Medlive Technology Co., Ltd. — Proxy Solicitation & Information Statement 2005

Nov 29, 2005

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult a licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Guangdong Kelon Electrical Holdings Company Limited, you should at once hand this circular to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 0921)

CONTINUING CONNECTED TRANSACTION

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

A letter from the board of directors of Guangdong Kelon Electrical Holdings Company Limited (the “Company”) is set out on pages 4 to 12 of this circular. A letter from the Independent Board Committee is set out on page 13 of this circular. A letter from AMS Corporate Finance Limited containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 14 to 26 of this circular.

29 November 2005

CONTENTS

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		4
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
2.	The Continuing Connected Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
3.	The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
4.	Suspension of trading of H Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
5.	Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
6.	Procedure to demand a poll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
7.	Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . .		13
Letter from AMS Corporate Finance Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . .		14
Appendix	– General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

“agency products”	products ordered by Hisense Agent pursuant to the Sales
	Agency Agreement and the Supplemental Agreement
“Announcement”	the announcement issued by the Company dated 21
	September 2005 relating to change of senior management
	and connected transaction
“associate”	has the meaning ascribed to it in the Listing Rules
“Board”	the board of Directors
“Cap”	RMB1,414 million, being the aggregate of the values
	under each of the 2005 Purchase Cap, the 2006 Purchase
	Cap, the 2005 Agency Fees Cap, and the 2006 Agency
	Fees Cap
“Company”	Guangdong Kelon Electrical Holdings Company Limited,
	a company incorporated in the PRC with limited liability
	and listed on the main board of the Stock Exchange and
	Shenzhen Stock Exchange
“Connected Transaction	the announcement issued by the Company dated 26
Announcement”	September 2005 relating to the Continuing Connected
	Transaction
“Continuing Connected	the transactions contemplated under the Sales Agency
Transaction”	Agreement and the Supplemental Agreement
“Director(s)”	director(s) of the Company
“Equity Transfer Agreement”	the agreement entered into by Guangdong Greencool and
	Hisense Air-Conditioner in relation to the transfer of the
	Sale Shares of the Company on 9 September 2005
“Group”	the Company and its subsidiaries
“Guangdong Greencool”	Guangdong Greencool Enterprise Development Company
	Limited, the Company’s existing single largest
	shareholder

– 1 –

DEFINITIONS

==> picture [426 x 654] intentionally omitted <==

----- Start of picture text -----

|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|“Hisense|Agent”|(Qingdao|Hisense|Marketing|
|Company|Limited),|an|indirect|non-wholly|owned|
|subsidiary|of|the|Hisense|Group|
|“Hisense|Air-Conditioner”|(Qingdao|Hisense|Air-|
|Conditioning|Company|Limited)|
|“Hisense|Group”|(Hisense|Group|Company),|a|limited|
|company|incorporated|in|the|PRC|
|“Independent|Shareholders”|Shareholder(s)|other|than|Guangdong|Greencool|and|its|
|associates|
|“Latest|Practicable|Date”|23 November 2005, being the latest practicable date prior|
|to|the|printing|of|this|circular|for|ascertaining|certain|
|information|in|this|circular|
|“Listing|Rules”|the|Rules|Governing|the|Listing|of|Securities|on|the|
|Stock|Exchange|
|“PRC”|the|People’s|Republic|of|China,|excluding|Hong|Kong,|
|Macau|and|Taiwan|
|“Qingdao|Hisense|Electric”|(Qingdao|Hisense|
|Electronics|Holdings|Company|Limited)|
|“RMB”|Renminbi,|the|lawful|currency|of|the|PRC|
|“Sale|Shares”|262,212,194|domestic|legal|person|shares|of|the|
|Company|
|“Sales|Agency|Agreement”|the|sales|agency|agreement|entered|into|by|the|Company|
|and|Hisense|Agent|on|16|September|2005|
|“SFO”|the|Securities|and|Futures|Ordinance|(Chapter|571|of|the|
|Laws|of|Hong|Kong)|as|amended|from|time|to|time|
|“Share(s)”|share(s)|of|RMB1|each|in|the|capital|of|the|Company|
|“Share|Transfer|Announcement”|the|announcement|issued|by|the|Company|dated|14|
|September|2005|relating|to|share|transfer|pursuant|to|the|
|Equity|Transfer|Agreement|
|“Shareholder(s)”|holder(s)|of|Shares|

----- End of picture text -----

– 2 –

DEFINITIONS

• “Stock Exchange”

The Stock Exchange of Hong Kong Limited

• “Supplemental Agreement”

the supplemental agreement to the Sales Agency Agreement entered into by the Company and Hisense Agent on 26 September 2005

• “2005 Agency Fees Cap”

• RMB5 million, being the maximum aggregate value of agency fees payable by the Company to Hisense Agent for the period from 16 September 2005 to 31 December 2005 (both days inclusive) pursuant to the Sales Agency Agreement

• “2006 Agency Fees Cap” RMB9 million, being the maximum aggregate value of agency fees payable by the Company to Hisense Agent for the period from 1 January 2006 to 31 March 2006 (both days inclusive) pursuant to the Sales Agency Agreement

• “2005 Purchase Cap” RMB500 million, being the maximum aggregate value of purchases of products from the Company by Hisense Agent for the period from 16 September 2005 to 31 December 2005 (both days inclusive) pursuant to the Sales Agency Agreement

• “2006 Purchase Cap”

• RMB900 million, being the maximum aggregate value of purchases of products from the Company by Hisense Agent for the period from 1 January 2006 to 31 March 2006 (both days inclusive) pursuant to the Sales Agency Agreement

– 3 –

LETTER FROM THE BOARD

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 0921)

Executive Directors: Mr. Gu Chu Jun Mr. Liu Cong Meng Mr. Li Zhen Hua Mr. Yan You Song Mr. Zhang Hong Mr. Fang Zhi Guo

Registered office: No. 8 Ronggang Road Ronggui Street Shunde District Foshan City Guangdong Province China

Independent non-executive Directors:

Mr. Chan Pei Cheong, Andy Mr. Li Kung Man Mr. Xu Xiao Lu

Principal place of business in Hong Kong: Room 2502-2505, Harbour Centre 25 Harbour Road Wanchai Hong Kong

29 November 2005

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTION

1. INTRODUCTION

Reference is made to the Share Transfer Announcement, the Announcement and the Connected Transaction Announcement.

Unless the context provides otherwise, references to the Sales Agency Agreement in this circular shall mean the Sales Agency Agreement as amended by the Supplemental Agreement.

As disclosed in the Connected Transaction Announcement, the Company and Hisense Agent entered into the Sales Agency Agreement on 16 September 2005 and entered into the Supplemental Agreement amending the terms of the Sales Agency Agreement on 26 September 2005. Under the Sales Agency Agreement, Hisense Agent would act as sales agent of the Company’s domestic sales products by way of distribution within the entire domestic market.

– 4 –

LETTER FROM THE BOARD

In addition, there are the following arrangements in relation to the products under the Sales Agency Agreement:

• (a) upon delivery of the products by the Company to the warehouses designated by Hisense Agent, the title to the products will pass to Hisense Agent, and the Company will recognise the relevant proceeds from such sales as sales revenue;

• (b) upon the sale of the products by the Company to Hisense Agent, Hisense Agent has no right to return any unsold products to the Company; and

• (c) in the event that Hisense Agent is unable to recover any proceeds from the sale of products under the Sales Agency Agreement to any distributor, Hisense Agent and/or the distributor has no right to claim against the Company pursuant to the Sales Agency Agreement.

As announced in the Share Transfer Announcement, Hisense Air-Conditioner has entered into the Equity Transfer Agreement with Guangdong Greencool, the single largest shareholder of the Company, under which Guangdong Greencool intends to transfer the Sale Shares to Hisense Air-Conditioner representing 26.43% of the Company’s total issued share capital. The aforesaid transfer is expected to complete after the relevant regulatory approvals have been obtained. Both Hisense Air-Conditioner and Hisense Agent are subsidiaries controlled by Hisense Group which through Qingdao Hisense Electric indirectly holds 93% and 70% equity interest in Hisense Air-Conditioner and Hisense Agent respectively.

Under Rule 14A.11(4), each of Hisense Group and its subsidiaries are deemed to be an associate of the Company’s existing substantial shareholder, Guangdong Greencool, and therefore connected persons of the Company. As a result, the transactions contemplated under the Sales Agency Agreement will be deemed to be a continuing connected transaction under Chapter 14A of the Listing Rules. As the consideration under the Sales Agency Agreement are estimated to be a maximum of RMB1,414 million, the Sales Agency Agreement and the transactions contemplated thereunder will be subject to independent shareholders’ approval pursuant to Rule 14A.35 of the Listing Rules.

The Independent Board Committee has been set up to advise the Independent Shareholders on the terms of the Sales Agency Agreement and the Cap in relation to the Continuing Connected Transaction. AMS Corporate Finance Limited has been appointed as the independent financial adviser to the Independent Board Committee and Independent Shareholders. The recommendation of the Independent Board Committee and the advice of AMS Corporate Finance Limited are as set out on pages 13 to 26 of this circular.

