Medlive Technology Co., Ltd. — Annual Report 2006

Apr 27, 2007

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

(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 2006

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 2006 (the “Reporting Period”) together with the 2005 comparative figures, prepared in accordance with International Financial Reporting Standards (“IFRS”) as follows:

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2006

Notes Revenue 3 Cost of sales Gross profit Other income and gains 5 Distribution costs Administrative expenses Other operating expenses 6 Profit/(loss) from operations Dilution loss on share reform of an associate Share of results of associates Finance costs 7 Profit/(loss) before income tax 8 Income tax credit/(expense) 9 Profit/(loss) for the year Attributable to: Equity holders of the Company Minority interests Dividends Basic earnings/(loss) per share attributable to equity holders of the Company 10	2006 RMB’000 6,564,257 (5,474,785) 1,089,472 409,305 (869,207) (391,749) (56,815) 181,006 (16,317) 3,590 (140,672) 27,607 20,871 48,478 69,218 (20,740) 48,478 – RMB0.07	2005 RMB’000 (Restated) 6,978,372 (6,817,774) 160,598 73,328 (1,517,946) (1,495,569) (815,931) (3,595,520) – (31,571) (162,524) (3,789,615) (1,021) (3,790,636) (3,726,095) (64,541) (3,790,636) – RMB(3.76)

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CONSOLIDATED BALANCE SHEET

At 31 December 2006

Notes ASSETS Non-current assets Property, plant and equipment Investment properties Payments for leasehold land held for own use under operating leases Interests in associates Intangible assets Goodwill Deferred tax assets Available-for-sale financial assets Current assets Inventories Trade and other receivables 11 Taxation recoverable Pledged bank deposits Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables 12 Trade deposits received Provisions Taxation payable Other liabilities Bank borrowings Non-current liabilities Other liabilities Total liabilities Net current liabilities Total assets less current liabilities Total net liabilities Capital and reserves attributable to equity holders of the Company Share capital Share premium Statutory reserves Capital reserve Revaluation reserve Foreign exchange reserve Accumulated losses Minority interests Total Equity	2006 RMB’000 1,601,625 26,144 372,533 78,981 125,831 – 21,387 – 2,226,501 919,837 1,119,733 827 248,257 142,247 2,430,901 4,657,402 3,093,956 488,587 169,995 26,663 46,978 1,556,702 5,382,881 13,594 13,594 5,396,475 (2,951,980) (725,479) (739,073) 992,007 1,195,597 114,581 29,096 373,570 14,956 (3,725,527) (1,005,720) 266,647 (739,073)	2005 RMB’000 (Restated) 1,828,689 27,723 470,080 92,186 128,782 – – – 2,547,460 1,232,979 1,414,388 1,474 102,814 184,284 2,935,939 5,483,399 3,534,418 277,845 209,916 26,846 43,106 2,160,523 6,252,654 30,818 30,818 6,283,472 (3,316,715) (769,255) (800,073) 992,007 1,195,597 114,581 29,573 373,570 4,954 (3,794,745) (1,084,463) 284,390 (800,073)

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NOTES

1. PRINCIPAL ACCOUNTING POLICIES

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) of the IASB. IFRSs include International Accounting Standards (“IAS”) and Interpretations. In addition, the consolidated financial statements also comply with the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

(b) Basis of preparation

As at 31 December 2006, the Group’s current liabilities exceeded its current assets by approximately RMB2,952 million (2005: RMB3,317 million (restated)). In addition, the Group has outstanding short-term loans in the aggregate of approximately RMB1,557 million (2005: RMB2,161 million) of which approximately RMB255 million (2005: RMB1,233 million) were overdue as at 31 December 2006. 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 negotiated 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. Based on the above assessment, 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.

The consolidated financial statements for the year ended 31 December 2006 comprise the Company and its subsidiaries and the Group’s interests in associates. The measurement basis used in the preparation of the financial statements is the historical cost basis, as modified by the revaluation of certain 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 IFRSs, if any, are adjusted in these financial statements but will not be taken up in the accounting books of the Group.

The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

(c) Application of International Financial Reporting Standards

In the current year, the Group has applied all the new and revised standards, amendments and interpretations (“new IFRSs”) issued by the IASB, that are relevant to its operation and effective for accounting periods beginning on or after 1 January 2006. The adoption of the new IFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented.

(d) Potential impact arising from the new accounting standards not yet effective

The Group has not yet applied the following new standards, amendment or interpretations that have been issued but are not yet effective. The directors of the Company anticipated that the application of these new IFRSs will have no material impact on the financial statements of the Group.

• IFRS 7, “Financial instruments: Disclosures”, effective for annual periods beginning or after 1 January 2007. This standard has no significant impact to the Group for the financial year ended 31 December 2006. The directors considered that the Group may provide financial guarantee to certain of its distributors in the future and the directors will take action to assess the impact of this standard to the Group for the financial year ending 31 December 2007 when they considered appropriate;

• IFRS 8, “Operating segments”, effective for annual periods beginning on or after 1 January 2009. The directors considered that this standard has no significant impact to the Group and the Group will take action to assess the impact of this standard to the Group for the financial year ending 31 December 2007 when they considered appropriate;

• Amendment to IAS 1, “Capital disclosures”, effective for annual periods beginning on or after 1 January 2007. This amendment would result in more disclosure on the Group’s capital management;

• IFRIS - Int 7, “Applying the restatement approach under IAS 29 financial reporting in hyperinflationary economies”, effective for annual periods beginning on or after 1 March 2006. This interpretation is not relevant for the Group;

• IFRIC - Int 8, “Scope of IFRS 2”, effective for annual periods beginning on or after 1 May 2006. This interpretation is not relevant for the Group;

• IFRIC - Int 9, “Reassessment of embedded derivatives”, effective for annual periods beginning on or after 1 June 2006. This interpretation is not relevant for the Group;

• IFRIC - Int 10, “Interim financial reporting and impairment”, effective for annual periods beginning on or after 1 November 2006. This interpretation has no significant impact to the Group;

• IFRIC - Int 11, “IFRS 2 - Group and treasury share transactions”, effective for annual periods beginning on or after 1 March 2007. This interpretation is not relevant for the Group; and

• IFRIC - Int 12, “Service concession arrangements”, effective for annual periods beginning on or after 1 January 2008. This interpretation has no significant impact to the Group.

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2. RETROSPECTIVE RESTATEMENT OF ERRORS

The financial statements for the year ended 31 December 2006 include a restatement of the 2005 financial statements to correct the errors noted by the Company. The effects of the restatement on the 2005 financial statements are summarised below:

Income statement: Increase in administrative expenses (i) Increase in other operating expenses (i) Increase in loss for the year Increase in basic loss per share Balance sheet: Decrease in inventories (i) Decrease in trade and other receivables (ii) Decrease in property, plant and equipment (i) Decrease in total assets Decrease in trade and other payables (ii) Decrease in trade deposits received (ii) Decrease in total liabilities Increase in net liabilities Decrease in accumulated losses as at 1 January (ii) Increase in loss for the year (i) Decrease in equity as at 31 December	Effect on 2005 RMB’000 (15,787) (8,136)
	(23,923)
	RMB (0.03)
	Effect on 2005 RMB’000 (15,787) (26,708) (8,136)
	(50,631)
	9,372 23,034
	32,406
	(18,225)
	5,698 (23,923)
	(18,225)

(i) This represents the effect arising from loss of inventories and property, plant and equipment in a subsidiary, Jiangxi Kelon Industrial Development Co., Ltd. (“Jiangxi Kelon”) in 2005 due to the business of Jiangxi Kelon was interrupted after the freezure of its assets by the Higher People’s Court of Jiangxi Province in August 2005.

(ii) This represents other operating income in connection with a write back of unidentified net credit balances brought forward from prior years.

3. 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:

follows:
Sales of refrigerators Sales of air-conditioners Sales of freezers Sales of product components	2006 RMB’000 3,327,896 2,533,360 231,972 471,029 6,564,257	2005 RMB’000 2,542,839 3,600,489 261,113 573,931
		6,978,372

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4. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

The Group is 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 2006

Consolidated income statement

Refrigerators RMB’000 Turnover External sales 3,327,896 Inter-segment sales – Total revenue 3,327,896 Inter-segment sales are charged at prevailing market Result Segment result 150,644 Unallocated corporate income Profit from operations Dilution loss on share reform of an associate Share of results of associates 1,819 Finance costs Profit before income tax Income tax credit Profit for the year Year ended 31 December 2005 (Restated) Consolidated income statement Refrigerators RMB’000 Turnover External sales 2,542,839 Inter-segment sales – Total revenue 2,542,839 Inter-segment sales are charged at prevailing market Result Segment result (1,451,864) Unallocated corporate expenses Loss from operations Share of results of associates (11,504) Finance costs Loss before income tax Income tax expense Loss for the year	Air- conditioners RMB’000 2,533,360 – 2,533,360 rates. 22,395 1,385 Air- conditioners RMB’000 3,600,489 – 3,600,489 rates. (1,602,663) (16,289)	Freezers RMB’000 231,972 – 231,972 10,000 127 Freezers RMB’000 261,113 – 261,113 (94,264) (1,181)	Product components RMB’000 471,029 671,840 1,142,869 (11,834) 259 Product components RMB’000 573,931 1,190,854 1,764,785 (413,735) (2,597)	Elimination RMB’000 – (671,840) (671,840) – – Elimination RMB’000 – (1,190,854) (1,190,854) – –	Consolidated RMB’000 6,564,257 –
					6,564,257
					171,205 9,801
					181,006 (16,317) 3,590 (140,672)
					27,607 20,871
					48,478
					Consolidated RMB’000 6,978,372 –
					6,978,372
					(3,562,526) (32,994)
					(3,595,520) (31,571) (162,524)
					(3,789,615) (1,021)
					(3,790,636)

