Medlive Technology Co., Ltd. — Audit Report / Information 2006

Aug 29, 2006

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED 廣東科龍電器股份有限公司

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

(Stock Code: 0921)

Announcement relating to the Auditor’s Report on the status and progress of the Sales Agency Agreement and the Supplemental Agency Agreements

This announcement is made in accordance with Rule 13.09(2) of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The former board of directors of Guangdong Kelon Electrical Holdings Company Limited (“the Company”) issued an announcement, the detail of which was disclosed on the announcements of the Company in the China Securities Journal, the Securities Times, the Hong Kong Commercial Daily and China Daily on 16 June 2006, based on the internal inspection report on the progress and status of the sales agency agreement, the first supplemental agency agreement and the second supplemental agency agreement (the “Sales Agency Agreements”) used by the management of the Company relating to the status and progress of the Sales Agency Agreements on 15 June 2006.

The current board of directors of the Company (the “Board”) received the auditor’s report on the status and progress of the sales agency agreement (the “Sales Agency Agreement”) and the supplemental agency agreements (the “Supplemental Agency Agreements”) entered into between Guangdong Kelon Electrical Holdings Company Limited and Qingdao Hisense Marketing Company Limited (“Hisense Agent”) as at 18 August 2006 (the “Auditor’s Report”) from Shenzhen Nanfang Minhe Certified Public Accountants Ltd. (“Nanfang Minhe”) on 23 August 2006. The contents of this Auditor’s Report and the Board’s opinions of the related issues are set out as follows:

I. THE RELEVANT CONTENTS OF THE SALES AGENCY AGREEMENT AND THE SUPPLEMENTAL AGENCY AGREEMENTS ENTERED INTO BETWEEN THE COMPANY AND HISENSE AGENT

All of them were set out in the announcements of the Company dated 26 September 2005, 4 April 2006 and 10 May 2006, the details of which were disclosed on the announcements of the Company in the China Securities Journal, the Securities Times, the Hong Kong Commercial Daily and China Daily on 27 September 2005, 5 April 2006 and 11 May 2006.

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II. THE STATUS AND PROGRESS OF THE PREPAYMENTS PAID BY HISENSE AGENT TO THE COMPANY AND CAPITAL UTILISATION FEE PAID BY THE COMPANY

• (i) The status and progress of the internal inspection on prepayment from Hisense Agent to the Company

1. Regarding prepayments

As set out in the internal inspection report of the Company, the total amount of received prepayments were RMB301,004,000.00, the details of which are as follows:

Date of Receipt 23 September 2005 23 September 2005 12 October 2005 13 October 2005 13 October 2005 24 October 2005 15 December 2005 Total	Cash (RMB) – – 30,000,000.00 100,000,000.00 50,000,000.00 72,000,000.00 31,100,000.00 283,100,000.00	Bank acceptance (RMB) 4,000,000.00 13,904,000.00 – – – – – 17,904,000.00	Total (RMB) 4,000,000.00 13,904,000.00 30,000,000.00 100,000,000.00 50,000,000.00 72,000,000.00 31,100,000.00
			301,004,000.00

2. Regarding capital utilisation fee

• (1) Regarding capital utilisation fee for prepayments during the valid period of the Sales Agency Agreements

According to the internal inspection report of the Company, the capital utilisation fee payable by the Company to Hisense Agent was RMB9,474,781.10 as at 10 May 2006.

• (2) Regarding capital utilisation fee for prepayments after the date of expiry of the Sales Agency Agreements

According to the internal inspection report of the Company, the capital utilisation fee payable by the Company to Hisense Agent was RMB3,961,242.92 from the date of expiry of the Sales Agency Agreements to 18 August 2006. This calculation is as follows:

• 1) Since the Company received prepayments from Hisense Agent amounting to RMB301,004,000.00, the capital utilisation fee of RMB4,665,562.00 was payable to Hisense Agent for the period from 11 May 2006 to 18 August 2006.

• 2) Since the payments of Hisense Agent due to the Company exceeds the credit period, namely the 60 days credit period for finished products from 11 May to 10 July, Hisense Agent has to pay the Company interest for exceeding such period. The Company calculated the interest at RMB704,319.08 which Hisense Agent shall pay the Company for 39 days from 10 July to 18 August for the trade receivables exceeding the credit period, which was calculated as the difference between the average trade receivable due from Hisense between 30 June 2006 to 18 August and the prepayment of RMB301,004,000.00. This amount was deducted from the capital utilisation fee payable by the Company to Hisense Agent.

• (3) The total capital utilisation fee payable by the Company to Hisense Agent from the execution of the Sales Agency Agreements as at 18 August 2006 is RMB13,436,024.02.

