliances market.

DIVIDEND

The directors resolved not to pay any dividend for the year ended 31 December 2001 (the Group did not pay any dividend for the year ended 31 December 2000), and recommended that the accumulated losses of approximately RMB1,446,804,000 as at 31 December 2001 be carried forward.

LIQUIDITY AND SOURCES OF FUNDS

Net cash outflow for operating activities was approximately RMB111,631,000 (2000 - net cash inflow of approximately RMB1,378,813,000) for the year ended 31 December 2001.

As of 31 December 2001, the Group had cash and bank deposits amounting to approximately RMB778,191,000 (2000 - RMB838,710,000), of which approximately RMB97,231,000 (2000 - RMB192,314,000) was denominated in foreign currencies, and bank loans amounting to approximately RMB1,558,230,000 (2000 - RMB694,783,000), of which approximately RMB60,530,000 (2000 - RMB57,083,000) was denominated in foreign currencies.

Total capital expenditures for the year ended 31 December 2001 amounted to approximately RMB218,306,000 (2000 - RMB305,809,000) and the major expenditure item was the purchase of new equipment for operating purpose and fixtures for promotion purpose. The capital expenditures were funded by the working capital of the Group.

EMPLOYEES' REMUNERATION

As of 31 December 2001, the Group has approximately 7,400 employees (2000 : 8,600 employees). Staff cost (including pension costs) for the year ended 31 December 2001 amounted to approximately RMB 309,683,000 (2000 : RMB272,548,000).

CHARGES ON THE GROUP'S ASSETS

As of 31 December 2001, the Group's fixed assets of approximately RMB 161,099,000 (2000: RMB118,820,000) were pledged as security for the Group's bank loans.

EXPOSURE TO EXCHANGE RATES FLUCTUATION

Since substantially all of the Group's sales and purchases were denominated in RMB, the Group had no significant exposure to exchange rate fluctuation and no financial instrument was used to hedge exchange rate risk.

CONTINGENT LIABILITIES

As of 31 December 2001, the Group had contingent liabilities in relation to guarantee for loan facilities granted to associate(s) of approximately RMB3,975,000.

SHARE CAPITAL STRUCTURE

As of 31 December 2001, the share capital structure of the Company was as follows:

Percentage of Total

Number of Shares Issued Share Capital (%)

Domestic Shares 422,416,755 42.58

H Shares 459,589,808 46.33

A Shares 110,000,000 11.09

992,006,563 100

TOP TEN/SUBSTANTIAL SHAREHOLDERS

As of 31 December 2001, the top 10 shareholders of the Company (including shareholders who registered an interest of more than 10% of the issued share capital) were as follows:

Percentage of

the total issued

Number share capital of

Name of Shareholder Class of shares held the Company (%)

Guangdong Kelon (Rongsheng) Domestic legal 337,915,755 34.06 *

Group Company Limited person shares

The Hongkong and Shanghai Banking H shares 65,861,654 6.64

Corporation Limited

Bank of China (Hong Kong) Limited H shares 37,223,000 3.75

Standard Chartered Bank H shares 36,985,800 3.73

Citibank, N.A. H shares 24,617,802 2.48

XINDAS LIMITED H shares 13,155,000 1.32

Tai Fook Securities Company Limited H shares 11,181,000 1.13

Guotai Junan Securities (Hong Kong) Ltd. H shares 10,414,000 1.05

DBS Vickers Securities (HK) Limited H shares 10,413,000 1.05

Hang Seng Securities Limited H shares 10,241,000 1.03

* Guangdong Kelon (Rongsheng) Group Company Limited ("GKG") and Greencool Enterprise Development Company Limited ("Greencool") entered into a sale and purchase agreement on 29 October 2001 (and such agreement was amended on 5 March 2002) under which GKG agreed to sell to Greencool 204,775,755 legal person shares of RMB1.00 each in the Company, representing approximately 20.64% of the existing issued share capital of the Company. Mr Gu Chu Jun holds 90% of the total investment of Greencool. The transfer procedures in respect of the 204,775,755 legal person shares in the Company were completed by GKG and Greencool on 18 April 2002.

INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVES

As of 31 December 2001, the directors, supervisors and chief executive of the Company had the following beneficial interests in the Company's PRC domestic shares of RMB1 each, A shares or H shares (within the meaning of the Securities (Disclosure of Interests) Ordinance ("SDI Ordinance")) as recorded in the Register required to be kept by the Company pursuant to Section 29 of the SDI Ordinance:

Name Position Nature of Interest Number of Shares

Mr. Gu Chu Jun Director Corporate 204,775,755 legal person shares*

Corporate 3,830,000 H shares*

Li Di Qiang Supervisor Personal/family 105,000 domestic employee shares

He Si Supervisor Personal/family 50,000 domestic employee shares

* GKG and Greencool entered into a sale and purchase agreement on 29 October 2001 (and such agreement was amended on 5 March 2002) under which GKG agreed to sell to Greencool 204,775,755 legal person shares of RMB1.00 each in the Company, representing approximately 20.64% of the existing issued share capital of the Company. Mr Gu Chu Jun holds 90% of the total investment of Greencool. The transfer procedures in respect of the 204,775,755 legal person shares in the Company were completed by GKG and Greencool on 18 April 2002.

** Mr. Gu Chu Jun controls approximately 62.5% of the issued share capital of Greencool Technology Holdings Limited, a company listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited. Two subsidiaries of Greencool Technology Holdings Limited hold 3,830,000 H shares in the Company, representing approximately 0.39% of the issued share capital of the Company.

Save as disclosed above, the Company had no notice of any interests required to be recorded under Section 29 of the SDI Ordinance or pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as of 31 December 2001.

PURCHASE, SALE OR REDEMPTION OF SHARES

During the year ended 31 December 2001, neither the Company nor any of its subsidiaries had purchased, sold or redeemed any of the Company's listed shares.

CODE OF BEST PRACTICE

Paragraph 14 of the Code of Best Practice requires the Board of Directors to establish an audit committee. However, since the appointment of the current Board of Directors on 23 December 2001, no audit committee has been appointed.

Save as disclosed above and the matters disclosed in the announcement made by the Company on 29 November 2001 in relation to the Company's Report in respect of the Corrective and Remedial Measures in response to the Inspection by Guangzhou Securities Administration Office of China Securities Regulatory Commission, the Board of Directors considers that the Company has complied with the Code of Best Practice as set out in Appendix 14 of the Listing Rules throughout the year ended 31 December 2001.

DETAILED ANNUAL RESULTS ANNOUNCEMENT

A detailed annual results announcement containing all the information required by paragraphs 45(1) to 45(3) of Appendix 16 of The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong will be published on the Stock Exchange website (http://www.hkex.com.hk) in due course.

By the order of the Board of

Guangdong Kelon Electrical Holdings Company Limited

Gu Chu Jun

Chairman

Shunde, the PRC, 24 April 2002

AUDITORS' REPORT

To the Shareholders of Guangdong Kelon Electrical Holdings Company Limited:

(Incorporated in the People's Republic of China with limited liability)

We have audited the consolidated balance sheet of Guangdong Kelon Electrical Holdings Company Limited (the ''Company") and its subsidiaries (hereinafter collectively referred to as the ''Group") as of 31 December 2001, and the related consolidated statement of income, changes in equity, and cash flows for the year then ended, and the balance sheet of the Company as of 31 December 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

Except as discussed in the following paragraphs, we conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

We draw attention to Note 1 in the financial statements. The Group incurred net losses of RMB 1,571 million and RMB 846 million during the years ended 31 December 2001 and 31 December 2000, respectively. As of 31 December 2001, the Group's current liabilities exceeded its current assets by RMB 219 million. The Group may have possible additional losses and reclassification of assets arising from the matters described in the paragraphs below which would increase its losses and current liabilities. There exists a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern. Steps taken by the management to address this situation are set out in Note 1 in the financial statements.

In late 2001 and early 2002, most of the board members and senior management of the Company who are responsible for the operations of 2001 resigned from the Company. As such, we were unable to obtain reasonable representations and assurances from management on which we could rely for the purpose of our audit and there were no satisfactory audit procedures that we could perform to obtain reasonable assurance that all material transactions were properly recorded and completely disclosed.

During 2001, a subsidiary of the Group executed a debt guarantee for RMB 230 million to secure borrowings of Guangdong Kelon (Rongsheng) Group Company Limited (GKG), the major shareholder, without proper approvals. This guarantee has been enforced and the Company has settled RMB 211 million of GKG's liabilities as a result. This incident indicated inadequate controls over the granting of guarantees. Management of the Group has represented that to date they have not become aware of any further liability arising from unauthorised guarantees. However, we are unable to identify all contingent or real liabilities that might have arisen from guarantees issued by the Group and to assess their effect on the financial statements. Steps taken by the management of the Group to address the situation are set out in Note 39.

Included in the consolidated balance sheet of the Group are leasehold land of RMB 304 million, property, plant and equipment of RMB 2,268 million, construction-in-progress of RMB 31 million and investment in associates of RMB 284 million. Included in the balance sheet of the Company are leasehold land of RMB 207 million, property, plant & equipment of RMB 1,147 million, construction-in-process of RMB 17 million, investment in subsidiaries of RMB 1,548 million and investment in associates of RMB 303 million. According to IFRS 16, the Group is required to revalue its property, plant and equipment at regular intervals, normally three to five years. The last valuation was performed on 20 April 1996. The Group is currently performing a valuation of its assets. As the valuation has not been completed, the valuation results have not been reflected in the financial statements. This does not comply with the requirements of IFRS 16. Furthermore, given the operating results of 2000 and 2001 and the fast changing market condition in which the Group operates, we are unable to assess the appropriateness of the management assumptions underlying the Group's discounted cash flow analysis used to assess the recoverable amount of the leasehold land, property, plant and equipment, construction-in-progress, investment in associates and investment in subsidiaries, and the possible impact of asset impairment.

Included in the accrual and other payable balance on the Group's and the Company's balance sheets as at 31 December, 2001 is an accrual for advertising fee amounting to RMB 160 million. This accrual is provided for advertising services performed in 2001. We are unable to obtain sufficient evidence to support that the related advertising services have been performed.

Included in the receivables from major shareholder on the Group's and the Company's balance sheets as at 31 December, 2001 is a receivable from GKG of RMB 862 million which resulted from payments made to GKG in 2001. The Group and the Company recorded a provision against this receivable in the amount of RMB 172 million. The management is currently negotiating with GKG on the method and timing of settlement of the outstanding balance. We are unable to assess whether the provision is adequate and whether any reclassification may be required to reflect the timing of the ultimate settlement.

Included in long-term receivables from related parties on the Group's and the Company's balance sheets is a receivable from Kelon Employee Union of RMB 58 million. We are unable to assess whether any provision is required to reflect the collectibility of the receivable from Kelon Employee Union.

Because of the significance of the matters discussed in the preceding paragraphs, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state of affairs of the Group and the Company as at 31 December 2001 and of the loss and cash flows of the Group for the year then ended in accordance with International Financial Reporting Standards, as published by International Accounting Standards Board, and whether the financial statements have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

ARTHUR ANDERSEN & CO

Certified Public Accountants

Hong Kong, the People's Republic of China

24 April 2002

SUPPLEMENTARY INFORMATION AS REQUIRED BY THE STOCK EXCHANGE OF HONG KONG LIMITED IN RELATION TO THE COMPANY'S A SHARE ANNUAL RESULTS ANNOUNCEMENT

FINANCIAL SUMMARY

(Prepared in accordance with PRC Accounting Standards ("PRC GAAP"))

For the year ended

31 December

2001 2000

(Audited) (Audited)

RMB RMB

Sale 4,720,466,432 4,410,880,037

Net loss profit (1,555,573,089 ) (830,653,498 )

Shareholder's equity

(excluding minority interests) 2,628,747,664 4,220,988,424

Loss per share (1.57 ) (0.84 )

Net assets per share 2.42 3.99

Return on net assets (64.7% ) (21% )

Adjusted net assets per share 2.20 3.76

Notes:

1. The above financial summary is extracted from the audited results of the Group.

The number of shares of the Company outstanding as of 31 December 1999 and 31 December 2000 were 992,006,563 shares.

3. The weighted average number of shares of the Company for the year ended 31 December 1999 and 2000 were 943,486,003 shares and 992,006,563 shares, respectively.

4. The calculation formulae for the key financial indicators as shown in financial summary are as follows:

Loss per share = net (loss)/weighted average number of shares for the Period

Net assets per share = shareholders' equity as of the Period end/number of shares outstanding as of the Period end.

Return on net assets = net (loss)/shareholders' equity as of the Period end 100%

Adjusted net assets per share = (shareholders' equity as of the Period end-accounts receivable aged over 3 years-deferred expenditures -pre-operating expenditures-long-term deferred expenditures)/number of shares outstanding as of the Period end.

AUDITORS' REPORT

To the Shareholders of Guangdong Kelon Electrical Holdings Company Limited:

Arthur Andersen Hua Qiang Certified Public Accountants (hereinafter referred to as "We") have audited the consolidated balance sheet of Guangdong Kelon Electrical Holdings Company Limited (the "Company") and its subsidiaries (hereinafter collectively referred to as the "Group") as of 31 December 2001, the related consolidated statement of income and profit appropriation, and the consolidated statement of cash flows of the Group for the year then ended, and the balance sheet of the Company as at 31 December 2001, the statement of income and profit appropriation, and the statement of cash flows of the Company for the year then ended. These financial statements are the responsibility of the Group and the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with "China's Independent Auditing Standards". Our audit included such tests of the accounting records and such other auditing procedures as we considered necessary and appropriate to the circumstances of the Group and the Company.

As disclosed in Note 1 in the financial statements, the Group incurred net loss of approximately RMB 1,555,573,000 and RMB 830,653,000 during the years 2001 and 2000, respectively. As of 31 December 2001, the Group had negative working capital of approximately RMB 182,501,000. The Group may have possible additional losses and reclassification of assets arising from the matters described in the paragraphs below which will increase its losses and current liabilities. There exists a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern. Steps taken by the management to address this situation are set out in Note 1 to the financial statements.

In late 2001 and early 2002, most of the board members and senior management of the Company who are responsible for the operations of 2001 have resigned from the Company. We are unable to obtain reasonable representation and assurance from management on which we could rely for the purpose of our audit and there were no satisfactory audit procedures that we could perform to obtain reasonable assurance that all material transactions were properly recorded and completely disclosed.

During 2001, a subsidiary of the Group executed a debt guarantee of RMB 230 million to secure borrowings of Guangdong Kelon (Rongsheng) Group Company Limited (GKG), the major shareholder, without proper approval. This guarantee has been enforced and the Company has settled RMB 211 million of GKG's liabilities as a result. This incident indicates inadequate control over the granting of guarantees. The management of the Group represents that up to now, they are not aware of any other liability arising from unauthorised guarantees. However, we are unable to identify all contingent or real liabilities that might have arisen from guarantees issued by the Group and assess their impacts on the financial statements. Steps taken by the management of the Group to address the situation are set out in Note 8 to the financial statements.

Included in the consolidated balance sheet of the Group are land use right of approximately RMB 304,000,000, fixed assets of RMB 2,058,000,000, construction-in-progress of RMB 31,000,000 and long-term equity investment of RMB 260,000,000. Included in the balance sheet of the Company are land use right of approximately RMB 207,000,000, fixed assets of RMB 1,000,000,000, construction-in-progress of RMB 17,000,000 and long-term equity investment of RMB 1,165,000,000. Given the operating results during year 2000 and 2001, and the rapidly changing market conditions, we are unable to assess the appropriateness of the management's assumptions underlying the Group's discounted cash flow analysis to assess the recoverable amount of the land use right, fixed assets, construction-in-progress and long-term equity investment, and the possible impact of asset impairment.

Included in the accrual of the Group's and the Company's balance sheets as of 31 December 2001 is an accrual for advertising expenditures of RMB 160,000,000. This accrual is provided for the advertising services received during year 2001. We are unable to obtain sufficient evidence to support that related advertising services have been performed.

Included in the balance sheets of the Group and the Company as of 31 December 2001 are notes receivable of RMB 170,000,000 and other receivable of RMB 692,000,000 due from GKG, which resulted from payments to GKG in 2001. The Group has made provision against these receivables for the amount of RMB172,000,000. The management is currently negotiating with GKG on the method and timing of settlement of the outstanding balance. We are unable to assess whether the provision is adequate and whether any reclassification may be required to reflect the timing of ultimate settlement.

Included in long-term receivables of the Group's and the Company's balance sheets is receivable from Kelon Employee Union of RMB 58,000,000. We are unable to assess whether any provision is required to reflect the collectibility of this receivable.

Because the impact of the matters discussed in the preceding paragraphs on the financial statements cannot be ascertained, we are unable to form an opinion as to whether the financial statements give a true and fair view of the financial positions of the Group and the Company as of 31 December 2001, the results of operations and the cash flows of the Group and the Company for the year then ended, and whether the financial statements have been properly prepared in accordance with the requirements of "Accounting Standards for Business Enterprises", "Accounting Regulations for Business enterprise", "Temporary Regulations for Consolidated Financial Statements" and other relevant regulations of the PRC.

Arthur Andersen ‧Hua Qiang

Certified Public Accountants

Signed on Original Chinese Version

(Chen Yun Jin)

Beijing, the PRC

Signed on Original Chinese Version

24 April 2002 (He Ying Fan)

BALANCE SHEETS

As of 31 December 2001

Presented by: Guangdong Kelon Electrical Holdings

Company Limited and its subsidaries Expressed in RMB

The Group The Company

31 December 31 December 31 December 31 December

2001 2000 2001 2000

Assets Note (Restated, Note 3) (Restated, Note)

1. Current assets

Cash and bank deposits 6(1) 778,191,077 838,710,032 492,198,063 461,842,796

Short-term investments - - - -

Notes receivable 6(2) 351,188,636 280,255,647 346,601,619 4,123,740

Dividend receivable - - - -

Interest receivable - - - -

Accounts receivable 6(3) 220,899,049 297,542,830 127,250,589 6,424,447

Other receivables 6(4) 920,145,160 426,048,067 1,944,443,323 2,279,594,405

Prepayments 6(5) 68,102,966 67,149,203 16,158,696 21,216,776

Subsidies receivable - - - -

Inventories 6(6) 1,225,838,916 1,736,641,111 801,622,736 21,186,421

Deferred expenditures 4,302,593 7,448,872 1,075,281 5,081,115

Investments in debt securities,

current portion - - - -

Other current assets 592,731 - 592,731 -

Total current assets 3,569,261,128 3,653,795,762 3,729,943,038 2,799,469,700

2. Long-term investments

Long-term equity

investments 6(7) 259,892,540 338,261,758 165,048,043 1,382,562,809

Investments in debt securities,

non-current portion - - - -

Total long-term investments 259,892,540 338,261,758 1,165,046,643 1,382,562,809

3. Fixed assets

Fixed assets, cost 6(8) 3,383,892,823 3,367,402,922 1,410,203,800 1,340,207,640

Less: Accumulated depreciation 6(8) (1,278,861,600 ) (1,063,555,842 ) (409,811,665 ) (300,895,062 )

Net book value 6(8) 2,105,031,223 2,303,847,080 1,000,392,135 1,039,312,578

Less: Provision for fixed assets

impairment loss 6(8) (47,236,170 ) - - -

Net book amount 2,057,795,053 2,303,847,080 1,000,392,135 1,039,312,578

Project materials - - - -

Construction-in-progress 6(9) 31,187,206 26,171,005 16,597,973 19,626,516

Disposal of fixed assets - - - -

Total fixed assets 2,088,982,259 2,330,018,085 1,016,990,108 1,058,939,094

4. Intangible assets

and other assets

Intangible assets 6(10) 305,783,805 313,969,738 209,127,331 213,998,964

Long-term deferred

expenditures 6(11) 210,904,281 223,060,602 108,379,846 39,217,469

Long-term receivables 7(2) 92,139,947 34,000,000 58,139,947 -

Other long-term assets - - - -

Total intangible assets and

other assets 608,828,033 571,030,340 375,647,124 253,216,433

5. Deferred tax

Deferred tax assets - - - -

Total Assets 6,526,963,960 6,893,105,945 6,287,626,913 5,494,188,036

The accompanying notes form an integral part of these financial statements.

