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

Jul 12, 2007

HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED 海信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 ON THE ADDITION AND AMENDMENT TO THE ANNUAL REPORT OF 2006

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”).

Hisense Kelon Electrical Holdings Company Limited (the “Company”) published the Company’s annual report of 2006 on the website of CNINF at http://www.cninfo.com.cn on 27 April 2007. In response to the verification request made by the Shenzhen Stock Exchange, certain issues relating to the 2006 Annual Report are added and amended as follows:

• I. Additional information relating to the “Business Review” under “(1) Management Discussion and Analysis” under “VIII. Report of the Directors” of the 2006 Annual Report is provided as follows:

For the year ended 2006, the Company achieved a turnaround from loss to profit. During the reporting period, the Company recorded a turnover of RMB6.565 billion from its principal operations, and net profit of approximately RMB24.12 million. These results are attributable to the following reasons:

1. 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.

2. In 2006, the Company, through adjusting its product portfolio and persisting the highend strategy, recorded significant growth in profitability and profit margin.

The Company took a series of effective measures to reduce various costs and expenses. With the gradual implementation of these measures, the Company recorded significant reduced expenses as compared to the previous year. These measures include: The headquarters of the Company significantly optimized the allocation of human resources and simplified the organization. In 2006, the human resources costs were reduced by RMB10 million as compared to 2005; Based on the principles of careful calculation and strict budgeting, diligence and thrift, and benefiting work in 2006, the administration expenses and communication expenses under the operating expenses and management expenses were reduced by RMB5.1 million as compared to 2005; By controlling unnecessary business trips and the persons attending external meetings and the numbers of attended meetings; In 2006, the traveling and meeting expenses were reduced by RMB7.5 million as compared to 2005; The headquarters of the Company disposed of idle vehicles in 2006 and resulted in a reduction of the vehicle operating expenses under the operating expenses and management expenses of that year by RMB4.5 million as compared to 2005; in 2006, the Company boosted its profitability and significantly enhanced the gross profit margin of its products through the optimization of product structure and implementation of high-end strategy.

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1. Revenues from the disposal of idle assets by the Company. Breakdown as follows:

2. (a) Intangible assets

							Implication
							on the profit
				Impairment	Net book	Net gain	and loss of
Types		Receiving party	Book value	provision	value	from disposal	the Company
Land		Disposed to third party	80,846,943.45	–	80,846,943.45	117,207,347.72	36,360,404.27
(b)	Fixed assets
							Implication
							on the profit
				Impairment	Net book	Net gain	and loss of
Types		Receiving party	Book value	provision	value	from disposal	the Company
Buildings and		Disposed to third party	37,383,029.58	763,982.66	36,619,046.92	56,226,839.35	19,607,792.43
structures		or accounted as obsolete
Machinery and		Transfer between subsidiaries	13,522,561.99	3,665,583.77	9,856,978.22	9,856,978.21	–
equipment		Disposed to third party	14,636,144.84	5,902,925.15	8,733,219.69	4,317,290.78	(4,415,928.91)
		or accounted as obsolete
		Sub-total	28,158,706.83	9,568,508.92	18,590,197.91	14,174,268.99	(4,415,928.92)
Furniture,		Transfer between subsidiaries	6,104,913.17	1,528,714.79	4,576,198.38	4,576,198.38	–
fixtures		Disposed to third party	5,911,488.40	4,200,477.12	1,711,011.28	959,118.26	(751,893.02)
and office		or accounted as obsolete
equipment		Sub-total	12,016,401.57	5,729,191.92	6,287,209.66	5,535,316.64	(751,893.02)
Motor vehicles		Transfer between subsidiaries	896,768.57	37,525.67	859,242.90	859,242.90	–
		Disposed to third party	3,253,877.21	51,258.48	3,202,618.73	2,617,481.31	(585,137.42)
		or accounted as obsolete
		Sub-total	4,150,645.78	88,784.15	4,061,861.63	3,476,724.21	(585,137.42)
Moulds		Transfer between subsidiaries	1,930,377.86	1,690,833.73	239,544.13	239,544.13	–
		Disposed to third party	9,150,744.39	9,108,839.39	41,905.00	241,409.00	199,504.00
		or accounted as obsolete
		Sub-total	11,081,122.25	10,799,673.12	281,449.13	480,953.13	199,504.00
Total			92,789,906.01	26,950,140.76	65,839,765.25	79,894,102.32	14,054,337.08

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(c) Construction in progress