The purpose of this circular is (i) to provide you with further information on the Sales Agency Agreement and the Continuing Connected Transaction (including its Cap); and (ii) to set out the opinions and recommendations of the Independent Board Committee and AMS Corporate Finance Limited. An Extraordinary General Meeting will be held for the purpose of,

– 5 –

LETTER FROM THE BOARD

among others, obtaining the approval from the Independent Shareholders in respect of the Sales Agency Agreement and the Continuing Connected Transaction (including its Cap) by way of poll. Guangdong Greencool and its associates will abstain from voting at the Extraordinary General Meeting. A notice convening the Extraordinary General Meeting will be announced separately and despatched to the Independent Shareholders as soon as reasonably practicable in accordance with the Listing Rules.

2. THE CONTINUING CONNECTED TRANSACTION

2.1 The Sales Agency Agreement and the Supplemental Agreement

The Sales Agency Agreement contains terms set out below.

2.1.1 Parties

Party A (the “Agent”): Hisense Agent;

Party B (the “Supplier”): Guangdong Kelon Electrical Holdings Company Limited

2.1.2 Date of the agreement

16 September 2005 (as amended on 26 September 2005)

2.1.3 Term

Subject to Independent Shareholders’ approval, the Sales Agency Agreement is for a term of approximately 6 months commencing from 16 September 2005 to 31 March 2006.

2.1.4 Sales agency in the domestic market

Hisense Agent would act as sales agent of the Company’s domestic sales products by way of distribution within the entire domestic market in the PRC. Hisense Agent would purchase certain products (as it may require from time to time) from the Company and distribute to various vendors in the PRC.

2.1.5 Pre-payment amount

Hisense Agent agreed that it would advance an aggregate prepayment for purchases of the Company’s products not exceeding RMB600 million, of which RMB300 million has been received in various stages by the Company during the period from 21 September 2005 to 24 October 2005. Another prepayment in an amount not exceeding RMB300 million will be paid within one month from 24 October 2005 (being the date when the last instalment of the first prepayment of RMB300 million was made) as the parties see fit according to then prevailing circumstances. The Company received two instalments of prepayments of approximately RMB50.5 million each from Hisense Agent on 17 November 2005 and 24 November 2005. It is agreed that the Company is not required to repay any of the prepayments within the term of the Sales Agency Agreement.

– 6 –

LETTER FROM THE BOARD

The Company intends to apply the prepayments received or to be received from Hisense Agent to purchase raw materials for production of its products.

2.1.6 Hisense Agent’s orders and set-offs against the pre-payments

In relation to sales to Hisense Agent which occur when the aggregate value of the Company’s sales to Hisense Agent has exceeded the aggregate prepayment actually received by the Company during the term of the Sales Agency Agreement, each of such sales will be settled in cash by Hisense Agent within a period of 60 days from the day when the products pursuant to each of such sales are delivered to Hisense Agent.

The Sale Agency Agreement contemplates that Hisense Agent will purchase products from the Company from time to time. Within 15 days from the date of expiry of the Sales Agency Agreement, the balance of the sum of the total amount of pre-payment and the proceeds received by the Company from sale of products made under the Sales Agency Agreement minus the total value of agency products sold by the Company to Hisense Agent will be calculated, confirmed and settled by the Company and Hisense Agent. If this is a positive figure, the Company shall make repayment of the entire balance to Hisense Agent. If this is a negative figure, Hisense Agent shall make payment of the entire balance to the Company. The price at which products will be sold to Hisense Agent will be that equivalent to prices offered by the Company to various distributors, which are independent third parties, including but not limited to sales discounts, price differences and all expenses which have been included in such prices.

Interest will be calculated by reference to the amount of prepayments received by the Company and will accrue until 31 March 2006. The rate of interest is equivalent to the annual interest rates on working capital loans announced by the People’s Bank of China from time to time. Accrued interest shall be paid on a quarterly basis.

2.1.7 Agency fees

Hisense Agent will receive 1% of the total amount of sales proceeds of products in cash under the Sales Agency Agreement as agency fees from the Company. The agency fees will be paid quarterly. The amount of the agency fees is determined after arm’s length negotiations between the Company and Hisense Agent and is considered as a nominal amount to compensate Hisense Agent for the administrative costs that will be incurred by Hisense Agent in respect of the transactions under the Sales Agency Agreement. Hisense Agent will undertake the following main administrative works for the Company in respect of the transactions under the Sales Agency Agreement: (i) marketing work in an effort to recover the confidence of distributors in the Company and its products, for instance, by inviting distributors to attend products’ exhibitions organised by the Company; and (ii) making available display areas at Hisense Agent’s own premises for the purpose of displaying and selling the Company’s products. As at the Latest Practicable Date, there is no historical transaction between the Company and any other independent third parties which is similar or comparable to the transactions contemplated under the Sales Agency Agreement. Hisense Agent will not charge any other fees and it is not responsible for any sales expenses. All sales expenses relating to the sale of products will be reimbursed by the Company.

– 7 –

LETTER FROM THE BOARD

Means of settlement:

• (A) Agency fees will be settled in cash on a three month basis upon completion of assessment of the operational targets by the Company (which are (i) an aggregate amount of purchase of products amounting to RMB500 million for the period from 16 September 2005 to 31 December 2005; and (ii) an aggregate amount of purchase of products amounting to RMB1,400 million for the period from 16 September 2005 to 31 March 2006, and such operational targets are subject to further negotiation by the Company and Hisense Agent). Settlement of agency fees will be finally determined by the Company based on the evaluation results of the agreed operational target and the means of calculation, and will be notified to Hisense Agent in writing.

• (B) Agency fees will be deposited by the Company into the account designated by Hisense Agent by way of bank transfer within 7 working days upon Hisense Agent’s confirmation of the amount of the agency fees determined by the Company, which will occur as soon as possible after Hisense Agent receives the notification of the amount of the agency fees in writing from the Company.

If the result of Hisense Agent cannot reach the operational targets (which are subject to further negotiation by the Company and Hisense Agent and the first assessment will be taken by reference to the target of 31 December 2005) the Company will deduct its agency fees on the basis below:

• (1) If 90%-100% of the operational targets is achieved, 5% agency fees of Hisense Agent will be deducted.

• (2) If 80%-90% of the operational targets is achieved, 10% agency fees of Hisense Agent will be deducted.

• (3) If 70%-80% of the operational targets is achieved, 15% agency fees of Hisense Agent will be deducted.

• (4) If 60%-70% of the operational targets is achieved, 20% agency fees of Hisense Agent will be deducted.

• (5) If less than 60% of the operational targets is achieved, all agency fees of Hisense Agent will be deducted.

• (C) The operational targets will be assessed by the Company on 31 December 2005 and 31 March 2006.

2.1.8 Termination

The Company and Hisense Agent have agreed and confirmed that the effective period of the Sales Agency Agreement shall be from 16 September 2005 (being the signing date) to 31 March 2006, except that:

• (A) The Sales Agency Agreement may be rescinded or extended at any time with mutual consents of both parties.

– 8 –

LETTER FROM THE BOARD

• (B) If any one party to the Sales Agency Agreement proposes any extension, early termination or modification of the Sales Agency Agreement, such party shall serve a written notice to the other party within 15 working days and gain consent of the other party before extension, modification or withdrawal of the Sales Agency Agreement, failing which the proposal shall be void.

In the event that the Company and Hisense Agent agree to terminate the Sales Agency Agreement, the balance of the sum of the total amount of pre-payment and the proceeds received by the Company from sale of products made under the Sales Agency Agreement minus the total value of agency products sold by the Company to Hisense Agent will be calculated, confirmed and settled by the Company and Hisense Agent. If this is a positive figure, the Company shall make repayment of the entire balance to Hisense Agent. If this is a negative figure, Hisense Agent shall make payment of the entire balance to the Company.

2.1.9 Material amendments made by the Supplemental Agreement to the Sales Agency Agreement

Pursuant to the Supplemental Agreement, the Company and Hisense Agent have made the following material amendments to the Sales Agency Agreement:

• (A) The Supplemental Agreement stipulates a period of 60 days within which the excess of the value of the Company’s sales to Hisense Agent over the aggregate prepayment actually received by the Company during the term of the Sales Agency Agreement must be paid, but no such specific time period is stipulated under the corresponding term of the Sales Agency Agreement;

• (B) The Supplemental Agreement stipulates that the price of the products that the Company sells to Hisense Agent will be equivalent to the price Hisense Agent sells to the distributors, which price shall be determined by the Company and the distributors, whereas the Sales Agency Agreement is silent on the point of the price between Hisense Agent and the distributors;

• (C) The Supplemental Agreement sets out the maximum aggregate value of purchases of products from the Company by Hisense Agent for the period from 16 September 2005 to 31 March 2006 to be RMB1,400 million, but no such maximum value is stipulated in the Sales Agency Agreement; and

• (D) The Supplemental Agreement clarifies that the operational targets will be assessed by the Company on 31 December 2005 and on 31 March 2006. This supersedes the corresponding term in the Sales Agency Agreement, which states that the operational targets will be assessed by the Company on a quarterly basis.