Presented by: Guangdong Kelon Electrical Holdings

Company Limited and its subsidaries Expressed in RMB

The Group The Company

31 December 31 December 31 December 31 December

Liabilities and 2001 2000 2001 2000

Shareholders' Equity Note (Restated, Note 3) (Restated, Note 3)

1. Current liabilities

Short-term borrowings 6(12) 1,323,309,386 437,700,000 965,700,000 355,700,000

Notes payable 6(13) 678,710,489 216,354,679 824,359,379 151,203,183

Accounts payable 6(14) 578,148,753 506,449,676 9,318,641 3,812,526

Trade deposits from customers 6(15) 440,396,170 553,272,123 432,266,240 -

Salary payable 55,442,703 64,363,358 35,287,596 29,124,040

Welfare payable 2,392,998 3,511,001 798,006 40,282

Dividend payable 3,187 - - -

Tax payable 6(16) (157,832,050 ) (186,842,451 ) (168,419,901 ) (16,379,242 )

Payable to others 4,287,088 1,990,693 2,443,887 1,847,785

Other payables 6(17) 73,887,114 163,179,096 439,111,897 287,625,316

Accruals 6(18) 389,735,410 373,291,354 377,674,560 14,423,878

Provision 6(19) 157,356,546 164,616,546 157,356,546 -

Long-term liabilities, current

portion 6(20) 204,958,929 19,777,334 200,000,000 -

Other current liabilities 965,158 - - -

Total Current liabilities 3,751,761,881 2,317,663,409 3,275,896,851 827,397,768

2. Non-current liabilities

Long-term borrowings 6(20) 29,961,937 237,306,327 - 200,000,000

Debentures - - - -

Long-term payable 6(21) 116,492,478 117,147,785 113,263,739 113,621,705

Payable for special purposes - - - -

Accrued liabilities of

investee enterprise 6(7) - - 495,849,789 395,289,441

Other non-current liabilities - - - -

Total non-current liabilities 146,454,415 354,454,112 609,113,528 708,911,146

3. Deferred tax

Deferred tax liabilities - - - -

Total liabilities 3,898,216,29 2,672,117,521 3,885,010,379 1,536,308,914

4. Minority interests 6(22) 226,131,130 263,109,302 - -

5. Shareholders' equity

Share capital 6(23) 992,006,563 992,006,563 992,006,563 992,006,563

Capital reserve 6(24) 2,451,222,837 2,451,222,837 2,451,222,837 2,451,222,837

Revenue reserve 6(25) 343,742,703 343,742,703 343,742,703 343,742,703

Including: Statutory common

welfare fund 114,580,901 114,580,901 114,580,901 114,580,901

(Accumulated losses)

Retained earnings 6(26) (1,380,906,800 ) 174,666,289 (1,380,906,800 ) 174,666,289

Exchange difference (3,448,769 ) (3,759,270 ) (3,448,769 ) (3,759,270 )

Total shareholders' equity 2,402,616,534 3,957,879,122 2,402,616,534 3,957,879,122

Total liabilities and

shareholders' equity 6,526,963,960 6,893,105,945 6,287,626,913 5,494,188,036

The accompanying notes form an integral part of these financial statements.

Statements of Impairment Provision for Assets

For the year ended 31 December 2001

Presented by: Guangdong Kelon Electrical Holdings

Company Limited and its subsidaries Expressed in RMB

The Group

2001 2000 (Restated, Note 3)

Beginning Beginning

Description balance Addition Reversal End balance balance Addition Reversal End balance

1. Provision for

doubtful accounts 159,056,119 235,223,026 (31,046,354 ) 363,232,791 99,435,892 59,620,227 - 159,056,119

Including: Accounts

receivable 159,056,119 62,813,993 (31,046,354 ) 190,823,758 99,435,892 59,620,227 - 159,056,119

Other receivables - 172,409,033 - 172,409,033 - - - -

1. Provision for impairment

loss of short-term

investments - - - - - - -

Including: Investments

in stock securities - - - - - - -

Investments in debt

securities - - - - - - -

1. Provision for inventory

obsolescence 198,538,611 281,652,428 (156,212,234 ) 323,978,805 76,216,020 163,067,000 (40,744,409 ) 198,538,611

Including: Raw materials 32,264,408 16,235,897 - 48,500,305 39,651,892 31,532,000 (38,919,484 ) 32,264,408

Work-in-progress 1,968,783 - (322,186 ) 1,646,597 3,793,708 - (1,824,925 ) 1,968,783

Commodites 164,305,420 265,416,531 (155,890,048 ) 273,831,903 32,770,420 131,535,000 - 164,305,420

1. Provison of impairment

loss of

long-term investment 74,129,000 71,200,641 - 145,329,641 74,129,000 - - 74,129,000

Including: Long-term

equity investments 74,129 71,200,641 - 145,329,641 74,129,000 - - 74,129,000

Long-term investments

in debt securities - - - - - - - -

1. Provision for impairment

loss of fixed assets - 47,236,170 - 47,236,170 - - - -

Including: Buildings - 47,236,170 - 1 47,236,170 - - - -

Machinary and equipment - - - - - - - -

1. Provision for impairment

loss of intangible assets - - - - - - - -

Including: Technology know-how - - - - - - - -

Trademark - - - - - - - -

1. Provision for impairment loss of

construction-in-progress - - - - - - - -

1. Provision for impairment

loss of entrusted loans - - - - - - - -

The accompanying notes form an integral part of these financial statements.

Presented by: Guangdong Kelon Electrical

Holdings Company Limited and its subsidaries Expressed in RMB

The Group

2001 2000 (Restated, Note 3)

Transferred

Beginning from Beginning

Description balance subsidiaries Addition Reversal End balance balance Addition Reversal End balance

1. Provision for

doubtful accounts - 120,156,488 235,223,026 - 355,379,514 81,255,717 - (81,255,717 ) -

Including: Accounts

receivable - 120,156,488 62,813,993 - 182,970,481 81,255,717 - (81,255,717 ) -

Other receivables - - 172,409,033 - 172,409,033 - - - -

1. Provision for impairment

loss of short-term investm - - - - - - - - -

Including: Investments

in stock securities - - - - - - - - -

Investments

in debt securities - - - - - - - - -

1. Provision for inventory

obsolescence - 198,538,611 277,776,722 (156,212,234 ) 320,103,099 22,216,000 - (22,216,000 ) -

Including: Raw materials - 32,264,408 12,360,191 44,624,599 10,005,121 - - (10,005,121 ) -

Work-in-progress - 1,968,783 - (322,186 ) 1,646,587 1,103,350 - (1,103,350 ) -

Commodites - 164,305,420 265,416,531 (155,890,046 ) 273,831,903 11,107,529 - (11,107,529 ) -

1. Provison for impairment

loss of long-term

investmen 74,129,000 - 59,381,641 - 133,510,641 74,129,000 - - 74,129,000

Including: Long-term

equity investments 74,129,000 - 59,381,641 - 133,510,641 74,129,000 - - 74,129,000

Long-term investments

in debt securities - - - - - - - -

1. Provision for

impairment of

fixed assets - - - - - - - -

Including: Buildings - - - - - - - -

Machinary and equipment - - - - - - - -

1. Provision for impairment

loss of intangible assets - - - - - - - -

Including: Techonology

know-how - - - - - - - -

Trademar - - - - - - - -

７．－Provision for impairment

loss of construction

-in-progress - - - - - - - -

1. Provision for impairment

loss of entrusted loans - - - - - - - -

The accompanying notes form an integral part of these financial statements.

STATEMENTS OF INCOME AND PROFIT APPROPRIATION

For the year ended 31 December 2001

Presented by: Guangdong Kelon Electrical Holdings Company

Limited and its subsidaries Expressed in RMB

The Group The Company

Descritpion Note 2001 2000 2001 2000

(Restated, (Restated,

Note 3) Note 3)

1. Revenue from

principal

business 4,720,466,432 4,410,880,037 3,989,120,183 154,670,280

Less:

Discounts and

allowances (338,850,064 ) (541,377,420 ) (290,801,124 ) (11,858,737 )

Revenue from

principal

business, net 6(27) 4,381,616,368 3,869,502,617 3,698,319,059 142,811,543

Less: Costs of sales 6(27) (3,615,716,071 ) (3,250,533,167 ) (3,061,260,085 ) (136,006,123 )

Sur-taxes (70,884 ) - (68,134 ) -

2. Profit from

principal

business 765,829,413 618,969,450 636,990,840 6,805,420

Add: Other operating

profit (loss) 19,930,301 11,333,777 9,098,660 (448,135 )

Less: Distribution

costs (1,205,943,268 ) (918,195,704 ) (1,150,258,909 ) -

Administrative

expenses (911,607,048 ) (631,116,249 ) (597,308,928 ) (34,090,713 )

Financial costs 6(28) (86,687,871 ) (73,030,754 ) (54,337,938 ) (27,297,184 )

3. Loss from operations (1,418,478,473 ) (992,039,480 ) (1,155,816,275 ) (55,030,612 )

Add:Investment

Loss 6(29) (99,063,264 ) (1,829,000 ) (398,888,349 ) (765,869,331 )

Subsidy income 64,764 175,300 64,764 175,300

Non-operating

income 21,529,992 12,929,298 13,826,125 61,580

Less:

Non-operating

Expenses 6(30) (73,282,675 ) (20,505,821 ) (14,759,354 ) (5,393,224 )

4. Loss before taxation (1,569,229,656 ) (1,001,269,703 ) (1,555,573,089 ) (826,056,287 )

Less:

Income tax 6(31) - (5,494,674 ) - (4,597,211 )

Minority

interests 6(22) 13,656,567 176,110,879 - -

5. Net loss (1,555,573,089 ) (830,653,498 ) (1,555,573,089 ) (830,653,498 )

Add: Retained earnings,

beginning of year 174,666,289 1,005,319,787 174,666,289 1,005,319,787

Other transfer in - - - -

6. Profit available

for appropriation (1,380,906,800 ) 174,666,289 (1,380,906,800 ) 174,666,289

Less: Statutory common

reserve fund - - - -

Statutory common

welfare fund - - - -

Staff welfare and

bonus fund - - - -

Reserve fund - - - -

Enterprise

expansion fund - - - -

Return of profits - - - -

7. Profit available for distribution to

shareholders (1,380,906,800 ) 174,666,289 (1,380,906,800 ) 174,666,289

Less: Dividends on preferential shares - - - -

Discretionary reserve - - - -

Dividends on

ordinary shares - - - -

Dividends transferred to share capital - - - -

8. (Accumulated losses)

Retained earnings (1,380,906,800 ) 174,666,289 (1,380,906,800 ) 174,666,289

Supplementary Information:

The Group The Company

Note 2001 2000 2001 2000

(Restated, (Restated,

Note 3) Note 3)

1 Profit from disposal of departments

or investee enterprise - - - -

2 Loss incurred from natural disasters - - - -

3 Profit (loss) from change of

accounting policies 3 - 5,881,102 - 5,881,102

4 Profit (loss) from change of accounting

estimates - - - -

5 Loss incurred from debt restructure - - - -

6 Others - - - -

The accompanying notes form an integral part of these financial statements.

Presented by: Guangdong Kelon Electrical Holdings

Company Limited and its subsidaries Expressed in RMB

The Group

Profit for the 2001 2000 (Restated, Note 3)

reporting period Note Return on net assets Earnings per share Return on net assets Earnings per share

Fully Weighted Fully Weighted Fully Weighted Fully Weighted

diluted average diluted average diluted average diluted average

Profit from principal

activities 6(32) 31.9% 24.1% 0.77 0.77 15.6% 14.1% 0.62 0.62

Loss from operations 6(32) -59.0% -44.6% -1.43 -1.43 -25.1% -22.7% -1.00 -1.00

Net loss 6(32) -64.7% -48.9% -1.57 -1.57 -21.0% -19.0% -0.84 -0.84

Net loss before

extraordinary items 6(32) -62.3% -47.0% -1.51 -1.51 -21.0% -19.0% -0.84 -0.84

The Group

Profit for the 2001 2000 (Restated, Note 3)

reporting period Note Return on net assets Earnings per share Return on net assets Earnings per share

reporting period Note Fully Weighted Fully Weighted Fully Weighted Fully Weighted

diluted average diluted average diluted average diluted average

Profit from principal

activities 6(32) 26.5% 20.0% 0.64 0.64 0.2% 0.2% 0.01 0.01

Loss from operations 6(32) -48.1% -36.3% -1.17 -1.17 -1.4% -1.3% -0.06 -0.06

Net loss 6(32) -64.7% -48.9% -1.57 -1.57 -21.0% -19.0% -0.84 -0.84

Net loss before

extraordinary items 6(32) -64.5% -48.7% -1.56 -1.56 -21.2% -19.1% -0.84 -0.84

The accompanying notes form an integral part of these financial statements.

STATEMENTS OF CASH FLOWS

For the year ended 31 December 2001

Presented by: Guangdong Kelon Electrical Holdings

Company Limited and its subsidaries Expressed in RMB

The Group The Company

2001 2000 2001 2000

Note (Restated, Note 3) (Restated, Note 3)

1.Cash flow from

operating activities:

Cash received from sale of

goods or rendering of serves 4,659,473,911 5,311,941,041 4,189,772,644 761,730,188

Refund of taxes and levies 43,728,843 10,846,636 6,557,769 10,846,636

Cash received from other

operating activities 19,339,857 18,145,810 21,784,158 7,135,191

Sub-total of cash inflows

from operating activities 4,722,542,611 5,340,933,487 4,218,114,571 779,712,015

Cash paid for purchasing of

goods and services (3,607,830,681 ) (3,368,415,325 ) (3,231,042,950 ) (136,540,087 )

Cash paid to and on

behalf of employees (384,007,181 ) (382,063,695 ) (243,463,001 ) (47,077,670 )

Taxes paid (162,072,763 ) (197,961,400 ) (89,159,022 ) (66,424,833 )

Cash paid for other

operating activities (420,538,251 ) (341,195,436 ) (206,945,937 ) (271,208,856 )

Sub-total of cash outflows

from operating activities (4,574,448,876 ) (4,289,635,856 ) (3,770,610,910 ) (521,251,446 )

Net cash flows from

operating activities 148,093,735 1,051,297,631 447,503,661 258,460,569

2.Cash flows from

investing activities:

Cash received from disposal

of investments - 639,000 - -

Cash received from

investment income - - - -

Net cash received from

disposals of fixed assets,

intangible assets and other

long-term assets 81,796,652 6,118,913 58,091,669 -

Cash received from other

investing activities 12,552,101 12,577,944 10,652,955 9,198,266

Sub-total of cash inflows

from investing activities 94,348,753 19,335,857 68,744,624 9,198,266

Cash paid for acquisition of

fixed assets, intangible

assets and other long-term assets (307,488,842 ) (285,385,965 ) (221,293,772 ) (65,047,346 )

Cash paid for investments (16,849,108 ) (14,948,244 ) (83,845,424 ) (34,634,554 )

Cash paid for other investing

activities 6(33) (837,572,947 ) - (837,574,947 ) (242,548 )

Sub-total of cash outflows

from investing activities (1,161,910,897 ) (300,334,209 ) (1,142,714,143 ) (99,924,448 )

Net cash flows from investing

activities (1,067,562,144 ) (280,998,352 ) (1,073,969,519 ) (90,726,182 )

3.Cash flows from financing activities

Proceeds from equity financing - - - -

Proceeds from borrowings 863,446,591 51,410,000 610,000,000 -

Cash received from

other financing acitivities - - - -

Sub-total of cash inflows

from financial activities 863,446,591 51,410,000 610,000,000 -

Repayment of borrowings - (474,888,878 ) - (20,000,000 )

Cash paid for distribution

of dividends or profits (92,864,732 ) (297,898,102 ) (63,960,478 ) (248,784,857 )

Cash paid for other

financing activities - - - -

Sub-total of cash outflows

from financing activities (92,864,732 ) (772,786,980 ) (63,960,478 ) (268,784,857 )

Net cash flows from

financing activities 770,581,859 (721,376,980 ) 546,039,522 (268,784,857 )

4.Effect of changes in foreign

exchange rate 310,501 (2,290,170 ) - (3,415,304 )

5.Net (decrease) increase in

cash and cash equivalents (148,576,049 ) 46,632,129 (80,426,336 ) (104,465,774 )

The accompanying notes form an integral part of these financial statements.

Presented by: Guangdong Kelon Electrical Holdings

Company Limited and its subsidaries Expressed in RMB

The Group The Company

2001 2000 2001 2000

Supplementary

information Note (Restated, Note 3) (Restated, Note 3)

1.Reconciliation of net

loss to net cash flows from

operating activities:

Net loss (1,555,573,089 ) (830,653,498 ) (1,555,573,089 ) (830,653,498 )

Add: Minority interests (13,656,567 ) (176,110,879 ) - -

Provision for impairment

loss of assets 635,312,265 222,687,227 572,381,389 -

Depreciation of fixed assets 248,504,370 277,274,774 93,800,639 82,417,494

Amortization of

intangible assets 10,885,801 9,985,843 7,571,501 6,671,543

Amortization of Long-term

expenditures 165,538,180 126,481,870 39,754,299 46,107,958

Decrease in deferred

expenditures (less: increase) 3,146,279 20,337,084 4,005,834 5,294,103

Increase in accruals

(less:decrease) 16,444,056 232,427,385 363,250,682 (46,970,545 )

Loss from disposals

of fixed assets,

intangible assets and

other long-term assets 15,057,482 5,544,048 12,685,498 1,653,069

Loss from write off

of fixed assets - - - -

Financial costs 86,687,871 73,030,754 54,337,938 27,297,184

Investment income (add: loss) 99,063,264 1,829,000 398,888,349 765,869,331

Deferred tax liabilities (loss: debit) - - - -

Increase in inventories

(add: decrease) 229,149,767 (415,569,606 ) (1,058,213,037 ) 308,929,566

Increase in operating

receivables (add: decrease) 63,764,853 655,811,943 94,475,035 49,932,678

Increase in operating

payables (less: decrease) 143,769,203 848,221,686 1,420,138,623 (158,088,314 )

Others - - - -

Net cash flows from

operating activities 148,093,735 1,051,297,631 447,503,661 258,460,569

2.Non-cash investing and

financing activities:

debts transferred to capital - - - -

Convertible bonds due

within one year - - - -

Fixed assets purchased

under finance leases - - - -

3.Net increase in cash and

cash equivalents:

Cash, end of period 6(33) 651,196,564 799,772,613 381,358,836 461,785,172

Less: Cash, beginning of period 6(33) (799,772,613 ) (753,140,484 ) (461,785,172 ) (566,250,946 )

Add: Cash and cash equivalents,

end of period - - - -

Less: Cash and cash equivalents,

beginning of period - - - -

Net decrease in cash and

cash equivalents. (148,576,049 ) 46,632,129 (80,426,336 ) (104,465,774 )

The accompanying notes form an integral part of these financial statements.

Segment Information(Business Segment)

For the year ended 31 December 2001

Presented by: Guangdong Kelon Electrical Holdings Company Limited and its subsidaries Expressed in RMB

			2001
	Refrigerator	Air-conditioner	Fitting	Others	Elimination	Retained items	Total
1 Revenue	2,164,254,362	2,177,206,505	498,503,141	8,662,111	(467,009,751)	-	4,381,616,368
Including: External revenue	2,164,254,362	2,177,206,505	31,493,390	8,662,111	-	-	4,381,616,368
Internal revenue	-	-	467,009,751	-	(467,009,751)	-	-
2 Cost of sales	(1,766,962,106)	(1,815,052,540)	(481,324,297)	(2,213,631)	449,836,503	-	(3,615,716,071)
Including: External
cost of sales	(1,766,962,106)	(1,815,052,540)	(31,487,794)	(2,213,631)	-	-	(3,615,716,071)
Internal cost of sales	-	-	(449,836,503)	-	449,836,503	-	-
3 Operating expenses	(1,016,117,982)	(1,121,297,447)	(32,421,067)	(14,542,274)	-	-	(2,184,378,770)
4 Loss from operations	(618,825,726)	(759,143,482)	(15,242,223)	(8,093,794)	(17,173,248)	-	(1,418,478,473)
5 Total assets	2,978,178,330	2,987,300,299	430,993,359	130,491,972	-	-	6,526,963,960
6 Total liabilities	1,834,054,930	1,962,462,666	47,819,619	44,879,081	-	-	3,898,216,296

			2000 (Restated, Note 3)
	Refrigerator	Air-conditioner	Fitting	Others	Elimination	Retained items	Total
1 Revenue	2,153,246,610	1,574,493,175	529,296,538	132,641,474	(520,175,180)	-	3,869,502,617
Including: External revenue	2,149,212,825	1,574,493,175	29,555,143	116,241,474	-	-	3,869,502,617
Internal revenue	4,033,785	-	499,741,395	16,400,000	(520,175,180)	-	-
2 Cost of sales	(1,733,824,911)	(1,468,613,719)	(463,787,068)	(40,601,487)	456,294,018	-	(3,250,533,167)
Including: External cost of sales	(1,730,286,503)	(1,468,613,719)	(25,417,423)	(26,215,522)	-	-	(3,250,533,167)
Internal cost of sales	(3,538,408)	-	(438,369,645)	(14,385,965)	456,294,018	-	-
3 Operating expenses	(611,716,081)	(888,686,886)	(27,904,388)	(82,701,575)	-	-	(1,611,008,930)
4 (Loss) Profit from
operations	(192,294,382)	(782,807,430)	37,605,082	9,338,412	(63,881,162)	-	(992,039,480)
5 Total assets	4,567,223,176	1,528,214,219	453,458,401	344,210,149	-	-	6,893,105,945
6 Total liabilities	1,520,059,615	891,939,774	57,936,695	202,181,437	-	-	2,672,117,521

The accompanying notes form an integral part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2001

(Amounts expressed in Renminbi Yuan unless otherwise stated)

1. INCORPORATION AND PRINCIPAL ACTIVITIES

Guangdong Kelon Electrical Holdings Company Limited (the "Company") is a joint stock limited company incorporated in the People's Republic of China (the "PRC") on 16 December 1992. The Company and its subsidiaries hereinafter are referred to as the "Group".

