Medlive Technology Co., Ltd. — Interim / Quarterly Report 2001

Aug 29, 2001

GuAngdong kelon electrical holdings Company limited

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

2001 INTERIM RESULTS ANNOUNCEMENT

The Board of Directors ("Directors") of Guangdong Kelon Electrical Holdings Company Limited (the "Company") is pleased to announce the unaudited consolidated interim financial statements of the Company and its subsidiaries (the "Group") for the six months ended 30 June 2001 (the "Period"), together with the unaudited comparative figures for the corresponding period in 2000. The consolidated interim financial statements have not been audited but have been reviewed by the Company's audit committee and auditors.

CONDENSED CONSOLIDATED INCOME STATEMENT

(Amounts expressed in thousands of Renminbi)

For the six months ended 30 June

2001 2000

(unaudited) (unaudited)

Turnover 2,791,077 3,093,468

Cost of sales (2,151,842 ) (2,357,672 )

Gross profit 639,235 735,796

Other revenue 42,983 18,794

Distribution costs (462,032 ) (407,115 )

Administrative expenses (165,543 ) (169,451 )

Other operating expenses (1,360 ) (13,012 )

Profit from operations 53,283 165,012

Finance cost (48,436 ) (39,147 )

Share of profits from investments

under equity method 7,030 -

Profit before taxation and

minority interests (Note 3) 11,877 125,865

Income tax expense (Note 4) (8 ) (7,280 )

Profit after taxation but

before minority interests 11,869 118,585

Minority interests 3,829 (8,103 )

Net profit for the period 15,698 110,482

Dividends (Note 5) - 212,289

Earnings per share (Note 6)

• Basic 0.02 0.11

CONDENSED CONSOLIDATED BALANCE SHEET

(Amounts expressed in thousands of Renminbi)

As of 30 As of 31

June 2001 December 2000

(unaudited) (audited)

ASSETS AND LIABILITIES

Non-current assets

Property, plant and equipment (Note 10) 2,700,811 2,833,684

Construction-in-progress 27,184 26,171

Investments in associates (Note 9) 283,966 148,119

Goodwill 183,132 186,999

Other assets 75,928 40,074

Total non-current assets 3,271,021 3,235,047

Current assets

Cash and bank deposits 1,769,672 838,710

Notes receivable 150,922 280,256

Accounts receivable (Note 8) 267,446 141,913

Inventories 1,962,298 1,736,641

Due from holding company (Note 15) 113,888 280,612

Due from related companies (Note 15) 35,189 196,762

Deposits, prepayments and other receivables 384,679 184,824

Tax recoverable 137,129 186,842

Total current assets 4,821,223 3,846,560

Current liabilities

Short-term bank loans (602,813 ) (437,700 )

Long-term bank loans, current portion (4,559 ) (19,777 )

Notes payable (1,142,298 ) (216,355 )

Trade deposits from customers (182,183 ) (530,957 )

Accounts payable (Note 11) (832,957 ) (506,450 )

Accruals and other payables (488,394 ) (626,777 )

Warranty provision (142,608 ) (144,172 )

Due to related companies (Note 15) (98,146 ) (148 )

Total current liabilities (3,493,958 ) (2,482,336 )

Net current assets 1,327,265 1,364,224

Total assets less current liabilities 4,598,286 4,599,271

Non-current liabilities

Long-term borrowings, non-current portion (232,665 ) (237,306 )

Pension liabilities (117,148 ) (117,148 )

Other long-term liabilities (6,424 ) -

Total non-current liabilities (356,237 ) (354,454 )

4,242,049 4,244,817

CAPITAL AND RESERVES

Issued capital (Note 12) 992,007 992,007

Reserves (Note 7) 2,875,729 2,874,174

Retained earnings 298,048 282,349

4,165,784 4,148,530

MINORITY INTERESTS (Note 16) 76,265 96,287

4,242,049 4,244,817

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

(Amounts expressed in thousands of Renminbi)

For the six months ended 30 June

2001 2000

(unaudited) (unaudited)

Net cash flows from operating activities 1,035,303 1,017,774

Returns on investments and servicing of finance (16,491 ) (251,534 )

Taxation - (57,581 )

Investing activities (218,467 ) (76,243 )

Net cash flows before financing 800,345 632,416

Financing 129,061 (503,694 )

Increase in cash and cash equivalents 929,406 128,722

Cash and cash equivalents, beginning of period 838,710 753,140

Effect of foreign currency translation 1,556 8,886

Cash and cash equivalents, end of period 1,769,672 890,748

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts expressed in thousands of Renminbi)

For the six months ended 30 June

2001 2000

Cumulative

Issued Share Statutory Revaluation translation Retained

capital premium reserves reserve reserve earnings Total Total

(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)

Balance as of 1 January

• As previously reported 992,007 2,160,621 343,743 373,570 (3,760 ) 282,349 4,148,530 4,863,208

• Prior year adjustment

(Note 20) - - - - - - - 188,147

As restated 992,007 2,160,621 343,743 373,570 (3,760 ) 282,349 4,148,530 5,051,355

Net profit for the period - - - - - 15,698 15,698 110,482

Dividends - - - - - - - (212,289 )

Translation differences - - - - 1,556 - 1,556 8,886

Balance as of 30 June 992,007 2,160,621 343,743 373,570 (2,204 ) 298,047 4,165,784 4,958,434

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in Renminbi except otherwise stated)

1. PRINCIPLES AND BASIS OF CONSOLIDATION

The accompanying condensed consolidated financial statements include the accounts of Guangdong Kelon Electrical Holdings Company Limited (the "Company") and its consolidated subsidiaries (hereinafter together with the Company referred to as the "Group").

All significant intercompany balances and transactions, including intercompany profits and losses and resulting unrealised profits and losses are eliminated on consolidation. Condensed consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.

(a) During the six months ended 30 June 2001, the Company had set up the following new subsidiaries and associates:

Percentage of

Place and date equity interest

of incorporation/ attributable to Issued capital/

Name of the entity establishment the Group Registered capital Principal activities

2001 (Rmb)

Directly Indirectly

Subsidiaries

Pioneer Holding Group PRC 80% - 30,000,000 Research and

4 June 2001 develop industrial

and commercial

computer system

Associated companies

Chongqing Rongsheng PRC 28% - 1,000,000 Sale of refrigerators

Kelon Refrigerator Co., Ltd. 19 February 2001

("Chongqing Rongsheng")

Sichuan Rongsheng PRC - 28% 2,000,000 Sale of refrigerators

Kelon Refrigerator Co., Ltd. 21 February 2001

("Sichuan Rongsheng")

Shunde Wangao Import PRC 20% - 3,000,000 Import and export

and Export Co., Ltd. 7 June 2001 business

(b) During the six months ended 30 June 2001, the Company had increased its investment in the following subsidiary:

Percentage of equity interest Amount of Additional Revised

Name of the entity attributable to the Group original investment investment investment amounts

As of As of (Rmb) (Rmb) (Rmb)

31 December 30 June

2000 2001

Subsidiary

Yingkou Kelon 67% 78.79% 133,492,430 24,753,677 158,246,107

Refrigerator Co., Ltd

("Yingkou Kelon")

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES

a. The accompanying condensed interim consolidated financial statements are prepared in accordance with International Accounting Standards ("IAS") 34 "Interim Financial Reporting" promulgated by the International Accounting Standards Committee and Appendix 16 of the Rules governing the Listing of Securities on the Stock Exchange of Hong Kong Limited ("Listing Rules"), except for the accounting for minority interests in one of the Group's subsidiaries, which is further explained in Note 16 to the condensed financial statements.

b. The principal accounting policies adopted in preparing the interim condensed financial statements of the Group are the same as those adopted in the preparation of the annual financial statements as at and for the year ended 31 December 2000, except that financial instruments are recognised and measured in accordance with IAS 39, which is effective from 1 January 2001 (Note 18). In addition, there is no change of accounting policies as the result of the implementation of revised IAS 12, which is also effective from 1 January 2001.

c. The financial assets purchased and sold in regular way are accounted for on the day of transaction. Gain or loss arising from changes in the fair value of those available-for-sales financial assets that are measured at fair value subsequent to initial recognition are included in net profit or loss for the period.

3. PROFIT BEFORE TAXATION AND MINORITY INTERESTS

Profit before taxation and minority interests in the condensed consolidated income statements was determined after charging (crediting) the following items:

For the six months ended 30 June

2001 2000

(unaudited) (unaudited)

Rmb'000 Rmb'000

Interest expenses 43,864 42,705

Depreciation of fixed assets 210,659 182,196

Interest income (27,373 ) (3,854 )

4. TAXATION

Taxation consisted of:

For the six months ended 30 June

2001 2000

(unaudited) (unaudited)

Rmb'000 Rmb'000

Company and subsidiaries

PRC enterprise income tax - 7,280

Hong Kong profits tax - -

Overseas tax - -

• 7,280

Associates

PRC enterprise income tax 8 -

8 7,280

The Group companies provide for taxation on the basis of their income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes.

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

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

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

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

As of 30 June 2001, deferred tax assets not recognised in the condensed financial statements were analysed into:

June 30 December 31

2001 2000

(unaudited) (audited)

Rmb'000 Rmb'000

Accelerated depreciation allowances - (1,346 )

Tax losses 115,183 129,367

Fixed assets revaluation (5,855 ) (3,321 )

109,328 124,700

5. DIVIDENDS

The directors do not recommend any interim dividend for the six months ended 30 June 2001 (six months ended 30 June 2000: Nil).

Dividend of Rmb212,289,000 declared during the six months ended 30 June 2000 represented final dividend for the year ended 31 December 1999.

6. EARNINGS PER SHARE

The calculation of basic earning per share was based on the unaudited consolidated net profit of approximately Rmb15,698,000 for the six months ended 30 June 2001 (six months ended 30 June 2000: Rmb110,482,000) divided by the weighted average number of 992,006,563 ordinary shares (six months ended 30 June 2000: 992,006,563 shares) in issue during the period.

No diluted earnings per share is presented because there was no diluted potential ordinary shares outstanding during the year.

7. RESERVES

There is no appropriation of net profit to reserves during the six months ended 30 June 2001 (six months ended 30 June 2000: nil). In accordance with the Company's articles of association, these appropriations will be proposed, if there is any, by the Board of Directors for the approval from the annual general meetings of shareholders.

8. ACCOUNTS RECEIVABLE

Accounts receivable were generated mainly from the sales of refrigerators and air-conditioners. The age of accounts receivable was analysed as follows:

As of 31

As of 30 December

June 2001 2000

(unaudited) (audited)

Rmb'000 Rmb'000

• not exceeding one year 323,801 219,961

• more than one year but not exceeding two years 98,243 79,098

• more than two years 4,456 1,910

426,500 300,969

Less: provision for doubtful debts (159,054 ) (159,056 )

267,446 141,913

9. INVESTMENTS IN ASSOCIATES

Investments in associates consisted of:

As of 31

As of 30 December

June 2001 2000

(unaudited) (audited)

Rmb'000 Rmb'000

Investments in associates, at fair value on the

date of transaction 238,682 237,714

Share of results of associates (88,890 ) (95,912 )

Due from associates 134,174 6,317

283,966 148,119

10. PROPERTY, PLANT AND EQUIPMENT

During the six months ended 30 June 2001, the Group has acquired total fixed assets amounted to approximately Rmb110,928,000.

