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) (Stock Code: 0921)

ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005

The board of directors (the “Directors”) (“the Board”) of Guangdong Kelon Electrical Holdings Company Limited (the “Company”) announces the audited consolidated results of the Company and its subsidiaries (collectively the “Group” or “Kelon”) for the year ended 31 December 2005 (the “Reporting Period”) together with the 2004 comparative figures, prepared in accordance with International Financial Reporting Standards (“IFRS”) as follows:

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2005

Notes Revenue 4 Cost of sales Gross profit Other operating income 6 Distribution costs Administrative expenses Other operating expenses 7 (Loss) profit from operations Share of results of associates Finance costs 8 Loss before tax 9 Income tax expense 10 Loss for the year Attributable to: Equity holders of the Company Minority interests Dividends Basic loss per share attributable to equity holders of the Company 11	2005 RMB’000 6,978,372 (6,817,774) 160,598 73,328 (1,517,946) (1,479,782) (807,795) (3,571,597) (31,571) (162,524) (3,765,692) (1,021) (3,766,713) (3,702,172) (64,541) (3,766,713) – RMB(3.73)	2004 RMB’000 (Restated) 7,923,001 (6,265,943) 1,657,058 73,104 (1,182,555) (507,875) (9,374) 30,358 (84,252) (159,138) (213,032) (23,718) (236,750) (226,294) (10,456) (236,750) – RMB(0.23)

CONSOLIDATED BALANCE SHEET At 31 December 2005

ASSETS Non-current assets Property, plant and equipment Investment properties Interests in leasehold land held for own use under operating leases Interests in associates Intangible assets Goodwill Negative goodwill Amount due from a related company Other investments Current assets Inventories Trade and other receivables Taxation recoverable Pledged bank deposits Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Trade deposits from customers Provisions Taxation payable Other liabilities Bank borrowings – amount due within one year Non-current liabilities Bank borrowings – amount due after one year Other liabilities Total liabilities Net current liabilities Total assets less current liabilities TOTAL NET (LIABILITIES) ASSETS Capital and reserves attributable to equity holders of the Company Share capital Share premium Statutory reserves Capital reserve Revaluation reserve Translation reserve Accumulated losses Minority interests TOTAL EQUITY	2005 RMB’000 1,836,825 27,723 470,080 92,186 128,782 – – – – 2,555,596 1,248,766 1,441,096 1,474 102,814 184,284 2,978,434 5,534,030 3,543,790 300,879 209,916 26,846 43,106 2,160,523 6,285,060 – 30,818 30,818 6,315,878 (3,306,626) (751,030) (781,848) 992,007 1,195,597 114,581 29,573 373,570 4,954 (3,776,520) (1,066,238) 284,390 (781,848)	2004 RMB’000 (Restated) 2,309,454 – 720,754 124,138 469,981 39,195 (76,636) 34,000 7,249 3,628,135 3,320,116 2,428,907 102 1,302,587 1,017,534 8,069,246 11,697,381 4,348,549 848,041 119,338 29,944 – 3,351,445 8,697,317 16,723 69,963 86,686 8,784,003 (628,071) 3,000,064 2,913,378 992,007 1,195,597 114,581 29,573 373,570 1,103 (150,984) 2,555,447 357,931 2,913,378

NOTES

1. BASIS OF PREPARATION

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) promulgated by the International Accounting Standards Board (“IASB”). IFRSs include International Accounting Standards (“IAS”) and interpretations. The consolidated financial statements for the year ended 31 December 2005 have been prepared under the historical cost basis as modified by the revaluation of property, plant and equipment and financial instruments at fair value. The accounting policies and bases adopted in the preparation of these financial statements differ from those used in the statutory accounts of the Group which are prepared in accordance with generally accepted accounting principles and relevant financial regulations in the PRC (“PRC GAAP”). The differences arising from the restatement of the results of operations for compliance with IFRS, if any, are adjusted in these financial statements but will not be taken up in the accounting books of the Group.

The Group incurred losses of approximately RMB3,767 million and RMB237 million (restated) for the year ended 31 December 2005 and year ended 31 December 2004 respectively. As at 31 December 2005, the Group’s current liabilities exceeded its current assets by approximately RMB3,307 million. In addition, the Group has outstanding short-term loans in the aggregate of approximately RMB2,161 million of which approximately RMB1,233 million were overdue as at 31 December 2005. The management has implemented various measures including: (1) streamlining operational processes and improving internal management mechanism; (2) introducing cost reduction plans; (3) rationalising business structures of the Group; and (4) rebuilding the image and reputation of the Group. In addition, the Group is in the process of negotiating with certain banks and to restructure the amounts due to them and the Company’s management confirmed that most of the Group’s bankers have expressed their intentions to reschedule overdue bank borrowings and/or renew/grant credit facilities to the Group. Further, the successor single largest shareholder of the Company, Hisense Air-Conditioner Company Limited has expressed its intention to provide necessary financial support to the Group so as to enable it to continue as a going concern. Based on the above assessments, the directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis.

2. RETROSPECTIVE RESTATEMENT OF ERRORS

The Company has been formally investigated by the China Securities and Regulatory Commission (the “CSRC”) since 5 April 2005. On 1 August 2005, the Company was informed that five of the Company’s former senior management, including the Company’s former chairman, a former executive director and a former vice president, and other former senior management responsible for finance (collectively “Relevant Persons”) became formally investigated by the police department of the People’s Republic of China (the “PRC”) and subject to procedures adopted by the police department of the PRC in connection with criminal offences, for alleged economic crime. Against this background and at the request of the CSRC, the Company conducted an in-depth investigation for the purpose of identifying, as far as possible, the possible financial impact to the Group that might arise in respect of the allegation. The result of the investigation revealed that the Relevant Persons had caused the Company to enter into a series of fraudulent activities/transactions in current year and prior periods including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, misstatement in distribution costs, administrative expenses, other operating expenses and income tax expense and non disclosure of related party transactions.

(a) The financial statements for the year ended 31 December 2005 include a restatement of the 2004 financial statements to correct the errors noted by the Company. The effects of the restatement on the 2004 financial statements are summarised below:

Income statement: (Decrease) in sales revenue Decrease in cost of sales (Decrease) in other operating income Decrease in distribution costs Decrease in administrative expenses (Increase) in other operating expenses (Increase) in income tax expense (Increase) in loss for the year (Increase) in basic loss per share	Effect on 2004 RMB’000 (513,403) 349,864 (22,538) 24,058 1,376 (3,557) (17,436) (181,636) RMB (0.183)

Balance sheet: Increase in intangible assets Increase in inventories (Decrease) in trade and other receivables (Decrease) in total assets (Increase) in trade and other payables (Increase) in taxation payable (Increase) in total liabilities (Decrease) in net assets (Decrease) in retained earnings at 1 January (Increase) in loss for the year (Decrease) in equity at 31 December	Effect on 2004 RMB’000 12,903 323,261 (470,800) (134,636) (51,465) (23,051) (74,516) (209,152) (27,516) (181,636) (209,152)

(b) Full details on the restatement of disclosure of related party transactions will be set out in the 2005 Annual Report.

3. CHANGES IN ACCOUNTING POLICIES

In 2005, the Group adopted the following revised and newly released IFRSs which are generally effective for accounting periods beginning on or after 1 January 2005 that are relevant to its operations, including IASs 1, 2, 7, 8, 10, 12, 16, 17, 18, 19, 21, 23, 24, 27, 28, 32, 33, 36, 37, 38, 39 and 40 and IFRS 3. The 2004 comparatives have been restated as required, in accordance with the relevant requirements.

IAS 1 has affected the presentation of minority interests, share of results of associates and other disclosures.

IAS 21 had no material effect on the policy of the Group. The functional currency of each of the entities of the Company and its subsidiaries has been re-evaluated based on the guidance in the revised standard.

IAS 24 has extended the identification of related parties and disclosure of related parties to include state-owned enterprises. The revised IAS 24 also requires the compensation of key management personnel to be disclosed. The Group has included these additional disclosures in the financial statements.

IASs 2, 7, 8, 10, 12, 16, 18, 19, 23, 27, 28, 32, 33, 36, 37, 39 and 40 had no material effect on the policies of the Group. Full details on the Group’s changes in accounting policies following the adoption of new/revised IAS 17 and 38 and IFRS 3 will be set out in the 2005 Annual Report.

The effects of the adoption of the new/revised IAS 1, 17 and 38 and IFRS 3 are summarised as follows:

(i) The effects of the changes in the accounting policies described above on the consolidated income statements for the year ended 31 December 2005 and 2004 are summarised below:

Year ended 31 December 2005 Increase (decrease) in administrative expenses: – discontinuation of amortisation of trademarks – discontinuation of amortisation of goodwill – discontinuation of recognition of negative goodwill as income – reduction of depreciation charge due to reclassification of interests in leasehold land held for own use under operating leases – amortisation charge arising from the reclassification of interests in leasehold land held for own use under operating leases Decrease in share of results of associates Decrease in income tax expense Increase (decrease) in loss for the year Increase (decrease) in basic loss per share	Effect of IAS 1 RMB’000 – – – – – (2,372) 2,372 – RMB –	Effect of IAS 17 RMB’000 – – – (20,422) 20,422 – – – RMB –	Effect of IAS 38 and IFRS 3 RMB’000 (52,186) (4,866) 4,790 – – – – (52,262) RMB (0.053)	Total RMB’000 (52,186) (4,866) 4,790 (20,422) 20,422 (2,372) 2,372 (52,262) RMB (0.053)

Effect of Effect of IAS 1 IAS 17 Total RMB’000 RMB’000 RMB’000

Year ended 31 December 2004

Increase (decrease) in administrative expenses: – reduction of depreciation charge due to reclassification of interests in leasehold land held for own use under operating leases – amortisation charge arising from the reclassification of interests in leasehold land held for own use under operating leases Decrease in share of results of associates Decrease in income tax expense Increase (decrease) in loss for the year Increase (decrease) in basic loss per share	– – (2,025) 2,025 – RMB –	(17,571) 17,571 – – – RMB –	(17,571) 17,571 (2,025) 2,025 – RMB –

(ii) The effects of the changes in the accounting policies described above on the consolidated balance sheets as at 31 December 2005, 1 January 2005 and 31 December 2004 are summarised below:

At 31 December 2005 Increase (decrease) in assets: Property, plant and equipment Interests in leasehold land held for own use under operating leases Intangible assets Negative goodwill Increase (decrease) in equity: Accumulated losses At 1 January 2005 Increase (decrease) in assets: Property, plant and equipment Interests in leasehold land held for own use under operating leases Intangible assets Negative goodwill Increase (decrease) in equity: Retained earnings At 31 December 2004 Increase (decrease) in assets: Property, plant and equipment Interests in leasehold land held for own use under operating leases Intangible assets	Effect of IAS 17 RMB’000 (63,689) 470,280 (406,591) – – Effect of IAS 17 RMB’000 (388,426) 720,754 (332,328) – –	Effect of IAS 38 and IFRS 3 RMB’000 – – – 76,636 76,636 Effect of IAS 38 and IFRS 3 RMB’000 – – – 76,636 76,636 Effect of IAS 17 RMB’000 (388,426) 720,754 (332,328)	Total RMB’000 (63,689) 470,280 (406,591) 76,636 76,636 Total RMB’000 (388,426) 720,754 (332,328) 76,636 76,636 Total RMB’000 (388,426) 720,754 (332,328)

4. REVENUE

Revenue represents the net amounts received and receivable for goods sold during the year. An analysis of the Group’s revenue for the year is as follows:

revenue for the year is as follows:
Sales of refrigerators Sales of air-conditioners Sales of freezers Sales of product components	2005 RMB’000 2,542,839 3,600,489 261,113 573,931 6,978,372	2004 RMB’000 (Restated) 3,213,581 4,049,279 335,190 324,951
		7,923,001

5. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management purposes, the Group is currently organised into four main operating divisions – refrigerators, air-conditioners, freezers and product components. These divisions are the basis on which the Group reports its primary segment information.

Segment information about these businesses is presented below:

Year ended 31 December 2005

Income statement

Income statement
Air- Refrigerators conditioners RMB’000 RMB’000 REVENUE External sales 2,542,839 3,600,489 Inter-segment sales – – Total revenue 2,542,839 3,600,489 Inter-segment sales are charged at prevailing market rates. RESULT Segment result (1,446,362) (1,584,482) Unallocated corporate expenses Loss from operations Share of results of associates (11,504) (16,289) Finance costs Loss before tax Income tax expense Loss for the year	Freezers RMB’000 261,113 – 261,113 (94,024) (1,181)	Product components RMB’000 573,931 1,190,854 1,764,785 (413,735) (2,597)	Elimination RMB’000 – (1,190,854) (1,190,854) – –	Consolidated RMB’000 6,978,372 –
				6,978,372
				(3,538,603) (32,994)
				(3,571,597) (31,571) (162,524)
				(3,765,692) (1,021)
				(3,766,713)

Year ended 31 December 2004 (Restated)

Income statement

REVENUE External sales Inter-segment sales Total revenue	Refrigerators RMB’000 3,213,581 – 3,213,581	Air- conditioners RMB’000 4,049,279 – 4,049,279	Freezers RMB’000 335,190 – 335,190	Product components RMB’000 324,951 1,433,329 1,758,280	Elimination RMB’000 – (1,433,329) (1,433,329)	Consolidated RMB’000 7,923,001 –
						7,923,001

Inter-segment sales are charged at prevailing market rates.

RESULT Segment result Unallocated corporate expenses Profit from operations Share of results of associates Finance costs Loss before tax Income tax expense Loss for the year	83,224 (34,173)	32,822 (43,059)	(751) (3,564)	(64,185) (3,456)	– –	51,110 (20,752)
						30,358 (84,252) (159,138)
						(213,032) (23,718)
						(236,750)

Geographical segments

The following table provides an analysis of the Group’s revenue by geographical market, irrespective of the origin of the goods/services:

The PRC Mainland China Hong Kong Europe America Others	Revenue by geographical market 2005 2004 RMB’000 RMB’000 (Restated) 4,154,957 4,464,075 19,518 118,762 4,174,475 4,582,837 1,258,611 1,481,458 824,541 1,002,743 720,745 855,963 6,978,372 7,923,001	Revenue by geographical market 2005 2004 RMB’000 RMB’000 (Restated) 4,154,957 4,464,075 19,518 118,762 4,174,475 4,582,837 1,258,611 1,481,458 824,541 1,002,743 720,745 855,963 6,978,372 7,923,001
		4,582,837 1,481,458 1,002,743 855,963
		7,923,001

The Group’s operations are carried out in the PRC and almost all of the production facilities of the Group are located in the PRC.

6. OTHER OPERATING INCOME

An analysis of the Group’s other operating income is as follows: Sales of scrap materials Interest income Gain on disposal of property, plant and equipment Gain on disposal of interests in leasehold land held for own use under operating leases Penalty income Subsidy income Others	2005 RMB’000 – 29,443 5,609 11,984 2,831 4,780 18,681 73,328	2004 RMB’000 (Restated) 16,828 38,832 – – – – 17,444
		73,104

7. OTHER OPERATING EXPENSES

An analysis of the Group’s other operating expenses is as follows:

Loss on disposal of property, plant and equipment Revaluation decrease Impairment loss on interests in leasehold land held for own use under operating leases Impairment loss on intangible assets Impairment loss on investment in a deconsolidated subsidiary Impairment loss on goodwill Loss on disposal of scrap materials Penalty Others	2005 RMB’000 106,282 261,524 18,207 338,677 11,000 39,195 12,032 12,712 8,166 807,795	2004 RMB’000 (Restated) 2,950 – – 2,372 – – – 487 3,565
		9,374

8. FINANCE COSTS

9.

10.

Interest on: – bank borrowings wholly repayable within five years – discounted note receivables Total borrowing costs Others LOSS BEFORE TAX Loss before tax is stated after charging: Cost of sales Staff costs, including directors’ and supervisors’ remuneration Defined contribution pension cost Depreciation of property, plant and equipment Amortisation of interests in leasehold land held for own use under operating leases Amortisation on goodwill of associates Amortisation on goodwill of subsidiaries Amortisation of intangible assets Auditors’ remuneration Research and development costs Impairment on goodwill of an associate Impairment loss on trade and other receivables Write-down of inventories recognised as an expense Operating lease charges – land and buildings – plant and machinery Share of associates’ taxation and after crediting: Discount on acquisition of a subsidiary release to income Gain on disposal of associates Release of negative goodwill of subsidiaries to income Rental income from investment properties INCOME TAXES Income taxes consist of: Current tax – PRC enterprise income tax (“EIT”) – Hong Kong Profits Tax Deferred tax	2005 RMB’000 122,306 32,125 154,431 8,093 162,524 2005 RMB’000 6,817,774 562,167 25,129 383,854 20,422 – – 4,551 5,824 8,025 – 479,006 292,976 64,153 6,000 2,372 – – – 1,289 2005 RMB’000 1,006 15 – 1,021	2004 RMB’000 89,851 65,202 155,053 4,085 159,138 2004 RMB’000 (Restated) 6,265,943 497,174 19,518 348,283 17,571 13,734 4,541 56,116 5,500 6,147 71,400 40,405 41,412 56,816 4,000 2,025 12,429 656 4,790 – 2004 RMB’000 (Restated) 24,505 (787) – 23,718

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.

The Company was established in Shunde, Guangdong Province and, pursuant to the “Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises” (“Income Tax Law”), the Company is normally subject to EIT at a rate of 24%, which is applicable to enterprises located in coastal open economic zones. Together with the local enterprise income tax rate of 3%, the aggregate EIT rate is 27%. In June 2003, the Company is classified as a high new technology enterprise and is subject to an EIT of 15%. Together with the local enterprise income tax rate of 3%, the aggregate EIT rate is 18%.

The Company’s subsidiaries, Guangdong Kelon Refrigerator Ltd. (“Kelon Refrigerator”), Guangdong Kelon Air-Conditioner Co., Ltd. (“Kelon Air-Conditioner”), Hangzhou Kelon Electrical Co. Ltd. (“Hangzhou Kelon”), Guangdong Kelon Fittings Co., Ltd. (“Kelon Fittings”) and Shunde Rongsheng Plastic Products Co., Ltd. (“Rongsheng Plastic”) and Yingkou Kelon Refrigerator Co. Ltd. (“Yingkou Kelon”), established in coastal open economic zones, are subject to an EIT rate of 24%. Together with the 3% local enterprise income tax, the aggregate EIT rate is 27%. Pursuant to 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 brought forward from the previous years (for a maximum period of five years), followed by a 50% reduction in tax rate for the next three years.

The Company’s subsidiaries, Chengdu Kelon Refrigerator Co., Ltd. (“Chengdu Kelon”) and Jiangxi Kelon Industrial Development Co., Ltd. are subject to an EIT rate of 30%. Together with the 3% local enterprise income tax, the aggregate EIT rate is 33%. Pursuant to the 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 brought forward from the previous years (for a maximum period of five years), followed by a 50% reduction in tax rate for the next three years.

Other subsidiaries of the Group which are established and operating in PRC are subject to EIT at a standard rate of 33% based on their assessable income for the year.

Hong Kong Profits Tax has been provided at the rate of 17.5% (2004: 17.5%) on the estimated assessable profit for the year.

Kelon USA Inc., a wholly owned subsidiary incorporated in Delaware, USA, is subject to overseas income tax. The taxation is calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

Reconciliation between income tax expense and accounting loss at applicable tax rate is as follows:

Loss before tax Tax at the applicable tax rate of 27% (note) Tax effect of non-deductible expenses Tax effect of non-taxable revenue Tax effect of unused tax losses not recognised Tax effect of utilisation of tax losses previously not recognised Other temporary differences not recognised Income tax expense	2005 RMB’000 (3,765,692) (1,016,737) 162,979 (964) 816,712 – 39,031 1,021	2004 RMB’000 (Restated) (213,032)
		(57,519) 55,231 (22,595) 114,799 (67,868) 1,670
		23,718

Note: The applicable tax rate represents the domestic tax rate in the jurisdiction where the operation of the Group is substantially based.

11. BASIC LOSS PER SHARE

The calculation of basic loss per share attributable to equity holders of the Company for the year is based on the net loss attributable to equity holders of the Company for the year of RMB3,702,172,000 (2004: net loss attributable to equity holders of the Company for the year of RMB226,294,000 (restated)) and on 992,006,563 shares (2004: 992,006,563 shares) outstanding during the year.

No diluted earnings per share have been presented as there were no dilutive potential ordinary shares in issue in both years.

12. DIFFERENCES BETWEEN IFRS AND PRC GAAP AS APPLICABLE TO THE GROUP

The consolidated balance sheet of the Group prepared under IFRS and that prepared under PRC GAAP have the following major differences:

Equity attributable to equity holders of the Company as per financial statements prepared under IFRS Adjustment on property, plant and equipment revaluation and related depreciation Adjustment on pre-operating expenses Adjustment on contribution from minority shareholders Impairment loss on goodwill Effect of adoption of IFRS 3 Equity attributable to equity holders of the Company as per financial statements prepared under PRC GAAP	2005 RMB’000 (1,066,238) 10,348 – 26,684 11,200 (71,846) (1,089,852)	2004 RMB’000 (Restated) 2,555,447 1,934 9,938 26,684 – –
		2,594,003

The consolidated income statement of the Group prepared under IFRS and that prepared under PRC GAAP have the following major differences:

Net loss attributable to equity holders of the Company as per financial statements prepared under IFRS Adjustment on property, plant and equipment revaluation and related depreciation Release of discount on acquisition of a subsidiary Notional rental expenses Adjustment on pre-operating expenses Adjustment on impairment loss on goodwill Release of negative goodwill to income Government grants recognised as income under IAS 20 Others Net loss attributable to equity holders of the Company as per financial statements prepared under PRC GAAP	2005 RMB’000 (3,702,172) 3,530 – – (9,938) 11,200 4,790 (2,471) 1,446 (3,693,615)	2004 RMB’000 (Restated) (226,294) 3,532 (12,429) (17,660) 9,938 – – – (2,885) (245,798)

There are differences in other items in the financial statements due to differences in classification between IFRS and PRC GAAP.

EXTRACT FROM REPORT OF THE AUDITORS

Basis of opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants except that the scope of our work was limited as explained below.

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and its subsidiaries (collectively “the Group”), consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited as follows:

a. The consolidated financial statements include the financial statements of Jiangxi Kelon Industrial Development Co., Ltd. (“Jiangxi Kelon”), the business of which was interrupted after the freezure of its assets by the Higher People’s Court of Jiangxi Province in August 2005. The scope of our audit on Jiangxi Kelon was limited as personnel responsible for the operations of Jiangxi Kelon had left during the year and the management of the Group were unable to assertain the accuracy and completeness of the books and records of Jiangxi Kelon. Due to this limitation, we were unable to obtain sufficient reliable evidence to assess whether the carrying amounts of the following significant financial statement areas (after elimination of intra-group balances and transactions), relating to Jiangxi Kelon, were free from material misstatements:
Property, plant and equipment of approximately RMB60 million;
Inventories of approximately RMB44 million;
Other receivables of approximately RMB49 million;
Amounts due from companies suspected to be connected with Mr. Gu (as defined in point (f) below) of approximately RMB85 million;
Cash and bank balances of approximately RMB1.5 million;
Trade payables of approximately RMB172 million;
Other payables of approximately RMB18 million;
Amounts due to Greencool Enterprise and its affiliates (as defined in point (f) below) of approximately RMB13 million;
Taxation payable of approximately RMB23 million;
Short-term bank borrowings of approximately RMB151 million; and
Net loss attributable to the Group of approximately RMB244 million.

b. Included in leasehold land and buildings at 31 December 2005 were asset appreciation adjustments made in prior years of an aggregate gross amount and net book value of approximately RMB133 million and RMB96 million respectively. Those asset appreciation adjustments were initially recorded in lump sums without sufficient details as to the individual asset items they relate to. As no further information was available to us with respect to the lump sums, we were unable to determine with reasonable certainty whether the carrying amounts of the property, plant and equipment and revaluation reserve at 31 December 2005 were free from material misstatements and the possible impact on the Group’s income statements in the current year and prior periods should adjustments be found necessary.
c. The Company and certain of its subsidiaries did not maintain a proper costing system in respect of finished goods of sufficient reliability for financial reporting purpose. There were numerous negative quantities and negative unit costs in the inventory ledgers for certain of the Company’s subsidiaries throughout the year. The carrying amounts of inventories at the balance sheet date were re-calculated based on the physical quantities at the balance sheet date and the weighted average cost of production in the year. Since both the carrying amounts of finished goods at 1 January 2005 and 31 December 2005 have direct impact on the cost of sales figure for the current year, and we could not place reliance on the Group’s inventory system nor was it practical for us to perform other audit procedures to verify the carrying value of the Group’s inventories at 1 January 2005, we were therefore unable to obtain sufficient information to assess whether the cost of sales for the current year was free from material misstatement. We have, however, performed alternative audit procedures to ascertain the existence, completeness and valuation of the closing inventories as at 31 December 2005 and our opinion is not qualified in this respect.
d. At 31 December 2005, included in trade and other receivables under current assets were intra-group receivables of approximately RMB80 million and included in trade and other payables under current liabilities were intragroup payables of approximately RMB52 million. This resulted from an inability to eliminate balances among companies within the Group on consolidation. We were unable to obtain sufficient information and explanation concerning the timing and nature underlying the unreconciled receivables and payables. We were therefore unable to assess the validity and recoverability of the unreconciled receivables amount of approximately RMB80 million and the validity and completeness of the unreconciled payables amount of approximately RMB52 million and the possible impact on the Group’s income statements in the current year and prior periods should adjustments be found necessary.
e. Included in trade and other receivables at 31 December 2005 was a receivable arising from the sale of an interest in leasehold land under operating lease in Shunde, the People’s Republic of China (the “PRC”), of gross amount and carrying amount of approximately RMB169 million and RMB85 million respectively. Although the land use right was registered in the name of the purchaser in June 2005, no settlement of the receivable has been recorded in the Company’s books up to the date of this report. The carrying amount was stated net of an impairment loss, made in the current year, of approximately RMB84 million. During the course of our audit, we sought but were unable to obtain direct confirmation from the purchaser concerning the continued existence of the receivable. There were no other satisfactory audit procedures that we could adopt to satisfy ourselves concerning the existence of the receivable nor for us to assess its recoverability. Accordingly, we were unable to assess with reasonable certainty whether the carrying amount of such receivable at 31 December 2005 as well as the impairment loss made in the current year were free from material misstatement.
f. It was reported by the Company that the controlling shareholder, Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”), had entered into a series of activities/transactions during the period from 2001 to 2005 which had been harmful to the Group, including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, unreasonable prepayments and purchases of raw materials and property, plant and equipment at unreasonable quantities and prices. These transactions were conducted through Greencool Enterprise, its affiliates and/or companies suspected to be connected with the Company’s former chairman, Mr. Gu Chu Jun (“Mr. Gu”). As at 31 December 2005, the aggregate amount of receivables and aggregate amount of payables due from/to these companies were approximately RMB680 million and RMB131 million respectively which are reflected in the consolidated balance sheet at 31 December 2005 as “Amounts due from Greencool Enterprise and its affiliates” and “Amounts due from companies suspected to be connected with Mr. Gu” within current assets and “Amounts due to Greencool Enterprise and its affiliates” and “Amounts due to companies suspected to be connected with Mr. Gu” within current liabilities. The management has made an impairment loss of approximately RMB374 million on the receivables. Due to the irregularity of the transactions mentioned above and limitation of information available to us, we were unable to satisfy ourselves concerning the validity of these transactions, the appropriateness of the impairment amount and the recoverability of the net carrying amounts.

g. As a result of the alleged breaches of PRC securities laws and regulations and consequent upon the alleged economic crimes committed by the former chairman of the Company, the Company had appointed an independent professional firm to carry out an investigation on the material cash flows of the Group during the period from 1 October 2001 to 31 July 2005 (the “Investigation Period”). The results of the investigation, announced by the Company on 20 January 2006, revealed that there were significant cash flows which were inconsistent with or were irrelevant to the business of the Group: (1) between the Group and Greencool Enterprise and its affiliates (“Greencool Companies”); (2) between the Group and companies suspected to be connected with Greencool Companies; (3) between the Group and other companies; and (4) within the Group, during the Investigation Period.

The management considered that the results of the investigation indicated that (1) there could have been omissions of recording and disclosure of material related party transactions during the year ended 31 December 2005 and prior periods and (2) there could have been material misstatements under the cash flow statements in distinguishing operating, investing and financing cash flows during the year ended 31 December 2005 and prior periods.

