Medlive Technology Co., Ltd. - Proxy Solicitation & Information Statement 2006

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 TRANSACTIONS

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

A letter from the Board of the Company is set out on pages 7 to 33 of this circular. A letter from the Independent Board Committee is set out on pages 34 to 35 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 36 to 60 of this circular.

10 October 2006

		Page
Definitions	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from	the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Letter from	the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . .	34
Letter from	AMS Corporate Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Appendix	– General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	61

– i –

DEFINITIONS

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

“A Shares”

domestic ordinary shares of the Company with a nominal value of RMB1.00 each and are listed on the Shenzhen Stock Exchange

“AGM”

the annual general meeting to be held at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC

“Air-Conditioners Production and Purchase Framework Agreement”

the agreement ( ) entered into between Kelon Air-Conditioner and Hisense Zhejiang dated 15 September 2006 in connection with the purchase of air-conditioners by Kelon Air-Conditioner

“Air-Conditioners Production and Supply Framework Agreement”

the agreement ( ) entered into between Kelon Air-Conditioner and Hisense Marketing dated 15 September 2006 in connection with the supply of air-conditioners by Kelon Air-Conditioner

“AMS Corporate Finance”

AMS Corporate Finance Limited, a corporation licensed under the SFO to carry on type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement

“associate(s)” has the meaning ascribed to it in the Listing Rules
“Board” the board of Directors
“Chengdu Kelon”

Chengdu Kelon Refrigerator Co., Ltd. ( ), a subsidiary of the Company

“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

– 1 –

DEFINITIONS

“Compressors Purchase and Supply Framework Agreements”
“Compressors Purchase and Supply Framework Agreement I”
“Compressors Purchase and Supply Framework Agreement II”
“Compressors Purchase and Supply Framework Agreement III”
“Compressors Purchase and Supply Framework Agreement IV”
“Compressors Purchase and Supply Framework Agreement V”
“Compressors Purchase and Supply Framework Agreement VI”

Compressors Purchase and Supply Framework Agreement I, Compressors Purchase and Supply Framework Agreement II, Compressors Purchase and Supply Framework Agreement III, Compressors Purchase and Supply Framework Agreement IV, Compressors Purchase and Supply Framework Agreement V, Compressors Purchase and Supply Framework Agreement VI, Compressors Purchase and Supply Framework Agreement VII, Compressors Purchase and Supply Framework Agreement VIII, Compressors Purchase and Supply Framework Agreement IX, Compressors Purchase and Supply Framework Agreement X, Compressors Purchase and Supply Framework Agreement XI and Compressors Purchase and Supply Framework Agreement XII

the agreement ( ) entered into between Kelon Freezer and Huayi Compressor dated 15 September 2006 in connection with the purchase and supply of compressors

the agreement ( ) entered into between Kelon Freezer and Jiaxi Beila dated 15 September 2006 in connection with the purchase and supply of compressors

the agreement ( ) entered into between Kelon Freezer and Huayi Jingzhou dated 15 September 2006 in connection with the purchase and supply of compressors the agreement ( ) entered into between Yingkou Kelon and Jiaxi Beila dated 15 September 2006 in connection with the purchase and supply of compressors

the agreement ( ) entered into between Jilin Kelon and Jiaxi Beila dated 15 September 2006 in connection with the purchase and supply of compressors

the agreement ( ) entered into between Hangzhou Kelon and Huayi Compressor dated 15 September 2006 in connection with the purchase and supply of compressors

– 2 –

DEFINITIONS

“Compressors Purchase and Supply Framework Agreement VII”

the agreement ( ) entered into between Hangzhou Kelon and Jiaxi Beila dated 15 September 2006 in connection with the purchase and supply of compressors

“Compressors Purchase and Supply Framework Agreement VIII”

the agreement ( ) entered into between Chengdu Kelon and Jiaxi Beila dated 15 September 2006 in connection with the purchase and supply of compressors

“Compressors Purchase and Supply Framework Agreement IX”
“Compressors Purchase and Supply Framework Agreement X”

the agreement ( ) entered into between Chengdu Kelon and Huayi Compressor dated 15 September 2006 in connection with the purchase and supply of compressors the agreement ( ) entered into between Kelon Refrigerator and Huayi Compressor dated 15 September 2006 in connection with the purchase and supply of compressors

“Compressors Purchase and Supply Framework Agreement XI”

the agreement ( ) entered into between Jilin Kelon and Huayi Compressor dated 15 September 2006 in connection with the purchase and supply of compressors

“Compressors Purchase the agreement ( ) entered into and Supply Framework between Yingzhou Kelon and Huayi Compressor dated 15 Agreement XII” September 2006 in connection with the purchase and supply of compressors

“Director(s)” director(s) of the Company

“Equity Transfer Agreement” the agreement entered into by Guangdong Greencool and Hisense Air-Conditioning on 9 September 2005 in relation to the transfer of the 262,212,194 domestic legal person shares of the Company which was supplemented by a supplemental agreement entered into on 28 September 2005 and a second supplemental agreement entered into on 15 April 2006 (for further details please refer to the announcement of the Company dated 14 September 2005, 30 September 2005, the circular dated 29 November 2005 and the announcement dated 21 April 2006)

“Group”

the Company and its subsidiaries

– 3 –

DEFINITIONS

“Guangdong Greencool”	Guangdong Greencool Enterprise Development Company	Guangdong Greencool Enterprise Development Company	Guangdong Greencool Enterprise Development Company
	Limited, the Company’s single largest shareholder
“H Shares”	overseas listed foreign shares of the Company with a nominal
	value of RMB1.00 each and are listed on the Stock Exchange
“Hangzhou Kelon”	Hangzhou Kelon Electrical Co., Ltd ( ), a subsidiary of the Company
“Hisense Agreements”	the Mould Purchase Framework Agreement, the Raw
	Materials Purchase and Supply Framework Agreement, the
	Air-Conditioners Production and Purchase Framework
	Agreement and the Air-Conditioners Production and Supply
“Hisense Air- Conditioning”	Framework Agreement Qingdao Hisense Air-Conditioning Co., Ltd ( ), a subsidiary of Hisense Group
“Hisense Group”	Hisense Group Company, a limited company incorporated in
	the PRC
“Hisense Marketing”	Qingdao Hisense Marketing Company Limited ( ), a subsidiary of Hisense Group
“Hisense Zhejiang”	Hisense (Zhejiang) Air-Conditioner Co., Ltd. ( ), a subsidiary of Hisense Group
“HK$”	Hong Kong dollar(s), the lawful currency of Hong Kong
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Huayi Compressor”	Huayi Compressor Company Limited ( ), a limited company incorporated in the PRC
“Huayi Jingzhou”	Huayi Compressor (Jingzhou) Co., Ltd. ( ), a subsidiary of Huayi Compressor
“Independent Board Committee”	an independent board committee of the Company comprising
	all the independent non-executive Directors, namely Mr.
	Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai,
	Warren
“Independent Shareholders” or	Shareholder(s) other than persons who are, under the Listing
“independent shareholders”	Rules, required to abstain from voting on the resolution to
	approve a transaction

– 4 –

DEFINITIONS

==> picture [426 x 627] intentionally omitted <==

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

||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Jiaxi|Beila”|Jiaxi|Beila|Compressor|Company|Limited|
|(|),|a|subsidiary|of|Huayi|
|Compressor|
|“Jilin|Kelon”|Jilin Kelon Electrical Co., Ltd. (|) , a|
|subsidiary|of|the|Company|
|“Kelon Air-Conditioner”|Guangdong|Kelon|Air-Conditioner|Co.,|Ltd.|
|(|),|a|subsidiary|of|the|Company|
|“Kelon|Freezer”|Guangdong|Kelon|Refrigerator|Ltd.|(|
|),|a|subsidiary|of|the|Company|
|“Kelon|Mould”|Guangdong|Kelon|Mould|Co.,|Ltd.|(|
|),|a|subsidiary|of|the|Company|
|“Kelon|Refrigerator”|Guangdong|Kelon|Refrigerator|Co.,|Ltd.|(|
|),|a|subsidiary|of|the|Company|
|“Latest|Practicable|Date”|27|September|2006,|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|
|“Mould|Purchase|Framework|the|agreement|(|)|entered|into|between|
|Agreement”|Kelon|Mould|and|Hisense|Air-Conditioning|dated|15|
|September|2006|in|connection|with|the|purchase|and|supply|
|of|moulds|
|“PRC”|the|People’s|Republic|of|China|
|“Qingdao|Hisense|Electric”|Qingdao|Hisense|Electric|Company|Limited|
|(|),|a|subsidiary|of|
|Hisense|Group|
|“Raw|Materials|Purchase|and|the|agreement|(|)|entered|into|
|Supply|Framework Agreement”|between|Kelon Air-Conditioner|and|Hisense|Zhejiang|dated|
|15|September|2006|in|connection|with|the|purchase|and|
|supply|of|air-conditioners’ components|
|“RMB”|Renminbi|yuan,|the|lawful|currency|of|the|PRC|

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

– 5 –

DEFINITIONS

“Rongsheng Plastic”	Shunde Rongsheng Plastic Products Co., Ltd ( ), a company
	incorporated in the PRC on 18 October 1991 and which is an
	indirect non wholly-owned subsidiary of the Company
“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 RMB1.00 each in the capital of the Company,
	comprising the A Shares and the H Shares
“Shareholder(s)”	holder(s) of the Shares
“Shenzhen Listing Rules”	Rules Governing Listing of Stocks on Shenzhen Stock
	Exchange
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“subsidiary” or “subsidiaries”	has the meaning defined in sections 2 and 2B of the
	Companies Ordinance (Cap. 32 of the Laws of Hong Kong)
“Yangzhou Kelon”	Yangzhou Kelon Electrical Company Limited
“Yingkou Kelon”	( ), a subsidiary of the Company Yingkou Kelon Refrigerator Co., Ltd. ( ), a subsidiary of the Company
“%”	percent.

– 6 –

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. Tang Ye Guo Ms. Yu Shu Min Mr. Su Yu Tao Mr. Xiao Jian Lin Mr. Lin Lan Mr. Zhang Ming

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

Independent non-executive Directors:

Mr. Zhang Sheng Ping Mr. Lu Qing Mr. Cheung Yui Kai, Warren

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

10 October 2006

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

Compressors Purchase and Supply Framework Agreements

On 18 September 2006, the Board announced that the relevant subsidiaries of the Company entered into the Compressors Purchase and Supply Framework Agreements with Huayi Compressor, Jiaxi Beila or Huayi Jingzhou for a term of one year ending on 31 December 2006 in connection with the purchase of compressors for the purpose of the manufacture of household electrical appliances, including but not limited to refrigerators, by the Group.

Mould Purchase Framework Agreement

On 18 September 2006, the Board announced that on 15 September 2006 Kelon Mould and Hisense Air-Conditioning entered into the Mould Purchase Framework Agreement for a term of one year ending on 31 December 2006 in connection with the provision of moulds by Kelon Mould to Hisense Air-Conditioning for the manufacturing of household appliances, including air-conditioners, by Hisense Air-Conditioning.

– 7 –

LETTER FROM THE BOARD

Air-Conditioners Production and Purchase Framework Agreement and Raw Materials Purchase and Supply Framework Agreement

On 18 September 2006, the Board announced that on 15 September 2006 Kelon Air-Conditioner and Hisense Zhejiang entered into the Air-Conditioners Production and Purchase Framework Agreement for a term of one year ending on 31 December 2006 in connection with the manufacture and sale of air-conditioners by Hisense Zhejiang to Kelon Air-Conditioner.

In order to enable Hisense Zhejiang to manufacture and supply air-conditioners to Kelon Air-Conditioner, Kelon Air-Conditioner and Hisense Zhejiang entered into the Raw Materials Purchase and Supply Framework Agreement for a term of one year ending on 31 December 2006 in connection with the provision of air-conditioners’ components by Kelon AirConditioner to Hisense Zhejiang in connection with the manufacture of air-conditioners by Hisense Zhejiang for sale to Kelon Air-Conditioner pursuant to the Air-Conditioners Production and Purchase Framework Agreement.

Air-Conditioners Production and Supply Framework Agreement

On 18 September 2006, the Board announced that on 15 September 2006 Kelon Air-Conditioner and Hisense Marketing entered into the Air-Conditioners Production and Supply Framework Agreement for a term of one year ending on 31 December 2006 in connection with the manufacture and sale of air-conditioners by Kelon Air-Conditioner to Hisense Marketing.

CONTINUING CONNECTED TRANSACTIONS

Compressors Purchase and Supply Framework Agreements

As at the Latest Practicable Date, each of Huayi Compressor, Jiaxi Beila and Huayi Jingzhou (both of which are non wholly-owned subsidiaries of Huayi Compressor) are connected persons of the Company by virtue of the holding of 30% equity interest by Huayi Compressor in each of Kelon Mould and Rongsheng Plastic, both of which are non wholly-owned subsidiaries of the Company. Accordingly, the transactions contemplated under the Compressors Purchase and Supply Framework Agreements constitute continuing connected transactions for the Company under the Listing Rules. As each of the applicable percentage ratios (other than the profit ratio) is more than 2.5%, the continuing connected transactions under the Compressors Purchase and Supply Framework Agreements are subject to reporting, announcement and independent shareholders’ approval requirements under Rule 14A.35 of the Listing Rules.

The relevant subsidiaries of the Company have engaged in the transactions relating to the purchase of compressors with Huayi Compressor, Huayi Jingzhou and Jiaxi Beila since 2000. The Compressors Purchase and Supply Framework Agreements are to be effective retrospectively on 1 January 2006 and are conditional upon obtaining independent shareholders’ approval.

– 8 –

LETTER FROM THE BOARD

As far as the Company is aware, Huayi Compressor, Huayi Jingzhou and Jiaxi Beila are independent from and not related to Hisense Group or its subsidiaries.

Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement

As a result of the signing of the Equity Transfer Agreement (pursuant to which Guangdong Greencool, the Company’s existing substantial shareholder, shall transfer 262,212,194 domestic shares of the Company, being approximately 26.43% of the issued shares of the Company, held by it to Hisense Air-Conditioning), each of Hisense Group and its subsidiaries are deemed to be associates of Guangdong Greencool, and therefore connected persons of the Company.

Hisense Air-Conditioning, Hisense Marketing and Hisense Zhejiang are indirect subsidiaries of Hisense Group. Hisense Group, through Qingdao Hisense Electric, indirectly holds 93% and 70% of the shares of Hisense Air-Conditioning and Hisense Marketing respectively. Hisense Zhejiang is a subsidiary of Hisense Air-Conditioning which directly holds 51% of the shares of Hisense Zhejiang.

Both Kelon Air-Conditioner and Kelon Mould are the subsidiaries of the Company. The Company directly holds 60% of the shares of Kelon Air-Conditioner. The Company directly and indirectly holds 40% and 30% of the shares of the Kelon-Mould respectively.

As a result, the transactions contemplated by the Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement will be deemed to be continuing connected transactions of the Company under the Listing Rules and should be aggregated for the purpose of Rules 14A.25 to 14A.27 of the Listing Rules, since Hisense Air-Conditioning, Hisense Marketing and Hisense Zhejiang are subsidiaries of Hisense Group and thus are connected or otherwise associated with each other.

Given that each of the applicable percentage ratios (other than the profit ratio) for the aggregated amount of the transactions contemplated under the Mould Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement, the AirConditioners Production and Purchase Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement is more than 2.5%, the continuing connected transactions under the Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement are subject to reporting, announcement and independent shareholders’ approval requirements under Rule 14A.35 of the Listing Rules.

Kelon Mould, as a supplier, has engaged in the transactions contemplated under the Mould Purchase Framework Agreement with Hisense Air-Conditioner, as a buyer, since January 2006. The Mould Purchase Framework Agreement is effective retrospectively on 1 January 2006 and conditional upon obtaining independent shareholders’ approval.

– 9 –

LETTER FROM THE BOARD

Kelon Air-Conditioner, as a supplier, has engaged in the transactions contemplated under the Raw Materials Purchase and Supply Framework Agreement with Hisense Zhejiang, as a buyer, since April 2006. The Raw Materials Purchase and Supply Framework Agreement is to be effective retrospectively on 1 January 2006 and conditional upon obtaining independent shareholders’ approval.