11. ACCOUNTS PAYABLE

As of 30 June 2001, the Group's accounts payable were aged for less than one year.

12. ISSUED CAPITAL

There was no movement in the issued capital of the Company in the interim reporting period.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of the Group's cash and bank deposit, short-term borrowings and other current financial assets and liabilities approximate their fair value due to the short-term maturity of these instruments.

The carrying amount of the long-term bank loans approximate the fair value of these loans.

14. SEGMENTAL INFORMATION

The Group is principally engaged in the manufacture and sale of refrigerators and air-conditioners. Analysis of financial information by business segment is as follows:

For the six months ended 30 June 2001 For the six months ended 30 June 2000

Refrigerator Air-conditioner Consolidated Refrigerator Air-conditioner Consolidated

(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)

Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000

Turnover 1,264,086 1,526,991 2,791,077 1,789,590 1,303,878 3,093,468

Profit from operations 17,318 35,965 53,283 149,766 15,246 165,012

Profit after taxation but

before minority interests 8,612 3,257 11,869 115,210 3,375 118,585

Minority interests 5,132 (1,303 ) 3,829 (6,753 ) (1,350 ) (8,103 )

Net profit for the period 13,744 1,954 15,698 108,457 2,025 110,482

The refrigerator's business does not have seasonality. The air-conditioner's business has seasonality, with the slow season from August to November of each year.

15. RELATED PARTY TRANSACTIONS

The following is a summary of significant transactions carried out in the ordinary course of business between the Group and related parties for the six months ended 30 June 2001 and the respective balances with the related companies as of 30 June 2001:

a. Transaction with related companies

For the six months ended 30 June

2001 2000

(unaudited) (unaudited)

Rmb'000 Rmb'000

Sale of goods/raw material to

• GKG (Note i) 9,777 28,160

• Shunde Cheung Tat (Note ii) - 319,207

• Shunde Huaao (Note iii) 22,026 -

• Sanyo-Kelon (Note iv) 11,524 25,007

• Chongqing Rongsheng (Note v) 56,307 -

• Sichuan Rongsheng (Note xi) 47,481 -

Purchase of goods/raw material from

• GKG (Note i) 101,029 85,980

• Shunde Huaao (Note iii) 185,212 -

• Sanyo-Kelon (Note iv) 1,369 1,774

Advertising fee paid to Kelon Advertising (Note vi )19,299 55,477

Advertising fee paid to C&Y (Note vii) 19,080 -

Finance charges charged to GKG (Note i) 18,967 -

b. Balances due from (to) related companies

As of 31

As of 30 December

June 2001 2000

(unaudited) (audited)

Rmb'000 Rmb'000

Balance due from GKG (Note i) 113,888 280,612

Balances due from related companies

• Shunde Cheung Tat (Note ii) - 121,429

• Chengdu Xinxing (Note viii) 34,000 34,000

• Others (Note ix) 1,189 41,333

35,189 196,762

Balance due to related companies

• Shunde Huaao (Note iii) (94,689 ) -

• Others (3,457 ) (148 )

(98,146 ) (148 )

Note i: Under the licence agreement ("Licence Agreement") dated 6 July 1996 made between Guangdong Kelon (Rongsheng) Group Company Limited ("GKG"), the holding company of the Group, and the Company, GKG granted to the Company an exclusive right to use the trademarks "Kelon" and "Ronshen" for no consideration (i) as registered in the PRC and Hong Kong, and/or (ii) as may from time to time be registered and/or in respect of which applications for registration may be made with the trademarks registry of any other territory by GKG and /or (iii) all "Kelon" or "Ronshen" trademark registrations as may be assigned to GKG from time to time on freezers, refrigerators and other similar or related products and such other products as may be requested by the Company from time to time which are not objected by GKG, on a worldwide basis, for a term equivalents to the period of validity of the relevant registration. GKG may use and, with the prior written consent of the Company, allow third party to use, such trademarks on production other than the types of products covered by the Licence Agreement. At present, the Group has used the trademarks of "Kelon" and "Ronshen" on the refrigerators' products and "Kelon" on the air-conditioners products under the above-mentioned Licence Agreement.

The Group had sold goods to GKG and purchased raw material from GKG during the six months ended 30 June 2001.

The Group made payments on behalf of GKG in the settlement of GKG's operating expenses. On the other hand, GKG also made payments on behalf of the Group in the settlement of the Group's purchase of material and other operating expenses.

The Group and GKG used the banking facilities of each other for the purpose of effective utilisation of banking facilities. The Group charged GKG financial expenses at market interest rate based on average net balance due from GKG. During the six months ended 30 June 2001, the Group has charged GKG finance charges of approximately Rmb18,967,000 in connection with the advances made to GKG (six months ended 30 June 2000: nil).

As of 30 June 2001, long-term bank loan of Rmb200,000,000 of the Company was guaranteed by GKG (As of 31 December 2000: Rmb200,000,000).

Kelon Refrigerator, Kelon Air-Conditioner and GKG have an agreement ("Cost Sharing Agreement") whereby GKG agreed to share part of the advertising and promotional costs incurred by Kelon Refrigerator and Kelon Air-Conditioner in promoting the brand names of "Kelon" and "Ronshen" which are owned by GKG as referred above. According to the Cost Sharing Agreement, GKG agreed to share advertising costs of Rmb235,000,000 for 2000. During the period from 1 January 2001 to 30 June 2001, no such advertising cost sharing arrangement was entered into with GKG.

As of 30 June 2001, total amount due from GKG was Rmb113,888,000 (as of 31 December 2000: Rmb280,612,000).

Note ii: The Group sold refrigerators to Shunde Cheung Tat Household Appliance Co. Ltd ("Shunde Cheung Tat"). Shunde Cheung Tat is a PRC registered company and obtained significant financial support from GKG. For the six months ended 31 June 2000, the sale of refrigerators to Shunde Cheung Tat amounted to Rmb319,207,000. Prior to 31 December 2000, the Group entered into agreement and bought back certain unsold refrigerators from Shunde Cheung Tat for Rmb98,292,000. The amount represents the lower of cost and net realisable value of the unsold refrigerators at the time of buy-back. During the six months ended 30 June 2001, the Group did not have any transactions with Shunde Cheung Tat. The balance due from Shunde Cheung Tat as of 31 December 2000 amounted to approximately Rmb121,429,000 was repaid during the period ended 30 June 2001.

Note iii: Shunde Huaao Electrical Company Limited ("Shunde Huaao") is a subsidiary of GKG.

Note iv: Sanyo-Kelon Refrigerator Co., Ltd. ("Sanyo-Kelon") is an associated company of the Group.

Note v: Chongqing Rongsheng is an associated company of the Group.

Note vi: The Group engaged Kelon Advertising Company ("Kelon Advertising") as one of its advertising agency. Kelon Advertising Company is a wholly-owned subsidiary of GKG. For the six months ended 30 June 2001, the Group made payment of Rmb19,299,000 (for the six months ended 30 June 2000: Rmb55,477,000) to Kelon Advertising in connection with advertising activities in respect of Kelon brands.

Note vii: Kelon Development Company Limited ("KDC"), a subsidiary of the Company, entered into an agreement with Qin Jia Yuan Shares Company Limited ("QJY") on 23 September 2000 regarding the subscription of shares by KDC in Communication and You Holdings Company Limited ("C&Y") as well as setting out the respective rights and obligations of QJY and KDC as shareholders of C&Y and setting out the basis on which the business and affairs of C&Y would be managed and controlled.

C&Y is principally engaged in the media advertising and marketing business, including but not limited to:

(a) the provision of production support on audio-visual program;

(b) marketing of shows to overseas broadcasting entities;

(c) provision of promotion, public relations, advertising consultancy services to advertisers and factory owners;

(d) production of special audio-visual programmes for advertisers and factory owners; and

(e) obtaining advertising air time from various media and selling such air time to advertising clients.

In accordance with the agreement, KDC subscribed for 25 shares in C&Y at a consideration of HK$12,000,000 and QJY subscribed for 73 shares in C&Y at a consideration of HK$2,000,000 and the assignment of certain advertising and business contracts to C&Y. QJY also acquired 1 share in C&Y from each of C&Y's initial subscribers for cash at par.

During the six months ended 30 June 2001, the Group paid HK$18,000,000 for the sponsorship air time from C&Y.

As the sole shareholder of QJY is the spouse of Dr. Philip Yu Hong Wong, a non-executive director of the Company, QJY is a connected person of the Company under the Listing Rules.

Note viii: The Company made prepayments amounting to an aggregate sum of Rmb34,000,000 indirectly through its subsidiary, Chengdu Kelon to Chengdu Xinxing Electrical Appliance Holdings Company Limited ("Chengdu Xinxing"), which is an associate of Chengdu Engine (Group) Company Limited ("Chengdu Engine"), the minority investor of Chengdu Kelon. As consideration for such prepayment, Chengdu Xinxing has agreed to repay Chengdu Kelon by supplying an agreed number of refrigerator parts together with interest payments at an annual rate of 9.504% for Rmb30,000,000 and 9% for Rmb4,000,000. The prepayment was guaranteed by Chengdu Engine and Chengdu Kelon has the right to deduct from any dividends payable to Chengdu Engine the outstanding amount of any payments (in whatever form) due from Chengdu Xinxing directly or indirectly to the Company. As security for Chengdu Engine's performance of its obligations under the above guarantee, Chengdu Engine has charged its entire interests in Chengdu Kelon in favour of the Company.

Note ix: The Group has advanced money to certain related parties of GKG. The advances outstanding from these related parties as of 31 December 2000 amounted to approximately Rmb28,551,000. The obligation to repay of these advances are taken up by GKG prior to 30 June 2001.

Note x: Except for prepayment paid to Chengdu Xinxing (Note viii) and due from GKG (Note i), all balances with related parties are non-interest bearing, unsecured and have no fixed repayment terms.

Note xi: Sichuan Rongsheng is an associated company of the Group.

16. MINORITY INTERESTS

As of 30 June 2001, cumulative losses applicable to the minority interest of one of the Group's subsidiaries exceeded the minority interest in the equity of the subsidiary ("the excess loss") by approximately Rmb156,812,000 (31 December 2000: 158,115,000). Management is currently in discussion with the minority shareholder and believes that the minority shareholder will ultimately make additional financial contribution to absorb the excess loss, and accordingly, has allocated the excess loss to the minority interests in the Group's 30 June 2001 condensed consolidated financial statements.