						Implication
						on the profit
Project			Impairment	Net book	Net gain	and loss of
name	Receiving party	Book value	provision	value	from disposal	the Company
Project for	Disposed to third party	14,580,947.58	6,067,566.33	8,513,381.25	8,573,576.76	60,195.51
reconstruction	or accounted as obsolete
of Yangzhou	Transfer between subsidiaries	92,272.73	26,847.27	65,425.46	65,425.46	–
Kelon factories	Sub-total	14,673,220.31	6,094,413.60	8,578,806.71	8,639,002.22	60,195.51
Project for	Disposed to third party	22,505,250.51	7,902,211.14	14,603,039.37	11,587,336.68	(3,015,702.69)
Jiangxi Kelon	Transfer between subsidiaries	27,614,205.50	14,679,257.89	12,934,947.61	12,934,947.61	–
production line	Sub-total	50,119,456.01	22,581,469.03	27,537,986.98	24,522,284.29	(3,015,702.69)
Project for Zhuhai	Obsolete	8,111,297.55	8,111,297.55	–	–	–
refrigerator	Transfer between subsidiaries	22,104,863.97	8,193,025.23	13,911,838.74	13,911,838.74	–
production line	Sub-total	30,216,161.52	16,304,322.78	13,911,838.74	13,911,838.74	–
Others	Obsolete	1,710,476.71	223,400.00	1,487,076.71		(1,487,076.71)
Total		96,719,314.55	45,203,605.41	51,515,709.14	47,073,125.25	(4,442,583.89)

• II. Supplemental and amended explanation on issues relating to the amount of transferred out of impairment provisions for various assets for other reasons, the write off of trade receivables during the reporting period, prepayment with accounting age of one year or above, transferred out of the land use rights during the period, gain on physical inventory and others from non-operating business.

• (1) Additional information relating to “Schedule 1: Statement of Provisions for Impairment of Assets” under “XI. Financial Report” of the 2006 Annual Report is provided as follows:

Unit: RMB

Aggregated amount of Items transferred out Notes I. Aggregated provisions 98,419,532.11 for bad debts Including: trade receivables 79,491,401.40 The transferred-out amounts mainly comprise of: 1. the amounts of RMB57,270,000 recovered in 2006, which included a directly-recovered amount of RMB32,010,000 and the amount of RMB25,260,000 for offsetting the expenses payable to domestics home appliance chain stores with trade receivables; 2. the write off of bad debts of RMB11,200,000 for previous years (see note 3); 3. a provision for bad debts decreased by RMB11,020,000 by aging analysis method. Other receivables 18,928,130.71 The transferred-out amounts mainly comprise of: 1. an amount of RMB1,930,000 recovered in 2006; 2. the write off of bad debts of RMB17,000,000 for previous years (see note 3).

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II. Aggregated provisions for	345,022,901.02	Please refer to note 1 for the detailed breakdown by
impairment of inventory		products.
Including: raw materials	152,954,250.92	The provision for impairment of the inventories which
		was correspondingly transferred out due to the use and
		sales of the raw materials for which the provision for
		impairment was made in prior period.
Work-in-progress	6,536,588.91	The provision for impairment of the inventories of work-
		in-progress which was correspondingly transferred out
		due to the use of such work-in-progress for which the
		provision for impairment was made in prior period.
Storage goods	185,532,061.19	The provision for impairment of the storage goods which
		was correspondingly transferred out due to the sales of
		such inventories for which the provision for impairment
		was made in prior period.
III. Aggregated provisions for	26,950,140.76
impairment of fixed assets
Including: machinery and	9,568,508.91	The provision for impairment of fixed assets which was
equipment		correspondingly transferred out due to the disposal of
		the machinery and equipment for which the provision
		for impairment was made in prior period.
Electronic equipment,	5,729,191.92	The provision for impairment of fixed assets which was
appliance and furniture		correspondingly transferred out due to the disposal of
		the electronic equipment, appliance and furniture for
		which the provision for impairment was made in prior
		period.
Architectural Building	763,982.66	The provision for impairment of fixed assets which was
		correspondingly transferred out due to the disposal of
		the architectural buildings for which the provision for
		impairment was made in prior period.
Transportation equipment	88,784.15	The provision for impairment of fixed assets which was
		correspondingly transferred out due to the disposal of
		the transportation equipment for which the provision
		for impairment was made in prior period.
Moulds	10,799,673.12	The provision for impairment of fixed assets which was
		correspondingly transferred out due to the disposal of
		the moulds for which the provision for impairment was
		made in prior period.
IV. Aggregated provisions for	45,203,605.41	The provision for impairment of construction in progress
impairment of construction		which was correspondingly transferred out due to the
in progress		disposal of such construction in progress for which the
		provision for impairment was made in prior period.
		Please refer to note 2 for the detailed breakdown of the
		transferred-out provision for impairment.