– 9 –

LETTER FROM THE BOARD

2.2 Reasons for, benefits and the effects of the Sales Agency Agreement

The Company’s production has been partly interrupted from May to August 2005 and the Directors consider that it is not easy for the Company to raise funds from bank loans. The Company therefore has to seek additional means of obtaining extra funding so as to resume operation as soon as possible. The Company considered that the prepayments received or to be received from Hisense Agent would improve the Company’s cash flow position considerably and allow it to normalize production as soon as possible. As such, the Directors believe that the terms of the Sales Agency Agreement are fair and reasonable and in the interests of the Shareholders as a whole.

On 16 September 2005, the Board passed a resolution with 6 Directors voting in favour of the Company entering into the Sales Agency Agreement and no Director voted against the resolution or abstained from voting. On 26 September 2005, the Board passed a further written resolution with 6 Directors voting in favour of the Company entering into the Supplemental Agreement amending the terms of the Sales Agency Agreement and no Director voting against the resolution or abstained from voting.

2.3 Information on Hisense Agent

Hisense Agent was incorporated on 21 July 2003 with a registered capital of RMB30,000,000. The registered place of Hisense Agent is Hisense Information Industrial Park, 18, Tuanjie Road, Qingdao Economic and Technical Development Zone, and the legal representative is Yu Shu Min.

Hisense Agent is principally engaged in the sales of household electrical appliances, electronic products and the relevant services. As prepared and audited in accordance with the financial accounting standards of the PRC, the total assets of Hisense Agent as at 31 December 2004 was RMB815,289,900 and its revenue from principal business amounted to RMB3,211,607,800. Its net profit for 2004 amounted to RMB48,540,000.

2.4 Relationship with Hisense Agent

On 9 September 2005, Guangdong Greencool and Hisense Air-Conditioner entered into the Equity Transfer Agreement. Pursuant to the provisions of the Equity Transfer Agreement, Guangdong Greencool agreed to transfer the Sale Shares to Hisense Air-Conditioner representing 26.43% of the Company’s total issued share capital (subject to certain conditions as disclosed in the Share Transfer Announcement). The aforesaid transfer is expected to complete after the relevant regulatory approvals have been obtained. Both Hisense AirConditioner and Hisense Agent are subsidiaries controlled by Hisense Group which through Qingdao Hisense Electric indirectly holds 93% and 70% equity interest in Hisense AirConditioner and Hisense Agent respectively.

– 10 –

LETTER FROM THE BOARD

2.5 Cap for the Continuing Connected Transaction

The transactions contemplated under the Sales Agency Agreement are in the ordinary and usual course of business of the Company, and on arm’s length basis between the Company and Hisense Agent. As at the Latest Practicable Date, there has been no previous connected transaction between the Company and Hisense Agent.

The Company and Hisense Agent agreed that the purchases for the period from 16 September 2005 to 31 March 2006 will not exceed RMB1,400 million. In particular, the maximum aggregate value of purchases for the period from 16 September 2005 to 31 December 2005 and for the period from 1 January 2006 to 31 March 2006 will not exceed RMB500 million and RMB900 million, respectively. Accordingly, the maximum value of agency fees payable by the Company to Hisense Agent for the period from 16 September 2005 to 31 December 2005 and for the period from 1 January 2006 to 31 March 2006 will not exceed RMB5 million and RMB9 million, respectively.

The amount of the Cap in respect of such purchases is determined after arm’s length negotiations between the Company and Hisense Agent with reference to historical domestic sales of the Company for the corresponding periods from 1 October 2004 to 31 December 2004 and from 1 January 2005 to 31 March 2005, which amounted to approximately RMB495.5 million and RMB974.3 million, respectively. The amount of the Cap in respect of the agency fees is determined after arm’s length negotiations between the Company and Hisense Agent with reference to the Cap in respect of the purchases of products from the Company by Hisense Agent for the periods between 16 September 2005 and 31 December 2005, and between 1 January 2006 and 31 March 2006 pursuant to the Sales Agency Agreement as mentioned above.

2.6 Disclosure requirements and approval by the Independent Shareholders

Under Rule 14A.11(4), Hisense Group and its subsidiaries are deemed to be an associate of the Company’s existing substantial Shareholder, Guangdong Greencool, and therefore connected persons of the Company. As a result, the transactions contemplated under the Sales Agency Agreement will be deemed to be a continuing connected transaction under the Listing Rules. As the consideration under the Sales Agency Agreement are estimated to be a maximum of RMB1,414 million, the Sales Agency Agreement and the transactions contemplated thereunder will be subject to Independent Shareholders’ approval at general meeting of the Company pursuant to Rule 14A.35 of the Listing Rules. Guangdong Greencool and its associates will abstain from voting at the Extraordinary General Meeting.

3. THE COMPANY

The Company is principally engaged in the manufacture and sales of refrigerators and air-conditioners.

4. SUSPENSION OF TRADING OF H SHARES

At the request of the Company, trading in H Shares of the Company was suspended with effect from 10:00 a.m. on 16th June 2005 pending the release of an announcement in relation to price sensitive information. Subject to the publication of a further announcement in relation to, among others, the financial, production and trading position of the Group, trading in H Shares of the Company will remain suspended until further notice.

– 11 –

LETTER FROM THE BOARD

5. EXTRAORDINARY GENERAL MEETING

A notice convening the Extraordinary General Meeting will be announced separately and despatched to the Independent Shareholders as soon as reasonably practicable in accordance with the Listing Rules.

6. PROCEDURE TO DEMAND A POLL

In accordance with article 8.27 of the Articles of Association, a poll may be demanded in any general meeting of the Company by:

• (A) the chairman of the meeting; or

• (B) at least two shareholders with voting rights or their representative; or

• (C) individual or a group of shareholders (including their representatives) holding 10% or more of the voting rights present in that general meeting.

7. RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee as set out on page 13 of this circular which contains its recommendation to the Independent Shareholders on the terms of the Sales Agency Agreement and the Cap in relation to the Continuing Connected Transactions. Your attention is also drawn to the letter of advice received from the AMS Corporate Finance Limited, independent financial adviser to the Independent Board Committee and the Independent Shareholders as set out on pages 14 to 26 of this circular which contains, among others, its advice to the Independent Board Committee and the Independent Shareholders in relation to the terms of the Sales Agency Agreement and the Cap in relation to the Continuing Connected Transactions, the casting of votes for or against the resolution approving the Sales Agency Agreement, the Cap in relation to the Continuing Connected Transactions by poll at the Extraordinary General Meeting as well as the principal factors and reasons considered by it in concluding its advice.

Your attention is also drawn to the general information as set out in the appendix of this circular.

Yours faithfully,

By order of the Board of

Guangdong Kelon Electrical Holdings Company Limited

Liu Cong Meng

Vice Chairman

– 12 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 0921)

29 November 2005

To the Independent Shareholders

Dear Sir and Madam,

CONTINUING CONNECTED TRANSACTION

We refer to the circular issued by the Company to its shareholders and dated 29 November 2005 (the “Circular”) of which this letter forms part. Terms defined in this Circular have the same meanings when used in this letter unless the context otherwise requires.

Under the Listing Rules, the transactions contemplated under the Sales Agency Agreement between the Company and Hisense Agent constitute Continuing Connected Transaction for the Company and are thus subject to the approval of the Independent Shareholders at the Extraordinary General Meeting.

We have been appointed by the Board to consider the terms of the Sales Agency Agreement and to advise the Independent Shareholders in connection with the Continuing Connected Transaction as to whether, in our opinion, their terms and the Cap are fair and reasonable so far as the Independent Shareholders are concerned. AMS Corporate Finance Limited has been appointed as the independent financial adviser to advise us in this respect.

We wish to draw your attention to the letter from the Board and the letter from AMS Corporate Finance Limited as set out in the Circular. Having considered the principal factors and reasons considered by, and the advice of, AMS Corporate Finance Limited as set out in its letter of advice, we consider that the Sales Agency Agreement is on normal commercial terms, and that the Continuing Connected Transaction is in the best interest of the Company and the Shareholders as a whole. We also consider that the Continuing Connected Transaction and the Cap of the Continuing Connected Transaction are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to approve the Continuing Connected Transaction and the Cap at the Extraordinary General Meeting.

Yours faithfully,

For and on behalf of the Independent Board Committee CHAN Pei Cheong, Andy LI Kung Man XU Xiao Lu Independent non-executive Directors Guangdong Kelon Electrical Holdings Company Limited

– 13 –

LETTER FROM AMS CORPORATE FINANCE LIMITED

The following is the full text of the letter of advice from AMS Corporate Finance Limited in respect of the Sales Agency Agreement and is prepared for the purpose of incorporation into this circular.