The Company's 459,589,808 overseas public shares (hereinafter referred to as "H Shares") were listed on the Stock Exchange of Hong Kong Limited on 23 July 1996. In 1998, the Company obtained approval to issue 110,000,000 domestic shares (hereinafter referred to as "A Shares") which were listed on the Shenzhen Stock Exchange on 13 July 1999.

Guangdong Kelon (Rongsheng) Group Company Limited ("GKG"), a company incorporated in the PRC, was the major shareholder of the Company. As of 31 December 2001, GKG held 337,915,755 legal person shares of the Company, representing 34.06% of the Company's total share capital.

On 29 October 2001, GKG entered into an agreement with Shunde Greencool Development Co. Ltd. ("Greencool") in connection with the transfer of 204,775,755 shares of legal person shares to of the Company, representing 20.64% of total share capital of the Company for a consideration of RMB 560,000,000. The consideration was subsequently reduced to RMB 348,000,000 according to a revised share transfer agreement dated 5 March 2002. The shares were transferred to Greencool from GKG on 18 April 2002.

The Group is principally engaged in the manufacture and sale of refrigerators and air-conditioners, manufacture and purchase of moulds and plastic.

The Group incurred net loss of RMB 1,555,573,000 during the year ended 31 December 2001. As of 31 December 2001, the Group had negative working capital of approximately RMB 182,501,000. The accompanying financial statements are still prepared based on the going concern basis. Management of the Group and the Company has taken various measures to enhance the operating performance and financial positions and anticipates significant improvement of the financial positions in the following twelve months. These measures include:

(1) Change in company structure and measures to increase efficiency;

(2) Develop and manufacture high value-added products;

1. Introduce new systems and reduce cost;

(4) Request Greencool to repay its RMB 198,000,000 payable in connection with the debt transfer as described in Note 7(3)(b).

2. PRINCIPAL ACCOUNTING POLICIES, ACCOUNTING ESTIMATES AND BASIS OF CONSOLIDATION

(a) Accounting policies

The accounting policies adopted by the Company and the Group are in accordance with "Accounting Standards for Business Enterprises", "Accounting Regulations for Business Enterprise", "Temporary Regulations for Consolidated Financial Statements" and other relevant policies and regulations in the PRC (hereinafter referred to as "PRC Accounting Standards").

(b) Accounting year

The accounting period covers the calendar year from 1 January to 31 December.

(c) Reporting currency

The reporting currency is Chinese Yuan ("RMB").

(d) Accounting principles and basis of valuation

The Group maintains its accounting records on accrual basis. Assets are recorded at cost, except for assets recorded at revalued amount based on valuation performed in accordance with the relevant regulations.

(e) Consolidation of financial statements

The financial statements of the Company and its subsidiaries, in which the Company directly or indirectly holds more than 50% of the issued share capital as a long-term investment, are included in the consolidated financial statements. The consolidated financial statements of the Group are prepared using the following methods:

(i) Differences between the accounting policies adopted by the parent company and the subsidiaries should be adjusted;

(ii) All significant intra-group transactions and balances should be eliminated upon consolidation;

(iii) Intra-group equity investments, investment income and unrealised profit should be eliminated upon consolidation.

(f) Foreign exchange translation

The Company and its PRC subsidiaries and associates maintain their books and records in RMB. RMB is not a freely exchangeable currency. Foreign currency transactions are translated into RMB at the applicable exchange rates prevailing on the day of transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB at the applicable rates in effect at the balance sheet date. Exchange differences arising from above, unless capitalised, are included in the determination of the results of operations.

The Group's overseas subsidiaries maintain their books and records in their respective functional currency, which is generally the currency of the country of incorporation of the Group's overseas subsidiaries. Foreign currency transactions of the Group's overseas subsidiaries are translated into their respective functional currency at the applicable average exchange rate prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the applicable rates in effect at the balance sheet date. Exchange differences arising from above are included in the determination of the results of operations of the Group's overseas subsidiaries.

(g) Method for translation of foreign currency financial statements

The foreign currency financial statements of the Group's overseas subsidiaries are translated into RMB for consolidation according to the following methods:

Assets and liabilities are translated into RMB at the exchange rates prevailing at the balance sheet date. Equity items, except retained earnings, are translated into RMB at the exchange rates prevailing at the dates of the transactions. Income statement items are translated into RMB at the average exchange rates for the year.

Exchange differences arising from the translation of the foreign currency financial statements are included in the cumulative translation reserve under shareholders' equity.

(h) Cash and cash equivalents

Cash includes cash on hand and cash in banks or other financial instruments which are repayable on demand.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value.

(i) Provision for doubtful accounts

Provision for doubtful accounts receivable and other receivables is calculated based on the analysis of collectibility of accounts receivables and other receivables at year-end. The management estimates the collectibility according to prior years' experiences, the financial and cash flow status of the debtors and other related information.

(j) Inventories

Inventories include raw materials, work-in-progress and finished goods. Standard cost is applied for the routine inventory flow. At month end, allocation of cost variances is calculated based on standard cost of various kinds of inventory delivered out. Cost of work-in-progress and finished goods comprises direct materials, direct labor and other manufacturing overhead.

Inventories are stated at the lower of cost and net realisable value ("NRV"). The inventory NRV is calculated based on estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. When the inventory NRV is lower than the cost of inventories, inventory NRV provision is provided and included in the determination of the results of operations.

Stock-take of inventories adopts perpetual count method.

(k) Long-term investments

Long-term equity investments

Long-term equity investments include investments in subsidiaries, associates and other investments that are accounted for using the cost method or the equity method, respectively.

(i) Long-term equity investments in subsidiaries and associates

A subsidiary represents a company in which the Company directly or indirectly (1) holds more than 50% of the equity interest as a long-term investment and/or (2) has the power to cast the majority of votes at meetings of Board of Directors/management committee.

An associate is a company, not being a subsidiary, in which the Company holds more than 20% but less than 50% of the share capital or equity, and in which the Company has significant influence to participate in the financial and operating decisions of the Company.

Investment in subsidiaries and associates are accounted for using the equity method. After acquisition of the equity investment, the carrying amount of the investment is adjusted for its attributable share of the investee enterprise's net profit or loss, which is recognised as investment income for the current period accordingly. The carrying amount of investments is decreased by its attributable share of the investee enterprise's distributed profits or cash dividends declared. Generally speaking, the Company recognises net losses incurred by the investee enterprise to the extent which reduces the carrying amount of the investment to zero except where the Company has committed to continue its financial support to the investee enterprise. If the investee enterprise realises net profits in subsequent periods, the Company should increase the original carrying amount of the investment by the excess of its attributable share of profits over the share of unrecognised losses.

The Company accounts for the long-term equity investment using the equity method in its own financial statements and also includes the subsidiaries' financial statements in the consolidated financial statements.

(ii) Other long-term equity investments

Long-term investments in which the Company has no control, joint control and significant influence are accounted for using the cost method. The carrying amount of long-term equity investments should generally remain unchanged, unless there are additional investments or repayment of investments. Investment income is recognised to the extent of dividend declared. If the dividend declared subsequent to the acquisition exceeds the post-acquisition profit, the excess of dividend declared is charged against the investment cost.

(iii) Equity investment difference

When a long-term equity investment is accounted for using the equity method, the difference between the investment cost of the investor and the investor's share of equity of the investee enterprise should be amortised evenly over the investment period. If the investment period is not specified in the contract, the excess of the investment cost over the share of equity of the investee enterprise should generally be amortised over a period not more than 10 years, while the short fall of investment cost over share of equity of the investee enterprise is amortised over a period of not less than 10 years.

Provision for long-term investment impairment loss

The carrying amount of long-term investments is periodically reviewed on an individual basis. If the recoverable amount of any investment is lower than the carrying amount of that investment as a result of a continuing decline in market value or changes in operating conditions of the investee enterprise, the difference between the recoverable amount and the carrying amount of the investment should be provided as investment loss in the current period.

(l) Fixed assets and depreciation

The recognition standards of the Company's and its subsidiaries' fixed assets are:

(i) Buildings, machinery and equipment, motor vehicles and office equipment which are related to operation and have a useful life of more than one year and

(ii) Those assets which are not relating to operation but have a useful life of more than two years and unit cost of more than RMB 2,000.

Fixed assets are stated at actual cost less accumulated depreciation and impairment loss. Actual cost includes purchase cost, related expenses and taxes, and necessary expenditure incurred before the assets can be used. Expenditure incurred after the fixed assets have been put into operation, such as repairs and maintenance and overhauls costs, is recognised as expense in the period in which they are incurred. In situations where it is probable that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditure are capitalised as an additional cost of the asset.

Depreciation is provided on a straight-line basis and provided according to category, estimated useful life and estimated residual value. The depreciation rate of each asset is determined based on the category of fixed assets, estimated useful life and estimated residual value as follows:

Estimated Estimated Annual

useful residual depreciation

Categories lives value rates

Buildings 20 to 50 years 5% 1.9% to 4.75%

Machinery and equipment 10 years 5% 9.5%

Motor vehicles 5 years 5% 19.0%

Office equipment 5 years 5% 19.0%

When assets are sold or retired, any gain or loss resulting from their disposal is included in the income statement based on the difference between net consideration received and their carrying value.

The Company and its subsidiaries assess their fixed assets at the balance sheet date on an individual basis. If due to continuous decline in market price, technically out-of-date, obsolete or idle for a long period, the carrying amount of an asset exceeds its recoverable amount. The difference is recognised as impairment loss in the determination of the results of the operation. The provision of impairment loss is made on individual basis.

(m) Construction-in-progress

Construction-in-progress represents plant under construction, machinery and equipment and other fixed assets pending for installation and testing, and is stated at actual cost. This includes the costs of construction, and interest charges arising from borrowings used to finance these assets during the period of construction, installation and testing. When the assets concerned are brought into use, the costs are transferred to fixed assets and depreciated. Construction-in-progress is not depreciated until such time as the assets are completed and put into operational use.

As of balance sheet date, the Company and its subsidiaries perform overall assessment of their construction-in-progress. Impairment losses is provided for those (i) which stopped construction for long time and construction will not re-commence in the next 3 years, (ii) technically and functionally out-of-date and have significant uncertainty whether there is any future economic benefit, and (iii) proved to have suffered impairment loss. The provision is included in the determination of the results of operations.

(n) Borrowing costs

Borrowing costs represent costs incurred in connection with the Group's borrowing of funds, including interest charges, amortisation of discount and premium, auxiliary costs, and exchange differences, normally expensed as incurred.

Borrowing costs are capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. Capitalisation of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalised until the assets are ready for their intended use.

The capitalised borrowing costs are capitalised based on weighted averages of cumulative borrowing costs and capitalisation rate before their intended use.

(o) Intangible assets

Intangible assets mainly represent land use rights, which is stated at cost less accumulated amortisation. Land use right is amortised on a straight-line basis over the estimated useful lives of 20 to 50 years.

The cost of land use right is transferred to related construction-in-progress when developing the land. According to Cai Kuai [2001] No. 43 promulgated by the Ministry of Finance, land use right which was accounted for as intangible assets rather than recorded in the cost of building construction costs before the effectiveness of Accounting Regulations for the Business Enterprises do not require to be adjusted.

The Company and its subsidiaries assess future economic benefits of their intangible assets periodically when the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognised in income statement.

(p) Long-term deferred expenditures

Long-term deferred expenditures mainly represent moulds used for production and illuminated advertising displays for exhibition. Long-term deferred expenditures are recorded at cost when incurred, and amortised on a straight-line basis over a expected beneficial periods.

(q) Revenue recognition

(i) Revenue from principal activities

Revenue from principal activities represents the net amount of sales invoices (excluding value-daded tax) after deducting all discounts and allowances. Revenue from principal activities is recognised when the following conditions are fulfilled:

the title of the goods and its major risks and rewards are passed to customers;

the company ceases to have control over the goods and does not reserve the rights to continue the control related to the ownership;

the economic benefits associated with the transaction will flow to the company; and

the revenue and the cost of sale can be reasonably measured.

(ii) Interest income

Interest income from bank deposits and fund occupied by related parties is recognised on a time proportion basis at the applicable interest rates.

(r) Taxation

The Company and its subsidiaries provide for taxation on the basis of its statutory profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes after considering all available tax benefits.

Deferred tax liabilities are recognised for all taxable temporary differences. Deferred taxation is provided under the liability method. Deferred tax asset is not recognised unless the related benefit will be crystallised in the foreseeable future.

(s) Pension scheme

Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Group's local staff are to be made monthly to a government agency based on 17% of the standard salary set by the provincial government, of which 10% is borne by the Group and the remainder is borne by the staff. The government agency is responsible for the pension liabilities related to such staff on their retirement. The Group accounts for these contributions on accrual basis.

(t) Changes in accounting policies and estimates

A change in accounting policy should be made only if the change is required by administrative rules or regulations such as laws or accounting standards, or the change will provide more reliable and relevant accounting information about the financial position, operating performance and cash flows of the Group.

Where an enterprise changes its accounting policy, the cumulative effect of change in accounting policy should be reported as a retrospective adjustment to the opening balance of retained earnings. If the cumulative effect of change in accounting policy cannot be reasonably determined, the change should be applied prospectively.

Formerly, the Company and the Group adopted Accounting Regulation for Joint Stock Limited Company. According to the notices issued by Ministry of Finance, Cai Kuai [2000] No.25, Cai Kuai [2001] No.17 and Cai Kuai [2001] No.43, the Group and Company adopt Accounting Regulations for Business Enterprises effective from January 1, 2001. The major changes in accounting policies are as follows:

(i) Before December 31, 2000, pre-operating expenses are amortised on a straight-line basis over 5 years since the Company commences its commercial operation. Since the year of 2001, pre-operating expenses are expensed off upon the commencement of production. The cumulative effect of the change in accounting policy is reported as a retrospective adjustment to the opening balance of retained earnings. The change of accounting policy decreased beginning retained earnings of year 2000 by RMB 13,267,000, and decreased net loss from for the year 2000 by RMB 5,131,102.

(ii) Long-term deferred pension expenses is formerly amortised on straight-line basis over 20 years. Since it cannot be matched with future benefits, it is expensed off when incurred. The cumulative effect of change in accounting policy is reported as a retrospective adjustment to the opening balance of retained earnings. The change of accounting policy decreased beginning retained earnings of year 2000 by RMB 10,875,000, and decreased net loss of 2000 by RMB 750,000.

The impact of the above changes in accounting policies on the operation results of year 2001 is to reduce the loss of the Company and the Group for year 2001 by RMB 5,881,002.

(u) Correction of material accounting errors

As of 31 December 2000, accumulated losses attributable to the minority interest of one of the Group's subsidiary exceeded the minority interest in the equity of the subsidiary ("the excess loss") by approximately RMB 158,116,000. The Group was in discussion with the minority shareholder and believes that the minority shareholder would ultimately make additional financial support to fund the excess loss, and accordingly, had charged the excess loss to the minority interest in the Group's consolidated financial statements of 2000. In year 2001, the Group has not reached agreement with minority interest about additional financial contribution to fund the excess loss. Therefore, the Group corrected the accounting errors by charging the excess loss to consolidated financial statements of year 2000, and accordingly, increased net loss of year 2000 by RMB 158,116,000.

3. IMPACT OF CHANGE OF ACCOUNTING POLICIES AND CORRECTION OF MATERIAL ACCOUNTING ERRORS

Retrospective adjustments rising from change of accounting policies (Note 2(t)) and correction of material accounting errors (Note 2(u)) affected retained earnings of the Group and the Company as of 1 January 2000 and 2001 and net loss of year 2000 are listed as follows:

The Group

Retained earnings, Net loss Retained earnings,

beginning of 2001 2000 beginning of 2000

Amounts in consolidated financial

statements before retrospective

adjustments 351,042,964 (678,418,823 ) 1,029,461,787

Retrospective adjustments

1.Adjustment items for change

of accounting policies

• Amortisation of pre-operating

expense (8,135,898 ) 5,131,102 (13,267,000 )

• Amortisation of deferred

pension expenses (10,125,000 ) 750,000 (10,875,000 )

Sub-total (18,260,898 ) 5,881,102 (24,142,000 )

2.Adjustment items for correction of

material accounting errors:

• the excess loss not shared by

minority interests (158,115,777 ) (158,115,777 ) -

Amounts in consolidated financial

statements after adjustments 174,666,289 (830,653,498 ) 1,005,319,787

The Group

Retained earnings, Net loss Retained earnings,

beginning of 2001 2000 beginning of 2000

Amounts in financial statements before

retrospective adjustments 351,042,964 (678,418,823 ) 1,029,461,787

Retrospective adjustment

1.Adjustment items for change of

accounting policy

• Amortisation of deferred

pension expenses (10,125,000 ) 750,000 (10,875,000 )

2.Adjustment items for correction

of material accounting errors:

• the exceed loss not shared

by minority interests (158,115,777 ) (158,115,777 ) -

3.Impact of subsidiaries' adjustment

on the investment income picked

up by the Company (8,135,898 ) 5,131,102 (13,267,000 )

Amounts in financial statements

after adjustments 174,666,289 (830,653,498 ) 1,005,319,787

4. TAXATION

(a) Value-added tax ("VAT")

The Group is subject to VAT, which is charged at a rate of 17%. Pursuant to VAT regulation, input VAT paid on purchases of raw materials can be used to offset the output VAT on sales.

(b) Enterprise income tax ("EIT")

The Company was incorporated in Shunde, Guangdong province and is normally subject to an EIT at a rate of 24%, which is applicable to enterprises located in coastal open economic zone. As the Company is designated as a key enterprise in Guangdong Province, pursuant to the document Yue Fu Han [1997] 157 issued by Guangdong Provincial Government, the Company is entitled to a preferential EIT rate of 15% for 2001. Pursuant to Cai Shui [2000] No.99 issued in October 2000, the above preferential tax treatment would remain effective until 31 December 2001.

The Company's subsidiaries, Guangdong Kelon Refrigerator Co., Ltd. ("Kelon Refrigerator"), Guangdong Kelon Air-Conditioner Co., Ltd. ("Kelon Air-Conditioner"), Guandong Kelon Fittings Co., Ltd. ("Kelon Fitting") and Shunde Rongsheng Plastic Products Co., Ltd. ("Rongsheng Plastic") are incorporated in coastal open economic zone, are subject to an EIT rate of 24%. Guangdong Kelon Mould Co., Ltd. ("Kelon Mould") is an advanced technology enterprise and is subject to an EIT rate of 15%. Pursuant to "Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises" ("Income Tax Law"), they are entitled to preferential tax treatment with full exemption from EIT for two years starting from the first profitable year of operations, after offsetting all tax losses carried forward from the previous years (at most five years), followed by a 50% reduction in tax rate for the next three years. In 2001, Kelon Refrigerator, Kelon Air-Conditioner and Rongsheng Plastic are subject to an EIT rate of 12%, Kelon Mould is subject to an EIT rate of 15%, Kelon Fittings is exempt from EIT.

The Company's subsidiary, Chengdu Kelon Refrigerator Co., Ltd. ("Chengdu Kelon") is subjected to an EIT rate of 30%. The Company's subsidiary, Yingkou Kelon Refrigerator Co., Ltd. ("Yingkou Kelon"), incorporated in coastal open economic zone, is subject to an EIT rate of 24%. Pursuant to Income Tax Law, they are also entitled to preferential tax treatment, with full exemption from income tax for two years starting from the first profitable year of operations, after offsetting all tax losses carried forward from the previous years (at most five years), followed by a 50% reduction in tax rate for the next three years. As of 31 December 2001, Chengdu Kelon is still in loss position and does not require to pay tax. Yingkou Kelon is subject to an EIT rate of 12% in 2001.

Hong Kong profits tax for the Company's subsidiaries in Hong Kong has been provided at a rate of 16% on estimated assessable profit which was earned in or derived from Hong Kong.

In year 2001, the Company and all above subsidiaries sustained losses, so no EIT is provided.