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Note 1: Detailed breakdown of provision for impairment of inventories transferred out by product

					Unit: RMB
	Provision for		Work-
Product category	impairment of inventory	Raw materials	in-progress	Storage goods	Total
Refrigerator	Use in Production	2,406,811.16			2,406,811.16
	Sale Treatment	15,181,447.41	263,528.94	10,566,681.52	26,011,657.87
Air-Conditioner	Use in Production	33,960,482.13	275,754.39		34,236,236.52
	Sale Treatment	60,511,423.57		85,895,489.74	146,406,913.31
Freezer	Use in Production				–
	Sale Treatment	18,574,888.54	96,332.73	31,554,924.10	50,226,145.37
Others	Use in Production				–
	Sale Treatment	22,319,198.11	5,900,972.85	57,514,965.83	85,735,136.79
Total	Use in Production	36,367,293.29	275,754.39	–	36,643,047.68
	Sale Treatment	116,586,957.63	6,260,834.52	185,532,061.19	308,379,853.34

Note 2: The detailed breakdown of provision for impairment of construction in progress transferred out (disclosed in note 6 (10) to the Annual Financial Statements)

		Unit: RMB
Construction	Reason for	Amount
project name	being transferred out	transferred out
Project for reconstruction of Yangzhou Kelon factories	disposal	6,094,413.60
Project for Jiangxi Kelon production line	disposal	22,581,469.03
Zhuhai refrigerator production line	disposal	16,304,322.78
Others	disposal	223,400.00
Total		45,203,605.41

Note 3: Additional information on the write off of trade receivables and other receivables

The write off of bad debts amounting to RMB11,200,000 mainly referred to trade receivables of the year 2005 or the previous year, the Company has entered into trade receivables payment agreements with debtors who discontinued business or who suffered difficulties in business to write off the outstanding trade receivables.

Other trade receivables in the amount of RMB17,000,000 was written off in relation to receipt of invoice in 2006 of invoice expenses which had not been returned punctually in the previous years, and based on the trade receivables payment agreements entered with debtors who discontinued business to write off the outstanding trade receivables.

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• (2) Information relating to “Note 5. Prepayments” under “Appendix 6. Notes to Major Items of the Financial Statements” of “Notes to the Financial Statements” under “XI. Financial Report” of the 2006 Annual Report is amended as follows:

Due to an oversight, an accounting error occurred regarding the aging analysis of prepayments, amendments of which are as follows:

Before the amendments:

Prepayments	At the end of the year	At the end of the year
		Percentage of
Age	Amount (Unit RMB)	total amount
Within one year	3,853,093.24	4.70%
One to two years	64,511,962.40	9.11%
Two to three years	13,316,924.00	85.83%
Over three years	298,686.28	0.36%
Total	81,980,665.92	100%

5. Prepayments

After the amendments:

**5. **	Prepayments	At the end of the year	At the end of the year
			Percentage of
	Age	Amount (Unit RMB)	total amount
	Within one year	80,902,487.23	98.68%
	One to two years	239,170.39	0.29%
	Two to three years	540,322.02	0.66%
	Over three years	298,686.28	0.36%
	Subtotal	81,980,665.92	100.00%

The amount of the revised prepayments exceeding one year is much smaller and mainly includes the prepaid deposits.

• (3) Additional information relating to “Land use right in the amount of RMB81,660,000 being transferred-out under current period” under “Note 11. Intangible assets” under “Appendix 6. Notes to Major Items of the Financial Statements” of “Notes to the Financial Statements” under “XI. Financial Report” of the 2006 Annual Report is provided as follows:

The Company originally owned the land use right of the land with an area of 133,334.05 m[2] under the land use right certificate (Shunfuguoyong (2004) No. 1001950). On 1 December 2006, the Company sold part of the land with an area of 133,334.05 m[2] at a consideration of RMB127,207,347.72. The net book value of this land was RMB80,846,900 at the time of disposal, the details were disclosed in the Announcement on Assets Disposal dated 27 November 2006. In addition, Chengdu Kelon (the Company’s subsidiary) disposed of a property this year and the net book value of the land related to the property was RMB816,800. The aggregate net book value of the two lands were RMB81,660,000.

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• (4) Additional information relating to RMB18,800,000 accounted for as “Others” under “1. Non-operating income” under “Note 33. Non-operating income/expenses” of “Appendix 6. Notes to Major Items of the Financial Statements” of “Notes to the Financial Statements” under “XI. Financial Report” of the 2006 Annual Report is provided as follows:

Gain on physical inventory and others from non-operating business of RMB18,800,000 included gain on physical inventory and the cash award from “Energy-Saving Grand Prix” etc., breakdown of which is as follows:

Other categories of	Amount
non-operating income	(Unit: RMB)	Remarks
Income from the gain on	4,238,372.60	Although a gain on physical inventory is recorded, a deficit of RMB5,020,000
physical inventory		on the other hand occurs under “Non-operating expenses-others” because during
		the transfer of goods between subsidiaries, some companies recorded a surplus
		while others recorded a deficit due to unpunctual communication in terms of
		transactions and financing.
Refrigerators’ “Energy	3,467,200.00	The Company was presented the “Energy Saving Grand Prix” in 2006 and
Saving Grand Prix” award		awarded a Prize worth of USD440,000 (or RMB3,467,200)
Profits from the disposal of fixed	assets 4,437,297.34	Profits deriving from the disposal of fixed assets
Transportation compensation	345,813.30	Compensation received from forwarding companies due to damage done to goods
		in transit
Rental income	581,906.51	Mainly rental income of the subsidiaries
Penalty income	1,333,524.73	Mainly fines imposed on agents
Maintenance service income	1,546,433.31	Mainly income earned from after-sale maintenance service
Others	2,854,984.16	All other non-operating income that are not classified under the above-mentioned
		items, such as income from retirement of equipments and fees in tax withholding
		or collection on behalf of others
Total	18,805,531.95

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III. Supplemental information on “(1) Major litigations” under “X. Significant Events” of the 2006 Annual Report is provided as follows:

• (1) Below are the litigations which involved a claim amount exceeding RMB10,000,000 and were concluded during the period from 1 January 2006 to 30 June 2007 and the subsequent progress:

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Claim amount
Number Name of case (RMB) Accepting court Basic information Progress
1 Claims against Foshan 168,855,132.63 High Court of On 29 December 2004, the Company entered into On 26 December 2006, the High Court of Guangdong
Shunde Jiegao Investments Guangdong the “State-owned Land Use Rights Transfer Province ordered the defendant to pay RMB168,855,132.63
Company Limited Province Agreement” (the “Agreement”) with Foshan and the interests thereon with the litigation costs borne by
by the Company Shunde Jiegao Investments Company Limited for Jiegao. On 18 April 2007, the Company, Ronggui Rural Credit
the transfer of the land use rights of a state-owned Cooperative of Shunde and Jiegao entered into a settlement
piece of land, which was owned by the Company, agreement under which the three parties agreed to dispose of
with a site area of 254,629.69 sq.m. the above land use rights held by Jiegao at the market price
located at the east of Wai Huan Lu, Rong Gui comparable to the previous disposal of the land use rights of
Gao Li Community, Shunde District, Foshan 200 mu of land in the same location. Proceeds from the
City to Jiegao, at a consideration of disposal of the land use rights, after deducting the relevant
RMB168,855,132.63. However, Jiegao did not tax expenses, shall be equally distributed between the
pay the consideration for the transfer to the Company and Ronggui Rural Credit Cooperative of Shunde
Company in accordance with the Agreement. The to repay the liabilities payable by Jiegao to the Company and
Company lodged a claim to the High Court of Ronggui Rural Credit Cooperative of Shunde. To expedite
Guangdong Province on 1 August 2006. the collection of the repayment, the Company and Foshan
Shunde Shunrong Investments Company Limited entered into
a debt transfer agreement on 31 May 2007, under which the
Company transferred the principal of the debt against Foshan
Shunde Jiegao Investments Company Limited amounting to
approximately RMB168 million, the interests thereon, the
litigation fees and the rights granted by the settlement
agreement entered into between the Company, Shunde
Ronggui Rural Credit Cooperative and Jiegao to Shunrong
Investments at the consideration of RMB142 million.
2 Claims against Jiangxi 31,000,000.00 High Court of The court ordered to seal up 30,105 sets of air- Given that both parties had entered into a repayment
Kelon and the Company Jiangxi conditioners from Jiangxi Kelon. On 22 August, agreement of the delivered goods and the agreement
initiated by China the Company received documents from the court. had been largely performed, the plaintiff applied to the
Merchants Bank on a loan The plaintiff alleged that it had discounted Higher People’s Court of Jiangxi Province to withdraw
contracts certain bank acceptance notes issued by Jiangxi the claim on 31 May 2006. On 2 June 2006, the Higher
Kelon to the amount of RMB43,013,270.97, People’s Court of Jiangxi Province ordered that the
Jiangxi Kelon has only paid a deposit of 30% of plaintiff was permitted to withdraw the claim and the
the total value and the balance of RMB30,109,289.68 plaintiff should be liable for the case acceptance fee
remains outstanding. Although part of the acceptance and the property preservation expense.
note has yet to fall due, the plaintiff demanded
immediate settlement by Jiangxi Kelon pursuant to
the agreement and demanded the Company to take
over the collateral liabilities.
3 Claims against Kelon 26,873,844.00 Intermediate Court The plaintiff claimed that Kelon Air-Conditioner Given that the settlement agreement entered into between
Air-conditioner by of Foshan confirmed an amount due to the plaintiff of both parties by the end of 2005, and the defendant had been
Guangdong Weiling Electric RMB27,422,275.56 on 23 May 2005 and the making repayments pursuant to the settlement agreement,
Machines on a sale and outstanding amount of RMB26,412,244, net of the plaintiff, on 17 July 2006, applied to the Intermediate
purchase contract the steel worth of RMB1,010,031.50 delivered People’s Court of Foshan, Guangdong Province to withdraw
by the Company to the plaintiff on 21 May. The the claim. On 26 July 2006, the Intermediate Court of
plaintiff requested Kelon Air-Conditioner to pay Foshan ordered that the plaintiff was permitted to withdraw
the consideration of the goods and the interest the claim and the plaintiff should be liable for the case
thereon, and to bear the litigation fees of the case. acceptance fee and the property security expense.
4 Claims against Yangzhou 21,000,000.00 Intermediate Court The plaintiff claimed that on 22 March 2005, Since the debtor had fully repaid the loan, China
Kelon and the Company by of Nanjing Yangzhou Kelon entered into a loan agreement in the Merchants Bank, on 25 October 2006, applied to the
China Merchants Bank Co., amount of RMB20,000,000 for a term of one year. Intermediate People’s Court of Nanjing, Jiangsu
Ltd. (“China Merchants The loan was guaranteed by the Company. The Province to withdraw the claim. On 27 October 2006,
Bank”) Nanjing Branch in plaintiff had granted the loan and subsequently as the Intermediate Court of Nanjing ordered that the
relation to loan agreement a result of material events affecting the repayment plaintiff was permitted to withdraw the claim and
ability of Yangzhou Kelon and the Company, the China Merchants Bank should be liable for case
plaintiff demanded early repayment of the loan plus acceptance fee, claim security expenses and other
interests thereon, the debt recovery fees of litigation fee.
RMB253,100 as well as all costs of the legal
proceedings. At the same time, the plaintiff applied
for a court order to freeze the bank deposit of
RMB21,000,000 or to seal up its assets.
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5 Claims against Yangzhou 12,000,000.00 Intermediate Court The plaintiff claimed that a letter of credit was On 5 September 2006, the plaintiff applied to the
Kelon and the Company by of Yangzhou issued on behalf of Yangzhou Kelon pursuant to Intermediate Court of Yangzhou, Jiangsu Province to
Bank of China Limited the Banking Facility Agreement entered into by withdraw the claim on the basis that the terms of the
Yangzhou Branch in the two parties, with the Company as guarantor. debt repayment had been agreed on between the parties.
relation to a loan contracts Several letters of credit were issued by Bank of On 6 September 2006, the Intermediate Court of
China Limited Yangzhou Branch on behalf of Yangzhou ordered that the plaintiff is permitted to
Yangzhou Kelon in favour of Nanjing Hongbaoli withdraw the claim and the plaintiff was liable for case
Company Limited and the accepting bank produced acceptance fee and security expenses incurred.
the bills under those letters of credit to the
plaintiff. Yangzhou Kelon failed to make payment.
6 Claims against Kelon 10,463,130.79 Intermediate Court Dongguan Xinnong claimed that both parties On 21 August 2006, the plaintiff applied to the
Air-Conditioner by of Foshan confirmed upon verification on 31 May 2005 that Intermediate People’s Court of Foshan, Guangdong
Dongguan Xinnong Motors Kelon Air-Conditioner defaulted in payment of a total Province to withdraw the claim on the basis that a
Company Limited purchase price of RMB10,463,359.99 and a deposit settlement agreement between the parties had been
(“Dongguan Xinnong”) in of RMB499,770.80. An amount of RMB500,000 was arrived at. On 19 August 2006, the Intermediate Court
relation to a sale and subsequently repaid, however, the balance remained of Foshan ordered that the plaintiff is permitted to
purchase contract unsettled. Dongguan Xinnong initiated proceedings withdraw the claim and the plaintiff was liable for case
against Kelon Air-Conditioner for payment by the acceptance fee.
Company of the unpaid purchase price and all costs
of the legal proceedings and security expenses.
7 Claims against Wuhu 10,000,000.00 Intermediate Court Based on the loan contracts the plaintiff applied Since the parties had reached a settlement agreement, the
Yingjia by the Bank of of Wuhu, Anhui for a pre-trial security order from the court to plaintiff applied to the Intermediate People’s Court of
CommunicatiWuhu Branch Province freeze deposits of Wuhu Yingjia or to seal up its Wuhu, Anhui Province to withdraw the claim on 4
in relation to loan contracts properties worth of RMB10 million. The court September 2006, the Intermediate Court of Wuhu ordered on
notified the Company to assist in withholding 5 September 2006 that the plaintiff is permitted to withdraw
the purchase price of RMB10 million payable to the claim and the plaintiff shall be liable for case acceptance
Wuhu Yingjia. fee and claim security expenses.
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From 1 January 2006 to 30June 2007, the Company and its subsidiaries were involved in a total of 75 closed cases with a total claim amount of RMB390,597,100.

Among the closed cases above, the Company and its subsidiaries were acting as plaintiffs in 4 litigations with a total claim amount of RMB169,289,600.