==> picture [236 x 33] intentionally omitted <==

20th Floor

Hong Kong Diamond Exchange Building 8-10 Duddell Street Central Hong Kong

29 November 2005

• To the Independent Board Committee and

• the Independent Shareholders of

• Guangdong Kelon Electrical Holdings Company Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Sales Agency Agreement, details of which have been set out in the circular to the Shareholders dated 29 November 2005 (the “Circular”), of which this letter forms part. This letter contains our advice to the Independent Board Committee and the Independent Shareholders in respect of the Sales Agency Agreement. Unless the context otherwise requires, terms used in this letter have the same meanings as those defined in the Circular.

The Board announced that on 16 September 2005, the Company entered into the Sales Agency Agreement with Hisense Agent and pursuant to which Hisense Agent would act as a sales agent of the Company’s domestic sales products by way of distribution within the entire domestic market in the PRC. Pursuant to the Sales Agency Agreement, Hisense would purchase certain products (as it may require from time to time) from the Company and distribute to various vendors in the PRC. As disclosed in the Share Transfer Announcement, on 9 September 2005, Guangdong Greencool, which was the single largest shareholder of the Company, entered into the Equity Transfer Agreement with Hisense Air-Conditioner and pursuant to which Guangdong Greencool agreed to transfer the Sale Shares (representing approximately 26.43% of the Company’s total issued share capital as at the Latest Practicable Date) to Hisense Air-Conditioner. Since both Hisense Air-Conditioner and Hisense Agent are subsidiaries of Hisense Group, which through Qingdao Hisense Electric, indirectly holds 93% and 70% equity interest in Hisense Air-Conditioner and Hisense Agent respectively, Hisense Group and its subsidiaries are deemed to be associates of the Company’s existing substantial shareholder,

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Guangdong Greencool, under Rule 14A.11(4) of the Listing Rules and each of them is therefore a connected person of the Company. Accordingly, the transactions contemplated under the Sales Agency Agreement will be deemed to be continuing connected transactions of the Company under Chapter 14A of the Listing Rules and are subject to, among others, the approval of the Independent Shareholders at a general meeting of the Company.

An Independent Board Committee has been formed to advise the Independent Shareholders as to whether (i) the transactions contemplated under the Sales Agency Agreement are in the interests of the Company and the Shareholders as a whole; and (ii) the terms of the Sales Agency Agreement including the relevant Cap are fair and reasonable so far as the Independent Shareholders are concerned. We have been appointed to advise the Independent Board Committee and the Independent Shareholders as to (i) whether or not the transactions contemplated under the Sales Agency Agreement are in the interests of the Company and the Shareholders as a whole; (ii) whether or not the terms of the Sales Agency Agreement and the relevant Cap are fair and reasonable so far as the Independent Shareholders are concerned; and (iii) how the Independent Shareholders should vote in respect of the resolution to approve the Sales Agency Agreement.

In formulating our opinion, we have relied on the statements, information, opinions and representations contained in the Circular and the information and representations provided to us by the Company and the Directors. We have assumed that all information, representations and opinions contained or referred to in the Circular which have been provided by the Directors and for which they are solely responsible, are true and accurate at the time they were made and continue to be so at the date hereof. We consider that we have reviewed sufficient information which enables us to form a reasonable basis for our opinion. The Directors have further confirmed, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts or representations the omission of which would make any statement in the Circular, including this letter, misleading. We have not, however, conducted any independent verification of the information provided, nor have we carried out any in-depth investigation into the business and affairs of the Group and the Hisense Group and the markets in which they operate. We have no reason to believe that any information and representations relied on by us in forming our opinion is untrue, inaccurate or misleading, nor are we aware of any material facts the omission of which would render the information provided and the representations made to us untrue, inaccurate or misleading.

PRINCIPAL FACTORS CONSIDERED

In formulating our opinion regarding the Sales Agency Agreement, we have taken into consideration the following principal factors:

1. Background information and reasons for the Sales Agency Agreement

(i) Information on the Group

The Group is principally engaged in the manufacture and sales of refrigerators and air-conditioners. As stated in the Company’s 2004 annual report and its latest interim report, the Group’s operations were carried out in the PRC and almost all of the

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production facilities of the Group were located in the PRC. For the year ended 31 December 2004, approximately 60% of the Group’s turnover was derived from the PRC market (including Hong Kong) with the rest derived from European, American and other overseas markets. Similarly, for the six months ended 30 June 2005, approximately 52% of the Group’s turnover was derived from the PRC market (including Hong Kong) while the remaining 48% of the turnover was derived from the European, American and other overseas markets.

Set out below is a summary of the financial results of the Group extracted from the Company’s 2003 and 2004 annual reports and interim report for the six months ended 30 June 2005:

Turnover −Sales of refrigerators −Sales of air- conditioners −Sale of freezers −Sales of product components Profit/(loss) from operations Net profit/(loss)	For the year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 (Audited) (Audited) (Audited) 2,252,045 3,016,247 3,274,329 2,337,240 2,680,590 4,501,234 103,979 211,467 335,890 184,993 259,806 324,951 4,878,257 6,168,110 8,436,404 182,006 374,806 194,558 84,593 191,170 (44,658)	For the six months ended 30 June 2004 2005 RMB’000 RMB’000 (Unaudited) (Unaudited) 1,919,998 1,469,138 2,688,304 2,596,029 149,920 193,905 172,794 299,201 4,931,016 4,558,273 240,762 (368,260) 158,063 (434,554)

As shown in the above table, the operations of the Group were profitable for each of the two years ended 31 December 2003. The Group’s turnover increased substantially by over 25% from approximately RMB4,878.3 million for the year ended 31 December 2002 to approximately RMB6,168.1 million for the year ended 31 December 2003, whereas over the same period, the Group’s operating profit doubled from approximately RMB182.0 million to RMB374.8 million.

Nevertheless, for the year ended 31 December 2004, despite the increase in turnover by over 35% to approximately RMB8,436.4 million, the Group’s operating profit decreased substantially by approximately 48% to approximately RMB194.6 million. In addition, the Group recorded a net loss of approximately RMB44.7 million for the year ended 31 December 2004 as opposed to a net profit of approximately RMB191.2 million for 2003. As indicated in the Company’s annual report for 2004, although the Group was able to achieve a record high turnover of approximately RMB8,436.4 million for the year

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ended 31 December 2004, the operating results of the Group were significantly affected by, among others, the decrease of gross profit margins of the Group’s products from approximately 27% for 2003 to 22% for 2004 due to intense competition in both domestic and export markets, the increase of price of raw materials such as copper, aluminium and plastics during the second half of 2004 and the decrease of VAT-rebate for exports of refrigerators and air-conditioners from 17% in 2003 to 13% in 2004. Furthermore, as a result of (i) the write-off of approximately RMB71.4 million in goodwill for investment in an associated company; (ii) the provision of approximately RMB41.4 million for inventories for 2004 versus a write-back of approximately RMB32.8 million for the allowance for inventories for 2003; and (iii) the provision for irrecoverable debts of approximately RMB42.0 million, the Group reported a net loss for the year ended 31 December 2004.

In addition, we notice that since 16 June 2005, the Shares had been suspended from trading at the request of the Company pending the issue of an announcement in relation to price-sensitive information of the Company. As at the Latest Practicable Date, the Shares remained suspended from trading.

For the six months ended 30 June 2005, the Group recorded an unaudited turnover of approximately RMB4,558.3 million, representing a decrease of approximately 8% from the unaudited turnover of approximately RMB4,931.0 million for the corresponding period last year. Over the same period, the Group recorded loss from operations and net loss of approximately RMB368.3 million and RMB434.6 million, respectively. As stated in the Company’s interim report for 2005 (the “Interim Report”), the significant loss for the six months ended 30 June 2005 was mainly attributable to the suspension of certain production lines of the Group since May 2005.

According to the Company’s announcement dated 9 May 2005, the Company confirmed that it was being formally investigated by the China Securities Regulatory Commission (the “CSRC”) for alleged breaches of the securities laws and regulations in the PRC. As further stated in the Interim Report, such investigation by the CSRC was the result of the formal investigation by the PRC’s Public Security Bureau in connection with criminal offences on the Company’s former chairman, Mr. Gu Chu Jun, and other senior management officers who are suspected of having committed economic crimes. According to an announcement of the Company dated 12 August 2005, as Mr. Gu Chu Jun has been formally investigated by the PRC police department, in order to maintain the Company’s production and operation, the Board unanimously resolved to remove Mr. Gu Chu Jun as chairman of the Company at a meeting of the Board held on 12 August 2005.