5. SUBSIDIARIES AND ASSOCIATES

As of 31 December 2001, the Company had the following subsidiaries and associates:

Name of the entity	Place and date of incorporation	Investment cost	Percentage of equity interest attributable to the Company		Registered capital	Principal activities	Investment period
			Directly	Indirectly
Subsidiaries
Pearl River Electric Refrigerator Company Limited ("Pearl River")	Hong Kong 26 July 1985	HKD 400,000	-	100%	HKD 400,000	Trading in materials and parts for regrigerators	Without fixed period
Kelon Electric Appliances Co., Ltd. ("Kelon Appliances")	Hong Kong 29 August 1991	HKD 10,000	-	100%	HKD 10,000	Property investment	Without fixed period
Shunde Rongsheng Plastic Products Co., Ltd. ("Rongsheng Plastic") (i)	PRC 18 October 1991	RMB 91,439,104	45%	25%	USD15,800,000	Manufacture of plastic parts	1991.10.18 -2006.10.18
Kelon Development Company Limited("Kelon Development")	Hong Kong17 August 1993	HKD 10,000,000	100%	-	HKD5,000,000	Investment holding	Without fixed period
Guangdong Kelon Mould Co., Ltd. ("Kelon Mould") (i)	PRC 20 July 1994	RMB 86,940,000	40%	30%	USD 15,000,000	Manufacture of moulds	1994.7.20 - 2009.7.20
Guangdong Kelon Refrigerator Co., Ltd. ("Kelon Refrigerator") (i)	PRC 25 December 1995	USD 26,800,000	70%	30%	USD 26,800,000	Manufacture and sale of refrigerators	1995.12.25 -2020.12.25
Guangdong Kelon Air-C onditioner Co., Ltd. ("Kelon Air-Conditioner") (i)	PRC 19 March 1996	RMB 281,000,000	60%	-	USD 36,150,000	Manufacture and sale of air-conditioners	1996.3.19 -2026.3.18
Kelon (Japan) Limited (a)	Japan 22 May 1996	JPY 1,085,000,000	-	100%	JPY 1,100,000,000	Technical research and trading of electrical household appliances	Without fixed period
Chengdu Kelon Refrigerator Co., Ltd. ("Chengdu Kelon") (i)	PRC 19 November 1996	RMB 140,000,000	45%	25%	RMB 200,000,000	Manufacture and sale of refrigerators	1996.11.29 - 2021.11.29
Yingkou Kelon Refrigerator Co., Ltd. ("Yingkou Kelon")(i) (b)	PRC 15 December 1996	RMB 134,000,000	42%	36.79%	RMB 200,000,000	Manufacture and sale of refrigerators	1996.12.23 - 2021.12.22
Wetherell Development Limited	The British Virgin Islands1 July 1997	USD 1	-	100%	USD 1	Advertising agency	Without fixed period
Kelon International Incorporation ("KII") (Formerly known as"Kelon Financial Services Limited")	The British Virgin Islands 13 January 1999	USD 50,000	-	100%	USD 50,000	Investment holding	Without fixed period
Guangdong Kelon Fittings Co., Ltd. (Formerly known as"Shunde Rongqi Kelon Fittings Co., Ltd.") ("Kelon Fittings") (i)	PRC 24 November 1999	USD 5,620,000	70%	30%	USD 5,620,000	Manufacture and sale of components of refrigerators and air-conditioners	1999.11.24 -2029.11.23
Sichuan Rongsheng Kelon Refrigerator Sales Company Limited. ("Sichuan Rongsheng")(iii) (c)	PRC 21 February 2001	RMB 1,520,000	76%	-	RMB 2,000,000	Sale of refrigerators	2001.2.21 -2003.2.20
Beijing Hengsheng XingChuang Technology Company("Beijing Hengsheng") (iii) (d)	PRC 4 June 2001	RMB 24,000,000	80%	-	RMB 30,000,000	Research and develop of industrial and commercial IT system	2001.6.4 - 2016.6.4
Shunde Jiake Electronic Company Limited ("Jiake Electronic") (iii) (e)	PRC 12 October 2001	RMB 60,000,000	70%	30%	RMB 60,000,000	IT and communication technology, and micro-electronics technology development	Without fixed period
Beijing Kelon Tiandi IT Network Limited("Kelon Tiandi") (iii) (f)	PRC 8 November 2001	RMB 3,200,000	-	64%	RMB 5,000,000	Not specified	2001.11. 8 - 2016.11.8
Beijing Kelon Shikong Information Technology Company Limited("Kelon Shikong") (iii) (g)	PRC 8 November 2001	RMB 3,200,000	-	64%	RMB 5,000,000	Not specified	2001.11.8 - 2016.11.8
Associates
Guangdong Sanyo-Kelon Refrigerator Co., Ltd. ("Sanyo-Kelon") (i)	PRC 25 December 1995	RMB 104,280,000	44%	-	RMB 237,000,000	Manufacture and sale of freezers	1995.12.25 - 2020.12.24
Huayi Compressor Holdings Company Limited("Huayi Compressor") (ii)	PRC 13 June 1996	RMB 255,360,000	24.99%	-	RMB 237,250,000	Manufacture and sale of compressors	Without fixed period
Shunde Kelon Household Electrical Appliance Company Limited("Kelon HEA") (iii)	PRC 16 July 1999	RMB 2,500,000	25%	-	RMB 10,000,000	Manufacture and sale of electrical household appliances	Without fixed period
Shanghai Yilian Electric Business Limited("Shanghai Yilian") (iii)	PRC 15 June 2000	RMB 10,000,000	41.7%	-	RMB 24,000,000	Electronic business	Without fixed period
Communication and You Holdings Company Limited ("C&Y")	Hong Kong 14 August 2000	HKD 12,000,000	-	25%	HKD 100	Advertising business	Without fixed period
Chongqing Kelon Electrical Appliance Company Limited("Chongqing Kelon") (iii)	PRC10 November 2000	RMB 200,000	-	20%	RMB 1,000,000	Sale, installation and maintenance of air-conditioners	2000.11.10 - 2002.11.30
Chongqing Rongsheng (Kelon) Refrigerator Trading Co., Ltd. ("Chongqing Rongsheng") (iii)	PRC19 February 2001	RMB 280,000	-	28%	RMB 1,000,000	Refrigerator sales and after sales services	2001.2.19 -2002.12.31
Shunde Wangao Import & Export Co., Ltd. ("Wangao Co") (iii)	PRC7 June 2001	RMB 600,000	20%	-	RMB 3,000,000	Import and export business	Without fixed period
Guangzhou Antaida Logistic Co., Ltd. ("Guangzhou Antaida") (iii)	PRC11 July 2001	RMB 2,000,000	20%	-	RMB 10,000,000	logistic and storage	2001.7.11 - 2031.7.10

(i) Established as sino-foreign equity joint venture.

(ii) Established as joint stock limited company.

(iii) Established as limited liability company.

All financial statements of above subsidiaries are included in the consolidated financial statements.

Changes in the Company's interests in subsidiaries and the scope of consolidation in year 2001 are as follows:

a) Pearl River signed an acquisition agreement with the minority of Kelon (Japan) Limited on 9 August 2001, and acquired 10% of Kelon (Japan) Limited's equity from this minority shareholder at a consideration of JPY 95,000,000 (equivalent to RMB 6,348,000).

b) On 5 September 2000, the Company, YingKou Kelon shareholding union, Kelon Refrigerator, YingKou Yinlang (Group) Limited and Pearl River signed an equity transfer agreement. According to the agreement, YingKou kelon shareholding union transferred its 11.79% equity of YingKou Kelon to Kelon Refrigerator. A public accounting firm has issued capital verification report for such equity transfer.

c) Sichuan Rongshen is a limited liability company established in Chengdu, Sichuan Province of the PRC by the Company and other investors. Sichuan Rongshen obtained business license on 21 February 2001 with a registered capital of RMB 2,000,000, and an operating period of two years. The principle activity of Sichuan Rongshen is the sales of refrigerators.

d) Beijing Hengsheng is a limited liability company established in Beijing, the PRC by the Company and other investors. Beijing Hengsheng was established on 4 June 2001, upon the issuance of business license. The registered capital of Beijing Hengsheng is RMB 30,000,000, with an operating period of fifteen years. Beijing Hengsheng mainly engages in the research and development of industrial and commercial artificial intelligence system. As of 31 December 2001, Beijing Hengsheng is still in pre-operating stage.

e) Jiake Electric is a limited liability company registered in Shunde, the PRC. The investors of Jiake Electric are the Company and Kelon Refrigerator. Jiake Electric obtained business license on 12 October 2001, with a registered capital of RMB 60,000,000. The operating period of Jiake Electric is not specified. The principle activity of Jiake Electric is the development of information, communication network and microelectronic technology. As of 31 December 2001, Jiake Electric is still in pre-operating period.

f) Kelon Tiandi is a limited liability company established in Bejjing, the PRC. The investors of Kelon Tiandi are Beijing Hengsheng and Huaao Electrical Electrical Company Limited ("Huaao Electrical"), a subsidiary of GKG. Kelon Tiandi obtained business license on 8 November 2001, with a registered capital of RMB 5,000,000. The operating period of Kelon Tiandi is fifteen years. As of 31 December 2001, Kelon Tiandi had not commenced any operating activity.

g) Kelon Shikong is a limited liability company established in Bejjing, the PRC. The investors of Kelon Shikong are Beijing Hengsheng and Huaao Electrical. Kelon Shikong obtained business license on 8 November 2001, with a registered capital of RMB 5,000,000. The operating period of Kelon Shikong is fifteen years. As of 31 December 2001, Kelon Shikong had not commenced any operating activity.

h) EDAS.com (Shenzhen) Limited ("EDAS Shenzhen") is an indirect wholly owned subsidiary of the Company. EDAS Shenzhen was established on 8 June, 2000, with a registered capital of USD 600,000. EDAS Shenzhen mainly engages in the business of Internet website. EDAS Shenzhen entered into liquidation procedure in August 2001 and the loss incurred from liquidation, amounting to approximately RMB 11,089,000, was recorded in the profit and loss of the Group for the year ended 31 December 2001.(Note 6 (29))

i) EDAS Development (BVI) Limited ("EDAS Development") is an indirect wholly owned subsidiary of the Company, with a registered capital of USD 50,000. EDAS Development was established on 1 March 2000. EDAS Development did not execute any operating activity since its establishment and was deregistered in year 2001.

j) Kelondotcom Limited ("Kelondotcom") is an indirect wholly owned subsidiary of the Company, with a registered capital of USD 50,000. Kelondotcom was established on 21 February 2001. Kelondotcom did not execute any operating activity since its establishment and was deregistered in year 2001.

k) Kelondotcom (HongKong) Limited ("Kelondotcom HongKong") is an indirect wholly owned subsidiary of the Company, with a registered capital of HKD 2. Kelondotcom HongKong was established on 7 June 1999. Kelondotcom Hongkong did not execute any operating activity since its establishment and was deregistered in year 2001.

6. NOTES TO MAJOR ITEMS OF FINANCIAL STATEMENTS

(1) CASH AND BANK DEPOSITS

The Group

		31 December 2001						31 December 2000
		Original currency		Exchange		RMB		Original currency		Exchange		RMB
	Currency	amount		rate		equivalent		amount		rate		equivalent
Cash	RMB	1,385,237		-		1,385,237		160,295		-		160,295
	HKD	37,165		1.0606		39,417		42,076		1.0606		44,626
						1,424,654						204,921
Bank deposits	RMB	552,390,083		-		552,390,083		626,607,229		-		626,607,229
	HKD	13,887,746		1.0606		14,729,344		8,582,752		1.0606		9,102,867
	USD	8,421,990		8.2766		69,705,446		18,171,024		8.2782		150,419,986
	JPY	49,069,286		0.0630		3,091,365		131,490,751		0.0719		9,454,185
	DEM	-		-		-		997,320		3.9308		3,920,264
	EUR	48,405		7.3178		354,218		-		-		-
	Others	-		-		39,617		-		-		63,161
						640,310,073						799,567,692
- restricted deposits	RMB	117,722,437		-		117,722,437		19,628,302		-		19,628,302
	USD	1,120,276		8.2766		9,272,076		2,332,117		8.2782		19,309,117
- cash in transit	RMB	9,461,837		-		9,461,837		-		-		-
						136,456,350						38,937,419
						778,191,077						838,710,032
The Company
	31 December 2001	31 December 2000
								Original
		Original currency		Exchange		RMB		currency		Exchange		RMB
	Currency	amount		rate		equivalent		amount		rate		equivalent
Cash	RMB	1,240,372		-		1,240,372		-		-		-
Bank deposits	RMB	365,998,607		-		365,998,607		360,488,267		-		360,488,267
	HKD	112,266		1.0606		119,069		112,566		1.0606		119,388
	USD	127,159		8.2766		1,052,443		12,229,058		8.2782		101,176,644
	Others	-		-		669		-		-		873
						367,170,788						461,785,172
-restricted deposits	RMB	105,460,355		-		105,460,355		-		-		-
	US$	649,889		8.2766		5,378,872		6,961		8.2782		57,624
-cash in transit	RMB	12,947,676		-		12,947,676		-		-		-
						123,786,903						57,624
						492,198,063						461,842,796

As of 31 December 2001, RMB and USD restricted deposits represent pledged deposits for bank and commercial notes, and letter of credit (Year 2000: Both RMB and USD restricted deposits represent pledged deposits for letter of credit).

As of 31 December 2001, balance of cash and bank deposits of overseas subsidiaries is approximately RMB 46,490,000 (Year 2000: approximately RMB 53,426,000)

(2) NOTES RECEIVABLE

(a) Breakdown of notes receivable

	The Group				The Company
Nature	31 December 2001		31 December 2000		31 December 2001		31 December 2000
Bank draft	178,285,306		280,255,647		173,698,289		4,123,740
Commercial draft	172,903,330		-		172,903,330		-
	351,188,636		280,255,647		346,601,619		4,123,740

Except for the draft due from GKG of RMB 170,000,000, balances of notes receivable do not comprise any material amounts due from shareholders who held more than 5% (including 5%) of the Company's share equity.

(b) Notes receivable discounted

As of 31 December 2001, total discounted or endorsed but undue bank draft of the Group was RMB 582,930,370. (Year 2000: RMB 300,430,000)

As of 31 December 2001, total discounted or endorsed but undue bank draft of the Company was RMB 592,893,339. (Year 2000: Nil)

(3) ACCOUNTS RECEIVABLE

	The Group				The Company
	31 December 2001		31 December 2000		31 December 2001		31 December 2000
Accounts receivable	411,722,807		456,598,949		310,221,070		6,424,447
Less: Provision for
doubtful accounts	(190,823,758	)	(159,056,119	)	(182,970,481	)	-
Net	220,899,049		297,542,830		127,250,589		6,424,447

(a) Aging analysis of accounts receivable of the Group is as follows

			31 December 2001								31 December 2000
Aging	Balance		Percentage		Provision		Net		Balance		Percentage		Provision		Net
			(%)								(%)
Within one year	259,347,722		63		(38,448,673	)	220,899,049		375,590,411		82		(78,047,581	)	297,542,830
One to two years	102,412,901		25		(102,412,901	)		-	79,097,944		17		(79,097,944	)	-
Two to three years	48,051,590		12		(48,051,590	)	-		1,910,594		1		(1,910,594	)	-
More than three years	1,910,594		-		(1,910,594	)	-		-		-		-		-
Total	411,722,807		100		(190,823,758	)	220,899,049		456,598,949		100		(159,056,119	)	297,542,830

As of 31 December 2001, the Group's accounts receivable, excluding related party balances which have been disclosed in Note 7, from top five debtors totally amounted to RMB 31,803,522 (Year 2000: RMB 31,597,574), accounts for 8% of total ending balance of accounts receivable. (Year 2000: 7%)

Balances of accounts receivable do not comprise any material amount due from shareholders who held more than 5% (including 5%) of the Company's share capital.

For the year ended 31 December 2001, the Group wrote off long-aging receivables of approximately RMB 31,000,000. These receivables cannot be recovered as the debtors closed their business or bankrupted. The write-off of these receivables was approved by the management of the Group.

(b) Aging analysis of accounts receivable of the Company is as follows:

			31 December 2001						31 December 2000
Aging	Balance		Percen-tage		Provision		Net		Balance		Percen-tage		Provision		Net
	(%)								(%)
Within one year	165,636,304		53		(38,385,715	)	127,250,589		6,424,447		100		-		6,424,447
One to two years	102,412,901		33		(102,412,901	)		-		-		-		-	-
Two to three years	42,171,865		14		(42,171,865	)	-		-		-		-		-
Total	310,221,070		100		(182,970,481	)	127,250,589		6,424,447		100		-		6,424,447

As of 31 December 2001, the Company's accounts receivable, excluding related party balances which has been disclosed in Note 7, from top five debtors totally amounted to RMB 28,474,652, accounts for 9% of total ending balance of accounts receivable.

As of 31 December 2001, the increase of the Company's accounts receivable was caused by the change of the Group's business module. In year 2001, all domestic sales of the Group was carried out by the Company.

(4) OTHER RECEIVABLES

	The Group				The Company
	31 December 2001		31 December 2000		31 December 2001		31 December 2000
Other receivables	1.092,554,193		426,048,067		2,116,852,356		2,279,594,405
Less: Provision for
doubtful accounts	(172,409,033	)	-		(172,409,033	)	-

Net	920,145,160		426,048,067		1,944,443,323		2,279,594,405

(a) Aging analysis of other receivables of the Group is as follows:

			31 December 2001								31 December 2000
Aging	Balance		Percentage		Provision		Net		Balance		Percentage		Provision		Net
			(%)								(%)
Within one year	1,091,521,581		100		(172,409,033	)	919,112,548		416,006,393		98		-		416,006,393
One to two years	1,032,612		-		-		1,032,612		10,041,674		2		-		10,041,674
Total	1.092,554,193		100		(172,409,033	)	920,145,160		426,048,067		100		-		426,048,067

As of 31 December 2001, other receivables include amount due from GKG of RMB 692,045,165, arising from related party transactions with GKG (See Note 7(3)(a)). Management of the Group considers there is a risk of collectibility, so a provision of RMB 172,409,033 was made against this balance as of 31 December 2001.

Since the remaining balance of other receivables has aging within one year and mainly comprises receivables from other related parties (See Note 7(2)) and tax refund receivable (approximately of RMB 91,000,000), no provision for doubtful accounts is made as the management considers the risk of bad debt is low.

As of 31 December 2001, excluding the amount of RMB 692,045,165 due from GKG (Year 2000: RMB 280,612,660), and receivable of RMB 198,000,000 due from Greencool (See Note 7 (3) (b)), balances of other receivables of the Company do not comprise any material amount due from shareholders who held more than 5% (including 5%) of the Company's share capital.

As of 31 December 2001, excluding the balances due from GKG and Greencool, the Group's other receivables from top five debtors totally amounted to RMB 166,660,370 (Year 2000: RMB 57,653,378), accounts for 15% of total ending balance of other receivables (Year 2000: 14%)

(b) Aging analysis of other receivables of the Company is as follows:

			31 December 2001						31 December 2000
Aging	Balance		Percentage		Provision		Net		Balance		Percentage		Provision		Net
			(%)								(%)
Within one year	2,116,852,356		100		(172,409,033	)	1,944,443,323		2,271,934,988		99		-		2,271,934,988
One to two years	-		-		-		-		7,659,417		1		-		7,659,417
Total	2,116,852,356		100		(172,409,033	)	1,944,443,323		2,279,594,405		100		-		2,279,594,405

Other receivables of the Company mainly comprise of receivables from consolidated subsidiaries and receivables from GKG and Greencool.

Receivables from subsidiaries mainly resulted from temporary borrowings and advances to subsidiaries.

As of 31 December 2001, excluding the amounts due from consolidation subsidiaries and receivables from GKG and Greencool, the Company's other receivables from top five debtors amounted to RMB 46,140,440, accounts for 2% of total ending balance of other receivables. (Year 2000: RMB 43,938,713, accounts for 2%)

(5) PREPAYMENTS

As of 31 December 2001 and 2000, the majority balances of prepayment were within one year and no material prepayment ages more than one year.

As of 31 December 2001 and 2000, balances of prepayments do not comprise any material amount due from shareholders who held more than 5% (including 5%) of the Company's share capital.