Among the closed cases above, the Company and its subsidiaries were acting as defendants in 71 litigations involving a total claim amount of RMB221,307,500.

Among the closed cases in which the Company and its subsidiaries were involved, other than the 7 significant litigations and arbitrations disclosed in this report with the claim amount over RMB10,000,000 (the claim amount of the litigation was RMB280,192,100). The claim amount of the remaining 68 cases were all less than RMB10,000,000 (the claim amount of the litigation was RMB110,405,000).

(2) The table below shows the relevant progress of the litigations and arbitrations from 26 April 2007 to 30 June 2007 date of the announcement where the claim amount was over RMB10,000,000.

			Litigation involving Greencool Companies and the specified thirdparties	Litigation involving Greencool Companies and the specified thirdparties
No.	Name of case	Claim Amount (in ten thousand dollars)	Background information of the case	Theprogress of the case
1	Litigation initiated by Jiangxi Kelon against Guangdong Greencool, Gu Chu Jun, Tianjin Greencool, Hainan Greencool and Jinan San Ai Fu	8,160.00	On 20 January 2005, under the direction of Gu Chu Jun and Guangdong Greencool, Tianjin Greencool and Jinan San Ai Fu entered into a sale and purchase contract to sell 700 tons of refrigerant to Jinan San Ai Fu, of which 600 tons were sold by Jinan San Ai Fu to the plaintiff. The plaintiff alleged that the five defendants had embezzled its funds by fraud.	The Intermediate People’s Court of Foshan City heard the case in open session on 14 June 2007 and all parties involved in the case attended the hearing. The case is now pending judgement.
2	Litigation initiated by Kelon Air-Conditioner against Guangdong Greencool, Jinan San Ai Fu, Tianjin Greencool, Hainan Greencool and Gu Chu Jun	4,080.00	The plaintiff entered into a sale and purchase contract with Jinan San Ai Fu to purchase 300 tons of environment-friendly refrigerant from it. The plaintiff paid RMB40,800,000 for the goods on 1 April 2005, but Jinan San Ai Fu failed to deliver the goods. The plaintiff alleged that the five defendants had embezzled its funds by fraud.	The Intermediate People’s Court of Foshan City heard the case in open session on 13 June 2007 and all parties involved in the case attended the hearing. The case is now pending judgement.

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3 Litigation initiated by 9,000.00 The Company alleged that Aike Enterprises (Tianjin) Co., Ltd. The Intermediate People’s Court of Foshan City heard the case
Jiangxi Kelon against embezzled its funds and Guangdong Greencool and the others in open session on 30 May 2007 and all parties involved in the
Guangdong Greencool should assume the joint liability. The first trial was conducted case attended the hearing. The case is now pending judgement.
and others on 24 July 2006.
4 Litigation initiated by 7,500.00 The Company alleged that Tianjin Greencool embezzled its The Intermediate People’s Court of Foshan City heard the case
Jiangxi Kelon against funds and Guangdong Greencool and the others should assume in open session on 30 May 2007 and all parties involved in the
Guangdong Greencool the joint liability. The first trial was conducted on 24 July 2006. case attended the hearing. The case is now pending judgement.
and others
5 Litigation initiated by 3,500.00 In course of investment in Yangzhou Kelon, Gu Chu Jun had The Intermediate People’s Court of Foshan City heard the case
Yangzhou Kelon against asserted repeatedly to the Management Committee of the in open session on 13 June 2007 and all parties involved in the
Guangdong Greencool, Economic Development Zone that the Company was a case attended the hearing. The case is now pending judgement.
Yangzhou Greencool subsidiary of Greencool and Greencool was the owner of the
and Gu Chu Jun Company during the negotiation and purchase of land. Thus,
the Finance Bureau of Economic Development Zone was misled
to deposit the incentive fund of RMB35 million to 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
Claim Amount
(in ten
No. Name of case thousand dollars) Background information of the case The progress of the case
1 Litigation against the 1,985.30 The plaintiff alleged that it had undertaken the construction The Intermediate People’s Court of Foshan City heard the case
Company by Hangxiao works of the Company’s plain warehouse factories No. 1 and in open session in No. 28 tribunal on 14 March 2007. The
Ganggou No. 2 pursuant to a construction contract with the Company second court session was scheduled on 19 June 2007 and the
and the Company defaulted in payment of RMB1,193,000 of case would be tried together with the litigation against
construction fees. The plaintiff filed proceeding against the Hangxiao Ganggou by the Company for breach of contract.
Company for the payment of RMB1,193,000 in construction
fees and RMB17,660,000 in default penalties and the costs of
legal proceedings. The proceedings was resumed in March
2007. The construction fees were revised as RMB1,170,000
by Hangxiao Ganggou.
2 Litigation against 2,716.00 The plaintiff applied for a pre-trial security order from the On 12 June 2007, the Company presented jurisdictional dissent
Jiangxi Kelon and court to seize properties worth of RMB18,000,000 of Jiangxi to the Intermediate People’s Court of Kaifeng City as a result of
Kaifeng Kelon by Kelon and Kaifeng Kelon. The plaintiff applied for a property the arbitration clause entered by the parties and the court
Kaifeng Economic security in the course of litigation and the court ordered to accepted the case. Meanwhile, the two parties were negotiating
Technology seize the properties of Jiangxi Kelon and Kaifeng Kelon to settle the case. Jiangxi Kelon Share Capital Transfer
Development (Group) amounting to RMB9,160,000. Agreement has been entered provisionally.
Company in relation to
joint a venture contract
3 Litigation initiated by 1154.70 The Company alleged that Hangxiao Ganggou failed to As litigation against the Company by Hangxiao Ganggou for the
the Company against complete the construction works according to the terms of the payment for the construction in 2005 and the first court session
Zhejiang Hangxiao contract and has to pay default compensation. was conducted on 14 March 2007. The court would hear the
Ganggou Holdings case against Hangxiao Ganggou by the Company for breach of
Company Limited the construction contract together with the above cases on 19
June 2007.
----- End of picture text -----