17. COMMITMENTS

Capital commitments as of 30 June 2001 were as follows:

As of 31

As of 30 December

June 2001 2000

(unaudited) (audited)

Rmb'000 Rmb'000

Contracted but not provided for

• Purchase of property 38,700 -

• Purchase of plant and equipment 5,780 13,297

• Purchase of advertisement and /or sponsorship air time 16,120 21,200

18. CHANGE IN ACCOUNTING POLICY

From 1 January 2001, the Group changed its accounting policy with respect to the recognition and measurement of the financial instruments to conform to IAS 39 "Financial Instruments: Recognition and Measurement".

After initial recognition of a financial asset or financial liability at cost, the Group now measured each major class of the financial instruments, at the reliable fair value or amortised cost in accordance with IAS 39. The financial assets purchased and sold in regular way are accounted for on the day of transaction. Gain or loss arising from changes in the fair value of those available-for-sale financial assets that are measured at fair value subsequent to initial recognition are included in net profit or loss for the period.

The adoption of IAS 39 did not have a significant effect to the opening balances to these condensed financial statements.

For the six months ended 30 June 2001, there is no gain or loss arising from changes in the fair value of those available-for-sale financial assets that are measured at fair value subsequent to initial recognition.

19. FINANCIAL RISK MANAGEMENT

(a) Financial risk factors

The Group activities expose it to a variety of financial risks, including credit risk and interest rate risk.

Financial risk management is carried out by the Finance department under policies approved by the Board of Directors.

Credit risk, or the risk of counterparties defaulting, are controlled by the application of credit terms and monitoring procedures.

The Group's income and operating cash flows are substantially independent of changes in market prices interest rates.

The Group has no significant concentration of other financial risks, including foreign exchange risk.

(b) Fair value estimation

The fair value of publicly traded securities is based on quoted market prices at the balance sheet date.

In assessing the fair value of non-trading securities and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.

20. PRIOR YEAR ADJUSTMENT

In accordance with the revised IAS 10 "Events After the Balance Sheet Date", dividends proposed or declared after the balance sheet date are no longer permitted to be recognised as a liability as at the balance sheet date. This change in accounting policy has been applied retrospectively with the result that the retained earnings of the Group and the Company as at 1 January 2000 were increased by approximately Rmb212,289,000, representing the dividends declared by the Company after the respective balance sheet dates.

In addition, prior to 1 January 2000, expenditures incurred prior to commencement of business operations of individual subsidiaries and certain of the pension costs are deferred and amortised on a straight-line basis over a period of five and twenty years, respectively. With the adoption of IAS 38 "Intangible Assets" for the year ended 31 December 2000, the Group changed its accounting policy whereby all pre-operating expenditures and pension costs are expensed as incurred.

The effect of changes in accounting policies had been accounted for retrospectively as prior year adjustments as follows:

Group

2001 2000

Rmb'000 Rmb'000

Retroactive effect of change of accounting policies

on beginning retained earnings

• dividends - 212,289

• write-off of pre-operating expenditures - (13,267 )

• write-off of deferred pension costs - (10,875 )

• 188,147

• PRIOR YEAR COMPARATIVES

Certain comparative figures for the six months ended 30 June 2000 and as of 31 December 2000 have been reclassified to conform to the current interim period's presentation.

RESULTS

For the Period, turnover of the principal activities of the Group was approximately RMB2,791,000,000, representing a decrease of approximately 9.8% over the corresponding period in 2000, while net profit decreased by about 85% to approximately RMB15,700,000.

DIVIDENDS

At a meeting of the Directors held on 28 August 2001, the Directors resolved not to pay any interim dividend to shareholders (2000: nil).

REVIEW OF OPERATIONS AND PROSPECTS

Operations of the Group

The Group's principal activities include refrigerators and air-conditioners product development, manufacturing and the sale of such products in the domestic and overseas markets. The Group's refrigerator business was mainly conducted under the "Kelon" and "Ronshen" brands, whereas its air-conditioner business was under the "Kelon" and Huabao" brands.

Despite continued keen competition in the PRC domestic appliances market during the first half of 2001, the Group's strong commitment to its "honesty and integrity" business strategy has led to meaningful improvements.

In 2001, the Group's efforts in expanding its sales channels were rewarded with a significant increase in its coverage, as demonstrated by a growth of 40% in the number of contracted distributors for refrigerator as compared with last year. The number of distributors is expected to continue to increase in the second half of the year. Proportion of retail sales to overall sales increased by 14% as compared with last year. For air-conditioners the number of contracted distributors increased by 32% over last year. For new products the success ratio increased significantly and new models were very well received by consumers. As a result, new refrigerator models developed with ten new technologies accounted for 78% of the total sales for the first half of 2001. Besides, a series of new air-conditioners will be put onto the market. The total sales volume of air-conditioners for the past 6 months already matched the volume for the entire year 2000.

During the Period, the Group successfully increased awareness in cost control among the staff. Through measures such as combined purchase and optimization of product mix, the Group managed to lower the production costs of refrigerators and air-conditioners by 13% and 12% respectively over that of the same period in the pervious year. In addition, distribution costs were well under control despite increased efforts in developing its sales channels.

The above results were attributable to the Group's corporate culture of "Honesty, Cooperation, Learning and Creativity". As part of corporate reform, the Group attracted overseas and domestic professionals from the industry and established a management team of profound expertise and experience. These professionals were deployed into their respective fields of expertise to bring their talents into full play.

According to the "PRC Urban Household Appliances Market Survey 2000" released jointly by the Institute of Market Economy under the Development Research Center of the State Council, the Department of Economic Operation of the Ministry of Information Industry, the Research and Development Department of the Information Center of the State and the PRC Home Appliances Trade Association in May 2001, the "Rongsheng" and "Kelon" refrigerators came first in four areas - "Most Frequently Mentioned Products", "Most Recognized Brand", "Market Share" and "Expected Purchase Rate".

Operating Strategy

The operating strategy of the Group for 2001 revolves around sales reform, technological upgrade, cost control and expansion in business scope.

I. Sales Reform

1. The Group completed its re-engineering program and transformed from production-oriented to market-oriented. The establishment of the Group's 28 provincial branches throughout the PRC in 2001 marked the decentralization of our sales platform. With this change, the development of sales channels and response to market changes are now more timely and efficient;

2. The "500-5000 Project" and "Hundred-store Project" were launched by the Group's refrigerators and air-conditioners business units respectively. By strengthening its network with hundreds of leading shopping malls, supermarkets and chain stores throughout the PRC, the Group stepped up its investment in and development of retail outlets and will continue its efforts to increase the proportion of its sales to end retailers;

3. The Group reviewed and registered its existing service network and upgraded its network structure. The Group established a management structure of: "Headquarters - Customer Services Centres - Service Chain Stores - Franchised Stores" and is committed to promote our brand for customer service: "Total Carefree"; and

4. On the exports front, the Group effectively expanded its sales channels via exhibitions, company visits, the Internet and other channels. The number of countries and regions the Group now exports to surged from 23 last year to 74 this year. Meanwhile, sales volume and foregin exchange earned in the first half of this year increased by 67% and 160% respectively over the corresponding period of last year.

II. Technological Upgrade

1. Product development for refrigerators in 2001 placed particular emphasis on the prevailing features of "energy saving" and "environmental friendliness". Development of other new products are also adjusted on a timely basis in response to market changes. For air-conditioners, the Group kicked-off 110 new product development projects and 14 new designs that reached sample testing stage, 9 completed small-batch testing and 18 completed medium-batch testing. During second half of the year, the Group will develop more new products not only for domestic markets but also for exports to cater for customer demands;

2. Technical collaborations and exchanges were established with renowned PRC institutions such as Tsinghua University, Xian Jiaotong University, Fuzhou University and the Chinese Academy of Sciences. In addition, the Group is constructing one of the most advanced laboratories on refrigeration systems in the PRC; and

3. During first half of the year, the Group established Pioneer Holding Group, a hi-tech industrial entity in Beijing, to enhance the technology content and quality of traditional Kelon appliances. This will form the Group's core technological innovation strength for the development of new products and technologies for the next five to ten years. In addition, the new company can become a new profit center that opens up new operation frontiers by functioning as the incubator of hi-tech research results.

III. Stringent Cost Control

1. The Group completed a comprehensive analysis of its existing cost structure to formulate and implement cost control measures in every area from procurement, design and technology, and production;

2. The Group established an information collection and analysis system for prices of raw materials as well as competitors' products and suppliers, so as to provide sufficient support for its pricing and adjustment policies;

3. The Group enhanced and further improved its tender mechanism by splitting its purchase department into three separate regimes of pricing, procurement and approval of new vendors; and

4. The Group expanded coverage for items required tendering procurement. It successfully reduced the difference among purchase prices in Guangdong, Chengdu and Yingkou by joint tendering and procurement efforts.

IV. Expansion of Business Scope

1. Following its successful development of core technologies for Intelligence Control Household Systems, the Group is now in the preliminary stage of product commercialization. Working in conjunction with real estate developers, the Group has now set up a number of show flats equipped with such systems; and

2. Regarding our B2B procurement platform, which has been set up to lower purchase cost, we are working together with Wuxi Little Swan, a washing machine manufacturer, to merge and restructure our respective platforms in an attempt to create a larger PRC home appliance procurement platform.

Successful implementation of the above strategies has strengthened the Group's overall foundation in 2001. This helps further improve the Group's competitiveness. The Directors are confident about the Group's bright future prospect.

TRUST DEPOSITS

As of 30 June 2001, the Company did not have any trust deposits with any financial institutions in the PRC or deposits with any financial institutions in the PRC, which are allowed to be withdrawn only upon maturity. All of the Company's deposits have been placed with commercial banks in the PRC and Hong Kong and the Company has not encountered any collection difficulties.

UNIFIED INCOME TAX AND LOCAL TAX REFUND PREVILEGE

The Company is not aware of any government policy change so far that may affect the Company's tax rate.

EMPLOYEE HOUSING SCHEME

The Company has an incentive scheme with the objective of retaining middle management and technical staff. Under the scheme, the Company can at its discretion sell residential flats to the employees selected by the Company at book value. The employees pay a purchase price by monthly installments for ten years. Such monthly installments carried no interest element before 1997 but was subsequently revised so that effective from 1997 they all carried interest charges. The monthly installments are deducted automatically from the employees' monthly salaries. Title of properties will remain with the Company until the installments are fully paid by the employees. If an employee leaves the Company or is dismissed by the Company during the repayment period, the installment payments already made by the employee will be treated as rental payment and no refund of installment payments will be necessary.

As of 30 June 2001, a total of 571 (2000: 391) employees participated in this scheme. During the Period, no employee has fully paid up the installments and accordingly the titles of the properties remained with the Company.