(6) INVENTORIES AND PROVISION FOR INVENTORY OBSOLESCENCE

The Group

	31 December 2001						31 December 2000
	Balance		Provision		Net		Balance		Provision		Net
Raw materials	355,956,526		(48,500,305	)	307,456,221		435,022,820		(32,264,408	)	402,758,412
Work-in-progress	55,159,218		(1,646,597	)	53,512,621		69,242,467		(1,968,783	)	67,273,684
Finished goods	1,138,701,977		(273,831,903	)	864,870,074		1,430,914,435		(164,305,420	)	1,266,609,015
	1,549,817,721		(323,978,805	)	1,225,838,916		1,935,179,722		(198,538,611	)	1,736,641,111
The Company
	31 December 2001						31 December 2000
	Balance		Provision		Net		Balance		Provision		Net
Raw materials	66,773,591		(44,624,599	)	22,148,992		3,326,297		-		3,326,297
Work-in-progress	3,040,515		(1,646,597	)	1,393,918		4,878,503		-		4,878,503
Finished goods	1,051,911,729		(273,831,903	)	778,079,826		12,981,621		-		12,981,621
	1,121,725,835		(320,103,099	)	801,622,736		21,186,421		-		21,186,421

(7) Long-term equity investments

The Group

Movement in long-term equity investments of the Group for the year ended 31 December 2001 was as follows:

		31 December						31 December
		2000		Increase		Decrease		2001
Investments in associates	(a)	206,922,741		14,305,958		(7,428,996	)	213,799,703
Other long-term equity
investments		9,460,695		2,958,371		(2,000,000	)	10,419,066
Equity investment
difference	(b)	196,007,322		1,010,737		(16,014,647	)	181,003,412
		412,390,758		18,275,066		(25,443,643	)	405,222,181
Less: Provision for
impairment loss	(c)	(74,129,000	)	(71,200,641	)	-		(145,329,641	)
		338,261,758		(52,925,575	)	(25,443,643	)	259,892,540

(a) Investments in associates

														Total
Name of companies	Operating period	31 December 2000		Investment cost Increase (decrease) during the year		31 December 2001		31 December 2000		Share of profit and loss Increase (decrease) during the year		31 December 2001		31 December 2000		31 December 2001
The Company
Sanyo-Kelon	25 years	104,280,000		-		104,280,000		(30,151,000	)	1,398,571		(28,752,429	)	74,129,000		75,527,571
Huayi Compressor *	Unlimited	118,013,641		-		118,013,641		8,368,000		(5,071,287	)	3,296,713		126,381,641		121,310,354
Kelon HEA	Unlimited	2,500,000		-		2,500,000		-		(1,204,513	)	(1,204,513	)	2,500,000		1,295,487
Shanghai Yilian	Unlimited	-		10,000,000		10,000,000		-		(866,308	)	(866,308	)	-		9,133,692
Wangao Co	Unlimited	-		600,000		600,000		-		(10,653	)	(10,653	)	-		589,347
Guangzhou Antaida	30 years	-		2,000,000		2,000,000		-		(276,235	)	(276,235	)	-		1,723,765
Subtotal of the
Company		224,793,641		12,600,000		237,393,641		(21,783,000	)	(6,030,425	)	(27,813,425	)	203,010,641		209,580,216
C&Y	Unlimited	3,712,100		-		3,712,100		-		-		-		3,712,100		3,712,100
Chongqing Kelon	2 years	200,000		-		200,000		-		16,831		16,831		200,000		216,831
Chongqing Rongshen	1 year	-		280,000		280,000		-		10,556		10,556		-		290,556
Total of the Group		228,705,741		12,880,000		241,585,741		(21,783,000	)	(6,003,038	)	(27,786,038	)	206,922,741		213,799,703

* For the year ended 31 December 2001, the Company received RMB 5,391,612 cash dividends from Huayi Compressor

(b) Equity investment difference

											Balance
Name of Companies	31 December 2000		Original value Increase (decrease) during the year		31 December 2001		31 December 2000		Accumulated amortisation Increase (decrease) during the year		31 December 2001		31 December 2000		31 December 2001
The Company
Kelon Air-conditioner(i)	66,596,234		-		66,596,234		(7,214,593	)	-		(7,214,593	)	59,381,641		59,381,641
Huayi Compressor	137,346,359		-		137,346,359		(9,728,570	)	(15,013,858	)	(24,742,428	)	127,617,789		112,609,931
Subtotal of the Company	203,942,593		-		203,942,593		(16,943,163	)	(15,013,858	)	(31,957,021	)	186,999,430		171,985,572
C&Y	9,007,892		-		9,007,892		-		(900,789	)	(900,789	)	9,007,892		8,107,103
YingKou Kelon	-		1,010,737		1,010,737		-		(100,000	)	(100,000	)	-		910,737
Total of the Group	212,950,485		1,010,737		213,961,222		(16,943,163	)	(16,014,647	)	(32,957,810	)	196,007,322		181,003,412

Equity investment difference represents the excess of the amount paid for acquisition of Kelon Air-conditioner, Huayi Compressor, C&Y and YingKou Kelon over the net assets acquired on the date of acquistion. The difference is amortised on straight-line basis over the investment period specified in the investment contracts. If the contract does not specify the period, the difference is amortised over ten years.

(i) Since Kelon Air-conditioner sustained excess loss, the Company's investment in Kelon Air-conditioner had been reduced to a negative balance, and was recorded as "accrued liability for investee enterprise". Therefore, the unamortised equity investment difference is not amortised in the current year. Provision for impairment loss has been made against the unamortised equity investment difference.

(c) Provision for impairment loss on equity investment

		31 December						31 December
		2000		Increase		Decrease		2001
The Company
- Sanyo-Kelon		74,129,000		-		-		74,129,000
- Kelon Air-Conditioner	(i)	-		59,381,641		-		59,381,641
Subtotal of the Company		74,129,000		59,381,641		-		133,510,641
- C&Y	(ii)	-		11,819,000		-		11,819,000
Total of the Group		74,129,000		71,200,641		-		145,329,641

(ii) C&Y, the Group's associate, sustained losses. The management of the Group considers that the investment cannot be recovered and provision for impairment loss for investment cost and equity investment difference was fully provided.

Except for the above provisions, the management of the Group considers no further impairment loss for long-term equity investment exists as of 31 December 2001.

The Company

Movement of long-term equity investments is as follows:

31 December 31 December

2000 Increase Decrease 2001

Investments in subsidiaries (d) 1,061,191,961 71,245,424 (219,246,167 ) 913,191,218

Investments in associates (a) 203,010,641 13,998,571 (7,428,996 ) 209,580,216

Other long-term equity

investments 9,249,047 - (2,000,000 ) 7,249,047

Equity investment difference (b) 186,999,430 - (15,013,858 ) 171,985,572

Exchange Difference of

foreign currency

financial statments (3,759,270 ) 310,501 - (3,448,769 )

1,456,691,809 85,554,496 (243,689,021 ) 1,298,557,284

Less: Provision for

impairment loss (c) (74,129,000 ) (59,381,641 ) - (133,510,641 )

1,382,562,809 26,172,855 (243,089,021 ) 1,165,046,643

(d) Investments in subsidiaries

31 December Profit 31 December

Names of Companies 2000 Increase Decrease appropriated 2001

Investment cost

Kelon Development 11,200,000 - - - 11,200,000

Kelon Refrigerator 155,552,426 - - - 155,552,426

Kelon Air-Conditioner 214,403,766 - - - 214,403,766

Rongsheng Plastic 49,544,640 3,725,424 - - 53,270,064

Chengdu kelon 90,000,000 - - - 90,000,000

Yingkou Kelon 84,000,000 - - - 84,000,000

Kelon Mould 49,860,000 - - - 49,860,000

Kelon Fittings 32,634,554 - - - 32,634,554

Beijing Hengsheng - 24,000,000 - - 24,000,000

Jiake Electric - 42,000,000 - - 42,000,000

Sichuan Rongshen - 1,520,000 - - 1,520,000

687,195,386 71,245,424 - - 758,440,810

Share of profit and

loss of

subsidiaries (21,292,866 ) - (312,617,698 ) (7,188,817 ) (341,099,381 )

665,902,520 71,245,424 (312,617,698 ) (7,188,817 ) 417,341,429

Add: accrued

liabilities of investee

enterprise (iii) 395,289,441 - 100,560,348 - 495,849,789

1,061,191,961 71,245,424 (212,057,350 ) (7,188,817 ) 913,191,218

(iii) As of 31 December 2001 and 2000, Kelon Air-conditioner, the Company's subsidiary, sustained excess loss. The Company has undertaken to continue to extend financial support to Kelon Air-conditioner so that Kelon Air-conditioner would be able to carry out its future business plan and pay off due liabilities, while the minority shareholder of Kelon air-conditioner has not indicated their intention to continue with their financial support to Kelon Air-conditioner and undertake the excess loss. Hence, the excess loss of Kelon Air-conditioner will totally be absorded by the Company. In order to reflect the financial position of the Company more fairly and prudently, the Company refers to the International Accounting Standards and adopts equity method of accounting to account for the results of the subsidiary and continue to reduce the carrying value after the carrying amount of the investment is reduced to zero. The credit balance of equity investment is recorded as liability separately in the account of "accrued liability of investee enterprise" in the balance sheet.

(8) Fixed Assets

(a) Fixed assets movement is as follows:

The Group

2001 2000

Machinery and Motor Office

Buildings equipment vehicles equipment Total Total

Cost

Beginning of year 1,328,135,600 1,893,840,373 90,153,010 55,273,939 3,367,402,922 3,283,982,469

Reclassification 50,878,572 (293,276,101 ) (33,476,223 ) 275,873,752 - -

Addition 30,573,827 17,310,627 14,622,367 35,900,999 98,407,820 98,984,206

Transfer from construction

-in-progress 41,484,922 10,471,163 185,000 851,436 52,992,521 10,027,907

Disposals (104,151,797 ) (10,175,619 ) (10,432,092 ) (5,141,505 ) (129,901,013 ) (21,548,549 )

Exchange differences (4,832,307 ) - (12,514 ) (164,606 ) (5,009,427 ) (4,043,111 )

End of year 1,342,088,817 1,618,170,443 61,039,548 362,594,015 3,383,892,823 3,367,402,922

Accumulated depreciation

Beginning of year 201,410,807 781,794,073 48,275,425 32,075,537 1,063,555,842 796,292,609

Reclassification 11,888,640 (103,395,018 ) (19,259,961 ) 110,766,339 - -

Charge for the year 57,864,738 145,855,794 6,144,158 38,639,680 248,504,370 277,274,774

Written back on disposals (20,032,117 ) (2,171,633 ) (7,566,513 ) (3,276,616 ) (33,046,879 ) (9,885,588 )

Exchange differences (142,872 ) - (1,620 ) (7,241 ) (151,733 ) (125,953 )

End of year 250,989,196 822,083,216 27,591,489 178,197,699 1,278,861,600 1,063,555,842

Net book value

End of year 1,091,099,621 796,087,227 33,448,060 184,396,316 2,105,031,223 2,303,847,080

Beginning of year 1,126,724,793 1,112,046,300 41,877,585 23,198,402 2,303,847,080 2,487,689,860

The Company

2001 2000

Machinery

and Motor Office

Buildings equipment vehicles equipment Total Total

Cost

Beginning of year 781,083,787 530,075,957 3,366,506 25,681,390 1,340,207,640 1,508,836,909

Reclassification 10,004,968 (74,491,058 ) 13,913,880 50,572,210 - -

Addition 26,829,537 6,573,273 12,882,657 28,135,401 74,420,868 21,588,554

Transfer from construction

-in-progress 34,890,703 3,394,200 - - 38,284,903 54,500

Purchase from (Sales to)

subsidiaries (Note 7(3)(b) 4,915,487 394,098 22,051,729 8,215,260 35,576,574 (186,916,789 )

Disposals (64,150,075 ) (4,205,598 ) (9,454,980 ) (475,532 ) (78,286,185 ) (3,355,534 )

End of year 793,574,407 461,740,872 42,759,792 112,128,729 1,410,203,800 1,340,207,640

Accumulated depreciation

Beginning of year 118,791,503 168,057,844 2,700,377 11,345,338 300,895,062 295,474,767

Charge for the year 37,161,847 42,919,716 3,469,049 10,250,027 93,800,639 82,417,494

Purchase from (Sales to)

subsidiaries (Note 7(3)(b)) - 1,796,594 14,850,455 5,977,933 22,624,982 (75,052,186 )

Written back on disposals - - (7,186,753 ) (322,265 ) (7,509,018 ) (1,945,013 )

End of year 155,953,350 212,774,154 13,833,128 27,251,033 409,811,665 300,895,062

Net book value

End of year 637,621,057 248,966,718 28,926,664 84,877,696 1,000,392,135 1,039,312,578

Beginning of year 662,292,284 362,018,113 666,129 14,336,052 1,039,312,578 1,213,362,142

Buildings comprise buildings, plants, office premises, staff quarters situated in the PRC, Hong Kong and Japan. Buildings in Hong Kong with net book value of approximately RMB 80,818,800 (Year 2000: approximately RMB 118,820,000) were mortgaged as security for the Group's short-term bank loans (Note 6(20)). Buildings in the PRC with net book value of approximately RMB 80,281,000 (Year 2000: Nil) were mortgaged as security for the Group's long-term bank loans (Note 6(12)).

As of 31 December 2000, RMB mortgage loans were secured by machinery with net book value of approximately RMB 38,378,000 (Note 6(12)).

(b) Provision for impairment losses for fixed assets

The Group's overseas subsidiaries made provision of RMB 47,236,170 for impairment losses for their buildings located in Hong Kong and Japan based on the difference between the carrying value and their recoverable amounts. The provision for impairment loss was recorded in non-operating expenses (Note 6(30)).

Except for the above assets, the management of the Group considers that no more impairment loss for fixed assets exists as of 31 December 2001.

(9) CONSTRUCTION-IN-PROGRESS

31 December Transferred to 31 December Project

Project Name Budget 2000 Addition Fixed Assets 2001 Source of capital Progress

The Company

Renovation of staff 11,000,000 9,717,366 950,398 (10,667,764 ) - Working Capital 100%

quarters

Kelon Beijing 1,000,000 1,535,080 321,641 (1,856,721 ) - Working Capital 100%

Research center

Office building of 8,000,000 6,408,313 1,441,755 (7,850,068 ) - Working Capital 100%

3 centers

No. 2 Refrigerator plant 12,952,873 - 12,613,535 - 12,613,535 Working Capital 97%

(2nd and 4th floor)

Renovation of office 14,900,000 - 14,516,150 (14,516,150 ) - Working Capital 100%

building for the Group

Others 1,965,757 5,412,881 (3,394,200 ) 3,984,438 Working Capital

Subtotal of the company 19,626,516 35,256,360 (38,284,903 ) 16,597,973

Subsidiaries of the

company

Huabao Research center 1,100,000 1,102,866 - (1,102,866 ) - Working Capital 100%

Restructuring of 16,040,684 - 7,863,760 - 7,863,760 Working Capital 49%

production No.1

and No. 2 line of

refrigerator

Others 5,441,623 14,888,602 (13,604,752 ) 6,725,473 Working Capital

Total of the Group 26,171,005 58,008,722 (52,992,521 ) 31,187,206

There are no capitalised interest expenses in construction-in- progress.

Management of the Group considers, as of 31 December 2001, no indicator of impairment losses existed for the Group's construction-in-progress, and hence no provision is required.

(10) INTANGIBLE ASSETS

Means of Original 31 December Accumulated 31 December Residual

Nature acquisition cost 2000 Addition Amortisation Amortisation 2001 useful life

The Group

Land use Purchase 373,484,114 313,969,738 - (9,985,845 ) (69,500,221 ) 303,983,893 22-40 years

rights

Others Purchase 2,699,868 - 2,699,868 (899,956 ) (899,956 ) 1,799,912 2 years

376,183,982 313,969,738 2,699,868 (10,885,801 ) (70,400,177 ) 305,783,805

The Company

Land use Purchase 250,505,358 213,998,964 - (6,671,545 ) (43,177,939 ) 207,327,419 10-18 years

rights

Others Purchase 2,699,868 - 2,699,868 (899,956 ) (899,956 ) 1,799,912 2 years

253,205,226 213,998,964 2,699,868 (7,571,501 ) (44,077,895 ) 209,127,331

Management of the Company considers as of 31 December 2001, the recoverable amount of the above intangible assets is not lower than the book value and therefore no provision for impairment loss for intangible assets was provided.

(11) LONG-TERM DEFERRED EXPENDITURES

The Group

Original 31 December Accumulated 31 December Residual

Nature Cost 2000 Addition Amortisation amortisation 2001 years

Moulds and tools 582,959,093 162,947,839 108,692,013 (140,516,277 ) (451,835,518 ) 131,123,575 1-3 years

Illuminated 115,813,832 57,721,870 34,542,056 (22,191,674 ) (45,741,580 ) 70,072,252 1-3 years

Advertising display

Leasehold 3,628,423 - 3,628,423 (570,862 ) (570,862 ) 3,057,561 1-5 years

Improvement

Costs of computer 3,477,859 779,350 - (779,350 ) (3,477,859 ) - 2 years

software

Others 10,288,148 1,611,543 6,519,367 (1,480,017 ) (3,637,255 ) 6,650,893

716,167,355 223,060,602 153,381,859 (165,538,180 ) (505,263,074 ) 210,904,281

The Company

Transferred

Original 31 December from a Accumulated 31 December Residual

Nature Cost 2000 Addition subsidiary Amortisation amortisation 2001 years

Illuminated

Advertising

display 115,813,832 - 34,542,056 52,023,870 (16,493,674 ) (45,741,580 ) 70,072,252 1-3years

Moulds and

tools 108,014,803 39,217,469 19,038,762 - (22,689,763 ) (72,448,335 ) 35,566,468 1-3 years

Improvement

of fixed

assets 3,311,988 - 3,311,988 - (570,862 ) (570,862 ) 2,741,126 1-5years

227,140,623 39,217,469 56,892,806 52,023,870 (39,754,299 ) (118,760,777 ) 108,379,846

(12) SHORT-TERM BANK LOANS

The Group

31 December 2001 31 December 2000

RMB Rate RMB Rate

Nature Currency Original Equivalent (per annum) Original Equivalent (per annum)

Bank loans

• Mortgage loans * RMB 82,000,000 82,000,000 7.02% 22,000,000 22,000,000 5.36%-6.43%

• Guarantee loans ** RMB 230,000,000 230,000,000 4.77%-6.44% 60,000,000 60,000,000 5.85%

HKD 24,159,798 25,609,386 2.81%-9.00%

• Credit loans RMB 705,700,000 705,700,000 5.58%-6.14% 355,700,000 355,700,000 5.58%-6.44%

• Financing from

Bank Acceptance

Notes RMB 280,000,000 280,000,000 3.24% - - -

1,323,309,386 437,700,000

* As of 31 December 2001, RMB Mortgage loans were secured by buildings with net book value of approximately RMB 80,281,000 (Note 6(8)). As of 31 December 2000, RMB Mortgage loans were secured by machinery with net book value of approximately RMB 38,378,000 (Note 6(8)).

** Guarantee loans were guaranteed by GKG. The HKD loan of Pearl River is guaranteed by the Company and Kelon Development.

The Company

31 December 2001 31 December 2000

RMB Rate RMB Rate

Nature Currency Original Equivalent (per annum) Original Equivalent (per annum)

Bank loans

-Mortgage loans * RMB 60,000,000 60,000,000 7.02% - - -

-Guarantee loans ** RMB 200,000,000 200,000,000 4.77%-6.44% - - -

-Credit loans RMB 705,700,000 705,700,000 5.58%-6.14% 355,700,000 355,700,000 5.58%-6.435%

965,700,000 355,700,000

(13) NOTES PAYABLE

The Group The Company

31 December 31 December 31 December 31 December

Nature 2001 2000 2001 2000

Bank draft 678,568,666 83,151,496 604,217,556 18,000,000

Commercial draft 141,823 133,203,183 220,141,823 133,203,183

678,710,489 216,354,679 824,359,379 151,203,183

Balances of notes payable do not comprise any material amount due to shareholders who held more than 5% (including 5%) of the Company's share capital.

(14) ACCOUNTS PAYABLE

As of 31 December 2001 and 2000, balances of accounts payable were aged within one year and did not comprise any material amount due to shareholders who held more than 5% (including 5%) of the Company's share capital.

(15) TRADE DEPOSITS FROM CUSTOMERS

As of 31 December 2001 and 2000, balances of trade deposits from customers all had aging within one year and did not comprise any material amount due to shareholders who held more than 5% (including 5%) of the Company's share capital.

(16) TAX PAYABLE

The Group The Company

31 December 31 December 31 December 31 December

2001 2000 2001 2000

Prepaid EIT (293,680 ) (9,075,568 ) - (6,557,769 )

Input VAT to be offset (155,098,731 ) (177,869,135 ) (168,416,745 ) (9,821,473 )

Others (2,439,639 ) 102,252 (3,156 ) -

(157,832,050 ) (186,842,451 ) (168,419,901 ) (16,379,242 )

(17) OTHER PAYABLES

As of 31 December 2001, major items of other payables are as follows:

The Group The Company

31 December 31 December 31 December 31 December

Nature 2001 2000 2001 2000

Due to subsidiaries - - 365,571,180 169,131,792

Deposit 23,313,985 15,757,110 23,313,985 -

Payment for staff

quarters 15,460,963 58,044,631 15,460,963 58,044,631

Payables for equipment

and moulds 11,642,871 9,734,918 8,563,779 5,292,290

Consulting fee for

ERP system 4,513,920 - 4,513,920 -

Fuoshan Jingui

Auction Company 162,189 51,431,000 162,189 51,431,000

Shunde Committee of

science and technology - 2,300,00 - 2,300,000

Others 18,793,186 25,911,437 21,525,881 1,425,603

73,887,114 163,179,096 439,111,897 287,625,316

As of 31 December 2001 and 2000, balances of other payables do not comprise any amount due to shareholders who held more than 5% (including 5%) of the Company's share capital.