As indicated in the Company’s announcement dated 26 August 2005, the incidents of the investigations announced in May 2005 had adversely affected the confidence of the financial institutions, suppliers and customers on the Company. The Company was unable to settle the amounts due to certain suppliers and about 40% of the suppliers reduced or stopped supplying raw materials for the production of air-conditioners to the Company since May 2005. As a result, about 70% of the Group’s production lines of airconditioners were gradually suspended during the period from May to August 2005. Similarly, about 20% of the suppliers reduced or stopped supplying raw materials for the

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production of refrigerators and freezers to the Company and accordingly, about 50% of the production lines of freezers and refrigerators were suspended during the period from May to August 2005. As further disclosed in the Interim Report, the Group experienced difficulties on renewal and origination of banking facilities and the lack of working capital significantly disturbed the Group’s relationship with its suppliers and sales agents. As a result, the Group missed the peak season for production and sales of refrigerators and air-conditioners in May and June 2005 in which the turnover dropped by over 50% when compared with the corresponding period in 2004.

As noted from the Interim Report, as at 30 June 2005, the Group had total current assets of approximately RMB6,541 million and total current liabilities of approximately RMB7,470 million, representing net current liabilities of approximately RMB929 million. As at 30 June 2005, the Group had outstanding bank borrowings of approximately RMB2,452 million, substantially all of which were short-term in nature, of which approximately RMB240 million were overdue as at 30 June 2005 and approximately RMB1,420 million will fall due in December 2005. It was mentioned in the Interim Report that the Group was in the process of negotiating with certain banks and other creditors to restructure the amounts due to them.

According to the Company’s announcement dated 26 August 2005, the Group announced that its principal production lines have resumed operations gradually since 20 August 2005 and the Company had in August 2005 established a special working unit, comprising the Company’s vice chairman and president and five other members of the Company’s principal management, who would be responsible for the Company’s daily operation and the management of the workers so as to maintain production. It was also stated in the announcement that the Company intended to use funding from the Company’s available banking facilities, payments from customers for products sold and deposits for new orders from customers in order to conduct its day to day operation, including production. It appears that the management of the Company has been actively working with the relevant financial institutions and creditors on matters relating to debt management and the Group is striving to settle the amounts due to its suppliers and to ensure stability of its sales network.

Given the substantial loss recorded by the Group for the six months ended 30 June 2005 as a result of the suspension of certain production lines of the Group due to the CSRC’s investigation for alleged breaches of the PRC securities regulations by the Company (which arose from the investigation by the PRC’s Public Security Bureau in connection with criminal offences on the Company’s former chairman, Mr. Gu Chu Jun, and others who are suspected of having committed economic crimes), we consider it important for the Group being able to resume, in a timely manner, its production and sales activities to a scale comparable to the pre-crisis level. In addition, in view of the current financial position of the Group, we also consider it vital for the Group to have adequate working capital to satisfy the production requirements as well as to settle the overdue balances owed to the short term creditors including suppliers and sales agents.

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Pursuant to the terms of the Sales Agency Agreement, an aggregate prepayment of not exceeding RMB600 million for purchases of the Company’s products will be made available to the Group within less than two months from the date of the Sales Agency Agreement. It is the current intention of the Group that such prepayment will be utilised for the purchases of raw materials for production of its products. As the prepayment will be able to ease the existing financial pressure on the Group as well as to restore the Group’s normal operation which has been severely disrupted since May 2005, we consider that the entering into the Sales Agency Agreement is in the interests of the Company and the Shareholders as a whole.

(ii) Information on Hisense Group

Hisense Agent, which is an indirect 70%-owned subsidiary of Hisense Group, is principally engaged in the sales of household electrical appliances, electronic products and the provision of related services. Based on the information available from the website of Hisense Group, we understand that Hisense Group is one of the major electronic companies in the PRC. Hisense Group is headquartered in Qingdao, the PRC and has an operational presence in every major continent and sells its products to more than 100 countries worldwide. Its major product lines include televisions, set-top boxes, mobile phones, air-conditioning systems and refrigerators. In addition, we note that Hisense Electric Co., Ltd. (“Hisense Electric”), of which Hisense Group was beneficially interested in approximately 58.72% of the issued share capital as at the Latest Practicable Date, has been listed on the Shanghai Stock Exchange of the PRC since 1997. The following financial results of Hisense Electric for each of the three years ended 31 December 2004 and the six months ended 30 June 2005 are extracted from its annual report for 2004 and interim report for 2005, respectively.

				For the six
	**For the year **	**ended 31 **	December	months ended
	2002	2003	2004	30 June 2005
	RMB’000	RMB’000	RMB’000	RMB’000
	(Audited)	(Audited)	(Audited)	(Unaudited)
Turnover	5,623,550	5,734,404	7,500,208	4,464,962
Net profit	35,059	41,401	58,424	33,870
Net assets as at end
of year/period	2,307,219	2,348,758	2,408,199	2,399,365

As indicated above, Hisense Electric reported an average annual compound growth of approximately 15.5% and approximately 29.1% for its turnover and net profit, respectively, from 2002 to 2004. As stated in its latest annual report for the year ended 31 December 2004, the turnover of Hisense Electric mainly represented sales of televisions and refrigerators and approximately 85% of its turnover was generated from the domestic sales in the PRC. As at 30 June 2005, Hisense Electric had unaudited net asset value of approximately RMB2,399.4 million. In view of the favourable historical

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financial performance of Hisense Electric for the past few years and its strong financial position as at 30 June 2005, we consider that it has demonstrated a good track record and is one of the major electronic companies in the PRC. In addition, we consider that Hisense Electric has established an effective domestic sales network in the PRC. As a fellow subsidiary of Hisense Electric, Hisense Agent can benefit from Hisense Electric’s expertise and local knowledge in the domestic electric appliances market in the PRC. On this basis, we are of the view that it is in the commercial interest of the Company to enter into the Sales Agency Agreement as Hisense Agent has the relevant expertise and resources to assist the Group in rebuilding its market position.

(iii) Reasons for the Sales Agency Agreement

As mentioned above, the production of the Group has been severely disrupted since May 2005 due to the withdrawal of the support from the financial institutions, suppliers and sales agents on the Group as a result of the CSRC’s investigation for alleged breaches by the Company of the PRC securities regulations which arose from the investigation by the PRC’s Public Security Bureau in connection with criminal offences on the Company’s former chairman, Mr. Gu Chu Jun, and others who are suspected of having committed economic crimes. As stated in the Letter from the Board, the Directors consider that it is unlikely for the Company to raise funds by way of bank borrowings and therefore has to seek other means of financing so as to resume operation as soon as possible. Pursuant to the terms of the Sales Agency Agreement, an aggregate prepayment for purchases of the Company’s products not exceeding RMB600 million will be make available to the Group for the purchases of raw materials for production of its products. The Company considered that the prepayments to be received from Hisense Agent would improve the Group’s liquidity considerably and allow the Group to normalise its operation within a short period of time. Accordingly, the Directors are of the view that the entering into the Sales Agency Agreement is in the interests of the Company and the Shareholders as a whole.

As mentioned above, the Shares had been suspended from trading since 16 June 2005 and remained so as at the Latest Practicable Date. It would be unlikely, if not impossible, for the Company to raise fund through equity financing, such as share placement or rights issue. As the Group is operating in difficult financial and trading positions and with the prolonged suspension of trading of Shares, we are of the opinion that the Company would hardly be able to obtain funds on comparable terms as those under the Sales Agency Agreement.

As indicated from the Share Transfer Announcement, upon completion of the Equity Transfer Agreement, Hisense Air-conditioner will become the single largest shareholder of the Company and will hold 262,212,194 domestic legal person shares in the Company (representing approximately 26.43% of the Company’s total issued share capital as at the Latest Practicable Date). In view of the possible substantial interest of Hisense Group in the Company, we consider it commercially reasonable and sensible for Hisense Group to provide certain financial support to the Company in the present difficult time. In sum, given that prepayments of not exceeding RMB600 million will be available to the Group for satisfying its immediate working capital requirements and that Hisense Group,

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together with its subsidiaries, is currently one of the major electronic companies in the PRC and has demonstrated a good track record in the sales of electrical appliances in the PRC, we consider that it is in the commercial interest of the Company to appoint Hisense Agent (which will become its fellow subsidiary upon completion of the Equity Transfer Agreement) as its sales agent for the entire domestic market in the PRC. Accordingly, we consider that the entering into the Sales Agency Agreement is in the interests of the Company and the Independent Shareholders as a whole.

2. Terms of the Sales Agency Agreement

The Sales Agency Agreement provides that Hisense Agent would act as a sales agent of the Company’s domestic sales products by way of distribution within the entire domestic market in the PRC from 16 September 2005 to 31 March 2006.

The terms of the Sales Agency Agreement have been set out in the Letter from the Board. The Sales Agency Agreement contemplates that Hisense Agent will purchase products from the Company from time to time. Particularly, from the date of receipt of the prepayment by the Company under the Sales Agency Agreement, the Company would supply its products to Hisense Agent by delivering them to the warehouses designated by Hisense Agent. Upon delivery of the ordered products to the designated warehouses, the title to the products would pass to Hisense Agent, who will be responsible for collecting the sales proceeds from the relevant customers, and the Group will recognise the sales revenue. In addition, as stated in the Letter from the Board, Hisense Agent has no right to return any unsold products to the Company, and in the event that Hisense Agent is unable to recover the sales proceeds from the relevant customers, Hisense Agent has no right to claim against the Company.