Geographical segments

The following table provides an analysis of the Group’s turnover by geographical markets with reference to locations of customers:

The PRC Mainland China Hong Kong Europe America Others	2006 RMB’000 4,300,110 259,792 4,559,902 525,854 613,349 865,152 6,564,257	2005 RMB’000 4,154,957 19,518
		4,174,475 1,258,611 824,541 720,745
		6,978,372

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5. OTHER INCOME AND GAINS

An analysis of the Group’s other income and gains is as follows:

Gain on disposal of raw materials Gain on disposal of property, plant and equipment Gain on disposal of payments for leasehold land held for own use under operating leases Gain on debts settlement with suppliers Interest income Penalty income Rental income Subsidy income Reversal of impairment loss on trade and other receivables Reversal of provision for sales rebates Others 6. 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 of property, plant and equipment Impairment loss on payments for 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 7. FINANCE COSTS Interest on: – bank borrowings wholly repayable within five years – discounted note receivables Others 8. PROFIT/(LOSS) BEFORE INCOME TAX Profit/(loss) before income tax is stated after charging/(crediting): Inventories recognised as an expense Staff costs (including directors’ and supervisors’ remuneration) - Basic salaries, housing and other allowances and benefits in kind - Defined contribution pension cost Depreciation of property, plant and equipment Depreciation of investment properties Amortisation of payments for leasehold land held for own use under operating leases Amortisation of intangible assets Auditors’ remuneration Research and development costs Impairment loss on trade and other receivables Write down of inventories to net realisable value Write off of inventories Reversal of write down of inventories to net realisable value Operating lease charges - land and buildings - plant and machinery Foreign exchange loss, net Rental income from investment properties	2006 RMB’000 114,139 24,588 38,597 10,231 5,238 7,843 7,723 70,511 61,012 37,593 31,830 409,305 2006 RMB’000 19,408 25,159 – – – – 10,047 1,145 1,056 56,815 2006 RMB’000 100,196 21,125 121,321 19,351 140,672 2006 RMB’000 5,465,345 506,843 31,223 538,066 248,283 641 14,449 4,126 5,551 11,925 – 42,700 – (345,023) 63,855 6,500 28,619 (7,723)	2005 RMB’000 – 5,609 11,984 – 29,443 2,831 6,476 4,780 – – 12,205 73,328 2005 RMB’000 (Restated) 106,282 269,660 18,207 338,677 11,000 39,195 12,032 12,712 8,166 815,931 2005 RMB’000 122,306 32,125 154,431 8,093 162,524 2005 RMB’000 (Restated) 6,515,161 562,167 25,129 587,296 383,854 1,513 20,422 4,551 5,824 8,025 479,006 292,976 15,787 – 64,153 6,000 35,309 (6,476)

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9. INCOME TAX (CREDIT)/EXPENSE

INCOME TAX (CREDIT)/EXPENSE
Income taxes consist of: Current tax – PRC enterprise income tax (“EIT”) – Hong Kong Profits Tax Deferred tax	2006 RMB’000 516 – (21,387) (20,871)	2005 RMB’000 1,006 15 –
		1,021

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.

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 and its subsidiaries which are established and operating in the PRC are subject to EIT at a statutory rate of 33%.

The Company was established in Shunde, Guangdong Province and, pursuant to the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises” (“Income Tax Law”), 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 EIT at a rate of 15%. Together with the local EIT at a 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 AirConditioner”), Guangdong Kelon Freezer Co., Ltd. (“Kelon Freezer”), Guangdong Kelon Fittings Co., Ltd. (“Kelon Fittings”), 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 EIT at a rate of 24%. Together with local EIT at a rate of 3%, the aggregate EIT rate is 27%. Guangdong Kelon Mould Co., Ltd. (“Kelon Mould”), as a company established in coastal open economic zones, is also classified as a high new technology enterprise and subject to EIT at a rate of 15%. Together with the local EIT at a rate of 3%, the aggregate EIT at a rate is 18%. 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.

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

Pursuant to the PRC enterprise income tax law passed by the Tenth National People’s Congress on 16 March 2007, the new enterprise income tax rates for domestic and foreign enterprises are unified at 25% and will be effective from 1 January 2008. The impact of this change in enterprise income tax rates on the Group’s consolidated financial statements will depend on detailed implementation pronouncements that are to be issued subsequently. The Group is currently assessing the impact on the Group’s results of operations and financial position of this change in enterprise income tax rates.

No provision for Hong Kong Profits Tax has been made as the subsidiaries in Hong Kong did not generate assessable profits during the year. Hong Kong Profits Tax has been provided at the rate of 17.5% on the estimated assessable profit for last year.

A reconciliation between income tax (credit)/expense and accounting profit/(loss) at applicable tax rate is as follows:

Profit/ (loss) before tax Tax at the PRC statutory rate of 33% Effect of different tax rates of subsidiaries operating in other jurisdictions Effect of exemption granted and preferential tax treatment Tax effect of expenses not deductible for tax purposes Tax effect of revenue not taxable for tax purposes Tax effect of tax losses and deductible temporary differences not recognised Utilisation of tax losses and deductible temporary differences previously not recognised Income tax (credit)/expense	2006 RMB’000 27,607 9,110 1,560 (18,718) 1,826 (290) 164,914 (179,273) (20,871)	2005 RMB’000 (Restated) (3,789,615
		(1,250,573 23,293 681,311 162,979 (964 386,070 (1,095
		1,021

10. BASIC EARNINGS/(LOSS) PER SHARE

The calculation of basic earnings per share attributable to equity holders of the Company for the year is based on the net profit attributable to equity holders of the Company for the year of RMB69,218,000 (2005: net loss attributable to equity holders of the Company for the year RMB3,726,095,000 (restated)) and on 992,006,563 shares (2005: 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.

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11. TRADE AND OTHER RECEIVABLES

Included in trade and other receivables were trade receivables of net carrying amount of RMB290,166,000 (2005: 238,786,000). The aging analysis of trade receivables is as follows:

As at 31 December 2006 Within 3 months Three to six months Six months to one year One to two years Two to three years Over three years As at 31 December 2005 Within 3 months Three to six months Six months to one year One to two years Two to three years Over three years	Gross amount Impairment loss RMB’000 RMB’000 252,966 – 30,938 (954) 9,691 (4,854) 19,591 (17,212) 66,405 (66,405) 108,215 (108,215) 487,806 (197,640) 164,445 – 47,338 – 89,803 (62,830) 12,058 (12,028) 51,618 (51,618) 144,444 (144,444) 509,706 (270,920)	Net amount RMB’000 252,966 29,984 4,837 2,379 – –
		290,166
		164,445 47,338 26,973 30 – –
		238,786

12. TRADE AND OTHER PAYABLES

Included in trade and other payables were trade payables amounted to RMB1,415,803,000 (2005: RMB1,993,906,000). The aging analysis of trade payables is as follow:

Within one year One to two years Two to three years Over three years	2006 RMB’000 1,177,093 196,857 30,937 10,916 1,415,803	2005 RMB’000 1,645,415 83,768 59,097 205,626
		1,993,906

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

The consolidated shareholders’ equity of the Group prepared under IFRS and that prepared under PRC GAAP have the following major differences:

	2006	2005
	RMB’000	RMB’000
Equity attributable to equity holders of the Company as per
financial statements prepared under IFRS	(1,005,720)	(1,084,463)
Adjustment on property, plant and equipment revaluation and related depreciation	11,142	10,350
Adjustment on contribution from minority shareholders	26,684	26,684
Adjustment on dilution loss on share reform of an associate	16,317	–
Amortisation of trademark	(16,712)	–
Adjustment on impairment and amortisation of goodwill	(57,253)	(60,647)
Non-recognition of deferred tax assets	(21,387)	–
Equity attributable to equity holders of the Company as per
financial statements prepared under PRC GAAP	(1,046,929)	(1,108,076)
The consolidated net profit/(loss) prepared under IFRS and that prepared under PRC GAAP have the following major differences:
	2006	2005
	RMB’000	RMB’000
Net profit/ (loss) attributable to equity holders of the
Company as per financial statements prepared under IFRS	69,218	(3,726,095)
Adjustment on property, plant and equipment revaluation and related depreciation	771	3,530
Recognition of long outstanding payables in capital reserve	(27,479)	–
Amortisation of trademark	(16,712)	–
Adjustment on pre-operating expenses	–	(9,938)
Adjustment on impairment and amortisation of goodwill	(1,396)	11,200
Release of negative goodwill to income	4,790	4,790
Government grants recognised in capital reserve	–	(2,471)
Non-recognition of deferred tax assets	(21,387)	–
Adjustment on dilution loss on share reform of an associate	16,317	–
Others	–	1,447
Net profit/(loss) attributable to equity holders of the Company as per
financial statements prepared under PRC GAAP	24,122	(3,717,537)

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

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EXTRACT FROM REPORT OF THE AUDITORS

BASIS FOR QUALIFIED OPINION

It was reported by the Company that the previous 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 2006, the aggregate amount of receivables and aggregate amount of payables due from/to these companies were approximately RMB286 million (net of an accumulated impairment loss of RMB364 million) and RMB132 million respectively which were reflected in the consolidated balance sheet at 31 December 2006 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. 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 accumulated impairment and the recoverability of the carrying amounts. Any adjustments found to be necessary would affect the net liabilities as at 31 December 2006 and the profit for the year then ended.