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(ii) Nanfang Minhe’s audit on the status and progress of the Sales Agency Agreements

1. Details of the prepayments made by Hisense Agent received by the Company

Nanfang Minhe has audited the relevant information and explanations provided by the financial department of the Company and the prepayments made by Hisense Agent for the execution of the Sales Agency Agreements are set out as follows:

• (1) Hisense Agent transferred bank acceptances amounting to RMB17,904,000.00 to the Company on 23 September 2005, the issuing date of which are 16 September 2005;

• (2) Hisense Agent transferred the Company an aggregated amount of RMB252,000,000.00 in cash from 12 October 2005 to 24 October 2005. According to the bank statements provided by Hisense Agent, this amount of RMB252,000,000.00 was an account which is separate from the account for the settlement of Kelon’s products opened by Hisense Agent;

• (3) Hisense Agent transferred to the Company an amount of RMB31,100,000.00 in cash on 15 December 2005, which was from an accounts separate from the account for the settlement of Kelon’s products opened by Hisense Agent.

The Company received prepayments from Hisense Agent amounting RMB301,004,000.00 in total.

2. The calculation of capital utilisation fee relating to prepayment during the valid period of the Sales Agency Agreements as reviewed by Nanfang Minhe

Nanfang Minhe calculated that the capital utilisation fee payable by the Company to Hisense Agent at RMB9,495,086.10 for the valid period of the Sales Agency Agreements from 23 September 2005 to 10 May 2006, based on the amount and date of the above prepayments received by the Company and the annual rate of 5.58% of corresponding bank loan as specified on the Sales Agency Agreements.

According to the calculation of Nanfang Minhe, the actual capital utilisation fee payable by the Company to Hisense Agent was understated by RMB20,305.00 in the internal inspection report.

3. The calculation of capital utilisation fee relating to prepayment after the date of expiry of the Sales Agency Agreements as reviewed by Nanfang Minhe

• (1) Nanfang Minhe calculated that the capital utilisation fee of the Company payable to Hisense Agent at RMB4,665,562.00 for the period of 11 May 2006 to 18 August 2006, based on the amount and date of the above prepayments received by the Company and the annual interest rate of 5.58% of corresponding bank loan as specified in the Sales Agency Agreements;

• (2) Based on the calculating method of the interest on the trade receivables of the Company due from Hisense Agent which exceeded the credit period, Nanfang Minhe calculated that the interest of the trade receivables of the Company due from Hisense Agent which exceeded the credit period during 10 July to 18 August 2006 is RMB704,319.08, which is the same as the amount calculated by the internal inspection of the Company.

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(iii) Problems relating to the execution of the Sales Agency Agreements

1. Hisense Agent failed to pay full amount of RMB300 million within 10 working days after the signing of the Sales Agency Agreements as agreed, except the amount of RMB17,904,000.00 which was paid within 10 working days after the signing of the Sales Agency Agreements, other payments were paid after 10 working days after the conclusion of the Sales Agency Agreements.

2. The Company did not according to the Sales Agency Agreements pay the capital utilisation fee for prepayments to Hisense Agent on a quarterly basis.

3. The above capital utilisation fee was calculated as at 18 August 2006. Since the settlement between the Company and Hisense Agent is not complete, the Company still has to pay Hisense Agent a capital utilisation fee.

(iv) The Board’s explanation on above matters

The above matters were proven to be true upon the Company’s verification. The Company has entered into an agreement with Hisense Agent pursuant to which both parties agreed to settle the above amounts before the end of August 2006.

III. PAYMENTS PAYABLE BY HISENSE AGENT TO THE COMPANY

(i) The Company’s verification on the receipt of the payments (including trade deposits) from Hisense Agent

On 23 September 2005, Hisense Agent issued to all its branches the “Notice on opening a special settlement account for the payments from the sales of Kelon’s products in all Hisense Agent’s branches”, which required every branch to open a new special settlement account to deposit the payments from the sales of Company’s products, and which also required every branch to separately keep all the acceptance bills relating to the sales of Kelon’s products. Meanwhile, apart from applying the existing finance system for stating the sales of Kelon’s products to which Hisense Agent has a production right, the head office of Hisense Agent also applied UFIDA Software and all its branch applied NEWGRAND finance software to separately establish an account for financial measurement.

As at 18 August 2006, the Company received from Hisense Agent aggregate payments (including trade deposits) of RMB2,867,777,454.62, among which RMB859,999,251.49 was paid by remittance while the remaining RMB2,007,778,203.13 was settled by banker’s acceptance bills. If calculated in two separate periods, during the period of the Sales Agency Agreements (as at 10 May 2006), the Company received from Hisense Agent the aggregate payments (including trade deposits) of RMB2,257,452,730.87, among which RMB737,100,000.00 was paid by remittance while the remaining RMB1,520,352,730.87 was settled by banker’s acceptance bills; since expiry of the Sales Agency Agreements up until 18 August 2006, the Company received from Hisense Agent aggregate payments of RMB610,324,723.75, among which RMB122,899,251.49 was paid by remittance while the remaining RMB487,425,472.26 was settled by banker’s acceptance bills.