(18) ACCRUALS

The Group The Company

Reasons for existing 31 December 31 December 31 December 31 December

Nature ending balance 2001 2000 2001 2000

Installation costs Accrual for unpaid 54,911,126 36,665,832 54,911,126 -

installation costs of

goods sold

Interest expense Accrual for interest 3,983,440 1,284,005 3,528,565 1,045,907

expenses occurred but

not yet paid

Sub-contracting fee Accrual for un-invoiced fee 7,778,494 6,166,282 - 3,288,852

Sales discounts Accrual for unpaid discount 38,981,398 218,473,969 38,981,398 -

related to sales of

current year

Advertising costs Accrual for un-invoiced 256,346,876 90,603,990 256,346,876 3,313,589

costs

Transportation costs Accrual for un-invoiced 11,262,800 - 11,262,800 -

costs

Others 16,471,276 20,097,276 12,643,795 6,775,530

389,735,410 373,291,354 377,674,560 14,423,878

As of 31 December 2001, RMB 160,000,000 of accrual is made for the advertising expenditures of 2001 due to Regal Lucky Limited (Note 7 (3)(b)(ii)).

(19) PROVISION

The Group provides 3-5 years of warranty for products sold, and within the warranty period, free repair service is offered. According to industry practice, warranty costs are accrued based on warranty years, estimated repairing rate and unit cost of repairing.

(20) LONG-TERM BORROWINGS

The Group

31 December 2001

RMB Rate

Nature Currency Original Equivalent Loan period (per annum)

Bank loans

• mortgage loans * HKD 32,944,215 34,920,866 1-10years 5%-9%

• guarantee loans ** RMB 200,000,000 200,000,000 2 years 4.77%

234,920,866

Less: amount payable

within one year (204,958,929 )

29,961,937

31 December 2000

RMB Rate

Nature Currency Original Equivalent Loan period (per annum)

Bank loans

• mortgage loans * HKD 53,852,510 57,083,661 1-7years 8.625%-12.25%

• guarantee loans ** RMB 200,000,000 200,000,000 2 years 4.77%

257,083,661

Less: amount payable

within one year (19,777,334 )

237,306,327

* Mortgage loans were secured by buildings in Hong Kong with net book value of approximately RMB 80,818,000 (Year 2000: approximately RMB 118,820,000) (Note 6 (8)).

** Guarantee loans were guaranteed by GKG.

The Company

31 December 2001

RMB Rate

Nature Currency Original Equivalent Loan period (per annum)

Bank loans

• guarantee loans ** RMB 200,000,000 200,000,000 2 years 4.77%

Less: amount payable

within one year (200,000,000 )

-

31 December 2001

RMB Rate

Nature Currency Original Equivalent Loan period (per annum)

Bank loans

• guarantee loans ** RMB 200,000,000 200,000,000 2 years 4.77%

Less: amount payable

within one year -

200,000,000

(21) LONG-TERM PAYABLES

The Group The Company

31 December 31 December 31 December 31 December

Nature 2001 2000 2001 2000

Pension liabilities 109,094,101 113,621,705 109,094,101 113,621,705

Others 7,398,377 3,526,080 4,169,638 -

116,492,478 117,147,785 113,263,739 113,621,705

Contributions to the Group's pension scheme withheld from the employees' salaries and the Group's contributions will be payable upon the retirement of the employees.

(22) MINORITY INTEREST

As of 31 December 2001, cumulative losses of Kelon Air-Conditioner attributable to the minority shareholder exceeded the minority interest in the equity of Kelon Air-Conditioner ("excess loss") by approximately RMB198,340,000.(Year 2000: RMB 158,116,000). In year 2000, management of the Group was negotiating with the minority shareholders to obtain additional finance from the minority shareholders to absorb the excess loss. Hence, in the consolidated financial statements of the year ended 31 December 2000, the excess loss was recorded as minority interest. During year 2001, management of the Group did not reach an agreement with the minority shareholder on the above matters. Therefore, the excess loss of year 2000 and year 2001 amounted to RMB 158,116,000 and RMB40,224,000, respectively, are charged to the beginning balance of retained earnings of 2001 and net loss for the year ended 31 December 2001, respectively. Correction of material accounting errors and retrospective adjustments of comparative financial statements of 2000 are made.

(23) SHARE CAPITAL

Movement of share capital from 1 January to 31 December of 2001 and 2000 is as follows:

Unit: share

Increase (Decrease)

Transfer from

statutory

Beginning Place- Bonus common

of year ment issue reserve fund Other Sub-total End of year

(1) Unlisted shares

1. Founder Shares include: - - - - - - -

State-owned shares

PRC domestic shares

in form of domestic

legal person shares 337,915,755 - - - - - 337,915,755

PRC domestic shares

in form of foreign

legal person

shares - - - - - - -

Others - - - - - - -

1. PRC domestic shares

in form of subscriber

shares - - - - - - -

1. PRC domestic shares

held by employees 84,501,000 - - - - - 84,501,000

1. Preference shares

and others - - - - - - -

Total unlisted shares 22,416,755 - - - - - 422,416,755

(2) Listed shares

1. Domestic shares listed

in the PRC 110,000,000 - - - - - 110,000,000

1. Overseas shares listed

in the PRC - - - - - - -

1. Overseas shares listed

outside the PRC 459,589,808 - - - - - 459,589,808

1. Others - - - - - - -

Total listed shares 569,589,808 - - - - - 569,589,808

(3) Total shares 992,006,563 - - - - - 992,006,563

(24) CAPITAL RESERVE

Movement of capital reserve is as follows:

Assets received

Share premium as donation Total

H Shares and

PRC domestic A Shares

1 January 2000 1,499,662,592 933,863,500 17,696,745 2,451,222,837

Increase (decrease)

for the year - - - -

31 December 2000 1,499,662,592 933,863,500 17,696,745 2,451,222,837

Increase (decrease)

for the year - - - -

31 December 2001 1,499,662,592 933,863,500 17,696,745 2,451,222,837

According to the Company's Articles of Association, the following items should be recorded as Capital Reserve:

(i) share premium from issuance of share: (ii) surplus arising from revaluation of assets; and (iii) other items specified by the relevant PRC regulations and the Company's Articles of Association. Capital reserve can be utilised to offset prior year's deficit or increase share capital.

Share premium represents the difference between the value of net assets acquired from holding company and the par value of the domestic shares issued to holding company and the difference between proceeds from issuance of H Shares and A Shares, and the par value of the H Shares and A Shares issued, net off underwriting commissions, organisation costs and professional fees.

(25) REVENUE RESERVE

Movement of revenue reserve is as follows:

Statutory common Statutory common

reserve fund welfare fund Total

(a) (b)

1 January 2000 229,161,802 114,580,901 343,742,703

Increase (Decrease) for the year - - -

31 December 2000 229,161,802 114,580,901 343,742,703

Increase (Decrease) for the year - - -

31 December 2001 229,161,802 114,580,901 343,742,703

(a) The policy for the Company's revenue reserve is as follows:

(i) Statutory common reserve fund

In accordance with the relevant PRC regulations and the Company's Articles of Association, the Company shall appropriate 10% of its annual statutory net profit (after offsetting prior years' losses) to the statutory common reserve fund. When the balance of statutory common reserve fund reaches 50% of share capital, any further appropriation is optional. The statutory common reserve fund can be utilised to offset prior years' losses or to increase capital. However, the statutory common reserve fund must be maintained at a minimum of 25% of share capital after such usage.

(ii) Statutory common welfare fund

The Company appropriate 5% to 10% of its annual statutory net profit (after offsetting any prior years' losses) to a statutory common welfare fund to be utilised to build or acquire capital items for the common benefits of the employees.

(b) The appropriation policy for surplus reserve of the subsidiaries in the PRC:

(i) For subsidiaries in the PRC and registered as Sino-foreign joint ventures:

In accordance with the PRC laws and relevant regulations, the subsidiaries in the PRC are required to provide certain statutory funds, namely reserve fund, enterprise expansion fund and staff and workers' bonus and welfare fund, which are appropriated from net profit after taxation but before dividend distribution. These funds are created for specific purposes and appropriations to these funds are at the discretion of the directors of the subsidiaries in the PRC. The reserve fund can only be used, upon approval by the relevant authority, to offset accumulated losses or increase capital. The enterprise expansion can only be used to increase capital upon approval by the relevant authority. The staff and workers' bonus and welfare fund can only be used for special bonuses or collective welfare of the Company's employees and assets acquired through this fund shall not be taken as the assets of the subsidiaries in PRC.

The reserve fund and enterprise expansion fund of the subsidiaries in the PRC are recorded in the account caption of statutory surplus reserve fund in the consolidated financial statement, while the staff and workers' bonus and welfare funds are recorded in the account caption of welfare payable in the consolidated financial statements.

(ii) For the Group's subsidiaries in the PRC and registered as limited liability company, the policy for reserve fund is the same as the Company.

(26) (ACCUMULATED LOSSES) RETAINED EARNINGS

2001 2000

Retained earnings, beginning of year 174,666,289 1,005,319,787

Less: Net loss for the year (1,555,573,089 ) (830,653,498 )

Retained earnings (accumulated losses),

end of year (1,380,906,800 ) 174,666,289

According to the Company's Articles of Association, the amount of profit available for distribution will be determined based on the lower of retained earnings in the financial statements prepared in accordance with the PRC Accounting Standards and International Accounting Standards.

The Company does not recommend any dividend payment for the year or appropriate reserve fund according to the resolution by the board of directors since the Company sustained loss in year 2001.

(27) REVENUE AND COST FROM PRINCIPAL BUSINESS

The Group

2001 2000

Line of business Revenue Cost of sales Revenue Cost of sales

Sales of refrigerators 2,164,254,362 1,766,962,106 2,149,212,825 1,730,286,503

Sales of air-conditioners 2,177,206,505 1,815,052,540 1,574,493,175 1,468,613,719

Sales of fittings 31,493,390 31,487,794 29,555,143 25,417,423

Others 8,662,111 2,213,631 116,241,474 26,215,522

4,381,616,368 3,615,716,071 3,869,502,617 3,250,533,167

For the year ended 31 December 2001 and 2000, the Group's sales to 5 largest customers amounted to RMB 601,879,134 and RMB 657,815,445, accounting for 14% and 17% of total revenue of the Group in year 2001 and 2000, respectively.

The Company

2001 2000

Line of business Revenue Cost of sales Revenue Cost of sales

Sales of refrigerators 1,873,787,788 1,569,731,194 142,811,543 136,006,123

Sales of air-conditioners 1,824,531,271 1,491,528,891 - -

3,698,319,059 3,061,260,085 142,811,543 136,006,123

The Company's sales to 5 largest customers for the year ended 31 December 2001 amounted to RMB 601,879,134, accounting for 16% of total revenue of the Group and the Company in year 2001, respectively. For the year ended 31 December 2000, all sales of the Company were made to Kelon Refrigerator.

(28) FINANCIAL COSTS

The Group The Company

2001 2000 2001 2000

Interest expenses (92,864,732 ) (78,675,496 ) (63,960,478 ) (32,805,075)

Interest income 12,552,101 12,577,944 10,652,955 9,198,266

Exchange (Loss) gain, net (2,946,181 ) (3,671,640 ) 131,321 (3,415,304 )

Bank charges (3,429,059 ) (3,261,562 ) (1,161,736 ) (275,071 )

(86,687,871 ) (73,030,754 ) (54,337,938 ) (27,297,184)

In year 2001 and 2000, interest income of the Group includes the interest from the associate company of Chengdu Kelon's minority shareholder for advance of capital. The interest income in this connection amounted to RMB 3,231,360 and RMB 3,264,317 respectively. (Note 7(3) (b) (xii))

(29) PROFIT (LOSS) FROM INVESTMENTS

The Group The Company

2001 2000 2001 2000

Share of loss of subsidiaries - - (312,617,698 ) (764,040,331 )

Loss on disposal of Investee

enterprise (Note 5(h)) (11,089,152 ) - (11,089,152 ) -

Share of (loss) profit

of associates (611,426 ) 8,368,000 (638,813 ) 8,368,000

Amortisation of equity

investment difference (16,014,647 ) (10,197,000 ) (15,013,858 ) (10,197,000 )

Provision for impairment

loss for equity

investment (Note 6(7)) (71,200,641 ) - (59,381,641 ) -

Others (147,398 ) - (147,187 ) -

(99,063,264 ) (1,829,000 ) (398,888,349 ) (765,869,331 )

As of 31 December 2001, no significant restriction is posed over the remittance of investment income for the Group and the Company.

(30) NON-OPERATING EXPENSES

The Group The Company

2001 2000 2001 2000

Provision for impairment loss for

fixed assets(Note 6 (8)) 47,236,170 - - -

Loss on disposal of fixed assets 15,057,482 5,544,048 12,685,498 1,653,069

Others 10,989,023 14,961,773 2,073,856 3,740,155

73,282,675 20,505,821 14,759,354 5,393,224

(31) INCOME TAX

The Group The Company

2001 2000 2001 2000

PRC enterprise income tax - 5,429,722 - 4,597,211

Hong Kong profits tax - - - -

Others - 64,952 - -

• 5,494,674 - 4,597,211

(32) RETURN RATIO ON NET ASSETS AND EARNINGS PER SHARE

Ratio of return on net assets and earnings per share are prepared in accordance with "No.9 Document of Regulations and Information Disclosure Requirements for Public listed Companies - Computation and Disclosure of Return on Net Assets and Earnings per Share". The detailed formulas are as follows:

Fully diluted return on net assets = Profit for the reporting period/net assets as of the end of the period

Fully diluted earnings per share = Profit for the reporting period/total number of shares as of the end of the period

P

Weighted average return on net assets =

(Eo + NP/2 + Ei *Mi/Mo)

P: Profit for the reporting period

Eo: Net assets as of the beginning of the period

NP: Net profit for the reporting period

Ei: Increase in net assets by issue of new shares

Mi: Number of months from the month immediately after the issue of new shares to the end of the reporting.

Mo: Number of months for the reporting period

P

Weighted average earnings per share =

(So + Si *Mi/Mo)

P: Profit for the reporting period

So: Number of shares as of the beginning of the period

Si: Increase in number of shares from issue of new shares

Mi: Number of months from the month immediately after the issuance of new shares to the end of the reporting.

Mo: Number of months for the reporting period

Non-operating gain or loss includes two kinds of income or expenditure: one is incurred with no direct relationship with operation while the other has relations with operation. But due to its nature, amount or frequency, the latter will have impact on truly, fairly evaluating company's results of operations and its ability to make profits.

Non-operating gain or loss includes:

The Group The Company

2001 2000 2001 2000

Fee received for providing

capital (3,231,360 ) (3,264,317 ) (5,504,085 ) (6,037,617)

Disposal of impairment loss

of equity investment 11,089,152 - 11,089,152 -

Subsidy income (64,764 ) (175,300 ) (64,764 ) (175,300 )

Retrospective adjustment for

the change of accounting

policy - (5,881,102 ) - (5,881,102 )

Non-operating income (21,529,992 ) (12,929,298 ) (13,826,125 ) (61,580 )

Non-operating expenses 73,282,675 20,505,821 14,759,354 5,393,224

Less: EIT impact - - - -

59,545,711 (1,744,196 ) 6,453,532 (6,762,375 )

(33) SUPPLEMENTARY INFORMATION OF CASH FLOWS

(a) Cash paid for other investment activities:

2001

The Group and

The Company

Fund to GKG (Note 7 (3)(a)) 5,873,904,000

Less: fund from GKG (Note 7(3)(a)) (4,944,471,000 )

Funding to GKG, net 929,433,000

Less: Repayment from Greencool (Note (3)(b)(i)) (150,000,000 )

Add: Fund to Kelon Employee Union (Note 7(3)(b)(vi)) 58,139,947

Cash paid for other investment activities 837,572,947

(b) Reconciliation of Cash and Bank, and Cash and Cash Equivalent

The Group The Company

31 December 31 December 31 December 31 December

2001 2000 2001 2000

Cash and Bank 778,191,077 838,710,032 492,198,063 461,842,796

Less: pledged deposit (126,994,513 ) (38,937,419 ) (110,839,227 ) (57,624 )

Cash and Cash

Equivalent 651,196,564 799,772,613 381,358,836 461,785,172

7. RELATED PARTY TRANSACTIONS

(1) The basic information of related parties and their relationship with the Group:

The related party relationships principally refer to:

(i) enterprises that, directly or indirectly, control, or are controlled by, the reporting enterprise; and two or more enterprises subject to control from the same enterprise;

(ii) joint ventures;

(iii) associate enterprises;

(iv) principal individual investors, key management personnel, or the close family members of such individuals; and

(v) other enterprises directly controlled by principal individual investors, or key management personnel, or the close family members of such individuals.

(a) Except for subsidiaries as disclosed in Note 5, related parties with controlling interests also include:

Place of Enterprise Legal/

Name of company incorporation Principal activities Relationship nature representative

Guangdong Kleon Shunde, Investment holding Major Limited Li Zheng Hua

(Rongsheng) Group Guangdong shareholder liability

Company Limited company

("GKG")

Shunde (Greencool) Shunde, Research,manufacture, Company Limited Gu Chu Jun

Development Co. Ltd. Guangdong and sale of owned by liability

("Greencool") refrigeration chairman of company

equipment, the Company

fittings and

fluorine-free

cryogen

(b) Movement in paid in capital of the related parties with controlling interests

Name of company Beginning of year Addition Deduction End of year

GKG RMB30,000,000 - - RMB30,000,000

Greencool - RMB1,200,000,000 - RMB1,200,000,000

Pearl River HKD400,000 - - HKD400,000

Kelon Appliances HKD10,000 - - HKD10,000

Rongshen Plastic USD14,800,000 USD1,000,000 - USD15,800,000

Kelon Development HKD5,000,000 - - HKD5,000,000

Kelon Mould USD15,000,000 - - USD15,000,000

Kelon Refrigerator USD26,800,000 - - USD26,800,000

Kelon Air-Conditioner USD36,150,000 - - USD36,150,000

Kelon (Japan) Limited JPY1,100,000,000 - - JPY1,100,000,000

Chengdu Kelon RMB200,000,000 - - RMB200,000,000

YingKou Kelon RMB200,000,000 - - RMB200,000,000

Wetherell Developments

Limited USD1 - - USD1

KII USD50,000 - - USD50,000

Kelon Fittings USD5,620,000 - - USD5,620,000

Sichuan Rongsheng - RMB2,000,000 - RMB2,000,000

Beijing Hengsheng - RMB30,000,000 - RMB30,000,000

Jiake Electronic - RMB60,000,000 - RMB60,000,000

Kelon Tiandi - RMB5,000,000 - RMB5,000,000

Kelon Shikong - RMB5,000,000 - RMB5,000,000

(c) Movement in equity interests in the Company of the related parties with controlling interests

i) Major shareholder

Name of Beginning of year Addition Deduction End of year

company Amount % Amount % Amount % Amount %

GKG 337,915,755 34.06% - - - - 337,915,755 34.06%

On 18 April 2002, GKG transferred 204,775,755 shares of the Company's legal person shares it owned to Greencool, and subsequently, GKG's share capital in the Company was reduced from 34.06% to 13.42%.

ii) Subsidiaries

For the movement of the Company's share capital or equity in subsidiaries, please refer to Note 5.

d) Related parties without controlling interests

Name Relationship with the Company

Chendu Xinxing Electrical Appliance Associate of the minority

Holdings Company Limited ("Chengdu shareholder of Chendu Kelon

Xinxing")

Cheung Tat Household Applicance Co.,. Financially supported by GKG

Ltd ("Cheung Tat")

Kelon Advertising Company ("Kelon Subsidiary of GKG

Advertising")

Huaao Electrical Electrical Company Subsidiary of GKG

Limited ("Huaao Electrical")

Kelon HEA Associate of the Company, Subsidiary of GKG

Sanyo-Kelon Associate of the Company

Wangao Co Associate of the Company, Subsidiary of GKG

Chongqing Kelon Associate of the Company

C&Y Associate of the Company

Labor Union of Guangdong Kelon Entity organised and owned by

Electrical Holdings Company ("Kelon employees of the Company

Employee Union")

YingKou Shareholding Committee Shareholder of YingKou Kelon

("YK Shareholding Committee")