QUALIFIED OPINION ARISING FROM LIMITATION OF AUDIT SCOPE

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to the matters set out in the basis for qualified opinion section of this report, the financial statements give a true and fair view of the state of the Group’s affairs as at 31 December 2006 and of its profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Without qualifying our opinion, we draw attention to the fact that the Group’s current liabilities exceeded its current assets by approximately RMB2,952 million as at 31 December 2006. In addition, the Group had outstanding short-term loans in the aggregate of approximately RMB1,557 million (2005: RMB2,161 million) of which approximately RMB255 million (2005: RMB1,233 million) were overdue as at 31 December 2006. These conditions may cast significant doubt about the Group’s ability to continue as a going concern. 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.

MANAGEMENT DISCUSSION AND ANALYSIS

Performance Review

In 2006, the Group successfully achieved a turnaround. During the Reporting Period, the Group recorded a turnover of RMB6.564 billion from its principal operations, and net profit of approximately RMB48.5 million (2005: losses of approximately RMB3.791 billion) and earnings per share of approximately RMB0.07. These results are attributable to the following reasons:

• (1) The costs and expenses incurred by the Company were significantly lower than previous years as a result of the gradual implementation and adoption of various costs control measures during the year. The structure of product sales of the Company improved substantially while the volume of sales was maintained, the gross profit margin rose substantially and profitability of products of the Company was strengthened.

• (2) The Company received subsidies for technological upgrade and innovation in the sum of RMB70 million from the Ronggui Street Office, Shunde District, Foshan City on 25 December 2006.

• (3) Revenues from the disposal of idle assets by the Company

Despite still facing great difficulties in its operations during the Reporting Period, the Company continued to pursue its operational guidelines of “optimizing internal systems, improving cash flow, continuing high-end strategy and maintaining operational efficiency”, and implemented the Sales Agency Agreement and its supplementary agreements entered into between the Company and Qingdao Hisense Marketing Company Limited. With the full understanding and support from governments at various levels, banks, suppliers and distributors and the concerted efforts of all our staff, the production and sales activities of the Company were gradually improving, with the profit margin of products and the liquidity of assets further enhanced, and the quality of operations improved notably as compared to 2005. As at the end of the Reporting Period, the Company has resumed normal business operations in all aspects and has accomplished its primary objectives of rescuing Kelon, maintaining stability and protecting its brandname.

Operation Structure Analysis

During the Reporting Period, the sales revenues of refrigerators, air-conditioners and freezers accounted for 50.70%, 38.59% and 3.53% of the total revenues of the principal operations of the Company, respectively, while the remaining 7.18% of the total revenues generated from other businesses.

Among which, domestic and export sales accounted for 65.51% and 34.49% of the total revenues of the principal operations of the Company, respectively.

Refrigerators business

During the Reporting Period, competition was still keen in the refrigerators’ market. Despite being affected by various adverse factors, the Company insisted to adhere to technological innovation, aggressively optimized the product mix of its refrigerators and underwent a major restructuring in both domestic and export sales channels, thereby consumers’ confidence recovered significantly and our market share improved rapidly. Meanwhile, the Company significantly improved the quality of its operation while maintaining a growth in sales. As such, the gross profit margin of its products has substantially increased. During the Reporting Period, the refrigerators business of the Company recorded a sales revenue of approximately RMB3.328 billion, representing an increase of 30.87% as compared to the same period of the previous year, and has therefore secured its leading position in the industry in the PRC. During the Reporting Period, the refrigerators business of the Company recorded a profit from principal operations of approximately RMB150,644,000.

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Air-conditioners business

During the Reporting Period, as a result of the breach of laws and regulations of the former substantial shareholder of the Company in 2005, the exporting orders of air-conditioners of the Company decreased significantly, resulting in a decrease in the sales volume as compared to the corresponding period of the previous year. However, the Company, on one hand, adhered to its high-end strategy, intensified its research and technology development, continued to launch new products with high efficiency and energy-saving features under its market orientation policy, rebuild the market influence of its brandname and enhanced product competitiveness. On the other hand, by taking measures such as optimization of product design, establishment of strategic reserve, improvement of cash flow, reduction of locked-in funds and improvement of quality assurance system, the Company, to some extent, offset the adverse effects of factors including the increasing price of raw materials and significantly reduced various costs and expense. As such, the operation quality of the air-conditioners segment of the Company improved significantly during the Reporting Period.

The Company recorded a sales revenue of RMB2.533 billion for its air-conditioners business during the Reporting Period, representing a decrease of 29.64% as compared to 2005. However, the profitability of its air-conditioners business was significantly improved with the profit margin for the principal operations of the air-conditioners business enhanced significantly, a profit of RMB22 million was recorded for the principal operations (a loss of RMB1,603 billion in the corresponding period of last year).

Technology, Research and Development

During the Reporting Period, on the regimes of technology, research and development, the Company obtained impressive results:

The Company was granted an aggregate of 48 refrigerators’ patents and 71 air-conditioners’ patents.

Among the 71 air-conditioners’ patents granted to the Company during the Reporting Period, the VC series was awarded the IF industrial design award and the VB series was awarded the industrial design award.

On the research and development of refrigerator products, the Company is in a leading position among its domestic counterparts in the fields of core energy- saving and freshness-retention technologies and measurement management. During the Reporting Period, Rongsheng refrigerator won the “Energy Saving Grand Prix” again, which was granted by the United Nations Development Programme, the Global Environmental Fund and the State Administration of Environmental Protection. The Company’s BCD-215YMB refrigerator with the brand of “Ronsheng” was awarded the “Best Selling Refrigerator” award at the “2006 Seminar on the Development Trend of Refrigerator” jointly held by China Household Electric Appliance Research Institute (中國家用電器研究院 ) and China Electronic Chamber of Commerce (中國電子商會 ) etc. The measurement management system adopted by the Company was recognized by authoritative organizations and attained the highest 3A rating.

On the research and development of refrigerator products, during the Reporting Period, the Company’s “VC” cabinet-type airconditioner won the “IF China Design Award” for its novelty and fashionable appearance, which is the only award winning product in the PRC air-conditioning industry, reflecting that the leading position of the Company in designing air-conditioners in China has been continuously maintained.

Outlook

On 13 December 2006, the equity transfer procedures of transferring the legal person shares in the Company held by Guangdong Greencool Enterprise Development Company Limited to Qingdao Hisense Air-conditioning Company Limited (“Hisense AirConditioner”) was completed and became the single largest shareholder of the Company. With Hisense formally becoming the shareholder of the Company, the confidence and expectation on the future prospects of the Company from different sectors of the community improved significantly, the co-operation between the Company and banks, distributors and suppliers fully resumed. The major adverse factors restraining the development of the Company had basically been eliminated, which lays strong foundation for future expansion and improvement of competitiveness of the Company.

In 2007, the Company will adhere to the operating guidelines of “forging competitive edge of products, improving cash flow, enhancing management efficiency, strengthening talent training and capitalizing on the effectiveness of integration”, so as to make new breakthrough in the development of the Company.

• (1) The Company will, as in the past, adhere to its principle of “leading in technology, products with quality”, and increase investments in technological research and development, particularly in the global frontline technology of household electrical appliance and refrigeration industry. The Company will be able to maintain and create a leading advantage in technology through continuous technological research and the introduction of critical technology. Also, the Company will place an emphasis on upgrading its products and cultivating its market reputation as a technologically advanced company based on products quality. Further, the Company will maintain the leading position of its products in the current and future markets, so as to maintain the continuous development momentum and profitability of the Company.

• (2) The Company will explore the intrinsic value of the brandnames, Kelon and Rongsheng, enhance the image of Kelon and Ronsheng, increase brand building and promotion in 2007 to make up for the adverse impacts on the brandnames due to historical reasons in prior periods and improve the reputation and, recognition of the Company’s brandname through reshaping the image of Rongsheng and promoting the brandname of Kelon to support the healthy development of the Company.

• (3) In the domestic market, the Company will, on the one hand, continue to focus on direct sales channels represented by large chain stores, and co-operate closely with manufacturers and strengthen the retail network; and on the other hand, continue to rely on and further develop the traditional agency channel, strengthen the development of sales channels and open up development of third-tier and fourth-tier markets to accelerate the expansion of its market size.

• (4) On the overseas market, the Company will adhere to the parallel development of its self-owned brands and OEM brands. On one hand, the Company will continue and consolidate the advantage of co-operating with international leading brands and major clients, establish long-term strategic partnership with them and enlarge the export scale rapidly; and on the other hand, the Company will leverage on other advantageous resources in well established markets, devote to the development of local markets, develop more diversified customers, expand vigorously the export of self-owned brands , enhance international recognition of the Company’s self-owned brand products and improve the profitability of export sales on the existing basis.

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• (5) The Company will adhere to the concept of “health accounts more than speed and profit accounts more than scale” in the implementation of a prudent financial policy, and make all decisions in a prudent manner. The Company will adhere to the strategy of steady development. In 2007, the Company will make an effort to tap its assets and various idle funds, optimize the coordination of supply, production and sales, adjust and reform its workflow, and improve the Company’s operating performance by accelerating cash flow and enhancing the operational profitability of the Company.

• (6) While reinforcing the training of its own human resources , the Company will coordinate and plan to attract external talents, especially the highly skilled technical personnel, so as to meet the needs of internationalization and continuous development of the Company.

Each of the above guidelines is addressed from the perspectives of exploring the Company’s own internal potentials, operating and managing the Company with a solid and sound management system, and focusing on the Company’s long-term sustainable development. As such, a brand new operating model of Kelon will be established to develop and cultivate its core competitiveness, which will surely play a very important role in enhancing the Company’s operating performance and strengthening its competitive edges which is solid and healthy with notable technological advantage, excellent operating performance, and long-term growth potential.