(ii) Nan-fang Minhe’s audit on the execution of the Sales Agency Agreements

Based on the selective examination on the payment receipts of the Company’s domestic marketing department from September 2005 to August 2006, Nan-fang Minhe, according to the funds management method and based on the features of the financial measurement

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system during Hisense Agent’s sales of Kelon’s products which were provided by the management of the Company, conducted an audit on the special reconciliation account, records of the bills available for inspection and the accounting information relating to Hisense Agent and the Sales Agency Agreements which were provided by Hisense Agent and its branches. Nan-fang Minhe found no apparent deviation from its audit.

1. According to the information obtained by Nan-fang Minhe, the balance in the special accounts opened by Hisense Agent and its branches for the sales of Kelon’s products are as follows:

	Funding balance	Attributable to:
	of Hisense Agent’s	Funding balance
	account for Kelon’s	of branches of
End date	payment of goods	Hisense Agent
	(RMB ten thousand)	(RMB ten thousand)
31 December 2005	10,204.62	1,392.54
31 January 2006	4,840.67	1,166.29
28 February 2006	4,921.55	2,196.34
31 March 2006	2,669.36	865.08
30 April 2006	6,713.05	761.41
10 May 2006	3,583.46	559.38

2. Balance amounts due from Hisense Agent to the Company at the end of each month

In respect of those payments confirmed by both Hisense Agent and the Company, and not taking into account of the unsettled bills, the payments due from Hisense Agent to the Company at the end of each month are as follows:

End Date	Amount	Note
30 September 2005	-17,904,000.00	17,904,000
		prepayment included
31 October 2005	-117,561,598.85	269,904,000
		prepayment included
30 November 2005	45,168,709.24	269,904,000
		prepayment included
31 December 2005	48,177,878.96	301,004,000
		prepayment included
31 January 2006	146,974,701.00	301,004,000
		prepayment included
28 February 2006	328,112,001.72	301,004,000
		prepayment included
31 March 2006	614,090,909.85	301,004,000
		prepayment included
30 April 2006	348,641,026.89	301,004,000
		prepayment included
31 May 2006	578,298,052.38	301,004,000
		prepayment included
30 June 2006	-110,599,239.75	301,004,000
		prepayment included
31 July 2006	-208,701,253.11	301,004,000
		prepayment included

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(iii) Problems arising from execution of the Sales Agency Agreements

1. The headquarters and branches of Hisense Agent created separate accounts for Kelon’s account receivables. The following problems were identified by Nanfang Minhe during the examination made on Kelon’s account receivable statements as provided by Hisense Agent:

• (1) On 15 November 2005, the headquarters of Hisense Agent transferred an amount of RMB50,730,076.85 to the finance centre of Hisense Group, being the fund balance of the separate account for Kelon’s account receivables (with the account number of 3803020109200163396) as at 15 November 2005, this amount was subsequently transferred back to the separate account on 16 November 2005.

Hisense Agent’s explanation was “as at 15 November 2005, the balance of the separate account for Kelon’s account receivables managed by Hisense Agent amounted to RMB50,730,076.85. In view of the safety of the fund, the department of finance of Hisense Agent created a separate account for Kelon’s account receivables in the settlement centre of Hisense Group on 15 November. On the same day, the settlement centre of Hisense Group appropriated such funds to the separate account for Kelon’s account receivables created in the settlement centre of Hisense Group. To avoid any misunderstandings caused by the above action, relevant leaders in Hisense Group ordered the settlement centre to transfer the amount of RMB50,730,076.85 back to the separate account for Kelon’s account receivables created by Hisense Agent in the Industrial and Commercial Bank of China on the following day, on 16 November 2005.”

• (2) On 31 October 2005, Hisense Agent Guangzhou Branch transferred an amount of RMB11,071,620.00 out of the separate account for Kelon’s account receivables (with an account number of 3602866229100008116). Nan-fang Minhe discovered that such fund was not transferred to the separate account for Kelon’s account receivables created at the headquarter of Hisense Agent. On 5 December 2005, Hisense Agent transferred such fund back into the separate account for Kelon’s account receivables managed by Hisense Agent Guangzhou Branch, and was transferred to the separate account for Kelon’s account receivables created in the headquarter of Hisense Agent on the following day.