Grand Moment Investment Limited Minority shareholder of Kelon

Company ("Grand Moment") Air-conditioner

(2) Balance with related parties

The Group The Company

31 December 31 December 31 December 31 December

2001 2000 2001 2000

Notes Receivable

• GKG(Note 3 (a)) 170,000,000 - 170,000,000 -

Accounts Receivable

• Huaao Electrical

(Note 3 (b) (iii)) 34,154,564 5,716,018 1,967,881 -

• Wangao Co

(Note 3(b)(iv) 9,813,628 - - -

• Cheung Tat

(Note 3(b)(v)) - 121,429,165 - -

• Sanyo-Kelon

(Note (3)(b)(x)) 37,050,000 28,484,336 37,050,000 -

• Huayi Compressor 2,483,616 - - -

• Chongqing

Rongsheng 2,318,665 - 2,318,665 -

• Others 100,384 - - -

85,920,857 155,629,519 41,336,546 -

Less: Bad debt provision

(Note (3)(b)(x)) (37,050,000 ) - (37,050,000 ) -

48,870,857 155,629,519 4,286,546 -

Other Receivables

• GKG (Note (3)(a)) 692,045,165 280,612,660 692,045,165 23,645,296

• Greencool

(Note (3)(b)(i)) 198,000,000 - 198,000,000 -

• Huaao Electrical

(Note (3)(b)(iii)) 46,956,257 - 7,335,171 -

• Wangao Co

(Note (3)(b)(iv)) 5,574,993 - 5,779,973 -

• Kelon HEA

(Note (3)(b)(vii)) 23,850,685 - 30,078,119 -

• Subsidiaries - - 1,155,567,056 2,212,064,054

• Others 273,937 35,617,050 247,157 12,634,000

966,701,037 316,229,710 2,089,652,641 2,248,343,350

Less: Bad debt provision

(Note 3 (a)) (172,409,033 ) - (172,409,033 ) -

794,292,004 316,229,710 1,916,643,608 2,248,343,350

Long-term receivables

• Kelon Employee Union

(Note (3)(b)(vi)) 58,139,947 - 58,139,947 -

• Chengdu Xinxing

(Note (3)(b)(xii)) 34,000,000 34,000,000 - -

92,139,947 34,000,000 58,139,947 -

The Group The Company

31 December 31 December 31 December 31 December

2001 2000 2001 2000

Accounts Payable

• Huaao Electrical

(Note (3)(b)(iii)) 93,676,908 - 1,723,610 -

Other Payables

• Subsidiaries - - 365,571,180 169,131,792

• Others 263,100 - - -

263,100 - 365,571,180 169,131,792

Advance from customers

• Chongqing Kelon 5,902,078 22,154,008 5,902,078 -

• Others - 160,995 - -

5,902,078 22,315,003 5,902,078 -

(3) Related party transactions

The Group The Company

2001 2000 2001 2000

Sales of goods to related parties

• Huaao Electrical (Note (b) (iii)) 53,024,758 5,716,018 1,681,950 -

• Wangao Co (Note (b) (iv)) 13,868,651 - 73,441 -

• Cheung Tat (Note (b)(v)) - 246,177,855 - -

• Kelon HEA (Note (b)(vii)) - 2,095,601 - -

• Chongqing Kelon (Note (b)(viii)) 57,771,537 50,864,328 57,771,537 -

• Chongqing Rongsheng

(Note (b)(ix)) 73,222,962 - 73,222,962 -

• Sanyo-Kelon

(Note (b)(x)) 25,483,847 36,119,549 6,239,949 -

• Kelon Refrigerator - - - 154,670,280

223,371,755 340,973,351 138,989,839 154,670,280

Purchase goods from

related parties

• Wangao Co (Note (b)(iv)) 5,978,567 - - -

• Cheung Tat (Note (b)(v)) - 98,292,212 - -

• Kelon HEA (Note (b)(vii)) 12,485,857 - 12,485,857 -

• Kelon Refrigerator - - 1,179,792,489 -

• Kelon Air-conditioner - - 2,227,614,661 -

• Chengdu Kelon - - 245,920,903 -

• YingKou Kelon - - 205,620,798 -

18,464,424 98,292,212 3,871,434,708 -

Purchase of raw material

from related parties

• Huaao Electrical

(Note (b) (iii)) 201,302,903 - 10,713,510 -

• Wangao Co (Note (b)(iv)) 2,025,976 - - -

• Rongsheng Plastic - - 33,268,766 1,360,991

• Kelon Fittings - - 28,496,122 7,962,641

203,328,879 - 72,478,398 9,323,632

Purchase moulds from

related parties

• Kelon Mould - - 6,728,630 4,962,352

Sales of net fixed assets

to related parties

• Kelon Fittings - - - 139,100,770

• Kelon Mould - - 776,102 -

• Chengdu Kelon - - 43,470 -

• • 819,572 139,100,770

Purchase of net fixed assets from related parties

• Kelon Refrigerator - - 9,408,181 20,386,167

• Kelon Air-conditioner - - 4,362,983 6,850,000

• • 13,771,164 27,236,167

Guarantee provided by

related parties.

• GKG 430,000,000 200,000,000 400,000,000 200,000,000

The Group The Company

2001 2000 2001 2000

Guarantee and mortgage

provided to related parties

• C& Y (Note (b) (xi)) 3,975,000 - - -

• Chengdu Kelon - - - 60,000,000

• YingKou Kelon - - - 22,000,000

• Kelon Electric

Applicance Co., Ltd. - - - 42,000,000

• Pearl River * - - 83,634,510 269,686,000

3,975,000 - 83,634,510 393,686,000

* For the year ended 31 December 2001, the Company and Kelon Development provided guarantee for Pearl River's bank loan RMB 83,634,510. As of 31 December 2001, Pearl River had obtained RMB 25,609,386 of guarantee loans within such limit (Note 6 (12)).

The Group The Company

2001 2000 2001 2000

Provide loan to related

parties

• Chengdu Kelon

(Note (b) (xii)) 34,000,000 34,000,000 - -

• YingKou Kelon

(Note (b) (xv)) - - 37,000,000 37,000,000

34,000,000 34,000,000 37,000,000 37,000,000

Other income (expenses)

obtained from (paid to)

related parties

• Allocation of

advertising

and promotion costs

to GKG

(Note (a) (ii)) - 235,000,000 - -

• Service fee from GKG

for exporting appliance

(Note (b) (iii)) 9,010,000 - - -

• Advertising expenses

paid to Kelon

Advertising

(Note b(ii)) (47,458,371 ) (88,065,439 ) (47,458,371 ) -

• Advertising expenses

paid to C&Y

(Note b(xi)) (21,229,000 ) - (21,229,000 ) -

• Interest income from

Chengdu Xinxing

(Note b(xii)) 3,231,360 3,264,317 3,231,360 3,264,317

• Management fee

received from

Kelon Air

Conditioner

(Note b(xiv)) - - 96,000,000 125,000,000

• Interest income from

YingKou Kelon

(Note b(xv)) - - 2,272,725 2,773,300

• Overseas service fee

paid to Pearl River

(Note (b) (xvi)) - - (24,900,000 ) -

• Overseas service fee

paid to Kelon

(Japan) Limited.

(Note (b) (xvi)) - - (7,125,800 ) -

Except for disclosed interest income from related parties, Balances with related companies are interest-free and have no fixed repayment dates.

(a) Transactions with GKG:

(i) License Agreement

Under the license agreement ("License Agreement") dated 6 July 1996 made between GKG, the major shareholder of the Group, and the Company, GKG granted to the Company an exclusive right to use the trademarks "Kelon" and "Rongsheng" for no consideration (a) as registered in the PRC and Hong Kong, and/or (b) as registered and/or in respect of which applications for registration may be made with the trademarks registry of any other territory by GKG and /or (c) all "Kelon" or "Rongsheng" trademark registrations as may be assigned to GKG from time to time on freezers, refrigerators and other similar or related products and such other products as may be requested by the Company from time to time which are not objected by GKG, on a worldwide basis, for a term equivalents to the period of validity of the relevant registration. GKG may use and, with the prior written consent of the Company, allow third party to use, such trademarks on production other than the types of products covered by the License Agreement. At present, according to the agreement, the Group use the trademarks of "Kelon" and "Rongsheng" on the refrigerators and "Kelon" on the air-conditioners under the above License Agreement.

(ii) Cost Sharing Agreement

According to the agreement signed among Kelon Refrigerator, Kelon Air-conditioner and GKG ("Cost Allocation Agreement") signed in 2000, GKG agreed to share part of the advertising and promotion expenses paid by Kelon Refrigerator and Kelon Air-conditioner for the promotion of Kelon and Rongsheng brands. According to the Cost Sharing Agreement, the amount GKG agreed to share during 2000 is approximately RMB 235,000,000. No such cost sharing arrangement is made for year 2001.

(iii) Other related parties transaction with GKG during year 2001

a) In year 2001, GKG had requested the Company to repay (which the Company had repaid), on its behalf, to Sanyo-Kelon (an associate of the Company) RMB101,370,000 incurred by GKG for the purchase of goods from Sanyo-Kelon.

b) During 2001, Kelon Air-Conditioner, the Company's subsidiary, had provided a guarantee for a maximum amount of up to RMB230,000,000 in favor of the Agriculture Bank of China as security for the bank granting loans to GKG. Prior to 31 December 2001, the Company had undertaken the guarantor's responsibility and made repayment of bank loan amounting to RMB211,220,000 on behalf of GKG.

c) During 2001, GKG made a payment of RMB 9,010,000 (2000: Nil) to one of the Company's subsidiaries as the service fee for exporting household electric appliances for GKG.

Except for the above transactions, there is also significant fund transfers between the Group and GKG. Including the transactions disclosed in (a), (b) and (c), the Group provided funds of RMB 5,873,904,000 to and also received funds of RMB 4,944,471,000 from GKG.

As of 23 December 2001, GKG entered into debt transfer agreement with the Company and Greencool. Such debt transfer agreement was subsequently revised on 22 March 2002. In accordance with the agreement, GKG transferred a portion of its debt owing to the Company, amounting to RMB 348,000,000, to Greencool in connection with its sale of part of the Company's shares to Greencool.

As of 31 December 2001, taken into account the debt transfer, the total amount due from GKG for the Company amounted to RMB 862,045,000 as of 31 December 2001. The management considers that it is uncertain to recover full amount of the receivable from GKG. After negotiating with management of GKG, management of the Group estimated that RMB 172,409,000 of the receivable may not be recovered and therefore made provision for it as for the year ended 31 December 2001.

(b) Transaction with other related parties:

Other related party transactions can be summarised as follows:

(i) As disclosed in Note (a), Greencool becomes a debtor of the Company subsequent to the transfer of debt of RMB 348,000,000. In accordance with the debt transfer agreement, the total amount of debt was due for full repayment 10 days after 204,775,755 shares of the Company held by GKG are legally transferred to Greencool. As of 31 December 2001, an amount of RMB 150,000,000 was settled by Greencool.

(ii) Kelon Advertising is a wholly-owned subsidiary of GKG. The Group engaged Kelon Advertising as one of its advertising agency. For the year ended 31 December 2001, the Group made payment of RMB 47,458,000 as the advertising fee (2000: RMB 88,065,000) to Kelon Advertising in connection with advertising activities in respect of Kelon brands.

During 2001, the Company also provided funding to the operation of Kelon Advertising. The amount due from Kelon Advertising in this connection was transferred to GKG as of 31 December 2001.

The Company signed a contract with Regal Lucky Limited, on the advertising service of year 2001. The total amount of the contract is RMB 160,000,000. According to the contract, Kelon Advertising would assist the Company to monitor the advertising service performed by Regal Lucky Limited, and collect advertising fee on behalf of Regal Lucky Limited,. As of 31 December 2001, the Company made an accrual of RMB 160,000,000 for this advertising expenditure. (Note 6(18))

(iii) Huaao Electrical is a subsidiary of GKG. During 2001, The Group purchased certain materials at market price amounted to RMB 201,303,0000 (2000: Nil) from Huaao Electrical.

The Group also sold electronic spare parts to Huaao Electrical. During 2001, the amount of sales to Huaao Electrical by the Group amounted to RMB 53,025,000 (2000: RMB 5,716,000).

The Group also provided funding to the operation of Huaao Electrical in year 2001.

As of 31 December 2001, the amount due to Huaao Electrical in connection with the above amounted to RMB 12,566,000.

(iv) Wangao Co is a subsidiary of GKG established in June 2001. In year 2001, it imported material of RMB 2,026,000 on behalf of Rongsheng Plastic, a subsidiary of the Company. Meanwhile, Pearl River and KII, subsidiaries of the Group purchased mini household electrical appliances from Wangao Co for export purposes. Such purchase amounted to approximately RMB 5,979,000. Also, Wangao Co purchased refrigerators of RMB 13,869,000 from the group for trading purpose.

The Group also provided funding to Wangao Co during 2001.

As of 31 December 2001, the amount due from Wangao Co is RMB 15,389,000.

(v) The Group sells refrigerators to Cheung Tat. Cheung Tat is a PRC registered company and obtained significant financial support from GKG. For the year ended 31 December 2000, the sale of refrigerators to Cheung Tat amounted to approximately RMB 246,178,000. Prior to 31 December 2000, the Group reached agreement and bought back certain unsold refrigerators from Cheung Tat for RMB 98,292,000. The amount represents the lower of cost and net realisable value of the unsold refrigerators at the time of the buy-back. No such transaction occurred in 2001.

(vi) In year 2001, the Company provided funds of RMB 116,000,000 to Kelon Employee Union, an employee association organised by employees of the Group and controlled by delegates who are elected by the employees. As of 31 December 2001, the amount due from Kelon Employee Union in this connection is RMB 58,140,000.

(vii) Kelon HEA is 75% held by GKG and 25% by the Company, respectively. During the year ended 31 December 2000, Kelon HEA purchased refrigerators and air-conditioners from the Group and sold them in the market. In year 2000, the total sales of the Group to Kelon HEA amounted to approximately RMB 2,096,000. No such transaction occurred in year 2001. During year 2001, the Company purchased household appliance from Kelon HEA as promotion gifts for sales of refrigerators and air-conditioners. As of 31 December 2001, the total purchase from Kelon HEA in this connection amounted to RMB 12,486,000.

The Group also provided funding to Kelon HEA during 2001.

As of 31 December 2001, the amount due from Kelon HEA in connection with the transaction to RMB 23,851,000.

(viii) Chongqing Kelon is an associate company of the Group. During year 2001, the Group's sales to Chongqing Kelon amounted to RMB 57,772,000.

(ix) Chongqing Rongsheng is an associate company of the Group. During year 2001, the Group's sales to Chongqing Rongsheng amounted to RMB 73,223,000.

(x) Sanyo-Kelon is an associate company of the Group. During year 2001, the Group's sales to Chongqing Kelon amounted to RMB 25,484,000.

As of 31 December 2001, the receivable from Sanyo-Kelon amounted to RMB 37,050,000. Because there is an uncertainty as to whether the receivable can be collected, full provision is made against the balance.

(xi) C&Y is a 25% owned associated company of Kelon Development, a subsidiary of the Company. The major shareholder of C&Y is Qin Jia Yuan Shares Company Limited ("QJY").

The sole shareholder of C&Y is the spouse of a director of the Company prior to his resignation in 2001.

In year 2000, Kelon Development signed an agreement with C&Y to hold shares of C&Y. The agreement specifies respectively the rights and obligations of C&Y and Kelon Development as shareholders, and the management principal of C&Y.

According to the agreement, Kelon Development purchased 25 shares of C&Y with the price of HKD 12,000,000. As the counterpart, C&Y purchased 73 shares of Kelon Development and some contracts, amounting to HKD 2,000,000. C&Y also purchased one share from each of its original shareholders at par value.

C&Y mainly engages in the business of media advertising and promotion.

According to the agreement, Kelon Development agreed with C&Y to purchase HKD20,000,000 worth of advertisement and/or sponsorship air-time when completing contracts. As of 31 December 2000, no relevant contract was signed and no payment for advertising services is made to C&Y.

As of 31 December 2001, Kelon Development granted to C&Y loan guarantee of RMB 3,975,000. In year 2001, the advertising fee that the Group paid to C&Y amounted to RMB 21,229,000.

Because the operating results of C&Y are not satisfactory, as of 31 December 2001, the Group made provision of RMB 12,000,000 for its investment in C&Y. (Note 6(7))

(xii) The Company provided working capital amounting to an aggregate sum of RMB 34,000,000 indirectly through its subsidiary, Chengdu Kelon to Chengdu Xinxing Electrical Appliance Holdings Company Limited ("Chengdu Xinxing"), which is an associate of Chengdu Engine (Group) Company Limited ("Chengdu Engine"), the minority shareholder of Chengdu Kelon. The payment was guaranteed by Chengdu Engine and Chengdu Kelon has the right to deduct from any dividends payable to Chengdu Engine the outstanding amount of any payments (in whatever form) due from Chengdu Xinxing directly or indirectly to the Company. As security for Chengdu Engine's performance of its obligations under the above guarantee, Chengdu Engine has mortgaged its entire equity in Chengdu Kelon to the Company. As consideration for such payment, Chengdu Xinxing has agreed to repay Chengdu Kelon by supplying an agreed number of refrigeration parts together with interest payments at an annual rate of approximately 9%.

(xiii) On 5 September 2000, YK Shareholding Committee, Kelon Refrigerator, YingKou Yinlang (Group) Limited. and Pearl River signed an agreement on equity transfer. According to the agreement, the Company's share holder of YingKou kelon transfers the 11.79% of YingKou Kelon's share that it owns to Kelon Refrigerator.

YingKou Kelon is a Sino-foreign joint venture registered in the PRC. It is formerly held by the Company, YingKou Yinlang (Group) Limited and Pearl River at the percentage of 42%, 33% and 25%. According to relevant PRC court verdict on 2 June 2000, the equity held by YingKou Yinlang (Group) Limited. (already in the process of liquidation) is transferred to YK share holding committee .

The above equity transfer is based on the consideration that YingKou Kelon is an important base of production for the Group in the northeastern part of the PRC and that the Group enjoys priority of transfer as YingKou Kelon's shareholder after YK Shareholding Committee made the suggestion to transfer all share capital of YingKou Kelon that it owns.

YingKou Jincheng asset valuation company, which is credited by the PRC ministry of finance with the qualification of asset valuation, serves as the independent valuator of this transfer. The base date of the valuation is 14 November 2001 and the valuation price is RMB 24,753,677. The transaction was conducted at the valuation price and the legal formalities of the transfer were completed.

(xiv) During 2001, the Company signed management agreement with Kelon Air-conditioner. According to this agreement, Kelon Air-conditioner should pay management fee and fund occupation fee for the resources and working capital it uses. During 2001, the Company receives management fee from Kelon Air-conditioner amounting to RMB 96,000,000. (2000: RMB 125,000,000)

Kelon Air-Conditioner is a 60% owned subsidiary of the Company. The remaining 40% of equity is owned by Grand Moment, which is incorporated in the British Virgin Islands, the shareholding of Grand Moment is such that it is 37.5% held by GKG. One of the ex-director of the Company is also a director of Grand Moment.

(xv) The Company signed a loan contract with Yingkou Kelon and provided working capital amounting o RMB 37,000,000 to Yingkou Kelon. According to the contract, the Company received from YingKou Kelon interest income amounting to RMB 2,273,000 and RMB 2,773,000 respectively in 2001 and 2000 at the rate of 6.14% per annum.

(xvi) The Company signed service agreement with Pearl River and Kelon (Japan) Limited respectively. According to the agreement, Pearl River and Kelon (Japan) Limited offers market consulting, information, and training services. In return, the Company pays to Pearl River and Kelon (Japan) Limited relevant service fee.

(c) Commitment on acquiring related parties

To avoid the occurrence of future connected transactions with Kelon Advertising, Kelon HEA, Huaao Electrical and Wangao Co as described above and in consideration of the Company's plan to consolidate its import/export business and to utilise the household mini electrical appliances business to promote the Company's refrigerators and air-conditioners, the Company entered into sales and purchase agreement with GKG on 26 November 2001, through its wholly owned subsidiary Jia Ke Electronics, to acquire GKG's entire share capital in Kelon Advertising, Kelon HEA, Huaao Electrical and Wangao Co (collectively referred to as "GKG Service Companies") respectively.

The above transfer of shares was suspended by legal authorities.

(d) Violation of listing rules and regulations

As disclosed in the Company's announcement on 13 March 2002, some of the Group's related party transactions violated rules and regulations for listing companies issued by The Stock Exchange of Hong Kong Limited and Shenzhen Stock Exchange. The above stock exchanges have stated that they reserve the rights to take actions against the Company and related directors according to relevant rules and regulations for listing companies.

8. CONTINGENT LIABILITY

The Group

As of 31 December 2001, the Group provided guarantees for loan facilities granted to its associates, RMB approximately 3,975,999 (Year 2000: Nil).

During 2001, a subsidiary of the Group executed a debt guarantee of RMB 230 million to secure borrowings of GKG without proper approval. This guarantee has been enforced and the Company has settled RMB 211 million of GKG's liabilities as a result. This incidence indicates inadequate control over the granting of guarantees.

In order to improve control over this area, the Company has amended the internal control procedure to centralize the authorization of obtaining finance and granting of guarantee to the Treasure Department of the Company.

In respect of the possible unrecorded liability and guarantees, the Company has inquired various banks in Shunde, and those nearby, with which the Group has business relationship. Up to the present, the management is not aware of any further liability arising from unauthorized guarantees.