Looking forward, the Company sees both opportunities and challenges. The Company’s management strongly believes that the Company has gone through the most difficult phrase and it is in a way to continuous healthy development. With the continuous concern and support of its shareholders as in the past and the concerted efforts of all its staff, the Company will fulfill its operational goals and build a solid foundation for its future development and strive towards becoming the “No.1 Home Appliances Brandname in the PRC”.

FINAL DIVIDENDS

The Group recorded a profit of RMB48,478,000 for the year ended 2006. The Board resolved not to pay any dividend for the year ended 2006 and not to capitalize any reserve funds (no dividend was paid by the Group for the year ended 31 December 2005).

LIQUIDITY AND SOURCES OF FUNDS

Net cash generated from operating activities was approximately RMB767,913,000 (2005: net cash used in of approximately RMB817,936,000) for the year ended 31 December 2006.

As at 31 December 2006, the Company had bank deposits and cash (including pledged bank balances) amounting to approximately RMB390,504,000 (2005: RMB287,098,000), and bank loans amounting to approximately RMB1,556,702,000 (2005: RMB2,160,523,000).

Total capital expenditures for the year ended 2006 amounted to approximately RMB142,652,000 (2005: RMB336,836,000).

HUMAN RESOURCES AND EMPLOYEES’ REMUNERATION

As at 31 December 2006, the Group had approximately 11,359 employees, mainly comprising 1,260 technical staff, 4,609 sales representatives, 421 financial staff, 461 administrative staff and 3,981 production staff. Three of the Company’s employees hold a doctorate degree while 106 and 2,326 Company’s employees hold a master degree and a bachelor degree, respectively. There were 421 employees with an official title of middle rank or above. In addition, the Company currently has 56 resigned or retired staff. Staff costs for the year ended 31 December 2006 amounted to approximately RMB538,066,000 (2005: RMB587,296,000).

CHARGES ON THE GROUP’S FIXED ASSETS

As at 31 December 2006, the Group’s property, plant and equipment (including self-used leasehold land) of approximately RMB821,523,000 (2005: RMB999,795,000) were pledged as security for the Group’s bank borrowings.

EXPOSURE TO EXCHANGE RATE FLUCTUATION

Since substantially the Group’s purchase and overseas sales in the Reporting Period were denominated in foreign currency, the Group had some extent of 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 26 April 2007, 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 RMB 4,212,000.

MATERIAL LITIGATION

Up to 26 April 2007, the Company and its subsidiaries were involved in 25 litigations which, in each case involved an amount over RMB 10 million, the total amount involved was RMB1,044,168,100.

AUDIT COMMITTEE

The sixth audit committee of the Company has reviewed the final result announcement and report for the year ended 31 December 2006.

CAPITAL EXPENDITURE

The Group expects that the capital expenditure for 2007 to be approximately RMB 155,223,600.

11

TRUST DEPOSITS

As at 31 December 2006, 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 2006, the Group had long-term bank borrowings of RMB nil (2005: RMB nil) and cash and cash equivalents of RMB142,247,000 (2005: RMB 184,284,000), of which over 74% are denominated in Renminbi.

RATIO OF TOTAL ASSETS TO TOTAL LIABILITIES

As at 31 December 2006, the ratio of total assets to total liabilities of the Group was 86.30%.

INDEPENDENCE OF THE INDEPENDENT NON-EXECUTIVE DIRECTORS

The sixth 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, and consider that all the independent non-executive Directors of the sixth 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.

The directors and supervisors of the sixth Board of the Company have not directly or indirectly held any material interests in any material contracts.

INDEPENDENT NON-EXECUTIVE DIRECTORS’ REVIEWS OF CONTINUING CONNECTED TRANSACTIONS

The independent non-executive Directors of the sixth Board have reviewed the continuing connected transactions of the Company for the year 2006 ended 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.

MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS

The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issurers (“Model Code”) as set out in the Listing Rules as its code for securities transaction by Directors. After specific enquiries made to the Directors of the sixth Board, Mr. Tang Ye Guo, Mr. Yang Yun Duo, Mr. Wang Shi Lei, Ms. Yu Shu Min, Mr. Lin Lan, Mr. Xiao Jian Lin, Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren and former directors Mr. Su Yu Tao and Mr. Zhang Ming confirmed that they have complied with the Model Code during their terms of office.

SHARE CAPITAL STRUCTURE

As at 31 December 2006, 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 2006, the Company has a total of 50,137 shareholders in total, of which the top ten/substantial shareholders were as follows:

Total number of Shareholders 50137

Shareholdings of the top ten shareholders

Shareholdings of the top ten shareholders
	Percentage of	Percentage of
	the total issued	the relevant class		No. of
	share capital	of issued shares	No. of	Pledged or
Name of Shareholder	of the Company	of the Company	Shares Held	Frozen Shares
Qingdao Hisense Air-conditioning	26.43%	77.60%	262,212,194	0
Company Limited
Shunde Economic Consultancy Company	6.92%	20.32%	68,666,667	0
Shenyin Wanguo Securities (H.K.) Limited	5.53%	11.93%	54,851,000	Unknown
The Hongkong and Shanghai Banking	5.17%	11.16%	51,295,925	Unknown
Corporation Limited
Bank of China (Hong Kong) Limited	4.94%	10.66%	48,981,000	Unknown
Guotai Junan Securities (Hong Kong) Limited	4.12%	8.90%	40,920,000	Unknown
HSBC Nominees (Hong Kong) Limited	4.04%	8.73%	40,106,904	Unknown
First Shanghai Securities Limited	2.61%	5.63%	25,868,000	Unknown
Hang Seng Securities Limited	2.04%	4.40%	20,235,000	Unknown
Standard Chartered Bank (HK) Ltd.	1.07%	2.31%	10,614,500	Unknown

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(2)

Notes: As at 31 December 2006, 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 “SFO”), the above top eight shareholders among the top 10 shareholders maintained short positions in the issued share capital of the Company:

Shareholdings of top ten tradable Shareholders

Shareholdings of top ten tradable Shareholders
	Number of listed
Name of Shareholder	Shares Held	Class of Shares
Shenyin Wanguo Securities (H.K.) Limited	54,851,000	Overseas listed foreign shares
The Hongkong and Shanghai Banking Corporation Limited	51,295,925	Overseas listed foreign shares
Bank of China (Hong Kong) Limited	48,981,000	Overseas listed foreign shares
Guotai Junan Securities (Hong Kong) Limited	40,920,000	Overseas listed foreign shares
HSBC Nominees (Hong Kong) Limited	40,106,904	Overseas listed foreign shares
First Shanghai Securities Limited	25,868,000	Overseas listed foreign shares
Hang Seng Securities Limited	20,235,000	Overseas listed foreign shares
Standard Chartered Bank (HK) Ltd.	10,614,500	Overseas listed foreign shares
BOCI Securities Limited	8,034,000	Overseas listed foreign shares
Sun Hung Kai Investment Services Limited	7,859,000	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.

• Brief introduction about the controlling shareholder of the Company

• (1) Qingdao Hisense Air-Conditioning Co., Ltd., the single largest shareholder of the Company, was incorporated on 17 November 1995 with a registered capital of RMB 674.79 million. Its registered address is Changsha Road, Hi-tech Zone, Qingdao, the PRC and the legal representative is Mr. Tang Ye Guo. It is primarily engaged in researching and manufacturing of air-conditioners, injection moulds and provision of after-sale repairing services for its products.

• (2) Relationship between the Company and its Beneficial Controlling Shareholds

Qingdao State-owned Assets Supervision and Adminstration Commission 100% Hisense Group Company Limited 55.58% Qingdao Hisense Electric Holdings Company Limited 93% Qingdao Hisense Air-conditioning Company Limted 26.43% Gungdong Kelon Electrical Holdings Company Limited

The actual beneficial controller of the Company is Qingdao State-owned Assets Supervision and Administration commission.

• (3) The transfer procedure of 26.43% legal person shares of the Company held by Guangdong Greencool was completed on 13 December 2006. Following the share transfer, Hisense Air-Conditioning held 262,212,194 shares of the Company, representing 26.43% of total issued shares of the Company.

As at 29 March 2007, the share reform plan of the Company is implemented, the percentage of shares held by Hisense Air-Conditioning to shares of the Company changed to 24.08% accordingly.

13

INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVES IN THE SHARES

As at 31 December 2006, none of the sixth Board, supervisors and the chief executive of the Company and any of their associates held any interests or short positions in any shares, underlying shares and debentures of the Company and its associated corporations, as recorded in the register maintained by the Company pursuant to Section 352 of the SFO.

MAJOR CUSTOMERS AND SUPPLIERS

During the year ended 31 December 2006, the aggregate amount of the Company’s purchases from the top five suppliers was RMB 747,000,000, representing 15.14% of total purchase amount of the Company for the year and the aggregate sales amount of the top five customers was RMB 2,140,000,000, representing 32.60% of total sales amount of the Company for the year. Among them the largest customer is Hisense Marketing, which accounted for 23.96% of the Company’s total sales. As at 31 December 2006, none of the Directors, associates of the Directors or shareholders of the Company, who to the knowledge of the Company hold 5% or more of the shares in the Company, have any interest in the above suppliers or customers.

PURCHASE, SALE OR REDEMPTION OF SHARES

During the year ended 31 December 2006, neither the company nor any of its subsidiaries has purchased, sold, redeemed any of the Company’s listed shares.