Kelon Air-Conditioner, as a buyer, has engaged in the transactions contemplated under the Air-Conditioners Production and Purchase Framework Agreement with Hisense Zhejiang, as a supplier, since April 2006. Kelon Air- Conditioner, as a supplier, as engaged in the transactions contemplated under the Air-Conditioners Production and Supply Framework Agreement with Hisense Marketing, as a buyer, since February 2006. The Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement are to be effective retrospectively on 1 January 2006 and conditional upon obtaining independent shareholders’ approval.

The purpose of this circular is to provide you with details of the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the AirConditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement, to set out the recommendation of the Independent Board Committee and to set out the letter of advice from AMS Corporate Finance to the Independent Board Committee and the Independent Shareholders in respect of the terms of the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement.

(A) COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENTS

Save and except that the Compressors Purchase and Supply Framework Agreements were entered into by different contracting parties with the Company’s subsidiaries as customers on one hand and Huayi Compressor, Jiaxi Beila or Huayi Jingzhou as suppliers on the other hand and the annual cap of each of the Compressors Purchase and Supply Framework Agreements are different, the terms of each of the Compressors Purchase and Supply Framework Agreements are identical in all respects.

Date and Parties

1. Compressors Purchase and Supply Framework Agreement I

Date: 15 September 2006

Parties: (i) Kelon Freezer (as customer); and

(ii) Huayi Compressor (as supplier).

– 10 –

LETTER FROM THE BOARD

2. Compressors Purchase and Supply Framework Agreement II

Date: 15 September 2006

Parties: (i) Kelon Freezer (as customer); and

(ii) Jiaxi Beila (as supplier).

3. Compressors Purchase and Supply Framework Agreement III

Date: 15 September 2006

Parties: (i) Kelon Freezer (as customer); and

(ii) Huayi Jingzhou (as supplier).

4. Compressors Purchase and Supply Framework Agreement IV

Date: 15 September 2006

Parties: (i) Yingkou Kelon (as customer); and

(ii) Jiaxi Beila (as supplier).

5. Compressors Purchase and Supply Framework Agreement V

Date: 15 September 2006

Parties: (i) Jilin Kelon (as customer); and

(ii) Jiaxi Beila (as supplier).

6. Compressors Purchase and Supply Framework Agreement VI

Date: 15 September 2006

Parties: (i) Hangzhou Kelon (as customer); and

(ii) Huayi Compressor (as supplier).

7. Compressors Purchase and Supply Framework Agreement VII

Date: 15 September 2006

Parties: (i) Hangzhou Kelon (as customer); and

(ii) Jiaxi Beila (as supplier).

– 11 –

LETTER FROM THE BOARD

8. Compressors Purchase and Supply Framework Agreement VIII

Date: 15 September 2006

Parties: (i) Chengdu Kelon (as customer); and

(ii) Jiaxi Beila (as supplier).

9. Compressors Purchase and Supply Framework Agreement IX

Date: 15 September 2006

Parties: (i) Chengdu Kelon (as customer); and

(ii) Huayi Compressor (as supplier).

10. Compressors Purchase and Supply Framework Agreement X

Date: 15 September 2006

Parties: (i) Kelon Refrigerator (as customer); and
(ii) Huayi Compressor (as supplier).

11. Compressors Purchase and Supply Framework Agreement XI

Date: 15 September 2006
Parties: (i) Jilin Kelon (as customer); and
(ii) Huayi Compressor (as supplier).

12. Compressors Purchase and Supply Framework Agreement XII

Date: 15 September 2006

Parties: (i) Yingkou Kelon (as customer); and

(ii) Huayi Compressor (as supplier).

Term

Each of the Compressors Purchase and Supply Framework Agreements is valid for a term of one year commencing from 1 January 2006 to 31 December 2006, which, subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties.

Sale and Purchase of Compressors

Pursuant to the terms of the Compressors Purchase and Supply Framework Agreements, the relevant subsidiaries of the Company agreed to purchase on a non-exclusive basis such

– 12 –

LETTER FROM THE BOARD

quantities of compressors as they may require from time to time from each of Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) for the purpose of the manufacture of household electrical appliances, including but not limited to refrigerators, by the Group. The relevant subsidiaries of the Company agreed with Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) to enter into individual compressors purchase and supply orders setting out specific terms including the price, technological services and other terms of delivery , but such terms must be consistent with the principles and the terms of the Compressors Purchase and Supply Framework Agreements.

The relevant subsidiaries of the Company have the right to purchase compressors from other suppliers apart from Huayi Compressor, Huayi Jingzhou and Jiaxi Beila from time to time according to their own needs. The Compressors Purchase and Supply Framework Agreements also do not restrict the rights of Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) to sell its compressors to any other third parties.

Pricing

Pricing for the purchase of compressors is determined principally by commercial negotiation between the relevant subsidiaries of the Company and each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila according to the principle of fairness and reasonableness with reference to the market price of compressors from time to time.

Maximum Aggregate Annual Caps

The transactions contemplated by the Compressors Purchase and Supply Framework Agreements are subject to the annual caps set out in the table below:

							Maximum aggregate
							amount of
							purchases of
							compressors for
							the financial
							year ending
							31 December 2006
							(RMB)
Compressors	Purchase	and	Supply	Framework	Agreement	I	19,235,300
Compressors	Purchase	and	Supply	Framework	Agreement	II	124,559,100
Compressors	Purchase	and	Supply	Framework	Agreement	III	3,400,000
Compressors	Purchase	and	Supply	Framework	Agreement	IV	9,738,000
Compressors	Purchase	and	Supply	Framework	Agreement	V	10,472,000
Compressors	Purchase	and	Supply	Framework	Agreement	VI	4,703,000
Compressors	Purchase	and	Supply	Framework	Agreement	VII	14,589,000
Compressors	Purchase	and	Supply	Framework	Agreement	VIII	7,788,000
Compressors	Purchase	and	Supply	Framework	Agreement	IX	4,703,000
Compressors	Purchase	and	Supply	Framework	Agreement	X	8,000,000
Compressors	Purchase	and	Supply	Framework	Agreement	XI	454,000
Compressors	Purchase	and	Supply	Framework	Agreement	XII	1,816,000

TOTAL: 209,457,400

– 13 –

LETTER FROM THE BOARD

The above annual caps have been determined with reference to (a) similar transactions between the subsidiaries of the Company with each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila in the past; (b) the prevailing market conditions; and (c) the projected level of production of household electrical appliances of the subsidiaries of the Company, including but not limited to refrigerators, for the financial year ending 31 December 2006.

It is currently estimated that the value of the transactions contemplated under the Compressors Purchase and Supply Framework Agreements will amount to approximately 8% of the total value of the same type of transactions, i.e. the purchase of compressors, to be conducted by the Group for the year ending 31 December 2006. The aggregate value of the same type of transactions conducted by the Group in the previous year was approximately RMB1,500,000,000.

Reasons For and Benefits of the Compressors Purchase and Supply Framework Agreements

Each of the relevant subsidiaries of the Company is engaged in the manufacture of household electrical appliances, including but not limited to refrigerators, which requires compressors as a component for its products. After considering a range of factors including the quality, the price and the compatibility of the compressors manufactured by Huayi Compressor, Huayi Jingzhou and Jiaxi Beila with the current facilities used by and the refrigerators manufactured by the relevant subsidiaries of the Company, as well as the level of services provided by Huayi Compressor, Huayi Jingzhou and Jiaxi Beila, the Group considers each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila is in a good position to supply compressors to the relevant subsidiaries. In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms of the Compressors Purchase and Supply Framework Agreements are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

(B) MOULD PURCHASE FRAMEWORK AGREEMENT

Date: 15 September 2006

Parties: (i) Kelon Mould (as supplier); and

(ii) Hisense Air-Conditioning (as buyer).

Term

The Mould Purchase Framework Agreement is for a term of one year commencing from 1 January 2006 to 31 December 2006, which subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties.

Mould Purchase

Pursuant to the terms of the Mould Purchase Framework Agreement, Kelon Mould has agreed to manufacture and supply on a non-exclusive basis such quantities of moulds as Hisense Air-Conditioning may require from time to time for the purpose of the manufacture of household electrical appliances, including but not limited to air-conditioners, by Hisense Air-Conditioning. Kelon Mould and Hisense Air-Conditioning agreed to enter into individual

– 14 –

LETTER FROM THE BOARD

mould purchase orders setting out specific terms including the price, technological services and other terms of delivery, but such terms must be consistent with the principles and the terms of the Mould Purchase Framework Agreement.

Hisense Air-Conditioning has the right to purchase moulds from other suppliers apart from Kelon Mould from time to time according to its own needs. The Mould Purchase Framework Agreement also does not restrict the rights of Kelon Mould to sell its moulds to any other third parties.

Kelon Mould has engaged in the transactions contemplated under the Mould Purchase Framework Agreement since about January 2006 and the value of such transactions amounted to the total approximate sum of RMB759,000 as at the end of July 2006.

Pricing

In response to Hisense Air-Conditioning’s invitations to tender (which are also extended to various independent third parties) from time to time, Kelon Mould may submit such tenders or bids to manufacture the moulds for such products requested by Hisense Air-Conditioning in its invitation to tender. Pricing for the manufacture of moulds is determined predominantly by the open bidding process.

Maximum Aggregate Annual Cap

The transactions as contemplated by the Mould Purchase Framework Agreement are subject to the annual cap below:

For the year ending 31 December 2006 RMB8,000,000

The above annual cap has been determined with reference to (a) the similar transactions between Kelon Mould and Hisense Air-Conditioning in the past, (b) the prevailing market conditions; and (c) the projected level of production of household electrical appliances of Hisense Air-Conditioning for the financial year ending 31 December 2006.

It is currently estimated that the value of the transactions contemplated under the Mould Purchase Framework Agreement will amount to approximately 10% of the total value of the same type of transactions to be conducted by the Group for the year ended 31 December 2006. The aggregate value of the same type of transaction, i.e. the manufacture and supply of moulds, conducted by the Group in the previous year was approximately RMB65,710,000.

Reasons For and Benefits of the Mould Purchase Framework Agreement

Kelon Mould is principally engaged in the design and manufacture of large and medium size moulds for household electrical appliances. Hisense Air-Conditioning is principally engaged in the manufacture of air-conditioners. The manufacture and provision of moulds by Kelon Mould to Hisense Air-Conditioning therefore formed an integral part of Kelon Mould’s business. The Directors consider that the Mould Purchase Framework Agreement will facilitate the Company to maintain an important existing relationship with Hisense Air-Conditioning so that Hisense Air-Conditioning may become a stable customer of the Company thereby further expanding the sales of Kelon Mould. In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms of the Mould Purchase Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

– 15 –

LETTER FROM THE BOARD

(C) AIR-CONDITIONERS PRODUCTION AND PURCHASE FRAMEWORK AGREEMENT AND RAW MATERIALS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT
(i) Air-conditioners Production and Purchase Framework Agreement

Date: 15 September 2006

Parties (i) Hisense Zhejiang (as supplier); and

(ii) Kelon Air-Conditioner (as buyer).

Term

The Air-Conditioners Production and Purchase Framework Agreement is for a term of one year commencing from 1 January 2006 to 31 December 2006, which subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties.

Air-Conditioners Purchase

Pursuant to the terms of the Air-Conditioners Production and Purchase Framework Agreement, Hisense Zhejiang has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners as Kelon Air-Conditioner may require from time to time to facilitate its sale mainly in the East China region of the PRC, which is a strong sales region for air-conditioners of the Group. Kelon Air-Conditioner and Hisense Zhejiang agreed to enter into individual air-conditioners production and purchase orders setting out specific terms including the price, technological services and other terms of delivery, but such terms must be consistent with the principles and the terms of the Air-Conditioners Production and Purchase Framework Agreement.

Kelon Air-Conditioner has the right to purchase air-conditioners from other suppliers apart from Hisense Zhejiang from time to time according to its own needs. The AirConditioners Production and Purchase Framework Agreement also does not restrict the rights of Hisense Zhejiang to sell air-conditioners to any other third parties.

Kelon Air-Conditioner has engaged in the transactions contemplated under the AirConditioners Production and Purchase Framework Agreement since about April 2006 and the value of such transactions amounted to the total approximate sum of RMB65,890,800 as at the end of July 2006.

Pricing

The pricing for the purchase of air-conditioners is determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between Kelon Air-Conditioner and Hisense Zhejiang with reference to market price of the airconditioners from time to time and the Group’s knowledge of pricing policy of OEM products within the industry.

– 16 –

LETTER FROM THE BOARD

The price of individual air-conditioner sold by Hisense Zhejiang to Kelon Air-Conditioner under the Air-Conditioners Production and Purchase Framework Agreement is determined according to the following standard:

The purchase price of individual air-conditioner purchased by Kelon AirConditioner from Hisense Zhejiang should be less than or equal to the aggregate of (1) production cost for individual air-conditioner produced by Kelon AirConditioner, (2) management fee, and (3) transportation costs for individual air-conditioner (from Guangdong to Zhejiang).

After considering the above pricing standard and the relevant percentage level of the production costs and management fee of Kelon Air-Conditioner and making reference to the market prices of air-conditioners, the price of individual air-conditioner under the AirConditioners Production and Purchase Framework Agreement, after negotiation and agreed by both parties, is:

The price of air-conditioner (specific model) sold by Hisense Zhejiang to Kelon Air-Conditioner = production cost of the air-conditioner (specific model) of Kelon Air-Conditioner/0.95

Kelon Air-Conditioner is responsible for the collection of the air-conditioners from Hisense Zhejiang.

Maximum Aggregate Annual Cap

The transactions contemplated by the Air-Conditioners Production and Purchase Framework Agreement are subject to the annual cap below:

For the year ending 31 December 2006

RMB120,000,000

The above annual cap has been determined with reference to (a) the prevailing market conditions; (b) the supply of air-conditioners by Hisense Zhejiang to Kelon Air-Conditioner for the period from April 2006 to the end of July 2006 had already amounted to approximately RMB65,890,800; and (c) the projected level of production and sale of air-conditioners of Hisense Zhejiang and Kelon Air-Conditioner for the financial year ending 31 December 2006.

As the Group is not engaged in similar transactions with any other parties, the value of the transactions contemplated under the Air-Conditioners Production and Purchase Framework Agreement will represent 100% of the total value of the same type of transactions, i.e. the purchase of air-conditioners, to be conducted by the Group for the year ending 31 December 2006.

Reasons For and Benefits of the Air-conditioners Production and Purchase Framework Agreement

Kelon Air-Conditioner is engaged in the production of air-conditioners. Hisense Zhejiang is principally engaged in the production of air-conditioners and the production and sales of other household electrical appliances.

– 17 –

LETTER FROM THE BOARD

The eastern region of the PRC (“East China Region”) is economically advanced with concentration of population and represents a significant strategic meaning in terms of brand image and sales in the PRC air-conditioners’ market. The East China Region is also an important market for the products of the Company since early years. Given the proximity of Hisense Zhejiang to the markets in the East China Region and Kelon Air-Conditioner always wants to further develop the sales market of air-conditioners in the East China Region. Taking into account a range of factors including the reduction in transportation costs, the improvement in competitiveness, the quality and the price of the air-conditioners manufactured by Hisense Zhejiang, as well as the level of services provided by Hisense Zhejiang, the Company considers that the transactions contemplated under the Air-Conditioners Production and Purchase Framework Agreement will improve the competitiveness and responsiveness of the airconditioners of the Company for its sales in the East China Region and thus facilitating the Group’s air-conditioner sales in the East China Region so as to assist the Company to resume normal business operations.

In consideration of the following factors, the Company intends to carry out the transactions as contemplated under the Air-Conditioners Production and Purchase Framework Agreement:

(1) The purchase price of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang is more or less the same as the total sum of production costs and transportation costs of air-conditioners as produced by Kelon Air-Conditioner in Shunde, Guangdong and transporting the same for sale in the Zhejiang Province.

Kelon Air-Conditioner can save management fee and logistic cost, which is equivalent to approximately 5% of the total production costs of air-conditioners of Kelon Air-Conditioner, as a result of its purchase of air-conditioners from Hisense Zhejiang. As such, the price of air-conditioner (specific model) sold by Hisense Zhejiang to Kelon Air-Conditioner is determined by dividing the production cost of the air-conditioner (specific model) of Kelon Air-Conditioner as divided with 0.95.