As at 30 June 2007, the Company and its subsidiaries were involved in 91 litigations with a total claim amount of RMB1,192,434,900 and involving 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 cases with a total claim amount of RMB908,254,900 and as defendants in 63 cases involving an amount of RMB284,180,000 and land of 629,003.22 square metres.

Among the aforementioned litigations involving the Company and its subsidiaries, there are 27 litigations and arbitrations as disclosed above involving an amount exceeding RMB10,000,000 each (with a total claim amount of RMB1,143,352,200), 64 litigations and arbitrations with a claim amount less than RMB10,000,000 each (with a total claim amount of RMB49,082,700 and the land use rights of 629,003.22 square metres).

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From 26 April 2007 to 30 June 2007, the Company and its subsidiaries were involved in 27 new litigations with a total claim amount of RMB111,859,700. The Company and its subsidiaries acted as a plaintiff in 1 case with a total claim amount of RMB89,184,100 and as defendants in 26 cases involving an amount of RMB22,675,600. Among the aforementioned new litigations, there are 2 litigations and arbitrations as disclosed above involving an amount exceeding RMB10,000,000 each (with a total claim amount of RMB99,184,100), 25 litigations and arbitrations with a claim amount less than RMB10,000,000 each (with a total claim amount of RMB12,675,600).

• IV. Supplemental information relating to “1. Connected transactions entered into during ordinary course of business” under “(3) Particulars on major connected transactions during reporting period” of “X. Significant Events” of the 2006 Annual Report is provided as follows:

Parties to the				Sales of products and	Sales of products and	Purchase of products and	Purchase of products and
Connected	Subject matter			provision of service to		acceptance of service
Transactions	of the transaction	Pricing policy	Settlement period	connected parties		from connected parties
					Percentage of		Percentage of
					total amount		total amount
				Transaction	of similar	Transaction	of similar
				amount	transactions	amount	transactions
Hisense	Sales of refrigerators	Agency agreement*	Agency agreement*	77,993.02	11.88%
Marketing
Hisense	Sales of air-	Agency agreement*	Agency agreement*	79,276.49	12.08%
Marketing	conditioners
Hisense	Purchase of	Agency agreement*	Agency agreement*			6,711.34	1.36%
Marketing	refrigerators
Hisense	Purchase of air-	Agency agreement*	Agency agreement*			14,261.59	2.89%
Marketing	conditioners
Hisense	Sales of moulds	Note 3	60-day	64.87	0.01%
Marketing
Hisense	Purchase of air-	Note 1	55-day	595.56	0.09%
Zhejiang	conditioners
Hisense	Sales of plastic parts	Note 2	55-day	129.72	0.02%
Zhejiang	of air-conditioners
Hisense	Purchase of raw	Note 5	55-day			6,985.41	1.42%
Zhejiang	materials of air-
	conditioners
Hisense	Sales of equipments	Market price	60-day	30.01	0.00%
Zhejiang
Hisense	Sales of moulds	Note 3	60-day	255.43	0.04%
Electric
Hisense	Sales of raw	Note 2	55-day	26.59	0.00%
Import &	materials of air-
Export	conditioners
Hisense	Sales of raw	Note 2	55-day	28.59	0.00%
Hitachi	materials of air-
	conditioners
Hisense Air-	Purchase of raw	Note 5	55-day			1.75	0.00%
conditioner	materials of air-
	conditioners
Hisense	Purchase of raw	Note 5	60-day			182.99	0.04%
Nanjing	materials of
	refrigerators