THE IMPACT OF the PRC'S ENTRY INTO WTO ON THE GROUP

The household appliances industry is among the first in the PRC to embrace the market economy. Following the deepening of the PRC's economic reform, most of the famous household appliances enterprises from overseas have set up factories in the PRC to compete for a share in the domestic market. In essence, the market for household appliances in the PRC is already on the road to globalization. In view of the Group's sound competitiveness in the household appliances industry, benefits brought by the PRC's entry into the WTO are expected to outweigh any potential setbacks. Once it becomes a member of the WTO, the PRC will have to reduce its import tariffs, and prices of imported goods will drop as a result. PRC enterprises will nonetheless be subject to considerable pressure in the short run. Yet, in the long run, the PRC's entry into the WTO will speed up the process of globalization for leading players in the industry. Meanwhile, the decrease in tariffs will also lead to a decline in the costs of crucial components imported from overseas, thereby reducing the costs of operation of PRC enterprises, which will in turn enhance their competitiveness. Furthermore, the PRC's entry into the WTO will open up more promising opportunities for PRC enterprises to explore the overseas markets. The Group believes that through strengthening its research and development capability, the establishment of network infrastructure and brand name promotion, and leveraging on its competitive edge, it can certainly strengthen and further enhance its position in both the domestic and international markets.

SOURCES OF WORKING CAPITAL AND CAPITAL

Net cash inflow from operating activities for the first half of 2001 amounted to approximately RMB1,035,000,000.

As at 30 June 2001, the Company had bank balances and cash on hand totaling RMB1,769,000,000 and bank loan balance totaling RMB840,000,000.

Meanwhile, capital expenditure for the first half of 2001 amounted to approximately RMB218,000,000.

As at 30 June 2001, the net proceeds from the Company's initial public offering and subsequent placement of H shares and public offer of A shares have been applied as the Group's capital expenditure and working capital.

SHARE CAPITAL STRUCTURE

As at 30 June 2001, the share capital structure of the Company was as follows:

Percentage of Total Issued Share

Number of Shares Capital (%)

Domestic shares 422,416,755 42.58

H shares 459,589,808 46.33

A shares 110,000,000 11.09

Total 992,006,563 100

TOP TEN/SUBSTANTIAL SHAREHOLDERS

As at 30 June 2001, the top ten shareholders of the Company (including shareholders who registered an interest of more than 10% of the issued share capital of the Company) were as follows:

Name of Shareholders Class Shares Held Percentage of Holding

Guangdong Kelon (RongSheng)

Group Company Limited ("GKG") Domestic 337,915,755 34.06%

The Hongkong and Shanghai Banking

Corporation Ltd. H Shares 90,083,271 9.08%

Standard Chartered Bank H Shares 34,486,300 3.48%

ICEA Securities Limited H Shares 24,787,000 2.50%

Citibank N.A. H Shares 19,913,802 2.01%

XINDAS LIMITED H Shares 13,155,000 1.33%

Vickers Ballas Hong Kong Securities Ltd. H Shares 11,094,000 1.12%

Hang Seng Bank Ltd. H Shares 9,793,000 0.99%

Bank of Bermuda Ltd. H Shares 9,762,000 0.98%

Celestial Asia Securities Holdings Limited H Shares 9,595,000 0.97%

INTERESTS OF DIRECTORS AND SUPERVISORS

As at 30 June 2001, the interests of the directors and supervisors of the Company in the share capital of the Company were as follows:

Director/Supervisor Type of Interest Number of Domestic

Shares

Cai Shier Personal 100,000

Li Diqiang Personal/Family 105,000

He Si Personal/Family 50,000

PURCHASE, SALE AND REDEMPTION OF SHARES

The proceedings in respect of the approval and disclosure of the H Share Repurchase Scheme have been completed and the Directors are of the view that the Company will repurchase such securities in the market under appropriate circumstances.

Neither the Company nor any of its subsidiaries had purchased, sold or redeemed any of the securities of the Company or its subsidiaries during the Period.

SIGNIFICANT EVENTS

A resolution concerning the change of Directors of the Company was considered and approved at the general meeting on 18 June 2001. Wang Guoduan, Chen Dingbang and Liang Yuanying resigned as Directors of the Company. Xu Tiefeng, Li Zhenhua, Qu Yunbo, Yu Chor Woon, Carol and Zhang Xusheng were appointed as Directors of the Company.

Xu Tiefeng was elected by the Directors as the Chairman of the Company on 29 June 2001. At the same time, resignations by Chen Tongxing and Fan Chorwah, Vincent for personal reasons were accepted by the Directors.

Neither the Company nor its subsidiaries were involved in any material litigation or significant arbitration during the Period.

STATEMENT OF AFFAIRS RELATED TO THE AUDITORS' REPORT FOR 2000

The management of the Company is under negotiation with certain minority shareholders in respect of the excess loss in a subsidiary of the Group, which gave rise to the auditors' qualified opinion arising from disagreement about accounting treatment, which was expressed in the auditors' report for 2000 prepared by Arthur Andersen & Co. on 27 April 2001. It is the belief of the Company that such minority shareholders will ultimately contribute additional capital to cover the excess loss.

In the financial statements of the Company reviewed by Arthur Andersen & Co. for the six months ended 30 June 2001, there was still disagreement about the accounting treatment in respect of such excess loss attributable to minority shareholders.

CODE OF BEST PRACTICE

The Directors are not aware of any information that would reasonably indicate that the Company is not, or was not, in compliance with the Code of Best Practice contained in Appendix 14 of the Listing Rules, in any part of the Period.

DOCUMENT AVAILABLE FOR INSPECTION

The original copy of the interim report signed by the Chairman will be available for inspection at the following address:

No. 8 Ronggang Road

Ronggui, Shunde

Guangdong Province

China

By Order of the Board

Xu Tiefeng

Chairman

Shunde, 28 August 2001

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

1. FINANCIAL SUMMARY

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

For the year ended

For the six months ended 30 June 31 December

2001 2000 2000

(Unaudited) (Unaudited) (Unaudited)

Turnover from principal activities 2,791,119,830 3,093,467,978 3,869,502,617

Net profit (loss) 19,750,961 126,431,247 (672,537,438 )

Non-recurring items

• Loss on disposals of assets - 11,717 5,544,048

• Amortization of goodwill 8,648,884 5,024,906 10,197,000

Net profit before non-recurring

items 28,399,845 131,467,870 (656,796,390 )

Earnings per share 0.02 0.13 -0.68

Earnings per share considering

share change after the balance

sheet date 0.02 0.13 -0.68

Return on net assets (%) 0.48% 2.57% -16.34%

30 June 2001 31 December 2000

(Unaudited) (Unaudited)

Total assets 7,930,262,396 6,893,105,945

Asset-liability ratio (%) 46.76% 38.77%

Shareholders' equity (excluding

minority interests) 4,137,302,548 4,115,994,899

Net assets per share 4.17 4.15

Adjusted net assets per share 3.93 3.92

Net assets per share considering

share change after balance

sheet date 4.17 4.15

Net cash flow from operating

activities per share 1.04 1.10

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

Earnings per share = net profit/weighted average number of ordinary shares outstanding for the Period.

Return on net assets = net profit/shareholders' equity as of the Period end x 100%.

Asset-liability ratio = total liabilities/total assets x 100%

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

Adjusted net assets per share = (shareholders' equity as of the Period end - accounts receivable aged over 3 years - deferred expenses - net loss on disposals of (current, fixed) assets - pre-operating expenditures - long-term deferred expenditures - negative balance of housing fund)/number of ordinary shares outstanding as of the Period end.

* If earnings per share is calculated as "net profit/number of ordinary shares outstanding at the end of the period", then the earnings per share for the six months ended 30 June 2001 is RMB0.02 (for six months ended 30 June 2000: RMB0.13).

BALANCE SHEETS

(Prepared in accordance with PRC GAAP)

(Denominated in RMB)

Group Company

Note 30 June 2001 31 December 2000 30 June 2001 31 December 2000

(Unaudited) (Unaudited) (Unaudited) (Unaudited)

ASSETS

CURRENT ASSETS:

Cash at bank and on hand 1,769,670,408 838,710,032 1,511,125,841 461,842,796

Notes receivable 150,924,313 280,255,647 126,433,633 4,123,740

Dividends receivable - - - -

Interest receivable - - - -

Accounts receivable 1 331,228,324 297,542,830 136,598,501 6,424,447

Other receivables 2 544,839,199 460,048,067 1,626,256,045 2,279,594,405

Prepayments 51,916,969 67,149,203 28,622,194 21,216,776

Subsidy receivable - - - -

Inventories 3 1,962,298,332 1,736,641,111 1,549,554,961 21,186,421

Deferred expenses 7,372,337 7,448,872 4,293,305 5,081,115

Investments in debt

securities, current portion - - - -

Other current assets - - - -

Total current assets 4,818,249,882 3,687,795,762 4,982,884,480 2,799,469,700

LONG-TERM INVESTMENTS:

Long-term equity investments 4 340,788,463 338,261,758 1,191,302,098 1,149,148,415

Long-term investments

in debt securities,

non-current portion - - - -

Total long-term investments 340,788,463 338,261,758 1,191,302,098 1,149,148,415

FIXED ASSETS:

Fixed assets, cost 3,353,575,343 3,367,402,922 1,344,587,143 1,340,207,640

Less: Accumulated depreciation (1,152,180,504 ) (1,063,555,842 ) (348,485,296 ) (300,895,062 )

Fixed assets, net 2,201,394,839 2,303,847,080 996,101,847 1,039,312,578

Less: impairment provision

for fixed assets - - - -

Fixed assets, net 2,201,394,839 2,303,847,080 996,101,847 1,039,312,578

Project materials - - - -

Construction-in-progress 5 27,184,050 26,171,005 21,836,919 19,626,516

Fixed assets pending disposal - - - -

Total fixed assets 2,228,578,889 2,330,018,085 1,017,938,766 1,058,939,094

INTANTIBLE ASSETS

AND OTHER ASSETS:

Intangible assets 308,214,022 313,969,738 210,663,191 213,998,965

Long-term deferred

expenditures 6 234,431,140 223,060,602 100,305,579 39,217,469

Other long-term assets - - - -

Total intangible assets

and other assets 542,645,162 537,030,340 310,968,770 253,216,434

DEFERRED TAXATION

Deferred tax assets - - - -

TOTAL ASSETS 7,930,262,396 6,893,105,945 7,503,094,114 5,260,773,643

Group Company

Note 30 June 2001 31 December 2000 30 June 2001 31 December 2000

(Unaudited) (Unaudited) (Unaudited) (Unaudited)

LIABILITIES AND

SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Short-term loans 7 669,812,967 437,700,000 575,700,000 355,700,000

Notes payable 1,075,297,157 216,354,679 879,785,083 151,203,183

Accounts payable 832,957,346 506,449,676 42,546,694 3,812,243

Advances from customers 182,183,216 553,272,123 182,385,689 -

Salary payable 17,133,086 64,363,358 4,909,215 29,124,040

Staff welfare payable 6,539,725 3,511,001 3,431,025 40,282

Dividends payable - - - -

Taxes payable (137,464,155 ) (186,842,451 ) (110,306,344 ) (16,379,242 )