Hisense Agent’s explanation was “on 31 October, Hisense Agent Guangzhou Branch transferred the amount of RMB11,071,620.00, being Kelon’s account receivables collected in October, to Hisense Agent by wire transfer, but the cashier of its Guangzhou Branch made a mistake by wiring such fund to the account for Hisense Agent’s account receivables. The mistake was not discovered by either the headquarters or the branch during the wire transfer. In November, accountants of the department of finance made coupons according to the statements of the collected account receivables sent by the branch and recorded the financial account in respect of collected account receivables, but unfortunately this accounting error was not identified due to the accountants’ negligence. Such error was eventually discovered during an examination of bank statements carried out by the accountants in early December. In compliance with the administrative rules of Hisense Agent for Kelon accounts receivables, the Company remitted the relevant amount from the account for Hisense’s account receivables back to Guangzhou Branch on 5 December and on the following day Guangzhou Branch transferred the amount back to the account for Kelon’s account receivables maintained in the head office of Hisense Agent.”

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2. Problem regarding the time of making payment

Pursuant to the Sales Agency Agreements, upon delivery of products to the warehouses designated by Hisense Agent, the ownership of such products will be transferred to Hisense Agent. If the value of the sale of goods made by the Company to Hisense Agent exceeds the prepayment actually received by the Company, the parties shall enter into a deed of buying or borrowing goods on credit and Hisense Agent must pay the Company the value of the sale of goods which is in excess of the prepayments within 60 days. Hisense Agent shall make the payment to the Company within 3 working days following the collection of account receivables.

During the review carried out by Nan-fang Minhe, it was discovered that the management members of the Company orally notified both parties rather than requiring both parties to execute a written document in respect of a deed of buying or borrowing goods on credit. Hisense Agent also did not abide by the term of the Sales Agency Agreements that it shall make the payment to the Company within 3 working days following the collection of account receivables. There is a conflict between the terms of the above-mentioned agreement.

3. Regarding the differences beween total transaction amounts and the payments thereof

Pursuant to the related agreements, should there be a difference between total transaction amounts by both parties as at the expiration date of the Sales Agency Agreements, the debtor shall pay the other party the differences within 15 working days following the expiration date of this agreement and the capital utilisation fee thereon. The differences are calculated as follows: difference = total prepayment made by Hisense Agent to the Company during the effective period of the agreement + total value of sale of goods made by Hisense Agent to the Company during the effective period of the Sales Agency Agreements - total accumulated proceeds from sale of products to Hisense Agent by the Company during the effective period of the Sales Agency Agreements. During the course of the review, Nan-fang Minhe noticed that both parties had not settled the transaction differences and the capital utilisation fee within the 15 working days following the expiration date of the Sales Agency Agreements.

Clarification of the issue by the management of the Company:

• 1) In view of the complexity of the sales agency procedures of both parties as well as the influence of market situation, the status of Hisense Agent as an Agent lasted till the end of May and there still were transactions between the two parties during the period;

• 2) As most of the chain stores of domestic appliances in PRC operate under a mode known as “credit spreading”, and moreover, the buyer would not allow the supplier to open an invoice until transaction is due, Hisense Agent still owed a number of invoices to the chain stores upon the termination of the Sales Agent Agreements;

• 3) Upon completion of the Sales Agent Agreements, Kelon Agent Company and Hisense Agent started to recheck the transactions with the dealers. As the task covers a wide scope, it would take a certain period of time for the accounts to be finally sorted out.

(iv) Clarification of the above issues by the Board of the Company:

The Company has probed into the aforesaid issues and confirmed the truthfulness of them. The Board of the Company agreed with the management on their clarification for the aforesaid issues. As for the schedule of payment collection, there was an agreement entered into between the Company and Hisense Agent during the execution of the Sales Agent Agreements, which set out that Hisense Agent must pay the Company the value of the sale of goods which is in excess of the prepayments within 60 days.

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IV. DISTRIBUTION OF THE COMPANY’S PRODUCTS BY HISENSE AGENT AND CALCULATION OF AGENCY FEE

(i) Sales to Hisense Agent (before tax) as shown in the Internal Inspection Report of the Company:

1. The Company’s sales to Hisense Agent (before tax) during the period of the Sales Agent Agreements are set out as follows:

	Sales to Hisense Agent,
Items	(before tax)
	(RMB)
October 2005	183,392,995.64
November 2005	270,132,525.40
December 2005	423,747,614.00
January 2006	360,785,001.00
February 2006	393,575,936.00
March 2006	487,231,303.75
April 2006	376,053,752.00
10 May 2006	355,553,785.52
Total:	2,850,472,913.31

2. The return of goods from Hisense Agent to the Company upon the expiry of the Sales Agency Agreements

Upon the expiry of the Sales Agency Agreements, there still were a certain amount of goods remaining in the stock of Hisense Agent. In order to guarantee the normal sales of our products and avoid pricing disorder as well as the strong request of our dealers on dealing with Kelon products from only one source and the fact that the accounts could not be settled in the middle of the month, the Company has extended the term of the Sales Agency Agreements up to 31 May, during which Hisense Agent agreed not to charge the Company for an agency fee.