The Company

As of 31 December 2001, the Company provided guarantees of RMB 83,635,000 for loan facilities granted to its subsidiaries (Year 2000: approximately RMB 393,686,000).

9. CAPITAL COMMITMENT

	2001		2000
Authorised and contracted for
- Purchase of advertisement and sponsorship air-time (Note 7(3)(b)(xi)	-		21,200,000
- Purchase of property, plant and machinery	51,740,000		13,297,000

10. SUBSEQUENT EVENT

On 18 April 2002, GKG transferred 204,775,755 shares of legal person shares of the Company to Greencool.

11. OTHER IMPORTANT ISSUES

During the years of 2001 and 2000, one of the Company's 60% subsidiary, Kelon Air-conditioner ("the subsidiary") suffered excess loss of approximately RMB 100,561,000 and RMB 395,289,000 respectively. Negative net assets of Kelon Air-conditioner were RMB 495,850,000 and RMB 395,289,000 respectively as at December 31, 2001 and 2000. According to the Accounting Standards for Business Enterprises-Investments and according to notice issued by Ministry of Finance, Cai Kuai 2 Han Zi [1999] No. 10 in relation to the consolidation of companies with negative equity, the Company has no obligation to absorb the excess loss of the subsidiary. However, since the Company intends to inject more capital to continue its support for the subsidiary, and to reflect the financial position and operating results in a more fair and prudent manner, the Company applies International Accounting Standard No.27-Consolidation of Financial Statements and Accounting of Investment in Subsidiaries to the treatment of long-term investment. The losses of the subsidiary in year 2001 and 2000 were fully absorbed, recognised as investment loss, and recorded as separately as "liabilities of investee enterprise". As of 31 December 2001 and 31 December 2000, the balance of liabilities of investee enterprise was RMB 495,850,000 and RMB 395,289,000 respectively.

12. RECONCILIATION OF DIFFERENCES BETWEEN FINANCIAL STATMENTS

The financial statements for the Company's listed H Share in The Stock Exchange of Hong Kong Limited is prepared according to International Accounting Standards and audited by Arthur Andersen Co. Differences exist between International Accounting Standards and Accounting Standards of the PRC. The impact of the differences on net loss and owner's equity is summarised as follows:

The Group

		Net Loss									Owner's Equity
		2001			2000						2001		2000
As per PRC GAAP		(1,555,573,089		)	(830,653,498				)		2,402,616,534		3,957,879,122
IAS adjustments:
- Adjustment on fixed assets
revaluation and related
depreciation		(15,463,682		)	(15,463,682				)		17,069,677		32,533,359
As restated under IAS		(1,571,036,771		)	(846,117,180				)		2,419,686,211		3,990,412,481
The Company
	Net Loss									Owner's Equity
	2001						2000			2001			2000
As per PRC GAAP	(1,555,573,089		)				(830,653,498	)		2,402,616,534			3,957,879,122
IAS adjustments
- Adjustment on fixed assets revaluation
and related depreciation	(17,299,585		)				(17,299,585	)		42,241,833			59,541,418
- Adjustment on equity
pickup in subsidiaries	328,270,369						765,869,331			367,263,224			33,627,019
- Adjustment on profit
appropriation of subsidiaries
and associates	12,580,429						-			-			-
- Adjustment on additional
amortisation of good will under
International Accounting Standards	(7,214,593		)				-			-			-
- Adjustment on exchange
difference of translation of foreign
currency financial statements	-						-			(310,501		)	-
As restated under IAS	(1,239,236,469		)				(82,083,752	)		2,811,811,090			4,051,047,559

13. EXPLANATION ON SIGNIFICANT FLUCTUATION IN ACCOUNT CAPTIONS OF CONSOLIDATED FINANCIAL STATEMENTS

The account captions in the consolidated financial statements, whose extent of fluctuation between the two years ended 31 December 2001 and 31 December 2000 is over 30%, and whose percentage of fluctuation is over 5% of total assets of the Group as of 31 December, 2001 or over 10% of profit before taxation of the Group for the year ended 31 December 2001, were as follows:

					Fluctuation amount and ratio
	2001		2000		Amount		%
Assets and liabilities
Other receivables (a)	920,145,160		426,048,067		494,097,093		116%
Short term bank loans (b)	1,323,309,386		437,700,000		885,609,386		202%
Notes payable (c)	678,710,489		216,354,679		462,355,810		214%
Profit or profit appropriation
Sales discount (d)	338,850,064		541,377,420		(202,527,356	)	-37%
Distribution costs (e)	1,205,943,268		918,195,704		287,747,564		31%
Administration expenses (f)	911,607,049		631,116,249		280,490,800		44%
Minority interests (g)	13,656,567		176,110,879		(162,454,312	)	-92%

(a) The increase of other receivables mainly results from receivable due from GKG and Greencool (See note 7(3)(a),(b)).

(b) Short-term bank loans increased as the Group borrowed larger amount of bank loans to finance working capital and to provide funds for GKG in 2001.

(c) The increase of notes payable mainly results from frequent use of commercial notes as means of settlement for operating activities in 2001.

(d) The decrease of sales discounts is mainly due to the shift of marketing strategy and the increase of promotion by the Group in 2000. As a result, more discount is offered to clients.

(e) In year 2000 GKG shared advertising expenditure of RMB 235,000,000 for the Group, and no such cost sharing arrangement is made in 2001, which contributes to higher distribution costs. Besides, as of 31 December 2001, the Group accrued RMB 160,000,000 for the advertising expenditure due to Regal Lucky Limited (Note 7(3)(b)ii).

(f) The increase of administration expenses mainly results from more inventories provision is made in 2001 compared with market environment of year 2000. On the other hand, the Company had provided RMB 172,000,000 for receivable from GKG (Note 7(3)(a)).

(g) The decrease of minority interests mainly results from one subsidiary, Kelon Air-Conditioner suffered excess loss and minority interests do not share the loss of Kelon Air-Conditioner in year 2001.

14. COMPARATIVE FIGURES

Certain comparative figures have been modified by retrospective adjustments as disclosed in note 3 and other figures are reclassified to conform to the current year's presentation.

NOTICE OF 2001 ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that the board of directors (the "Board") of Guangdong Kelon Electrical Holdings Company Limited (the "Company") has decided to hold the 2001 Annual General Meeting (the "AGM") of the Company at 9:30 a.m. on Tuesday, 18 June 2002, at the Meeting Room, Dormitory Region, No.13 Ronggang Road, Ronggui, Shunde, Guangdong Province, the People's Republic of China (the "PRC") to deal with the following matters :

(1) to consider and approve the 2001 Report of the Directors;

(2) to consider and approve the 2001 Report of the Supervisory Committee;

(3) to consider and approve the 2001 audited financial statements;

(4) to consider and approve the proposal for the distribution of 2001 profit;

(5) to consider and approve the budget for the appropriation of 2002 profit;

(6) to consider and approve the Board's proposal to change the Company's auditors and to authorise the Board to fix their remuneration;

(7) to consider and approve "The Rules and Regulations Governing Shareholders' Meetings";

(8) to consider and approve "The Rules and Regulations Governing Directors' Meetings";

(9) to consider and approve "The Rules and Regulations Governing Supervisory Committee's Meetings";

(10) to consider and approve "The Detailed Rules and Regulations Governing the Work of the Management";

(11) to consider and approve "The Regulatory System for Disclosure of Information"; and

(12) to consider and approve the proposal to change the Company's supervisors.

By the order of the Board of

Guangdong Kelon Electrical Holdings Company Limited

Gu Chu Jun

Chairman

Shunde, the PRC, 24 April 2002

Notes :

(a) Holders of the Company's shares whose names appear on the register of members of the Company as at the close of business on 17 May 2002 will be entitled to attend the AGM or any adjournment thereof if they complete and return the attendance confirmation slip for receipt by the Company on or before 28 May 2002 (9 a.m. - 5 p.m.). Please refer to the attendance confirmation slip for details.

(b) Persons holding H shares of RMB1.00 each of the Company ("H Shares") should note that the register of members of H Shares will be closed from 18 May 2002 to 18 June 2002 both days inclusive, during which period no share transfer will be effected.

(c) A shareholder entitled to attend and vote at the AGM may appoint a proxy or proxies (no matter whether he or she is a shareholder of the Company or not) to attend and vote instead of him or her. Each shareholder (or his/her proxy or proxies) shall be entitled to one vote for each share held. The completion and deposit of a form of proxy will not preclude any shareholder from attending and voting at the AGM or any adjournment thereof.

(d) Shareholders must appoint a proxy or proxies in writing. Such instrument should be signed by the person appointing the proxy or proxies or by his or her authorised attorney. If the form of proxy is signed by an attorney, the document appointing the attorney must be certified by a notary. To be valid, a notarily certified power of attorney or other authority (if any) and the form of proxy must be received by the Secretary's Office 24 hours prior to the commencement of the AGM. A form of proxy for use at the AGM will be despatched to each of the shareholders in due course.

(e) The AGM is expected to last half a day. Shareholders attending the AGM are responsible for their own transportation and accommodation expenses.

(f) The address of the Secretary's Office is :

The Secretary's Office of the Board of Directors of Guangdong Kelon Electrical Holdings Company Limited

No.8 Ronggang Road

Ronggui, Shunde

Guangdong Province

The People's Republic of China

Tel : (86-765) 8362570

Fax: (86-765) 8361055

Post code: 528303

Contact person : Zhong Liang, Wan Xi

The Company's Response to the Auditors' Report

Regarding the financial statement audited by Arthur Andersen Hua Qiang ("Andersen"), the following are the Company's explanation to the opinion of Andersen:

1. Although the present directors of the Company have already adopted the following policies in early 2002:

a) modify the structure of the Company to enhance its efficiency;

b) develop and manufacture products with high added value;

c) introduce new mechanism to reduce costs;

d) request Greencool Enterprise Development Company Limited to pay the Company RMB 198 million, being the amount due under the share transfer and the transfer of debts arrangements as soon as possible so as to increase the cash flow of the Company,

Andersen was unable to form an opinion on the Group's ability to continue as a going concern because the Company recorded losses in the two consecutive years ended 31 December 2001 and had a net current debt of RMB180 million.

Such opinion does not have any impact on the Company's financial condition and results of operation.

1. As most of the directors and senior management responsible for the Company's operation in 2001 resigned, Andersen was not able to obtain representations and assurances from the previous management to confirm that all material transactions in 2001 were accurately recorded and fully disclosed. Although the present management endeavoured to ensure that all material transactions were recorded and fully disclosed and was willing to make such representations and assurances, Andersen was unable to form an opinion because the present management was not responsible for the operations in 2001 and hence could not accept such representations and assurances. Unless such liabilities become known, such opinion does not have any impact on the Company's financial condition and results of operation.

2. In 2001, the company seal of one of the Company's subsidiaries was mistakenly used, and as a result the Company had to repay a debt of RMB210 million for and on behalf of Guangdong Kelon (Rongsheng) Group Company Limited. Based on this incident, the auditors indicated that they could not ascertain the contingent or real liabilities caused by this incident. The present management has increased its control and management over the use of the company seal of all companies and has also implemented various policies including:

a) the present management has conducted a financial audit of all existing guarantees made by the Group;

b) the present management has demanded the officers at the financial management department to review all guarantees and loans made with external parties to ensure that the records are complete;

c) the present management has confirmed with Shunde local banks and financial institutions, China Merchant Bank, Shenzhen Development Bank and Pudong Development Bank that the Group has not incurred any contingent or actual liabilities as a result of any guarantees provided by the Group.

So far, no further contingent liability has been discovered. But the Group cannot refute the possibility of the existence of contingent or actual liabilities. Unless these liabilities become known, such opinion does not have any impact on the Company's financial condition and results of operation.

1. Fixed assets are stated in the accounts at actual cost or estimated value less accumulated depreciation. The management has used an estimate as a basis to forecast the discounted cash flow of these assets. Although the discounted cash flow is positive, that is, no provision has to be made, having considered the results of operation in the past 2 years and the fact that the market condition is changing rapidly, Andersen was unable to determine whether the discounted cash flow forecast is appropriate. Based on the evaluation of the present management, the value attached to such assets is reasonable.

Such opinion does not have any impact on the Company's financial condition and results of operation.

1. The present management team noted that a contract was signed at the end of 2000 with advertising agents relating to the advertisements which they would handle for and on behalf of the Company with an aggregate value of RMB160 million. After consulting the previous management team and on the basis of the terms of the contract, and a representation made by the previous management team and in accordance with the conservative policy in accounting standards, the advertising fees were included in the accrual and other payable balance. Andersen is of the opinion that there is insufficient evidence to support that the advertising services had been performed in 2001. The present management team is now gathering more information on this matter.

Such opinion does not have any impact on the Company's financial condition and results of operation.

1. By the end of 2001, accounts receivable from Guangdong Kelon (Rongsheng) Group Company Limited amounted to RMB862 million. The present management believes that the chance of recovery of such amount is very high. Nevertheless, the management has, in accordance with the conservative policy in accounting standards, made a 20% provision amounting to RMB172 million. The management team is now in negotiation with Guangdong Kelon (Rongsheng) Group Company Limited to collect the money. Since there is no agreement reached as to the timing and method of repayment of the money, Andersen was unable to assess whether the provision is adequate and whether any reclassification may be required to reflect the timing of the ultimate settlement.

If the total amount can be collected, the net asset value and total asset value of the Group will increase by RMB172 million while its loss will be reduced by RMB172 million for 2001. If the amount cannot be collected, the liabilities of the Group will increase by RMB690 million while the total asset value will decrease by RMB690 million and the increase in loss will be RMB690 million for 2001.

1. Long term receivables for 2001 include the RMB58 million to be collected from the Employee Union of the Company. No provision has been made on this amount as the present management believes that the total amount can be collected. RMB6 million has already been collected at the end of March 2002.

As Andersen is unable to assess the collectibility of the above amount, it has reserved its opinion in respect of this matter.

If the collectibility of this amount can be ascertained, such opinion does not have any impact on the Company's financial condition and results of operation. If the remaining balance of the money cannot be collected, the long term receivables of the Group in 2001 and the value of the total assets will reduce by RMB52 million while its loss will increase by RMB52 million.

Announcement on the Resolutions of the Fourth Meeting of the Fourth Board of Directors

The fourth meeting (the "Meeting") of the fourth board of directors (the "Board") of Guangdong Kelon Electrical Holdings Company Limited (the "Company") was held on 19 to 24 April 2002 by video conferencing at the Company's conference room. The Meeting was attended by eight out of the nine directors and Ms Yu Xiaoyang, non-executive director, was unable to attend the Meeting due to a business trip. Mr Huang Kun You and Mr He Si, members of the Supervisory Committee also attended the Meeting and the Meeting was held in accordance with the Company Law of the People's Republic of China and the Articles of Association of the Company. The Meeting was chaired by Mr Gu Chu Jun, and the following resolutions were considered and approved:

1. That the results announcement of Guangdong Kelon Electrical Holdings Company Limited for the year 2001 be adopted, and the chairman of the Board, Mr Gu Chu Jun, be authorised to sign such announcement;

2. That the profit distribution proposal of Guangdong Kelon Electrical Holdings Company Limited for the year 2001 be adopted. According to the audit of Messrs Arthur Andersen Hua Qiang, the Company recorded a loss for the year 2001, and the Board has proposed not to distribute any dividend for the year 2001 nor to capitalise any provident fund;

3. The Board's view regarding the qualified opinion issued by Messrs Arthur Andersen Hua Qiang for the Company's 2001 annual report is set out in the Company's Response to the Auditors' Report above;

4. That, in accordance with the spirit of "關於做好上市公司2001年年度報告工作的通知" (The Notice On The Relevant Issues Regarding the Preparation of Annual Reports Of Listed Companies For The Year 2001) of the Shenzhen Stock Exchange and having considered the actual situation of the Company, the profit distribution policy for the year 2002 be considered and approved: the Board proposed the Company to carry out profit distribution at least once in the year 2002. The portion of the net profit of the Company to be applied for distribution in the year 2002 will be around 30% - 50% and will be distributed principally by way of cash dividend. The above distribution policy shall be implemented after being approved at the general meeting of the Company where the Board has proposed such policy, and the Board will retain the right to make any adjustment to the policy in line with any future development and profit status of the Company;

5. That "The Rules and Regulations Governing Shareholders' Meetings" and "The Regulatory System for Disclosure of Information" be considered and approved;

6. Due to the forthcoming merger of Messrs Arthur Andersen Hua Qiang with another firm, the Board proposed to appoint Messrs Deloitte & Touche Tohmatsu and its member firms as the Company's auditors in place of Messrs Arthur Andersen Hua Qiang for the year 2002;

7. That the date for the 2001 Annual General Meeting ("AGM") of the Company be fixed on 18 June 2002, the agenda of which is contained in the AGM Notice tabled to the Meeting; and

8. That the unaudited budget, profit and loss statement and other financial statements of the Company for the first quarter of 2002 be adopted.

By the order of the Board of

Guangdong Kelon Electrical Holdings Company Limited

Gu Chu Jun

Chairman

Shunde, the PRC, 24 April 2002

Announcement on the Resolutions of the Sixth Meeting of the Third Supervisory Committee

The sixth meeting (the "Meeting") of the third Supervisory Committee of Guangdong Kelon Electrical Holdings Company Limited (the "Company") was held on 24 April 2002 at the Company's conference room. The Meeting was attended by two out of the four supervisors and was in accordance with the Company Law of the People's Republic of China and the Articles of Association of the Company. The two supervisors who were absent from the Meeting were Mr Li Di Qiang and Mr He Zheng Guang. Mr He Zheng Guang appointed Mr Huang Kun You as his alternate for voting. The Meeting was chaired by Mr Huang Kun You, and the following resolutions were considered and approved:

1. That the results announcement of Guangdong Kelon Electrical Holdings Company Limited for the year 2001 be considered and approved;

2. That the budget, the profit and loss statement and other financial statements of Guangdong Kelon Electrical Holdings Company Limited for the year 2001 be considered and approved;

3. That the report of the third Supervisory Committee of Guangdong Kelon Electrical Holdings Company Limited for the year 2001 be considered and approved; and

4. That the resignation of Mr Li Dai Qiang, Mr He Zheng Guang and Mr Huang Kun You, and the nomination of Mr Huang Kang Ping and Mr Jiang Bao Jun to be supervisors of the Company be considered and approved and be submitted to the shareholders' meeting for consideration and approval. Mr He Si will remain as a supervisor of the Company. The profile of the new supervisors are set out below.

Supervisory Committee of

Guangdong Kelon Electrical Holdings Company Limited

Shunde, the PRC, 24 April 2002

Note:

Set out below are brief particulars of the proposed new supervisors:

Mr. Wang Kang Ping

Born in November 1969, Mr. Wang graduated from the Beijing University of Aeronautics and Astronautics with a Bachelor Degree in Electronics. Mr. Wang joined the Company in August 1995. Mr. Wang has been employed as the deputy product design manager of the technical department of an air-conditioning company and also as the Assistant General Manager of 日本科龍株式會社. With six years of experience in the Company, Mr. Wang is very experienced in manufacturing organisation, quality control and product development. Mr. Wang also has knowledge of the latest international development in household appliances. In March 2000, Mr. Wang was promoted to the position of Vice President of the Production Department. In 2001, Mr. Wang was also appointed as General Manager of Kelon Air-conditioner Co. Ltd.

Mr. Jiang Bao Jun

Mr. Jiang Bao Jun, also known as Jiang Yuan, male, aged 34, graduated from the Economics Department of the Zhengzhou University in 1989 with a Bachelor Degree in Economics. Mr. Jiang graduated from the Statistics Department of the Capital Economics and Trade University with a Masters Degree in Economics in 1992, majoring in economic statistics analysis and prediction theories and methodologies. During his time as a research student, Mr. Jiang was selected to participate in a one year course for research students organised jointly by the American and Chinese governments at the Fudan University. The course focused mainly on western economics and financial theories. Mr. Jiang was awarded with a research student certificate jointly by the American and the Chinese Governments. Since July 1992, Mr. Jiang joined the State Electronics and Electrical Department and the China Electrical Products Company, being involved in data analysis and consultancy work. In 1994, Mr. Jiang joined the China International Futures Brokers Company Limited and took up the responsibilities of securities and futures trading analysis and customer services and was employed as Senior Analyst and then Business Manager. In 1998, Mr. Jiang graduated with a Doctor Degree in Economics from the Statistics Department of the Renmin University of China, majoring in risk management and financial engineering theories and methodologies. Since 1997, Mr. Jiang has been employed as the Assistant General Manager of the Finance Department, the General Manager, the Group Financial Controller, the Assistant to President, etc of 華慶時代投資集團有限公司, mainly focusing on international financial investment management, merger and acquisition and company management. In 2001, Mr. Jiang joined the Greencool Group as the Senior Assistant to President. Since 27th December 2001, Mr. Jiang works as Financial Supervisor of the Company.

"Please also refer to the published version of this announcement in the Hong Kong i-mail"