CORPORATE GOVERNANCE

1. There were only two independent executive directors of the Company during the period from 23 January 2006 to 26 June 2006 due to the resignation of Mr. Chen Pei Cheong from his directorship, which also results that there remained only two members of audit committee of the fifth Board during such period. The Company was unable to comply with provision A.3.2 of the Code on Corporate Goverance Practices (the “Code”) set out in Appendix 14 of the Listing Rules during such period. With the election and establishment of the sixth Board, the Company has corrected such deviation event.

2. The Company was unable to comply with provision A.5.3 of the Code during the period from 1 January 2006 to 26 June 2006 as Mr. Gu Chu Jun, Mr. Yan You Song and Mr. Zhang Hong were subject to enforcement measures adopted by the PRC police department for alleged economic crimes, and were not able to discharge the directors’ duties. With the election and the establishment of the sixth Board, the Company has corrected such deviation event.

3. Save as disclosed above, to the best knowledge 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 until further notice.

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

Hong Kong, 26 April 2007

Shunde District, Foshan City, Guangdong, the PRC, 26 April 2007

As at the date of this announcement, the Company’s executive directors are Mr. Tang Ye Guo, Mr. Yang Yun Duo, Mr. Wang Shi Lei, Ms. Yu Shu Min, Mr. Xiao Jian Lin and Mr. Lin Lan; 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 (The financial information is calculated in accordance with the PRC GAAP).

I. CHANGES IN SHAREHOLDERS’ INTEREST DURING THE REPORTING PERIOD AND DESCRIPTION

In RMB

						In RMB
					Conversion
					difference on
					foreign	Total
	Share	Capital	Surplus	Undistributed	exchange	shareholders’
Item	Capital	reserve	reserve	profits	returns	interests
At the beginning of the period	992,006,563	1,581,099,649	114,580,901	(3,800,717,444)	4,954,275	(1,108,076,056)
Increase for the period	–	27,002,478	–	24,120,753	10,024,118	61,147,349
Decrease for the period	–	–	–	–	–	–
At the end of the period	992,006,563	1,608,102,127	114,580,901	(3,776,596,691)	14,978,393	(1,046,928,707)

Reasons for changes: Of the increase of capital reserve for the period, the increase of provision for equity investment for the year amounting to RMB 11,009,933 represents the increase of the capital reserve of the subsidiaries of the Company which is the share attributable to the Company and the settlement of debts of RMB15,992,545. The increase of undistributed profit for the period of RMB 24,120,753 represents the net profit for the period. The increase of exchange difference on foreign currency translation of RMB 10,024,118 represents the fluctuation of exchange rates.

14

II. INFORMATION ABOUT DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

1. Information about current directors, supervisors and senior management (since 26 June 2006)

The following amounts include salaries paid to the individuals from the period from 1 January 2006 to the dates of appointment as directors, supervisor and senior management:

Name Position Sex Age Appointment period Tang Ye Guo Director, Chairman Male 44 2006.6.26-2009.6.26 Yang Yun Duo Director, Vice Chairman Male 51 2007.1.4-2009.6.26 Wang Shi Lei President, Director Male 39 2007.1.4-2009.6.26 Yu Shu Min Director Female 56 2006.6.26-2009.6.26 Lin Lan Director Male 49 2006.6.26-2009.6.26 Xiao Jian Lin Director Male 39 2006.6.26-2009.6.26 Zhang Sheng Ping Independent Non- Male 42 2006.6.26-2009.6.26 Executive Director Lu Qing Independent Non- Male 40 2006.6.26-2009.6.26 Executive Director Cheung Yui Kai, Warren Independent Non- Male 39 2006.6.26-2009.6.26 Executive Director Guo Qing Cun Supervisor Male 53 2006.12.5-2009.6.26 Zhou Zhao Li Supervisor Male 38 2006.12.5-2009.6.26 Liu Zhan Cheng Supervisor Male 29 2006.6.23-2009.6.26 Su Yu Tao Vice President Male 41 2007.3.23 to date Zhang Ming Vice President Male 36 2006.6.26 to date Wang Jiu Cun Vice President Female 53 2006.6.26 to date Jia Shao Qian Vice President Male 35 2007.1.30 to date Liu Chun Xin Vice President Female 38 2006.11.17 to date Dai Zu Mian Company Secretary Male 30 2006.9.7 to date Zhong Liang Secretary to the Board Male 29 2006.9.7 to date Total	No. of shares held at the beginning of the year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 13,800 0 0 0 0 13,800	No. of shares held at the end of the year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 13,800 0 0 0 0 13,800	Total Whether remuneration received in received from shareholder’s the Company entities or during the other Reporting related Period companies (RMB thousand) 2,145.2 No 0 No 0 No 0 Yes 960 Yes 1,126.7 Yes 25.9 No 25.9 No 100 No 0 Yes 0 Yes 235.3 No 1,111.7 No 246.4 No 451.1 No 0 No 81.8 No 169.9 No 90.9 No 6,770.8

Note: The exchange rate of Hong Kong dollars against RMB is 1:1.

REPORT OF THE DIRECTORS

(1) Investments of the Company during the Reporting Period

1. During the Reporting Period, the Company did not raise any capital and no capital raised during any prior Reporting Period were used during the Reporting Period.

2. 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.

15

OTHER DISCLOSEABLE MATTERS MATERIAL MATTERS

I. Material litigations and arbitrations of the Company 1. Background information on material litigations involving target claim amount over RMB10,000,000

(in RMB)

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Litigation involving Greencool Companies and the specified third parties
Target
No. Name of case Counterparty Claim Amount Background information of the case
1 Litigation initiated by Kelon Guangdong Greencool, 18,630,000 Under the authorisation by Gu Chu Jun, on 20 February
Air-Conditioner against Gu Chu Jun and 2005, Kelon Air-conditioner purchased 14.1 tons of
Guangdong Greencool, Jiangxi Kesheng refrigerants from Jiangxi Kesheng at a price of
Gu Chu Jun and Jiangxi RMB18,630,000, However, Kelon Air-conditioner has not
Kesheng Industry and Trading received the goods under the contract. The plaintiff
Company Limited considered that Guangdong Greencool has taken benefits
(“Jiangxi Kesheng”) fromits role as the substantial shareholder to embezzle
the capital of the plaintiff by making use the name of
Jiangxi Kesheng so as to avoid the regulatory restrictions on
related parties’ transactions.
2 Litigation initiated by Jiangxi Guangdong Greencool, 81,600,000 On 20 January 2005, under the direction of Gu Chu Jun
Kelon Industrial Development Gu Chu Jun, and Guangdong Greencool, Tianjin Greencool and Jinan
Co., Ltd. (“Jiangxi Kelon”) Tianjin Greencool, San Ai Fu entered into a sale and purchase contract to
against Guangdong Greencool, Hainan Greencool and sell 700 tons of refrigerant to Jinan San Ai Fu, of which
Gu Chu Jun, Greencool Jinan San Ai Fu 600 tons were sold by Jinan San Ai Fu to the plaintiff.
Refrigerant (China) Company The plaintiff alleged that the five defendants had
Limited (“Tianjin Greencool”), embezzled its funds by fraud.
Hainan Greencool
Environmental Protection
Engineering Co., Ltd.
(“Hainan Greencool”) and
Jinan San Ai Fu Petrochemical
Co., Ltd. (“Jinan San Ai Fu”)
3 Litigation initiated by Shenzhen Guangdong Greencool, 89,600,300 The plaintiff entered into a sale and purchase contract
Kelon Procurement Co., Ltd Greencool Shenzhen with Tianjin Lixin to purchase 12,700 tons of steel. The
against Guangdong Greencool, Procurement Centre and plaintiff made the payments by two instalments to
Tianjin Lixin Commercial Gu Chu Jun Tianjin Lixin on 26 April 2005 and 27 April 2005,
Trading Development Company respectively, and Tianjin Lixin transferred the funds
Limited (“Tianjin Lixin”), collected to Greencool Shenzhen Procurement Centre.
Greencool Procurement Centre The plaintiff has not received any steel supply from
(Shenzhen) Co., Ltd. Tianjin Lixin. The plaintiff alleged that the four
(“Greencool Shenzhen defendants had embezzled its funds by fraud.
Procurement Centre”) and
Gu Chu Jun
4 Litigation initiated by Guangdong Greencool, 97,412,200 The plaintiff entered into a sale and purchase contract
Guangdong Kelon Fittings Co., Tianjin Xiangrun, with Tianjin Xiangrun to purchase 8,820 tons of steel
Ltd against Guangdong Greencool Shenzhen from Tianjin Xiangrun. The plaintiff made the
Greencool, Tianjin Xiangrun, Procurement Centre and payments by instalments to Tianjin Xiangrun on 26, 27
Greencool Shenzhen Gu Chu Jun and 28 April 2005, respectively, but it has not received
Procurement Centre and any steel supply from Tianjin Xiangrun. The plaintiff
Gu Chu Jun alleged that the four defendants had embezzled its funds
by fraud.
5 Litigation initiated by Kelon Guangdong Greencool, 40,800,000 The plaintiff entered into a sale and purchase contract
Air-Conditioner against Jinan San Ai Fu, with Jinan San Ai Fu to purchase 300 tons of
Guangdong Greencool, Tianjin Greencool, environment-friendly refrigerant, and paid a price
Jinan San Ai Fu, Hainan Greencool and of RMB40,800,000 on 1 April 2005, but Jinan San Ai Fu
Tianjin Greencool, Gu Chu Jun failed to deliver the goods. The plaintiff alleged that
Hainan Greencool and the five defendants had embezzled its funds by fraud.
Gu Chu Jun
6 Litigation initiated by Jiangxi Guangdong Greencool and 90,000,000 The Company alleged that Aike Enterprises (Tianjin)
Kelon against Guangdong others Co., Ltd. embezzled its funds and Guangdong Greencool
Greencool and the others have joint liability. The first trial was conducted
on 24 July 2006.
7 Litigation initiated by Jiangxi Guangdong Greencool and 75,000,000 The Company alleged that Tianjin Greencool embezzled
Kelon against Guangdong others its funds and Guangdong Greencool and the others have
Greencool joint liability. The first trial was conducted on 24 July 2006.
----- End of picture text -----