Pay to others 18,721,428 1,990,693 3,684,706 1,847,785

Other payables 184,481,775 163,179,095 1,001,367,240 287,625,599

Accruals 357,356,310 373,291,354 319,575,526 14,423,878

Provision 140,076,546 164,616,546 140,076,546 -

Current portion of

long-term liabilities 4,559,058 19,777,334 - -

Other current liabilities 448,658 - 156,833 -

Total current liabilities 3,352,103,117 2,317,663,408 3,043,312,213 827,397,768

LONG-TERM LIABILITIES:

Long-term loans 232,665,320 237,306,327 200,000,000 200,000,000

Debentures - - - -

Long-term payable 119,436,707 117,147,785 117,148,000 113,621,706

Special payable - - - -

Other long-term payable 4,137,068 - 3,128,771 -

Total long-term liabilities 356,239,095 354,454,112 320,276,771 313,621,706

DEFERRED TAXATION:

Deferred tax liabilities - - - -

Total liabilities 3,708,342,212 2,672,117,520 3,363,588,984 1,141,019,474

MINORITY INTERESTS 84,617,636 104,993,526 - -

SHAREHOLDERS' EQUITY:

Share capital 8 992,006,563 992,006,563 992,006,563 992,006,563

Capital surplus 9 2,451,222,837 2,451,222,837 2,451,222,837 2,451,222,837

Reserve surplus 343,742,703 343,742,703 343,742,703 343,742,703

Including: common

welfare reserve 114,580,901 114,580,901 114,580,901 114,580,901

Retained earnings 352,533,027 332,782,066 352,533,027 332,782,066

Currency translation differences (2,202,582 ) (3,759,270 ) - -

Total shareholders' equity 4,137,302,548 4,115,994,899 4,139,505,130 4,119,754,169

TOTAL LIABILITIES AND

SHAREHOLDERS' EQUITY 7,930,262,396 6,893,105,945 7,503,094,114 5,260,773,643

STATEMENT OF IMPAIRMENT PROVISION FOR ASSETS

(Prepared in accordance with PRC GAAP)

(Denominated in RMB)

31 December

Note 2000 Provision Reversal 30 June 2001

(Unaudited) (Unaudited) (Unaudited) (Unaudited)

(Unaudited) (Unaudited) (Unaudited) (Unaudited)

1. Provision for

doubtful accounts 159,056,119 - 1,667 159,054,452

Including: Accounts

receivable 159,056,119 - 1,667 159,054,452

Other receivables - - - -

1. Provision for impairment

in value of short-term

investments

Including: Investments

in stocks - - - -

Investments in debt securities - - - -

1. Provision for inventory

obsolescence 198,538,611 42,965,941 93,760,867 147,743,685

Including: Commodities 166,274,203 42,965,941 73,104,156 136,135,988

Raw materials 32,264,408 - 20,656,711 11,607,697

1. Provision for impairment

in value of long-term

investments 74,129,000 - - 74,129,000

Including: Long-term

equity investments 74,129,000 - - 74,129,000

Long-term investments in

debt securities - - - -

1. Provision for impairment

in value of fixed assets - - - -

Including: Buildings - - - -

Machinery and equipment - - - -

1. Provision for impairment in

value of intangible assets - - - -

Including: Patent - - - -

Trademark - - - -

1. Provision for impairment

in value of

construction-in-progress - - - -

1. Provision for impairment in

value of entrusted loans - - - -

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(Prepared in accordance with PRC GAAP)

(Denominated in RMB)

For the six months ended

30 June 2001 30 June 2000

(Unaudited) (Unaudited)

1. Share capital

Beginning of period 992,006,563 992,006,563

Addition during the period - -

Including: transfer from capital surplus - -

transfer form reserve surplus - -

transfer from profit appropriation - -

issue of shares - -

Decrease during the period - -

End of period 992,006,563 992,006,563

1. Capital surplus

Beginning of period 2,451,222,837 2,451,222,837

Addition during the period - -

Including: premium on share capital - -

reserve for non-cash assets received

as donation - -

reserve for cash received as donation - -

investment surplus reserve - -

fund transfer in - -

translation reserve - -

revaluation reserve - -

other reserve - -

Decrease during the period - -

Including: transfer to share capital - -

End of period 2,451,222,837 2,451,222,837

1. Statutory and discretional reserve surplus

Beginning of period 229,161,802 229,161,802

Addition during the period - -

Including: appropriation from net profit - -

Including: statutory reserve surplus - -

discretional reserve surplus - -

reserve fund - -

enterprise development fund - -

transfer from statutory reserve - -

Decrease during the period - -

Including: offsetting losses - -

transfer to share capital - -

appropriation of cash dividends or profit - -

appropriation of stock dividends - -

End of period 229,161,802 229,161,802

Including: Statutory reserve surplus 229,161,802 229,161,802

Reserve fund - -

Enterprise development fund - -

1. Common welfare fund

Beginning of period 114,580,901 114,580,901

Addition during the period - -

Including: appropriation from net profit - -

Decrease during the period - -

End of period 114,580,901 114,580,901

1. Retained earnings

Beginning of period 332,782,066 1,005,319,504

Net profit during the period 19,750,961 126,431,247

Profit appropriation during the period

End of period 352,533,027 1,131,750,751

STATEMENTS OF INCOME AND PROFIT APPROPRIATION

(Prepared in accordance with PRC GAAP)

(Denominated in RMB)

Group Company

For the six For the six For the year For the six For the six For the year

months ended months ended ended 31 months ended months ended ended 31

Note 30 June 2001 30 June 2000 December 2000 30 June 2001 30 June 2000 December 2000

(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Turnover 10 2,791,119,830 3,093,467,978 3,869,502,617 2,303,478,772 171,367,725 142,811,543

Less: Cost of sales (2,144,503,435 ) (2,350,333,173 ) (3,250,533,167 ) (1,802,081,123 ) (162,717,932 ) (136,006,123 )

Sales tax (43,086 ) - - (43,086 ) - -

Profit from principal

operations,net 646,573,309 743,134,805 618,969,450 501,354,563 8,649,793 6,805,420

Add: Profit from

other

operations 11 11,805,566 16,108,746 11,333,777 1,611,755 52,815 (448,135 )

Less: Operating

expenses (462,032,471 ) (407,115,370 ) (918,195,704 ) (439,228,622 ) - -

General and

administrative

expenses (169,181,635 ) (165,177,781 ) (631,116,249 ) (57,837,134 ) (52,965,284 ) (34,090,713 )

Financial expenses 12 (21,063,011 ) (39,146,994 ) (73,030,754 ) (712,896 ) (15,176,424 ) (27,297,184 )

Operating profit (loss) 6,101,758 147,803,406 (992,039,480 ) 5,187,666 (59,439,100 ) (55,030,612 )

Add: Investment

income 7,021,464 7,600 (1,829,000 ) 15,273,684 190,976,638 (607,753,554 )

Subsidy income - 96,601 175,300 - 96,601 175,300

Non-operating

income 13 2,737,599 2,581,300 12,929,298 77,545 97,545 61,580

Less: Non-operating

expenses 14 (292,665 ) (5,936,897 ) (20,505,821 ) (787,934 ) (530,437 ) (5,393,224 )

Profit (loss) before

taxation 15,568,156 144,552,010 (1,001,269,703 ) 19,750,961 131,201,247 (667,940,510 )

Less:Taxation - (7,280,485 ) (5,494,391 ) - (4,770,000 ) (4,596,928 )

Minority

interests 4,182,805 (10,840,278 ) 334,226,656 - - -

Net profit (loss) 19,750,961 126,431,247 (672,537,438 ) 19,750,961 126,431,247 (672,537,438 )

Add:Retained earnings,

beginning of

period 332,782,066 1,005,319,504 1,005,319,504 332,782,066 1,005,319,504 1,005,319,504

Others - - - - - -

Profit available

for distribution 352,533,027 1,131,750,751 332,782,066 352,533,027 1,131,750,751 332,782,066

Less: Statutory reserve

surplus - - - - - -

Common welfare

fund - - - - - -

Profit available for

shareholders 352,533,027 1,131,750,751 332,782,066 352,533,027 1,131,750,751 332,782,066

Less:Discretional

reserve fund - - - - - -

Cash Dividend - - - - - -

Stock Dividend - - - - - -

Retained earnings,

end of period 352,533,027 1,131,750,751 332,782,066 352,533,027 1,131,750,751 332,782,066

Profit for the Group Company

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

(Unaudited) Fully Weighted Fully Weighted Fully Weighted Fully Weighted

diluted average diluted average diluted average diluted average

Profit from principal

operations 15.63% 15.67% 0.65 0.65 12.11% 12.14% 0.51 0.51

Operating profit 0.15% 0.15% 0.01 0.01 0.13% 0.13% 0.01 0.01

Net profit 0.48% 0.48% 0.02 0.02 0.48% 0.48% 0.02 0.02

Net profit before

non-recurring items 0.69% 0.69% 0.03 0.03 0.69% 0.69% 0.02 0.02

CASH FLOW STATEMENTS

(Prepared in accordance with PRC GAAP)

(Denominated in RMB)

For the six months ended

30 June 2001

Group Company

(Unaudited) (Unaudited)

I. Cash flows from operating activities:

Cash received from sale of goods or rendering

of services 3,878,048,447 2,318,527,736

Refund of taxes and levies 14,532,426 -

Other cash received relating to operating activities 14,250,500 1,611,755

Sub-total of cash inflows 3,906,831,373 2,320,139,491

Cash paid for purchases of goods and services (2,237,239,044 ) (896,058,075 )

Cash paid to and on behalf of employees (365,295,499 ) (243,044,421 )

Taxes paid (28,814,236 ) (44,258,925 )

Other cash paid relating to operating activities (240,181,839 ) (81,541,629 )

Sub-total of cash outflows (2,871,530,618 ) (1,264,903,050 )

Net cash flows from operating activities 1,035,300,755 1,055,236,441

II. Cash flows from investing activities:

Net cash received from disposals of fixed assets,

intangible assets and other long-term assets 12,137,914 -

Other cash received relating to investing activities 27,373,054 24,725,045

Sub-total of cash inflows 39,510,968 24,725,045

Cash paid for acquisition of fixed assets,

intangible assets and other long-term assets (112,562,166 ) (34,424,470 )

Cash paid for acquisition of investments (4,154,125 ) (26,880,000 )

Other cash paid relating to investing activities (113,888,295 ) (164,539,807 )

Sub-total of cash outflows (230,604,586 ) (225,844,277 )

Net cash flows from investing activities (191,093,618 ) (201,119,232 )

III. Cash flows from financing activities:

Proceeds from borrowing 165,112,967 220,000,000

Sub-total of cash inflows 165,112,967 220,000,000

Repayment of borrowings (19,859,283 ) -

Cash paid for distribution of dividends,

profits or interest expenses (43,864,048 ) (24,834,164 )

Other cash paid relating to financing activities (16,193,085 ) -

Sub-total of cash outflows (79,916,416 ) (24,834,164 )

Net cash flows from financing activities 85,196,551 195,165,836

IV. Effect of change in foreign exchange rate 1,556,688 -

V. Net increase in cash and cash equivalents 930,960,376 1,049,283,045

For the six months ended

30 June 2001

Group Company

(Unaudited) (Unaudited)