(2) The purchase of air-conditioners from Hisense Zhejiang can save the time for transporting air-conditioners between Shunde, Guangdong and Zhejiang Province and thus improving the Group’s responsiveness to the changes in East China Region’s air-conditioner market and avoiding the loss of market share to other competitors.

Since the East China Region is the largest sales region of air-conditioners in the PRC, its competition is also the keenest. The change of weather is one of the main factors affecting the sales of air-conditioner and it is also a sales feature which differentiates it from the sales of other electrical appliances. The opportunity of making substantial sales can be lost or obtained in one or two days’ time difference. As such, air-conditioner manufacturers always use their best endeavours to gain more market share in this region within the shortest time frame.

(3) The reduction in transportation distance of the air-conditioners can also help to reduce the wear and tear caused to the air-conditioners products during transportation.

In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms of the Air-Conditioners Production and Purchase Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

– 18 –

LETTER FROM THE BOARD

(ii) Raw Materials Purchase and Supply Framework Agreement

Date: 15 September 2006

Parties: (i) Kelon Air-Conditioner (as supplier); and

(ii) Hisense Zhejiang (as buyer).

Term

The Raw Materials Purchase and Supply Framework Agreement is for a term of one year commencing from 1 January 2006 to 31 December 2006, which, subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties.

Raw Materials Purchase

Pursuant to the terms of the Raw Materials Purchase and Supply Framework Agreement, Kelon Air-Conditioner has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners’ components as Hisense Zhejiang may require from time to time for the purpose of the manufacture of air-conditioners, for sale to Kelon Air-Conditioner pursuant to the Air-Conditioners Production and Purchase Framework Agreement. Kelon Air-Conditioner and Hisense Zhejiang agreed to enter into individual raw materials purchase and supply orders setting out specific terms including the price, technological services and other terms of delivery, but such terms must be consistent with the principles and the terms of the Raw Materials Purchase and Supply Framework Agreement.

Hisense Zhejiang has the right to purchase air-conditioners’ components from other suppliers apart from Kelon Air-Conditioner from time to time according to its own needs. The Raw Materials Purchase and Supply Framework Agreement also does not restrict the rights of Kelon Air-Conditioner to sell its air-conditioners’ components to any other third parties.

Kelon Air-Conditioner has engaged in the transactions contemplated under the Raw Materials Purchase and Supply Framework Agreement since about April 2006 and the value of such transactions amounted to the total approximate sum of RMB5,502,900 as at the end of July 2006.

Pricing

The pricing for the purchase of air-conditioners’ components is determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between Kelon Air-Conditioner and Hisense Zhejiang with reference to market price of the air-conditioners’ components.

Maximum Aggregate Annual Cap

The transactions contemplated by the Raw Materials Purchase and Supply Framework Agreement are subject to the annual cap below:

For the year ending 31 December 2006

RMB12,000,000

The above annual cap has been determined with reference to (a) the prevailing market conditions; and (b) the projected level of production of air-conditioners of Hisense Zhejiang for the financial year ending 31 December 2006.

– 19 –

LETTER FROM THE BOARD

It is currently estimated that the value of the transactions contemplated under the Raw Materials Purchase and Supply Framework Agreement will amount to approximately 3% of the total value of the same type of transactions, i.e. the manufacture and supply of air-conditioners’ components, to be conducted by the Group for the year ending 31 December 2006. The aggregate value of the same type of transactions conducted by the Group in the previous year was approximately RMB302,420,000.

Reasons For and Benefits of the Raw Materials Purchase and Supply Framework Agreement

Kelon Air-Conditioner is principally engaged in the design and manufacture of airconditioners. Hisense Zhejiang is principally engaged in the manufacture of air-conditioners. Pursuant to the Air-Conditioners Production and Purchase Framework Agreement, Hisense Zhejiang shall manufacture and supply air-conditioners to Kelon Air-Conditioner to facilitate its sale mainly in the East China Region. In the circumstances, Hisense Zhejiang shall purchase air-conditioners’ components for the production of air-conditioners for its sale to Kelon Air-conditioner. The manufacture and provision of air-conditioners’ components by Kelon Air-conditioner to Hisense Zhejiang facilitates Kelon Air-Conditioner to distribute and sell its products mainly in the East China Region.

In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms of the Raw Materials Purchase and Supply Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

(D) AIR-CONDITIONERS PRODUCTION AND SUPPLY FRAMEWORK AGREEMENT

Date: 15 September 2006

Parties: (i) Kelon Air-Conditioner (as supplier); and

(ii) Hisense Marketing (as buyer).

Term

The Air-Conditioners Production and Supply Framework Agreement is for a term of one year commencing from 1 January 2006 to 31 December 2006, which can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties.

Air-Conditioners Supply

Pursuant to the terms of the Air-Conditioners Production and Supply Framework Agreement, Kelon Air-Conditioner has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners as Hisense Marketing may require from time to time for its sale to its customers. Kelon Air-Conditioner and Hisense Marketing agreed to enter into individual air-conditioners production and supply order setting out specific terms including the price, technological services and other terms of delivery, but such terms must be consistent with the principles and the terms of the Air-Conditioners Production and Supply Framework Agreement.

Hisense Marketing has the right to purchase air-conditioners from other suppliers apart from Kelon Air-Conditioner from time to time according to its own needs. The AirConditioners Production and Supply Framework Agreement also does not restrict the rights of Kelon Air-Conditioner to sell air-conditioners to any other third parties.

– 20 –

LETTER FROM THE BOARD

Kelon Air-Conditioner has engaged in the transactions contemplated by the AirConditioners Production and Supply Framework Agreement with Hisense Marketing since February 2006, and the value of such transactions amounted to the total approximate sum of RMB84,331,500 as at the end of July 2006.

Pricing

The pricing for the supply of air-conditioners is determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between Kelon Air-Conditioner and Hisense Marketing with reference to the market price of the air-conditioners from time to time and the price fixing policy of OEM products within the industry.

The price of individual air-conditioner sold by Kelon Air-Conditioner to Hisense Marketing under the Air-Conditioners Production and Supply Framework Agreement is determined according to the following standard:

The selling price of individual air-conditioner sold by Kelon Air-Conditioner to Hisense Marketing should not be less than the aggregate of (1) production cost for individual air-conditioner, (2) management fee, and (3) after-sale service fee.

After considering the above pricing standard and the relevant percentage level of the management fee and after-sale service fee of Kelon Air-Conditioner and making reference with the market prices of air-conditioners, the price of individual air-conditioner under the Air-Conditioners Production and Supply Framework Agreement, after negotiation and agreed by both parties, is:

The price of air-conditioner (specific model) sold by Kelon Air-Conditioner to Hisense Marketing = production cost of the air-conditioner (specific model) of Kelon Air-Conditioner/0.95.

Hisense Marketing is responsible for the collection of the air-conditioners from Kelon Air-Conditioner.

Maximum Aggregate Annual Cap

The transactions contemplated by the Air-Conditioners Production and Supply Framework Agreement are subject to the annual cap below:

For the year ending 31 December 2006

RMB120,000,000

The above annual cap has been determined with reference to (a) the prevailing market conditions; (b) the supply of air-conditioners by Kelon Air-Conditioner to Hisense Marketing for the period from February 2006 to the end of July 2006 had already amounted to approximately RMB84,331,500; and (c) the projected level of sale of air-conditioners of Hisense Marketing for the financial year ending 31 December 2006.

It is currently estimated that the value of the transactions contemplated under the Air-Conditioners Production and Supply Framework Agreement will amount to approximately 5% of the total value of the same type of transactions, i.e. the manufacture and supply of air-conditioners, to be conducted by the Group for the year ending 31 December 2006. The aggregate value of the same type of transactions conducted by the Group in the previous year was approximately RMB2,031,120,000.

– 21 –

LETTER FROM THE BOARD

Reasons For and Benefits of the Air-conditioners Production and Supply Framework Agreement

Kelon Air-Conditioner is principally engaged in the design and manufacture of airconditioners. Hisense Marketing is principally engaged in the production, research and sales of household appliances and electronic products and the provision of related services. Pursuant to the Air-Conditioners Production and Supply Framework Agreement, Kelon Air-Conditioner shall manufacture and supply air-conditioners to Hisense Marketing for its sale to its customers. The manufacture and provision of air-conditioners by Kelon Air-Conditioner to Hisense Marketing will increase the sales and revenues of the Group and facilitate the Group to resume normal business operations.

The competition in the air-conditioners’ market in the PRC is very keen at present with substantial increase in raw materials prices, the production and supply of air-conditioners by Kelon Air-Conditioner to Hisense Marketing can help to share the fixed costs incurred by Kelon Air-Conditioner for the production of air-conditioners and thus increasing the competitiveness of its products. Further, the manufacture and supply of air-conditioners, which models are different from the air-conditioners manufactured and supplied by Hisense Zhejiang to Kelon Air-Conditioner under the Air-Conditioners Production and Purchase Framework Agreement, to Hisense Marketing can assist Kelon Air Conditioner to utilise its excess resources since Kelon Air-Conditioner does not have other similar OEM air-conditioners sales orders for the PRC’s sales market apart from Hisense Marketing.

For the period from February 2006 to the end of July 2006, the fixed costs shared by the production of air-conditioners by Kelon Air-Conditioner to Hisense Marketing represents approximately 5% of the total fixed costs for the production of air-conditioners incurred by Kelon Air-Conditioner during the same period.

In light of the above, the Directors ( excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular ) are of the view that the terms of the Air-Conditioners Production and Supply Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

AGGREGATION

Since Hisense Air-Conditioning, Hisense Marketing and Hisense Zhejiang are subsidiaries of Hisense Group and thus are connected or otherwise associated with each other, the transactions contemplated under the Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement are aggregated for the purpose of Rules 14A.25 to 14A.27 of the Listing Rules and are subject to independent shareholders’ approval.

The annual caps for the Hisense Agreements are summarized as follows:

	Annual cap for
	the year ending
Agreements	31 December 2006
	(RMB)
Mould Purchase Framework Agreement	8,000,000
Raw Materials Purchase and Supply Framework Agreement	12,000,000
Air-Conditioners Production and Purchase Framework Agreement	120,000,000
Air-Conditioners Production and Supply Framework Agreement	120,000,000

– 22 –

LETTER FROM THE BOARD

ANALYSIS OF ABILITY TO PERFORM OBLIGATIONS UNDER THE COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT AND THE HISENSE AGREEMENTS

Based on information available to the Company:

(1) As at 31 December 2005, the audited total assets of Hisense Air-Conditioning amounted to RMB 1,709,310,000. The revenues from principal operations and the net profit of Hisense Air-Conditioning in 2005 were RMB2,751,230,000 and RMB38,980,000, respectively.
(2) As at 31 December 2005, the audited total assets of Hisense Zhejiang amounted to RMB112,340,000. The revenues from principal operations and the net profit of Hisense Zhejiang in 2005 were RMB106,830,000 and RMB-5,530,000, respectively.
(3) As at 31 December 2005, the audited total assets of Hisense Marketing amounted to RMB2,396,630,000. The revenues from principal operations and the net profit of Hisense Marketing in 2005 were RMB5,374,340,000 and RMB11,770,000, respectively.
(4) As at 31 December 2005, the total assets of Huayi Compressor amounted to RMB1,166,983,600 and its shareholders’ equity interests (excluding minority shareholders’ interests) was RMB388,687,700. The revenues from principal operations and the net profit of Huayi Compressor in 2005 were RMB406,389,100 and RMB-142,790,300, respectively.
(5) As at 31 December 2005, the total assets of Jiaxi Beila amounted to RMB719,527,100 and its net assets amounted to RMB277,918,100. The sales revenues and the net profit of Jiaxi Beila in 2005 were RMB700,408,800 and RMB16,161,500, respectively.
(6) As at 31 December 2005, the total assets of Huayi Jingzhou amounted to RMB75,307,300 and its net assets amounted to RMB13,592,200. The sales revenues and the net profit of Huayi Jingzhou in 2005 were RMB161,848,400 and RMB4,238,800, respectively.

Even though Hisense Zhejiang recorded a loss in 2005, after investigation, the Company considers that the production capacity, quality control level, and control of delivery of goods level of Hisense Zhejiang can satisfy the requirements of the Company. Further, Hisense Zhejiang has a satisfactory assets position and should be able to continue carrying on its operations. Since Hisense Zhejiang has only officially commenced its operations in 2005, it is understandable for it to incur a loss.

According to the information relating to the connected persons as set out above, the knowledge of the Company as to the creditworthiness and commercial operations ability of Hisense Air-Conditioning, Hisense Zhejiang and Hisense Marketing, and the long-term co-operation experience with Huayi Compressor and its subsidiaries, the Board considers that the above connected persons can perform their obligations and make timely payments and deliveries to the Company under the Compressors Purchase and Supply Framework Agreements and Hisense Agreements, as the case may be.

– 23 –

LETTER FROM THE BOARD

THE EFFECT OF THE ABOVE CONNECTED TRANSACTIONS ON THE INDEPENDENCE OF THE COMPANY AND ITS SUBSIDIARIES

As at the Latest Practicable Date, Kelon Mould and Kelon Air-Conditioner do not develop any dependence on or being controlled by Hisense Air-Conditioning, Hisense Zhejiang or Hisense Marketing as a result of the transactions contemplated under the Hisense Agreements which represent only a small portion of the total transactions of the same type entered into by Kelon Mould and Kelon Air-Conditioner.

Since the transactions contemplated under the Compressors Purchase and Supply Framework Agreements represent only approximately 8% of the total value of compressors purchased by the Company and its subsidiaries from other third parties, the Company or its subsidiaries do not develop any dependence on Huayi Compressor, Jiaxi Beila or Huayi Jingzhou.

INFORMATION RELATING TO THE COMPANY

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

INFORMATION RELATING TO HUAYI COMPRESSOR

Huayi Compressor was incorporated in the PRC on 13 June 1996 with a registered capital of RMB260,853,800. Its authorised representative is Mr. Yu Xiao Bing. Its registered address is 28 Xinchang Road East, Jingdezhen City, Jiangxi Province, the PRC. It is principally engaged in the production and sales of fluorine-free compressors, refrigerators and related accessories, the processing of refrigerating equipment with imported materials and imported samples, the assembly of refrigerating equipment with imported parts, trade of refrigerating equipment, the processing and sales of hardware accessories, and export trading business.

INFORMATION ON JIAXI BEILA

Jiaxi Beila was incorporated in the PRC on 22 May 2002 with limited liability and is a non wholly-owned subsidiary of Huayi Compressor. It has a registered capital of RMB240,000,000. Its authorised representative is Mr. Fu Nian Ping. Its registered address is 40 Baile Road, Wangdian Town, Jiaxing City, the PRC. It is principally engaged in the design, production and sales of compressors for household electrical appliances and their accessories, and the provision of after-sales maintenance and repair services.

INFORMATION ON HUAYI JINGZHOU

Huayi Jingzhou was incorporated in the PRC on 5 February 2001 with limited liability and is a non wholly-owned subsidiary of Huayi Compressor. It has a registered capital of RMB5,000,000. Its authorised representative is Mr. Fu Nian Ping. Its registered address is 1 Jinlong Road, Shashi District, the PRC. It is principally engaged in the production and sales of fluorine-free compressors and related products and small household appliances, the research and development of new products, the export of self-produced products and technologies, the import of raw materials, instruments and meters, machinery and equipment, spare parts and technologies required for the manufacture of its products, and the processing of imported materials and the business of “three types of processing plus compensation trade”.

– 24 –

LETTER FROM THE BOARD

INFORMATION ON HISENSE AIR-CONDITIONING

Hisense Air-Conditioning was incorporated in the PRC on 17 November 1995 as a sino-foreign joint equity venture enterprise (foreign investment proportion less than 25%) with limited liability and is an indirect subsidiary of Hisense Group. It has a registered capital of RMB674,790,000. Its authorised representative is Mr. Tang Ye Guo. Its registered address is Changsha Road, Qingdao City Hi-tech Industrial Park, the PRC. It is principally engaged in the research and production of air-conditioning products, plastic injection mould, and the provision of after-sales maintenance and repair services in respect of the products.