16

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8 Litigation initiated by Guangdong Greencool, 40,000,000 During the course of negotiation conducted in early 2004
Yangzhou Kelon against Gu Chu Jun and by the Company with the management committee of
Guangdong Greencool, Yangzhou Greencool Yangzhou Economic Development Zone (hereinafter
Gu Chu Jun and referred to as the “Zone”) with respect to the production
Yangzhou Greencool Venture of “Twin Door Freezers” (also named “Huge Freezers”)
Capital Company Limited in the Zone, Gu Chu Jun deliberately misrepresented
(“Yangzhou Greencool”) the relationship between the Company and Greencool to the
management committee of the Zonefor the purpose of attracting
the large-sized investment project. As such, the finance bureau of
the Zone granted the “Development Encouragement Fund”
amounting to RMB 40 million that should have been paid to
Yangzhou Kelon as an incentive subsidy on a “levy first and
refund later” basis, to Yangzhou Greencool, a private company
owned by Gu Chu Jun.
9 Litigation initiated by Jiangxi Guangdong Greencool, 13,000,000 For the purpose of embezzlement of Jiangxi Kelon’s
Kelon against Guangdong Gu Chu Jun, fund, Gu Chu Jun and certain Greencool companies made
Greencool, Gu Chu Jun, Jiangxi Keda and the Plaintiff transfer a total sum of RMB13 million to
Jiangxi Keda Plastic Greencool Procurement Jiangxi Keda on 20 May 2005 and thereafter made
Technology Company Jiangxi Keda transfer such fund immediately to
Limited (“Jiangxi Keda”) and Greencool Procurement. The four defendants failed to
Greencool Procurement return such fund to the Plaintiff as at the date hereof.
(Shenzhen) Co., Ltd. The transfer of such fund from the Plaintiff to Greencool
(“Greencool Procurement”) Procurement was not substantiated by any genuine transaction
and such transfer of fund is an encroachment of the Plaintiff’s
fund by the controlling shareholder and its associated companies
through Jiangxi Keda.
10 Litigation initiated by the Guangdong Greencool, 29,843,700 Under the manipulation of Guangdong Greencool and Gu
Company’s Hubei Branch Gu Chu Jun and Chu Jun, during the period from 15 December 2004 to 31
against Guangdong Greencool, Wuhan Changrong December 2004, Wuhan Changrong took delivery of a
Gu Chu Jun and large number of air-conditioners and other goods from
Wuhan Changrong Electrical the Plaintiff without making any payment. The defaulted
Appliance Company Limited payment of RMB29,843,700 has not yet been settled. The
(“Wuhan Changrong”) said connected transaction was conducted without going
through normal internal approval procedures of Kelon
Electrical and the Plaintiff and no announcement has
been issued on it. Therefore it is a sheer collusion between the
controlling shareholders, beneficial controllers and Wuhan
Changrong against the interest of the Plaintiff.
11 Litigation initiated by Guangdong Greencool, 28,600,000 Under the manipulation of Guangdong Greencool and Gu
Jiangxi Kelon against Zhuhai Longjia and Chu Jun, Jiangxi Kelon transferred RMB11 million to the
Guangdong Greencool, Gu Chu Jun bank account of Zhuhai Longjia on 24 December 2003
Zhuhai Longjia and further transferred RMB17.6 million on 15
Refrigerant Co., Ltd. December, 2004. Such transfers of funds were not
(“Zhuhai Longjia”) and supported by any transactions and were not recorded in
Gu Chu Jun the Plaintiff’s accounts. Therefore, it constitutes the
embezzlement of the Plaintiff’s funds by its controlling
shareholder and beneficial controller.
12 Litigation initiated by Guangdong Greencool, 21,400,000 Under the manipulation of Guangdong Greencool and Gu
Jiangxi Kelon against Gu Chu Jun and Chu Jun, Jiangxi Kelon transferred RMB9 million and
Guangdong Greencool, Zhuhai Defa RMB12.40 million to the bank account of Zhuhai Defa
Gu Chu Jun and on 24 December 2003 and on 15 December 2004
Zhuhai Defa Air-conditioner respectively. Such transfers of funds were not supported
Fittings Company Limited by any transactions and were not recorded in the
(“Zhuhai Defa”) Plaintiff’s accounts. Therefore, it constitutes the embezzlement
of the Plaintiff’s funds by its controlling shareholder and
beneficial controller.
13 Litigation initiated by Guangdong Greencool, 20,000,000 Under the manipulation of Guangdong Greencool and Gu
Jiangxi Kelon against Gu Chu Jun and Chu Jun, Jiangxi Kelon transferred RMB20 million to the
Guangdong Greencool, Wuhan Changrong bank account of Wuhan Changrong on 23 December
Gu Chu Jun and 2003. Such transfer of funds was not supported by any
Wuhan Changrong transactions and was not recorded in the Plaintiff’s accounts.
Therefore, it constitutes the embezzlement of the Plaintiff’s
funds by the controlling shareholder and the beneficial
controller.
14 Litigation initiated by the Guangdong Greencool, 18,694,800 Under the manipulation of Guangdong Greencool and Gu
Company and its Anhui Gu Chu Jun and Chu Jun, Hefei Weixi took delivery of a large number of
Branch against Guangdong Hefei Weixi air-conditioners and refrigerators from the Plaintiffs
Greencool, Gu Chu Jun and without making any payment during the period from 31
Hefei Weixi Home December 2003 to August 2005, and the defaulted
Appliances Co., Ltd. payments of RMB16,075,400 and RMB2,619,400 due to
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(“Hefei Weixi”) Anhui Branch and the Company, respectively, have not yet been
settled. The connected transaction above was conducted without
going through normal internal approval procedures of Kelon
Electrical and no announcement has been issued on it. Therefore,
it is a sheer collusion between the controlling shareholder and
beneficial controller together with their associated companies
against the interest of the Plaintiffs.
15 Litigation initiated by Kelon Greencool, 12,289,400 Under the manipulation of Guangdong Greencool and Gu
Air-Conditioner against Gu Chu Jun and Chu Jun, Kelon Air-Conditioner entered into a purchase
Guangdong Greencool, Hainan Greencool and sale agreement with Hainan Greencool on 10 March
Gu Chu Jun and 2005, under which Kelon Air-Conditioner purchased 100
Hainan Greencool tons of Greencool refrigerant at a unit price of
RMB135,000 per ton. After of the above agreement, the
Plaintiff made payment of RMB13,437,900 to Hainan
Greencool for the refrigerant under the direction of Guangdong
Greencool and Gu Chu Jun. However, according to the
subsequent investigation and assessment conducted by the
Paintiff, the price of the refrigerant quoted by Hainan Greencool
was about 10 times the normal market price and the refrigerant
under the agreement was only value at RMB1,148,500. In other
words, Hainan Greencool illegally embezzled the funds of the
plaintiff in the amount of RMB12,289,400 by way of connected
transaction. The above connected transaction was not subject to
the normal approval procedures by the Plaintiff and was not
disclosed to the public. Therefore, it constitutes an embezzlement
of the Plaintiff’s funds by the controlling shareholder and its
connected companies.
16 Litigation initiated by the Guangdong Greencool, 13,754,600 During the course of controlling and operating the
Company against Zhuhai Greencool, Plaintiff, Guangdong Greencool and Gu Chu Jun forcibly
Guangdong Greencool, Beijing Greencool, integrated the businesses of Greencool Companies that of
Zhuhai Greencool Hainan Greencool and the Company, and took control of the manpower,
Refrigeration and Gu Chu Jun financial resources and materials for promoting the
Engineering Co., Limited businesses of Greencool Group at Company’s costs. Given
(“Zhuhai Greencool”), that the “Greencool Authorized Project Agent” did not
Beijing Greencool make payment to Greencool Companies, Guangdong
Refrigerant Replacement Greencool manipulated the Company to settle the above-
Engineering Co., Limited mentioned franchise fees and the payment for purchasing
(“Beijing Greencool”), refrigerants on behalf of the “Greencool Authorized
Hainan Greencool and Project Agent”. With respect to such payments, the
Gu Chu Jun Company was manipulated to pay RMB35,175,000 to Zhuhai
Greencool, RMB3,960,000 to Beijing Greencool and
RMB2,673,000 to Hainan Greencool. So far, there is an
outstanding unrecovered amount of RMB13,754,600 paid by the
Company to the companies under the name of Greencool under
manipulation. The above actions conducted by the Defendants
were neither approved by the Board and the general meeting
under the laws and the articles of association of the Company,
nor disclosed to the public.
17 Litigation initiated by Kelon Guangdong Greencool, 32,000,000 From 31 March 2003 to 14 April 2003, under the
Air-Conditioner against Gu Chu Jun and manipulation of Gu Chu Jun and his Greencool
Guangdong Greencool, Shenzhen Greencool Companies name of Greencool, the cumulative payment
Gu Chu Jun and Technology transferred from Kelon Air-conditioning to Shenzhen
Greencool Technology Greencool Technology amounted to RMB 32 million, and
Development (Shenzhen) no repayment has been made to date. As such transfer of
Company Limited funds was not supported by any transactions, the act of
(“Shenzhen Greencool the controlling shareholder and its associated companies
Technology”) constitutes an embezzlement of the listed company’s funds
18 Litigation initiated by Kelon Guangdong Greencool, 33,000,000 From 6 May 2003 to 23 June 2003, under the
Air-Conditioner against Gu Chu Jun and manipulation of Guangdong Greencool and Gu Chu Jun,
Guangdong Greencool, Shenzhen Greencool the total amount transferred from Kelon Air-
Gu Chu Jun and Greencool Environmental Conditioner to Shenzhen Greencool Environmental
Technology Environmental was accumulated to RMB 33 million, and no repayment has
Protection Engineering been made to date. As the funds transferred from the
(Shenzhen) Co., Ltd. Plaintiff to Shenzhen Greencool Environmental were not
(“Shenzhen Greencool based on any transactions, the act of the controlling
Environmental”) shareholder and its associated companies constitutes an
embezzlement of the listed company’s funds.
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19 Litigation initiated by Guangdong Greencool, 35,000,000 In course of investment in Yangzhou Kelon, Gu Chu Jun
Yangzhou Kelon against Yangzhou Greencool and declared repeatedly to the Management Committee of the
Guangdong Greencool, Gu Chu Jun Economic Development Zone that Kelon was a
Yangzhou Greencool subsidiary of Greencool and Greencool was the owner of
Venture Capital Company Kelon during the negotiation and purchase of land. Thus,
Limited (“Yangzhou the Finance Bureau of Economic Development Zone was
Greencool”) and misled to deposit the incentive fund of RMB35 million to
Gu Chu Jun the bank account of Yangzhou Greencool, an associated company
of Guangdong Greencool (which was a company solely owned by
Gu Chu Jun), instead of Yangzhou Kelon.
Other litigations
Target
No. Name of case Counterparty Claim Amount Background information of the case
1 Litigation initiated by China China Construction Bank 69,550,000 China Construction Bank Corporation - Nanchang
Construction Bank Corporation – Nanchang Changbei Branch applied to the court for pre-trial security
Corporation – Nanchang Changbei Branch order on the basis of disputes over the loan contract and
Changbei Branch against guarantee contract with target calim amount of
Jiangxi Kelon and the RMB140 million. On 5 August 2005, the High Court of
Company in relation to the Jiangxi Province ordered to freeze Jiangxi Kelon’s 80%
loan contract and guarantee shareholdings in Shangqiu Kelon. During the freezing
contract period, no such shareholdings shall be pledged or transferred
without the court’s prior consent. With various negotiations
between the parties, so far, Jiangxi Kelon has repaid the Plaintiff
an amount of RMB70.45 million.
2 Litigation against the Company Hangxiao Ganggou 19,853,000 The plaintiff alleged that it had undertaken the
by Zhejiang Hangxiao Ganggou construction works of the Company’s plain warehouse
Holdings Company Limited factories No. 1 and No. 2 pursuant to a construction
(“Hangxiao Ganggou”) contract with the Company and the Company defaulted in
payment of RMB1,193,000 of construction fees. The
plaintiff filed proceeding against the Company for the payment
of RMB1,193,000 in construction fees and RMB17,660,000 in
default penalties and the cost of legal proceedings. The
proceedings was resumed in March 2007.
3 Litigation against Jiangxi Henan Province Kaifeng 27,160,000 The plaintiff applied for a pre-trial security order from
Kelon and Kaifeng Economic Technology the court to attach properties worth of RMB18,000,000
Kelon Air-Conditioner Development (group) of Jiangxi Kelon and Kaifeng Kelon. The equipments,
Co., Ltd. (“Kaifeng Kelon”) Company factory and the land use rights of Kaifeng Kelon were
by Kaifeng Economic attached.
Technology Development
(group) Company in relation
to joint venture contract
4 Litigation initiated by Can International. inc./ 13,750,719.19 The plaintiff alleged that it entered into a contract
CAN/MC Appliance MC Appliance USD with the defendant on 29 December 2003 to purchase
Corporation against the Corporation 108,108 units of MCBR1000W refrigerators, but the
Company and Kelon defendant failed to perform its obligations as set out in
International Incorporation the contract on a timely basis and that the goods delivered were
defective.
5 Litigation initiated by Jilin Jilin Commercial Bank 18,057,900 The plaintiff claimed for the loan principal and
Commercial Bank Jiangbei Jiangbei Branch related interest.
Branch against Jilin Kelon
Electric Co.,Ltd
(“Jilin Kelon”) and the
Company
6 Litigation initiated by the Hangxiao Ganggou 11,547,000 The Company alleged that Hangxiao Ganggou failed to
Company against complete the construction works according to the term of the
Zhejiang Hangxiao contract and has to pay default compensation.
Ganggou Holdings Company
Limited
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1. General status of the litigations