1. Reconciliation of net profit to net cash flows

from operating activities:

Net profit 19,750,961 19,750,961

Add: Minority interests (4,182,805 ) -

Provision for impairment in value of assets 42,964,274 42,965,941

Depreciation of fixed assets 125,443,400 47,590,234

Amortization of intangible assets 5,755,716 3,335,773

Amortization of Long-term expenditures 61,479,510 31,299,088

Decrease in deferred expenses 76,535 787,810

Increase in accrued expenses (less: decrease) (15,935,044 ) 305,151,648

Financial expenses 16,490,994 109,119

Investment loss (7,021,464 ) (15,273,684 )

Increase in inventories (268,623,162 ) (1,571,334,481 )

Decrease in operating receivables 152,195,788 1,280,373,100

Increase in operating payables 906,906,052 910,480,932

Others - -

Net cash flows from operating activities 1,035,300,755 1,055,236,441

1. Investing and financing activities that do not

involve cash receipts and payments: - -

Repayment of debts by the transfer of investments - -

Current portion of convertible debenture

Fixed assets purchased in the form of finance lease - -

1. Net increase in cash and cash equivalents:

Cash and cash equivalents, end of period 1,769,670,408 1,511,125,841

Less: Cash and cash equivalents, beginning of period 838,710,032 461,842,796

Net increase in cash and cash equivalents 930,960,376 1,049,283,045

Notes to the Financial Statements

I. Change of accounting policies

The Company adopted the "Accounting Regulations for Joint Stock Limited Companies" in the financial statements in the previous year. Pursuant to CaikuaiZi [2000] No. 25, Caikuaizi [2001] No.17 and Caikuai [2001] No. 43 promulgated by Ministry of Finance, from 1 January 2001, the Company adopted new "Accounting Regulation for Enterprises" and changed the accounting policies as follows:

1. Prior to 1 January 2001, expenditures incurred prior to commencement of business operations of individual subsidiaries are amortized within five years based on straight-line method. With the adoption of "Accounting Regulation for Enterprises", the Company changed its accounting policy whereby all pre-operating expenditures are expensed as incurred. The effect of changes in accounting policies had been accounted for retrospectively. Therefore, the Group's retained earnings as at the beginning of 2000 was decreased by RMB13,267,000, the net profits for the period from 1 January to 30 June 2000 and the year ended 31 December 2000 were increased by RMB1,919,240 and RMB5,131,102 respectively.

2. Prior to 1 January 2001, pension cost was amortized within twenty years based on straight-line method. This deferred pension cost has no future benefit, hence the Company changed its accounting policy whereby this pension cost is expensed as incurred. The effect of changes in accounting policies had been accounted for retrospectively. Therefore, the Group's retained earnings as at the beginning of 2000 was decreased by RMB10,875,000, the net profits for the period from 1 January to 30 June 2000 and the year ended 31 December 2000 were increased by RMB375,000 and RMB750,000 respectively.

II. CONSOLIDATION SCOPE AND BASIS OF PRESENTATION

As of 30 June 2001, the Company had the following subsidiaries and associates:

Percentage of

Place and date of Investment equity interest

incorporation/ cost of the attributable to Registered

Name of the entity establishment Group the Company capital Principal activities

Directly Indirectly

Subsidiaries

Kelon Development Hong Kong HK$ 100% - HK$ Investment holding

Company Limited 17 August 1993 10,000,000 5,000,000

Guangdong Kelon PRC US$ 70% 30% US$ Manufacture and sale of

Refrigerator Co., Ltd. 25 December 1995 26,800,000 26,800,000 refrigerators

("Kelon Refrigerator")

Guangdong Kelon Air- PRC RMB 60% - US$ Manufacture and sale of

conditioner Co. Ltd. 19 March 1996 281,000,000 36,150,000 air-conditioners

("Kelon Air-Con")

Shunde Rongsheng PRC RMB 45% 25% US$ Manufacture of plastic parts

Plastic Products Co., 18 October 1991 85,780,000 14,800,000

Ltd. ("Plastic")

Chengdu Kelon PRC RMB 45% 25% RMB Manufacture and sale of

Refrigerator Co., Ltd. 19 November 1996 140,000,000 200,000,000 refrigerators

("Chengdu Kelon") (i)

Yingkou Kelon PRC RMB 42% 36.79% RMB Manufacture and sale of

Refrigerator Co., Ltd. 15 December 1996 134,000,000 200,000,000 refrigerators

("Yingkou Kelon")

Guangdong Kelon Mould PRC RMB 40% 30% US$ Manufacture of moulds

Co., Ltd. ("Mould") 20 July 1994 86,940,000 15,000,000

Percentage of

Place and date of Investment equity interest

incorporation/ cost of the attributable to Registered

Name of the entity establishment Group the Company capital Principal activities

Directly Indirectly

Subsidiaries

Pearl River Electric Hong Kong HK$ - 100% HK$ Trading of materials and parts

Refrigerator Company 26 July 1985 400,000 400,000

Limited

Wetherell Developments The British U$1 - 100% US$1 Advertising agency

Limited Virgin Islands

1 July 1997

Kelon Financial Services British Virgin Islands U$ - 100% US$ Investment holding

Limited 13 January 1999 50,000 50,000

Kelon Electric Hong Kong HK$ - 100% HK$ Property investment

Appliances Co., Ltd. 29 August 1991 10,000 10,000

Kelon (Japan) Limited Japan JPY - 90% JPY Technical research and

22 May 1996 990,000,000 1,100,000,000 trading of electrical

household appliances

Shunde Rongqi Kelon PRC U$ 70% 30% US$ Manufacture and sale of

Fittings Co., Ltd. 24 November 1999 5,620,000 5,620,000 components of refrigerators

("Kelon Fitting") and air-conditioners

Kelondotcom Limited The British US$ - 100% US$ Dormant

Virgin Islands 50,000 50,000

21 February 2000

Kelondotcom (Hong Kong) Hong Kong HK$2 - 100% HK$2 Dormant

Limited 7 June 1999

EDAS Developments The British U$ - 100% US$ Dormant

(BVI) Limited Virgin Islands 50,000 50,000

1 March 2000

EDAS.com (Shenzhen) PRC US$ - 100% US$ Internet website

Limited 28 June 2000 600,000 600,000

Pioneer Holding Group PRC RMB 80% - RMB Research and develop

4 June 2001 24,000,000 30,000,000 industrial and

commercial computer

system

Associates

Guangdong Sanyo-Kelon PRC RMB 44% - RMB Manufacture and sale

Refrigerator Co., Ltd. 25 December 1995 104,280,000 237,000,000 of freezers

("Sanyo-Kelon")

Huayi Compressor Holdings PRC RMB 22.725% - RMB Manufacture and sale

Company Limited 13 June 1996 255,360,000 237,250,000 of compressors

("Huayi Compressor")

Shunde Kelon Household PRC RMB 25% - RMB Manufacture and sale

Electrical Appliance 16 July 1999 2,500,000 10,000,000 of electrical

Company Limited household appliances

("Kelon Household")

Communication and Hong Kong HK$ - 25% HK$100 Advertising

You Holdings Company 14 August 2000 12,000,000

Limited ("C&Y")

Chongqing Rongsheng PRC RMB 28% - RMB Sale of refrigerators

Kelon Refrigerator Co., Ltd. 19 February2001 280,000 1,000,000

("Chongqing Rongsheng)

Sichuan Rongsheng PRC RMB - 28% RMB Sale of refrigerators

Kelon Refrigerator Co., Ltd. 21 February2001 280,000 2,000,000

("Sichuan Rongsheng")

Shunde Wangao Import PRC RMB 20% - RMB Import and export business

and Export Co., Ltd. 7 June 2001 600,000 3,000,000

("Shunde Wangao")

III. TAXATION

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

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

(b) Enterprise income tax ("EIT")

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

Deferred taxation is provided under liability method in respect of significant temporary differences between profit as stated in the financial statements and profit as computed for income tax purpose. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are not recognised unless the related benefit will be crystalised in the forseeable future.

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

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

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

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

IV. NOTES TO THE FINANCIAL STATEMENTS OF THE GROUP

1. ACCOUNTS RECEIVABLE

(1) Aging analysis of accounts receivable is as follows:

30 June 2001 31 December 2000

Aging Balance Percentage Provision Net Balance Percentage Provision Net

(Unaudited) (%) (Unaudited) (Unaudited) (Unaudited) (%) (Unaudited) (Unaudited)

Within one year 387,583,225 82% (56,354,901 ) 331,228,324 375,590,411 82% (78,047,581 ) 297,542,830

One to two years 98,243,462 17% (98,243,462 ) - 79,097,944 17% (79,097,944 ) -

Two to three years 4,456,089 1% (4,456,089 ) - 1,910,594 1% (1,910,594 ) -

Total 490,282,776 100% (159,054,452 ) 331,228,324 456,598,949 100% (159,056,119 ) 297,542,830

(2) As of 30 June 2001, the Group's five largest debtors were as follows:

Name Outstanding balance Aging Nature

Sanyo-Kelon 39,646,535 Within 1 year Credit sales

Sichuan Rongsheng 20,551,783 Within 1 year Credit sales

Jiangsu Suning Household Applicance Co., Ltd. 22,256,772 0-2 year Credit sales

Harbin Hei Tiane Company Limited 12,192,357 0-2 year Credit sales

Henan Peng Yun Electric Appliance Co., Ltd. 6,767,506 Within 1 year Credit sales

(3) Balances of accounts receivable do not include any amounts due from companies which held more than 5% of the Company's share capital.

1. OTHER RECEIVABLES

(1) Aging analysis of other receivables is as follows:

30 June 2001 31 December 2000

Aging Balance Percentage Provision Net Balance Percentage Provision Net

(Unaudited) (%) (Unaudited) (Unaudited) (Unaudited) (%) (Unaudited) (Unaudited)

Within one year 456,177,580 84% - 456,177,580 416,006,393 90% - 416,006,393

One to two years 47,002,202 9% - 47,002,202 44,041,674 10% - 44,041,674

Two to three years 41,659,417 7% - 41,659,417 - - - -

Total 544,839,199 100% - 544,839,199 460,048,067 100% - 460,048,067

(2) As of 30 June 2001, the Group's five largest other receivable balances were as follows:

Name Outstanding balance Aging Nature

Labor Union* 117,148,000 Within one year Fund transfer

Guangdong Kelon (Rongsheng) 113,888,295 Within one year Advance and cost sharing

Group Company Limited ("GKG")

Shunde Export Tax Refund Bureau 102,119,210 0 - 2 years Refund of export VAT

Shunde Kelon Household Electrical 36,220,621 Within one year Advance

Appliances Company Limited

Guangdong Sanyo-Kelon 34,181,100 Within one year Advance

Refrigerator Co.,Ltd.

* In 2001, the Company transferred the long-term pension liability to its Labor Union, the latter is responsible for managing this fund. As of 30 June 2001, this fund was transferred to the Labor Union's bank account, but the corresponding legal procedure is still in progress.