INFORMATION ON HISENSE ZHEJIANG

Hisense Zhejiang was incorporated in the PRC on 22 April 2005 with limited liability and is an indirect subsidiary of Hisense Group. It has a registered capital of RMB110,000,000. Its authorised representative is Mr. Tang Ye Guo. Its registered address is Economic & Technological Development Zone of Changxing County, Huzhou City, Zhejiang Province, the PRC. It is principally engaged in the production of air-conditioners, the production and sales of other household electrical appliances and the provision of related technical services, and the import and export of goods and technologies.

INFORMATION ON HISENSE MARKETING

Hisense Marketing was incorporated in the PRC on 21 July 2003 with limited liability and is an indirect subsidiary of Hisense Group. It has a registered capital of RMB30,000,000. Its authorised representative is Ms. Yu Shu Min. Its registered address is Hisense Information Industry Park, 18 Tuanjie Road, Qingdao Economic & Technological Development Zone, the PRC. It is principally engaged in the production, research and sales of household appliances, electronic products and telecommunication products, the development of technologies and the provision of related services.

CONTINUING CONNECTED TRANSACTIONS

The Compressors Purchase and Supply Framework Agreements

As at the Latest Practicable Date, Huayi Compressor owns 30% of the equity interest in each of Kelon Mould and Rongsheng Plastic, both of which are non wholly-owned subsidiaries of the Company and Huayi Jingzhou and Jiaxi Beila are non wholly-owned subsidiaries of Huayi Compressor. As such, each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila is a connected person of the Company. Accordingly, the Compressors Purchase and Supply Framework Agreements constitute continuing connected transactions for the Company under the Listing Rules. As each of the applicable percentage ratios (other than the profit ratio) is more than 2.5 %, the continuing connected transactions under the Compressors Purchase and Supply Framework Agreements are subject to reporting, announcement and independent shareholders’ approval requirements under Rule 14A.35 of the Listing Rules.

– 25 –

LETTER FROM THE BOARD

The Company would like to inform the Shareholders that the subsidiaries of the Company have engaged in the transactions relating to the purchase of compressors with Huayi Compressor, Huayi Jingzhou and Jiaxi Beila since 2000, and the approximate amounts of such transactions are set out as follows:

						Total Approximate
						Amount of the
Year						Transactions
						(RMB)
2000						1,675,555.42
2001						714,602.53
2002						86,820,659.38
2003						158,349,771.49
2004						172,333,251.31
2005						104,853,130.68
From	January	2006	to	July	2006	90,129,308.04

The relevant subsidiaries of the Company has entered into individual agreement relating to the purchase of compressors with each of Huayi Compressor, Jiaxi Beila and Huayi Jingzhou. Save and except that the parties to each of the agreement is different, the terms of each of the agreements are substantially the same in all respects. The terms and conditions of the agreements relating to the above transactions since January 2005 up to 31 December 2005 are summarised as follows:

Parties:

The relevant subsidiaries of the Company (as purchaser); and Huayi Compressor, Jiaxi Beila and Huayi Jingzhou (as supplier).

Purchase of Compressors:

The relevant subsidiaries of the Company agreed to purchase on a non-exclusive basis such quantities of compressors as they may require from time to time from each of Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) for the purpose of the manufacture of household electrical appliances, including but not limited to refrigerators, by the Group. The relevant subsidiaries of the Company have the right to purchase compressors from other suppliers apart from Huayi Compressor, Huayi Jingzhou and Jiaxi Beila from time to time according to their own needs. The agreements also do not restrict the rights of Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) to sell its compressors to any other third parties.

Term:

All of the agreements relating to the above transactions commenced from the date of signing the agreement (all falling within 2005) up to 31 December 2005.

– 26 –

LETTER FROM THE BOARD

Pricing:

Reasons:

The Board confirms that the terms and conditions of such transactions since 1 January 2006 up to the date of the AGM are substantially the same as the terms of the Compressors Purchase and Supply Framework Agreements.

After reviewing the terms and conditions of the agreements relating to the purchase of compressors entered between the relevant subsidiaries of the Company and Huayi Compressor, Jiaxi Beila and Huayi Jingzhou since January 2005 and the terms and conditions of the agreements relating to the purchase of compressors entered between the relevant subsidiaries of the Company with independent third parties since January 2005 (which were in similar terms and conditions as set out above) and considering the comments and explanation made by the management and sales staff of the Company (who were working in the Company or its subsidiaries at the material time), relating to the above transactions, the Board (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the such transactions were conducted in the ordinary and usual course of business of the Company, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) independent third parties and therefore such transactions were conducted in the interest of the Company and the Shareholders as a whole.

The Company recognises that the above transactions were conducted without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules.

– 27 –

LETTER FROM THE BOARD

According to Shenzhen Listing Rules (as amended in 2004), which came into force on 10 December 2004 (the “Date of Amendment”), the transactions between the relevant subsidiaries of the Company and Huayi Compressor, Huayi Jingzhou or Jiaxi Beila were not considered as connected transactions before the Date of Amendment. However, as from the Date of Amendment, the said transactions were considered as connected transactions pursuant to the Shenzhen Listing Rules (as amended in 2004). Pursuant to the Listing Rules, the transactions between the relevant subsidiaries of the Company and Huayi Compressor, Huayi Jingzhou or Jiaxi Beila were considered as continuing connected transactions and were subject to the relevant disclosure or approval requirements. However, the former management and directors of the Company handled the said transactions based upon the Shenzhen Listing Rules (as amended in 2004) only and considered that they were non-connected transactions under the Listing Rules.

In these circumstances, the AGM will be held to consider and, if thought fit, among other things, to ratify the Company’s above transactions since January 2005 ( under the requirements of the Shenzhen Listing Rules) up to the date of the AGM despite the Company recognises that the entering into the above transactions has already constituted a non-compliance of the Listing Rules.

Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, Air-conditioners Production and Purchase Framework Agreement and Air-conditioners Production and Supply Framework Agreement

As a result of the signing Equity Transfer Agreement, each of Hisense Group and its subsidiaries are deemed to be associates of the Company’s existing substantial shareholder, Guangdong Greencool, and therefore connected persons of the Company. Hisense AirConditioning, Hisense Marketing and Hisense Zhejiang are indirect subsidiaries of Hisense Group. As a result, the transactions contemplated by the Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement will be deemed to be continuing connected transactions under the Listing Rules and should be aggregated for the purpose of Rules 14A.25 to 14A.27 of the Listing Rules, since Hisense Air-Conditioning, Hisense Marketing and Hisense Zhejiang are subsidiaries of Hisense Group and thus are connected or otherwise associated with each other.

Given that each of the applicable percentage ratios (other than the profit ratio) for the aggregated amount of the transactions contemplated under the Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement is more than 2.5%, the continuing connected transactions under the Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement and AirConditioners Production and Supply Framework Agreement are subject to reporting, announcement and independent shareholders’ approval requirements under Rule 14A.35 of the Listing Rules.

– 28 –

LETTER FROM THE BOARD

The Company would like to inform the Shareholders that:

(i) In view of the strategic co-operation relationship between the relevant subsidiaries of the Company and Hisense Air-Conditioning, the relevant subsidiaries of the Company (as supplier) have engaged in the transactions relating to the purchase and supply of electrical appliances with Hisense Zhejiang (as purchaser) since January 2006. Pricing for the electrical appliances is determined principally by commercial negotiation between the relevant subsidiaries of the Company and Hisense Zhejiang according to the principle of fairness and reasonableness with reference to the market price of –electrical appliances from time to time. The value of such transactions amounted to the total approximate sum of RMB1,500,435.30 as at the end of July 2006.The Company and its subsidiaries anticipate that they will not engage in the same type of transactions, i.e., the purchase and supply of electrical appliances, with Hisense Zhejiang for the rest of the year 2006.
(ii) Kelon Mould has engaged in the transactions in relation to the sale of moulds to Hisense Air-Conditioning for the manufacture of household appliances, with terms substantially the same as those in the Mould Purchase Framework Agreement, since about January 2006 and the value of such transactions amounted to the total approximate sum of RMB759,000 as at the end of July 2006.

The Board confirms that if such transactions continues to be conducted up to the date of the AGM, the terms and conditions of such transactions will be the same as the Mould Purchase Framework Agreement.

(iii) In order to reduce transportation costs and improve competitiveness and marketresponsiveness of air-conditioner products of Kelon Air-Conditioner, Kelon AirConditioner has engaged in the transactions relating to the purchase of airconditioners from Hisense Zhejiang, with terms substantially the same as those in the Air-Conditioners Production and Purchase Framework Agreement, since April 2006, and the value of such transactions amounted to the total approximate sum of RMB65,890,800 as at the end of July 2006. Kelon Air-Conditioner has engaged in the transactions relating to the sale of raw materials to Hisense Zhejiang for the purpose of the manufacture of air-conditioners for sale to Kelon Air-Conditioner, with terms substantially the same as those in the Raw Materials Purchase and Supply Framework Agreement, since April 2006, and the value of such transactions amounted to the total approximate sum of RMB 5,502,900.00 as at the end of July 2006.

The Board confirms that if such transactions continues to be conducted up to the date of the AGM, the terms and conditions of such transactions will be the same as the Air-Conditioners Production and Purchase Framework Agreement and the Raw Materials Purchase and Supply Framework Agreement respectively.

– 29 –

LETTER FROM THE BOARD

(iv) Kelon Air-Conditioner has engaged in the transactions relating to the sale of air-conditioners to Hisense Marketing, with terms substantially the same as those in the Air-Conditioners Production and Supply Framework Agreement, since February 2006, and the value of such transactions amounted to the total approximate sum of RMB84,331,500 as at the end of July 2006. The Board confirms that if such transactions continues to be conducted up to the date of the AGM, the terms and conditions of such transactions will be the same as the Air-Conditioners Production and Supply Framework Agreement.
(v) In order to meet production demand and compatibility between compressors with household electrical appliances, the relevant subsidiaries of the Company have engaged in the transactions relating to the purchase of compressors with the relevant subsidiaries of Hisense Group since October 2005. The selling price of the compressors sold by the subsidiaries of Hisense Group to the relevant subsidiaries of the Company is equal to the sum of (i) the price which the subsidiaries of Hisense Group purchased the said compressors from the suppliers; and (ii) the transportation cost incurred by the subsidiaries of Hisense Group to transport the said compressors to the relevant subsidiaries of the Company. The value of such transactions amounted to the total approximate sum of RMB12,337,216 as at the end of July 2006. The Company and its subsidiaries anticipate that they will not engage in the same type of transactions, i.e., the purchase of compressors, with the subsidiaries of Hisense Group for the rest of the year 2006.

The Company recognises that the above transactions were conducted without reporting, announcement and independent shareholders’ approval and constituted non-compliance with Rule 14A.35 of the Listing Rules.

Since 2005, the operations of the Company were seriously affected by the breach of laws and rules by its former chairman, Mr. Gu Chu Jun, and others. As Hisense Air-Conditioning will become a shareholder of the Company in the near future, Hisense Group and its subsidiaries and the Group entered into the above transactions with a view to assist the Group to resume normal operations as soon as possible.

Further, as a result of breach of relevant laws and regulations by the Company’s former chairman, Mr. Gu Chu Jun, and others, the then management and directors of the Company had to put their full efforts in handling the pressing issues in relation to the investigation conducted by the China Securities Regulatory Commission. The management and the board of directors of the Company were stablized until and after the new directors of the Company were elected on 26 June 2006. Meanwhile, as the frontline staff of the Company did not make timely report of the above transactions to the management and the Board, the above transactions were therefore conducted without complying with the requirements under the Listing Rules. The management and the Board commenced investigation of the above transactions after they were informed and became aware of the same in order to determine the appropriate course of action.

– 30 –

LETTER FROM THE BOARD

In view of the above, the Company is planning to improve the internal control system and in the course of planning to put in place a system requiring the frontline staff and other relevant personnel to inform and seek instructions from the management before entering into any transactions with Hisense Group or its subsidiaries.

After reviewing the terms and conditions of the agreements relating to the above transactions and the Hisense Agreements entered between the relevant subsidiaries of the Company and the subsidiaries of Hisense Group, and the terms and conditions of the agreements relating to the same type of transactions( if any, as the case may be) entered between the relevant subsidiaries of the Company with independent third parties (which were in similar terms and conditions as set out above) and considering the comments and explanation by the management and sales staff of the Company (who were working in the Company or its subsidiaries at the material time), relating to the above transactions, the Board (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the above transactions since October 2005 were conducted in the ordinary and usual course of business of the Company, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) independent third parties and therefore such transactions were conducted in the interest of the Company and the Shareholders as a whole.

In these circumstances, the AGM will be held to consider and, if thought fit, among other things, to ratify the above transactions since October 2005 up to the date of the AGM, despite the Company recognises that the entering into the above transactions has already constituted a non-compliance of the Listing Rules.

BOARD APPROVALS

(i) The Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement; and (ii) the proposal to the general meeting of the Company to ratify the above-mentioned transactions relating to the purchase and supply of electrical appliances, the purchase of moulds, the purchase of compressors and the transactions under Hisense Agreements entered into between the subsidiaries of the Company and the subsidiaries of Hisense Group since October 2005 were approved by the Board on 15 September 2006. Mr. Tang Ye Guo, Ms. Yu Shu Min, Mr. Su Yu Tao, Mr. Xiao Jian Lin and Mr. Lin Lan (all holding positions in Hisense Group or its Subsidiaries and thus having material interest in the Hisense Agreements) abstained from voting on such resolutions.

(iii) The Compressors Purchase and Supply Framework Agreements; and (iv) the proposal to the general meeting of the Company to ratify the above-mentioned transactions in relation to the purchase of compressors entered into between the subsidiaries of the Company and Huayi Compressor, Huayi Jingzhou and Jiaxi Beila since 2000 were approved by the Board on 15 September 2006. Mr. Su Yu Tao and Mr. Zhang Ming (all being directors of Huayi Compressors and having material interest in transactions contemplated under the Compressors Purchase and Supply Framework Agreements) abstained from voting on such resolutions.

The three independent non-executive directors of the Company agreed to pass the above-mentioned continuing connected transactions to the Board for consideration and approval.

– 31 –

LETTER FROM THE BOARD

SUSPENSION OF TRADING IN THE H SHARES

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

AGM

The Company will convene the AGM to, among other things:

(i) consider and approve the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement and the continuing connected transactions contemplated thereunder;
(ii) ratify the transactions in relation to the purchase of compressors entered into between the subsidiaries of the Company and Huayi Compressor, Huayi Jingzhou and Jiaxi Beila since January 2005 up to the date of the AGM; and
(iii) ratify the transactions relating to the purchase and supply of electrical appliances, the purchase of compressors, the supply of moulds, the purchase and supply of air-conditioners and the supply of raw-materials entered into between the subsidiaries of the Company and the subsidiaries of Hisense Group since October 2005 up to the date of the AGM.

A notice convening the AGM will be announced separately and despatched to the Shareholders as soon as reasonably practicable.

Pursuant to Rule 13.39(4) of the Listing Rules, the votes of Independent Shareholders taken at the AGM must be taken on poll.

So far as the Company is aware, in relation to the continuing connected transactions with Huayi Compressor, Jiaxi Beila or Huayi Jingzhou, no one would have to be abstained from voting. Should Huayi Compressor, Jiaxi Beila or Huayi Jingzhou and its associates become interested as registered or beneficial owner(s) of the Shares of the Company from the Latest Practicable Date to the date of the AGM, they would have to be abstained from voting in the continuing connected transactions entered between the relevant subsidiaries of the Company and Huayi Compressor, Jiaxi Beila or Huayi Jingzhou.

As Hisense Air-Conditioning has not yet become the holder of Shares of the Company, no one, except Guangdong Greencool and its associates, as far as the Company is aware, would have to be abstained from voting in relation to the continuing connected transactions entered between the Group and the Hisense Group and its subsidiaries. Should Hisense Group and its associates become interested as registered or beneficial owner(s) of Shares of the Company from the Latest Practicable Date to the date of the AGM, they would have to be abstained from voting in the continuing connected transactions entered between the Group and the Hisense Group and its subsidiaries.