Pursuant to the “Proposal on Recheck and Dispose of Hisense-owned Inventory at the End of May” issued by the Company, saved for the Kelon products in the Da Chen No. 7 Warehouse in Shunde which have been cleared and returned to the Company on 24 May 2006, the rest Hisense-owned Kelon products were put through a joint inventory check on 31 May by the Company, Hisense Agent and Guangzhou Antaida Logistic Co. Ltd. (a third-party logistics Company) and were returned in two batches to the Company in June and July 2006, respectively. As at 17 August, the returned goods have offset the sales of the Company to Hisense by RMB378,720,134.08 (after tax), or 443,102,558.44 (before tax). Among which RMB283,934,082.34 (after tax) or RMB332,202,876.34 (before tax) account for sales to Hisense during the execution of Sales Agency Agreements offset by the returned goods upon expiry of the Sales Agency Agreements.

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• (1) The return of goods after the Sales Agency Agreements

Items Refrigerator Air-conditioner Freezer Small home appliance Commercial air-conditioner Sub-total:	Total Total amount of Sets price and tax (Unit: set) (In RMB) 65,566 129,785,340.12 246,339 302,111,931.25 8,702 11,074,430.26 236 61,255.64 26 69,602.31 320,869 443,102,559.58	Total Total amount of Sets price and tax (Unit: set) (In RMB) 65,566 129,785,340.12 246,339 302,111,931.25 8,702 11,074,430.26 236 61,255.64 26 69,602.31 320,869 443,102,559.58
		443,102,559.58

• (2) During the period of the Sales Agency Agreements, details of the returned goods after Hisense sales period are as follows:

Items Refrigerator Air-conditioner Freezer Small home appliance Commercial air-conditioner Sub-total:	Total Total amount of Sets price and tax (Unit: set) (In RMB) 42,228 87,817,769.17 189,178 234,069,341.91 7,991 10,186,627.26 232 61,225.64 23 66,738.39 239,652 332,202,876.34	Total Total amount of Sets price and tax (Unit: set) (In RMB) 42,228 87,817,769.17 189,178 234,069,341.91 7,991 10,186,627.26 232 61,225.64 23 66,738.39 239,652 332,202,876.34
		332,202,876.34

3. The buy-back of products by Hisense Agent to the Company

Before the branches of the Company implemented the Sales Agency Agreements, the Company was affected by factors such as trade deposits, sales rebate, acceptance of returned goods and redrafts. The Company sold its products to Hisense Agent, meanwhile Hisense Agent sold products back to the Company. As at 18 August 2006, the amount after taxation generated from buy-back was RMB209,729,271.60, the amount before taxation from buy-back is RMB245,383,247.77. The details are as follows:

Items Refrigerator Air-conditioner Freezer Small home appliance Commercial air-conditioner Total:	Regular repurchase 84,889,646.43 136,614,312.36 4,333,551.22 714,848.38 179,728.08 226,732,086.46	Irregular repurchase (Invoiced more once) 9,065,277.37 7,063,704.21 1,274,348.00 1,247,831.72 – 18,651,161.30	In RMB Total 93,954,923.80 143,678,016.57 5,607,899.22 1,962,680.10 179,728.08
			245,383,247.77

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4. Sales affected by the settlement of negative gross profit

For the period from October 2005 to 17 August 2006, the negative gross profit after taxation which is used by the Company to make up for Hisense Agent is RMB107,958,765.85, the negative gross profit before taxation is RMB126,311,756. During the Sales Agency Agreements period, the amount after taxation which has been used by the Company to make up for Hisense Agent is RMB41,487,268.58, the amount before taxation is RMB48,540,104.24. The negative gross profit which is used to make up for Hisense Agent has offset the sales to Hisense Agent. During the calculation of sales agency fees, the negative gross profit of sales which should be offset is RMB77,771,651.81.