In consequence, we were unable to obtain sufficient reliable information and explanations to assess (1) whether all material related party transactions have been properly disclosed in the financial statements during the year ended 31 December 2005; and (2) whether all material cash flows have been properly reflected in operating, investing and financing activities under the cash flow statement for the year ended 31 December 2005.

h. Following a formal investigation into the Company for alleged breaches of securities laws and regulations in the PRC by the China Securities and Regulatory Commission, the management noted certain errors that had significant impact on the Group’s prior years’ financial statements. The financial statements for the year ended 31 December 2005 included a restatement of the 2004 financial statements to correct the errors noted by the management. The above restatements have, in aggregate, reduced the net assets of the Group as at 31 December 2004 by approximately RMB209 million, profit for the year ended 31 December 2004 by approximately RMB181 million and opening retained earnings as at 1 January 2004 by approximately RMB27 million. Details of the income statement and balance sheet line items being affected are disclosed in note 2 to the financial statements. Due to the irregularity of the transactions entered into by the Company as mentioned in the foregoing and in points (f) and (g) above, we were unable to obtain sufficient reliable evidence to satisfy ourselves concerning the appropriateness, completeness and accuracy of the prior year restatements. Further this will have a material impact on the financial statements for the year ended 31 December 2005. In addition, we were also unable to ascertain with reasonable accuracy as to whether the impairment losses on inventories of approximately RMB293 million and receivables of approximately RMB479 million as included in administrative expenses were under conditions that did not exist prior to 1 January 2005 and thus would not have led to prior year restatements.

Any adjustments found to be necessary to the matters set out in points (a) to (h) above would affect the net liabilities of the Group as at 31 December 2005 and/or the loss and cash flows of the Group for the year then ended.

Fundamental uncertainty relating to the going concern basis

In forming our opinion, we have considered the adequacy of the disclosures made in note 3(b) to the financial statements concerning the adoption of the going concern basis, being the basis on which the financial statements have been prepared. As explained in note 3(b) to the financial statements, the Group incurred losses of approximately RMB3,767 million and RMB237 million (restated) for the year ended 31 December 2005 and year ended 31 December 2004 respectively. As at 31 December 2005, the Group’s current liabilities exceeded its current assets by approximately RMB3,307 million. In addition, the Group had outstanding short-term loans in the aggregate of approximately RMB2,161 million of which approximately RMB1,233 million were overdue as at 31 December 2005. The Group is in the process of negotiating with certain banks to restructure the amounts due to them and the Company’s management confirmed that most of the Group’s bankers have expressed their intention to reschedule overdue bank borrowings and/or renew/grant credit facilities to the Group. In addition, the successor single largest shareholder of the Company, Hisense Air-Conditioner Company Limited has expressed its intention to provide necessary financial support to the Group so as to enable it to continue as a going concern. Based on the above assessments, the directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis. We consider that appropriate estimates and disclosures have been made and our opinion is not qualified in this respect.

In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Qualified opinion arising from limitation of audit scope and disclaimer on view given by consolidated income statement and consolidated cash flow statement

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence concerning the matters set out in the basis of opinion section of this report, in our opinion the financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2005 and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Because of the significance of the possible effects of the limitation in scope in respect of reliable evidence outside the control of the directors on matters set out in points (f) to (h) above, we are unable to form an opinion as to whether the financial statements give a true and fair view of the Group’s loss and cash flows for the year ended 31 December 2005.

In respect alone of the limitations on our work described in the basis of opinion section of this report:

we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and
we were unable to determine whether proper books of account had been kept.

MANAGEMENT DISCUSSION AND ANALYSIS

RESULTS REVIEW

The Group recorded substantial losses in its audited financial results for 2005. During the Reporting Period, the Group recorded a turnover of approximately RMB6,978,372,000, losses attributable to equity holders of approximately RMB3,702,172,000 (2004: approximately RMB226,294,000), and loss per share of approximately RMB3.73. The main reasons are:

(1) Substantial bad debts, substantial accrued expenses, defective inventories, excessive non-performing investments, idle assets, economic disputes and other potential losses arising from previous management of the Company were realized concurrently during the current period;
(2) The Group was subject to formal investigation by the CSRC in early April for alleged violation of PRC securities law and regulations as a result of Mr. Gu Chu Jun, the former Chairman of the Group, and his associates being suspected of having committed economic crimes. The above incident had adversely affected the confidence of financial institutions, suppliers and distributors in the Company, which led to great difficulties in our financing efforts. The tight cash flow situation also affected the Group’s relationship with our suppliers and distributors, and resulted in the Group being unable to engage in normal operations and production activities during the Reporting Period. As a result, nearly all of the Group’s production was suspended during the Reporting Period’s peak season for the production and sales of refrigerators and air-conditioners from May to September, causing the sales amount to decrease substantially.
(3) As a result of the suspension in production mentioned above, new models of products could not be manufactured in 2005, and as such popular products were unable to be supplied to the market in a timely manner and had to be substituted by older models, resulting in the reduction of the Group’s gross profit margin during the Reporting Period;
(4) From May to August during the Reporting Period, the Group has maintained a steady workforce and made regular payment of wages in the hope of resuming normal production as soon as possible, and at the same time, there was no reduction in other necessary operating costs and expenses. As such, the Group’s operating costs during the Reporting Period has not been significantly reduced; and
(5) The persistently increasing costs of the key raw materials resulted in a narrower profit margin for the Group’s core products during the Reporting Period.

The Board does not recommend the payment of a final dividend for the year 2005 (2004: nil).

Guangdong Greencool Enterprise Development Company Limited (“Guangdong Greencool”), the Company’s single largest shareholder, and Qingdao Hisense Air-Conditioner Company Limited (“Hisense Air-Conditioner”) entered into the “Equity Transfer Agreement between Guangdong Greencool Enterprise Development Company Limited and Qingdao Hisense Air-Conditioner Company Limited in relation to the transfer of shares in Guangdong Kelon Electrical Holdings Company Limited” (the “Equity Transfer Agreement”) on 9 September 2005, and Guangdong Greencool and Hisense Air-Conditioner further entered into the “Supplemental Agreement” and the “Second Supplemental Agreement” to the Equity Transfer Agreement on 28 September 2005 and 15 April 2006, respectively. To date, the equity transfer is still in process.

As an effort to overcome the difficulties of the Company and to resume normal operations, the Company entered into a sales agency agreement, a supplemental agreement and a second supplemental agreement with Qingdao Hisense Marketing Company Limited (“Hisense Agent”), a connected party of Hisense Air-Conditioner, on 16 September 2005, 26 September 2005 and 1 April 2006, respectively. Pursuant to these agreements, Hisense Agent will act as the Company’s sales agent and distribute its domestic sales products in the PRC and assist the Company to explore the domestic market before 10 May 2006. On 16 September 2005, the fifth Board appointed Mr. Tang Ye Guo as president of the Company; and Mr. Xiao Jian Lin, Mr. Su Yu Tao, Mr. Shi Yong Chang and Mr. Luo Jun as vice presidents of the Company, who together with Mr. Lin Lan, a vice president, comprised the new management of the Company. The new management of the Company has, since its inauguration, been working towards the Group’s future development, by realigning operation structure and internal control system, so as to resolve the remaining historical problems of the Company, and has taken advantage of the Hisense’s capital and sales channels, suppliers and market management. The new management of the Company has also taken certain effective measures, which included adjusting the internal organisation, strengthening planning and management, improving cash flow, disposing of idle assets, cutting down cost and expenses, and exploring domestic and overseas markets, and has effectively restored the confidence of financial institutions, distributors and suppliers in the Group’s prospects. Such measures have improved the Group’s external operating environment, as a result of which the Group’s production and operation have gradually normalised. Consequently, remarkable increase was recorded in both the Group’s production and product sales in the fourth quarter of the Reporting Period. The Company began to show healthy development trends in respect of its business management and internal management.

Turnover analysis

During the Reporting Period, the sales revenue of refrigerators and air-conditioners accounted for 36.44% and 51.59% of the Group’s total revenues, respectively, and that of freezers represented 3.74% of the Group’s total revenue, while the remaining 8.23% came from other businesses.

Domestic sales accounted for 59.54% of the Group’s total turnover, whereas export sales accounted for 40.46% of the Group’s total turnover.

Refrigerator Business

During the Reporting Period, continuously keen competition in the refrigerator market, higher prices of raw materials for refrigerators without a notable increase in sales prices for refrigerators all contributed to a plunge in the profit margin of this industry. Affected by the event that Mr. Gu Chu Jun (former Chairman of the Board) was suspected of having committed economic crimes, the production of the Company for the second and third quarters was severely hit. The suspension in production during the peak season, i.e. between May and August, resulted in a decrease in the production of refrigerators in the first nine months of the year. After the new management of the Company took office, production of the Company has gradually resumed. The volume of refrigerators produced in the fourth quarter was close to the level of the corresponding period in last year. During the Reporting Period, the sales revenue of our refrigerators business was RMB2,542,839,000, representing a decrease of 20.87% as compared with the 2004.

During the Reporting Period, despite the difficult situation that was faced by the production and operation of the Group, we continued to adhere to our “Technologically Led” business guidelines and strive for strengthening the core competitiveness of Group’s refrigerators. With the introduction of a series of energy-saving refrigerators, including 215YM (which can keep the food fresh even during power outage), at a time when power supply was generally insufficient throughout the country, the Group secured its leadership in the development of energy-saving refrigerators.

Air-conditioner Business

During the Reporting Period, the Company continued its devotion in developing its world-leading products with advanced technology products and paid great attention to scientific research and technological development. However, starting from May 2005, our air-conditioner business also came under significant pressure of insufficient capital, mainly because Mr. Gu Chu Jun (former Chairman of the Board) was suspected of having committed economic crimes. Since May to August were the peak season for sales of air-conditioners, insufficient supply of raw materials resulted in the suspension of production of air-conditioners, and sales revenue from the air-conditioner business during the Reporting Period dropped by approximately 11.08% as compared with the year 2004.

Export sales

Although the Company achieved excellent results for export sales in the first quarter during the Reporting Period, we had difficulties in obtaining banking facilities since May (mainly because Mr. Gu Chu Jun (former Chairman of the Board) was suspected of having committed economic crimes). This has resulted in output decline for the Group. Accordingly, we had to turn down a considerable amount of orders, which inevitably affected the growth of our export sales. After the new management of the Company took office, every possible measure was taken to restore the lost orders, leveraging on the long-term cooperative relationship with our customers as well as their confidence in the quality of our products. Nevertheless, the Group’s revenue from export sales during the Reporting Period dropped by approximately 18.37% as compared with that of the year 2004.

OUTLOOK

In 2006, competition in the global electrical appliance market will further intensify. The electrical appliance manufacturers are under unprecedented pressure arising from the soaring price of basic raw materials. The export business of electrical appliance enterprises is also subject to significant risks due to the appreciation of Renminbi and the ever-increasing trade barriers and non-tariff barriers established by some countries and economic regions.

In the domestic market, with the introduction of the compulsory energy-efficiency mark system by the PRC government, it is expected that energy-saving technology will be the arena for severe competition amongst airconditioners and refrigerators. In addition, excessive production capacity and significant accumulation of stocks means that price war will be rigorous, competition to attract end-users will be severe and the costs of sales will surge.

As for the Company, as a result of Mr. Gu Chu Jun, the former chairman of the Board, being suspected of having committed economic crimes, the Company faces the following uncertainties:

As Mr. Gu Chu Jun, the former chairman of the Company, was suspected of having committed economic crime, the society became suspicious about the prospect of the Company during the Reporting Period. The Company was plunged into crisis with stagnant production and sales. Despite that if the Company has resumed its normal production and sales with the help of Hisense Group since September 2005, the incident has caused uncertain effects on the brand name and marketing channels of the Company.
As at the date of this announcement, the Group has taken legal actions against Guangdong Greencool and its related companies (the “Greencool Companies”) for damaging the interests of the Group, and has claimed compensation for the losses. However, as the Group is not completely aware of the assets and liabilities situation of the Greencool Companies, there are risks that such claims, even if awarded, may be unable to enforce. Therefore, the outcome of such claims may have a material impact on the assets of the Company.

Although the Group is facing the foregoing uncertainties, the single largest shareholder of the Group will change soon. As such, it is expected that the credit risk arising from the current largest shareholder of the Company and chairman’s alleged unlawful acts and embezzlement of the Group’s interests should reduce substantially. The Group, as one of the leading enterprises in the domestic household electrical appliance industry, has an excellent technological development team with leading technological level in the industry, which will ensure the continued strong competitiveness of the Group’s technology and products in the industry. The completion of the restructuring of the assets with Hisense will enable the Group to forge an alliance between two leading enterprises and swiftly improve the financial position of the Company to significantly enhance the scale of its business and its market competitiveness. The consolidated strength of the Group’s principal business will leap to the forefront in the domestic industry and the Group still enjoys the great advantages of other enterprises in relevant industry, which will enable the Group to become a world-class manufacturer of household electrical appliances in the future.

Looking into 2006, the Group will adhere to its operation policy which is characterised by following mottos: “optimising internal systems, speeding up turnover of capital , continuing the pursuit of high-end innovation and ensuring operational efficiency”, and it will also strive to i) strengthen fundamental management construction; ii) streamline operational process and improve internal management mechanism; iii) cut product cost significantly; iv) improve sales structure; v) dispose of idle fixed assets; vi) speed up turnover of capital; vii) widen financing channels to increase capital; viii) lower financing costs; ix) reduce operational burden; and x) break the development bottleneck in respect of our products.

(1) Optimise internal systems

In 2006, the Group will bring into practice a management system characterised by a well-balanced combination of powers between central management and divisions with focus on the latter. The Group’s functions will be gradually adjusted to an investor-oriented managing function and a public platform constructing function, whereunder, the Group delegates its operational powers to subordinates by clearly designating responsibilities and operational targets. All of the subsidiaries of the Company will implement the market mechanism under the uniform platform constructed by the Group, including settlement on prices calculation and independent accounting, and that all of the subsidiaries will be responsible for their own profits or losses. At the same time, the Group will carry out strict reward and punishment system by linking annual salary of its management teams to operative responsibility indicators and linking the responsibility indicators of the subsidiaries to their respective responsibilities and benefits according to different natures and scales of the businesses. Meanwhile, the Group will establish operational planning system, internal settlement system, annual salary system and appraisal system in respect of each of the operating entities, with a view to motivate all of the operating entities through adjustments of internal mechanism, and ensure the Group will step into a path of healthy and rapid development.

(2) Speed up turnover of capital and obtain the required capital

The Group considers that the use of capital, liquidity and cash flow are problems that the Company needs to resolve. In 2006, the Group will adopt the following procedures to improve its financial position continuously in a short period, so as to guarantee a solid source of funding for the Group’s production and operations.

To speed up the restructuring of the assets of the Company and to improve the Company’s financial position so as to create a suitable environment for external financing.

Immediately after the change of its single largest shareholder, the Group will commence negotiation with its new shareholder, Hisense Air-Conditioner, to formulate and implement a plan of assets and business restructuring with Hisense. If the restructuring is implemented with the quality assets and business injected by Hisense, the assets and financial position of the Group will be improved significantly, and the scale of its business and its competitiveness will also be significantly enhanced. This will in turn improve the reputation of the Group and create a suitable environment for financing.

To accelerate clearance of the Group’s stored up capital

The Group considers that the stored up capital is a critical resource to the Group. In 2006, the Group will completely dispose of the Company’s idle assets, and resolve the liquidity and subsistent operational problems by improving the efficiency in using the stored up capital.

To concentrate on core businesses and dispose of non-performing subsidiaries as well as non-principal businesses.

Judging from our current status, the Group has run into a situation of over-investments. Many subsidiaries of the Company occupy large amount of capital but have been unable to operate and generate profits. This has placed the Group under heavy financial burden. In 2006, the Company will take strict measures to dispose of the subsidiaries that contribute little to our core development and generate little return. Meanwhile, in order to assure the healthy development of its core businesses including refrigerators, airconditioners and freezers, the Company will, with a view to protect the interest of its shareholders, restructure or dispose of the non-principal businesses and will concentrate all of its resources to ensure the return of its core business to normal and further development.

To formulate scientifically and strictly implement business plans to improve turnover of capital.

The Group will establish a scientific, accurate and strict system for the formulation and implementation of plans to establish and optimize its business processes and to prevent and eliminate the recurrence of any idle assets, while the accountability system for any idle assets shall be defined and responsibility of such occurrence shall be solemnly tracked down. The Group will strictly eliminate slow-moving and inefficient cash flows at the management level. In respect of any project with an unreasonable allocation of funds, serious measures will be implemented promptly and legal measures will be considered for settlement when necessary.

To reduce the use of funds significantly in all aspects.

In 2006, the Group will establish a series of scientifically reasonable internal control systems in various aspects which may affect the liquidity of capital, including the product distribution aspect, the accounts receivable collection aspect, the procurement aspect and the production aspect, so as to ensure a significant reduction in the use of funds in all aspects. The Group will establish guidelines with respect to the use of funds by every production, operations and management sections, and also establish a corresponding assessment mechanism and management system. For the marketing network in particular, such guidelines will be established for every subsidiary and office, while for the manufacturing network, such guidelines will be established for every production process and every category of products. The formulated management measures and policies will be strictly followed to ensure a high turnover of capital. The Group will also establish a system of analysis to examine areas including the source of funding, structure of funding, use of funds, turnover of capital and cash liquidity, with a view to formulate suitable measures to improve its financial position. All subsidiaries of the Company shall solve their respective financial problems and be responsible for improving their respective situations.

In 2006, the Group will strengthen cooperation with banks and other financial institutions. It is expected to enter into memoranda of understanding with major creditor banks for the purpose of improving the financing conditions, exploring more financing channels, maintaining and endeavouring to expand financing scales so as to cater for the Group’s additional funding requirements.
The Group will further regulate the products planning of the Group in 2006, streamline the types of products, underscore high-end strategy, reduce product costs, and further enhance the competitiveness of its products.
Continue to strengthen the settlement of embezzlement by Greencool and its related parties or third parties and solicit the support of the governments of all levels and regulatory bodies to recover any embezzled funds of the Company as far as possible, and supplement the liquidity of production.

In 2006, the Group will concentrate on disposing of excessive investments made in previous years, and also emphasise on the allocation of its resources on the core businesses of the Group in accordance with the strategic development of the Group. It will minimise the outflow of funds, reduce capital occupation by all means, raise the turnover of capital and ensure that the capital requirement for normal production of the Group’s core businesses will be met.

(3) Continuing the pursuit of high-end innovation

The Group will continue to aim towards high-end innovation in its product research and development, manufacturing and brand marketing. This strategy is vital in terms of the Group’s existence and growth, and it also sets the foundation and direction for the Group’s future expansion. In 2006, the concept of “high-end innovation” will be applied to all aspects of the Group’s operations. The Group will also assist all members of staff to develop this mind-set of high-end innovation. The Group hopes to become an “enterprise of high-end innovation” with high standards of management, producing high quality products and achieving high profit margins. Accordingly, the Group will focus on developing the following areas in the year 2006:

Continuing to be a world leader in terms of technological innovation and research;
In terms of production planning, the Group’s main objective is to use its technology to produce high-end consumer oriented products. This will be achieved by making comprehensive production plans, upgrading and transforming the Group’s products, improving product quality, reducing production costs, and making better allocation of resources to manufacture products that will rapidly penetrate the market;
The Group aims to achieve world class standards in the management of its manufacturing process, including areas such as quality control, design specifications and efficiency in the production process to improve the details of the products, the standards of quality and to allow for increased market responsiveness;
The objectives of the Group’s sales division is to raise the competitiveness of the products by increasing sales and by achieving a greater market share for the products. The sales division must also assist all aspects of the Group’s operation to make a transition towards the strategy of high-end innovation, including areas such as resource allocation, the formulation of policies, promotion of the Group’s image, methods of marketing, the transportation of the products, promotion activities and establishing the sales network. To maintain the strategy of high-end innovation, the sales division will also continuously strive to improve its promotion efforts to enhance the image and reputation of the “Kelon” and “Rongsheng” brand names.

(4) Ensuring operational efficiency

In 2006, the primary objectives of the Group’s operational management is to build a solid foundation and to achieve the targeted profit levels. The operational management will work towards achieving a healthy and fastpaced development for the Group as well as increase profit levels. It has always been the Group’s ultimate goal to achieve efficiency in its operations, and this will primarily be accomplished by improvements in production efficiency. In order to increase the efficiency of the Group’s operations in 2006, concepts of product efficiency and measures to improve product efficiency will be applied to every aspect of the Group’s operations.

Looking back, the Group has undergone a very critical stage. However, in the future, the Group sees both opportunities and challenges. The Group’s management strongly believes that possessing a clear vision and using united effort, with the support and supervision of its shareholders and the combined efforts of all its staff, it will overcome its difficulties and strive towards new innovations. In the year 2006, the Group will build a solid foundation for its future development and strive towards becoming a world class manufacturer of electrical appliances.

LIQUIDITY AND SOURCES OF FUNDS

Net cash used in operating activities was approximately RMB518,443,000 (2004: net cash generated of approximately RMB584,054,000) for the year ended 31 December 2005.

As at 31 December 2005, the Company had bank deposits and cash (including pledged bank balances) amounting to approximately RMB287,098,000 (2004: RMB2,320,121,000), and bank loans amounting to approximately RMB2,160,523,000 (2004: RMB3,368,168,000).

Total capital expenditures for the year 2005 amounted to approximately RMB336,836,000 (2004: RMB540,535,000).

HUMAN RESOURCE AND EMPLOYEES’ REMUNERATION

As at 31 December 2005, the Group had approximately 20,458 employees, mainly comprising 1,448 technical staff, 5,292 sales representatives, 474 financial staff, 954 administrative staff and 12,290 production staff. Seven of the Company’s employees hold a doctorate degree while 259 and 2,573 hold a master degree and a bachelor degree, respectively. There were 597 employees with an official title of middle rank or above. In addition, the Company currently has 67 resigned or retired staff. Staff costs for the year ended 31 December 2005 amounted to approximately RMB562,167,000 (2004: RMB497,174,000).

CHARGES ON THE GROUP’S ASSETS

As at 31 December 2005, the Group’s property, plant and equipment of approximately RMB931,283,009 (2004: RMB726,597,000) were pledged as security for the Group’s bank borrowings.

EXPOSURE TO EXCHANGE RATE FLUCTUATION

Since substantially all of the Group’s sales and purchases in the Reporting Period were denominated in Renminbi, the Group had some exposure to exchange rate fluctuation and financial instruments such as discounted export bills, import/export bills, and hedging were used to hedge exchange rate risk.

PUBLIC FLOAT

As at the date of this announcement, the Directors acknowledge that based on publicly available information and within the knowledge of the Directors, 25% or above of the total issued share capital of the Company are held by the public. Therefore, the public float of the Company satisfies the requirements stipulated under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”).

CONTINGENT LIABILITIES

During the reporting period, the Group was involved in a number of material litigations with estimated contingent liabilities of RMB595,923,307.

MATERIAL LITIGATION

Up to 23 June 2006, the Company and its subsidiaries were involved in 15 litigations which, in each case involved an amount over RMB10 million, the total amount involved was RMB967,300,739.

AUDIT COMMITTEE

The sixth audit committee of the Company has reviewed the final result announcement and report for the year ended 31 December 2005.

CAPITAL EXPENDITURE

The Group expects that the capital expenditure for 2006 to be approximately RMB51,505,000.

TRUST DEPOSITS

As at 31 December 2005, the Company did not own any trust deposit in any financial institution in the PRC. All of the Company’s deposits are placed with the commercial banks in the PRC and Hong Kong.

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

As at 31 December 2005, the Group had long-term bank borrowings of RMB Nil (2004: RMB16,723,000) and cash and cash equivalents of RMB184,284,000 (2004: RMB1,017,534,000), of which over 78% are denominated in Renminbi.

GEARING RATIO

As at 31 December 2005, the gearing ratio of the Group was 41.41%.

INDEPENDENCE OF THE INDEPENDENT NON-EXECUTIVE DIRECTORS

The fifth Board have received written confirmations from all of the independent non-executive Directors in respect of their independence in accordance with the requirements provided under Rule 3.13 of the Listing Rules of The Stock Exchange of Hong Kong Limited (“SEHK”), and consider that all the independent non-executive Directors of the fifth Board are in compliance with the relevant guidelines under Rule 3.13 of the Listing Rules and are still independent persons.

INTERESTS IN CONTRACTS OF DIRECTORS AND SUPERVISORS

The Company convened the first 2006 extraordinary general meeting on 26 June 2006, during which the sixth Board was elected. No service contract has been entered into with any Directors of the sixth Board.

As at the date of this report, certain executive Directors of the fifth Board, namely Mr. Gu Chu Jun, Mr. Yan You Song and Mr. Zhang Hong, were detained by the public security department for alleged economic crime, and none of them could be contacted. In addition, the Company was also unable to contact Mr. Zeng Jun Hong. Save as disclosed above, as at 31 December 2005 or during the year 2005, no Director of the fifth Board or supervisor was materially interested, either directly or indirectly, in any contract of significance.

INDEPENDENT NON-EXECUTIVE DIRECTORS’ INTERESTS IN CONTINUING CONNECTED TRANSACTIONS

The independent non-executive Directors of the fifth Board have reviewed the continuing connected transactions of the Company for the year 2005, and confirmed that these transactions were conducted in the ordinary course of business of the Company on normal commercial terms which were fair and reasonable and in the interest of the shareholders of the Company as a whole.

CONTINUING CONNECTED TRANSACTIONS WITH HUAYI COMPRESSOR HOLDINGS COMPANY LIMITED (“HUAYI COMPRESSOR”) AND ITS SUBSIDIARIES

During the Reporting Period, the Subsidiaries of the Company purchased raw materials from the Company’s associated company; Huayi Compressor and its Subsidiaries, for an amount of approximately RMB105 million, which amounted for less than 2.10% of the Group’s total purchase.

Such transactions may constitute connected transactions of the Company under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, the Company is in the process of obtaining professional advice in this regard.

MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS

The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”) as set out in Appendix 10 of the Listing Rules as its code for securities transaction by Directors. After specific enquiries made to the Directors of the fifth Board, Mr. Liu Cong Meng, Mr. Li Zhen Hua, Mr. Fang Zhi Guo, Mr. Li Kung Man, Mr. Xu Xiao Lu and Mr. Chan Pei Cheong, Andy confirmed that they have complied with the Model Code during the year.

As at the date of this report, certain executive directors of the fifth Board, namely Mr. Gu Chu Jun, Mr. Yan You Song and Mr. Zhang Hong, were detained by the public security department for alleged economic crime, and none of them could be contacted, thus the Company was unable to confirm whether they have complied with the Model Code.

SHARE CAPITAL STRUCTURE

As at 31 December 2005, the share capital structure of the Company was as follows:

Domestic Shares H Shares A Shares Total	Percentage of total Number of shares issued share capital (%) 337,915,755 34.06 459,589,808 46.33 194,501,000 19.61 992,006,563 100.00	Percentage of total Number of shares issued share capital (%) 337,915,755 34.06 459,589,808 46.33 194,501,000 19.61 992,006,563 100.00
		100.00

TOP TEN/SUBSTANTIAL SHAREHOLDERS

(1) As at 31 December 2005, there were 65,149 shareholders in total, of which the top ten/substantial shareholders were as follows:

were as follows:
Total number of Shareholders					65,149
Shareholdings of the top ten shareholders
				No. of	No. of
	Nature of Shareholdings		No. of	Unlisted	Pledged or
Name of Shareholder	Shareholder	Percentage	Shares Held	Shares Held	Frozen Shares
Guangdong Greencool Enterprise	Domestic legal	26.43%	262,212,194	262,212,194	262,212,194
Development Company Limited	person shares
Shunde Economic	Domestic legal	6.92%	68,666,667	68,666,667	–
Consultancy Company	person shares
Shenyin Wanguo Securities	Foreign Shareholder	5.53%	54,851,000	–	Unknown
(H.K.) Limited
The Hongkong and Shanghai	Foreign Shareholder	5.15%	51,092,925	–	Unknown
Banking Corporation Limited
Bank of China	Foreign Shareholder	4.96%	49,242,000	–	Unknown
(Hong Kong) Limited
Guotai Junan Securities	Foreign Shareholder	4.13%	40,965,000	–	Unknown
(Hong Kong) Limited
HSBC Nominees	Foreign Shareholder	4.04%	40,106,904	–	Unknown
(Hong Kong) Limited
First Shanghai Securities Limited	Foreign Shareholder	2.61%	25,878,000	–	Unknown
Hang Seng Securities Limited	Foreign Shareholder	2.04%	20,235,000	–	Unknown
Standard Chartered Bank (HK) Ltd.	Foreign Shareholder	0.96%	9,564,500	–	Unknown

Shareholdings of top ten tradable Shareholders

	Number of listed
Name of Shareholder	Shares Held
Shenyin Wanguo Securities (H.K.) Limited	54,851,000
The Hongkong and Shanghai Banking	51,092,925
Corporation Limited
Bank of China (Hong Kong) Limited	49,242,000
Guotai Junan Securities (Hong Kong) Limited	40,965,000
HSBC Nominees (Hong Kong) Limited	40,106,904
First Shanghai Securities Limited	25,878,000
Hang Seng Securities Limited	20,235,000
Standard Chartered Bank (HK) Ltd.	9,564,500
BOCI Securities Limited	7,830,000
Sun Hung Kai Investment Services Limited	7,770,000

Class of Shares

Overseas listed foreign shares Overseas listed foreign shares

Overseas listed foreign shares Overseas listed foreign shares Overseas listed foreign shares Overseas listed foreign shares Overseas listed foreign shares Overseas listed foreign shares Overseas listed foreign shares Overseas listed foreign shares

Remarks on the connected relationship or action in concert of the above shareholders

The Company does not know whether any one of the top ten holders of listed shares is connected with each other or any one of them is a party acting in concert with any of the other nine shareholders as defined in Administrative Measures for Information Disclosure of the Shareholders of Listed Companies.