– 32 –

LETTER FROM THE BOARD

POLL PROCEDURE

The voting in the AGM by the independent shareholders for the approval of, (i) the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement and the continuing connected transactions contemplated thereunder; and (ii) the ratification of the continuing connected transactions relating to the purchase of compressors entered between the relevant subsidiaries of the Company and Huayi Compressor, Jiazi Beila and Huayi Jingzhou since about 2005 up to the date of the AGM; and (iii) the ratification of the continuing connected transactions relating to the purchase and supply of electrical appliances, the purchase of compressors , the supply of moulds, the purchase and supply of air-conditioners and the supply of raw-materials entered into between the subsidiaries of the Company and the subsidiaries of Hisense Group since October 2005 up to the date of the AGM, will be taken by poll.

In accordance with article 8.27 of the articles of association of the Company, 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.

RECOMMENDATION

Your attention is drawn to the advice of the Independent Board Committee set out in its letter on pages 34 to 35 of this circular which contains its recommendation to the independent shareholders on the terms of the Compressors Purchase and Supply Framework Agreements and the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement and the continuing connected transactions contemplated thereunder.

Your attention is also drawn to the letter of advice from AMS Corporate Finance, which are set out on pages 36 to 60 in this circular, to the Independent Board Committee and the independent shareholders in respect of the terms of and the annual caps for the continuing connected transactions contemplated under the Compressors Purchase and Supply Framework Agreements and the Hisense Agreements, and the casting of votes for or against the resolutions ratifying the continuing connected transactions entered between (i) the subsidiaries of the Company and Huayi Compressor, Jiaxi Beila and Huayi Zingzhou in relation to the purchase of compressors since about January 2005 up to the date of the AGM; and (ii) the subsidiaries of the Company and the subsidiaries of Hisense Group in relation to the purchase of electrical appliances and compressors , the supply of moulds, the purchase and supply of air-conditioners and the supply of raw-materials since October 2005 up to the date of the AGM.

ADDITIONAL INFORMATION

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 Tang Ye Guo Chairman

– 33 –

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)

10 October 2006

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular issued by the Company to Shareholders dated 10 October 2006 (the “Circular”) of which this letter forms part. Terms defined in this Circular shall have the same meanings in this letter unless the context otherwise requires.

Under the Listing Rules, the entering into of the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement constitute continuing connected transactions for the Company and is thus subject to the approval of the independent shareholders at the AGM.

We have been appointed by the Board to consider the terms of the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the AirConditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement and to advise the independent shareholders in connection with the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement as to whether, in our opinion, their terms and their respective annual caps are fair and reasonable so far as the independent shareholders are concerned. AMS Corporate Finance 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 as set out in this circular. Having considered the principal factors and reasons considered by, and the advice of AMS Corporate Finance as set out in its letter of advice, we consider that the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement are on normal commercial terms and in the interest of the Company and the Shareholders as a whole.

– 34 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We also consider that the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement and their respective annual caps are fair and reasonable so far as the Independent Shareholders are concerned.

Further, after reviewing the terms and conditions of the agreements relating to the purchase of compressors entered between the relevant subsidiaries of the Company and Huayi Compressor, Jiaxi Beila and Huayi Jingzhou since January 2005, the Compressors Purchase and Supply Framework Agreements, the Hisense Agreements, the agreements relating to the purchase of compressors and supply of electrical appliances entered between the relevant subsidiaries of the Company and the subsidiaries of Hisense Group since October 2005, the terms and conditions of the agreements relating to the same type of transactions (if any, as the case may be) entered between the relevant subsidiaries of the Company with independent third parties at the relevant time and considering the comments and explanation made by the management and sales staff of the Company (who were working in the Company or its subsidiaries at the material time), relating to the said transactions, and considering the advice made by the independent financial adviser in this respect, we are of the view that the said transactions were conducted in the ordinary and usual course of business of the Company, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) independent third parties and therefore such transactions were conducted in the interest of the Company and the Shareholders as a whole.

Accordingly, we recommend the independent shareholders to vote in favour of the ordinary resolution to approve the Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Air-Conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement and the continuing connected transactions contemplated thereunder at the AGM and to vote in favour of ratifying the Company’s subsidiaries’ transactions conducted with (i) Huayi Compressor, Jiaxi Beila and Huayi Jingzhou in relation to the purchase of compressors since about January 2005 up to the date of the AGM; and (ii) the subsidiaries of Hisense Group in relation to the purchase of electrical appliances, the purchase of compressors , the supply of moulds, the purchase and supply of air-conditioners and the supply of raw-materials since October 2005 up to the date of the AGM.

Yours faithfully,

For and on behalf of the Independent Board Committee Zhang Sheng Ping Lu Qing Cheung Yui Kai, Warren

Independent non-executive Directors Guangdong Kelon Electrical Holdings Company Limited

– 35 –

LETTER FROM AMS CORPORATE FINANCE

The following is the full text of the letter from AMS Corporate Finance to the Independent Board Committee and the Independent Shareholders prepared for the incorporation into this circular.

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

20th Floor

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

10 October 2006

To the Independent Board Committee and

the Independent Shareholders of

Guangdong Kelon Electrical Holdings Company Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the 12 Compressors Purchase and Supply Framework Agreements, the Mould Purchase Framework Agreement, the Airconditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-conditioners Production and Supply Framework Agreement (collectively the “Framework Agreements”), details of which have been set out in the circular to the Shareholders dated 10 October 2006 (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 Framework Agreements. Unless otherwise stated, terms defined in the Circular have the same meanings in this letter.

On 18 September 2006, the Board announced that certain subsidiaries of the Company entered into the Framework Agreements respectively with Huayi Compressors, its subsidiaries and the subsidiaries of Hisense Group on 15 September 2006 (details of the Framework Agreements are stated in the section headed “Terms of the Framework Agreements” below).

As at the date of the Announcement and the Latest Practicable Date, Huayi Compressor, in which the Company was interested in approximately 22.73%, held 30% equity interest in Kelon Mould and Rongsheng Plastic (both of which were non-wholly owned subsidiaries of the Company) and Jiaxi Beila and Huayi Jingzhou were non-wholly owned subsidiaries of Huayi

– 36 –

LETTER FROM AMS CORPORATE FINANCE

Compressor. Accordingly, each of Huayi Compressor, Jiaxi Beila and Huayi Jingzhou is a connected person of the Company and the transactions contemplated under each of the Compressors Purchase and Supply Framework Agreements constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules. Since the relevant percentage ratios as represented by the maximum aggregate amount of purchases of compressors under the 12 Compressors Purchase and Supply Framework Agreements exceed the thresholds set out in Rule 14A.34 of the Listing Rules, the continuing connected transactions under the Compressors Purchase and Supply Framework Agreements are subject to, among other things, the approval of the Independent Shareholders at a general meeting of the Company.

As disclosed in the Company’s announcements of 14 September 2005, 30 September 2005 and 21 April 2006 and the Company’s circular of 29 November 2005, Guangdong Greencool, which was the single largest shareholder of the Company, entered into the Equity Transfer Agreement with Hisense Air-Conditioning on 9 September 2005 pursuant to which Guangdong Greencool agreed to transfer 262,212,194 domestic legal person shares of the Company (representing approximately 26.43% of the Company’s total issued share capital as at the Latest Practicable Date) to Hisense Air-conditioning. Since both Hisense Zhejiang and Hisense Marketing are indirect subsidiaries of Hisense Group, which indirectly holds 93% equity interest in Hisense Air-Conditioning, Hisense Group and its subsidiaries are deemed to be associates of the Company’s existing substantial shareholder, 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 each of the Mould Purchase Framework Agreement, the Air-conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-conditioners Production and Supply Framework Agreement have been deemed to be continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

In addition, since the relevant percentage ratios as represented by the maximum aggregate amount of the transactions contemplated under the Mould Purchase Framework Agreement, the Air-conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-conditioners Production and Supply Framework Agreement exceed the thresholds set out in Rule 14A.34 of the Listing Rules, the continuing connected transactions under each of the Mould Purchase Framework Agreement, the Air-conditioners Production and Purchase Framework Agreement, the Raw Materials Purchase and Supply Framework Agreement and the Air-conditioners Production and Supply Framework Agreement are subject to, among other things, the approval of the Independent Shareholders at a general meeting of the Company.

The Independent Board Committee, comprising all the independent non-executive Directors, has been formed to advise the Independent Shareholders as to whether the transactions contemplated under the Framework Agreements are in the interests of the Company and the Shareholders as a whole, and the terms of the Framework Agreements including the proposed annual caps are fair and reasonable. In addition, as set out in the Letter from the Board, the relevant subsidiaries of the Company have engaged in the continuing connected transactions with the Huayi Group since January 2005 and with subsidiaries of Hisense Group since October 2005 without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules.

– 37 –

LETTER FROM AMS CORPORATE FINANCE

In this connection, the Independent Board Committee will also consider the fairness and reasonableness of such transactions and advise the Independent Shareholders as to whether they should ratify those transactions conducted by the Group with the Huayi Group and subsidiaries of Hisense Group without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules since January 2005 and up to the date of the AGM.

As the independent financial adviser to the Independent Board Committee and the Independent Shareholders, our role is to give an independent opinion to the Independent Board Committee and the Independent Shareholders as to (i) whether or not the transactions contemplated under each of the Framework Agreements are in the interests of the Company and the Shareholders as a whole; (ii) whether or not the respective terms of the Framework Agreements, including the maximum value of the transactions contemplated thereunder, are fair and reasonable; (iii) whether the Independent Shareholders should vote in favour of the resolution(s) to approve each of the Framework Agreements and the transactions contemplated thereunder at the AGM; and (iv) whether the Independent Shareholders should vote in favour of the resolution(s) at the AGM to ratify those transactions conducted by the Group with the Huayi Group and subsidiaries of Hisense Group without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules since January 2005 and up to the date of the AGM.

Apart from the normal advisory fee payable to us in connection with our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders, no arrangement exists whereby we shall receive any other fees or benefits from the Company. We are independent of the Company for the purposes of Rule 13.84 of the Listing Rules.

BASIS OF OUR OPINION

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 Company and the Directors and for which they are solely and wholly responsible, were true and accurate at the time they were made and continue to be so at the date hereof. 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. The Directors have confirmed, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no other facts or representations the omission of which would make any statement in the Circular, including this letter, misleading. We consider that we have reviewed sufficient information which enables us to form a reasonable basis for our opinion. We also consider that we have performed all reasonable steps as required under Rule 13.80 of the Listing Rules to ascertain the reliability of the information provided to us and to form our opinion. 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 or Hisense Group or any parties to the Framework Agreements and the markets in which they respectively operate.

– 38 –

LETTER FROM AMS CORPORATE FINANCE

PRINCIPAL FACTORS CONSIDERED

In formulating our opinion regarding the Framework Agreements and the continuing connected transactions conducted by the Group without complying with the relevant requirements under the Listing Rules since January 2005, we have taken into consideration the following principal factors:

1. Background information and reasons for the Framework Agreements

a. Information on the Group

The Group is principally engaged in the manufacture and sale of refrigerators and air-conditioners. As stated in the Company’s annual report for the year ended 31 December 2005 (the “Annual Report”) and interim report for the six months ended 30 June 2006 (the “Interim Report”), the Group’s operations were carried out in the PRC and almost all of the production facilities of the Group were located in the PRC. For each of the year ended 31 December 2005 and the six months ended 30 June 2006, approximately 60% and 67%, respectively, 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.

Set out below is a summary of the Group’s operating results and financial position extracted from the Annual Report and the Interim Report:

Turnover – Sales of refrigerators – Sales of air-conditioners – Sales of freezers – Sales of product components Gross profit Other operating income Distribution costs Administrative expenses Other operating expenses Profit (loss) from operations Loss for the year/period Non-current assets Current assets Current liabilities Non-current liabilities Net current liabilities Total net assets (liabilities)	For the year ended 31 December 2004 2005 RMB’000 RMB’000 (Audited and restated) (Audited) 3,213,581 2,542,839 4,049,279 3,600,489 335,190 261,113 324,951 573,931 7,923,001 6,978,372 1,657,058 160,598 73,104 73,328 (1,185,555) (1,517,946) (507,875) (1,479,782) (9,374) (807,795) 30,358 (3,571,597) (236,750) (3,766,713) 3,628,135 2,555,596 8,069,246 2,978,434 (8,697,317) (6,285,060) (86,686) (30,818) (628,071) (3,306,626) 2,913,378 (781,848)	For the six months ended 30 June 2006 RMB’000 (Unaudited) 1,663,016 1,585,540 143,696 193,925 3,586,177 703,809 53,286 (558,786) (136,206) (13,414) 48,689 (37,645) 2,485,788 3,553,199 (6,824,675) (25,025) (3,271,476) (810,713)

– 39 –

LETTER FROM AMS CORPORATE FINANCE

As explained in the Annual Report, the financial results of the Group for the year ended 31 December 2004 had been restated to correct the errors noted by the Company following an in-depth investigation (the “Investigation”) conducted by the Company for the purpose of identifying the financial impacts of the alleged economic crimes committed by the Company’s former senior management, including the Company’s former chairman, a former executive Director and a former vice president and other former senior management officers responsible for the finance of the Group (the “Relevant Persons”). In particular, the Investigation was conducted by the Company at the request of the China Securities and Regulatory Commission (the “CSRC”), which has formally investigated the Company for alleged breaches of the securities laws and regulations in the PRC since 5 April 2005 as a result of the formal investigation by the PRC’s Public Security Bureau in connection with criminal offences on the Relevant Persons who are suspected of having committed economic crimes.

As set out in the Annual Report, the result of the Investigation revealed that the Relevant Persons had caused the Company to enter into a series of fraudulent activities/transactions in current year and prior periods including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, misstatement in distribution costs, administrative expenses, other operating expenses and income tax expenses and non-disclosure of related party transactions. As summarised in the Annual Report, the effects of the restatement on the Group’s financial statements for the year ended 31 December 2004 to correct the errors noted by the Company are that the net loss of the Group for the year increased by approximately RMB181.6 million and its total net assets decreased by approximately RMB209.2 million.

We have also noted from the Annual Report that the Company’s auditors (the “Auditors”) had expressed a qualified opinion on the financial statements of the Company for the year ended 31 December 2005 arising from the limitation of audit scope. In particular, the Auditors opined that the financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2005 except for any adjustments that might be required with respect to the limitation in audit scope on the consolidated financial statements of a subsidiary of the Company, the carrying amount of the property, plant and equipment and revaluation reserve, the opening balance of inventories, the validity and recoverability of unreconciled receivables and the validity and completeness of unreconciled payables, the existence and recoverability of a receivable arising from the sale of an interest in leasehold land under operating lease, the validity, the appropriateness of the impairment amount and the recoverability of the receivables due from Guangdong Greencool and its affiliates, all material related party transactions and the appropriateness, completeness and accuracy of the prior year restatements. Because of the significance of the possible effects of the limitation in scope in respect of reliable evidence outside the control of the Directors on the aforesaid matters, the Auditors were unable to form an opinion as to whether the financial statements give a true and fair view of the Group’s loss and cash flows for the year ended 31 December 2005.

For details of the Auditors’ opinion on the Company’s financial statements for the year ended 31 December 2005 and the restatements on the Group’s financial statements for the year ended 31 December 2004, Shareholders are advised to read the Annual Report.

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For the year ended 31 December 2005, the Group recorded an audited turnover of approximately RMB6,978.4 million (representing a decrease of approximately 12% from the restated turnover of approximately RMB7,923.0 million for the preceding year) and its net loss amounted to approximately RMB3,766.7 million. As explained in the Annual Report, such substantial loss was mainly due to the fact that (i) substantial bad debts, substantial accrued expenses, defective inventories, excessive non-performing investments, idle assets, economic disputes and potential losses arising from the previous management of the Company were realised concurrently during the financial year; (ii) the incident of the investigation by the CSRC on the Group had adversely affected the confidence of the financial institutions, suppliers and customers on the Company, which eventually led to the suspension in nearly all of the Group’s production activities during the period from May to September 2005, the peak season for the production and sale of refrigerators and air-conditioners in the financial year; (iii) as a result of the suspension in production activities, the Group could not manufacture or introduce new product models to the market and the sales of older models had led to a lower gross profit margin; (iv) during the period when production activities had been suspended, the Group continued to maintain a steady workforce and made regular wage payments in the hope of resuming normal production shortly; and (v) the persistently high costs of key raw materials resulted in a lower profit margin for the Group’s core products during the financial year.