5. The calculation of sales agency fees

Items	Amount
	(RMB)
Sales to Hisense (before tax) during the
Sales Agency period	2,850,472,913.31
Less: Returns after the expiry of the
agreement (before tax)	332,202,876.34
Less: Re-sales that offset sales	245,383,247.77
Less: Negative gross profit that offsets sales	77,771,651.81
Sales to Hisense (before tax) from which
agency fee should be provided)	2,195,115,137.39
Multiply: Provision basis for agency fee	1%
Agency fee that should be provided	21,951,151.37

(ii) Nanfang Minhe’s Review on the Execution of the Sales Agency Agreements

1. After a review on the financial information of marketing head office of the Company, Nanfang Minhe found no deviation in the invoiced amount from October 2005 to April 2006 in the internal inspection report. As at 10 May 2006, the products delivered but not invoiced are as follows:

Items Refrigerator Air-conditioner Freezer Small home appliance Commercial air-conditioner Total:	Total Total amount of Sets price and tax 81,350 136,428,404.00 193,910 199,475,095.00 9,306 7,826,901.52 79,194 7,131,575.00 3,847 4,691,810.00 367,607 355,553,785.52	Total Total amount of Sets price and tax 81,350 136,428,404.00 193,910 199,475,095.00 9,306 7,826,901.52 79,194 7,131,575.00 3,847 4,691,810.00 367,607 355,553,785.52
		355,553,785.52

As to the products delivered but not invoiced, Nanfang Minhe found no deviation after a selective examination of original documents such like delivery advices.

2. Review on Returned Goods

After implementing review procedures such as letter certification, sampling inspection and spot check, etc., Nanfang Minhe found no deviation in amount of returned goods in the internal inspection report of the Company.

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3. Review on Goods for Resale

Nanfang Minhe implemented a check and sampling examination on the breakdown of the goods for resale of the Company and found no abnormalities.

4. Recheck on the Calculation Procedure of Agency Fee

Nanfang Minhe rechecked the calculation form of agency fee which was provided by the management of the Company and recognized by both the Company and Hisense Agent, and found no abnormalities.

(iii) Problems in the Execution Procedure of the Sales Agency Agreements

1. Continuing Agency after the Expiration of the Sales Agency Agreements

The accounting information of the Company showed that the invoiced amount of RMB823,616,359.42 from 11 May 2006 to 17 August 2006 exceeded the amount delivered but not invoiced as at 10 May 2006, representing a continuing delivery and sales by the Company to Hisense Agent after the expiration of the Sales Agency Agreements. According to the information provided by the management of the Company, the products invoiced after the expiration of the Sales Agency Agreements are as follows:

Items Refrigerator Air-conditioner Freezer Small home appliance Commercial air-conditioner Total:	Amount RMB 372,023,219.40 419,313,704.02 16,395,473.20 10,471,330.37 5,411,260.45
	823,616,359.42

The Company’s Explanatory Statement on the above problems

The marketing system has been in operation independently since May 11, however, the Company has adopted the transitional measures as the financial department was unable to make payment and settlement during the middle of a month, and necessary transitional period for the consistency of business flow adjustment of commercial customers which, otherwise, would result in the suspension of sales and material loss to sales during midseason. The marketing system has resumed its independent operation on 1 June, and has basically completed payment and settlement as at the date hereof. Meanwhile, for the avoidance of the new connected transactions with Hisense Agent, new customers and customers who did not make prepayment to Hisense Agent have begun their operation and settlement in the marketing system of the Company.

2. Payment of the Agency Fee

As to the agency fee determined in the Sales Agency Agreements and paid by the Company to Hisense Agent, the Company made provision of 10% but has not yet been paid. The Company had not paid quarterly the agency fee to Hisense Agent in accordance with the Sales Agency Agreements.

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(iv) Comments on the abovementioned matter by the Board of Directors of the Company

1. After the verification made by the Company, it was confirmed that the abovementioned matter is true. Due to the fact that the Company was under a difficult financial situation during the implementation of the Sales Agency Agreements, the Company and Hisense Agent agreed by negotiation that the Company would pay the agency fee to Hisense Agent upon the completion of implementation of the Sales Agency Agreements. Also, agreement has been reached by both parties that such payment would be settled by the end of August 2006.

2. The Sales Agency Agreements between the Company and Hisense Agent should have expired on 10 May 2006. However, as payment and settlement cannot be made in the middle of a month, the Company revised and postponed the expiry of the Sales Agency Agreements to 31 May so as not to affect the normal operation of the business. As at 31 May, Hisense Agent still had products of the Company in stock amounting to $433 million. Owing to the following factors, the Company adopted the approach of return of sales for Hisense Agent and has taken back the inventories from Hisense Agent.

3. (1) Avoidance of confusion in pricing which could affect the market pricing system of the Company;

Since the termination of the Sales Agency Agreements on 31 May, the sales and marketing system of the Company has turned into normal and independent operation, though Hisense Agent still had the $433 million inventory at that time. If those inventories were not called back, two separate systems of sales and marketing would be operating in the market, hence two pricing systems thereof would be formed. In order to maintain the consistency of Kelon’s price adjustment strategy for 2006, as well as to avoid chaos in the subsequent market and loss-making after the restoration of the sales and marketing system to normal levels, the Company has resorted to the approach of return of sales as a resolution to the matter.