Notes:

(1) On 3 August 2005, the Company received a notification from China Securities Depository and Clearing Corporation Limited Shenzhen Branch, informing the Company that the 262,212,194 promoter domestic legal person shares in the Company held by its single largest shareholder, Guangdong Greencool, had been frozen by the Intermediate People’s Court of Shenzhen with effect from 28 July 2005 to 27 July 2006. On 21 September 2005, the Company received from the Intermediate People’s Court of Foshan City of Guangdong Province a List of Foreclosure ((2005)Fo Zhong Fa Li Bao Zi No.265), thus ordering the foreclosure of 262,212,194 legal person shares in the Company and all bonus shares, placement shares and bonus dividends and other interests thereof. Save for the above-mentioned pledged and frozen legal person shares of which the Company is aware, the Company is not aware whether any shares in the Company held by the top ten shareholders have been pledged or under freezing orders during the reporting period.
(2) Among the above-mentioned top ten shareholders, none of the legal person shareholders is connected with each other or is a party acting in concert with each other as defined under Administrative Measures for Information Disclosure of Changes in Shareholdings of Shareholders of Listed Companies (上市公司股東持股變動信息管理辦法 ). However, the Company is not aware as to whether the other shareholders are connected with each other or are parties acting in concert with each other as defined under Administrative Measures for Information Disclosure of Changes in Shareholdings of Shareholders of Listed Companies.
(3) Guangdong Greencool Enterprise Development Company Limited, the Company’s single largest shareholder, and Qingdao Hisense Air-Conditioner Company Limited (“Hisense Air-Conditioner”) entered into the “Equity Transfer Agreement between Guangdong Greencool Enterprise Development Company Limited and Qingdao Hisense Air-Conditioner Company Limited in relation to the transfer of shares in Guangdong Kelon Electrical Holdings Company Limited” on 9 September 2005, and further entered into the “Supplemental Agreement” and the “Second Supplemental Agreement” on 28 September 2005 and 15 April 2006, respectively (“Equity Transfer Agreements”). Pursuant to the Equity Transfer Agreements, Guangdong Greencool intended to transfer 262,212,194 domestic legal person shares in the Company (representing 26.43% of the total issued share capital of the Company) to Hisense Air-Conditioner. The consideration for the above equity transfer was RMB680,000,000 as agreed by both parties with initial payment of RMB500,000,000. As at the date of this announcement, the Company has not received any notification from China Securities Depository and Clearing Corporation Limited Shenzhen Branch that the equity transfer was completed.
(4) On 8 August 2005, the Company received a notice and a letter (the “Letter”) from a shareholder of the Company, Shunde Economic Consultancy Company (“Economic Consultancy”), which informed the Company and the Board of Directors that Economic Consultancy held an aggregate of 68,666,667 legal person shares in the Company (those legal person shares were held in trust for ICBC Guangdong Branch by Economic Consultancy) as at July 2005. According to the share reform plan and financial restructuring plan of ICBC approved by the State Council, under the supervision of the head office of the People’s Bank of China, the Ministry of Finance and other government authorities, ICBC Guangdong Branch legally transferred its holding of 68,666,667 legal person shares in the Company (representing 6.92% of the total issued share capital of the Company) to China Huarong Asset Management Corporation on 7 June 2005.

Upon completion of the transfer of legal person shares to China Huarong Asset Management Corporation, Economic Consultancy will no longer hold any share of the Company, while the number of legal person shares of the Company held by China Huarong Asset Management Corporation will be 68,666,667 shares, representing 6.92% of the total issued share capital of the Company.

As at the date of this announcement, the Company has not yet received any notice in relation to completion of the registration of the share transfer from China Securities Depository and Clearing Corporation Limited Shenzhen Branch.

(2) Brief introduction about the controlling shareholder of the Company
(1) Guangdong Greencool , the single largest shareholder of the Company, was incorporated on 22 October 2001 with a registered capital of RMB1,200,000,000. Its registered address is 8/F, Rongshan Building, Shunde District, Foshan, Guangdong of the PRC. Guangdong Greencool is primarily engaged in the development, manufacturing and sales of refrigeration equipments and parts and cholroflurocarbonfree (CFC-free) refrigerants, research and development of refrigerating technology, and the development, manufacturing and sales of computer and broadband networking facilities.

Guangdong Greencool is a limited liability company jointly invested by Mr. Gu Chu Jun and Greencool Refrigerant (China) Company Limited (“Greencool Refrigerant”) with Mr. Gu Chu Jun holding 60% of its equity interests and Greencool Refrigerant holding 40% of its equity interests.

Greencool Refrigerant is a foreign-invested company incorporated in Tianjin of the PRC on 3 March 1995 by GCT Investment Company Limited (a company incorporated in the British Virgin Islands), of which Mr. Gu Chu Jun is an absolute controlling shareholder. Greencool Refrigerant has a registered capital of US$ 150,000,000. It is primarily engaged in the development, manufacturing and sales of Gushi refrigerants, various cholroflurocarbon (CFC) substitutes, new refrigerants, thermal elements, thermal cycling intermediate and their respective raw materials, and the development, manufacturing and sales of the ancillary equipment and application equipment for the above products.

Mr. Gu Chu Jun graduated from Tianjin University of the PRC with a master’s degree in engineering. Mr. Gu is the founder of the Greencool Group. He is the chairman of Guangdong Greencool , Greencool Refrigerant, Yangzhou Yaxing Motor Coach Company Limited, and Greencool Technology Holdings Limited.

Mr. Gu Chu Jun cannot be contacted as at the date of this announcement, and the relevant information has not been confirmed by him.

(2) Relationship between the Company and its Beneficial Controlling Shareholders

	Mr. Gu Chu Jun	Mr. Gu Chu Jun
		60%
		GCT Investment Company Limited
	60%	100%
		Greencool Refrigerant (China) Company Limited
		40%
Guangdong Greencool Enterprise Development Company Limited
		26.43%
Guangdong Kelon Electrical		Holdings Company Limited

(3) There is no change to the controlling shareholder of the Company during the Reporting Period.

SUBSTANTIAL SHAREHOLDERS

As at 31 December 2005, as shown in the register of substantial shareholders kept according to Section 336 under the Securities and Futures Ordinance under the Laws of Hong Kong, the following shareholders maintained long positions in the issued share capital of the Company:

			Percentage	Percentage
		Number of	of the relevant	of the total
		issued	class of issued	issued share
		ordinary	shares of	capital of
Name of Shareholder	Class of Shares	shares held	the Company	the Company
Guangdong Greencool Enterprise	Domestic legal	262,212,194	77.60%	26.43%
Development Company Limited	person shares
Shunde Economic Consultancy Company	Domestic legal	68,666,667	20.32%	6.92%
	person shares
Shenyin Wanguo Securities (H.K.) Limited	H SHARES	54,851,000	11.93%	5.53%
The Hongkong and Shanghai Banking	H SHARES	51,092,925	11.12%	5.15%
Corporation Limited
Bank of China (Hong Kong) Limited	H SHARES	49,242,000	10.71%	4.96%
Guotai Junan Securities (Hong Kong) Limited	H SHARES	40,965,000	8.91%	4.13%
HSBC Nominees (Hong Kong) Limited	H SHARES	40,106,904	8.73%	4.04%
First Shanghai Securities Limited	H SHARES	25,878,000	5.63%	2.61%

Save as disclosed above, the Company was not aware of any relevant interests or short positions in the issued share capital of the Company held by the shareholders as recorded in the register of substantial shareholders maintained pursuant to Section 336 of the SFO as at 31 December 2005.

INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVES IN THE SHARES

As at 31 December 2005, the interests and short positions of the fifth Board, supervisors and the chief executive of the Company and their associates in the shares and underlying shares of the Company and its associated corporations, as recorded in the register maintained by the Company pursuant to Section 352 of the Securities and Futures Ordinance (“SFO”), or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, were as follows:

			Percentage	Percentage
			of the relevant	of total
			class of issued	issued share
		Number of issued	share capital	capital of
Name	Capacity	ordinary shares held	of the Company	the Company
Gu Chu Jun	Held by controlled	262,212,194 legal	77.60%	26.43%
	corporation	person shares (Note a)
	Held by controlled	3,830,000 H shares	0.83%	0.39%
	corporation	(Note b)
He Si	Beneficial owner	50,000 A shares	0.03%	0.005%

NOTES:

(a) Gu Chu Jun directly owns 60% equity interest in Guangdong Greencool, a company incorporated in the PRC with limited liability and the single largest shareholder of the Company. As at 31 December 2005, Guangdong Greencool owned 262,212,194 legal person shares of the Company.
(b) Gu Chu Jun owns approximately 63.6% of the issued share capital of Greencool Technology Holding Limited (“Greencool Technology”), a company listed on the GEM of the Stock Exchange. As at 31 December 2005, two subsidiaries of Greencool Technology held together 3,830,000 H shares of the Company.

Save as disclosed above, none of the fifth Board, supervisors, chief executives or their associates held any interests or short positions in any shares, underlying shares or debentures of the Company or its associated corporations as at 31 December 2005.

PURCHASE, SALE OR REDEMPTION OF SHARES

During the year ended 31 December 2005, neither the company nor any of its subsidiaries has purchased, sold, redeemed or cancelled any of the Company’s listed shares.

CORPORATE GOVERNANCE

The executive Directors of the fifth Board Mr. Gu Chu Jun, Mr. Yan You Song and Mr. Zhang Hong were suspected for alleged economic crimes and were subjected to enforcement measures by the police department of the PRC, and none of them can be contacted as at the date of this announcement, thus the Company was unable to confirm whether they have complied with the Model Code for Securities Transactions by Directors of Listed Issuers.
The Company has not fully complied with Code Provisions C.1.1 and C.1.2 of the Code on Corporate Governance Practices (the “Code”) under Appendix 14 of the Listing Rules during 2005. Since the executive Director of the fifth Board Mr. Gu Chu Jun and others were suspected for alleged economic crimes, the accounts of the Company for the year ended 31 December 2004 did not truly and fairly reflected the business and operating results of the Company during the relevant period.
The Company has not fully complied with Code Provision A.6.2 in 2005. Such deviations were due to the fact that executive Director of the fifth Board Mr. Gu Chu Jun and others were suspected for alleged economic crimes, which led the former operational management (the Company appointed a new operational management on 16 September 2005) to be unable to report on the conclusion of the Company’s major contracts, contract implementation status, use of capital and the Company’s profit and loss conditions to the fifth Board on a timely, true and complete basis.
The Company has not fully complied with Code Provision A2.1 during the Reporting Period. Such deviations were due to the fact that former chairman Mr. Gu Chu Jun was suspected for alleged economic crime and was being subjected to enforcement measures, thus the Company has appointed president Mr. Liu Cong Meng to perform the duties of the chairman. Therefore, the Company was not in compliance with Code A2.1 that “the roles of chairman and chief executive officer should be separate and should not be performed by the same individual” during the period from 12 August 2005 to 16 September 2005.

The Company has not fully complied with Code Provision A2.3. Since the former chairman of the Company Mr. Gu Chu Jun was suspected for alleged economic crime, the Company was not able to fully comply with Code A2.3 that “the chairman should be responsible for ensuring that directors receive adequate information, which must be complete and reliable, in a timely manner.”
The Company has not fully complied with Code Provision C.3.3. Since the executive Director Mr. Gu Chu Jun and others were suspected for economic crime, the ability of the audit committee of the fifth Board to fulfill its duties and to receive information from the Company was restricted. The audit committee was unable to guarantee the effective operation of the Company’s internal control system.

Save as disclosed above, to the best belief of the Company, the Company has complied with the Code during the Reporting Period.

PUBLICATION OF ANNUAL REPORT ON THE INTERNET WEBSITE OF THE STOCK EXCHANGE OF HONG KONG LIMITED

All information required by Appendix 16 of the Listing Rules will be published on the Stock Exchange’s website (http://www.hkex.com.hk) in due course.

At the request of the Company, trading in H Shares of the Company was suspended with effect from 10:00 a.m. on 16 June 2005 pending the release of an announcement in relation to price sensitive information. Subject to the publication of a further announcement in relation to, amongst others, the financial, production and trading position of the Group, and the satisfaction by The Stock Exchange of Hong Kong Limited of the adequacy of the internal control measures of the Company, trading in H shares of the Company will remain suspended until further notice.

By order of the Board of Guangdong Kelon Electrical Holdings Company Limited Tang Ye Guo Chairman

Hong Kong, 11 August 2006

Shunde District, Foshan City, Guangdong, the PRC, 11 August 2006

As at the date of this announcement, the Company’s executive directors are Mr. Tang Ye Guo, Ms. Yu Shu Min, Mr. Su Yu Tao, Mr. Xiao Jian Lin, Mr. Lin Lan and Mr. Zhang Ming; and the Company’s independent non-executive directors are Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren.

Supplementary information as required by the Stock Exchange of Hong Kong Limited in relation to the Company’s A shares results announcement.

Important Notice

Save for independent non-executive Directors Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren and supervisors Mr. Zeng Jun Hong and Mr. Bai Yun Feng, the members of the sixth Board and the current supervisors and senior management of the Company warrant that the content of this report does not contain any false statement, misleading representation and material omission and are collectively and individually responsible for the truthfulness, accuracy and completeness of such contents.

Among which: 1) Independent non-executive Directors Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren are of the opinion that:

We have conducted a thorough exploration and study into the issues in relation to the report, nevertheless: (i) as stated in the auditor’s report, the auditors have not been able to obtain adequate information on the issues for which they hold qualified opinions; (ii) with the impact of a number of factors such as the notes financing without any transaction actually conducted during the period under the operation of the former management, unreconciled inter-company transactions and balances, and the Company having to adopt an accounting treatment of backtracking operating cost of the principal operations in 2005, there may be inaccuracy in the separation of cash flow statement and profit and loss for the year 2005 from previous years. As a result, we are unable to guarantee the accuracy, truthfulness and completeness of the income statement and cash flow statement for 2005. Investors should take extra precaution.

We agree on the qualified opinions set forth in the auditor’s report and the Board’s explanation for such qualified opinions. Save for the aforesaid cash flow statement and income statement, we guarantee the accuracy, truthfulness and completeness of the balance sheet and the other information set out in the Company’s annual report for the current year.

Our opinions on the significant issues in relation to this report:

Our opinions on the execution of the Sales Agency Agreement, the Supplemental Agreement to the Sales Agency Agreement as well as the Second Supplemental Agreement to the Sales Agency Agreement (“the Sales Agency Agreement and its supplemental agreements”) entered into between the Company and Qingdao Hisense Marketing Company Limited:

We have carefully reviewed the Sales Agency Agreement and its supplemental agreements between the Company and Qingdao Hisense Marketing Company Limited) (“Hisense Agent”), the independent financial advisers’ reports prepared respectively by AMS Corporate Finance Limited on 27 April 2006 and GF Securities Co., Ltd. on 8 May 2006 as well as the self-inspection report on the Sales Agency Agreement and its supplemental agreements disclosed by the Company on 15 June 2006, and are of the opinion that, based on the preliminary self-inspection report, the execution of the Sales Agency Agreement and its supplemental agreements were not seen to have done any harm to the interests of the Company. Based on the selfinspection report, we would like to draw the attention of the investors to the following issues:

(1) The self-inspection report was prepared by the Company internally, and it has not been audited by any intermediate organisation. The Board has engaged Shenzhen Nan-fang Minhe Certified Public Accountants to audit the progress of the Sales Agency Agreement and its supplemental agreements. As the sales agency arrangement involves over 30 branches of the Company and covers a broad scope of matters, it will take a certain period of time for the audit to be completed, and it is estimated that the job could be done by the end of August. We will ensure that the Company make timely disclosure based on the audit results.
(2) In the course of execution of the Sales Agency Agreement, Hisense Agent has failed to settle RMB300,000,000 within ten business days of signing the agreement, and the last payment was made on 15 December. Save for the prepayment terms of the Sales Agency Agreement and its supplemental agreements, Hisense Agent has complied with the terms of the Sales Agency Agreement and its supplemental agreements.
(3) Meanwhile, we are of the view that the execution of the Sales Agency Agreement has enabled the Company to obtain the funds necessary for the production and the marketing activities of the Company. It has also improved the image and the confidence of distributors towards the Company, enhanced the collection of trade receivables and capital utilisation, thus enabling a smooth supply and sales process. The Sales Agency Agreement is essential for the continuation of the Company’s operations during the transitional period and also safeguards the interests of the Company.
Our opinions on misappropriation of the Company’s capital by Mr. Gu Chu Jun, former chairman of the Company, and his related parties and the relevant debt clearing measures:

We have reviewed the special investigation report by KPMG about the abnormal material cash flow incurred between Gu Chu Jun and the Greencool Companies (which means Greencool Enterprise Development Company Limited (“Guangdong Greencool”) and its related companies) and, through the management, finance and legal departments of the Company, understood the details about the misappropriation of funds by and litigation against Gu Chu Jun, the Greencool Companies and third parties as well as the “Special Explanation of misappropriation of funds of controlling shareholders and related parties of Guangdong Kelon Electrical Holdings Company Limited” provided by the auditors. The amounts due from the Greencool Companies and the amounts misappropriated by the third parties are 680 million, the payables are 131 million, The Company has made provision for bad debts of 374 million. We believe that the basis of the report about misappropriation of funds by Mr. Gu Chu Jun, the Greencool Companies and the third parties is reasonable. Under the special situation that the case of economic crime related to Mr. Gu Chu Jun and the Greencool Companies has not been judged and concluded, the Company has brought litigation, safeguarded assets to settle the debts and ensure the assets allocation involved with the Greencool Companies. We believe that these measures are reasonable. We suggest that the Company put more efforts in repayment and get support from governments and regulatory authorities, recover the misappropriated funds at the utmost so as to reduce loss.

Opinions on accounting treatments of the Company’s impairment provisions:

We are aware that, in complying with the Accounting Regulation for Business Enterprises, the Company has employed independent third parties to perform the assessment on the impairment of respective assets, and based on the conclusion of which, adjusted the financial accounts. After reviewing the assessment report in a stringent manner, and also according to some new or further evidence obtained after the balance sheet date, we consider the Company’s estimation and assumption of the impairment of respective assets are reasonable.

Special attention should be drawn to investors on the above opinions.

2) As at the date of this announcement, the Company could not contact Mr. Zeng Jun Hong, a supervisor of the Company. Supervisors Mr. Bai Yung Feng and Mr. Liu Zhan Cheng attended the supervisory committee meeting and considered this announcement, but no supervisory resolution thereof was passed. Mr. Liu Zhan Cheng, a supervisor of the Company, agreed with the opinions expressed in the audit report issued by auditors and the Board’s explanations on matters involved with such audit opinions.

Opinions of supervisor Mr. Bai Yung Feng on relevant matters were as follows: After understanding the relevant matters relating to this announcement, I noticed that: (i) the auditors issued a qualified audit report with emphasised matters as there were insufficient audit information on such matters available; (ii) the causes of the decrease in the Company’s profits, including impairment provided for fixed assets, construction in progress, finished products and raw materials. I was unable to express any opinion in this announcement due to such uncertainties, so I abstain from voting.

Opinions on material matters relating to this announcement:

Opinion on the execution of the Sales Agency Agreement, Supplemental Agreement to the Sales Agency Agreement and the Second Supplemental Agreement to the Sales Agency Agreement entered into between the Company and Qingdao Hisense Marketing Company Limited:

I do not have a thorough understanding of the above agreements, but in my view, it is necessary for accounting firms to be engaged by the Board to carry out an audit on the execution of the Sales Agency Agreement, and the audit work should be completed as soon as possible.

Opinion on the misappropriation of the Company’s funds by former chairman Mr. Gu Chu Jun and his related parties and settlement methods:

I agree on any claim by any legal means for the recovery of the Company’s funds which were appropriated by Mr. Gu Chu Jun, the Greencool Companies and third parties, in order to maximise the protection of the Company’s interests.

Opinion on the accounting treatments of the Company’s impairment provisions:

I reserve my opinion regarding the impairments provided for fixed assets, construction in progress, inventory and raw materials, etc, by the Company.

Investors should draw special attention to the above opinions.

As I cannot make any comment in respect of the report with emphasised matters incorporated with qualified opinions, I am not able to make any comment to the Board’s specific explanation, so I abstain from voting.

Nine out of the nine of the Directors attended the Board Meeting, while executive Directors Ms. Yu Shu Min and Mr. Lin Lan, independent non-executive Directors Mr. Lu Qing and Mr. Cheung Yui Kai, Warren attended the meeting and voted by way of telephone conference.

An auditor’s report with qualified opinion and emphasised matters was submitted by the auditors employed by the Company for the financial year 2005; detailed explanations of relevant issues were also made by the Board and the supervisory committees of the Company. Investors are advised to take note in reading them.

Mr. Tang Ye Guo, the chairman of the Board, Mr. Xiao Jian Lin, the Vice president of finance, and Ms. Dai Hui Jiao, the person in charge of the accounting department, have declared that they confirm the truthfulness and completeness of the financial statements in the annual report for the year.

I. BRIEF INTRODUCTION TO THE LISTED COMPANY

Official Chinese name of the Company: 廣東科龍電器股份有限公司 Official English name of the Company: Guangdong Kelon Electrical Holdings Co., Ltd.
Legal representative of the Company: Tang Ye Guo
Secretary of the Board: Tang Ye Guo (in addition to the other position in the Company), Securities Representative: Zhong Liang Correspondence Address: No. 8, Ronggang Road, Ronggui Street, Shunde District, Foshan City, Guangdong Province, the People’s Republic of China Telephone: (0757)28362570 Facsimile: (0757)28361055 E-mail: [email protected]
Registered office address: No. 8, Ronggang Road, Ronggui Street, Shunde District, Foshan City, Guangdong Province, the People’s Republic of China Postal Code: 528303 Company Website: http://www.kelon.com E-mail: [email protected]
Designated Newspapers for the Disclosure of Corporate Information: China Securities Journal, Securities News, Hong Kong Economic News, China Daily

Web site for Annual Report Publication: http://www.cninfo.com.cn Annual Report for the year to be kept at: Securities Department of the Company

Company shares listed on: Shenzhen Stock Exchange, Hong Kong Stock Exchange. Abbreviation of A shares: *ST Kelon Stock Code of A shares: 000921 Abbreviation of H shares: Guangdong Kelon Stock Code for H shares: 0921
Other relevant information Date of alteration of the registration of the Company: 21 January 2002 Registered with: Industrial and Commercial Administration Bureau of Guangdong Province Registration number of the Business License of the Company: QGYZZD003092 Tax registration number: 440681190343548

Name of the Accountant Firm: Shenzhen Da Hua Tian Cheng Certified Public Accountants Office address of the Accountant Firm: 11/F., Tower B, United Plaza, 5022, Binhe Road, Futian District, Shenzhen, the People’s Republic of China

II. FINANCIAL DATA AND BUSINESS DATA HIGHLIGHTS

Prepared according to PRC Generally Accepted Accounting Principles and Regulations (“PRC GAAP”)

Financial data and business data highlights

Financial data and business data highlights
	In Renminbi (“RMB”)
Item	Amount
Total profit	(3,758,417,697.82)
Net profit	(3,693,615,437.69)
Net profit after extraordinary items	(3,588,872,167.42)
Profit from principal operations	163,429,468.39
Profit from other operations	(8,588,805.11)
Operating profit	(3,046,788,411.87)
Investment gain	(46,081,250.93)
Subsidy income	2,307,703.99
Non-operating income and expenses, net	(667,855,739.01)
Net cash flow from operating activities	(1,259,814,617.11)
Net increase in cash and cash equivalents	(833,249,474.47)

Note: Deduction of extraordinary items and amounts involved

Item

2005

Non-operating income and expense: (667,855,739.01) add: Provision for impairment of construction in progress 84,802,421.80 add: Provision for impairment of fixed assets 173,612,014.44 add: Provision for impairment of intangible assets 304,698,032.50 Extraordinary Loss and profit before the Effect on income tax (104,743,270.27) Effect on income tax – Extraordinary Loss and profit after the Effect on income tax (104,743,270.27) Difference between PRC GAAP and International Financial Reporting Standards

		In RMB
		International
		accounting
	PRC GAAP	standards
Net profit	(3,693,615,437.69)	(3,702,172,437.69)
Explanation of difference
Adjustment made according to
international financial reporting standards on:		(8,557,000)
Adjustment on revaluation surplus of assets and
the relevant depreciation		(3,530,000)
Adjustment on goodwill		(11,200,000)
Adjustment on differences of related party tranactions
Adjustment on Start-up expenses of subsidiaries		9,938,000
Others		(3,765,000)

Principal financial data and indictors for the previous 3 years

					In RMB
	2005	2004		2003
		After	Before	After	Before
Item		adjustment	adjustment	adjustment	adjustment
Revenue from principal operations	6,978,371,716.63	7,923,000,768.00	8,436,403,435.00	6,168,109,963.00	6,168,109,963.00
Net profit	(3,693,615,437.69)	(245,798,151.00)	(64,160,206.00)	174,664,714.00	202,180,248.00
Net profit after extraordinary items	(3,588,872,167.42)	(263,118,705.00)	(81,480,760.00)	166,600,305.00	193,095,839.00
Total assets	5,420,343,170.97	11,160,351,150.00 11,361,393,597.00		9,493,540,898.00	9,501,441,214.00
Shareholders’ equity
(excluding minority interests)	(1,089,851,539.58)	2,594,003,282.00	2,803,156,761.00	2,781,215,407.00	2,808,730,941.00
Earnings per share (RMB) (diluted)	(3.7234)	(0.2478)	(0.0647)	0.1761	0.2038
Earnings per share (RMB) (weighted)	(3.7234)	(0.2478)	(0.0647)	0.1761	0.2038
Net asset value per share	(1.0986)	2.6149	2.8257	2.8036	2.8314
Net asset value per share after
adjustment	(1.1027)	2.5729	2.7837	2.7361	2.7638
Net cash flow from operating
activities per share	(1.2700)	0.9009	0.9009	(0.0836)	(0.0836)
Net asset yields (%) (diluted)	N/A	(9.48%)	(2.29%)	6.28%	7.20%
Net asset yields (%) (weighted)	N/A	(8.75%)	(2.46%)	7.44%	8.22%
Net asset yields after extraordinary
items (%)	N/A	(10.14%)	(2.91%)	5.99%	6.87%

Attachment to the profit statement

				Net asset yields	Net asset yields	Earnings per	Earnings per	share
				(%)			(RMB)
				Fully	Weighted		Fully	Weighted
Profit for the reporting period			diluted		average	diluted		average
Profit from principal operations				N/A	N/A	0.1647		0.1647
Operating profit				N/A	N/A	(3.0713)		(3.0713)
Net profit				N/A	N/A	(3.7234)		(3.7234)
Net profit after extraordinary items				N/A	N/A	(3.6178)		(3.6178)
All indices are calculated by		reference to the requirements of Rule				9 to Information Disclosure and
Presentation of Public Issuers
Changes in shareholders’ interest during the Reporting Period and description
								In RMB
							Conversion
							difference on
					Statutory		foreign	Total
		Share	Capital	Surplus	public	Undistributed	exchange	shareholders’
Item	Capital		reserve	reserve	welfare fund	profits	returns	interests
At the beginning of the period	992,006,563		1,576,684,229	114,580,901	114,580,901	(88,877,490)	(390,921)	2,594,003,282
Increase during the period		–	4,415,420	–	–	(3,693,615,438)	5,345,196	(3,683,854,822)
Decrease during the period		–	–	–	–	–	–	–
At the end of the period	992,006,563		1,581,099,649	114,580,901	114,580,901	(3,782,492,928)	4,954,275	(1,089,851,540)

Changes in shareholders’ interest during the Reporting Period and description

Reasons for changes: Of the increase of capital reserve during the period, the increase of provision for equity investment during the year amounting to RMB2,071,743 represents the increase on the capital reserve of the subsidiaries of the Company, the share attributable to the Company, the remaining RMB2,343,677 was injected for the key projects examined and accepted. The increase of undistributed profit of RMB-3,693,615,438 represents the net profit of the period. The increase of conversion difference on foreign exchange returns of RMB5,345,196 represents the fluctuation of exchange rates.