For the six months ended 30 June 2006, the Group recorded an unaudited turnover and gross profit of approximately RMB3,586.2 million and RMB703.8 million, respectively. For the same period, while the Group recorded an unaudited profit from operations of approximately RMB48.7 million, its net loss amounted to approximately RMB37.6 million. As noted in the Interim Report, the continuous rise in prices of raw materials, especially metals, and the impact of RMB appreciation had significantly shrunken the profit margin of the Group’s principal products. In addition, the fact that the Equity Transfer Agreement was yet to be finalized and the rumor in March 2006 that the relevant domestic legal person shares of the Company under the Equity Transfer Agreement might be put on auction, had adversely affected the confidence of the financial institutions, suppliers and distributors. Accordingly, the production and operation of the Group suffered a setback during the period despite the execution of the sales agency agreement and its supplemental agreements between the Company and Hisense Marketing (details of which are stated in the Company’s circulars of 27 April 2006 and 29 November 2005) had facilitated the revival of the principal operations of the Group.

As at 30 June 2006, the Group had unaudited current assets of approximately RMB3,553.2 million and unaudited current liabilities of approximately RMB6,824.7 million, representing net current liabilities of approximately RMB3,271.5 million. As at 30 June 2006, the Group had outstanding bank loans of approximately RMB2,090 million of which approximately RMB1,446.0 million were overdue as at 30 June 2006. As mentioned in the Interim Report, the Group was in the process of negotiating with certain banks in order to reschedule the overdue bank borrowings and/or renew the credit facilities to the Group. As at 30 June 2006, the unaudited net liabilities of the Group amounted to approximately RMB810.7 million.

b. Information on Huayi Compressors

Huayi Compressors is a company listed on the Shenzhen Stock Exchange of the PRC since 1996 and is located in Jingdezhen City, Jiangxi Province, the PRC. Based on the information available from the website of Huayi Compressors, Huayi Compressors is one of the major fluorine-free compressor producers in the PRC. As disclosed in the annual report of Huayi Compressors for the year ended 31 December 2005, its largest shareholder was Huayi

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Electrical Appliance General Company (“ ”), a PRC national enterprise holding approximately 40.67% of the issued share capital of Huayi Compressors as at 31 December 2005. We also note that the Company held approximately 22.73% of the issued share capital of Huayi Compressors as at 31 December 2005 and was the second largest shareholder. Set out below is the consolidated financial information of Huayi Compressors for each of the three years ended 31 December 2005 which is extracted from its 2004 and 2005 annual reports.

	For the year	ended 31 December	ended 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
	(Audited)	(Audited)	(Audited)
Turnover	668,949	977,323	1,268,646
Net (loss) profit	(119,889)	6,670	(142,743)
Net assets as at year end	523,518	531,233	388,495

As indicated above, Huayi Compressors reported an average annual compound growth of approximately 37.7% for its turnover from 2003 to 2005. As stated in the 2005 annual report of Huayi Compressors, its business turnover of approximately RMB1,268.6 million for 2005 was generated from the sales of about 7.03 million units of compressors. Based on the statistics of the China Household Electrical Appliances Association (“ ”), the sales volume of Huayi Compressors accounted for approximately 24% of China’s total sales of refrigerator compressors for 2005, and Huayi Compressors was the largest producer of refrigerator compressors in the PRC for 2005 in terms of sales volume. As at 31 December 2005, Huayi Compressors had audited net assets of approximately RMB388.5 million.

c. Information on Hisense Group

Based on the information available from the website of Hisense Group, 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 2005 are extracted from its 2004 and 2005 annual reports.

	For the year	ended 31 December	ended 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
	(Audited)	(Audited)	(Audited)
Turnover	5,734,404	7,500,208	10,163,432
Net profit	41,401	58,424	102,400
Net assets as at year end	2,348,758	2,408,199	2,504,534

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As indicated above, Hisense Electric reported an average annual compound growth of approximately 33.1% and approximately 57.3% for its turnover and net profit, respectively, from 2003 to 2005. As stated in its latest annual report for the year ended 31 December 2005, the turnover of Hisense Electric mainly represented sales of televisions and refrigerators and approximately 83% of its turnover was generated from domestic sales in the PRC. As at 31 December 2005, Hisense Electric had audited net assets of approximately RMB2,504.5 million. In view of the favourable historical financial performance of Hisense Electric for the past few years and its strong financial position as at 31 December 2005, we consider that it has demonstrated a good track record and is one of the major electronic companies in the PRC.

d. Reasons for the Framework Agreements

Compressors Purchase and Supply Framework Agreements

Under the Compressors Purchase and Supply Framework Agreements, the relevant subsidiaries of the Company has agreed to purchase compressors from Huayi Compressor, Jiaxi Beila or Huayi Jingzhou (as the case may be) on a non-exclusive basis for the purpose of the manufacture of household electrical appliances, including but not limited to refrigerators, by the Group for a term of one year commencing from 1 January 2006 to 31 December 2006.

As stated in the Letter from the Board, each of the relevant subsidiaries of the Company is engaged in the manufacture of household electrical appliances, including but not limited to refrigerators, and requires compressors as a component for its products. After considering various factors including the quality, the price and the compatibility of the compressors manufactured by Huayi Compressor, Huayi Jingzhou and Jiaxi Beila (collectively, the “Huayi Group”) with the current production facilities of the relevant subsidiaries of the Company and the refrigerators produced by them, as well as the level of services provided by the Huayi Group, the Group considers that the Huayi Group is in a good position to supply compressors to the relevant subsidiaries of the Company. Accordingly, the Executive Directors consider that the Compressors Purchase and Supply Framework Agreements are in the interests of the Company and the Shareholders as a whole.

In view of the fact that the manufacture and sale of refrigerators is one of the principal businesses of the Group and compressors are essential components of refrigerators, it is reasonable for the Group to purchase compressors as part of the components for the manufacture of refrigerators from time to time in its ordinary course of business. As mentioned above, Huayi Compressors is one of the major producers of compressors in the PRC and was the largest producer of refrigerator compressors in the PRC for 2005 in terms of sales volume. On this basis, we consider that the Huayi Group has the relevant experience and expertise in the manufacture of refrigerator compressors. Accordingly, we are of the view that the entering into of the Compressors Purchase and Supply Framework Agreements is in the interests of the Company and the Shareholders as a whole.

The Mould Purchase Framework Agreement

Under the Mould Purchase Framework Agreement, Kelon Mould has agreed to manufacture and supply moulds on a non-exclusive basis to Hisense Air-Conditioning for the manufacture of household appliances including air-conditioners for a term of one year commencing from 1 January 2006 to 31 December 2006.

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Kelon Mould is principally engaged in the design and manufacture of large and medium size moulds for household electrical appliances, whereas Hisense AirConditioning is principally engaged in the manufacture of air-conditioners. As stated in the Letter from the Board, the Company considers that the Mould Purchase Framework Agreement will facilitate the Company to maintain an important relationship with Hisense Air-Conditioning so that Hisense Air-Conditioning may become a stable customer of the Company thereby further expanding the sales of Kelon Mould. As such, the Executive Directors are of the view that the Mould Purchase Framework Agreement is in the interests of the Company and the Shareholders as a whole.

Given that Kelon Mould may be able to increase its sales through the transactions contemplated under the Mould Purchase Framework Agreement, we concur with the Executive Directors’ view that the Mould Purchase Framework Agreement is in the interests of the Company and the Shareholders as a whole.

The Air-conditioners Production and Purchase Framework Agreement and the Air-conditioners Production and Supply Framework Agreement

As stated in the Letter from the Board, both Kelon Air-Conditioner and Hisense Zhejiang are principally engaged in the manufacture of air-conditioners and Hisense Marketing is principally engaged in the production, research and sale of household appliances and electronic products and the provision of related services.

Under the Air-conditioners Production and Purchase Framework Agreement, Hisense Zhejiang has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners as Kelon Air-Conditioner may require from time to time until end of 2006 to facilitate its sales of air-conditioners mainly in the eastern region of the PRC. The Company considers that the eastern region of the PRC is economically advanced with concentration of population and represents a significant market for sales of air-conditioners. Such region has also been an important market for the products of the Group since early years and it is always the Group’s strategy to further develop the sales market of air-conditioners in the region. Given the proximity of Hisense Zhejiang to the markets in the eastern region of the PRC and having taken into account various factors including the reduction in transportation costs, the improvement in competitiveness, the quality and the price of the air-conditioners manufactured by Hisense Zhejiang, as well as the level of services provided by Hisense Zhejiang, the Company considers that the transactions contemplated under the Air-Conditioners Production and Purchase Framework Agreement will improve the Group’s competitiveness and responsiveness and therefore facilitate the sales of the Group’s air-conditioners in the eastern region of the PRC, which will assist the Group to resume normal business operations.

On the other hand, under the Air-conditioners Production and Supply Framework Agreement, Kelon Air-Conditioner has agreed to manufacture and supply on a nonexclusive basis such quantities of air-conditioners as Hisense Marketing may require from time to time until end of 2006 for onward sales by Hisense Marketing to its customers. As stated in the Letter from the Board, the Directors consider that the manufacture and provision of air-conditioners by Kelon Air-Conditioner to Hisense Marketing will increase the sales and revenues of the Group and facilitate the Group to resume normal business operations. Given the existing keen competition in the air-conditioners’ market in the PRC and the substantial increase in raw materials prices, the production and supply of air-conditioners by Kelon Air-Conditioner to Hisense Marketing can help to share the fixed costs incurred by Kelon Air-Conditioner for the production of air-conditioners and

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thus increasing the competitiveness of its products. In addition, the manufacture and supply of air-conditioners, which models are different from the air-conditioners manufactured and supplied by Hisense Zhejiang to Kelon Air-Conditioner under the Air-Conditioners Production and Purchase Framework Agreement, to Hisense Marketing can assist Kelon Air-Conditioner to utilise its excess resources since Kelon AirConditioner does not have other similar OEM air-conditioners sales orders for the PRC’s sales market apart from Hisense Marketing.

As indicated above and based on the similar terms between the Air-conditioners Production and Purchase Framework Agreement and the Air-conditioners Production and Supply Framework Agreement (details of the terms of these two agreements will be discussed in the section headed “Terms of the Framework Agreements” below), we consider that the reciprocal arrangements under the two agreements serve essentially to assist the Group in resuming its operations for the manufacture, by way of the Air-conditioners Production and Supply Framework Agreement, and sales, by way of the Air-conditioners Production and Purchase Framework Agreement, of air-conditioners. Therefore, the Executive Directors are of the view, with which we concur, that both the Air-conditioners Production and Purchase Framework Agreement and the AirConditioners Production and Supply Framework Agreement are in the interests of the Company and the Shareholders as a whole.

As noted from the Company’s announcements and its latest annual report for 2005, the CSRC’s investigation on the Company for alleged breaches of the securities laws and regulations in the PRC as announced in May 2005 had adversely affected the confidence of the financial institutions, suppliers and customers on the Company. In particular, the Company had been 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 air-conditioners were gradually suspended during the period from May to September 2005. Similarly, about 20% of the suppliers reduced or stopped supplying raw materials for the production of refrigerators and freezers to the Company and accordingly, about 50% of the production lines of freezers and refrigerators were suspended during the relevant period. The Group had also experienced difficulties in 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 airconditioners in the financial year.

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 assist the Group in rebuilding its market position which has been adversely affected by the suspension of certain production lines of the Group as a result of the aforesaid CSRC’s investigation.

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Given that Hisense Group, 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 are of the view that it is in the commercial interest of the Company to enter into both the Air-conditioners Production and Purchase Framework Agreement and the Air-conditioners Production and Supply Framework Agreement as Hisense Zhejiang and Hisense Marketing, being subsidiaries of Hisense Group, have the relevant expertise in the domestic electric appliances market in the PRC as well as strong financial resources and are therefore able to assist the Group in rebuilding its market position. Accordingly, we consider the entering into of the Air-conditioners Production and Purchase Framework Agreement and the Airconditioners Production and Supply Framework Agreement is in the interests of the Company and the Shareholders as a whole.

The Raw Materials Purchase and Supply Framework Agreement

Given that the air-conditioners’ components supplied by Kelon Air-Conditioner to Hisense Zhejiang under the Raw Materials Purchase and Supply Framework Agreement shall be used in the production of those air-conditioners which are to be sold to Kelon Air-Conditioner under the Air-Conditioners Production and Purchase Framework Agreement, we consider that the transactions contemplated under the Raw Materials Purchase and Supply Framework Agreement will facilitate the sales of air-conditioners under the Air-Conditioners Production and Purchase Framework Agreement. As mentioned above, the Air-Conditioners Production and Purchase Framework Agreement will improve the Company’s competitiveness and responsiveness and facilitate the sales of the Company’s air-conditioners in the eastern region of the PRC, which we consider to be in the interest of the Company. In addition, the transactions contemplated under the Raw Materials Purchase and Supply Framework Agreement will be able to increase the sales of the Group. Accordingly, we are of the view that the entering into of the Raw Materials Purchase and Supply Framework Agreement is in the interests of the Company and the Shareholders as a whole.

2. Terms of the Framework Agreements

a. The Compressors Purchase and Supply Framework Agreements

As noted from the Letter from the Board, there are a total of 12 Compressors Purchase and Supply Framework Agreements and except for different contracting parties and proposed transaction values, the terms of each of them are identical in all respects. Pursuant to the Compressors Purchase and Supply Framework Agreements, Kelon Freezer, Yingkou Kelon, Jilin Kelon, Hangzhou Kelon, Chengdu Kelon and Kelon Refrigerator, all being subsidiaries of the Company, have agreed to purchase on a non-exclusive basis such quantities of compressors

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as they may require from time to time from each of Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) for the purpose of the manufacture of household electrical appliances, including but not limited to refrigerators, by the Group for a term of one year commencing from 1 January 2006 to 31 December 2006 (which, subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties). Formal orders setting out specific terms including the price, technological services and terms of delivery will be entered into between the relevant contracting parties and such terms must be consistent with the principles and the terms of the Compressors Purchase and Supply Framework Agreements. The purchase price will be determined principally by commercial negotiation between the contracting parties according to the principle of fairness and reasonableness with reference to the market price of compressors from time to time.

The Compressors Purchase and Supply Framework Agreements will not restrict the Group to purchase compressors from other suppliers apart from the Huayi Group, nor will they restrict the Huayi Group to supply its compressors to any other third parties.

On the basis that the terms (including the price, technological services and terms of delivery) of the formal orders entered into between the Group and the Huayi Group will be consistent with those of the Compressors Purchase and Supply Framework Agreements and will be determined in accordance with the principle of fairness and reasonableness with reference to the market, we are of the view that the terms of the Compressors Purchase and Supply Framework Agreements are fair and reasonable.

b. The Mould Purchase Framework Agreement

Pursuant to the Mould Purchase Framework Agreement, Hisense Air-Conditioning would purchase moulds from Kelon Mould for the manufacture of household appliances including air-conditioners by Hisense Air-Conditioning for a term of one year commencing from 1 January 2006 to 31 December 2006 (which, subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties). Individual purchase orders setting out specific terms including the price, technological services and terms of delivery will be entered into by Kelon Mould and Hisense AirConditioning from time to time and such terms must be consistent with the principles and the terms of the Mould Purchase Framework Agreement. As stated in the Mould Purchase Framework Agreement, the pricing for the manufacture of moulds is determined predominantly by the open bidding process, and Kelon Mould may from time to time submit tenders or bids to manufacture the moulds for such products as requested by Hisense Air-Conditioning in its invitation to tender (which are also extended to various independent third parties).

The Mould Purchase Framework Agreement will not restrict Hisense Air-Conditioning to purchase moulds from other suppliers apart from Kelon Mould, nor will it restrict Kelon Mould to supply its moulds to any other third parties.

In view of the pricing for the manufacture of moulds that will be determined predominantly by open tendering process, which is a transparent pricing mechanism, we are of the view that the terms of the Raw Materials Purchase Framework Agreement are fair and reasonable.

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c. The Air-Conditioners Production and Purchase Framework Agreement

Pursuant to the Air-Conditioners Production and Purchase Framework Agreement, Hisense Zhejiang has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners as Kelon Air-Conditioner may require from time to time for a term of one year commencing from 1 January 2006 to 31 December 2006 (which, subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties). Kelon Air-Conditioner and Hisense Zhejiang have also agreed to enter into individual air-conditioners production and purchase orders setting out specific terms including the price, technological services and terms of delivery, and such terms must be consistent with the principles and the terms of the Air-Conditioners Production and Purchase Framework Agreement. Kelon Air-Conditioner is responsible for the collection of the air-conditioners from Hisense Zhejiang.