• (2) Distributors strongly demanded that they would deal with only one single system for the distribution of Kelon products;

Each of the distributors had given the Company tremendous and full support during the period of sales agency. Upon the termination of the Sales Agency Agreements, all the distributors had similar Kelon products in stock, and if no return of sales was carried out, the distributors would be faced with a situation that two separate systems are selling the products of the Company, thereby causing confusion to their daily operation management. For this reason, the distributors strongly demanded that they would deal with only one single system after the termination of the Sales Agency Agreements. For the benefit of the Company and for the purpose of further restoring the confidence among the distributors in the ability of the Company to resume its independency of sales, the Company therefore adopted the approach of return of sales to resolve the matter.

• (3) Reduction of the sales agency fee for the maximum benefit to the interests of the Company.

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(v) Execution of the Selling Price

• (1) The Company’s internal inspection on the implementation of the selling price under the Sales Agency Agreements

Hisense Agent and the Company has signed the “Policy regarding the settlement price between the Company and Qingdao Hisense Marketing Company Limited”, pursuant to which, both parties agreed that the issue of invoice to Hisense Agent by the finance department of the Company would be made on a monthly basis on the written report on the wholesale price granted by each of the product departments and in accordance with the quantity of products ordered by Hisense Agent. Hisense Agent and its branches would not generate any gross profit to their book accounts from Kelon products. If profits arise, the causes of such profits would be analysed by both parties and adjustment would be made to the invoice price in next following month. At the beginning of each month, each of the sales and marketing branches of the Company would together with the corresponding branch of Hisense Agent, cross-check the prices of the products sold in the previous month and make a confirmation with the corporate seal of both parties. As at 18 August 2006, the summary of the profit statements recognized by the respective sales and marketing branches of the parties, the head office of Hisense Agent and the Company is as follows:

Month October 2005 November 2005 December 2005 January 2006 February 2006 March 2006 April 2006 May 2006 June 2006 July 2006 Financial cost and non-operating income/expenses from October 2005 to July 2006* 1 to 18 August 2006 Total	Gross profit generated by Hisense Agent and recognised by both parties (In RMB) -848,319.00 -10,938,679.43 -12,818,913.87 -10,220,660.96 -6,660,695.32 -23,877,276.28 -10,509,804.55 -20,310,549.77 6,853,454.95 -16,047,589.31 314,738.55 -2,894,470.86 -107,958,765.85	Negative gross Negative gross profit covered profit to be covered by the Company by the Company to Hisense Agent to Hisense Agent (In RMB) (In RMB) -848,319.00 – -10,938,679.43 – -12,818,913.87 – -10,220,660.96 – -6,660,695.32 – -23,877,276.28 – -10,509,804.55 – -20,310,549.77 – 6,853,454.95 – – -16,047,589.31 – 314,738.55 – -2,894,470.86 -89,331,444.23 -18,627,321.62	Negative gross Negative gross profit covered profit to be covered by the Company by the Company to Hisense Agent to Hisense Agent (In RMB) (In RMB) -848,319.00 – -10,938,679.43 – -12,818,913.87 – -10,220,660.96 – -6,660,695.32 – -23,877,276.28 – -10,509,804.55 – -20,310,549.77 – 6,853,454.95 – – -16,047,589.31 – 314,738.55 – -2,894,470.86 -89,331,444.23 -18,627,321.62
			-18,627,321.62

* The financial cost and the non-operating income and expenses from October 2005 to July 2006 represented the interest income of bank deposits arising from the exclusive account in respect of the payment for Kelon products opened by Hisense Agent, the handling expenses and other non-operating income and expenses relate to the Sales Agency Agreements.

The management of the Company has analysed the causes of the above negative gross profit and considered that the major causes were the adjustment of the end selling price, the treatment of the obsolete goods and the incentive offered to the vendors for the return to profit-making.

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• (2) Review of the Execution of the Sales Agency Agreements by Nanfang Minhe

Nanfang Minhe has reviewed, on test basis, the invoice selling prices issued by the finance department of the Company and cross checked with the price list provided by the administrative division of the Company, and found that there were no material differences.

• (3) Comments on the abovementioned matter by the Board of Directors Based on the verification made by the Company, the Board of Directors agreed with the opinion made in the Auditors’ Report.