III. ISSUE OF SHARES AND LISTING

During the three years immediately preceding the Reporting Period, the Company has not issued any new shares or derivative securities.
There was no change in the Company’s total number of shares and the share structure.
There are no longer any staff shares in the Company.

IV. INFORMATION ABOUT DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

1. Changes in the shareholding and remuneration of Directors, supervisors and senior management (during the Reporting Period and before 26 June 2006)

							Total
							remuneration
							received	Whether
					No. of		from the	received in
					shares	No. of	Company	shareholder’s
					held at the	shares held	during the	entities or
					beginning	at the end	Reporting	other related
Name	Position	Sex	Age	Appointment Period	of the year	of the year	Period	companies
Liu Cong Meng	Executive Director,	Male	61	15 January 2005-	0	0	HK$1,800,000.00	No
	Vice Chairman,			26 June 2006
	Secretary to the Board
Li Zhen Hua	Vice Chairman,	Male	54	15 January 2005-	0	0	HK$1,800,000.00	No
	Executive Director			26 June 2006
Fang Zhi Guo	Executive Director	Male	44	15 January 2005-	0	0	HK$960,000.00	No
				26 June 2006
Li Kung Man	Independent	Male	49	15 January 2005-	0	0	HK$360,000.00	No
	Non-Executive			26 June 2006
	Director
Chan Pei Cheong	Independent	Male	45	15 January 2005-	0	0	HK$360,000.00	No
	Non-Executive			23 January 2006
	Director
Xu Xiao Lu	Independent	Male	50	15 January 2005-	0	0	HK$360,000.00	No
	Non-Executive			26 June 2006
	Director
Zeng Jun Hong	Supervisor	Male	33	15 January 2005-	0	0	RMB53,300.00	No
				15 January 2008
Bai Yun Feng	Supervisor	Male	44	15 January 2005-	0	0	RMB221,500.00	No
				15 January 2008
He Si	Supervisor	Female	52	15 January 2005-	50,000	50,000	RMB286,400.00	No
				23 June 2006
Tang Ye Guo	President	Male	43	16 September 2005-	0	0	RMB866,500.00	No
				26 June 2006
Xiao Jian Lin	Vice President	Male	38	16 September 2005-	0	0	RMB442,200.00	No
				16 September 2008
Lin Lan	Vice President	Male	48	16 September 2005-	0	0	HK$1,560,000.00	No
				26 June 2006
Su Yu Tao	Vice President	Male	40	16 September 2005-	0	0	RMB442,200.00	No
				26 June 2006
Shi Yong Chang	Vice President	Male	46	16 September 2005-	0	0	RMB448,500.00	No
				16 September 2008
Luo Jun	Vice President	Male	41	16 September 2005-	21,000	21,000	RMB431,200.00	No
				30 May 2006
Li Chi Sing, Gary	Company Secretary,	Male	50	15 January 2005-	0	0	HK$1,160,000.00	No
	Chief			July 2006
	Financial Officer
Gu Chu Jun	Executive Director	Male	47	15 January 2005-	0	0	HK$2,500,000.00	No
				26 June 2006
Yan You Song	Executive Director	Male	41	15 January 2005-	0	0	HK$700,000.00	No
				26 June 2006
Zhang Hong	Executive Director	Male	44	15 January 2005-	0	0	HK$560,000.00	No
				26 June 2006
Total	–	–	–	–	71,000	71,000	RMB15,796,600.00	–

Note: The aggregate amount of “Total remuneration received from the Company during the Reporting Period” was converted from HK$ to RMB at the exchange rate of 1:1.04.

2. Information about current Directors, supervisors and senior management (since 26 June 2006)

							Whether
					No. of	No. of	received in
					shares	shares	shareholders’
					held at the	held at	entities or
				Term of	beginning	the end	other related
Name	Position	Sex	Age	Office	of the year	of the year	companies
Tang Ye Guo	Executive Director,	Male	43	26 June 2006-	0	0	No
	Chairman,			26 June 2009
	Secretary to the
	Board (in addition
	to the other position
	in the Company)
Yu Shu Min	Executive Director	Female	55	26 June 2006-	0	0	No
				26 June 2009
Lin Lan	Executive Director	Male	48	26 June 2006-	0	0	No
				26 June 2009
Su Yu Tao	Executive Director,	Male	40	26 June 2006-	0	0	No
	President			26 June 2009
Xiao Jian Lin	Executive Director,	Male	38	26 June 2006-	0	0	No
	Vice President			26 June 2009
Zhang Ming	Executive Director,	Male	36	26 June 2006-	0	0	No
	Vice President			26 June 2009
Zhang Sheng Ping	Independent	Male	41	26 June 2006-	0	0	No
	Non-Executive			26 June 2009
	Director
Lu Qing	Independent	Male	40	26 June 2006-	0	0	No
	Non-Executive			26 June 2009
	Director
Cheung Yui Kai,	Independent	Male	39	26 June 2006-	0	0	No
Warren	Non-Executive			26 June 2009
	Director
Zeng Jun Hong	Supervisor	Male	33	15 January 2005-	0	0	No
				15 January 2008
Bai Yun Feng	Supervisor	Male	44	15 January 2005-	0	0	No
				15 January 2008
Liu Zhan Cheng	Supervisor	Male	28	23 June 2006-	0	0	No
				15 January 2008
Shi Yong Chang	Vice President	Male	46	16 September 2005-	0	0	No
				16 September 2008
Wang Jiu Cun	Vice President	Female	52	26 June 2006-	13,800	13,800	No
				26 June 2009
Li Chi Sing, Gary	Company Secretary,	Male	50	15 January 2005-	0	0	No
	Chief Financial			July 2006
	Officer
Total	–	–	–	–	13,800	13,800	–

3. Remuneration for the year

(1) Procedures for deciding and the basis of determining the remuneration of the Directors, supervisors and senior management

At the extraordinary general meeting held on 25 May 1996, the Company examined and approved the “Proposal concerning the Directors’ remuneration, fees, incentives and the Supervisors’ rewards”, which regulate the salaries of executive Directors, non-executive Directors and supervisors. The remuneration of the senior management were also approved by the Board.

A meeting of the fifth Board was held at the conference room at the Company’s head office on 15 October 2005, and it was resolved that the Company should establish a remuneration and evaluation committee of the fifth Board, comprising Mr. Liu Cong Meng, Mr. Li Zhen Hua, Mr. Xu Xiao Lu, Mr. Li Kung Man and Mr. Chan Pei Cheong, Andy as members of the remuneration and evaluation committee of the fifth Board, and Mr. Li Kung Man was appointed as chairman of the remuneration and evaluation committee of the fifth Board.

A meeting of the sixth Board was held at the conference room at the Company’s head office on 26 June 2006, and it was resolved that the Company should re-elect the members of the remuneration and evaluation committee, appointing Mr. Zhang Sheng Ping, Mr. Lu Qing, Mr. Cheung Yui Kai, Warren, Ms. Yu Shu Min and Mr. Tang Ye Guo as members of the remuneration and evaluation committee of the sixth Board, and Mr. Zhang Sheng Ping as chairman of the remuneration and evaluation committee of the sixth Board.

(2) During the Reporting Period, the former Directors, supervisors and senior management of the Company received remuneration and allowances from the Company.

4. Duties and performance of the independent non-executive Directors

(1) Attendance of Board meetings by the former independent non-executive directors

	Number of
Name of	Board
independent	meetings
non-executive	attended	Attending		Attending
Directors	in the year	In person		by proxy	Absence	Remarks
Chan Pei Cheong, Andy	9		9	0	0
Li Kung Man	9		9	0	0
Xu Xiao Lu	9		9	0	0

(2) Disagreements raised by the former independent non-executive Directors on the relevant issues of the Company

Mr. Chan Pei Cheong, Andy, Mr. Li Kung Man and Mr. Xu Xiao Lu, all being the independent nonexecutive Directors of the fifth Board, abstained from voting on the “Specific Explanation by the Board of Directors of the Company on the Matters Relating to the Qualified Opinions stated in the Auditor’s 2004 Report” to be considered and reviewed at the meeting of the Board held on 28 April 2005, and stated that they agreed with the qualified opinions of the auditors on the 2004 financial report of the Company and advised the Company to conduct a thorough investigation.

The “Specific Explanation by the Board of Directors of the Company on the Matters Relating to the Qualified Opinions stated in the 2004 Auditor’s Report” was approved by the former Board on 28 April 2005 set out as follows:

(a) The Company’s sales for the year 2004 amounted to RMB8,400,000,000, including sales of inventory amounting to approximately RMB570,000,000 (approximately RMB59,000,000 from the sale of refrigerators and RMB511,000,000 from the sale of air-conditioners) which was recognized after adjustment for auditing purposes. Such products were delivered before 31 December 2004 in accordance with the sales contracts. As agreed in the sales contracts, the customers have a credit term of six months and would make payment by instalments. According to the practice in previous years, the Company has recognised delivery of inventories (goods delivered to customers) made before 31 December 2004 as sales revenue for the year 2004. Based on the average gross margin, such delivered goods would make a difference of about RMB123,000,000 on the gross profit.

The auditors consider that such amount of RMB570,000,000 of the Company’s sale were generated from two customers in the PRC, of which RMB427,000,000 was recorded in December 2004. The auditors were able to confirm an amount of RMB297,000,000 from one of the new customers. The auditors were not able to obtain direct written confirmation from these two customers nor were the auditors able to confirm the truthfulness of the transactions with the new customers. Within the entire sales revenue attributed to these two customers in 2004, there were outstanding receivables of RMB576,000,000 and RMB556,000,000 as at 31 December 2004 and the date of the auditor’s report, respectively. Therefore, the auditors were unable to obtain sufficient evidence to prove the truthfulness of such sales amount of the trade receivables relating to such sales revenue of the Company in its consolidated balance sheet as at 31 December 2004. As such, the auditors were not able to confirm whether there existed any significant misstatement in the Company’s and the Group’s principal operations and trade receivables as at 31 December 2004.

The Company’s auditors visited one of the two customers on 23 March 2005. The other customer failed to return the confirmation letters to the auditor prior to the completion of auditing due to a postal delay. The Company arranged for the auditor to resend the confirmation letters and it was expected that the confirmation letters would be received shortly after the completion of the financial statement for 2004.

In order to expand its sales network, the Company has attempted to secure several large customers. The Company can control the risks generated from such customers. The credit facilities within certain limits granted to such customers by the Company is within the range of credit facilities for major customers in the region. It is a common practice and a successful approach in the industry and is of critical significance for the rapid growth of the Company.

The Board considers that the Company has provided the auditors with documents including sales contracts, out-of-warehouse documents and market analysis documents in accordance with the auditors’ requests. Taking into consideration the practice of the Company and the sales practice of the industry, the Directors believe that there were no risks or mistakes in the sales to such customers. Furthermore, such method of sales has been well accepted in previous years. As such, the Board is unable to understand the judgment of the auditors.

Since the Company provided its customers with sales on credit with a credit term of six months, most of the trade receivables were not yet due for payment when the 2004 financial statements were prepared. As the amounts gradually become payable and are recovered in stages, the sales process will be complete and the sales revenue amounting to RMB570,000,000 as at 31 December 2004 can be confirmed, and the auditors’ qualified opinions can be cleared accordingly.

(b) In 2004, the Company recorded a total value of RMB200,000,000 in returned good, approximately RMB120,000,000 of such amount was attributable to a single customer. Such amount of RMB200,000,000 was fully offset against the sales revenue in 2004.

In view of the large value of returned goods amounting to RMB200,000,000 in 2004, the auditors of the Company are concerned about the possibility of a large amount of returned goods in 2005 from the sales in 2004. As such, the auditors have requested for a provision for returned goods.

The Board noted that as part of the RMB200,000,000 of returned goods in 2004, RMB120,000,000 was attributable to a single customer, such customer acted in accordance with the instructions of the Company such that the Company could repurchase its products which were oversupplied in the market, in an attempt to stabilise the price in that region. Apart from that customer, the sales refund ratio for the remaining products sold was 0.9%. During the period from 1 January 2005 to 20 April 2005, the Company’s total amount of returned goods was merely RMB12,000,000. Moreover, in the new year of sales, the Company has strengthened its control over the market price. As such, the Board does not consider it necessary to make a provision for returned goods.

Saved as mentioned above, during the Reporting Period, the former independent non-executive Directors had no other disagreement on the resolutions of the meetings of the Board and other issues of the Company for the year.

5. Change in the Directors, supervisors and senior management

(1) The Company convened its first EGM in the year 2005 at the conference room of the Company’s head office on 15 January 2005 to consider and approve the resolution to elect members of the Board and the resolution to elect members of the supervisory committee. The Board considered and approved the appointment of Mr. Gu Chu Jun, Mr. Liu Cong Meng, Mr. Li Zhen Hua, Mr. Yan You Song, Mr. Zhang Hong and Mr. Fang Zhi Guo as the executive Directors of the fifth Board and Mr. Chan Pei Cheong, Andy, Mr. Li Kung Man and Mr. Xu Xiao Lu as the independent non-executive Directors of the fifth Board; and considered and approved the appointment of Mr. Bai Yun Feng and Mr. Zeng Jun Hong as shareholder representative supervisors of the fifth Supervisory Committee and Ms. He Si as a staff representative supervisor of the fifth supervisory committee.

The Company convened a meeting of the Board at the conference room of the Company’s head office on 15 January 2005 to elect Mr. Gu Chu Jun as chairman of the fifth Board, to elect Mr. Liu Cong Meng and Mr. Li Zhen Hua as vice chairman of the fifth Board; to appoint Mr. Liu Cong Meng as president of the Company, to appoint Mr. Yan You Song and Mr. Lin Lan as vice presidents of the Company; to appoint Mr. Li Chi Sing, Gary as the chief financial officer of the Company; to appoint Mr. Liu Cong Meng concurrently as secretary to the Board and at the same time to appoint Mr. Li Chi Sing, Gary as the company secretary responsible for Hong Kong affairs.

The Company convened a meeting of the supervisory committee at the conference room of the Company’s head office on 15 January 2005, at which Mr. Zeng Jun Hong was elected as chairman of the fifth supervisory committee.

(2) The Board convened a meeting on 12 August 2005. In order to ensure legal compliance as well as normal production and operation of the Company, the Board discussed and approved the dismissal of Mr. Gu Chu Jun as chairman of the fifth Board, and approved Mr. Liu Cong Meng, vice chairman and president of the Company, to assume the duties of chairman of the Board according to the Company Law of the PRC, the articles of association of the Company and other relevant standardised documents promulgated by the CSRC. This is a result of Mr. Gu Chu Jun being formally investigated by the PRC police department in connection with alleged economic crimes and is subject to procedures in connection with criminal offences, and is therefore not capable of performing his duties as chairman properly.
(3) The fifth Board convened a meeting on 16 September 2005 to discuss and approve the resignation of Mr. Liu Cong Meng as president of the Company and to express its gratitude for the contributions made by Mr. Liu Cong Meng during his term of office. The Board also resolved to dismiss Mr. Yan You Song as vice president of the Company and appointed Mr. Tang Ye Guo as president of the Company, Mr. Xiao Jian Lin, Mr. Su Yu Tao, Mr. Shi Yong Chang and Mr. Luo Jun as vice presidents of the Company, with effect from the approval at the meeting.
(4) The resignation submitted by Mr. Chan Pei Cheong, Andy, the independent non-executive Director of the fifth Board, became effective on 23 January 2006. From 23 January 2006 onwards, Mr. Chan Pei Cheong, Andy no longer assumed his duties as an independent non-executive Director, a member of the audit committee and the remuneration and evaluation committee of the Company. Therefore, started from 23 January 2006, there were only two independent non-executive Directors remaining on the fifth Board, which is not in compliance with the relevant securities regulations and the Company’s articles of association.
(5) At the extraordinary general meeting of the Company held on 26 June 2006, Mr. Tang Ye Guo, Ms. Yu Shu Min, Mr. Lin Lan, Mr. Su Yu Tao, Mr. Xiao Jian Lin and Mr. Zhang Ming were appointed as executive Directors of the sixth Board; Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren were appointed as independent non-executive Directors of the sixth Board; Mr. Yan You Song and Mr. Zhang Hong were removed as executive Directors; Mr. Gu Chu Jun, Mr. Liu Cong Meng, Mr. Li Zhen Hua, Mr. Fang Zhi Guo, Mr. Li Kung Man and Mr. Xu Xiao Lu resigned as Directors.

At the first board meeting of the sixth Board held on 26 June 2006, Mr. Tang Ye Guo was appointed as the chairman of the Company; Mr. Su Yu Tao was appointed as the president of the Company, and Mr. Tang Ye Guo ceased to be the president of the Company; Ms. Wang Jiu Cun and Mr. Zhang Ming were appointed as vice presidents of the Company, and Mr. Lin Lan, Mr. Su Yu Tao and Mr. Luo Jun ceased to be vice presidents of the Company; Mr. Xiao Jian Lin and Mr. Shi Yong Chang will continue to act as vice presidents of the Company. Mr. Tang Ye Guo was also appointed as the secretary to the Board, and Mr. Li Chi Sing, Gary will continue to act as the chief financial officer and the company secretary responsible for Hong Kong affairs.

Mr. Liu Zhan Cheng was appointed as the supervisor representing the staff and workers of the Company at the staff representative meeting of the Company held on 23 June 2006, and Ms. He Si ceased to be the supervisor representing the staff and workers of the Company.

(6) The sixth Board of the Company convened its second meeting on 10 July 2006 by means of written resolutions. All of the nine directors of the Company attended the meeting. The convening of and voting at the meeting were in compliance with the relevant provisions of the Company Law of the PRC and the articles of association of the Company. The following resolutions were considered and passed at the meeting:

As Mr. Li Chi Sing, Gary (“Mr. Li”), the company secretary responsible for Hong Kong affairs of the Company (“Company Secretary”), was subject to administrative sanctions imposed by the CSRC, he was no longer eligible for the position in the Company’s senior management pursuant to the Company’s articles of association and relevant regulatory documents, and accordingly the Board resolved to remove Mr. Li as the Company Secretary with 9 affirmative votes, 0 objecting vote and 0 abstaining vote.

Meanwhile, at the personal request of Mr. Li, the Board approved the cessation of Mr. Li to act as the qualified accountant of the Company from 10 July 2006. Further, Mr. Li ceased to be the chief financial controller of the Company from 7 July 2006.

REPORT OF THE DIRECTORS

(I) Operation during the Reporting Period

1. Scope of primary operations and the operations

The Company is principally engaged in the development, manufacturing, domestic and overseas sales and provision of after-sales services of electrical home appliances and relevant components and products of refrigerators, air conditioners, freezers and small sized electrical home appliances.

2. Analysis of income and profit from the primary operations of the Company by geographic and product segments

(1) Income and profit from primary operations by geographic segments

			(Unit: RMB’000)
		Income from
Operation indicators	primary operations		Increase Rate %
Domestic market		4,154,956.84	(6.92%)
Overseas market		2,823,414.88	(18.37%)
Total		6,978,371.72	(11.92%)
Primary businesses and products
	Income from sale	Cost of sale	Gross
Primary products	of products	of products	Profit Ratio %
	(‘000)	(‘000)
Refrigerators	2,542,838.90	2,571,065.12	(1.11%)
Air Conditioners	3,600,489.21	3,423,931.36	4.90%
Freezers	261,112.61	237,960.72	8.87%
Others	573,931.00	581,286.36	(1.28%)

(2) Primary businesses and products

3. Operations and results of the major subsidiaries and associates

Major subsidiaries		Nature of	Principal products	Registered	Scale of
or associates	Interest	business	or services	capital	assets	Net profit
					(RMB)	(RMB)
Guangdong Kelon	100%	Manufacturing	Manufacture and	US$26,800,000	2,062,689,710	(279,211,061)
Refrigerator Co., Ltd.			sale of refrigerators
Guangdong Kelon	60%	Manufacturing	Manufacture and	US$36,150,000	1,679,323,195	(265,082,867)
Air-Conditioner Co., Ltd.			sale of air-conditioners
Guangdong Kelon	100%	Manufacturing	Manufacture and	US$5,620,000	456,029,795	(82,673,164)
Fittings Co., Ltd.			sale of components
			of air-conditioners
			and refrigerators
Guangdong Kelon	70%	Manufacturing	Manufacture of moulds	US$15,000,000	190,278,825	(8,366,207)
Mould Co., Ltd.
Shunde Rongsheng Plastic	70%	Manufacturing	Manufacture of	US$15,800,000	394,388,073	(7,934,669)
Products Co., Ltd.			plastic components
Guangdong Kelon	100%	Manufacturing	Manufacture and	RMB237,000,000	279,453,012	(86,775,674)
Freezers Co., Ltd.			sale of freezers
Shunde Jiake Electronic	100%	Manufacturing	IT and communication	RMB60,000,000	53,577,317	39,182
Company Limited			technology, and
			micro-electronics
			technology development
Shunde Wangao	100%	Import and	Import and export	RMB3,000,000	86,819,431	(5,216,575)
Import & Export Co., Ltd.		export	business
Shunde Kelon Household	100%	Manufacturing	Manufacture and	RMB10,000,000	41,509,945	(23,730,919)
Electrical Appliance			sale of household
Company Limited			electrical appliances
Huayi Compressor Holdings	22.73%	Manufacturing	Manufacture and	RMB260,854,000	1,790,560,606	(142,742,665)
Company Limited			sale of compressors

4. Major Customers and Suppliers

Aggregate purchases attributable to the Group’s five largest suppliers were RMB678,000,000, representing 13.53% of total purchases. Aggregate sales attributable to the Group’s five largest customers were RMB2,224 million, representing 31.87% of total sales.

5. Problems arising from operations and resolutions of such problems

During the Reporting Period, due to the alleged economic crimes of the former chairman of the Board, Mr. Gu Chu Jun, and other parties, the CSRC filed an investigation against the Company in early April for the alleged violation of the Securities Law of the PRC. The matters had a direct impact on the confidence of financial institutions, suppliers and distributors etc. towards the Group, resulting in the Group facing enormous difficulties in raising capital, while the tight cash flow conditions faced by the Group directly affected the Group’s working relationship with suppliers and distributors. Therefore, the Group was not able to operate under normal conditions during the Reporting Period, and the Group also faced a large decrease in the level of sales.

In order to resolve the above problems, for the interests of its shareholders, the Company used great efforts to initiate numerous measures to minimise staff turnover, to maintain business operations as far as possible, and to strengthen communication with investors. A new management team took up their posts in September, and has implemented effective measures such as increasing turnover of capital, disposing idle assets and reducing costs, improving internal control in order to restore the confidence of financial institutions, distributors and suppliers in the Group’s prospects. Such measures have improved the Group’s external operating environment, as a result of which the Group’s production and operations have gradually restored. As a result there has been a remarkable increase in both the Group’s production and sales in the fourth quarter of 2005.

(2) Investments of the Company during the Reporting Period

During the Reporting Period, the Company did not raise any capital and no capital raised during any prior periods were used during the Reporting Period.
During the Reporting Period, there were no major investments funded by internal capital and thus there are no reports on the progress and income received from such investments.

(3) Financial situation and operating results during the Reporting Period.

			Unit: RMB
Items	31 December 2005	31 December 2004	Change (%)
Total assets	5,420,343,170.97	11,160,351,150.00	(51.43%)
Shareholders’ equity	(1,089,851,539.58)	2,594,003,282.00	(142.01%)
Profit from principal activities	163,429,468.39	1,660,428,838.00	(90.16%)
Net profit	(3,693,615,437.69)	(245,798,150.77)	N/A
Net increase in cash and cash equivalents	(833,249,474.47)	290,628,826.00	(386.71%)

Note: All major indicators in the Reporting Period fell sharply when compared with the corresponding period of last year. The reasons were as follows:
(I) As there are discrepancies between the accounting records as confirmed by the former management and actual operating activities, and due to the lack of internal control in the prior periods, there are many inconsistencies in the accounting records. The book values of the Company’s assets, liabilities and equity failed to reflect the actual financial position and operating results of the Company. In order for the actual financial position and operating results to be reflected in the accounting records, the new management of the Company since commencing its offices has undertaken an overall stock-count and inspection of assets. As a result, the following factors and amounts were discovered to have major impact on the Company’s financial position and results:
Rectification of accounting errors from previous periods resulting in a reduction of net assets in the beginning of the year:
- Discrepancies were revealed between some of the accounting records which had been confirmed by the former management of the Company and the actual operating activities, the Company discovered an overstatement of principal operating income of RMB513,402,667; an overstatement of profit from the sales of scrap material of RMB22,537,714; an understatement of advertising expenses of RMB7,370,000; and an understatement of corporate income tax loss of RMB17,435,805. For 2003 and prior years an overstatement of the profits from the sales of scrap material of RMB21,900,316 and an understatement of corporate income tax loss of RMB5,615,218. For 2003 and 2004, accrued accounts receivable and accounts payable amounting to RMB65,000,000.00 were not recorded. In preparing the comparable financial statements of the current year as against the previous year, the Company has rectified the above material errors. Due to such errors, the Company’s retained earnings for the year were overstated by RMB209,153,478.
The effect of the provision for assets impairment and provision for accrued charges on the net assets and profit in 2005 was RMB1,777,587,700. Please refer to the table below (unit: RMB ten thousand):

			Increase at the
			end of the year
			compared with
			the beginning
	Balance at	Balance at	of the year
	the beginning	the end	(increase
Item	of 2005	of 2005	for the year)	Expense category
Provision for bad debt	19,020.65	76,291.85	57,271.21	Management expense
Provision for impairment
of inventories	13,376.84	40,902.03	27,525.19	Management expense
Provision for impairment
of long-term investment	6,721.95	7,821.95	1,100.00	Investment gain
Provision for impairment
of fixed assets	6,401.18	21,044.22	14,643.04	Non-operating expense
Provision for impairment
of intangible assets	810.77	31,280.57	30,469.80	Non-operating expense
Provision for impairment
of construction in progress	0	8,480.24	8,480.24	Non-operating expense
Accrued charges	19,036.07	48,247.54	29,211.47	Operating expense,
				management expense
				and financial expense
Provision for liabilities	11,933.75	20,991.57	9,057.82	Operating expense and
				management expense
Total	77,301.21	255,059.57	177,758.77

(1) Provision for bad debt:

According to the accounting policies and accounting estimates of the Company, the Company made provisions for bad debts of the trade receivables according to the age of the debt and made provisions for bad debt of other receivables according to individual analysis. As approved by the Board of the Company during the year a provision for bad debt was made, amounting to 50% of the alleged embezzlement of the Company’s fund by companies related to Greencool and other third parties. As of 31 December 2005, provision for bad debt amounting to RMB762,918,500 was made by the Company, which means a further provision for bad debt amounting to RMB572,712,100 for the year shall be made by the Company in addition to the provision for bad debt amounting to RMB190,206,500 made by the Company at the beginning of the year. It was mainly attributable to (1) provision for bad debt, which amounted to RMB374,000,000, was made for the alleged embezzlement of the Company’s fund by companies related to Greencool and other third parties; (2) an increase in provision for decrease in land value in the amount of RMB84,000,000 was made (the above matters were mainly incurred before September 2005); (3)provision for bad debt amounting to RMB 17,590,000 for the Company’s commercial acceptance notes from previous periods which were converted to trade receivables when due; (4) the remaining provision for bad debt was principally incurred as a result of an increase in the age of trade receivables (Please refer to Item 3 of Note 6 to the financial statements “Particulars of consolidated amounts of trade receivables”).