The purchase price of the air-conditioners supplied by Hisense Zhejiang will be determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between Kelon Air-Conditioner and Hisense Zhejiang with reference to market price of the air-conditioners from time to time and the Group’s knowledge of pricing policy of OEM products within the industry. In particular, the price of airconditioner of a specific model sold by Hisense Zhejiang to Kelon Air-Conditioner will be equal to the production cost of such specific model of Kelon Air-Conditioner divided by 0.95. As noted in the Letter from the Board, such formula is determined by the relevant parties on the principle that the price of an individual air-conditioner sold by Hisense Zhejiang to Kelon Air-Conditioner under the Air-Conditioners Production and Purchase Framework Agreement should be less than or equal to the aggregate of (i) the production cost for that individual air-conditioner produced by Kelon Air-Conditioner; (ii) the management fee; and (iii) the transportation costs for individual air-conditioner (from Guangdong to Zhejiang). In arriving at the formula, the relevant parties have taken into account the relevant percentage level of the production costs and management fee of Kelon Air-Conditioner and have made reference to the market prices of air-conditioners.

As stated in the Letter from the Board, the purchase price of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang is more or less the same as the total sum of production costs and transportation costs of air-conditioners as produced by Kelon Air-Conditioner in Shunde, Guangdong and transporting the same for sale in the Zhejiang Province. In addition, Kelon Air-Conditioner can save management fee and logistic cost, which is equivalent to approximately 5% of the total production costs of air-conditioners of Kelon Air-Conditioner, as a result of its purchase of air-conditioners from Hisense Zhejiang. Accordingly, the formula for the pricing of the air-conditioner sold by Hisense Zhejiang to Kelon Air-Conditioner under the Air-conditioners Production and Purchase Framework Agreement has been determined by dividing the relevant production cost of the air-conditioner of Kelon Air-Conditioner by 0.95 (i.e. 1 – 5%).

The Air-conditioners Production and Purchase Framework Agreement will not restrict Kelon Air-Conditioner to purchase air-conditioners from other suppliers apart from Hisense Zhejiang, nor will it restrict Hisense Zhejiang to sell its air-conditioners to any other third parties.

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On the basis that (i) the terms (including the price, technological services and terms of delivery) of the air-conditioners production and purchase orders entered into between Kelon Air-Conditioner and Hisense Zhejiang will be consistent with those of the Air-Conditioners Production and Purchase Framework Agreement and will be determined in accordance with the principle of fairness and reasonableness with reference to the market; (ii) the purchase price of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang will be substantially the same as the total sum of production costs and transportation costs of air-conditioners that will otherwise have been incurred by Kelon Air-Conditioner if the relevant air-conditioners have been produced by Kelon Air-Conditioner; and (iii) the non-exclusive arrangement under the Air-conditioners Production and Purchase Framework Agreement provides the Group with the flexibility without any commitment on the purchase quantity from Hisense Zhejiang, we are of the view that the terms of the Air-Conditioners Production and Purchase Framework Agreement are fair and reasonable.

d. The Raw Materials Purchase and Supply Framework Agreement

Pursuant to the Raw Materials Purchase and Supply Framework Agreement, Kelon Air-Conditioner has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners’ components to Hisense Zhejiang as Hisense Zhejiang may require from time to time for the purpose of the manufacture of air-conditioners for sale to Kelon Air-conditioning pursuant to the Air-Conditioners Production and Purchase Framework Agreement. The Raw Materials Purchase and Supply Framework Agreement is for a term of one year commencing from 1 January 2006 to 31 December 2006 (which, subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties). Individual purchase orders setting out specific terms including the price, technological services and terms of delivery will be entered into by Kelon Air-conditioner and Hisense Zhejiang Air-Conditioning from time to time and such terms must be consistent with the principles and the terms of the Raw Materials Purchase and Supply Framework Agreement. As stated in the Letter from the Board, the price of the air-conditioners’ components will be determined principally by arm’s length commercial negotiations between the contracting parties according to the principle of fairness and reasonableness with reference to the market price of air-conditioners’ components.

The Raw Materials Purchase and Supply Framework Agreement will not restrict Hisense Zhejiang to purchase air-conditioners’ components from other suppliers apart from Kelon Air-Conditioner, nor will it restrict Kelon Air-Conditioner to supply its air-conditioners’ components to any other third parties.

On the basis that the terms (including the price, technological services and terms of delivery) of the formal orders entered into between Kelon Air-Conditioner and Hisense Zhejiang will be consistent with those of the Raw Materials Purchase and Supply Framework Agreement and will be determined in accordance with the principle of fairness and reasonableness with reference to the market, we are of the view that the terms of the Raw Materials Purchase Framework Agreement are fair and reasonable.

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e. The Air-Conditioners Production and Supply Framework Agreement

Pursuant to the Air-Conditioners Production and Supply Framework Agreement, Kelon Air-Conditioner has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners to Hisense Marketing as Hisense Marketing may require from time to time for sale to its customers for a term of one year commencing from 1 January 2006 to 31 December 2006 (which, subject to the applicable Listing Rules, can be extended upon its expiration or terminated before its expiration with mutual agreement by both parties). Kelon Air-Conditioner and Hisense Marketing have also agreed to enter into individual airconditioners production and supply orders setting out specific terms including the price, technological services and terms of delivery, and such terms must be consistent with the principles and the terms of the Air-Conditioners Production and Supply Framework Agreement. Hisense Marketing is responsible for the collection of the air-conditioners from Kelon Air-Conditioner.

The purchase price of the air-conditioners supplied by Kelon Air-Conditioner to Hisense Marketing will be determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between Kelon Air-Conditioner and Hisense Zhejiang with reference to market price of the air-conditioners from time to time and the Group’s knowledge of pricing policy of OEM products within the industry. Similar to the pricing policy under the Air-Conditioners Production and Purchase Framework Agreement, the price of air-conditioner of a specific model sold by Kelon Air-Conditioner to Hisense Marketing will be equal to the production cost of such specific model of Kelon Air-Conditioner divided by 0.95. As noted in the Letter from the Board, such formula is determined by the relevant parties on the principle that the price of an individual air-conditioner sold by Kelon Air-Conditioner to Hisense Marketing under the Air-Conditioners Production and Supply Framework Agreement should not be less than the aggregate of (i) the production cost for individual air-conditioner produced by Kelon Air-Conditioner; (ii) the management fee; and (iii) the after-sale service fee. In arriving at the formula, the relevant parties have taken into account the relevant percentage level of the management fee and after-sale service fee of Kelon Air-Conditioner and have made reference to the market prices of air-conditioners.

The Air-conditioners Production and Supply Framework Agreements will not restrict Hisense Marketing to purchase air-conditioners from other suppliers apart from Kelon Air-Conditioner, nor will it restrict Kelon Air-Conditioner to sell its air-conditioners to any other third parties.

As mentioned above, the air-conditioners sold by Kelon Air-Conditioner to Hisense Marketing under the Air-Conditioners Production and Supply Framework Agreement are of different models from the air-conditioners manufactured and supplied by Hisense Zhejiang to Kelon Air-Conditioner under the Air-Conditioners Production and Purchase Framework Agreement, and Kelon Air-Conditioner does not have other similar OEM air-conditioners sales orders for the PRC’s sales market apart from Hisense Marketing. In other words, the air-conditioners sold by Kelon Air-Conditioner to Hisense Marketing under the AirConditioners Production and Supply Framework Agreement are the exclusive OEM models that can only be sold to Hisense Marketing. As such, it may not be appropriate to compare the selling price of the Group’s own air-conditioners that are supplied to other independent third party distributors with the selling price of the air-conditioners that are to be sold to Hisense Marketing under the Air-Conditioners Production and Supply Framework Agreement.

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Nevertheless, on the basis that (i) the manufacture and provision of air-conditioners by Kelon Air-Conditioner to Hisense Marketing will increase the revenues of the Group as well as utilise its excess resources so as to facilitate the Group to resume normal business operations; (ii) the selling price of the air-conditioners will not be less than the aggregate of the production cost, management fee and after-sale service fee incurred by Kelon AirConditioner for the production of the relevant air-conditioners; (iii) the air-conditioners sold by Kelon Air-Conditioner to Hisense Marketing are the exclusive OEM models that can only be sold to Hisense Marketing; and (iv) the other terms such as technological services and terms of delivery will be determined in accordance with the principle of fairness and reasonableness with reference to the market, we are of the view that the terms of the Air-Conditioners Production and Supply Framework Agreement are fair and reasonable.

3. Rationale for determining the maximum value of the transactions contemplated under the Framework Agreements

Pursuant to Rule 14A.35(2) of the Listing Rules, the transactions contemplated under each of the Framework Agreements during the year commencing from 1 January 2006 to 31 December 2006 will be subject to an annual cap for the financial year ending 31 December 2006 of the Company. The maximum values, or “caps”, of the transactions contemplated under the Framework Agreements for the year ending 31 December 2006 are proposed as follows:

	Proposed caps for
	the year ending
	31 December 2006
	(RMB)
Maximum aggregate value of purchases of compressors	209,457,400
under the 12 Compressors Purchase and Supply
Framework Agreements
Maximum aggregate value of purchases of moulds	8,000,000
under the Mould Purchase Framework Agreement
Maximum aggregate value of purchases of air-conditioners	120,000,000
under the Air-Conditioners Production and Purchase
Framework Agreement
Maximum aggregate value of supply of air-conditioners	120,000,000
under the Air-Conditioners Production and Supply
Framework Agreement
Maximum aggregate value of supply of air-conditioners’	12,000,000
components under the Raw Materials Purchase and
Supply Framework Agreement

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LETTER FROM AMS CORPORATE FINANCE

a. The Compressors Purchase and Supply Framework Agreements

As noted in the Letter from the Board, the proposed maximum value of purchases of compressors in the aggregate amount of RMB209,457,400 for the year ending 31 December 2006 has been determined with reference to (i) similar transactions between the relevant subsidiaries of the Company with each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila in the past; (ii) the prevailing market conditions; and (iii) the projected level of production of household electrical appliances of the subsidiaries of the Company, including but not limited to refrigerators, for the financial year ending 31 December 2006.

We have noted in the Letter from the Board that the Group has engaged in the transactions relating to the purchase of compressors with the Huayi Group since 2000. The following table sets out the estimated aggregate amounts of such transactions for each of the relevant financial years and the seven months ended 31 July 2006.

								Total approximate amount of
								the transactions relating to
								purchase of compressors
								between the Group
Year								and the Huayi Group
								(RMB)
2000								1,675,555.42
2001								714,602.53
2002								86,820,659.38
2003								158,349,771.49
2004								172,333,251.31
2005								104,853,130.68
From	1	January	2006	to	31	July	2006	90,129,308.04

As indicated from the above table, except for the financial years 2000 and 2001, the value of purchases of compressors by the Group from the Huayi Group was substantial during the recent years. In particular, such transactions grew from approximately RMB86.8 million in 2002 to approximately RMB172.3 million in 2004, representing an average annual growth rate of approximately 41%. For the year 2005, the value of such transactions dropped significantly by approximately 39% from the preceding year to approximately RMB104.9 million, which is consistent with the drop in the Group’s production activities as a result of the suspension during the period from May to September 2005.

During the period from 1 January 2006 to 31 July 2006, the actual value of purchases of compressors by the Group from the Huayi Group amounted to approximately RMB90.1 million. In other words, given the proposed aggregate annual cap of approximately RMB 209.5 million for the year ending 31 December 2006, it is expected that the maximum aggregate value of purchases of compressors by the Group from the Huayi Group from 1 August 2006 to 31 December 2006 will amount to approximately RMB119.4 million (i.e. RMB209.5 million – RMB90.1 million).

Having considered that the historical value of purchases of compressors by the Group from the Huayi Group has been substantial with the actual value of purchases conducted between the Group and the Huayi Group during the period from 1 January 2006 to 31 July 2006 (i.e. seven months) amounted to approximately RMB90.1 million (representing approximately 86% of the actual value of transactions in 2005 and 43% of the proposed aggregate maximum value of approximately RMB209.5 million for the year 2006), we are of the view that the proposed aggregate annual caps of RMB209.5 million for the financial year ending 31 December 2006 under the 12 Compressors Purchase and Supply Framework Agreements have been arrived at on a fair and reasonable basis.

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LETTER FROM AMS CORPORATE FINANCE

b. The Mould Purchase Framework Agreement

As stated in the Letter from the Board, the proposed maximum aggregate value of the transactions contemplated under the Mould Purchase Framework Agreement of RMB8.0 million for the year ending 31 December 2006 has been determined with reference to (i) similar transactions between Kelon Mould and Hisense Air-Conditioning in the past; (ii) the prevailing market conditions; and (iii) the projected level of production of household electrical appliances of Hisense Air-Conditioning for the financial year ending 31 December 2006. As noted in the Letter from the Board, Kelon Mould has engaged in the transactions in relation to the sale of moulds to Hisense Air-Conditioning since January 2006 and the value of such transactions amounted to the total approximate sum of RMB759,000 as at the end of July 2006.

In addition, as stated in the Letter from the Board, it is currently estimated that the value of the transactions contemplated under the Mould Purchase Framework Agreement will amount to approximately 10% of the total value of the same type of transactions to be conducted by the Group for the year ending 31 December 2006, and the aggregate value of the manufacture and supply of moulds conducted by the Group for the year ended 31 December 2005 was approximately RMB65,710,000.

Given that (i) the annual cap of RMB8 million is not significantly greater than 10% of the total value of the manufacture and supply of moulds conducted by the Group for the year ended 31 December 2005; (ii) the pricing for the manufacture of moulds under the Mould Purchase Framework Agreement will be determined predominantly by open tendering process; and (iii) it is generally in the interest of the Company to maximise the value of the transactions contemplated under the Mould Purchase Framework Agreement so as to increase the sales of Kelon Mould which then gives positive income effect on the Group, we consider the proposed annual cap of RMB8 million for the financial year ending 31 December 2006 under the Mould Purchase Framework Agreement to be fair and reasonable.

c. The Air-Conditioners Production and Purchase Framework Agreement and the AirConditioners Production and Supply Framework Agreement

As noted in the Letter from the Board, the proposed annual cap of RMB120 million under the Air-Conditioner Production and Purchase Framework Agreement, being the proposed maximum value of purchases of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang for the year 2006 has been determined with reference to (i) the prevailing market conditions; (ii) the actual value of purchases of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang for the period from 1 April 2006 to 31 July 2006 of approximately RMB65,890,800; and (iii) the projected level of production and sales of air-conditioners of Kelon Air-Conditioner and Hisense Zhejiang for the financial year ending 31 December 2006.

On the other hand, the proposed annual cap of RMB120 million under the Air-Conditioner Production and Supply Framework Agreement, being the proposed maximum value of purchases of air-conditioners by Hisense Marketing from Kelon Air-Conditioner for the year 2006, has been determined with reference to (i) the prevailing market conditions; (ii) the actual value of supply of air-conditioners by Kelon Air-Conditioner to Hisense Marketing for the period from 1 February 2006 to 31 July 2006 of approximately RMB84,331,500; and (iii) the projected level of sales of air-conditioners by Hisense Marketing for the financial year ending

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LETTER FROM AMS CORPORATE FINANCE

31 December 2006. It is also stated in the Letter from the Board that the value of the transactions contemplated under the Air-Conditioners Production and Supply Framework Agreement is currently estimated to be approximately 5% of the total value of the manufacture and supply of air-conditioners to be conducted by the Group for the year ending 31 December 2006, and that the aggregate value of the same type of transactions conducted by the Group for the year ended 31 December 2005 was approximately RMB2,031,120,000.

As noted from above, while the actual amount of purchases of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang for the period from 1 April 2006 to 31 July 2006 was approximately RMB65.9 million, the actual amount of sales of air-conditioners by Kelon Air-Conditioner to Hisense Marketing for the period from 1 February 2006 to 31 July 2006 amounted to approximately RMB84.3 million. Given the proposed annual caps of RMB120 million, it is expected that for the period from 1 August 2006 to 31 December 2006, the maximum aggregate value of purchases of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang will amount to approximately RMB54.1 million (i.e. RMB120 million – RMB65.9 million), whereas the maximum aggregate value of sales of air-conditioners by Kelon Air-Conditioner to Hisense Marketing will amount to approximately RMB35.7 million (i.e. RMB120 million – RMB84.3 million).