(3) Except for those stated in note 15, balances of other receivables do not include any amounts due from companies which held more than 5% of the Company's share capital.

3. INVENTORIES

Breakdown of inventories is as follows:

30 June 2001 31 December 2000

Balance Provision Net Balance Provision Net

(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Raw materials 385,555,280 (11,607,697 ) 373,947,583 435,022,820 (32,264,408 ) 402,758,412

Work-in- progress 59,199,072 (1,775,971 ) 57,423,101 69,242,467 (1,968,783 ) 67,273,684

Finished goods 1,665,287,665 (134,360,017 ) 1,530,927,648 1,430,914,435 (164,305,420 ) 1,266,609,015

Total 2,110,042,017 (147,743,685 ) 1,962,298,332 1,935,179,722 (198,538,611 ) 1,736,641,111

4. LONG-TERM INVESTMENTS

For the six months ended 30 June 2001

Beginning

of period Increase Decrease End of period

(Unaudited) (Unaudited)

Investments in associates (a) 215,730,633 8,452,389 (270,925 ) 223,912,097

Other long-term equity investments 9,660,695 1,983,388 - 11,644,083

225,391,328 10,435,777 (270,925 ) 235,556,180

Premium on equity investments (b) 186,999,430 1,010,737 (8,648,884 ) 179,361,283

412,390,758 11,446,514 (8,919,809 ) 414,917,463

Provision for impairment in value

of investments in associates (c) (74,129,000 ) (74,129,000 )

(a) Investments in associates

Investment cost Share of profit Total

Increase Increase

(Decrease) (Decrease)

Investment 31 December during the 31 December during the 31 December

Company period 2000 period 30 June 2001 2000 period 30 June 2001 2000 30 June 2001

Sanyo-Kelon 25 years 104,280,000 - 104,280,000 (30,151,000 ) 3,531,132 (26,619,868 ) 74,129,000 77,660,132

Huayi Compressor Unlimited 118,013,641 - 118,013,641 8,368,000 873,207 9,241,207 126,381,641 127,254,848

Shunde Kelon Unlimited 2,500,000 - 2,500,000 - (270,925 ) (270,925 ) 2,500,000 2,229,075

C&Y Unlimited 12,719,992 - 12,719,992 - 1,936,115 1,936,115 12,719,992 14,656,107

Shunde Wangao Unlimited - 600,000 600,000 - - - - 600,000

Chongqing Rongsheng 1 year - 280,000 280,000 - 577,412 577,412 - 857,412

Sichuan Rongsheng 2 years - 280,000 280,000 - 374,523 374,523 - 654,523

237,513,633 1,160,000 238,673,633 (21,783,000 ) 7,021,464 (14,761,536 ) 215,730,633 223,912,097

(b) Premium on equity investments

Premium on equity investments arose from the excess of purchase consideration over the fair value of net assets on the date of purchase of Kelon Air-conditioner, Huayi Compressor and Yingkou Kelon. The premium is amortized using a straight-line method over investment period as specified in the investment contracts or 10 years if no investment period was regulated.

Original value Accumulated amortisation Balance

Increase Increase

(Decrease) (Decrease)

31 December during the 30 June 31 December during the 30 June 31 December 30 June

Company 2000 period 2001 2000 period 2001 2000 2001

Kelon Air-conditioner 66,596,234 - 66,596,234 (7,214,593 ) (1,141,955 ) (8,356,548 ) 59,381,641 58,239,686

Huayi Compressor 137,346,359 - 137,346,359 (9,728,570 ) (7,456,929 ) (17,185,499 ) 127,617,789 120,160,860

Yingkou Kelon - 1,010,737 1,010,737 - (50,000 ) (50,000 ) - 960,737

203,942,593 1,010,737 204,953,330 (16,943,163 ) (8,648,884 ) (25,592,047 ) 186,999,430 179,361,283

(c) Provision for impairment in value of investments in associates

Sanyo-Kelon has been in loss since commencing operation. Though it has made profit during the period from January to June 2001, the Board of Directors of the Company considered the profitability of Sanyo-Kelon was not stable and expected it would be in loss in the next few years. Therefore, the Company provided for 100% permanent diminution in value over its book value of the investment.

5. CONSTRUCTION-IN-PROGRESS

Movement of construction-in-progress is as follows:

For the six months ended 30 June 2001

Beginning of Transfer to Other End of Source of Project

Project name period Additions fixed assets transfers period capital status

(Unaudited) (Unaudited)

Kelon Beijing 1,535,080 9,278,521 - - 10,813,601 Working capital Under construction

Renovation of staff quarters 8,667,366 796,800 (9,464,166 ) - - Working capital Completed

Office building

of Sanda Centre 4,692,313 3,049,155 - - 7,741,468 Working capital Under construction

Huabao project 1,540,186 212,480 (1,292,866 ) - 459,800 Working capital Under construction

Kelon project 2,005,780 1,504,783 (2,132,673 ) - 1,377,890 Working capital Under construction

Others 7,730,280 2,541,457 (3,480,446 ) - 6,791,291 Working capital Under construction

26,171,005 17,383,196 (16,370,151 ) - 27,184,050

No capitalized interest was included in the balance of construction-in-progress.

6. LONG-TERM DEFERRED EXPENDITURES

Movement of long-term deferred expenditures is as follows:

For the six months ended 30 June 2001

Beginning of

Items period Additions Amortizations End of period

(Unaudited) (Unaudited)

Moulds and spare parts 164,393,872 63,871,609 (58,351,748 ) 169,913,733

Expense incurred in upgrading

leased fixed assets 51,965,870 8,666,356 (2,094,727 ) 58,537,499

Others 6,700,860 312,083 (1,033,035 ) 5,979,908

223,060,602 72,850,048 (61,479,510 ) 234,431,140

7. SHORT-TERM LOANS

Interest rate

Nature Currency 30 June 2001 per annum

(Unaudited)

Bank loan

• Mortgage loans* RM B 64,112,967 5.3625%-6.43%

• Guarantee loans** RMB 60,000,000 5.85%

• Credit loans RMB 575,700,000 5.85%-6.53%

669,812,967

* Mortgage loans were secured by letter of credit.

** Guarantee loans represent borrowings of Chengdu Kelon and Yingkou Kelon which were guaranteed by the Company.

Interest rate

Nature Currency 30 June 2001 per annum

(Unaudited)

Bank loan

• Mortgage loan RMB 22,000,000 5.3625%-6.43%

• Guarantee loan RMB 60,000,000 5.85%

• Credit loan RMB 355,700,000 5.85%-6.53%

437,700,000

8. SHARE CAPITAL

Number of share (RMB1 per share) and amount

31 December Increase 30 June equity interest as

2000 (decrease) 2001 of 30 June 2001

(Unaudited) (Unaudited)

(1)Unlisted shares

PRC domestic shares, in form

of legal person shares 337,915,755 - 337,915,755 34.06%

PRC domestic shares,

held by the employees 84,501,000 - 84,501,000 8.52%

Total unlisted shares 422,416,755 - 422,416,755 42.58%

(2)Listed shares

H shares 459,589,808 - 459,589,808 46.33%

A shares 110,000,000 - 110,000,000 11.09%

Total listed shares 569,589,808 - 569,589,808 57.42%

(3)Total shares 992,006,563 - 992,006,563 100.00%

9. CAPITAL RESERVE

Movement of capital reserve is as follows:

For the six months ended 30 June 2001

Beginning of

Items period Addition Deduction End of period

(Unaudited) (Unaudited)

Premium in share capital 2,433,526,092 - - 2,433,526,092

Assets received as donation 17,696,745 - - 17,696,745

Total 2,451,222,837 - - 2,451,222,837

10. TURNOVER

Breakdown of turnover is as follows:

For the six months ended 30 June

2001 2000

(Unaudited) (Unaudited)

Sales of refrigerators 1,264,118,025 1,789,589,847

Sales of air-conditioners 1,527,001,805 1,303,878,131

2,791,119,830 3,093,467,978

11. PROFIT FROM OTHER OPERATIONS

Breakdown of profit from other operations is as follows:

For the six months ended 30 June

2001 2000

(Unaudited) (Unaudited)

Other operating income

Sales of raw materials and scraps 194,017,619 105,726,109

Others 646,941 3,058,868

Subtotal 194,664,560 108,784,977

Other operating cost

Cost of sales of raw materials and scraps 182,349,669 92,673,791

Others 509,325 2,440

Subtotal 182,858,994 92,676,231

Profit from other operations 11,805,566 16,108,746

12. FINANCIAL EXPENSES

Breakdown of financial expenses is as follows:

For the six months ended 30 June

2001 2000

(Unaudited) (Unaudited)

Interest expense 43,864,049 42,705,021

Interest income (27,373,054 ) (3,853,580 )

Exchange (gain) loss, net 1,999,501 (160,312 )

Bank charges 2,572,515 455,865

21,063,011 39,146,994

13. NON-OPERATING INCOME

Breakdown of non-operating income is as follows:

For the six months ended 30 June

2001 2000

(Unaudited) (Unaudited)

Insurance compensation - 1,022,798

Others 2,737,599 1,558,502

Total 2,737,599 2,581,300

14. NON-OPERATING EXPENSES

Breakdown of non-operating expenses is as follows:

For the six months ended 30 June

2001 2000

(Unaudited) (Unaudited)

Medical insurance - 3,813,247

Others 292,665 2,123,650

Total 292,665 5,936,897

15. RELATIONSHIP WITH RELATED PARTIES AND RELATED PARTY TRANSACTIONS

(1) Relationship with related parties

(a) Related party with controlling relationship

Place of Legal

Name incorporation Principal activity Relationship Nature representative

GKG Shunde, PRC Investment holding Holding Company Limited liability Li Zhen Hua

(b) Movements of registered capital of related party with controlling relationship

For six months ended 30 June 2001

Beginning of

Name period Increase Decrease End of period

GKG 30,000,000 - - 30,000,000

(c) Movements of the Company's share capital held by related party with controlling relationship

For six months ended 30 June 2001

Beginning of period Increase Decrease End of period

Name Amount Percentage Amount Percentage Amount Percentage Amount Percentage

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

(d) Nature of related parties without controlling relationship

Name Relationship

Chendu Xinxing Electrical Appliance Associate of minority shareholder of Chengdu Kelon

Holdings Company Limited

("Chengdu Xinxing")

Shunde Cheng Tat-Household Appliance Financially supported by GKG

Co., Ltd. ("Shunde Cheung Tat")

Shunde Kelon Advertising Company Subsidiary of GKG

("Kelon Advertising")

Shunde Kelon Associate of the Company

Sanyo-Kelon Associate of the Company

Shunde Huaao Electrical Company Limited Subsidiary of GKG

("Shunde Huaao")

(2) Related party transactions

(i) During the Period, there were no transactions carried out between the Group and related parties, of which transaction prices were above or lower than the normal market prices.