(2) Accrued charges

Due to poor management of the Company by the previous management team, there were inconsistencies between the accounting records and operating activities of the Company and a large sum of unrecorded accruals. After clearing the off-balance-sheet expenses, provisions have been made according to the Company’s actual business operations. The Company carried out an investigation on accrued charges and verified the relevants charges by evidence such as contracts etc. The aforesaid accrued charges were subject to approval by the relevant departments of the Company and the relevant responsible officer. To reflect the actual situation of the expense of the Company, the Company has therefore made further provisions to its accrued charges. The principal items of accrued charges of the Company as follows:

		As at the
		beginning
Items	As at year end	of the year	Reasons for non-settlement
Maintenance charges	59,126,811.59		Payable to definite customers,
			incurred but yet to be paid
Advertising fee	71,492,819.19	43,368,605.00	Payable to definite customers,
			incurred but yet to be paid
Logistic charges	43,516,605.66	34,997,050.00	Payable to definite customers,
			incurred but yet to be paid
Listing expenses	12,154,179.92		Payable to definite customers,
			incurred but yet to be paid
Litigation fees	3,298,457.90		Payable to definite customers,
			incurred but yet to be paid
Trademark license fee	5,200,000.00		Payable to definite customers,
			incurred but yet to be paid
Installation costs	63,743,988.70	31,931,696.45	Installation costs provided for
			products sold but yet
			to be paid
Sales discounts	96,030,139.85	59,775,725.00	Incurred but yet to be paid
Transportation costs	8,011,859.63	—	Incurred but yet to be paid
Auditors’s fee	7,150,220.00	6,149,350.00	Incurred but yet to be paid
Business fee	22,188,399.88	—	Incurred but yet to be paid
Interest and default interest	22,206,757.05	—	Incurred but yet to be paid
Sales incentives	31,526,778.51	—	Incurred but yet to be paid
Agency charge and difference
in prices	13,402,831.68	—	Incurred but yet to be paid
Expenses for used capital	3,409,550.50	—	Use Hisense appropriations
Others	20,015,979.92	18,472,999.00	Incurred but yet to be paid
Total	482,475,379.98	190,360,711.45

(3) Provision for liabilities

Provision - Provision for maintenance represents the expected provision for warranty of products. The Company offers 3 years warranty for all products sold. During the warranty period, customers are entitled to maintenance services free of charge. In line with common industry practice and the data available from previous periods, the provision for maintenance is determined on the basis of 3 years of warranty and the estimated repair cost. According to the accounting policy of the Company and accounting estimations as confirmed by the auditors, as at 31 December 2005, provision for maintenance of the Company was RMB209,915,700, an increase of RMB90,578,200 as compared with RMB119,337,500 as at the beginning of 2005.

(4) Provision for inventories

Provision for inventories for the year was RMB275,251,900, which mainly comprises:

Provisions in the amount of RMB1,760,000, RMB26,300,000 and RMB5,440,000 respectively were made in respect of exported freezers, air-conditioners and refrigerators with book values of RMB12,600,000, RMB119,760,000 and RMB49,540,000, respectively, due to deferred delivery and cancellation of orders by client or quality defects found in products resulting in products not being sold at their original price and resulted in their net realizable value falling below their book value;

Provision of RMB26,740,000 in respect of freezers for domestic sales with an original value of RMB51,190,000 due to quality defects and return of stocks by clients, some of which were found non-repairable and which resulted in their net realizable value falling below their book value.

Provision of RMB32,490,000 in respect of air-conditioners with book value of RMB68,870,000. The reasons were because our main customer in the United States had ceased their partnership with the Company, quality defects found in some of the stocks and higher maintenance fees in the United States, as a result, the net realizable value of the air-conditioners have fallen below their book value.

The Company had inventories with carrying value of RMB812,820,000 at the end of 2005. After a stock count of raw materials, it was found that some raw materials purchased for the production of exporting products, mainly comprised of air-conditioners and refrigerator compressors for export purpose with a total book value of RMB120,030,000 and ancillary equipment for export purpose with a total carrying value of RMB46,090,000, could no longer be used and became obsolete due to the restrictions imposed by international environmental protection standards. As such, the Company made provisions for impairment of RMB72,510,000 and RMB27,670,000 respectively for the above two items and RMB646,700,000 for other raw materials, which represents the difference between the realizable value and book value. Also, some of the raw materials did not match the launch program of the Company’s products which rendered such materials redundant and obsolete, the Company made provisions for impairment of RMB60,590,000, which represents the difference between the realizable value and book value.

(5) Fixed Assets

Fixed assets with original cost of RMB3,882,260,000 and net value of RMB1,800,120,000, were made a provision for impairment of RMB146,430,000 for the year. This was due to the severe depreciation of certain facilities which needed replacement and also due to the cease of certain operations of the Company which resulted in the speeding up of impairment. As such, the affected facilities with cost of RMB2,056,440,000 and net value of RMB505,830,000 were made a provision for impairment of RMB151,510,000, using the lower value calculated under replacement method and discounted cash flow method. The Company also made an inspection of fixed assets and discovered a large amount of unused moulds. The affected moulds with original cost of RMB194,340,000 and net value of RMB98,480,000 were made a provision for impairment of RMB26,290,000. According to the relevant rules of accounting system, the Company made the above provisions for impairment on fixed assets based on the appraised value provided by an independent third party 北京眾華資產評估有限公司 (Beijing Zhong Hua Asset Appraisal Co., Ltd).

(6) Intangible Assets

As the assumptions on which valuation of intangible assets of the Company had not realized and the alleged violation of law by the former chairman causing damage to the Company’s brand name, the value of trademarks fell sharply. Trademarks of the Company, being “Kelon” and “Rongsheng” with original cost of RMB521,860,000 and amortized amount of RMB117,420,000 were made a provision for impairment in an aggregate of RMB286 million based on the result of a valuation made by an independent third party 山東正源和信評估事務所 (Shangdong Zheng Yuan He Xin Appraisal Co).

商丘科龍電器有限公司 (Shangqiu Kelon Electrical Appliance Co. Ltd.) (“Shangqiu Kelon”) received a notice from the local court in August 2005 that 商丘經濟技術開發區管委會 (the Management Committee of Shanggiu Economic and Technology Development Zone) has filed proceedings against Shangqiu Kelon, requesting the land of 200 arcs located at Shangqiu Economic and Technology Development Zone acquired by Shangqiu Kelon from Shangqiu Bing Xiong Freezing Facilities Company Limited. The court took control of the relevant land use rights. Accordingly, a total of provision for impairment of RMB18,210,000 was made on the land use right with book value of RMB47,470,000;

(7) Work in Progress

A provision for impairment of RMB84,800,000 was made to work in progress with cost of RMB403,690,000. This was due to the fact that certain work in progress items were obsolete equipment which needed replacement and also due to cease of certain operations of the Company which resulted in provisions made under the accounting system and results of appraisal made by independent third parties. Among which provision for impairment of RMB33,340,000 was made to items of Jianxi Kelon with cost of RMB81,860,000, provision for impairment of RMB35,100,000 was made to items of Yangzhou Kelon with cost of RMB242,280,000 (including work in progress of the Company in Yangzhou), provision for impairment of RMB16,150,000 was made to items of Zhuhai Kelon with cost of RMB30,220,000.

(8) Long-term Investment

The Company made investments of RMB11,000,000 to 江西科龍康拜恩有限公司 (Jiangxi Combine Electrical Appliance Co., Ltd.) (“Jiangxi Combine”) but Jiangxi Combine had never began effective operation since its incorporation. Due to the alleged violation of law by the former chairman of the Company, the Company lost control of Jiangxi Combine and therefore a provision for impairment of long-term investment of RMB11,000,000 was made;

3. Outstanding Rebates

In the course of the inspection on outstanding rebates, the Company discovered that the former management did not effectively exercised supervision and control. The former management did not procure settlement of rebates in a timely manner and there were serious discrepancies between accounting records and operating results. According to the rebate policy agreed with external merchants and the actual conditions, a provision for rebate payable of RMB87,504,500 was made in the current year.

In addition to the above corrections of accounting errors and provisions for impairment, there were other major adjustments which affected the performance of the Company as described below:
(1) Investment loss: The Company accounted for its two associated companies namely Huayi Compressor Holdings Company Limited (“Huayi Compressor”) and 廣州安泰達物流有限公司 (Guangzhou Antai Da Logistics Co., Ltd) (“Antaida”) using equity accounting method. Based on the operating conditions of Huayi Compressor and Antaida, an investment loss of RMB32,440,000 was recognized for Huayi Compressor and an investment gain of RMB730,000 was recognized for Antaida for the year 2005.
(2) Loss arising from retirement of fixed assets and unused fixed assets amounted to RMB50,530,000.

As required by the Board and management of the Company to deal with the redundant fixed assets, each subsidiary had examined its fixed assets thoroughly and invited public biddings for disposal of the idle fixed assets and obsolete fixed assets after being approved under the various approval procedures. The obsolete fixed assets with a net value of RMB35,260,000 were disposed of, resulting in a loss of RMB15,270,000 in fixed assets. The impact of the above assets on the net profit for the Reporting Period was -RMB50,530,000. The disposed assets had become idle before September 2005.

(3) Loss of RMB109,030,000 arisen from the claims for defective products.

The loss of RMB109,000,000 arisen from the claim for the defective products in export business was due to the client refusing to make payment for the defective products of the Company and requesting compensation. The loss had occurred prior to September 2005.

(4) The counters and advertisement boards made by the Company and Wetherell Development Limited in previous years had the amortised balances of RMB25,260,000 and RMB14,770,000 respectively, which together amounted to RMB40,030,000. There was no assets in kind when conducting a thorough stock-count in 2005. According to the accounting policy and accounting estimates of the Company, such amounts were fully recognised as an expense. It was before September 2005 when the loss had occurred.

(5) As former Chairman of the Company Mr. Gu Chu Jun was subject to procedures for alleged economic crimes, the Company was involved in a number of litigations which led to operating difficulties. As at 31 December 2005, the Company had overdue borrowings amounting to RMB1,233,237,604.98, resulting in a major increase in the finance cost of the Company for the year, which amounted to RMB166,680,000.
(6) Adjustment of the book value of cost: the new management of the Company found out, after taking office, that there were severe defects in the internal control of the Company’s inventory audit for the previous periods, i.e. the accounting system for cost audit does not match the stock maintenance records, as a result, the Company was unable to determine the cost of its principal operations with the ordinary financial audit method. When preparing the annual report, the Company adopted a method with which the year-end inventory is calculated with the amount of year-end finished products and the weighted purchase price, and the cost of principal operations of the Company for 2005 was then figured out based on the result. Such method may justify the year-end inventory, but will possibly include the cost incurred in previous years in the cost of principal operations for the year, as the Company was unable to clearly separate the cost for 2005 and that for the previous years.
(II) With the impact of the Company’s former Chairman Mr. Gu Chu Jun being suspected of having committed economic crimes as well as Mr. Gu and the Greencool Companies under his control misappropriating the Company’s capital, the Company has had cash flow difficulties, and financial institutes, suppliers and distributors have lost their confidence in the Company. Such serious situation has resulted in the suspension in the production of refrigerators and air-conditioners during the Reporting Period, as a result of which the normal operation and production of the Company was adversely affected and income from principal operations dropped significantly, and thus bringing forth huge loss.

As a result of the aforesaid issues, the Company suffered great loss during the Reporting Period.

(IV) The auditor’s report issued by Shenzhen Dahua Tiancheng Certified Public Accountants for the Company containing emphasised matters and qualified opinion. The Board explained the matters relating to the qualified auditors’ opinion in detail as follows:

Specific Explanation of the Board of Directors of Guangdongs Kelon Electrical Holdings Company Limited Relating to the Auditors’ Report with Emphasised Matters and Qualified Opinion The auditors, after having audited the Company’s financial statements for 2005, issued a report with emphasised matters and qualified opinion as follows:

Reserved Matter 1: As described in Note 5 to the financial statements “Particulars of subsidiaries and associates and scope of consolidated financial statements for the year”, Jiangxi Kelon Industrial Development Company Limited (“Jiangxi Kelon”) is a subsidiary of the Company consolidated into the financial statements of the Company for 2005. We were unable to conduct an on-site audit on Jiangxi Kelon as its assets have been seized by the court and the relevant financial personnel have left the Company. As at 31 December 2005, the financial statements of Jiangxi Kelon showed a total asset value of RMB586,000,000, accounting for 10.81% of the total consolidated assets, and its net profit for 2005 was - RMB199,600,000, accounting for 5.41% of the consolidated net profit. The specific data of the financial statements of Jiangxi Kelon for the Year 2005 are disclosed in detail in Note 5.2 to the financial statements.

Upon the revelation of former chairman’s involvement in illegal acts, Jiangxi Kelon’s business was discontinued by the Company after its assets were frozen by the court. As one of the major companies through which the Company’s former management had made fraudulent accounts and embezzled funds, the situation of Jiangxi Kelon was complicated and has brought about significant outstanding issues. Affected by this event, the remaining staff of the Company felt threatened about their personal security. Furthermore, as former management and accountants had resigned, we were unable to have a full understanding of many issues, and hence lacking the requisite conditions for carrying the on-site audit. We can only consolidate the accounts based on financial statements presented by Jiangxi Kelon.

The Company’s newly appointed management have attached great importance on the above problems in relation to Jiangxi Kelon. They have sent staff repeatedly to Jiangxi Kelon to negotiate with local banks and suppliers and to seek local government’s support. In order to improve Jiangxi Kelon’s external environment, safeguard the security of its financial resources and minimise Jiangxi Kelon’s losses, the Company has employed a new security company to be responsible for Jiangxi Kelon’s security. With respect to the indebtedness caused by the outstanding issues, the Company was in active coordination with local government, banks and other creditors for the purpose of working out solutions on an individual basis. Currently, some of the Company’s debts have been settled through negotiation, while the Company is in active negotiation with respect to other outstanding debts. The Company’s accounts are also being thoroughly tidied up. It is expected that the tidyingup will be completed by the end of the year 2006.

Reserved Matter 2: As described in Item 9 of Note 6 to the financial statements “Fixed assets, accumulated depreciation and provision for impairment loss”, the Company has since 1999 had certain of its fixed assets restated at valuation, and such fixed assets had an increase of RMB133,284,123.42 over its original cost, and an increase of RMB96,154,813.34 over its net value. As no breakdown information was recorded for the asset valuation when they were accounted for, the Company could not provide a detailed breakdown of such fixed assets, nor could it identify the corresponding fixed assets, and hence we were unable to acquire adequate evidence to determine whether such amounts should be included in the fixed asset value of the Company.

In 1999, the Company valuated its assets for the purpose of its issuance of shares. As no breakdown information was recorded for the asset valuation when they were accounted for, the Company could not provide a detailed breakdown of such fixed assets, nor could it identify the corresponding fixed assets. Thus there exists a possibility that some fixed assets were not written off despite having scraped or disposed of.

The Company’s management paid serious attention to such matter. The Company arranged for financial personnel to sort out and identify all the relevant documents at that time. In addition, relevant personnel were appointed to search for original documentation held by the organisation then responsible for valuation but no breakdown can be provided either. The present accountants of the Company were not involved in the matter, and as the matters occurred too long ago, it is difficult for the particulars to be made clear, so it is impossible to verify the accounts.

Although the former management was responsible for such huge divergence in the valuation of the Company’s assets, the Company will continue to follow up such matter to find out the causes and it is expected that the tidying-up will be completed by the end of the year 2006.

Reserved Matter 3: As described in Item 4 “Other receivables”, Item 18 “Other payables” of Note 6 to the financial statements, the accounting records confirmed by the former management of the Company were not in line with its actual operations; there were material imparities found in the inter-company balances between the Company and its subsidiaries; and the transactions and inter-company balances between the Company’s headquarters and its regional sales branches were difficult to match. The Company temporarily recorded the unreconciled debit balances of RMB80,043,221.73 for the year ended 31 December 2005 into other receivables, and the unreconciled credit balances of RMB51,504,170.08 into other payables. The reason for such difference is still under investigation.

In addition, as stated in the section headed “Principal Business Revenue and Costs” in explanatory item 28 of note 6 to the accounting statements, the Company calculated the inventory for the year by counting the quantity of the finished products for the year as well as the weighted purchasing price thereof. Based on such calculation, the Company estimated the amounts of costs in respect of principal businesses for 2005. Even if such accounting method has no impact on the recognition of the balance of inventory for the year, we are not able to implement satisfactory auditing procedures to determine whether the sales costs incurred are all belong to 2005 due to the unreliability of the inventory control system.

As the accounting records acknowledged by the former management of the Company were not in line with its actual operations, the Company’s new management found that there were defects in internal control of the inventory calculation. The accounting system of cost calculation and inventory in and out records did not match, as a result, the Company was unable to determine the cost of principal operations according to normal financial calculation methods. Therefore, the inventory is calculated on the basis of year-end stock takes and the weighted purchase unit price, and such method has superseded the accounting methods for 2005. Such method can ensure the verification of inventory as at year-end, however, under such method, the accrued cost for previous years may be included in the cost of principal operations for the current year.

Similarly, as a result of the former management’s failure in its financial management, the new management found that the Company recognised sales income based on delivery of goods, but there were material imparities found in the inter-company balances between the Company and its subsidiaries due to delayed issuance of invoice and the delayed reconciliation and improper reconciliation method. Also, as the former management made use of Jiangxi Kelon and other companies for fraudulent operations, the Company’s cash flows were not in line with its logistics, consequently, the transactions and inter-company balances between the Company’s headquarters and its regional sales branches were in poor match. Adjustment will be made when the reason for the difference is ascertained after the accounts are sorted out by the Company.

In light of the above objective facts, the auditors were unable to determine whether the consolidated financial statements and the Company’s financial statements as at 31 December 2004 should be adjusted accordingly.

For the above opinion, the Company has adopted remedial measures as follows:

1) The Company’s management has paid serious attention and has set up current accounts clearing group, to fully clear out the above problems in the Company’s former finance and operation, to investigate into the existing debit differences and credit differences of current accounts, and to adjust the accounts according to actual business operation.
2) In relation to its problems in the former in-and-out of inventory and cost calculations, the Company will set clear procedures in respect of the in-and-out of inventory and cost calculations, control stock-take and such basic management works of the Company, strengthen its internal control, and ensure consistency of fund liquidity and logistics, so as to make sure that accounts are in line with the actual facts.

As at the date of this report, the Company has completed rectification of its in-and-out system and cost calculation system. For existing unreconciled inter-company balances, it is expected to be settled by the end of 2006.

Reserved Matter 4: As described in Note 10.4 to the financial statements, the previous land use right for the land with an area of 254,600 square meters under Shun Fu Guo Yong (2004) No. 1002282 of the Company. In respect of the transfer in June 2005, the transferee, namely Foshan Shunde Jiegao Investments Company Limited (佛山市順德區捷高投資有限公司 ) has finished the registration of title as per the reply of the Land and Resources Bureau of Foshan City, Shunde Branch regarding the enquiry of the title of the relevant land . Pursuant to the transfer agreement entered into between the Company and Foshan Shunde Jiegao Investments Company Limited, the price for the transfer shall be RMB169 million. As at the date the audit report, the Company has no record of having received any payment of the price for the transfer, and therefore the Company has made provision for such receivables in the sum of RMB84 million. We have made a written enquiry to the transferee but received no reply. As the Company failed to provide us with further information, we cannot carry out other alternative auditing procedures to judge whether the receivables of RMB169 million arising from the transfer of the land still exist as at 31 December, 2005, and whether the provision made is sufficient.

The Company previously held the land use right of 266,668 square meters under Shun Fu Guo Yong (2004) No. 1002282. On 22 June 2005, the Company transferred 254,629.68 square meters of which to Foshan Shunde Jiegao Investment Company at the consideration of RMB168,855,132.63, however, the Company has not yet received the relevant land transfer payment. There is risk that such amount will become bad debts due to the age of the amount. The Company is currently negotiating with the relevant authorities to strive to collect the consideration for the land transfer as soon as possible.

Reserved Matter 5: As described in Notes 6.3, 6.4, and 7 to the financial statements, a series of related party transactions and abnormal cash flow occurred during the period from October 2001 to July 2005 between the Company and its largest shareholder, Guangdong Greencool Enterprise Development Limited and its related parties (the “Greencool Companies”) and specified third parties, such as Tianjin Lixin Commercial Trading Development Company Limited. Such transactions and abnormal cash flow as well as the suspected fund embezzlement have been and are now under investigation of the relevant authority and the investigation has not completed as at present. As at 31 December 2005, the accounts receivable in connection with the Company and the Greencool Companies and the above specified third party companies amounted to RMB680 million. The Company has made a provision of RMB374 million in respect of the accounts receivable from Greencool Companies and the above specified third party companies. The Company also had noted financing without trading background. Given the case was still under investigation, the Company was not able to provide sufficient information. We were unable to carry out appropriate audit procedures to ascertain whether the above specified third party were related parties. We were also unable to ascertain whether such related party transactions were valid, whether sufficient disclosure has been made, whether the accounts receivable and payable were the full amount or whether sufficient provision has been made. We were unable to ascertain whether there was any material misstatement as to the Company’s consolidated accounts for 2005 in relation to the cash flow from operating activities and financing activities under the Company’s cash flow statement.

As a result of the series of related party transactions and abnormal cash flow occurred during the period from 2001 to 2005 between the Company and its largest shareholder, Guangdong Greencool, and its related parties or third party companies, such transactions and abnormal cash flow above as well as the suspected fund embezzlement have been investigated by the relevant authority.

Based on initial results of investigations made by the police and court and the information currently available to the Company, the balance of payables due from the Greencool companies and specific third parties to the Company was RMB680.04 million, including receivables of RMB40 million due from the Finance Bureau of Yangzhou Economic Development Zone to Yangzou Kelon; receivables of RMB2 million due from Beijing De Heng Solicitors to Jiangxi Kelon; receivables of RMB2 million due from Beijing De Heng Solicitors to the Company; receivables of RMB9.5 million due from Zhejiang Yuhuan Compressors Factory (“Zhejiang Yuhuan”) to Chengdu Kelon Refrigerator Co. Ltd. (“Chengdu Kelon”), Yingkou Kelon Refrigerator Co. Ltd. (“Yingkou Kelon”) and Guangdong Kelon Refrigerator Ltd. (“Kelon Refrigerator”); receivables of RMB15.61 million due from Hefei Weixi Electrical Appliance Company Limited (“Hefei Weixi”) to the Company; receivables of RMB470,000 due from Hefei Weixi to Guangdong Kelon Weili Electrical Appliances Company Limited (“Kelon Weili”); receivables of RMB29.84 million due from Wuhan Changrong Electrical Appliances Company Limited to the Company. The amounts due to the Greencool companies and the specified third parties amounted to RMB131.17 million, including payables of RMB7.37 million due from the Company to Zhuhai Defa; payables of RMB2.59 million due from Kelon Refrigerator to Zhongshan Dongyue Electrical Company Limited (“Zhongshan Dongyue”); payables of RMB2.32 million due from Guangdong Kelon Refrigerators Co. Ltd. (“Kelon Refrigerators”) to Zhuhai Longjia Coolant Facility Company Ltd (“Zhuhai Longjia”); payable of RMB220,000 due from Kelon Refrigerators to Zhejiang Yuhuan; payables of RMB620,000 due from Guangdong Kelon Air-Conditioner Co. Ltd. (“Kelon Air-Conditioner”) to Jiangxi Keda Plastic Technology Company Limited (Jiangxi Keda), where:

The cash flow-out of Zhongshan Dongyue amounted to RMB80 million. As at 31 December 2005, Kelon Air-Conditioner had actually received sheet metal materials in the value of RMB67.32 million. Zhongshan Dongyue is already a normal supplier of Kelon Air-Conditioner;
The cash flow-out of Foshan Shumde Jingyi Wanxi Copper Co. Ltd. (“Foshan Jingyi”) amounted to RMB21 million. As at 31 December 2005, Foshan Jingyi had actually provided Kelon Air-Conditioner with products in the value of RMB17.65 million. Foshan Jingyi has as always been the normal supplier of Kelon AirConditioner;
The cash out-flow of Hainan Greencool Environmental Protection Engineering Co. Ltd. (“Hainan Greencool”) amounted to RMB13.44 million. Hainan Greencool has actually been providing Kelon Air-Conditioner with refrigerant in the actual value of RMB1.15 million. The cash out-flow of Jinan San Ai Fu Petrochemical Co., Ltd. (“Jinan San Ai Fu”) amounted to RMB122.4 million. Jinan San Ai Fu has actually been providing Kelon Air-Conditioner with refrigerant in the actual value of RMB900,000;
The cash out-flow of Tianjin Xiangrun Commercial Trading Development Company Limited (“Tianjin Xiangrun”) amounted to RMB97.4122 million. Tianjin Xiangrun has actually been providing Guangdong Kelon Fittings Co., Ltd. (“Kelon Fittings”) with 95 tons steel products in the actual value of RMB0.51 million;
The cash out-flow of Jiangxi Kesheng Industry and Trading Company Limited (“Jiangxi Kesheng”) amounted to RMB31.46 million. However, Jiangxi Kesheng has actually been providing Kelon Air-Conditioner with refrigerant in the actual value of RMB5.89 million;
The cash out-flow of Guangdong Greencool amounted to RMB42 million, of which RMB34 million has been collected from certain repairers and the remaining RMB8 million is yet to be collected. In addition, as the agreement entered into between the Company and the repairers is for a term of five years, which remains effective as at 31 December 2005, the customer service department of the Company intends to refund the entering fees paid by category A repairers as a form of compensation for the early termination of the agreements entered into between the Company and category A repairers. An estimated amount of approximately RMB7,900,000 is to be refunded.

In addition, the bill of acceptance of 西安飛達仕東方空調壓縮機有限公司 (Xi’an Feidashi Dongfang Air-Conditioner Compressor Company Limited) in the amount of RMB44 million had been fully accepted before December 2005. Kelon Air-Conditioner has received all of the products.

As the investigation conducted by the police and court is yet to be completed, certain information could not be immediately obtained due to the requirement of criminal investigation. The Company will, according to the progress of the investigation by the police and court, use its best endeavors to strengthen settlement measures particularly to minimise the loss of the Company. The Company will make timely disclosure in accordance with the latest development of the settlement.

The Company has currently taken the following settlement measures:

In respect of funds which have been transferred to the Greencool Companies or transferred through third parties, the Company has collected relevant evidence and engaged solicitors for further investigation. The Company has taken legal actions with sufficient legal evidence against the Greencool Companies or third parties to recover the funds. Meanwhile, in order to safeguard creditor’s rights in the Company and its subsidiaries, Gu Chu Jun was sued as one of the defendants in every litigation, as well as the Greencool Companies which was associated with the business of the Company. To avoid unnecessary litigation costs, the Company is looking into the possibility of recovery of debts and selectively applying to the court for asset protection measures.
Checking creditor’s rights and debts with the Greencool Companies and settling the outstanding debts by set-off.
In respect of abnormal expenditures, the Company has taken actions to check whether relevant companies have provided respective services pursuant to relevant agreements entered into by the Company. Upon release of the relevant results, solicitors of the Company will consider the possibility and means of recovery.
Striving for the support from local governments.
In respect of previous abnormal capital transfers of the Company, the Company has established a corresponding internal mechanism to regulate capital transfers and eliminate financing without trade backgrounds.

Through the above measures, the Company will settle the outstanding debts actively and make its best efforts to reduce loss.

Reserved Matter 6: As described in Note 14 “Comparative Information” and Note 3 “Rectification of Significant Accounting Errors “ to the financial statements, the Company restated the financial statements for 2004 and the prior years, and adjusted the items such as income from principal activities, profit from other activities and cost of sales for 2004 and prior years. Due to the correction of the above accounting errors, consolidated net assets of the Company as at 31 December 2004 was adjusted by a decrease of RMB209,000,000. Due to the pending investigation into the suspected infringement of laws of certain former management of the Company and the outstanding final verdict, we cannot ascertain whether the Company has adjusted all the accounting errors.