As at 26 April 2007, the Company and its subsidiaries were involved in 65 litigations with a total claim amount of RMB1,080,595,200 and the use rights of a land of 629,003.22 square metres.

Among the aforementioned litigations involving the Company and its subsidiaries, the Company and its subsidiaries acted as plaintiffs in 28 litigations with a total claim amount of RMB 819,090,800 and as defendants in 37 litigations involving an amount of RMB261,504,400 and the use rights of a land of 629,003.22 square metres.

Among the litigations involving the Company and its subsidiaries, save for the 25 material litigations and arbitrations as disclosed above involving an amount exceeding RMB10,000,000 each (with a total amount of RMB1,044,168,100), the remaining 40 litigations with target claim amount less than RMB10,000,000 each (with a total amount of RMB36,427,100 and the use rights of a land of 629,003.22 square metres.).

II. Particulars on the disposal of assets, takeover and merger during the Reporting Period

1. 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.

1. Disposal of assets

Unit: RMB ten thousand

				Net profit
				atttibutable to
				the disposed
				assets from the				Completion of	Completion of
				beginning of		Connected		transfer of	transfer of
		Date of	Price of	the year to the	Gain or loss	transaction	Basis of	title of relevant	relevant
Transaction counterpart	Disposed assets	disposal	disposal	date of disposal	on disposal	or not	pricing	assets	indebtedness
佛山市汽運輸有限公司	Transportation Equipment	October 2006	209.56	–	30.99	No	Tender	Yes	Yes
佛山市名勝投資有限公司Land		November 2006	12,720.73		3,636.04	No	Tender	No	Yes
Personal	House and construction	October 2006	995.14		271.79	No	Tender	No	Yes
Personal	House and construction	November 2006	1,386.13	–	572.03	No	Tender	No	Yes
Personal	House and construction	December 2006	2,422.89	–	627.15	No	Tender	Yes	Yes
Personal	Delivery Equipment	December 2006	71.90	–	7.24	No	Tender	Yes	Yes
China Resources Group
（華潤集團）	Land	June 2006	714.67		66.49	No	Auction	Yes	Yes

Note: Disposal mainly consisted of idle assets and posed no impact on the continuity of operation and stability of the management of the Company.

• III. Particulars of the Company’s material related parties’ transactions during the reporting period:

• Related parties’ transactions related to ordinary operation

During the Reporting Period, the Company and Hisense Group Company Limited (“Hisense Group”) and its relevant subsidiaries and Huayi Compressor Holdings Company Limited (“Huayi Compressor”) and its subsidiaries, entered into certain ordinary related parties’ transactions, details of which are as follows:

Unit: RMB ten thousand

				Unit:	RMB ten thousand
		Subject of			Percentage
		the related parties’		Transaction	total amount of
No.	Related parties	transaction	Pricing policy	amount	similar transactions
1	Huayi Compressor and its subsidiaries	Purchase of raw materials	Market price	12,797.77	2.60%
2	Hisense Group and its subsidiaries	Sales of finished goods	Market price	157,269.51	23.95%
3	Hisense Group and its subsidiaries	Sales of components	Market price	780.46	0.12%
4	Hisense Group and its subsidiaries	Sales of fixed assets	Market price	30.02	0.00%
5	Hisense Group and its subsidiaries	Purchase of components	Framework Agreement	736.27	0.15%
6	Hisense Group and its subsidiaries	Purchase of air-conditioners	Framework Agreement	6,985.41	1.5%
7	Hisense Group and its subsidiaries	Sales of moulds	Framework Agreement	320.30	0.05%
8	Hisense Group and its subsidiaries	Buy back by Hisense	Original agreed price	20,972.93	4.25%

1. Related parties’ transactions related to transfers of assets and equity interest

During the Reporting Period, the Company, Chengdu Engine (Group) Co.,Ltd.（成都發動機（集團）有限公司）, Chengdu Kelon Refrigerator Co.,Ltd.（成都科龍冰箱有限公司）(“Chengdu Kelon”) and Chengdu Xinxing Electrical Appliance Co., Ltd.（成都新星電器股份有限公司）entered into the equity transfer memorandum of understanding on 31 October 2006. Pursuant to which, the Company proposed to acquire 30% of the shares of Chengdu Kelon which were held by Chengdu Engine (Group) Co., Ltd. at a price of RMB81 million which was preliminarily determined following negotiations among the parties based on the assets and current financial condition of Chengdu Kelon. The procedure of the aforesaid equity transfer is still in the process as at the date of this announcement.