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Hisense	Purchase of raw	Note 5	60-day			551.97	0.11%
Beijing	materials of
	refrigerators
Huayi	Sales of compressors	Note 6	60-day	35.56	0.01%		0.00%
Compressor
Huayi	Purchase of	Note 6	60-day			3,532.77	0.72%
Compressor	compressors
Jiaxibeila	Purchase of	Note 6	60-day			9,265.00	1.88%
	compressors
Chengdu	Sales of raw	Market price	60-day	333.69	0.05%
Xinxing	materials of
	refrigerators
Chengdu	Purchase of	Market price	60-day			2,523.59	0.51%
Xinxing	components of
	refrigerators
Chongqing	Sales of refrigerators	Market price	Spot exchange	3,960.09	0.60%
Kelon
Total				162,729.62	24.79%	44,016.41	8.92%

Whereby, the connected transaction, with which the listed company sold its products and offer labour to the controlling shareholder and its subsidiaries during the reporting period, amounted to RMB1,584,002,900.

Agency Agreement*: for details on the Sales Agency Agreement relating to Hisense, please refer to the Company’s Announcements dated 27 September 2005 and 5 April 2006.

• Note 1: The Group sold customized products (including refrigerators and air-conditioners, same for as herein under) to Hisense’s Related Party.

The prices at which the Group sold customized products to the Related Party of Hisense were determined by both parties with reference to the products’ market prices as well as the pricing level of OEM products in industry, and through arm’s length negotiations.

The unit/set prices at which the Group sold products to the Related Party of Hisense was calculated by the following formula:

Manufacturing cost of each unit/set of the Group’s product(s) + administrative expenses + after-sales expenses ≤ unit/set price at which the Group sold customized products to the Related Party of Hisense.

After taking into account the above formula as well as the Group’s relevant administrative expenses rate and after-sales expenses rate, and with reference to the prevailing market price, the prices for the customized products determined after negotiation between both parties are as follows:

Price of a particular product model sold by the Group to the Related Party of Hisense = fixed cost of that model/(1 – processing rate) (whereby processing rate for refrigerators is 0.07, and that for airconditioners is 0.05)

The customized products would be picked-up by the relevant customer itself.

• Note 2: The prices of the raw materials and parts and components the Group sold to the Related Party of Hisense were determined through arm’s length negotiation between the Group and the Related Party of Hisense with reference to the prevailing market prices of the raw materials of the same kind and the parts and components of refrigerator and air-conditioner.

Note 3: Kelon Mould sold moulds to Hisense Electrical Appliances and Hisense Air-Conditioner

When the Related Party of Hisense starts to invite public bidding (open to a number of independent third parties at the same time), the Group may present its tender for manufacturing the moulds required by Hisense’s Related Party. The pricing for manufacturing the moulds is to be determined through a public bidding process.

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• Note 4: The prices of the customized products the Group orders from the Related Party of Hisense were determined by both parties with reference to the products’ market prices as well as the pricing level of OEM products in the industry, and through arm’s length negotiations.

Both parties would determine the settlement price for each unit/set according to the following formula:

Settlement price of each unit/set of the product(s) the Group ordered from the Related Party of Hisense ≤ Manufacturing cost of each unit/set of the Group’s product(s) (in Shunde Headquarters or other bases) + administrative expenses + transportation expenses of each unit/set of the product(s).

After taking into account the above formula as well as the Group’s relevant manufacturing expense rate and administrative expense rate, and with reference to the prevailing market price, the prices for the customized products determined after negotiation between both parties are as follows:

Price of a particular product model ordered by the Group from the Related Party of Hisense = the Group’s fixed cost of that model/(1–processing rate) (whereby processing rate for refrigerators is 0.07, and that for air-conditioners is 0.05)

The customized products would be picked-up by the relevant customer itself.

• Note 5: The prices of the raw materials and parts & components ordered by the Group from the Related Party of Hisense were determined through arm’s length negotiation between the Group and the Related Party of Hisense with reference to the prevailing market prices of the raw materials of the same kind and the parts and components of refrigerator and air-conditioner.

• Note 6: Prices for ordering compressors were determined by the relevant subsidiaries of the Company together with Huayi Compressor, Huayi Jingzhou and Jiaxi Beila on an arm’s length basis with reference to the prevailing market price of the compressor. Such transaction had been conducted on normal commercial terms or terms no less favourable to the Company than terms available to or from independent third parties in ordinary and usual course of business of the Company.

The Company would like to apologize sincerely for the omissions and amendments in its 2006 Annual Report which may cause inconvenience to the investors.

Suspension of 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 until further notice.

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

As at the date of this announcement, the directors of the Company are Mr. Tang Ye Guo, Mr. Yang Yun Duo, Mr. Wang Shi Lei, Ms. Yu Shu Min and Mr. Lin Lan; and independent non-executive directors of the Company are Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren.

Foshan City, Guangdong, the PRC, 11 July 2007

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

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