Adjustment is made according to the preliminary outcome of the investigation by the relevant departments of the government in the PRC on the suspected case of fraud committed by Gu Chu Jun and other relevant persons. The items and reasons of the adjustment are as follows:

Revealed by the discrepancy between some of the accounting records recognised by the Company’s former management and the actual operating activities, the Company discovered an overstatement of principal operating income of RMB513,402,667, an overstatement of profit from the sales of scraps of RMB22,537,714, an understatement of advertising expenses of RMB7,370,000; an understatement of corporate income tax loss of RMB17,435,805 in 2004; an overstatement of the profits of the sales of scraps of RMB21,900,316 and an understatement of corporate income tax loss of RMB5,615,218 for 2003 and prior years; and an accrual of accounts receivable and payable amounted to RMB65,000,000.00 were not recorded for 2003 and 2004. In preparing for the comparable financial statements for the prior years and the comparable financial statements of the current year as against the previous year, the Company has adjusted the above material misstatements. Due to such misstatements, the Company’s retained earning in the operating balance was overstated by RMB209,153,478.

As the case in relation to allegations of unlawful acts by the former management of the Company is still under investigation and the accounts of the Company are being cleared up comprehensively, the Company cannot make any assurance as to the completeness of the rectifications made in respect of the accounting errors. The Company will make timely disclosure and rectification in the event of findings of new significant accounting errors in accordance with the progress of the investigation.

Given the matters 1-6, we were unable to ascertain whether adjustment to the opening balance has to be made after the Company has cleared its accounts. Any adjustments to the opening balance of the Company’s and the consolidated financial statements in 2005 would impact the net profit as stated in the consolidated and in the Company’s accounts in 2005. Besides, the consolidated and the Company’s opening balance on the balance sheets, the income statements and profit appropriation statements and cash flow statements for the current year may not be comparable with those of the previous year.

In view of the inconformity between some of the accounting records recognised by certain former management and the actual operations, the new management of the Company discovered that there were previously defects in the internal control over the inventory check; the reconciliation of the current accounts was not done in a timely manner; the methods were not correct; the accounting system for cost check was not in line with the records of receipt, dispatch and stock in the warehouses; there are substantial financing without trade background; the accounts are not clear; and as such it is unable to determine the principal operation costs according to normal financial audit methods.

The newly appointed management of the Company strives to arrange the operation and finance departments for the full clearing of the accounts of the Company. The Company will make adjustments to the accounts according to the outcome of the clearing.

Emphasised matters: It is pointed out in the paragraph of emphasised matters in the audit report provided by the auditors: “furthermore, we would like to draw the attention of the financial statements users to the following: as stated in Note 6.13, Note 8 and Note 11 to the financial statements, Kelon Electrical recorded losses in the years of 2004 and 2005. Net assets of Kelon Electrical was RMB-1.090 billion as at 31 December 2005; short-term borrowings of RMB1.233 billion were overdue; and there were substantial litigations for the debts. If all these matters cannot be resolved in a short time, the continuous operations of Kelon Electrical may be affected. Kelon Electrical has disclosed the proposed improvement measures in Note 11 to its financial statements. The contents of the paragraph does not affect the published audit opinions”.

In the opinion of the Company, although the Company recorded huge losses and net assets turned out to be a negative value in 2005, the credit risk caused by the suspected law breaking and infringement of the interests of the Group committed by the single largest shareholder, Guangdong Greencool, and Mr. Gu Chu Jun, former chairman of the Group, will be tremendously reduced owing to the upcoming change of the single largest shareholder of the Group. The Company will take the following improvement measures subsequently:

(1) as Hisense Air-Conditioner will become the controlling shareholder of the Company, the management of the Company will implement thorough reform, strengthen the operation and management and enhance the operation quality in all aspects through the edges in management and experiences of Hisense.
(2) The Company will immediately negotiate with its new shareholder Hisense Air-Conditioner after the change of the single largest shareholder to formulate and implement the assets and business reorganisation plan with Hisense. Upon the implementation of the reorganisation, the quality assets and business input by Hisense Air-Conditioner will evidently improve the Company’s assets and financial position and enhance its business scale and competitiveness as well as its credit level, thus create advantageous conditions for financing.
(3) The Company will, according to the requirements of its strategic development, focus its activities on clearing the excessive investments in previous years, focus its vigor and resources on leading operations, reduce the Company’s cash outflow to the largest extent, reduce funds appropriation and enhance the use efficiency of funds, thus ensure the requirements of normal production and operation of the Company’s principal operations.
(4) The Company will strengthen its planing management and connection between production and sales, strictly control appropriation of its funds, accelerate liquidity of its funds, and enhance the efficiency of fund application.
(5) The Company will seek support from all parties and obtain more working capital. Mutual understanding with major banks have been achieved, and most of overdue loans have been or are in the process of being converted into normal loans. The Company will gain greater support from major creditors such as banks and suppliers in its future operations.

The management believes that taking the above measures will eliminate the effects on its continuous operation by the above-mentioned matters.

The Board of Directors of Guangdong Kelon Electrical Holdings Company Limited

11 August 2006

(III) Work progress of the Board during the Reporting Period

1. Meetings held by the Board and resolutions during the Reporting Period

During the Reporting Period, the Board held nine meetings.

(1) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 15 January 2005. The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 18 January 2005.
(2) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 28 April 2005. The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 29 April 2005.
(3) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 3 June 2005. The announcement of the written resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 4 June 2005.
(4) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 12 August 2005. The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 15 August 2005.
(5) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 30 August 2005. The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 31 August 2005.
(6) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 16 September 2005. The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 22 September 2005.
(7) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 15 October 2005. The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 18 October 2005.
(8) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 28 October 2005. The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 31 October 2005.
(9) The Company convened a meeting of the Board at the conference room of the Company’s head office at Shunde District, Foshan City, Guangdong Province on 1 December 2005. The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily dated 2 December 2005.

2. The execution of the resolutions passed at general meetings by the Board

During the Reporting Period, two general meetings were convened, being the 2004 annual general meeting and first 2005 extraordinary general meeting.

First 2005 extraordinary general meeting

The Company convened the First 2005 Extraordinary General Meeting in the conference room of the head office of the Company in Shunde, Foshan, Guangdong Province on 15 January 2005 at 11 a.m.

The announcement of the resolutions of the first 2005 extraordinary general meeting was published on “China Securities Journal” and “Securities Times”, “Hong Kong Commercial Daily” and “China Daily” on 18 January 2005.

2004 annual general meeting

The Company convened the 2004 annual general meeting at the conference room of the head office of the Company in Shunde District, Foshan City, Guangdong Province on 28 June 2005 at 11 a.m.

The announcement of the resolutions of the 2004 annual general meeting was published on “China Securities Journal” and “Securities Times”, “Hong Kong Commercial Daily” and “China Daily” on 29 June 2005.

During the Reporting Period, the Board has fully implemented all the resolutions passed at the shareholders’ meeting by strictly adhering to the articles of association of the Company and, the Company Law of the PRC according to the powers conferred by the shareholders’ meeting, with the exception of the resolution mentioned below.

In the Company’s 2004 annual general meeting held on 28 June 2005, the Company reviewed and passed the “Resolution Authorising the Board of Directors to Repurchase H Shares with Internal Capital”, however the aforesaid resolution had not been implemented because of the Company’s deteriorating operating environment.

(IV) OTHER DISCLOSEABLE MATTERS

Specific explanation of Shenzhen Dahua Tiancheng Certified Public Accountants on the use of funds by the controlling shareholders and other related parties of the Company:

Specific explanation on the use of funds by the controlling shareholders and related parties of Guangdong Kelon Electrical Holdings Company Limited

Shen Hua (2006) Zhuan Shen Zi No. 121

To the Board of Directors of Guangdong Kelon Electrical Holdings Company Limited:

We have been appointed to carry out the audit of the balance sheets of Guangdong Kelon Electrical Holdings Company Limited (the “Company”) and the Group as at 31 December 2005 and the income statement and profit apportionment and the cash flow statement of the Company and the Group for the year in accordance with Independent Auditing Standards for Chinese Certificated Public Accountants and issued a qualified auditor’s report which included an explanatory paragraph, document number Shen Hua (2006) Gu Shen Zi No.036 on 11 August 2006.

According to the “Notice of Issues in Relation to the Regulation of Capital Exchange between Listed Companies and Related Parties and External Guarantees made by Listed Companies” (Zheng Jian Fa 【2003】No 56) promulgated by the China Securities Regulatory Commission, as the registered accountants responsible for auditing the financial statements of the Company in 2005, have issued a specific explanation on the use of funds by the controlling shareholders and the related parties of the Company. Annex I of this specific explanation was issued pursuant to “Memorandum on the Requirements of Information Disclosure No.2 of 2006 (amended version): the Disclosure and Reporting Requirements of the Use of Extraordinary Capital and the Capital Exchange with Related Parties” issued by the Shenzhen Stock Exchange.

The Company is responsible for the preparation and the disclosure of the summary statements and is also responsible for ensuring its accuracy, legality and the completeness. We have reconciled the information provided in the summary statements with the accounting information reviewed in connection with our audit of the Company’s financial statements for the year ended 31 December 2005 and the relevant information as stated in the audited accounting reports, and have found no significant discrepancies. Save for the audit procedures on the related party transactions carried out in connection with our audit of the financial statements for the year ended 31 December 2005, we did not carry out additional audit procedures for the information provided in the summary statements.

The Company had a series of related party transactions and abnormal cash inflows and outflows with its substantial shareholder, namely Guangdong Greencool Enterprise Development Co., Ltd and its related parties (“Greencool Companies”) and Tianjin Lixin Trading Development Company Limited (天津立信商貿發展有限公司 ), etc. (“Suspected Related Parties”) from October 2001 to July 2005. During this period, the Greencool Companies, through Tianjin Lixin Trading Development Company Limited and other third party companies, had a series of abnormal cash inflows and outflows with the Company. Such transactions and abnormal cash inflows and outflows and suspected misappropriation of funds are in the process of being investigated by relevant authorities. Such issues involve the accounts receivable and accounts payable between the Company and the Greencool Companies and the above third party companies as at 31 December 2005. In order to accurately present the financial statement, the Company included the above dealings with third parties into the master statements.

This report has been prepared in accordance with the requirements of CSRC (including its representative organisation) and Shenzhen Stock Exchange, and cannot be used for any other purpose. The certified public accountants and accounting firm who have prepared this report, shall not be responsible for any consequences arising from the inappropriate use of this report.

China Shenzhen

Shenzhen Dahua Tiancheng Certified Public Accountants Chinese Certified Public Accountant Shenzhen, PRC Chinese Certified Public Accountant Hu Chun Yuan Wu Jian Hui 11 August 2006

Annex I: Summary of the Use of Extraordinary Capital and the Capital Exchange of the Other Related Party of the Company in 2005

Summary of the Use of Non-operating Capital and the Capital Exchange of the Other Related Party of the Company in 2005

											in ten	thousand RMB	thousand RMB
								Increase
							Balance at	during the	Interest	Repayment	Balance at
							the beginning	year 2005	for the year	during	the end of
Non-operating	Names of				Account		of the year	(exclusive	2005	the year	the year
fund occcupation	related parties		Relationship		items		2005	of interest)	(if any)	2005	2005	Reason	Nature
Controlling shareholder	Guangdong Greencool		Controlling		Other		1,592.59				1,592.59	Joining fee	Non-operating
and its subsidiaries		Enterprise Development		shareholder		receivables							use
		Company Limited
	Hefei Meiling Co., Ltd				Receivables		11.56				11.56	Sales receipt	Operating
													account
	Greencool Technology		Subsidiary of the		Other		3,300.00				3,300.00	Transfer	Non-operating
		Environmental		controlling		receivables							use
		Protection Engineering		shareholder
		(Shenzhen) Co., Ltd.
	Greencool Technology		Subsidiary of the		Other		3,200.00				3,200.00	Transfer	Non-operating
		Development		controlling		receivables							use
		(Shenzhen) Company		shareholder
		Limited
	Hainan Greencool		Subsidiary of the		Other			1,343.79		114.85	1,228.94	Prepayment	Non-operating
		Environmental		controlling		receivables							use
		Protection Engineering		shareholder
		Company Limited
Sub-Total	–		–		–		8,104.15	1,343.79	0	114.85	9,333.09		–
Total	–		–		–		8,104.15	1,343.79	0	114.85	9,333.09		–
Beneficial Controller and	Qingdao Hisense Marketing		Beneficial Controller		Receivables			101,707.34		81,272.41	20,434.92	Sales receipt	Operating
its subsidiaries		Company Limited											accounts
Sub-total								101,707.34	–	81,272.41	20,434.92
Other related parties	Chengdu Xinxing Electrical		Subsidiaries of minority		Other receivables		3,400.00	0	0	0	3,400.00	Loan	Non-operating
and other subsidiaries		Appliance Holdings		shareholders of									use
		Company Limited		fellow subsidiaries
	Shunde Yunlong		Minority shareholders		Other receivables		468.58	0	0	0	468.58	Advancement	Non-operating
		Consultancy Service		of fellow subsidiaries									use
		Company Limited
Sub-total							3,868.58	–	–	–	3,868.58
Specified third	Hefei Weixi Electrical		Specified third		Trade		1,561.02				1,561.02	Sales receipt	Non-operating
parties*		Appliance Company		party*		receivables							use
					Others			46.52			46.52	Sales receipt	Non-operating
													use
	Wuhan Changrong		Specified third		Trade		2,984.37				2,984.37	Sales receipt	Non-operating
		Electrical Appliance		party*		receivables							use
		Company Limited
								2,000.00			2,000.00	Sales receipt	Non-operating
													use

Sub-total Total

Jiangxi Kesheng	Specified third	Other	Other	1,154.25	1,863.00	–	459.97	2,557.28	Prepayment	Non-operating
Industry and Trading	party*		receivables							use
Company Limited
Zhongshan Dongyue	Specified third	Other			8,000.00		6,732.17	1,267.83	Materials	Non-operating
Electrical Company	party*		receivables						fee	use
Jinan San Ai Fu	Specified third	Other			12,240.00		90.35	12,149,65	Prepayment	Non-operating
Petrochemical Co., Ltd.	party*		receivables							use
Tianjin Xiangrun	Specified third	Other			9,741.22		50.69	9,690.53	Prepayment	Non-operating
Commercial Trading	party*		receivables							use
Development
Company Limited
Tianjin Lixin Trading	Specified third	Other			8,960.03			8,960.03	Prepayment	Non-operating
Development	party*		receivables							use
Company Limited
Jiangxi Keda Plastic	Specified third	Other			1,300.02			1,300.02	transfer	Non-operating
Technology Company	party*		receivables							use
Limited
Zhuhai City Lonjia	Specified third	Other		2,860.00				2,860.00	Materials	Non-operating
Refrigerant Facilities	party*		receivables						fee	use
Co., Ltd.
Beijing De Heng Solicitors	Specified third	Other			400.00			400.00	Service	Non-operating
	party*		receivables						fee	use
Zhejiang Yuhuan	Specified third	Receivables			239.81			239.81	Prepayment	Non-operating
Compressors Factory	Party*									use
		Other receivables		116.99	593.56			710.55	Materials fee	Non-operating
										use
Shangqiu Bing Xiong	Specified third	Other receivables			5,803.00			5,803.00	Land and	Non-operating
Freezing Facilities	Party*								facilities fee	use
Company Limited
Zhuhai Defa	Specified third	Other receivables		2,140.00				2,140.00	Materials fee	Non-operating
	Party*									use
Yangzhou Economic	Specified third			4,000.000				4,000.000	Land fee	Non-operating
Development Zone	Party*									use
Finance Bureau**
–	–	–		14,816.63	51,187.16	0.00	7,333.18	58,670.61		–
				18,685.21	152,894.50	–	88,605.59	82,974.12

Note: Specified third party is the abbreviation of the abovementioned companies through which abnormal cashflow between the Greencool Companies controlled by the former beneficial controller and the Company were incurred.
** The payables of RMB 40 million to Yangzhou Economic Development Zone Finance Bureau is, indeed, an amount embezzled, not an amount used for acquiring a piece of land.

*** The actual purchase price of the refrigerants is substantially lower than the contract price, The balance of the amount, after deducting the actual price, was embezzled.

2. Specific explanation and independent opinions of the independent non-executive Directors of the Company regarding external guarantees

Specific Explanation and Independent Opinions of the Independent Non-executive Directors of the Company Regarding the Accumulated External Guarantees and the External Guarantees for the Current Period of the Company as well as the Progress of the Execution of the Provisions set out in Document (Zheng Jian Fa (2003) No.56)

In accordance with the requirements of the “Notice on Issues concerning the Regulating of the Capital Exchange between Listed Companies and their Connected Parties and External Guarantees of Listed Companies” (Zheng Jian Fa (2003) No.56), as independent non-executive Directors of the Company, holding a pragmatic and diligent attitude, have carried out a thorough investigation on the external guarantees provided by the Company, details of which are set out as follows:

(1) During the Reporting Period, the Company did not provide guarantees to any of its controlling shareholders, other related parties in which the Company held interests of less than 50%, or any non legal entities or individuals;

(2) As the net assets in the consolidated financial statements of the latest financial year is negative, the total amount of the external guarantees made by the Company as of 31 December 2005 amounted to RMB687,575,000, which exceeds 50% of the net assets in the consolidated financial statements of the latest financial year.
(3) The accumulated guarantee and the guarantee for the current period of the Company amounted to RMB687,575,000;
(4) The Company provided guarantees amounting to RMB600,329,700 to entities with a gearing ratio of over 70%. The outstanding external guarantees directly provided by the Company to entities with a gearing ratio of over 70% amounted to RMB600,329,700.
(5) The balance of loan guarantees provided by Guangdong Greencool, being a related party, for the Company and its subsidiary amounted to RMB327,971,300 as at 31 December 2005.
(6) Save for the external guarantees mentioned above, we are not aware of other external guarantees during the Reporting Period.
(7) The Board has a strict approval procedure in relation to the Company’s external guarantees and has implemented the procedures in compliance with the “Notice on the Regulation of External Guarantees of Listed Companies” (Zheng Jian Fa (2005) No.120) in order to control the associated risks of such external guarantees.

Independent non-executive Directors: Zhang Sheng Ping, Lu Qing and Cheung Yui Kai, Warren. 11 August 2006

REPORT OF SUPERVISORY COMMITTEE

Dear shareholders:

During the Reporting Period, the supervisory committee of the Company (the “Supervisory Committee”) thoroughly complied with the Company Law of the PRC, the Rules Governing Listing of Stocks on Shenzhen Stock Exchange, the Listing Rules and the articles of association of the Company and earnestly carried out its duty to protect the legal interests of the Company, the Company’s employees and the shareholders of the Company as a whole. We, pursuant to the articles of association of the Company, would like to report to you the activities of the Supervisory Committee during 2005:

I. Meetings of the fourth Supervisory Committee during the Reporting Period

During the Reporting Period, the fourth Supervisory Committee held three meetings:

(1) The term of the fourth Supervisory Committee has ended. The first extraordinary general meeting for 2005 was held on 15 January 2005, where two supervisors were elected representing the shareholders, these two supervisors will form the fifth Supervisory Committee (the “Fifth Supervisory Committee”) together with Ms. He Si, a supervisor representing the staff of the Company.

The first meeting of the fifth Supervisory Committee was held on 15 January 2005, at the conference room of the Company’s head office in Shunde district, Foshan City, Guangdong Province. The meeting was attended by all of the three supervisors of the Supervisory Committee and was held in accordance with the Company Law of the PRC and the relevant provisions of the articles of association of the Company. The meeting was chaired by Mr. Zeng Jun Hong. The meeting considered and approved the resolution to elect Mr. Zeng Jun Hong as chairman of the Fifth Supervisory Committee for a term commencing from the date of approval of the resolution to the expiry date of the term of the Fifth Supervisory Committee.

The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily on 18 January 2005.

(2) A meeting of the Supervisory Committee was held on 28 April 2005 at the conference room of the Company’s head office in Shunde district, Foshan City, Guangdong Province. The meeting was attended by all of the three supervisors in person, namely, Mr. Zheng Jun Hong, Mr. Bai Yun Feng and Ms. He Si. The meeting was held in accordance with the Company Law of the PRC and the articles of association of the Company. The full text and the summary of the Company’s annual report for the year 2004, the amendment to certain provisions of the Rules Governing Procedures of Supervisory Committee Meetings, the Report of the Supervisory Committee of the Company for the year 2004, the Company’s first quarterly report for the year 2005 and Opinions of the Supervisory Committee on the Board’s explanation of matters relating to the qualified opinions in the auditors’ report for the year 2004 were considered and approved at the meeting.

The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily on 29 April 2005.

(3) A meeting of the Supervisory Committee was held on 30 August 2005 at the conference room of the Company’s headquarters in Shunde district, Foshan City, Guangdong Province. The meeting was attended by two of the three supervisors Ms. He Si attended the meeting in person, while Mr. Bai Yun Feng attended the meeting and voted by way of telephone conference. The Company was unable to contact Mr. Zeng Jun Hong and as such Mr. Zeng Jun Hong was absent from the meeting. The meeting was held in accordance with the Company Law of the PRC and the articles of association of the Company. The full text and the summary of the interim report for 2005, the explanation of the Supervisory Committee for the changes in matters relating to the qualified opinions in the auditors’ report for the year 2004, the explanation of the Supervisory Committee for the retrospective adjustments to the financial statements disclosed in the previous years were considered and approved at the meeting.

The announcement of the resolutions passed at the meeting was published in China Securities Journal, Securities Times, Hong Kong Commercial Daily and China Daily on 31 August 2005.

II. Independent opinions of the supervisory committee on relevant matters of the Company in 2005

As at the date of this announcement, Mr. Zeng Jun Hong, a supervisor of the Company cannot be contacted; Mr. Bai Yun Feng and Mr. Liu Zhan Cheng, being supervisors of the Company, attended the supervisory committee meeting and reviewed this report; however, no supervisory resolutions were reached. Mr. Liu Zhan Cheng, a supervisor of the Company, agreed as to the content of the audit report prepared by the auditor and the explanations made by the Board in relation to the audit opinions. The opinions of Mr. Bai Yun Feng, a supervisor of the Company, are as follows:

“I have made investigations into relevant matters as set out in this report and noticed the following: (i) the auditors were not provided with sufficient audit information in respect of qualified opinions, and therefore prepared an audit report with emphasised matters incorporated with qualified opinions; (ii) the reasons for the decrease of profit of the Company, including provisions made for fixed assets, construction in progress, finished products and raw materials etc. Based on the uncertain reasons mentioned above, I am not in a position to make any comment as to the content of this report and therefore I abstain from voting.

Opinions relating to relevant significant matters in this report:

The opinions in relation to the execution progress of the Sales Agency Agreement, the Supplemental Sales Agency Agreement and the Second Supplemental Agency Agreement entered into between the Company and Qingdao Hisense Marketing Company Limited:

I have limited understanding of the agreements mentioned above. I am of the opinion that it is necessary for the Board of the Company to engage accounting firms to audit the execution progress of the sales agency agreements and complete the audit as soon as possible.

Opinions in relation to the amount of the funds of the Company embezzled by Mr. Gu Chu Jun, the former president of the Company and his related parties and relevant settlement measures:
I agree that the Company take any lawful action to recover the Company’s funds embezzled by Mr. Gu Chu Jun, the Greencool companies and third parties to best protect the interests of the Company.
Opinions in relation to accounting methods of provisions for impairment losses of the Company:

I have qualified opinions as to the provisions made by the Company for fixed assets, construction in progress, inventory and raw materials etc.

Investors are reminded to exercise caution in respect of the opinions mentioned above.

MATERIAL MATTERS

I. Material litigations and arbitrations of the Company

1. Information on material litigations involving an amount in dispute exceeding RMB10,000,000


			Amount in
Number	Name of case	Counterparty	dispute	Description of progress
	Litigations between		Greencool Companies and Specified Third Parties
1	Claims initiated by	Guangdong	18,630,000.00	Under the authorisation by Gu Chu Jun, on
	Kelon Air-Conditioner	Greencool,		20 February 2005, Kelon Air-conditioner purchased 14.1 tons
	against Guangdong	Gu Chu Jun and		of refrigerants from Jiangxi Kesheng at a price of
	Greencool, Gu Chu Jun	Jiangxi Kesheng		RMB18,630,000, however, Kelon Air-conditioner has not
	and Jiangxi Kesheng			received the goods under the contract. The plaintiff considered
	Industry and Trading			that Guangdong Greencool has benefited from its role as the
	Company Limited			substantial shareholder to embezzle the capital of the plaintiff
	(“Jiangxi Kesheng”)			and use the name of Jiangxi Kesheng to avoid the
				regulatory restrictions on related party transactions.
2	Claims initiated by	Guangdong	81,600,000.00	On 20 January 2005, under the direction of Gu Chu
	Jiangxi Kelon against	Greencool,		Jun and Guangdong Greencool, Tianjin Greencool and
	Guangdong Greencool,	Gu Chu Jun,		Jinan San Ai Fu entered into a sale and purchase contract
	Gu Chu Jun, Greencool	Tianjin		to sell 700 tons of refrigerant to Jinan San Ai Fu, of
	Refrigerant (China)	Greencool,		which 600 tons were sold by Jinan San Ai Fu to the
	Company Limited	Hainan		plaintiff. The plaintiff claimed that the five defendants
	(“Tianjin Greencool”),	Greencool and		had embezzled its funds by fraud.
	Hainan Greencool	Jinan San Ai Fu
	Environmental Protection
	Engineering Co., Ltd.
	(“Hainan Greencool”)
	and Jinan San Ai Fu
	Petrochemical Co., Ltd.
	(“Jinan San Ai Fu”)
3	Claims initiated by Shenzhen	Guangdong	89,600,300.00	The plaintiff entered into a sale and purchase contract
	Kelon Procurement Co.,	Greencool,		with Tianjin Lixin to purchase 12,700 tons of steel.
	Ltd against Guangdong	Greencool		The plaintiff made two payments to Tianjin Lixin
	Greencool, Tianjin Lixin	Shenzhen		on 26 April 2005 and 27 April 2005, respectively, and
	Commercial Trading	Procurement		Tianjin Lixin transferred the funds to Greencool
	Development Company	Centre and		Shenzhen Procurement Centre. The plaintiff has not
	Limited (“Tianjin Lixin”),	Gu Chu Jun		received any steel supply from Tianjin Lixin. The plaintiff
	Greencool Procurement			claimed that the four defendants had embezzled its
	Centre (Shenzhen) Co., Ltd.			funds by fraud.
	(“Greencool Shenzhen
	Procurement Centre”) and
	Gu Chu Jun
4	Claims initiated by	Guangdong	97,412,200.00	The plaintiff entered into a sale and purchase contract
	Guangdong Kelon	Greencool,		with Tianjin Xiangrun to purchase 8,820 tons of steel
	Fittings Co., Ltd against	Tianjin Xiangrun,		from Tianjin Xiangrun. The plaintiff made instalment
	Guangdong Greencool,	Greencool		payments to Tianjin Xiangrun on 26, 27 and 28 April
	Tianjin Xiangrun	Shenzhen		2005, respectively, but it has not received any steel
	Commercial Trading	Procurement		supply from Tianjin Xiangrun. The plaintiff claimed that
	Development Company	Centre and		the four defendants had embezzled its funds by fraud.
	Limited (“Tianjin	Gu Chu Jun
	Xiangrun”), Greencool
	Shenzhen Procurement
	Centre and Gu Chu Jun

5	Claims initiated by	Guangdong	40,800,000.00	The plaintiff entered into a sale and purchase contract
	Kelon Air-Conditioner	Greencool,		with Jinan San Ai Fu to purchase 300 tons of environment-
	against Guangdong	Jinan San Ai Fu,		friendly refrigerant, and paid purchase price of
	Greencool, Jinan San	Tianjin Greencool,		RMB40,800,000 on 1 April 2005, but Jinan San Ai Fu failed to
	Ai Fu, Tianjin Greencool,	Hainan Greencool		deliver of the goods. The plaintiff claimed that the five
	Hainan Greencool and	and Gu Chu Jun		defendants had embezzled its funds through the use of fraud.
	Gu Chu Jun
6	Jiangxi Kelon	Guangdong	90,000,000.00	The Company alleged that Aike Enterprises (Tianjin)
		Greencool and		Co., Ltd. had embezzled its funds and Guangdong
		others		Greencool was jointly and severally liable. The first
				trial was conducted on 24 July 2006
7	Jiangxi Kelon	Guangdong	75,000,000.00	The Company alleged that Greencool Refrigerant
		Greencool and		(China) Company Limited had embezzled its funds and
		others		Guangdong Greencool was jointly and severally liable.
				The first trial was conducted on 24 July 2006.
			Other litigations
1	Claims against Kelon	Dongguan Xinnong	10,463,130.79	As a result of the claim by Dongguan Xinnong, both
	Air- Conditioner by			parties involved confirmed upon verification on
	Dongguan Xinnong			31 May 2005, Kelon Air-Conditioner defaulted a total
	Motors Company Limited			purchase price of RMB10,463,359.99 and deposit
	(“Dongguan Xinnong”)			amounted to RMB499,770.80. RMB500,000 has been
	in relation to a sale			repaid, however, the balance remained unsettled.
	and purchase contract			Dongguan Xinnong initiated proceedings against Kelon
				Air-Conditioner for payment of the unpaid purchase
				price and all costs of the legal proceedings and security.
2	Claims against	China Merchants	21,000,000.00	The plaintiff claimed that on 22 March 2005, Yangzhou Kelon
	Yangzhou Kelon and	Bank Nanjing		entered into a loan agreement in the amount of RMB20,000,000
	the Company by China	Branch		for a term of one year. The loan was guaranteed by the
	Merchants Bank Co., Ltd.			Company. The plaintiff had granted the loan and subsequently
	(“China Merchants Bank”)			as a result of material events affecting the repayment ability
	Nanjing Branch			of Yangzhou Kelon and the Company, the plaintiff demanded
	in relation to loan			early repayment of the loan plus interests thereon in the
	agreement			amount of RMB253,100 as well as all costs of the legal
				proceedings. At the same time, the plaintiff applied a court
				order to freeze bank deposit of RMB21,000,000 or seize its assets.
3	Claims against	Bank of China Limited	12,000,000.00	The plaintiff claimed that a letter of credit was issued
	Yangzhou Kelon and	Yangzhou Branch		on behalf of Yangzhou Kelon pursuant to the Banking
	the Company by			Facility Agreement entered into by the two parties, with
	Bank of China Limited			the Company as guarantor. Several letters of credit
	Yangzhou Branch			were issued by Bank of China Limited Yangzhou Branch
	in relation to a			on behalf of Yangzhou Kelon in favour of Nanjing
	loan agreement			Hongbaoli Company Limited and the accepting bank
				produced the bills under those letters of credit to the
				plaintiff. Yangzhou Kelon failed to make payment.
4	Claims against the	Zhejiang Hangxiu	19,853,000.00	The plaintiff alleged that it had undertaken the
	Company initiated			construction works of the Company’s plain warehouse
	by Zhejiang Hangzhou			factories No. 1 and No. 2 pursuant to a construction
	Xiu Ganggou Holdings			contract with the Company and the Company defaulted
	Company Limited			in payment of RMB1,193,000 in construction fees.
	(“Zhejiang Hangxiu”)			The plaintiff sued the Company for payment of
	in relation to a			RMB1,193,000 in construction fees and
	construction contract			RMB17,660,000 in default penalties and the cost of
				legal proceedings.