It is agreed that the purchases by Hisense Agent from the Company during the term of the Sales Agency Agreement will not exceed RMB1,400 million, of which the purchases to be made from 16 September 2005 to 31 December 2005 and from 1 January 2006 to 31 March 2006 will not exceed RMB500 million and RMB900 million, respectively. The prices at which products will be sold to Hisense Agent will be equivalent to those prices offered by the Company to various distributors, including but not limited to sales discounts, price differences and all expenses which have been included in such prices.

As noted from the Company’s annual reports, the turnover of the Group in respect of domestic sales in the PRC amounted to approximately RMB4,563.9 million, RMB3,922.9 million and RMB4,977.5 million for each of the three years ended 31 December 2004, respectively, representing an average annual turnover of approximately RMB4,511.4 million. In view of this, we consider that the proposed maximum sales of RMB1,400 million for the period from 16 September 2005 to 31 March 2006 (i.e. approximately six months), representing only approximately 31% of the Group’s average annual turnover in respect of domestic sales in the PRC for the past three years, is not excessive and has been determined by the Company and Hisense Agent on a reasonable basis.

Pursuant to the Sales Agency Agreement, Hisense Agent would advance an aggregate prepayment for purchases of the Company’s products not exceeding RMB600 million, of which RMB300 million has been received in various stages by the Company during the period from

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21 September 2005 to 24 October 2005. As stated in the Letter from the Board, Hisense Agent would advance the remaining portion of the prepayment not exceeding RMB300 million to the Company within one month from 24 October 2005 as the parties see fit according to the then prevailing circumstances. In this connection, the Company received two instalments as further prepayments of approximately RMB50.5 million each from Hisense Agent on 17 November 2005 and 24 November 2005. It is agreed that the Company is not required to repay any of the prepayments during the term of the Sales Agency Agreement. On the other hand, when the value of the Group’s sales to Hisense Agent exceeds the aggregate prepayments actually received by the Group during the term of the Sales Agency Agreement, the relevant sales to Hisense Agent will be settled within a period of 60 days. Pursuant to the terms of the Sales Agency Agreement, interest will be charged to the Company on the basis of the actual amount of the prepayments received by the Company and accrued until 31 March 2006 at the interest rate equivalent to the annual interest rates on working capital loans announced by the People’s Bank of China from time to time. The accrued interests will be paid on a quarterly basis.

Pursuant to the terms of the Sales Agency Agreement, upon the expiry of the Sales Agency Agreement, the balance of the sum of the total amount of prepayment and the proceeds received by the Company from sale of products made under the Sales Agency Agreement minus the total value of agency products sold by the Company to Hisense Agent will be calculated. The owing party will have to settle any such balance with the other party within 15 days from the date of expiry of the Sales Agency Agreement. As stated in the Letter from the Board, subject to the assessment of the operational targets (which, subject to further negotiation by the Company and Hisense Agent, are the aggregate value of purchases by Hisense Agent from the Company of RMB500 million and RMB1,400 million for each of the periods ending 31 December 2005 and 31 March 2006, respectively, pursuant to the terms of the Sales Agency Agreement), Hisense Agent will receive 1% of the total amount of sales proceeds of products under the Sales Agency Agreement as agency fees from the Company and such agency fees will be paid quarterly. Hisense Agent will not charge any other fees and the Company is responsible for all related sales expenses. The actual agency fees payable by the Company will be subject to deduction of different scale depending on the extent to which the actual sales by Hisense Agent cannot reach the operational targets.

It should be noted that the agency fee at 1% of the total amount of sales proceeds of products under the Sales Agency Agreement represents the maximum amount of agency fee to be payable by the Company under the scenario that the actual sales by Hisense Agent are not less than the agreed operational targets. On the other hand, if the actual sales by Hisense Agent are less than 60% of the agreed operational targets, the Company is not required to pay any agency fees at all. Particulars of the agency fee deduction under different scenarios have been set out in the Letter from the Board. The agency fees will be settled on a three-month basis upon completion of evaluation of the operational targets.

As stated above, the prices at which products will be sold to Hisense Agent will be equivalent to those prices offered by the Company to various distributors and, other than the 1% agency fee at the maximum, Hisense Agent will not receive any other fees from the Company.

As advised by the management of Hisense Agent, the primary objective of the arrangements under the Sales Agency Agreement is to provide working capital financing to the

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Group so that it will be able to resume its production and domestic sales activities. The involvement of Hisense Agent as a sales agent of the Group’s products aims to help the Group in regaining its bargaining power to deal with its customers which has been lost considerably following the CSRC’s investigation for alleged breaches by the Company of the PRC securities regulations (which was due to the investigation by the PRC’s Public Security Bureau in connection with criminal offences on the Company’s former chairman, Mr. Gu Chu Jun, and others who are suspected of having committed economic crimes) and the prolonged suspension of the Group’s operations.

As stated in the Letter from the Board, the 1% agency fee is determined after arm’s length negotiation between the Company and Hisense Agent and is considered as a nominal amount to compensate the administrative costs to be incurred by Hisense Agent for the transactions under the Sales Agency Agreement. As advised by the management of the Company, there is no historical transaction between the Group and any independent third parties which is similar or comparable to the transactions contemplated under the Sales Agency Agreement. On the other hand, we are not aware of any public information on agency arrangements or their terms in a similar or comparable industry. Accordingly, we are unable to opine on whether the arrangements or the agency fee payable to Hisense Agent under the Sales Agency Agreement are on normal commercial terms. Nevertheless, on the basis that (i) the sales of products by the Company to Hisense Agent will be conducted in the ordinary and usual course of business of the Group and at prices that are equivalent to those offered to other independent third party distributors; (ii) the proposed maximum sales during the term of the Sales Agency Agreement in the aggregate amount of RMB1,400 million represents about 28% of total domestic sales of the Group of approximately RMB4,977.5 million for the year ended 31 December 2004; (iii) prepayments of not exceeding RMB600 million will be made available to the Group for satisfying its immediate need for working capital, which would unlikely be attainable by other means of fund raising under the Group’s current critical financial and operating conditions; (iv) Hisense Group, being one of the major electronic companies in the PRC, has the required resources and expertise to assist the Group in rebuilding its market position; and (v) the amount of agency fee to be payable by the Group to Hisense Agent will be reduced if the operational targets could not be reached, we are of the view that the terms of the Sales Agency Agreement are fair and reasonable so far as the Independent Shareholders are concerned.

As regards the credit period of 60 days offered to Hisense Group, we note from the Company’s 2004 annual report that sales are usually settled by cash on delivery for small and new customers and the Group allows a credit period of one year for large and well established customers. Given the value of the proposed sales to Hisense Agent of up to RMB1,400 million during the term of the Sales Agency Agreement and the credit period of one year offered to the Group’s large and well-established customers in general, we consider that the proposed credit period of 60 days offered to Hisense Agent is fair and reasonable.

As regards the interest to be charged to the Group on the prepayments of not exceeding RMB600 million, we note that the annual interest rate on working capital loans announced by the People’s Bank of China was approximately 5.58% as at the Latest Practicable Date. As indicated in the Company’s 2004 annual report, the Group incurred total finance costs of approximately RMB159.1 million, representing a finance cost of approximately 4.87% per annum based on the Group’s average total bank borrowings of approximately RMB3,267.4

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million for the year ended 31 December 2004. As further indicated in the Interim Report, the total finance costs incurred by the Group for the six months ended 30 June 2005 amounted to approximately RMB79.5 million, representing a finance cost of approximately 5.46% per annum of its average total bank borrowings of approximately RMB2,910 million for the six months ended 30 June 2005 which is very close to the prevailing interest rate as announced by the People’s Bank of China for working capital loans. Given that the prepayments of not exceeding RMB600 million to be made available to the Company are essentially an alternative means of working capital financing by Hisense Group and, under the present critical financial and operating conditions, the Group would unlikely be able to obtain any further financial support from banks or business associates, we consider the interest payable by the Group on the prepayments under the Sales Agency Agreement which will be based on the annual interest rate on working capital loans announced by the People’s Bank of China from time to time to be fair and reasonable as far as the Independent Shareholders are concerned.