1. The Company does not have any other material related parties’ transaction

20

Unit: ten thousand

IV. MATERIAL CONTRACTS AND THEIR PERFORMANCE

1. External guarantees

Particulars of external guarantees

Inception
Name of date (Date of Amount of Type of	Guarantee	Discharged	Given to related
guaranteed entity agreement) guarantee guarantee	period	or not	parties or not
Nil
Total amount of guarantees incurred during the Reporting Period			0
Total balance of guarantees as at the end of the Reporting Period			0
Particulars of guarantees provided for subsidiaries by the Company
Total amount of guarantees provided for subsidiaries during the Reporting Period			316,969.93
Total balance of guarantees as at the end of the Reporting Period			133,021.74
Particulars of the total amount of guarantees provided by the Company (including guarantees		provided for	subsidiaries)
Total amount of guarantees			133,021.74
Percentage of total guarantees to net assets of the Company			127.06%
where:
Amount of guarantees provided for shareholders, beneficial owners and their related parties			0
Amount of loan guarantees provided, directly or indirectly,
for secured parties having a gearing ratio of more than 70%			123,352.66
Amount of guarantees in excess 50% of net assets			80,675.31
Total amount of guarantees of above 3 items			133,021.74

• V. FUNDS EMBEZZLED FOR NON-OPERATING PURPOSESS AND THEIR SETTLEMENT PROGRESS

• Amount of funds embezzled for non-operating purpose at the beginning and at the end of the Reporting Period

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Outstanding Amount of funds of
the listed company appropriated
by the former controlling
shareholder, its subsidiaries,
specified third parties and
other related parties for Total amount
non-operating purposes (in RMB) recovered
1 January 31 December during the Settlement Amount
2006 2006 reporting period method recovered Time of Settlement (month)
(in RMB) (In RMB)
718,607,200 689,219,900 29,387,300 By litigation and 12,678,300 The fund amounting to
by way of settling RMB12,678,300 was
with assets embezzled by Zhongshan
Dongyue Electrical Company
Limited at the beginning of
the period. As such, raw
materials were received for
settling the debt during the
period. Currently, Zhongshan
Dongyue Electrical Company
Limited has become a normal
material supplier.
Adjustment made 16,709,000 December 2006
in line with the (note)
verification of
accounts
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Note: During the Reporting Period, the Company recovered part of the embezzled funds of RMB12,678,300 through litigations and by way of settling debts with assets. The Company also adjusted the amount embezzled for non-operating purpose according to the updated information available to the Company after conducting further investigation and verification. Therefore, the total embezzled amount was reduced by RMB16,709,000 as compared with that as disclosed in the Company’s annual report for the year ended 2005 (the “Annual Report 2005”).

At the end of Reporting Period, the funds embezzled by the former controlling shareholder of the Company, its subsidiaries, specified third parties and other related parties for non-operating purposes amounted to RMB689,219,900 in aggregate, of which, a total amount of RMB650,694,100 was appropriated by the former controlling shareholder (Guangdong Greencool) and its associated companies (Greencool Companies), specified third parties for non-operating purposes, while the remaining balance of RMB38,525,800 was embezzled by other related parties.

21

1. Illustration on the embezzlement of funds of the listed company by the former controlling shareholder for non-operating purposes and the status of settlement

For details of the embezzlement of funds, please refer to “specific explanation on the embezzlement of funds by the controlling shareholder of the Company and other related parties by Shenzhen Dahua Tiancheng Certified Public Accountants”.

1. No additional embezzlement occurred during the Reporting Period

2. Illustration from the Board on the failure to resolve the matter of embezzlement completely by the Company at the end of the Reporting Period:

The Company has stepped up its effort to recover the embezzled funds pursuant to the requirements of the “Notice on Expediting the Loan Recovering Process”(Zheng Jian Gong Si Zi [2006] No. 92). At the end of 2006, the Company has recovered RMB12,678,300 from specified third parties and was in the process of reclaiming RMB38,525,800 by way of settling debts with assets, under which relevant actions has been taken to guarantee the collection of the amount. The Company has initiated 21 proceedings against the embezzlers, namely Gu Chu Jun and Guangdong Greencool, as the former controlling shareholder, specified third parties and other related parties, and applied to the courts to seal up or preserve the embezzler’s assets to the maximum extent. Gu Chu Jun is under prosecution by the judiciary for his criminal and civil liabilities . The relevant details and the subsequent actions are set out as follows:

The composition of the Board has been changed in June 2006. After the inauguration of the new Board, the Company has set up a special taskforce responsible for recovering the embezzled funds. The taskforce consists of the chairman of the Company (acting as the leader of the taskforce), the vice president who is responsible for the matters relating to securities law (acting as the deputy chief), and key officers in charge of the financial department, the legal department and the securities department of the Company. The Company has engaged two external law firms, namely, King & Wood and Guangdong Guangxin Law Office, responsible for initiating any possible proceedings for the embezzlement of the Company’s funds for the purpose of collecting the embezzled funds to the largest extant:

• (1) Recovering arrangement on the funds embezzled by Greencool companies and the specified third parties and its development:

• (i) To initiate every possible proceedings to secure every possible assets of Greencool companies for integrated arrangement and distribution so as to recover the embezzled fund to the maximum extent. (For details of the litigations, please see the section headed “Material litigations and arbitrations of the Company” of this announcement)

Greencool companies and specified third parties have embezzled RMB651 million of funds from the Company. As the management of Greencool companies have been dissolved and all assets of such companies have been attached or preserved by the relevant authorities, the Company could only recover the funds embezzled by the Greencool companies by way of litigation. In respect of funds which have evidently 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 where sufficient legal evidence against the Greencool Companies or third parties was present. 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.

Up to present, the Company has initiated 21 proceedings with a total claim amount of RMB792 million. The above litigations have been accepted by the relevant courts and are now pending for the judicial judgement on Gu Chu Jun and the Greencool companies.

• (ii) To seal up, freeze and preserve all valuable personal assets of the Greencool companies and Gu Chu Jun to the maximum extent. 12 assets were sealed up and frozen, and the funds in their 13 accounts have been preserved as well. (Details of which are disclosed in the 2006 third quarterly report of the Company)

• (iii) Apart from the on-going litigation mentioned above, the Company’s fund of RMB12,678,300 embezzled by 廣東中山東悅電器有限公司 (one of the specified third parties) at the end of 2005, was recovered in July 2006.

• (2) Recovering Arrangement on the funds embezzled by other parties and its development

The embezzled funds by other parties amounted to RMB38,525,800, of which RMB34,000,000 was embezzled by a related party, Chengdu Xinxing Electrical Appliance Holdings Company Limited. The Company has entered into agreements with Chengdu Xinxing and its substantial shareholders, pursuant to which their relevant assets have been pledged to the Company. The relevant approval has been obtained at the Company’s general meeting, and the funds will be recovered after completion of the relevant procedures. With respect to the funds of the Company’s subsidiary, Shunde Huaao Electrics Company Limited (“Huaao”), amounting to RMB4,525,800 embezzled by Shunde Yunlong Consultancy Service Company Limited (“Yunlong”), the Company has obtained certain valuable assets from Yunlong. The funds can be recovered after disposal of such assets.

22

• (3) Difficulties in settlement process

Firstly, the duration of settlement is unpredictable:

The overall solution scheme for the Greencool Companies is subject to the final decisions of the State Council and the Supreme Court. The embezzled funds will be recovered only after the judicial verdict is made on Greencool Companies’ properties for distribution to creditors. However, the time of settlement is unpredictable since litigation and proceedings are subject to several factors.

Secondly, the results of certain litigations remained uncertain:

Litigation was initiated by the Company against the Greencool Companies for their suspected embezzlement of the Company’ funds in late 2006. However, the Company fails to collect relevant evidence as no complete accounting records were found for inspection as a result of the dissolution of the management of Greencool Companies and majority of the evidential materials has been taken by the relevant police department for investigation. No criminal trial files are available for inspection before the judicial judgments Therefore, there are uncertainties in the litigation results.

Thirdly, certain settlement measures may fail to be implemented due to insufficient evidence:

As at 31 December 2005, the Company is payable to Greencool Companies and its associated company in the sum of RMB13,020,000 and is payable to specified third parties in the sum of RMB118,160,000. Since the accounting subjects of the above payables are different from the accounting subjects of the embezzled funds, therefore despite ostensibly the sums can be offset, such sums cannot be offset in accounting treatment temporarily at present. Therefore, such method cannot be used as a method of settlement.

The Company fully understands that the settlement of embezzled funds constitutes an irrevocable obligation of management of Company. The Company will put its greatest effort to recover the funds and reinforce communication with relevant judiciary authorities, gathering more evidence and secure the possible success in litigation to the most extent.

• (VI) Particulars of investigations by the China Securities Regulatory Commission (“CSRC”), administrative punishment, notice of criticism, or public censure by any stock exchange on the Company, the Board and its directors during the Reporting Period:

• The Company received an investigation notice from the CSRC on 31 May 2006. Since the Company failed to publish its 2005 Annual Report on time, the CSRC commenced an investigation against the Company;

• Since the annual reports for the years 2002, 2003 and 2004 issued by the Company committed such illegal acts as false statement and material omission, the Company received a notice of decision on administrative sanction against the Company from the CSRC (Zheng Jian Fa Zi [2006] No.16) on 4 July 2006;

• Since the Company failed to publish its 2005 Annual Report and its 2006 First Quarterly Report within the statutory periods, and was in breach of the Rules Governing Listing of Stocks on Shenzhen Stock Exchange (as revised on May 2006), the Shenzhen Stock Exchange therefore publicly denounced the Company, the Board, the supervisory committee and the senior management of the Company on 29 May 2006;

• The Company received a notice of decision on administrative sanction against the Company from the CSRC on 18 December 2006. Due to failure to publish its 2005 annual report on time, the Company was in breach of Article 66 of the Securities Law, which constitutes the misconduct as described in Article 193 of the Securities Law of “Failing to Disclose Information in accordance with Requirements”. According to the provision of Article 193 of the Securities Law of the PRC, the CSRC decided to give disciplinary warning to the Company.

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

23