5	Claims against Jiangxi	China Merchants	31,000,000.00	The plaintiff applied a pre-trial order from the court to
	Kelon Industrial	Bank Nanchang		freeze or seize assets with an amount of
	Development Co., Ltd.	Branch Dieshanlu		RMB31,000,000. The court ordered to seize 30,105
	(“Jiangxi Kelon”) and	Sub-branch		sets of air-conditioners from Jiangxi Kelon.
	the Company by China			On 22 August, the Company received documents from
	Merchants Bank			the court. The plaintiff alleged that it had discounted
	Nanchang Branch			certain bank acceptance bills issued by Jiangxi Kelon
	Dieshanlu Sub-branch			to the amount of RMB43,013,270.97, Jiangxi Kelon has
	on a loan agreement			only paid a deposit of 30% of the total value and the
				balance of RMB30,109,289.68 remains outstanding.
				Although part of the acceptance bill has yet to fall
				due, the plaintiff demanded immediate settlement by
				Jiangxi Kelon pursuant to the agreement and demanded
				the Company to take over the collateral liabilities.
6	Claims against	China Construction	140,000,000.00	China Construction Bank Corporation Nanchang
	Jiangxi Kelon and	Bank Corporation		Changbei Branch applied to the court for pre-trial
	the Company	Nanchang Changbei		security order on the basis of dispute over the loan
	initiated by China	Branch		contract and guarantee contract. On 5 August, the High
	Construction Bank			Court of Jiangxi Province ordered to freeze Jiangxi
	Corporation Nanchang			Kelon’s 80% shareholdings in Shangqiu Kelon. During
	Changbei Branch in			the freezing period, such shareholdings shall not be
	relation to the loan			pledged or transferred without the court’s prior consent.
	contract and guarantee
	contract
7	Claims against	Henan Province	18,000,000.00	The plaintiff applied for a pre-trial security order from
	Jiangxi Kelon and	Kaifeng Economic		the court to seize properties worth of RMB18,000,000
	Kaifeng Kelon	Technology		of Jiangxi Kelon and Kaifeng Kelon. The equipments,
	Air-Conditioner Co., Ltd.	Development		factory and the land use right of Kaifeng Kelon were
	(“Kaifeng Kelon”) by	(Group) Company		seized.
	Kaifeng Economic
	Technology Development
	(Group) Company in
	relation to joint venture
	contract
8	Claims initiated by CNA/MC	Can International.inc./	221,942,108.01	The plaintiff alleged that it had entered into a contract
	Appliance Corporation	MC Appliance		with the defendant on 29 December 2003 to purchase
	against the Company and	Corporation		108,108 units of MCBR1000W refrigerators, that the
	Kelon International			defendant failed to perform its obligations as set out
	Incorporation			in the contract on a timely basis and that the goods
				delivered were defective.

2. General status of the litigations

As at 23 June 2006, the Company and its subsidiaries were involved in 93 litigations with a total claim amount of RMB1,099,030,302.90.

Among the aforementioned litigations involving the Company and its subsidiaries, the Company and its subsidiaries acted as plaintiffs in 12 litigations involving a total amount of RMB503,106,995.57 and as defendants in 81 litigations involving an amount of RMB595,923,307.333.

Among the litigations involving the Company and its subsidiaries, save for the 15 material litigations and arbitrations as disclosed above involving an amount exceeding RMB10,000,000 each (with a total amount of RMB967,300,738.80), the remaining 78 litigations involved an amount less than RMB10,000,000 each (with a total amount of RMB131,729,564.10).

(2) Particulars on the disposal of assets, takeover and merger during the Reporting Period

Acquisition of assets, takeovers and mergers by the Company during the Reporting Period
No acquisition of assets, takeovers and mergers were made by the Company during the Reporting Period.
Disposal of assets

Unit: RMB ten thousand

				Net profit
				attributable
				to the disposed
				asset from the				Completion	Completion
				beginning of the		Connected		of transfer	of transfer
Transaction	Disposed	Date of	Price of	year to the date	Gain on	transaction	Basis of	of relevant	of relevant
counterpart	assets	disposal	disposal	of disposal	disposal	or not	pricing	assets title	indebtedness
（辰峰五金綜合	Equipment	December 2005	5.15	–	(87.20)	No	Tender	Yes	Yes
機械購銷部）
Chanfeng Wugin
Combination Machinery
Purchase and Sales
Department
（佛山市順德區容桂	Equipment	December 2005	1.5	–	(8.1)	No	Tender	Yes	Yes
精亮拋磨材料廠）
Foshan City Shunde
District Rongjia Jing
Liang Pao Mo
Material Factory
（佛山市順德區	Equipment	December 2005	69.4	–	(1,425.67)	No	Tender	Yes	Yes
大良精發辦公
用品經營部）
Foshan City Shunde
District Da Lang
Jing Fa Office Works
Department
（成都鎧宏辦公）	Equipment	December 2005	64. 99	–	(0.49)	No	Tender	Yes	Yes
Chengdu Kai Hong
Office
Jilin Kelon Electrical	Equipment	July 2005	35.5	–	–	No	Tender	Yes	Yes
Co Ltd.
（江西省鑫霸車業	Equipment	December 2005	0.42	–	(5.55)	No	Tender	Yes	Yes
有限公司）
Jiangxi Province
Xin Ba Vehicle
Industry Company
Limited
Total			176.98		(1,527)

Note: Disposal mainly consisted of obsolete assets and had no impact on the continuity and stability of the business operation of the Company.

(3) Information on the material related party transactions during the Reporting Period

During the Reporting Period, the Company and its subsidiaries purchased raw materials from the Company’s associated company, Huayi Compressor, and its subsidiaries for an amount of RMB105 million, which accounted for less than 2.10% of the Group’s total purchase.
Related party transactions between the Company (Party A) and Hisense Agent (Party B)
(1) The contents of the related party transactions between Hisense and the Company
- Related party: Hisense Agent

Subject matter: the Company’s domestically sold products

Transaction period: 16 September 2005 to 10 May 2006

Pricing policy: the pricing of the related party transactions are mainly based on the market prices at which the Company usually sells its products to its distributors. The settlement prices obtained by Hisense Agent from the Company are equal to those at which Hisense Agent sells the commissioned products to its distributors. The settlement prices are fixed between the Company and its distributors.

Transaction prices: The settlement prices obtained by Hisense Agent from the Company are equal to those at which Hisense Agent sells the commissioned products to its distributors. The settlement prices are fixed between the Company and its distributors. The Company is responsible for the approval and payment of all selling expenses, which include but is not limited to the discounts given to distributors, price differences, joining expense, marketing expense, display platform expense, products storage expense, cargo handling expense, logistics expense (including trunk lines and branch lines) and labour expense.

Transaction amount: In consideration of the fact that the Company is in the early stage of its recovery within the domestic market, both parties have mutually agreed that the total amount for the products commissioned by the Company to Hisense Agent will not exceed RMB2.8 billion, and in particular will not exceed RMB0.8 billion by the end of 2005.

Percentage of amount of similar transactions: 100%.

Settlement method: Upon receipt of prepayment, the Company will begin to provide Hisense Agent with its products and deliver the products to the warehouses designated by Hisense Agent. After delivery of the products to the warehouses designated by Hisense Agent, the ownership of such products is transferred to Hisense Agent. When the prepayment from Hisense Agent is exceeded, both parties will carry out procedures to purchase the finished goods on credit terms. The effective credit period for the proceeds of products sold by the Company to Hisense Agent was 60 days.

Prepayment: The aggregate amount of prepayments made by Hisense Agent for the purchase of products from the Company shall not exceed RMB0.6 billion, amongst which an amount of RMB0.3 billion shall be paid within ten business days after the execution of the agreement. Within one month after initial injection of capital, Hisense Agent may make another prepayment of not more than RMB0.3 billion, based on the Company’s actual capital needs for production and sales to the market. Within the effective period of the agreement, Hisense Agent will not demand the Company to repay the prepayment that it made to the Company in the amount of not more than RMB0.6 billion.

Sales method: the Company’s existing sales network remains intact, and the promotion of products to the end dealers still functions smoothly. All sales activities are still performed through the Company’s existing sales network. Agency fees: (1) Hisense Agent will charge the Company agency fees of 1% of its sales amount on quarterly basis. Hisense Agent will not charge any other expenses nor assume any distribution costs. Any distribution costs incurred (including costs such as the salaries of the persons sent by Hisense Agent) will be borne by the Company. (2) Within the effective period of the agreement, the Company will assess the operational targets realized by Hisense Agent at the end of 2005 and at the expiry of the agreement respectively. Settlement of the agency fees will be effected after assessing the operational targets, which will be finally determined by the Company following assessment methods and the Company will give written notice to Hisense Agent. (3) The agency fees will be transferred by the Company into the account designated by Hisense Agent within seven working days after mutual confirmation of such settlement.

If Hisense Agent fails to realize the aforementioned operational targets, the Company will deduct the agency fees based on the following standards:

(1) If 90% to 100% of the operational targets is achieved, 5% of the agency fees payable to Hisense Agent will be deducted.
(2) If 80% to 90% of the operational targets is achieved, 10% of the agency fees payable to Hisense Agent will be deducted.
(3) If 70% to 80% of the operational targets is achieved, 15% of the agency fees payable to Hisense Agent will be deducted.
(4) If 60% to 70% of the operational targets is achieved, 20% of the agency fees payable to Hisense Agent will be deducted.
(5) If less than 60% of the operational targets is achieved, all the agency fees payable to Hisense Agent will be deducted.

During the effective period of the agreement, Hisense Agent will charge the Company a utilisation fee in respect of the prepayments on a quarterly basis based on the following: Capital utilisation fee = the amount of prepayment x actual days of capital utilisation x annual interest rate for working capital loans announced by the People’s Bank of China 360.

(2) During the Reporting Period, the progress and status of the related party transaction between the Company and Hisense Agent

The Former Board of the Company received an internal inspection report on the progress and status of the Sales Agency Agreement, the supplemental agreement of Sales Agency and the second supplemental agreement of Sales Agency (“Internal Inspection Report”) from the management of the Company on 26 May 2006. In accordance with the Internal Inspection Report, the Company disclosed the initial progress and status of the Sales Agency Agreement as follows:

1) TERMS RELATING TO PREPAYMENTS UNDER THE SALES AGENCY AGREEMENT AND THE PROGRESS THEREOF
(1) Terms relating to Prepayments under the Sales Agency Agreement

Terms of the Sales Agency Agreement: Party A shall make prepayments to Party B in respect of the purchase of products in an amount not exceeding RMB600,000,000, of which RMB300,000,000 shall be paid within ten business days of the execution of the agreement. An amount not exceeding RMB300,000,000 shall be paid by Party B within one month of the first capital contribution, in accordance with the actual capital requirements of Party B after it commences operation, marketing and sales. Under the terms of this agreement, Party B is not required to repay the prepayment made by Party A in an amount not exceeding RMB600,000,000.

(2) Progress and status of the Terms of Prepayments

As shown in the Internal Inspection Report, the details of the prepayments under the Sales Agency Agreement are as follows:

Date of receipt 2005-9-23 2005-9-23 2005-10-12 2005-10-13 2005-10-13 2005-10-24 2005-12-15 Total	Cash Acceptance Bank Notes – 4,000,000.00 – 13,904,000.00 30,000,000.00 – 100,000,000.00 – 50,000,000.00 – 72,000,000.00 – 31,100,000.00 – 283,100,000.00 17,904,000.00	In RMB Total 4,000,000.00 13,904,000.00 30,000,000.00 100,000,000.00 50,000,000.00 72,000,000.00 31,100,000.00
		301,004,000.00

2) Terms relating to Sale Price under the Sales Agency Agreement and its progress and status

(1) Terms relating to sale price under the Sales Agency Agreement

Terms of the Sales Agency Agreement: the settlement price of goods sold by the Party B to Party A shall be equivalent to the settlement price of goods sold by Party A to the distributors, and such price shall be determined by Party B and the distributors.

(2) Execution Progress of the Terms relating to the Sales Prices under the Sales Agency Agreement

According to the Internal Inspection Report, Hisense Agent and the Company also entered into Policies in Relation to the Settlement Price between the Company and Qingdao Hisense Marketing Company Limited on 27 September 2005, pursuant to which the parties agreed that the accounting department of the Company shall issue an invoice to Hisense Agent on a monthly basis, based on the quantity of goods ordered by Hisense Agent and in accordance with the wholesale prices offered by respective production divisions, with no gross profit made by Hisense Agent and its subsidiaries in respect of the goods. If gross profit is generated by Hisense Agent, the parties shall analyse the cause and make adjustments to the invoice in the following month. At the beginning of every month, the marketing branch office of the Company and the branch office of Hisense Agent in the corresponding regions shall review the prices of the goods sold in the previous month and confirm by way of signing and sealing.

The Company and the branch office of Hisense Agent fully settled the gross profit of the year during the period commencing from October to November, 2005. The price differences and policies of Hisense Agent during the period from 1 December to 15 December 2005 were reviewed and confirmed, and made an advance settlement of a portion of the gross profits incurred in December in the amount of RMB-8,188,813.52.

(3) Terms relating to the Delivery of Goods and Payments under the Sales Agency Agreement
Terms of the Sales Agency Agreement:

Upon receipt of the prepayment by Party B, Party B will begin to supply goods to Party A and deliver such products to the warehouses designated by Party A. Upon delivery of products to the warehouses designated by Party A, the ownership of such products will be transferred to Party A. If the value of the sale of goods made by Party B exceeds the prepayment actually received by Party B, the Party A shall enter into a deed of buying or borrowing on credit of goods and Party A must pay Party B the value of the sale of goods which is in excess of the prepayments within 60 days.

Details on the Execution of Terms relating to the Delivery of Goods and Payments under the Sales Agency Agreement
i. As shown in the Internal Inspection Report, the details of sales of goods by the Company to Hisense Agent are as follows:

	Unit: RMB
	Sales to Hisense Agent,
Item	net of tax
October 2005	183,392,995.64
November 2005	270,132,525.40
December 2005	423,747,614.00
Total (Note 1):	877,273,135.04

Note 1: The above table summarizes the data in respect of the revenue of goods delivered but not yet invoiced, and the revenue in respect of goods ordered by the branches of Hisense Agent from the subsidiaries of the Company was not included as the goods are still being processed.

ii. Details of sales revenue received by the Company from Hisense Agent as shown in the Internal Inspection Report are as follows:

As at 31 December 2005, sales revenue received by the Company from Hisense Agrent amounted to an aggregate of RMB812,724,143.04.

iii. Details of payment to Hisense Agent by the Company‘s distributors as shown in the Internal lnspection Report are as follows:

4. Terms relating to agency fees and fees in relation to the working capital loan and the progress thereof.

Terms of the Sales Agency Agreement:

During the effective period of this agreement, Party A will receive quarterly prepayments from Party B for fees in relation to the working capital loan, which will be calculated according to the following formula: Fees in Relation to the Working Capital Loan = Amounts of Prepayments x Actual Days of Working Capital Loan x Annual Interest Rates on Working Capital Loans Announced by the People’s Bank of China 360; Party A will receive 1% of the sales revenue as agency fees every quarter, and Party A shall neither charge any other fees nor undertake any marketing fees.

Progress of Terms relating to the Agency Fees and Fees in relation to the Working Capital Loan

Details of agency fees and fees in relation to working capital loan as shown in the Internal Inspection Report are as follows:

				Unit: RMB
			Agency Fee	Amount of Fees
		Income (Sales to	from (Sales to	in Relation to
		Hisense Agent,	Hisense Agent,	the Working
Item	Refunds	with tax)	*with tax 1%)**	Capital Loan
As at 31 December 2005	812,724,143.04	877,273,135.04	8,772,731.35	3,409,550.50

Among the above calculations, actual days of Working Capital Loans starts from the day that the Company received prepayment and up to 31 December 2005.

As at the end of this Reporting Period, Hisense Agent has not yet asked the Company to pay the Agency Fees and the Fees in relation to the Working Capital Loan in accordance with the Sales Agency Agreement. The Company has not paid any Agency Fees and Fees in relation to the Working Capital Loan.

For the progress and status of the Sales Agency Agreement after this Reporting Period, please refer to the Company’s announcement dated 15 June 2006 titled “Announcement relating to the status and progress of the Sales Agency Agreement, the First Supplemental Agency Agreement and the Second Supplemental Agency Agreement entered into between Guangdong Kelon Electrical Holdings Company Limited and Qingdao Hisense Marketing Company Limited”, which was set out in the “Securities Times” and “China Securities Journal” in the PRC and “China Daily” and “Hong Kong Commercial Daily” in Hong Kong on 16 June 2006. The Board of Directors of the Company has appointed Shenzhen Nanfang Minhe Certified Public Accountants Ltd. to review the progress of the Sales Agency Agreement.

As the Company has to proceed with the settlement of the Sales Agency Agreement and its supplemental agreements, up till now, the Sales Agency Agreement and its supplemental agreements are still under the process of auditing. The Board of the Company will disclose the audit results and information in due course.

Related party transactions between Guangdong Kelon Mould Co., Ltd (“Kelon Mould”) (a subsidiary of the Company) and Hisense Electric Co., Ltd (“Hisense Electrical Appliances”)

Connected party: Hisense Electrical Appliances

Subject matter: Moulds produced as required by Hisense Electrical Appliances

Transaction period: 22 December 2005 to 31 December 2006

Pricing policy: Kelon Mould will consider whether it will conduct business with Hisense Electrical Appliances for the manufacture of moulds and will fix the prices for the moulds to be manufactured by reference to the following conditions: (1) the minimum profits which may be obtained by Kelon Mould from similar transactions; (2) the bidding prices which may be offered by the competitors in the tenders for the manufacture of moulds organised by Hisense Electrical Appliances; (3) the costs which must be paid by Kelon Mould for the performance of its obligations under the moulds purchase contract.

Contract amount: RMB20,000,000, among which the aggregate cap up to the end of each year (including 2005 and 2006) will not exceed RMB10,000,000

Percentage of amount of similar contracts: 6%

Transaction purpose and its impact on the Company

Kelon Mould is specialised in development, design and manufacturing of all sorts of precise and sophisticated metal moulds, plastic injection moulds, blistering moulds, foaming moulds and diecasting moulds of large and medium dimension, and is one of the largest and most advanced mould manufacturers in the PRC in terms of technology and productivity. Kelon Mould focuses on export business, with customers all over Europe, America and Asia, and Hisense Electrical Appliances is one of them.
Since March 2003, Kelon Mould, as one of Hisense Electrical Appliances’ qualified suppliers, has been participating in public tenders organized by Hisense Electrical Appliances. In consideration of Kelon Mould’s outstanding product quality, suitability, prices and services, Hisense Electrical Appliances has granted a number of mould processing contracts to Kelon Mould. However, as no related party relationship existed between the Company and Hisense Electrical Appliances or its related parties before 9 September 2005, such transactions shall not be deemed as related party transactions.
The related party transactions of the Company are in compliance with the relevant laws, regulations and policies, and are fair and reasonable, without prejudice to the interests of the Company and non-related shareholders. Such transactions would not have a material adverse effect on the financial condition and operating results of the Company, either for the current period or in the future, nor would it affect the independence of the Company.
As at the date of this announcement, Kelon Mould has not become dependent on (nor been subject to the control of) the related parties as a result of such transactions. The transactions with Hisense Electrical Appliances accounts for only a small portion of its whole business operations (it is estimated that for the year 2005, the related party transactions will only be 6% of the entire business operations).

(IV) MATERIAL CONTRACTS AND THEIR PERFORMANCE

1. External guarantees

Unit: ten thousand

Particulars of external guarantees provided by the Company (not including guarantees provided for subsidiaries of the Company)

for subsidiaries of the Company)
Name of Inception
guaranteed date (Date of Amount of Type of Guarantee	Discharged	Given to related
entity agreement) guarantee guarantee period	or not	parties or not
Total amount of guarantees incurred during the Reporting Period		–
Total balance of guarantees as at the end of the Reporting Period		–
Particulars of guarantees provided for subsidiaries by the Company
Total amount of guarantees provided for subsidiaries during the Reporting	Period	204,032.53
Total balance of guarantees as at the end of the Reporting Period		68,757.70
Particulars of the total amount of guarantees provided by the Company
(including guarantees provided for subsidiaries)
Total amount of guarantees		68,757.70
Proportion of total guarantees within net assets of the Company
where:
Amount of guarantees provided for shareholders, beneficial owners and
their related parties		–
Amount of loan guarantees provided, directly or indirectly,
for secured parties having a gearing ratio of more than 70%		60,032.97
Amount of guarantees in excess 50% of net assets		68,757.70
Total amount of guarantees of above 3 items		68,757.70

The balance of loan guarantees provided by Guangdong Greencool, a related party, to the Company and its subsidiaries amounted to RMB327,971,300 as at 31 December 2005.

2. Particulars of liability balance between the Company and related parties

Unit: ten thousand

Loans from listed company Name of Related Party to related parties Amount Balance Guangdong Greencool Enterprise Development Company Limited – 1,592.59 Mefei MeiLing Co. Ltd – 11.56 Greencool Environmental Protection Engineering (Shenzhen) Company Limited – 3,300.00 Greencool Technology Development (Shenzhen) Company Limited – 3,200.00 Hainan Greencool Environmental Protection Engineering Company Limited 1,343.79 1,228.94 Chengdu Xinxing Electrical Appliance Holdings Company Limited – 3,400.00 Shunde Yunlong Consultancy Service Company Limited – 468.58 Wuhan Changrong Electrical Appliance Company Limited 2,000.00 4984.37 Jiangxi Kesheng Trading Company Limited 1,863.00 2,557.28 Zhongshan Dongyue Electrical Company Limited 8,000.00 1,267.83 Jinan San’ai’fu Chemical Company Limited 12,240.00 12,149.65 Tianjin Xiangrun Trading Development Company Limited 9,741.22 9,690.53 Tianjin Lixin Trading Development Company Limited 8,960.03 8,960.03 Jiangxi Keda Plastic Technology Company Limited 1,300.02 1,300.02 Zhuhai Longjia Refrigerating Plant Company Limited – 2,860.00 Beijing De Heng Solicitors 400.00 400.00 Hefei Weixi Electrical Applince Company 46.52 1,607.54 Zhuhai Defa Air-conditioning Accessories Company Limited 2,140.00 Shangqiu Bing Xiong Freezing Facilities Company Limited – 5,803.00 Zhejiang Yuhuan Compressors Factory 833.37 950.36 Yangzhou Economic Development Zone Finance Bureau – 4,000.00 Total 46,727.95 71,872.29	Loans from related party to listed company Amount Balance – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 0.00 0.00	Loans from related party to listed company Amount Balance – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 0.00 0.00
		0.00

Included loans provided by the Company to the controlling shareholder and its subsidiaries during the period of RMB13.4379 million and balance of RMB93.3309 million.

3. Proposals for the settlement of embezzled funds

Planned

Planned
re-payment	Settlement	Settlement
schedule	methods	amount(in ten thousand RMB)	Remarks
As at the end of	Litigation	The specific amounts and	There were 5 cases of litigation
February 2006		schedules for settlement cannot be	lodged against Gu Chu Jun,
		determined as they are contingent	Guangdong Greencool and its
		on the litigation lodged by relevant	related companies and third party
		authorities against Gu Chu Jun	companies in relation to their illegal
		and overall disposal arrangement	embezzlement of the Company’s
		of assets by the Greencool	funds, involving an amount of
		Companies	RMB331,596,600 (details are set
			out in the announcement of the
			Company dated 28 February 2006).
			The Company has
			applied to the court to seal up and
			preserve the lands, properties and
			bank deposits of Gu Chu Jun and
			Greencool companies, so as to
			ensure recovery of debt.
As at the end of		0
March 2006
As at the end of
April 2006		0
As at the end of	Litigation	The specific amounts and	A litigation was lodged against
May 2006		schedules for settlement cannot be	Gu Chu Jun and Beijing De Heng
		determined as they are contingent	Solicitors, a third party, of the
		on the litigation lodged	Greencool Companies in relation to
		by relevant authorities against	their illegal embezzlement of the
		Gu Chu Jun and overall disposal	Company’s funds, in the amount of
		arrangement of assets by the	RMB4 million.
		Greencool Companies
As at the end of	Litigation	The specific amounts and	There were 3 cases of litigation
June 2006		schedules for settlement cannot be	lodged against Gu Chu Jun, the
		determined as they are contingent	Greencool related parties and
		on the litigation lodged	third parties of Greencool
		by relevant authorities against	companies in relation to their illegal
		Gu Chu Jun and overall disposal	embezzlement of the Company’s
		arrangement of assets by the	funds, involving an amount of
		Greencool Companies	RMB170.00 million (details are set
			out in the announcement of the
			Company dated 16 June 2006).
			The Company has applied to the
			court to seal up and preserve the
			land, properties and bank deposits
			of Gu Chu Jun and the Greencool
			Companies, so as to ensure
			recovery of debt.
As at the end of	Cash	1,267.83	Settlement of embezzled funds of
July 2006	settlement		the Company by Zhongshan
			Dongyue Electrical Appliance
			Company Limited was completed.
As at the end of		0
August 2006

As at the end of Litigation The specific amounts and The Company has collected evidence September 2006 schedules for settlement cannot be to lodge proceedings against determined as they are contingent Gu Chu Jun, Greencool Companies on the litigation lodged and the third parties in relation to by relevant authorities against their illegal embezzlement of the Gu Chu Jun and overall disposal Company’s funds in 3 cases, the arrangement of assets by amount of the claim will be Greencool Companies determined on the basis of supporting evidence. The embezzled amount of RMB107.51 million is composed of: (1) RMB16.07 million in relation to Hefei Weixi Electrical Appliance Company Limited and others; (2) RMB49.84 million in relation to Wuhan Changrong Electrical Appliances Company Limited and others, and the final amount of which is to be determined upon the settlement of debts of Wuhan Changrong Electrical Appliances Company Limited owe to/from Jiangxi Kelon and Kelon Refrigerator; (3) RMB13.00 million in relation to Jiangxi Keda Plastic Technology Company Limited; and (4) RMB28.60 million in relation to Zhuhai Longjia Refrigerating Plant Company Limited. The Company has applied to the court to seal up and preserve the land, properties and bank deposits of Gu Chu Jun and the Greencool companies, so as to ensure its recovery of debts.

			court to seal up and preserve the land, properties and bank deposits of Gu Chu Jun and the Greencool companies, so as to ensure its recovery of debts.
As at the end of		0
October 2006
As at the end of		0
November 2006
As at the end of	Others	13,117	The Company will check the current
December 2006			accounts with Greencool companies
			and make a settlement by way of
			offsetting RMB131.17 million of the
			Company’s debts owed to
			Greencool companies.