3. Rationale for determining the maximum value of the transactions contemplated under the Sales Agency Agreement

Pursuant to Rule 14A.35(2) of the Listing Rules and given the term of the Sales Agency Agreement, the value of the transactions contemplated under the Sales Agency Agreement (i.e. the ongoing purchases of products by Hisense Agent from the Company and the payments of agency fee by the company to Hisense Agent) will be subject to an annual cap for each of the relevant financial years of the Company. As stated in the Letter from the Board, the maximum value of purchases by Hisense Agent from the Company for the periods from 16 September 2005 to 31 December 2005 and 1 January 2006 to 31 March 2006 will not exceed RMB500 million and RMB900 million, respectively, and the maximum value of agency fees payable by the Company to Hisense Agent for the same respective periods will not exceed RMB5 million and RMB9 million. In other words, the maximum values, or “caps”, of the transactions contemplated under the Sales Agency Agreement for the relevant financial years will be as follows:

	Maximum value of	Maximum value of
	purchases by	agency fee payable
	Hisense Agent from	by the Company to
	the Company	Hisense Agent
	(RMB’million)	(RMB’million)
Proposed caps:
Year 2005 (from 16 September 2005 to
31 December 2005)	500	5
Year 2006 (from 1 January 2006 to
31 March 2006)	900	9

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In view of the fact that the domestic sales of the Group for each of the periods from 1 October 2004 to 31 December 2004 and from 1 January 2005 to 31 March 2005 was approximately RMB495.5 million and RMB974.3 million, respectively, and that the Group has just resumed its production gradually since late August 2005, the Company and Hisense Agent both consider that the maximum sales of the Company’s products to Hisense Agent during each of the periods from 16 September 2005 to 31 December 2005 and from 1 January 2006 to 31 March 2006 would not exceed RMB500 million and RMB900 million, respectively.

As discussed with the management of Hisence Agent, the primary objective of the arrangements under the Sales Agency Agreement is to provide working capital financing to the Company so that it will be able to resume the production and domestic sales activities, which in turn will facilitate the survival of the Group. Therefore, both the Company and Hisense Agent consider that it is appropriate and prudent to use the historical domestic sales of the Group during the comparative period as the proposed sales target. Given the fact that (i) the Sales Agency Agreement will provide an opportunity for the Group to rebuild its market position; (ii) the proposed maximum amount of sales to Hisense Group for each of the relevant periods has been based on the historical domestic sales of the Group for the relevant corresponding past periods; and (iii) the 1% agency fee is the maximum amount payable by the Company to compensate the administrative costs of Hisense Agent to be incurred for the transactions under the Sales Agency Agreement and Hisense Agent will not charge any other fees for acting as the sales agent of the Company, we consider that the proposed maximum value of the purchases and the agency fees for the relevant periods as set out above are reasonably stated. Accordingly, we consider that the proposed caps for purchases of RMB500 million and agency fees of RMB5 million for the period from 16 September 2005 to 31 December 2005, and the proposed caps for purchases of RMB900 million and agency fees of RMB9 million for the period from 1 January 2006 to 31 March 2006 are fair and reasonable so far as the Independent Shareholders are concerned.

4. Conditions of the annual caps under the Sales Agency Agreement

There are certain conditions of the annual cap pursuant to the Listing Rules, in particular, the restriction of the value of the transactions contemplated under the Sales Agency Agreement by way of the annual cap for each of the two relevant financial years ending 31 December 2006 and the annual review by the independent non-executive Directors of the terms of such transactions and the relevant annual caps not being exceeded, details of which must be included in the Company’s subsequent published annual reports and accounts. Also, pursuant to the Listing Rules, each year the auditors of the Company must provide a letter to the Board confirming, among other things, that the transactions contemplated under the Sales Agency Agreement are conducted in accordance with the terms of the Sales Agency Agreement and that the relevant caps not being exceeded. In addition, pursuant to the Listing Rules, the Company shall publish an announcement if it knows or has reason to believe that the independent non-executive Directors and/or its auditors will not be able to confirm the terms of such transactions or the relevant annual caps not being exceeded. We are of the view that there are appropriate measures in place to govern the conduct of the transactions contemplated under the Sales Agency Agreement and safeguard the interests of the Independent Shareholders.

RECOMMENDATION

In formulating our recommendation to the Independent Board Committee and the Independent Shareholders, we have considered the above principal factors and reasons, in particular, the following:

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LETTER FROM AMS CORPORATE FINANCE LIMITED

• (i) the existing financial and trading positions of the Group following the severe disruption as a result of the CSRC’s investigation;

• (ii) an aggregate prepayment of not exceeding RMB600 million for purchases of the Company’s products will be made available to the Group which will be utilised for the purchases of raw materials for production of the Group’s products;

• (iii) the sales of the Company’s products to Hisense Agent will be conducted in the ordinary and usual course of business of the Group and the prices at which products will be sold to Hisense Agent will be equivalent to those prices offered by the Company to various distributors;

• (iv) the interest and the agency fee to be charged by Hisense Agent under the Sales Agency Agreement are fair and reasonable given the Group’s present critical financial and trading conditions;

• (v) the value of, and the basis for determining, the caps under the Sales Agency Agreement are reasonable, details of which are set out in the section headed “Rationale for determining the maximum value of the transactions contemplated under the Sales Agency Agreement”; and

• (vi) annual review by the independent non-executive Directors and confirmation from the auditors of the Company in respect of the terms of the transactions contemplated under the Sales Agency Agreement are in place to monitor and to compare the terms and conditions of such transactions.

Based on the above, we are of the opinion that the Sales Agency Agreement is in the interests of the Company and the Shareholders as a whole, the transactions to be contemplated under the Sales Agency Agreement are in the ordinary and usual course of the business of the Group and the terms of which including the proposed Cap are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we would advise the Independent Board Committee and the Independent Shareholders that the Independent Shareholders should vote in favour of the ordinary resolution to approve the Sales Agency Agreement and the proposed Cap of the transactions contemplated under the Sales Agency Agreement at the Extraordinary General Meeting.

Yours faithfully, For and on behalf of AMS Corporate Finance Limited Alexander Tai Managing Director

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GENERAL INFORMATION

APPENDIX

RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. Save and except for Mr. Gu Chu Jun, Mr. Yan You Song and Mr. Zhang Hong who have been formally arrested by the Foshan City Police and cannot be contacted as at the Latest Practicable Date, the Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading.

DISCLOSURE OF INTERESTS

(a) Directors’ interests and short position

• (i) As at the Latest Practicable Date, the interests and short positions of the Directors, chief executive and supervisors of the Company in the Shares, underlying Shares and debentures of the Company were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), required pursuant to section 352 of the SFO, to be entered into the register referred to therein, or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange were as follows:

Interests in the Company

				Proportion to
				the relevant	Proportion to
			Number of	class of issued	the total issued
		Type of	issued ordinary	share capital of	share capital of
Name	Position	interest	Shares held	the Company	the Company
Gu Chu Jun (i)	Director	Corporate	262,212,194	77.60%	26.43%
			Legal Person
			Shares
Gu Chu Jun (ii)	Director	Corporate	3,830,000	0.83%	0.39%
			H Shares
He Si	Supervisor	Personal/Family	50,000	0.03%	0.005%
			A Shares

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GENERAL INFORMATION

APPENDIX

Notes:

• (i) As at the Latest Practicable Date, Greencool Enterprise Development Company Limited was interested in 262,212,194 Legal Person Shares in the Company, representing approximately 26.43% of the total issued share capital of the Company as at the Latest Practicable Date. Mr. Gu Chu Jun directly owns 60% of the total investment in Greencool Enterprise Development Company Limited. Accordingly, for the purposes of the SFO, Mr. Gu Chu Jun is deemed interested in such Shares through his interests in Greencool Enterprise Development Company Limited.

• (ii) Mr. Gu Chu Jun is the controlling shareholder of Greencool Technology Holdings Limited (a company listed on the Hong Kong Stock Exchange Growth Enterprise Market). Mr. Gu Chu Jun is interested in approximately 63.6% of the share capital of Greencool Technology Holdings Limited. Two subsidiaries of Greencool Technology Holdings Limited are together interested in 3,830,000 H Shares of the Company, representing approximately 0.39% of the issued share capital of the Company. Accordingly, for the purposes of the SFO, Mr. Gu Chu Jun is deemed interested in such H Shares through his interests in Greencool Technology Holdings Limited.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executive of the Company had any interests and short positions in the Shares, underlying Shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), which were required pursuant to section 352 of the SFO to be entered into the register referred to therein or, which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange.

• (ii) Save as Mr. Gu Chu Jun, Mr. Yan You Song and Mr. Zhang Hong who had been formally arrested by the Foshan City Police and cannot be contacted as at the Latest Practicable Date, none of the other Directors or proposed Directors has any direct or indirect interest in any assets which have since 31 December 2004 (being the date to which the latest published audited financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

• (iii) Save as Mr. Gu Chu Jun, Mr. Yan You Song and Mr. Zhang Hong who had been formally arrested by the Foshan City Police and cannot be contacted as at the Latest Practicable Date, none of the other Directors is materially interested in any contract or arrangement entered into by the Company subsisting at the date of this circular which is significant in relation to the business of the Group.