(ii) Related party transactions

During the Period transactions with related companies comprised:

For the six months ended 30 June

2001 2000

(Unaudited) (Unaudited)

Sale of goods/raw material to

• GKG (Note i) 9,776,700 28,159,675

• Shunde Cheung Tat (Note ii) - 319,206,723

• Shunde Huaao 22,025,583 -

• Sanyo-Kelon 11,524,848 25,006,769

• Chongqing Rongsheng 56,306,920 -

• Sichuan Rongsheng 47,480,960 -

Purchase of goods/raw material from

• GKG (Note i) 101,029,415 85,980,295

• Shunde Huaao 185,212,612 -

• Sanyo-Kelon 1,369,320 1,774,408

Advertising fee paid to Kelon Advertising

(Note iii ) 19,299,000 55,477,000

Advertising fee paid to C&Y (Note iii) 19,080,000 -

Finance charges charged to GKG (Note i) 18,967,400 -

(iii) Related party balances

30 June 31 December

2001 2000

(Unaudited) (UnAudited)

Accounts receivable

• Shunde Cheung Tat (Note ii) - 121,429,165

• Sanyo-Kelon 39,646,535 28,484,336

• Sichuan Rongsheng 20,551,783 -

• Chongqing Rongsheng 2,432,224 -

• Others 1,151,807 5,716,018

63,782,349 155,629,519

Other receivables

• GKG (Note i) 113,888,295 280,612,660

• Chengdu Xinxing (Note iv) 34,000,000 34,000,000

• Sanyo-Kelon 34,181,100 -

• Others 37,410,119 35,617,050

219,479,514 350,229,710

Accounts payable

• Shunde Huaao 94,689,035 -

• Others 3,457,451 -

98,146,486 -

(i) Under the licence agreement ("Licence Agreement") dated 6 July 1996 made between Guangdong Kelon (Rongsheng) Group Company Limited ("GKG"), the holding company of the Group, and the Company, GKG granted to the Company an exclusive right to use the trademarks "Kelon" and "Ronshen" for no consideration (i) as registered in the PRC and Hong Kong, and/or (ii) as may from time to time be registered and/or in respect of which applications for registration may be made with the trademarks registry of any other territory by GKG and /or (iii) all "Kelon" or "Ronshen" trademark registrations as may be assigned to GKG from time to time on freezers, refrigerators and other similar or related products and such other products as may be requested by the Company from time to time which are not objected by GKG, on a worldwide basis, for a term equivalents to the period of validity of the relevant registration. GKG may use and, with the prior written consent of the Company, allow third party to use, such trademarks on production other than the types of products covered by the Licence Agreement. At present, the Group has used the trademarks of "Kelon" and "Ronshen" on the refrigerators' products and "Kelon" on the air-conditioners products under the above-mentioned Licence Agreement.

The Group had sold goods to GKG and purchased raw material from GKG during the six months ended 30 June 2001.

The Group made payments on behalf of GKG in the settlement of GKG's operating expenses. On the other hand, GKG also made payments on behalf of the Group in the settlement of the Group's purchase of material and other operating expenses.

The Group and GKG used the banking facilities of each other for the purpose of effective utilization of banking facilities. The Group charged GKG financial expenses at market interest rate based on average net balance due from GKG. During the six months ended 30 June 2001, the Group has charged GKG finance charges of approximately Rmb18,967,400 in connection with the advances made to GKG (six months ended 30 June 2000: nil).

As of 30 June 2001, long-term bank loan of Rmb200,000,000 of the Company was guaranteed by GKG (As of 31 December 2000: Rmb200,000,000).

Kelon Refrigerator, Kelon Air-Conditioner and GKG have an agreement ("Cost Sharing Agreement") whereby GKG agreed to share part of the advertising and promotional costs incurred by Kelon Refrigerator and Kelon Air-Conditioner in promoting the brand names of "Kelon" and "Ronshen" which are owned by GKG as referred above. According to the Cost Sharing Agreement, GKG agreed to share advertising costs of Rmb235,000,000 for 2000. During the period from 1 January 2001 to 30 June 2001, no such advertising cost sharing arrangement was entered into with GKG.

As of 30 June 2001, total amount due from GKG was Rmb113,888,295 (As of 31 December 2000: Rmb280,612,660).

(ii) The Group sold refrigerators to Shunde Cheung Tat Household Appliance Co. Ltd ("Shunde Cheung Tat"). Shunde Cheung Tat is a PRC registered company and obtained significant financial support from GKG. For the six months ended 31 June 2000, the sale of refrigerators to Shunde Cheung Tat amounted to Rmb319,206,723. Prior to 31 December 2000, the Group entered into agreement and bought back certain unsold refrigerators from Shunde Cheung Tat for Rmb98,292,000. The amount represents the lower of cost and net realisable value of the unsold refrigerators at the time of buy-back. During the six months ended 30 June 2001, the Group did not have any transactions with Shunde Cheung Tat. The balance due from Shunde Cheung Tat as of 31 December 2000 amounted to Rmb121,429,165 was repaid during the period ended 30 June 2001.

(iii) The Group engaged Kelon Advertising Company ("Kelon Advertising") as one of its advertising agency. Kelon Advertising Company is a wholly-owned subsidiary of GKG. For the six months ended 30 June 2001, the Group made payment of Rmb19,299,000 (for the six months ended 30 June 2000: Rmb55,477,000) to Kelon Advertising in connection with advertising activities in respect of Kelon brands.

Kelon Development Company Limited ("KDC"), a subsidiary of the Company, entered into an agreement with Qin Jia Yuan Shares Company Limited ("QJY") on 23 September 2000 regarding the subscription of shares by KDC in Communication and You Holdings Company Limited ("C&Y") as well as setting out the respective rights and obligations of QJY and KDC as shareholders of C&Y and setting out the basis on which the business and affairs of C&Y would be managed and controlled.

C&Y is principally engaged in the media advertising and marketing business, including but not limited to:

(a) the provision of production support on audio-visual program;

(b) marketing of shows to overseas broadcasting entities;

(c) provision of promotion, public relations, advertising consultancy services to advertisers and factory owners;

(d) production of special audio-visual programmes for advertisers and factory owners; and

(e) obtaining advertising air time from various media and selling such air time to advertising clients.

In accordance with the agreement, KDC subscribed for 25 shares in C&Y at a consideration of HK$12,000,000 and QJY subscribed for 73 shares in C&Y at a consideration of HK$2,000,000 and the assignment of certain advertising and business contracts to C&Y. QJY also acquired 1 share in C&Y from each of C&Y's initial subscribers for cash at par.

During the six months ended 30 June 2001, the Group paid HK$18,000,000 for the sponsorship air time from C&Y.

As the sole shareholder of QJY is the spouse of Dr. Philip Yu Hong Wong, a non-executive director of the Company, QJY is a connected person of the Company under the Listing Rules.

(iv) The Company made prepayments amounting to an aggregate sum of Rmb34,000,000 indirectly through its subsidiary, Chengdu Kelon to Chengdu Xinxing Electrical Appliance Holdings Company Limited ("Chengdu Xinxing"), which is an associate of Chengdu Engine (Group) Company Limited ("Chengdu Engine"), the minority investor of Chengdu Kelon. As consideration for such prepayment, Chengdu Xinxing has agreed to repay Chengdu Kelon by supplying an agreed number of refrigerator parts together with interest payments at an annual rate of 9.504% for Rmb30,000,000 and 9% for Rmb4,000,000. The prepayment was guaranteed by Chengdu Engine and Chengdu Kelon has the right to deduct from any dividends payable to Chengdu Engine the outstanding amount of any payments (in whatever form) due from Chengdu Xinxing directly or indirectly to the Company. As security for Chengdu Engine's performance of its obligations under the above guarantee, Chengdu Engine has charged its entire interests in Chengdu Kelon in favour of the Company.

(v) The Group has advanced money to certain related parties of GKG. The advances outstanding from these related parties as of 31 December 2000 amounted to approximately Rmb28,551,000. The obligation to repay of these advances are taken up by GKG prior to 30 June 2001.

(vi) Except for prepayment paid to Chengdu Xinxing (Note viii) and due from GKG (Note i), all balances with related parties are non-interest bearing, unsecured and have no fixed repayment terms.

V. IMPACT OF IAS ADJUSTMENTS ON NET PROFIT/NET ASSETS

Consolidated net profit

for the six months ended 30 June Consolidated net assets as of

30 June 31 December

2001 2000 2001 2000

(Unaudited) (Unaudited) (Unaudited) (Unaudited)

As reported in accordance

with PRC GAAP 19,750,961 126,431,247 4,137,302,548 4,115,994,899

Impact of adjustments:

• Adjustments on amortization of goodwill 3,771,166 - 3,771,166 -

• Adjustments on fixed assets revaluation

surplus and related depreciation (7,823,557 ) (7,731,843 ) 24,709,802 32,533,359

• Write-off of pre-operating expenditures - (8,217,309 ) - -

As restated in accordance with IAS 15,698,570 110,482,095 4,165,783,516 4,148,528,258

VI. MAJOR CHANGES IN THE CONSOLIDATED FINANACIAL STATEMENTS

Balances in the consolidated financial statements as of and for the period ended 30 June 2001 which changed more than 30% compared to those as of 31 December 2000 and for the period ended 30 June 2000 and represented more than 5% of the total asset or 10% of the profit of the Group for the period ended 30 June 2001 are as follows:

30 June 31 December Changes

2001 2000 Amount %

(Unaudited) (Unaudited)

Cash at bank and on hand (i) 1,769,670,408 838,710,032 930,960,376 111%

For the six months ended 30 June Changes

2001 2000 Amount %

(Unaudited) (Unaudited)

Financial expenses (ii) 21,063,011 39,146,994 -18,083,983 -46%

Investment income (iii) 7,021,464 7,600 7,013,864 923%

Non-operating expenses (iv) 292,665 5,936,897 -5,644,232 -95%

Taxation (v) - 7,280,485 -7,280,485 -100%

Minority interests (vi) 4,182,805 (10,840,278 ) 15,023,083 138%

(i) The Group strengthened the cash management by properly using credit facilities and strict control over cash payments. Therefore, the balance of cash at bank and on hand as of 30 June 2001 increased.

(ii) The Group charged GKG financial expenses at market interest rate based on average net balance due from GKG. During the six months ended 30 June 2001, the Group has charged GKG finance charges of approximately Rmb18,967,000 in connection with the advances made to GKG. (Note15). Therefore the financial expenses decreased accordingly.

(iii) For the period ended 30 June 2001, the Group's associates make profit. The Company used equity accounting method to record its investments in associates, hence investment income from associates increased accordingly.

(iv) In 2001, The Group recorded medical issuance expense in general and administration expense instead of non-operating expenses, hence non-operating expense decreased.

(v) Decrease in Enterprise Income Tax (" EIT ") expense was consistent with the decrease of profit during the period ended 30 June 2001.

(vi) Some subsidiaries of the Company made profit in 2001, hence the profit attributable to the minority shareholders increased accordingly.

Please also refer to the published version of this announcement in the i-Mail.