Total

– –

4. During the Reporting Period, the Company was not entrusted or underwritten with assets of other companies, and no assets of the Company were entrusted, underwritten or leased to other companies.

5. During the Reporting Period, the Company has not appointed any outside party to manage its monetary assets.

6. The Company has not entered into any other material contracts during the Reporting Period.

(V) Undertakings given by the Company or shareholders holding 5% of shares in the Company in respect of shareholding reform

1. Undertakings to shareholding reform

(1) Guangdong Greencool, the single largest shareholder of the Company intends to transfer 26.43% of its shares in the Company to Hisense Air-Conditioner. Hisense Air-Conditioner has obtained authorization from Guangdong Greencool to carry out a share reform on the Company. The Company has been promised by Hisense Air-Conditioner that it would undertake the obligation of share reform on the Company and immediately initiate the share reform in accordance with the relevant laws, regulations and provisions of PRC.
(2) Shunde Economic Consultancy Company, the second largest shareholder of domestic legal person shares of the Company, has undertaken to the Company that it will perform all its obligation of being the second largest shareholder of domestic legal person shares of the Company according to the relevant laws, regulations and rules of the PRC in respect of the shareholding reform of the Company upon completion of the equity transfer.

2. Other undertakings

During the Reporting Period, no material undertakings have been given by the Company or shareholders holding more than 5% of shares in the Company which have been published on relevant newspapers and websites.

(VI) During the Reporting Period, the Company appointed Shenzhen Dahua Tiancheng Certified Public Accountants and BDO McCabe Lo Limited as the Company’s PRC and HK auditors, respectively, for the financial year 2005. It was the first time for the corporate auditors to provide auditing service for the Company. A total remuneration of HK$5.6 million was paid to Shenzhen Dahua Tiancheng Certified Public Accountants and BDO McCabe Lo Limited in 2005, and related operating costs and traveling expenses were borne by the Company.
(VII) Since 5 April 2005, the Company has been formally investigated by CSRC due to alleged breach of certain securities law of the PRC. The Company’s former chairman Mr. Gu Chu Jun and former executive Directors Mr. Zhang Hong and Mr. Yan You Song, have been formally investigated by the PRC police department and are subject to procedures relating to criminal offences due to alleged economic crimes.

A SHARE’S FINANCIAL STATEMENT FINANCIAL STATEMENT

BALANCE SHEET

At 31 December 2005

1. BALANCE SHEET

prepared by: Guangdong Kelon Electrical Holdings Company Limited

In RMB At 31 December 2005 At the end of the year At the beginning of the year Group Company Group Company 287,097,542.93 66,230,863.58 2,320,120,532.00 1,177,175,655.00 2,000.00 2,000.00 – – 140,818,945.44 104,796,523.26 792,903,018.00 506,457,634.00 – – – – – – – – 466,115,187.00 311,706,597.62 591,667,307.00 446,002,177.00 594,610,973.79 2,346,101,538.83 266,010,174.00 1,692,453,331.00 132,481,387.55 12,193,016.04 197,803,725.00 26,244,296.00 39,221,876.72 – 20,796,124.00 – 1,248,765,899.51 333,215,524.94 3,320,116,310.00 1,419,152,511.00 1,736,435.04 797,524.55 4,368,346.00 2,869,526.00 – – – – – – – – 2,910,850,247.98 3,175,043,588.82 7,513,785,536.00 5,270,355,130.00 63,255,982.31 959,252,113.94 93,945,657.00 1,757,679,178.28 – – – – 63,255,982.31 959,252,113.94 93,945,657.00 1,757,679,178.28 – – – – 6,572,677.40 – 29,777,773.00 – 3,882,263,272.74 993,073,433.69 4,289,997,578.00 1,159,719,861.00 2,082,142,355.73 442,543,136.93 2,165,216,534.00 513,512,749.00 --------------------- --------------------- --------------------- --------------------- 1,800,120,917.01 550,530,296.76 2,124,781,044.00 646,207,112.00 210,442,218.73 7,102,410.64 64,011,849.00 – --------------------- --------------------- --------------------- --------------------- 1,589,678,698.28 543,427,886.12 2,060,769,195.00 646,207,112.00 – – – – 318,885,601.93 15,182,059.00 349,490,180.00 33,061,019.00 – – – – 1,908,564,300.21 558,609,945.12 2,410,259,375.00 679,268,131.00	In RMB At 31 December 2005 At the end of the year At the beginning of the year Group Company Group Company 287,097,542.93 66,230,863.58 2,320,120,532.00 1,177,175,655.00 2,000.00 2,000.00 – – 140,818,945.44 104,796,523.26 792,903,018.00 506,457,634.00 – – – – – – – – 466,115,187.00 311,706,597.62 591,667,307.00 446,002,177.00 594,610,973.79 2,346,101,538.83 266,010,174.00 1,692,453,331.00 132,481,387.55 12,193,016.04 197,803,725.00 26,244,296.00 39,221,876.72 – 20,796,124.00 – 1,248,765,899.51 333,215,524.94 3,320,116,310.00 1,419,152,511.00 1,736,435.04 797,524.55 4,368,346.00 2,869,526.00 – – – – – – – – 2,910,850,247.98 3,175,043,588.82 7,513,785,536.00 5,270,355,130.00 63,255,982.31 959,252,113.94 93,945,657.00 1,757,679,178.28 – – – – 63,255,982.31 959,252,113.94 93,945,657.00 1,757,679,178.28 – – – – 6,572,677.40 – 29,777,773.00 – 3,882,263,272.74 993,073,433.69 4,289,997,578.00 1,159,719,861.00 2,082,142,355.73 442,543,136.93 2,165,216,534.00 513,512,749.00 --------------------- --------------------- --------------------- --------------------- 1,800,120,917.01 550,530,296.76 2,124,781,044.00 646,207,112.00 210,442,218.73 7,102,410.64 64,011,849.00 – --------------------- --------------------- --------------------- --------------------- 1,589,678,698.28 543,427,886.12 2,060,769,195.00 646,207,112.00 – – – – 318,885,601.93 15,182,059.00 349,490,180.00 33,061,019.00 – – – – 1,908,564,300.21 558,609,945.12 2,410,259,375.00 679,268,131.00	In RMB At 31 December 2005 At the end of the year At the beginning of the year Group Company Group Company 287,097,542.93 66,230,863.58 2,320,120,532.00 1,177,175,655.00 2,000.00 2,000.00 – – 140,818,945.44 104,796,523.26 792,903,018.00 506,457,634.00 – – – – – – – – 466,115,187.00 311,706,597.62 591,667,307.00 446,002,177.00 594,610,973.79 2,346,101,538.83 266,010,174.00 1,692,453,331.00 132,481,387.55 12,193,016.04 197,803,725.00 26,244,296.00 39,221,876.72 – 20,796,124.00 – 1,248,765,899.51 333,215,524.94 3,320,116,310.00 1,419,152,511.00 1,736,435.04 797,524.55 4,368,346.00 2,869,526.00 – – – – – – – – 2,910,850,247.98 3,175,043,588.82 7,513,785,536.00 5,270,355,130.00 63,255,982.31 959,252,113.94 93,945,657.00 1,757,679,178.28 – – – – 63,255,982.31 959,252,113.94 93,945,657.00 1,757,679,178.28 – – – – 6,572,677.40 – 29,777,773.00 – 3,882,263,272.74 993,073,433.69 4,289,997,578.00 1,159,719,861.00 2,082,142,355.73 442,543,136.93 2,165,216,534.00 513,512,749.00 --------------------- --------------------- --------------------- --------------------- 1,800,120,917.01 550,530,296.76 2,124,781,044.00 646,207,112.00 210,442,218.73 7,102,410.64 64,011,849.00 – --------------------- --------------------- --------------------- --------------------- 1,589,678,698.28 543,427,886.12 2,060,769,195.00 646,207,112.00 – – – – 318,885,601.93 15,182,059.00 349,490,180.00 33,061,019.00 – – – – 1,908,564,300.21 558,609,945.12 2,410,259,375.00 679,268,131.00
Group 287,097,542.93 2,000.00 140,818,945.44 – – 466,115,187.00 594,610,973.79 132,481,387.55 39,221,876.72 1,248,765,899.51 1,736,435.04 – – 2,910,850,247.98 63,255,982.31 – 63,255,982.31 – 6,572,677.40 3,882,263,272.74 2,082,142,355.73 --------------------- 1,800,120,917.01 210,442,218.73 --------------------- 1,589,678,698.28 – 318,885,601.93 – 1,908,564,300.21	Group 2,320,120,532.00 – 792,903,018.00 – – 591,667,307.00 266,010,174.00 197,803,725.00 20,796,124.00 3,320,116,310.00 4,368,346.00 – – 7,513,785,536.00 93,945,657.00 – 93,945,657.00 – 29,777,773.00 4,289,997,578.00 2,165,216,534.00 --------------------- 2,124,781,044.00 64,011,849.00 --------------------- 2,060,769,195.00 – 349,490,180.00 – 2,410,259,375.00	Company 1,177,175,655.00 – 506,457,634.00 – – 446,002,177.00 1,692,453,331.00 26,244,296.00 – 1,419,152,511.00 2,869,526.00 – –
		5,270,355,130.00
		1,757,679,178.28 –
		1,757,679,178.28
		– – 1,159,719,861.00 513,512,749.00 --------------------- 646,207,112.00
		– --------------------- 646,207,112.00
		– 33,061,019.00 –
		679,268,131.00

INTANGIBLE ASSETS AND OTHER ASSETS Intangible assets Long term deferred expenditures Other long term assets Total intangible assets and other assets Deferred taxation Deferred tax assets TOTAL ASSETS Liabilities and shareholders’ interests CURRENT LIABILITIES: Short term loans Notes payable Trade payables Advance from customers Accrued payroll Staff welfare payable Dividend payable Taxes payables Payable to others Other payables Accrued charges Provision Deferred income Long-term loans due within one year Other current liabilities Total current liabilities LONG TERM LIABILITIES: Long term loans Bonds payable Long-term payables Specific payables Accrued liabilities of investee enterprise Total long term liabilities Deferred taxation: Deferred tax liabilities Total liabilities Minority interests: shareholders’ equity: Capital (share capital) Capital reserve Surplus reserves including: statutory public welfare fund Unappropriated profits Exchange difference Declared cash dividends Accumulated loss not yet made up Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Legal representative: Tang Ye Guo	535,372,702.10 377,844,460.46 2,299,938.37 – – – 537,672,640.47 377,844,460.46 – – 5,420,343,170.97 5,070,750,108.34 2,160,522,820.56 1,268,135,260.17 183,465,027.51 180,340,873.71 2,068,885,828.19 50,629,618.23 301,318,221.63 239,312,012.34 52,542,739.06 33,437,359.51 886,321.43 230,307.94 2,067.02 – 174,340,203.01 159,037,949.21 4,048,161.18 950,004.58 734,951,850.68 2,444,833,810.08 287,686,505.72 239,438,823.59 209,915,745.89 201,937,388.53 – – – – – – 6,178,565,491.88 4,818,283,407.89 – – – – 73,923,424.44 68,779,557.54 – – – 1,016,803,629.34 73,923,424.44 1,085,583,186.88 – – 6,252,488,916.32 5,903,866,594.77 257,705,794.23 0.00 992,006,563.00 992,006,563.00 1,581,099,648.75 1,977,086,351.38 114,580,901.49 114,580,901.49 114,580,901.49 114,580,901.49 (3,782,492,927.69) (3,916,790,302.30) 4,954,274.87 – – – – – (1,089,851,539.58) (833,116,486.43) 5,420,343,170.97 5,070,750,108.34 Person in charge of accounting function: Xiao Jian Lin	1,071,066,931.00 887,902,262.00 37,293,651.00 25,424,841.00 34,000,000.00 – 1,142,360,582.00 913,327,103.00 – – 11,160,351,150.00 8,620,629,542.28 2,911,715,168.00 1,172,365,000.00 1,719,560,637.00 1,987,375,448.00 1,939,251,222.00 955,442,361.00 862,004,102.00 765,356,039.00 25,677,559.00 7,052,331.00 620,446.00 – – – (8,794,208.00) (58,379,072.00) 4,355,736.00 970,585.00 455,086,270.00 323,251,472.00 111,995,056.00 87,207,364.00 119,337,512.00 119,337,512.00 – – 4,215,420.00 – – – 8,145,024,920.00 5,359,979,040.00 16,723,295.00 – – – 69,962,105.00 64,991,061.00 – – – 185,758,323.00 86,685,400.00 250,749,384.00 – – 8,231,710,320.00 5,610,728,424.00 334,637,548.00 0.00 992,006,563.00 992,006,563.00 1,576,684,229.00 1,997,201,731.00 114,580,901.00 114,580,901.00 114,580,901.00 114,580,901.00 (88,877,490.00) (93,888,076.72) (390,921.00) – – – – – 2,594,003,282.00 3,009,901,118.28 11,160,351,150.00 8,620,629,542.28 Person in charge of accounting department: Dai Hui Jiao

2. STATEMENT OF INCOME AND PROFIT APPROPRIATION

prepared by: Guangdong Kelon Electrical Holdings Company Limited

			January to	December 2005	In RMB
		2005		2004
		Group	Company	Group	Company
Items
1.	Revenue from principal
	operations	6,978,371,716.63	3,862,710,118.64	7,923,000,768.00	5,940,964,929.00
	Less: Cost of sales	6,814,243,558.83	3,784,208,654.62	6,262,412,783.00	4,970,362,262.00
	Sales tax and surcharge	698,689.41	155,760.83	159,147.00	148,282.00
2.	Profit from principal operations	163,429,468.39	78,345,703.19	1,660,428,838.00	970,454,385.00
	Add: Other operating profit	(8,588,805.11)	7,912,587.06	20,448,359.00	(17,810,978.00)
	Less: Distribution costs	1,529,596,630.94	1,326,378,598.20	1,182,396,119.77	964,215,592.47
	Administrative expenses	1,505,353,830.38	519,835,535.84	521,487,145.00	227,518,210.00
	Financial expenses	166,678,613.83	84,733,127.57	127,457,832.00	56,988,087.00
3.	Operating profit	(3,046,788,411.87)	(1,844,688,971.36)	(150,463,899.77)	(296,078,482.47)
	Add: Investment profit	(46,081,250.93)	(1,666,591,653.73)	(83,108,297.00)	28,355,831.98
	Subsidy income	2,307,703.99	–	6,252,764.00	4,084,592.00
	Non-operating income	22,573,365.83	19,754,919.13	4,281,343.00	1,989,626.00
	Less: Non-operating expenses	690,429,104.84	331,376,519.62	9,497,710.00	2,614,755.00
4.	Profit before tax	(3,758,417,697.82)	(3,822,902,225.58)	(232,535,799.77)	(264,263,187.49)
	Less: Income tax	1,020,742.69	–	23,718,054.00	–
	Minority interests	(65,823,002.82)	–	(10,455,703.00)	–
	Loss in subsidiaries not
	yet made up	–	–	–	–
5.	Net profit	(3,693,615,437.69)	(3,822,902,225.58)	(245,798,150.77)	(264,263,187.49)
	Add: Unappropriated profits
	at the beginning
	of the year	(88,877,490.00)	(93,888,076.72)	156,920,660.77	170,375,110.77
	Others carried forward	–	–	–	–
6.	Profit available for appropriation	(3,782,492,927.69)	(3,916,790,302.30)	(88,877,490.00)	(93,888,076.72)
	Less: Appropriations to statutory
	common reserve fund	–	–	–	–
	Appropriations to statutory
	common welfare fund	–	–	–	–
	Appropriations to welfare
	and reward fund	–	–	–	–
7.	Profit available for appropriation
	to shareholders	(3,782,492,927.69)	(3,916,790,302.30)	(88,877,490.00)	(93,888,076.72)
	Less: Dividend payables
	in Respect of
	preferred shares	–	–	–	–
	Appropriations to
	discretionary reserve	–	–	–	–
	Dividends on
	ordinary shares	–	–	–	–
	Dividends on ordinary
	shares capitalized	–	–	–	–
8.	Unappropriated profits	(3,782,492,927.69)	(3,916,790,302.30)	(88,877,490.00)	(93,888,076.72)

Income statement (Supplemental information)

			This period	This period	The same period	of last		year
			Group	Company	Group		Company
	Items
	1.	Profit from sale and disposal
		of departments or
		investee enterprise	–	–	–			–
	2.	Loss due to natural disaster	–	–	–			–
	3.	Increase (or decrease) in
		total profit from change of
		all accounting policy	–	–	–			–
	4.	Increase (or decrease) in
		total profit from change
		of accounting estimates	–	–	–			–
	5.	Loss from debt reconstruction	–	–	–			–
	6.	Others	–	–	–			–
		Legal representative:	Person in charge of		Person in charge of accounting
		Tang Ye Guo	accounting function: Xiao Jian Lin		department: Dai Hui Jiao
3	STATEMENT OF CASH FLOWS
	prepared by: Guangdong Kelon Electrical Holdings Company Limited				January to December	2005		In RMB
	Items		2005		2004
			Group	Company	Group		Company
	1.	Cash flows from
		operating activities:
		Cash received from sales
		of goods and rendering
		of services	7,129,575,549.04	4,080,221,576.35	9,152,702,388.00	6,841,331,737.00
		Refund of tax and levies	152,272,459.93	–	527,197,037.00			–
		Cash received from other
		operating activities	40,853,357.25	3,565,987.90	8,157,507.00	18,373,845.00
		Sub-total of cash inflows	7,322,701,366.22	4,083,787,564.25	9,688,056,932.00	6,859,705,582.00
		Cash paid for purchases
		of goods and services	6,439,788,889.33	3,305,697,634.70	7,072,321,751.00	5,841,331,699.00
		Cash paid to and on behalf
		of employees	560,599,014.84	181,787,590.80	498,899,159.00	204,517,241.00
		Tax paid	214,902,139.33	27,513,299.01	218,768,849.00	148,452,719.00
		Cash paid for other
		operating activities	1,367,225,939.83	1,716,632,133.17	1,004,360,516.00	674,017,825.00
		Sub-total of cash outflows	8,582,515,983.33	5,231,630,657.68	8,794,350,275.00	6,868,319,484.00
		Net cash flows from
		operating activities	(1,259,814,617.11)	(1,147,843,093.43)	893,706,657.00	(8,613,902.00)

2. Cash flows from investing activities: Cash received from investment returns Including: Cash received from acquisition of subsidiaries Cash received from investment revenues Net cash received from disposals of fixed assets, intangible assets and other long-term assets Other cash received from investing activities Sub-total of cash inflows Cash paid for acquisition of fixed assets, intangible assets and other long-term assets Cash paid for acquisition of investments Net cash paid for acquisition of subsidiaries Cash paid for other investing activities Sub-total of cash outflows Net cash flows from investing activities 3. Cash flows from financing activities: Cash contribution from investment Including: cash contribution from minority shareholders by subsidiaries Cash received from borrowings Cash received from other financing activities Sub-total of cash inflows Cash paid for repayment of borrowings Cash paid for distribution of dividends, profit or interest expenses Including: dividends paid to minority by subsidiaries Cash received from reduction in registered capital Including: cash paid to minority by subsidiaries for reduction of capital according to laws Cash paid for other financing activities Sub-total of cash outflows Net cash flows from financing activities	– – – 324,081.05 29,442,938.48 29,767,019.53 120,304,960.51 – – – 120,304,960.51 (90,537,940.98) – – 2,522,986,554.75 1,199,773,514.60 3,722,760,069.35 3,073,432,493.25 132,224,492.48 – – – – 3,205,656,985.73 517,103,083.62	– – – – 17,737,617.96 17,737,617.96 7,202,725.09 – – – 7,202,725.09 10,534,892.87 – – 732,833,806.87 945,006,116.61 1,677,839,923.48 637,063,546.70 69,406,851.03 – – – – 706,470,397.73 971,369,525.75	8,286,133.00 – – 10,111,976.00 38,831,794.00 57,229,903.00 509,145,375.00 55,532,548.00 – – 564,677,923.00 (507,448,020.00) 44,300,000.00 – 5,599,913,128.00 93,405,960.00 5,737,619,088.00 5,673,540,819.00 154,626,987.00 – – – – 5,828,167,806.00 (90,548,718.00)	4,822,916.00 – – 731,547.00 30,585,243.00 36,139,706.00 39,077,237.00 359,225,800.00 – – 398,303,037.00 (362,163,331.00) – – 1,783,865,000.00 318,523,968.00 2,102,388,968.00 1,751,010,000.00 79,981,855.00 – – – – 1,830,991,855.00 271,397,113.00

(5,081,093.00)

(798,201.00)

–

4. Effect of foreign exchange rate changes on cash

5. Net increase in cash and cash equivalents (833,249,474.47) (165,938,674.81) 290,628,826.00 (100,178,321.00)

Items
2005
Group
Company
1.
Investing and financing
activities not involving
in cash receipts and payment
Liabilities convert into assets
–
–
Convertible company bonds
due within one year
–
–
Financing leased fixed assets
–
–
2.
Reconciliation of net profit
to cash flows from
operating activities:
Net profit
(3,693,615,437.69)
(3,822,902,225.58)
Add: Minority interests
(65,823,002.82)
–
Provision for impairment of
assets
1,411,076,506.09
532,342,088.18
Depreciation of fixed assets
372,974,566.33
95,846,124.83
Amortisation of intangible assets
76,225,078.11
67,588,758.74
Amortisation of long-term
deferred expenditure
41,334,081.88
25,424,842.04
Decrease in deferred expenditures
2,631,910.96
2,072,001.45
Increase of in accruals
153,484,692.22
130,024,702.54
Loss from disposal of
fixed assets, intangible assets
and other long-term assets
43,081,336.28
(16,420,896.09)
Losses on retirement of
fixed assets
–
–
Financial expenses
166,678,613.83
84,733,127.57
Investment loss
(46,081,250.93)
(1,666,591,653.73)
Deferred tax creditor
–
–
Decrease in inventories
1,778,374,420.80
1,092,151,507.33
Decrease in operating
receivables
(117,372,274.19)
3,113,797,384.62
Increase in operating payables
(1,382,783,857.98)
(785,908,855.33)
Spread other related party
transactions
–
–
Net cash flows from
operating activities
(1,259,814,617.11)
(1,147,843,093.43)
3.
Net increase in cash and
cash equivalents
Cash at the end of the period
184,284,027.53
65,195,258.19
Less: Cash at the beginning
of the period
1,017,533,502.00
231,133,933.00
Add: Cash equivalents at the
end of the period
–
–
Less: Cash equivalents at the
beginning of the period
–
–
Net increase in cash and
cash equivalents
(833,249,474.47)
(165,938,674.81)
Legal representative:
Person in charge of
Tang Ye Guo
accounting function:
Xiao Jian Lin

2004
Group
Company
–
–
–
–
–
–
(245,798,150.77)
(264,263,187.49)
(10,455,703.00)
–
81,817,395.96
41,944,984.00
344,895,556.00
94,016,175.00
73,458,329.00
66,295,441.00
28,005,331.00
18,827,932.00
10,598,299.00
11,000,475.00
(26,966,287.55)
(21,205,788.55)
2,950,447.00
(597.00)
–
–
119,991,915.00
50,194,814.00
83,108,297.00
(28,355,831.98)
–
–
(1,387,317,832.27)
(501,173,130.27)
71,419,675.63
(288,700,983.71)
1,730,286,734.00
812,805,796.00
17,712,651.00
–
893,706,657.00
(8,613,902.00)
1,017,533,502.00
231,133,933.00
726,904,676.00
331,312,254.00
–
–
–
–
290,628,826.00
(100,178,321.00)
Person in charge of
accounting department:
Dai Hui Jiao

“Please also refer to the published version of this announcement in China Daily”

AI assistant

Medlive Technology Co., Ltd. — Annual Report 2005

50436_rns_2006-08-14_2ea61e08-bb60-4674-8370-4c790f013333.pdf

Guangdong Kelon Electrical Holdings Company Limited 廣東科龍電器股份有限公司

ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005

CONSOLIDATED INCOME STATEMENT

NOTES

1. BASIS OF PREPARATION

2.

RETROSPECTIVE RESTATEMENT OF ERRORS

3. CHANGES IN ACCOUNTING POLICIES

Year ended 31 December 2004

4. REVENUE

5. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

Year ended 31 December 2005

Year ended 31 December 2004 (Restated)

Geographical segments

6. OTHER OPERATING INCOME

7. OTHER OPERATING EXPENSES

8. FINANCE COSTS

9.

10.

11. BASIC LOSS PER SHARE

12. DIFFERENCES BETWEEN IFRS AND PRC GAAP AS APPLICABLE TO THE GROUP

EXTRACT FROM REPORT OF THE AUDITORS

Basis of opinion

Fundamental uncertainty relating to the going concern basis

Qualified opinion arising from limitation of audit scope and disclaimer on view given by consolidated income statement and consolidated cash flow statement

MANAGEMENT DISCUSSION AND ANALYSIS

RESULTS REVIEW

Turnover analysis

Refrigerator Business

Air-conditioner Business

Export sales

OUTLOOK

(1) Optimise internal systems

(2) Speed up turnover of capital and obtain the required capital

(3) Continuing the pursuit of high-end innovation

(4) Ensuring operational efficiency

LIQUIDITY AND SOURCES OF FUNDS

HUMAN RESOURCE AND EMPLOYEES’ REMUNERATION

CHARGES ON THE GROUP’S ASSETS

EXPOSURE TO EXCHANGE RATE FLUCTUATION

PUBLIC FLOAT

CONTINGENT LIABILITIES

MATERIAL LITIGATION

AUDIT COMMITTEE

CAPITAL EXPENDITURE

TRUST DEPOSITS

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

GEARING RATIO

INDEPENDENCE OF THE INDEPENDENT NON-EXECUTIVE DIRECTORS

INTERESTS IN CONTRACTS OF DIRECTORS AND SUPERVISORS

INDEPENDENT NON-EXECUTIVE DIRECTORS’ INTERESTS IN CONTINUING CONNECTED TRANSACTIONS

CONTINUING CONNECTED TRANSACTIONS WITH HUAYI COMPRESSOR HOLDINGS COMPANY LIMITED (“HUAYI COMPRESSOR”) AND ITS SUBSIDIARIES

MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS

SHARE CAPITAL STRUCTURE

TOP TEN/SUBSTANTIAL SHAREHOLDERS

Shareholdings of top ten tradable Shareholders

Class of Shares

Remarks on the connected relationship or action in concert of the above shareholders

Notes:

SUBSTANTIAL SHAREHOLDERS

INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVES IN THE SHARES

PURCHASE, SALE OR REDEMPTION OF SHARES

CORPORATE GOVERNANCE

PUBLICATION OF ANNUAL REPORT ON THE INTERNET WEBSITE OF THE STOCK EXCHANGE OF HONG KONG LIMITED

Supplementary information as required by the Stock Exchange of Hong Kong Limited in relation to the Company’s A shares results announcement.

Important Notice

I. BRIEF INTRODUCTION TO THE LISTED COMPANY

II. FINANCIAL DATA AND BUSINESS DATA HIGHLIGHTS

III. ISSUE OF SHARES AND LISTING

IV. INFORMATION ABOUT DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

1. Changes in the shareholding and remuneration of Directors, supervisors and senior management (during the Reporting Period and before 26 June 2006)

3. Remuneration for the year

4. Duties and performance of the independent non-executive Directors

(1) Attendance of Board meetings by the former independent non-executive directors

(2) Disagreements raised by the former independent non-executive Directors on the relevant issues of the Company

5. Change in the Directors, supervisors and senior management

Medlive Technology Co., Ltd. Annual Report 2005