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GENERAL INFORMATION

APPENDIX

(b) Interests of Substantial Shareholders

Interests in the Company

As at the Latest Practicable Date, according to the register of interest kept by the Company under Section 336 of the SFO and so far as is known to the Directors or the chief executive of the Company, the following person (other than a Director or chief executive of the Company) had an interest or short position in the Shares and underlying Shares which fall to be disclosed to the Company under the provisions of Division 2 and 3 of Part XV of the SFO:

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

Note: As at the Latest Practicable Date, Guangdong Greencool Enterprise Development Company Limited was interested in 262,212,194 Legal Person Shares in the Company, representing approximately 26.43% of the total issued share capital of the Company as at the Latest Practicable Date. Mr. Gu Chu Jun directly owns 60% of the total investment in Greencool Enterprise Development Company Limited. Accordingly, for the purposes of the SFO, Mr. Gu Chu Jun is deemed interested in such Shares through his interests in Greencool Enterprise Development Company Limited.

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GENERAL INFORMATION

APPENDIX

As at the Latest Practicable Date, so far as is known to the directors, the following parties who was directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Group other than the Company:

Interests in other members of the Group other than the Company

		Percentage
		shareholding of
	Shareholders holding	shareholders in
	10% or more in other	other members of
Other members of the Group	members of the Group	the Group
Guangdong Kelon	Weishi Investments Company Limited	40%
Air-Conditioner Co., Ltd.
Guangdong Kelon Mould	Hua Yi Compressor Company Limited	30%
Co., Ltd.
Foshan Shunde Rongsheng Plastic	Hua Yi Compressor Company Limited	30%
Products Co., Ltd.
Guangdong Huaao Electrical	Foshan City Shunde District	30%
Electronics Co., Ltd.	Yun Long Enquiry Service
	Company Limited
Chengdu Kelon Refrigerator	Chengdu Generator Factory	30%
Co., Ltd.
Yingkou Kelon Refrigerator	Yingkou Yingleng (Group)	14.74%
Co., Ltd.	Bankruptcy Liquidation Team
Hangzhou Kelon Electrical	Hangzhou Xiling Group	30%
Company Limited	Company Limited
Xi’an Kelon Cooling Co., Ltd.	Xi’an Gaoke (Group) Company	29.05%
	Limited
Jiangxi Kelon Combine Electrical	Jiangxi Fadasi Domestic Electrical	45%
Appliances Co., Ltd.	Appliances Company Limited
Kaifeng Kelon Air-Conditioner	Kaifeng Economic Technique	30%
Co., Ltd.	Development (Group) Company

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GENERAL INFORMATION

APPENDIX

		Percentage
		shareholding of
	Shareholders holding	shareholders in
	10% or more in other	other members of
Other members of the Group	members of the Group	the Group
Huayi Compressor Company	Huayi Electrical Appliances	40.67%
Limited	Company Limited
	A-Share public Shareholders	30.61%
Chongqing Kelon Rongsheng	Chongqing Shang She Group	24%
Refrigerator Sales Co., Ltd.
	Chongqing Huaqing Commerce	24%
	Company
	Chongqing Department Building	24%
Guangzhou Antaida Logistic	Guangzhou Zhongyuan International	30%
Co., Ltd.	Freight Forwarding Company
	Limited
	China Far Ocean Network	25%
	Company Limited
	Wuxi Small Swan Holdings	20%
	Company Limited
Wuhu Yingjia Electrical	Heavenly King Incorporated	20%
Machinery Co., Ltd

Save as disclosed above, the Directors and the chief executive of the Company are not aware that there are any other persons (other than a Director or chief executive of the Company) who, as at the Latest Practicable Date, had an interest or short position in the Shares and underlying Shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is, directly or indirectly, interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group, or in any option, in respect of such capital.

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GENERAL INFORMATION

APPENDIX

COMPETING INTERESTS

As at the Latest Practicable Date, Mr. Gu Chu Jun, through Guangdong Greencool, indirectly holds 82,852,683 domestic legal person shares of Hefei Meiling Co., Ltd (“Hefei Meiling”), representing 20.03% of the total issued share capital of Hefei Meiling (the “Hefei Meiling Shares”). Hefei Meiling is principally engaged in the research, manufacturing, and sales of various types of household refrigerators, freezers, and low temperature medical refrigerators (the “Hefei Meiling Business”). In this respect, Mr. Gu Chu Jun is regarded to be interested in a competing business of the Group.

As at the Latest Practicable Date, the Company has not entered into any non-compete undertaking with Mr. Gu Chu Jun. The Company believes that there is no significant overlap between the respective businesses of the Company and Hefei Meiling, for the following reasons:

• (i) the Company is principally engaged in the research, manufacturing and sales of refrigerators and air-conditioners, which can be distinguished from the Hefei Meiling Business. As far as the Company is aware, the only potential overlapping business of the Company and Hefei Meiling is the refrigerators market in the PRC; and

• (ii) even if there is any overlap in the refrigerator business of the Company and Hefei Meiling in the PRC, such business can be further distinguished in terms of the levels of technology used in the manufacture of their respective products, the style of their respective products and their respective target market segments in the PRC.

Furthermore, on 10 November 2005, Hefei Meiling announced in the PRC that Sichuan Changhong Electric Co., Ltd (“Sichuan Changhong”) and Guangdong Greencool have entered into an equity transfer agreement (the “Sichuan Changhong Agreement”), pursuant to which Guangdong Greencool agreed to transfer the Hefei Meiling Shares to Sichuan Changhong. Upon completion of the Sichuan Changhong Agreement, the Company believes that there will no longer be any issues concerning competing business between Hefei Meiling and the Company as a result of Hefei Meiling and the Company being controlled, directly or indirectly, by the same person.

Save as disclosed above, none of the directors of the Company is interested in any business which competes or is likely to compete, either directly or indirectly, with businesses of the Group.

SERVICE CONTRACTS

None of the Directors has entered into or is proposing to enter into a service contract with any member of the Group which may not be expiring or determinable within one year without payment of compensation (other than statutory compensation).

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GENERAL INFORMATION

APPENDIX

MATERIAL CHANGE

Save and except for, among others, (i) the profit warning dated 26 April 2005; (ii) the formal investigation of the Company by the China Securities Regulatory Commission for alleged breaches of securities laws and regulations in the PRC; (iii) the suspension of trading in H shares of the Company since 16 June 2005; (iv) the suspension of part of the Company’s production of refrigerators and air conditioners from May to August 2005; (v) the profit warning dated 13 July 2005; (vi) the foreclosure by the Intermediate People’s Court of the Shenzhen City of 262,212,194 legal person shares of the Company held by Guangdong Greencool from 28 July 2005 to 27 July 2006; (vii) the resumption of operations of the Company’s principal production lines since 20 August 2005; (viii) the retrospective adjustments made to the 2003 and 2004 financial statements due to the excessive sum of revenue recognised in 2004 and the omission of recording trade receivables and payables in 2003; (ix) the material litigations and arbitrations involving the Company; (x) the Company’s former chairman Mr. Gu Chu Jun, the Company’s executive directors Mr. Yan You Song and Mr. Zhang Hong, and other members of the Company’s management being arrested for alleged economic crime on 2 September 2005; (xi) the change in senior management on 16 September 2005; (xii) the foreclosure by the Intermediate People’s Court of Foshan City of Guangdong Province of 262,212,194 legal person shares of the Company held by Guangdong Greencool and all the bonus shares, placement shares and bonus dividends and other interests thereof; and (xiii) the profit warning dated 28 October 2005, as disclosed in the Company’s announcements since 26 April 2005, the Directors confirm that, as at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2004 (being the date to which the latest published audited financial statements of the Company were made up).

EXPERT

• (a) The following is the qualification of AMS Corporate Finance Limited which has given its opinion or advice which is contained in this circular:

Name Qualification

• AMS Corporate Finance Limited a corporation licensed under the SFO to conduct types 4 (advising on securities), 6 (advising on corporate finance) and 9 (asset management) regulated activities under the SFO

• (b) AMS Corporate Finance Limited does not have any shareholding, direct or indirect, in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

• (c) AMS Corporate Finance Limited has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which they are included.

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GENERAL INFORMATION

APPENDIX

• (d) AMS Corporate Finance Limited does not have any interest, direct or indirect, in any assets which have been acquired or disposed of by or leased to any member of the Group, or which are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2004, the date to which the latest published audited financial statements of the Company were made up.

• (e) The letter and recommendation given by AMS Corporate Finance Limited are given as of the date of this circular for incorporation herein.

MISCELLANEOUS

The English version of this circular shall prevail over the Chinese text.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business in Hong Kong of the Company at Room 2502-2505, Harbour Centre, 25 Harbour Road, Wanchai, Hong Kong during normal business hours from the date of this circular up to and including 14 December 2005:

• (a) the articles of association of the Company;

• (b) the letter from the Independent Board Committee, the text of which is set out on page 13 of this circular;

• (c) the letter from AMS Corporate Finance Limited, the text of which is set out on pages 14 to 26 of this circular;

• (d) the written consent of AMS Corporate Finance Limited;

• (e) the Sales Agency Agreement; and

• (f) the Supplemental Agreement.

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