(vi) Current Balance between the Company and Hisense Agent after the period of the Sales Agency Agreements and the subsequent events

• (1) Internal inspection on the current account between the Company and Hisense Agent

• As at 18 August 2006, based on the reconciliation made by the Company and Hisense Agent, it was confirmed that the current balance of the Company with Hisense Agent(including RMB301,004,000.00 of prepayment by Hisense Agent) was RMB-241,733,467.32, representing the outstanding amount owed by the Company to Hisense Agent of RMB241,733,467.32. As the Company has not repaid the total prepayment by Hisense Agent in the sum of RMB301,004,000.00, as at 18 August 2006, the outstanding balance of payment for goods due from Hisense Agent to Kelon was RMB59,270,532.68 after deducting the amount of prepayment received by Kelon from Hisense Agent of RMB301,004,000.00. As at 18 August 2006, the carrying amount of the balances of payment in advance received from the vendors of Hisense Agent was RMB13.9481 million in aggregate, and the total amount of account receivable was RMB47.4082 million; and the balance of fund (including money in transit) held by Hisense Agent and each of its branches was RMB18.8898 million.

The respective administrative divisions of the Company and Hisense Agent intended to settle the above outstanding amounts in full by the end of August 2006.

1. According to the notice regarding the treatment of money transfer from five parties through the current balances with the customers of the branches of Hisense issued by the finance division under the sales and marketing department of the sales and marketing head office of the Company in the mainland, up until 31 May, the current balances (including the amount received in advance and the account receivable) with the vendors formed within the account of the branches of Hisense during the period of Hisense acting as an agent of Kelon products, subject to the verification with the vendors, would be transferred to the head office of Hisense by the branches of Hisense, and to the vendors and the head office of Kelon by the branches of Kelon respectively by way of the signing of a respective transfer agreement, under which no outstanding balance between branches of Hisense and Kelon would be permitted. As at 18 August 2006, the procedures of money transfer from the five parties to the Company were completed and the amount transferred was RMB-73,923,144.32, of which the account receivable was RMB22,946,129.12 and the amount received in advance was RMB96,869,273.44.

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1. The calculation of the current balance between the Company and Hisense Agent is as follows:

Items Amount (RMB) Invoice before tax to Hisense Agent as at 18 August 3,367,075,591.45 Less: Realized negative gross profit (after tax) to Hisense Agent 104,517,789.75 Less: Returns to the Company by Hisense Agent 443,102,559.58 Less: Re-sales to the Company by Hisense Agent 245,383,247.77 Less: Prepayment to the Company by Hisense Agent 301,004,000.00 Less: Payment to the Company by Hisense Agent 2,566,773,454.62 Less: Trade receivables from the transfers by the five parties 22,946,129.12 Less: Agency fee recognized by Hisense Agent 21,951,151.37 Add: Advanced receipt from the transfers by the five parties 96,869,273.44 Balance as at 18 August -241,733,467.32

1. According to the information provided by Hisense Agent, as at 18 August 2006, the balance of fund (including money in transit) of Hisense Agent and each of its branches was RMB18.8898 million.

2. (2) Review of the execution by Nanfang Minhe

3. Nanfang Minhe has reviewed, on test basis, the five-party money transfer agreement, the four-party money transfer agreement, and the bills provided by the finance division under the sales and marketing department of the Company, and verification has also been made with no material abnormalities were found.

4. Nanfang Minhe has cross checked the calculation of the current balance between the Company and Hisense Agent as at 18 August 2006 and no abnormalities were found.

5. (3) Comments on the abovementioned matter by the Board of Directors

Based on the verification made by the Company, the Board of Directors agreed with the opinion made in the Auditors’ Report.

• (vii) An overview of the execution of the Sales Agency Agreement and the supplementary agreements thereof by the Board of Directors and the independent non-executive directors of the Company

• (1) An overview of the implementation of the Sales Agency Agreement and the Supplemental Agreements thereof by the Board of Directors

As at the date of this announcement, all the amounts owed by Hisense Agent to the Company were settled. The Board of Directors of the Company considered that in light of the 2005 crisis, the Company, through the Sales Agency Agreement and the Supplemental Agreements thereof, managed to promptly obtain the urgent

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funds needed for production and the entry to market as well as rebuild its market image, thereby restoring the confidence among the distributors rapidly, accelerating the collection of payment for goods and improving the efficiency of fund utilisation, thus resulting in the positive cycle of supply and marketing. The entering into the agreements and their execution played an important part in bringing the Company through the operating predicament, and protected the interest of the Company. Although there was a slight departure from the Sales Agency Agreement and the Supplemental Agreements thereof in the course of execution of the agreements due to the practical needs of operation, the Board considered that both parties had essentially complied with the agreed terms under the Sales Agency Agreements without prejudice to the interests of the Company and the non-interested shareholders.

• (2) Comments on the execution of the Sales Agency Agreement and the Supplemental Agreements thereof by the independent non-executive directors of the Company

The independent non-executive directors of the Company concurred with the comments on the implementation of the Sales Agency Agreement and the Supplemental Agreements made by the Board of Directors of the Company.

Trading in the H shares of the Company

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

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

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

Foshan City, Guangdong, the PRC, 28 August 2006

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

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