As noted in the Annual Report, the Group’s turnover in respect of sales of air-conditioners amounted to approximately RMB4,049.3 million and RMB3,600.5 million for each of the two years ended 31 December 2005 respectively, representing an average annual turnover of approximately RMB3,824.9 million. In view of this, we consider that the annual caps in the sum of RMB240 million (being the aggregate amount of the two proposed maximum values of transactions in relation to purchases and sales of air-conditioners between the Group and Hisense Group for the year ending 31 December 2006), representing only about 6% of the Group’s average annual turnover in respect of the sales of air-conditioners for the past two years, is not excessive and has been determined by the Group on a reasonable basis.

As mentioned above, the main purpose of the Air-Conditioners Production and Purchase Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement is to assist the Group to resume its production and domestic sales activities, and to rebuild the Group’s market position which has been adversely affected by the suspension of certain production lines of the Group as a result of 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 senior management officers who are suspected of having committed economic crimes).

Given that the proposed maximum value of transactions in relation to the purchases and sales of air-conditioners between the Group and Hisense Group for the year ending 31 December 2006 has been substantially arrived at based on the actual transactions already conducted between them and that such maximum value does not appear to be excessive in view of the average historical turnover of the Group in respect of the sales of air-conditioners for the past two financial years ended 31 December 2005, we consider that the proposed annual cap of RMB120 million under each of the Air-Conditioners Production and Purchase Framework Agreement and the Air-Conditioners Production and Supply Framework Agreement is fair and reasonable.

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LETTER FROM AMS CORPORATE FINANCE

d. The Raw Materials Purchase and Supply Framework Agreement

As stated in the Letter from the Board, the proposed maximum aggregate value of the transactions contemplated under the Raw Materials Purchase and Supply Framework Agreement of RMB12.0 million for the year ending 31 December 2006 has been determined with reference to (i) the prevailing market conditions and (ii) the projected level of production of air-conditioners of Hisense Zhejiang for the financial year ending 31 December 2006. As noted in the Letter from the Board, Kelon Air-Conditioner has engaged in the transactions in relation to the sale of air-conditioners’ components to Hisense Zhejiang since about April 2006 and the value of such transactions amounted to the total approximate sum of RMB5,502,900 as at the end of July 2006.

As further stated in the Letter from the Board, it is currently estimated that the value of the transactions contemplated under the Raw Materials Purchase and Supply Framework Agreement will amount to approximately 3% of the total value of the manufacture and supply of air-conditioners’ components to be conducted by the Group for the year ending 31 December 2006. The aggregate value of the same type of transactions conducted by the Group for the year ended 31 December 2005 was approximately RMB302,420,000.

Given the proposed annual cap of RMB12.0 million for the year ending 31 December 2006 under the Raw Materials Purchase and Supply Framework Agreement, it is expected that the maximum aggregate value of the Group’s sales of air-conditioners’ components to Hisense Zhejiang from 1 August 2006 to 31 December 2006 will amount to approximately RMB6.5 million (i.e. RMB12.0 million – RMB5.5 million). On this basis, we consider that the proposed annual cap of RMB12.0 million has been determined largely by reference to the actual value of the transactions already conducted between Kelon Air-Conditioner and Hisense Zhejiang during the four-month period from April to July 2006 which amounted to approximately RMB5.5 million (representing approximately 46% of the proposed annual cap of RMB12.0 million for the year 2006). In addition, having considered the aggregate value of the manufacture and supply of air-conditioners’ components conducted by the Group of approximately RMB302.4 million for the year ended 31 December 2005, we do not consider the proposed annual cap of RMB12 million to be excessive as it would represent less than 4% of such historical value. As such, we are of the view that the proposed annual cap of RMB12.0 million for the financial year ending 31 December 2006 under the Raw Materials Purchase and Supply Framework Agreement has been arrived at on a fair and reasonable basis.

4. Continuing connected transactions which had been conducted by the Group with the Huayi Group and subsidiaries of Hisense Group without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules

As noted in the Letter from the Board, the Group had engaged in certain transactions with the Huayi Group since January 2005 and with certain subsidiaries of Hisense Group since October 2005 without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules. As stated in the Letter from the Board, the Executive Directors are of the view that such transactions were conducted in the ordinary and usual course of business of the Company, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) independent third parties and therefore such transactions were conducted in the interest of the Company and the Shareholders as a whole.

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LETTER FROM AMS CORPORATE FINANCE

For the purpose of evaluating the fairness and reasonableness of the aforesaid transactions, we have, where applicable, carried out a review on some random samples of such transactions, including their sales contracts and/or sales invoices, that were conducted up to July 2006. Our findings are summarised below.

a. Purchase of compressors by the Group from the Huayi Group

As mentioned above, the Group has engaged in the transactions in relation to the purchase of compressors with the Huayi Group since 2000 and for the year ended 31 December 2005 and the seven months ended 31 July 2006, the value of such transactions amounted to the total approximate sum of RMB104,853,130.68 and 90,129,308.04, respectively. Based on our review of the samples of sales invoices in relation to the Group’s purchases of compressors from the Huayi Group and from other independent third party suppliers during the period from January 2005 to July 2006, we note that the unit price of the compressors purchased from the Huayi Group was not higher than the unit price of the compressors purchased from independent third party suppliers. On this basis, we are of the view that the transactions in relation to the purchase of compressors by the Group from the Huayi Group for the year ended 31 December 2005 and the seven months ended 31 July 2006 had been conducted in the ordinary course of business of the Group and on normal commercial terms that were no less favourable to the Group than those offered to the Group by independent third party suppliers.

b. Sale of parts and accessories for electrical appliances by the Group to Hisense Zhejiang

As stated in the Letter from the Board, the Group (as supplier) have engaged in the transactions in relation to the purchase and supply of parts and accessories for electrical appliances with Hisense Zhejiang (as purchaser) since January 2006 and the value of such transactions amounted to the total approximate sum of RMB1,500,435.30 as at the end of July 2006. The pricing for the parts and accessories for electrical appliances was determined principally by commercial negotiation between the Group and Hisense Zhejiang according to the principle of fairness and reasonableness with reference to the market price of electrical appliances from time to time. As stated in the Letter from the Board, the Company anticipates that the Group will not engage in such transactions for the rest of 2006.

Based on our review of the samples of sales contracts, in particular the price list, in relation to the Group’s sale of parts and accessories for electrical appliances to Hisense Zhejiang for the relevant period, we note that the terms of the sampled sales contracts (including the pricing, technological services and terms of delivery) had been consistent with the above-mentioned basis that they were determined in accordance with the principle of fairness and reasonableness with reference to the market price of the relevant goods. On this basis and having regard to the total amount of only approximately RMB1.5 million involved in the transactions, we are of the view that the transactions in relation to the sale of parts and accessories for electrical appliances by the Group to Hisense Zhejiang for the relevant period had been conducted in the ordinary course of business of the Group and on normal commercial terms.

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LETTER FROM AMS CORPORATE FINANCE

c. Manufacture and supply of moulds by Kelon Mould to Hisense Air-Conditioning

Kelon Mould has engaged in the transactions in relation to the sale of moulds to Hisense Air-Conditioning for the manufacture of household appliances including air-conditioners by Hisense Air-Conditioning since January 2006. As stated in the Letter from the Board, the terms of such transactions were similar to those under the Mould Purchase Framework Agreement and the value of such transactions amounted to the total approximate sum of RMB759,000 as at the end of July 2006. Given the fact that the manufacture and supply of moulds is conducted on a customised basis, we do not consider it appropriate to compare the sales contracts for the sale of moulds by Kelon Mould to Hisense Air-Conditioning with those to independent third party customers for the relevant period as the underlying products may not be directly comparable. Nevertheless, having regard to the fact that the total value of the sales of moulds amounted to less than RMB0.8 million during the period from January 2006 to July 2006 and that the pricing for the manufacture and supply of moulds was determined predominantly by open tendering process which is a transparent mechanism, we are of the view that the transactions in relation to the sale of moulds for the relevant period had been conducted in the ordinary course of business of the Group and on normal commercial terms.

d. Purchase of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang

Kelon Air-Conditioner has engaged in the transactions in relation to the purchase of air-conditioners from Hisense Zhejiang since April 2006 and the actual value of such transactions during the period from 1 April 2006 to 31 July 2006 was approximately RMB65,890,800. As stated in the Letter from the Board, the terms of such transactions were similar to those under the Air-Conditioners Production and Purchase Framework Agreement. In addition, we understand from the management of the Company that other than Hisense Zhejiang, the Group had not purchased any air-conditioners from any other parties during the relevant period. Similar to the terms of the Air-Conditioners Production and Purchase Framework Agreement, the purchase price of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang was substantially the same as the total sum of production costs and transportation costs of air-conditioners that would have otherwise been incurred by Kelon Air-Conditioner if the relevant air-conditioners had been produced by Kelon Air-Conditioner. As the main purpose of the purchase of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang is to assist the Group to resume its domestic sales activities and to rebuild the Group’s market position, we consider that such transactions had been conducted in the ordinary course of business of the Group and were in the interests of the Company and the Shareholders.

e. Sale of air-conditioners’ components by Kelon Air-Conditioner to Hisense Zhejiang

Kelon Air-Conditioner has engaged in the transactions in relation to the sale of air-conditioners’ components to Hisense Zhejiang since about April 2006 and the value of such transactions amounted to the total approximate sum of RMB5,502,900 as at the end of July 2006. As stated in the Letter from the Board, the terms of such transactions were similar to those under the Raw Materials Purchase and Supply Framework Agreement. In addition, we have been advised by the management of the Company that since such air-conditioners’ components sold by Kelon Air-Conditioner to Hisense Zhejiang were exclusively utilised by Hisense Zhejiang for the manufacture of air-conditioners for sale to Kelon Air-conditioning since April 2006, Kelon Air-Conditioner had not sold any similar air-conditioners’ components to any other parties during the relevant period.

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LETTER FROM AMS CORPORATE FINANCE

As mentioned above, the transactions in relation to the sale of air-conditioners’ components to Hisense Zhejiang could facilitate the purchases of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang and such transactions would improve the Company’s competitiveness and responsiveness and facilitate the sales of the Company’s air-conditioners in the eastern region of the PRC. In addition, we have been advised by the management of the Company that the price of the air-conditioners’ components had been determined principally by arm’s length commercial negotiations between Kelon Air-Conditioner and Hisense Zhejiang according to the principle of fairness and reasonableness with reference to the market price of air-conditioners’ components. Accordingly, we consider that the transactions in relation to the sale of air-conditioners’ components by Kelon Air-Conditioner to Hisense Zhejiang since April 2006 were in the interests of the Company and the Shareholders and were fair and reasonable.

f. Sale of air-conditioners by Kelon Air-Conditioner to Hisense Marketing

Kelon Air-Conditioner has engaged in the transactions in relation to the sale of air-conditioners to Hisense Marketing since February 2006 and the actual value of such transactions during the period from 1 February 2006 to 31 July 2006 amounted to approximately RMB84.3 million. As stated in the Letter from the Board, the terms of such transactions were similar to those under the Air-Conditioners Production and Supply Framework Agreement. Since the air-conditioners sold to Hisense Marketing were the exclusive OEM models that could only be sold to Hisense Marketing, the Group had not manufactured or sold any air-conditioners of similar models to other parties during the relevant period. Similar to the terms of the Air-Conditioners Production and Supply Framework Agreement, the selling price of such air-conditioners had been determined by Kelon Air-Conditioner and Hisense Marketing on the principle that the selling price would not be less than the aggregate of (i) the production cost for air-conditioners produced by Kelon Air-Conditioner; (ii) the management fee; and (iii) the after-sale service fee. Similar to the purchase of air-conditioners by Kelon Air-Conditioner from Hisense Zhejiang, the main purpose of the sale of air-conditioners by Kelon Air-Conditioner to Hisense Marketing is to assist the Group to resume its production activities and to rebuild the Group’s market position. Accordingly, we also consider that the transactions in relation to the sale of air-conditioners by Kelon Air-Conditioner to Hisense Marketing since February 2006 had been conducted in the ordinary course of business of the Group and were in the interests of the Company and the Shareholders and were fair and reasonable.

g. Purchase of compressors by the Group from subsidiaries of Hisense Group

As stated in the Letter from the Board, the Group had engaged in the transactions in relation to the purchase of compressors with subsidiaries of Hisense Group during the period from October 2005 to July 2006 and the value of such transactions amounted to the total approximate sum of RMB12,337,216 as at the end of July 2006. In addition, the selling price of the compressors sold by subsidiaries of Hisense Group to the Group was essentially equal to the sum of the purchase price paid by the relevant subsidiaries of Hisense Group on the compressors and the transportation cost incurred by them for delivering the compressors to the Group. As stated in the Letter from the Board, the Company anticipates that the Group will not engage in such transactions for the rest of 2006.

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LETTER FROM AMS CORPORATE FINANCE

Based on our review of the samples of the invoices in relation to the purchase of compressors by the Group from subsidiaries of Hisense Group as well as the purchase of compressors by subsidiaries of Hisense Group from their independent third party suppliers for the relevant period, we note that the unit price of the compressors purchased by the Group from subsidiaries of Hisense Group represented a mark-up of approximately 2.6% on the unit price of the compressors purchased by subsidiaries of Hisense Group from independent third party suppliers. As advised by the management of the Company, such mark-up represented the transportation cost incurred by subsidiaries of Hisense Group on their delivery of the compressors to the Group.

Based on a mark-up of 2.6% on the purchase price and the total value of the transactions in relation to the purchase of compressors by the Group from subsidiaries of Hisense Group during the period from October 2005 to July 2006 amounted to approximately RMB12.3 million, the total premium paid by the Group to subsidiaries of Hisense Group would be approximately RMB313,000 (i.e. RMB12,337,216 – (RMB12,337,216/1.026)). Based on our review and having regard to an amount of only approximately RMB313,000 paid by the Group above the original cost to subsidiaries of Hisense Group, we consider that the transactions in relation to the purchase of compressors by the Group from subsidiaries of Hisense Group had been conducted in the ordinary course of business of the Group and were in the interest of the Group and on normal commercial terms that were no less favourable to the Group than those offered to the Group by independent third party suppliers.

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:

(i) The financial and trading positions of the Group following the severe disruption to its operations as a result of the CSRC’s investigation, details of which are set out in the section headed “Background information and reasons for the Framework Agreements”.
(ii) The manufacture and sale of refrigerators is one of the principal businesses of the Group and compressors are essential components of refrigerators. Huayi Compressors is one of the major producers of refrigerator compressors in the PRC and has the relevant experience and expertise in the manufacture of refrigerator compressors. It is therefore in the commercial interest of the Group to enter into the Compressors Purchase and Supply Framework Agreements with the Huayi Group.
(iii) The transactions contemplated under the Mould Purchase Framework Agreement and the Raw Materials Purchase and Supply Framework Agreement will increase the sales of the Group, so it is in the interest of the Group to enter into such agreements.
(iv) The purpose of the transactions contemplated under the Air-conditioners Production and Purchase Framework Agreement and the Air-conditioners Production and Supply Framework Agreement is to assist the Group in resuming its operations in both the production and sales aspects. Hisense Group, together with its subsidiaries, is currently one of the major electronic companies in the PRC and has the relevant expertise in the domestic electric appliances market in the PRC as well as strong financial resources. Accordingly, Hisense Group is in a good position to assist the Group in rebuilding its market position.

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LETTER FROM AMS CORPORATE FINANCE

(v) The terms (including the price, technological services and terms of delivery) of the formal orders entered into by the Group pursuant to the Framework Agreements will be determined in accordance with the principle of fairness and reasonableness with reference to the market. In addition, all the transactions contemplated under the Framework Agreements are to be conducted on a non-exclusive basis, so the Framework Agreements will not restrict the Group to engage in the similar transactions with other parties.
(vi) The value of, and the basis for determining, the annual caps under the Framework Agreements are fair and reasonable, details of which are set out in the section headed “Rationale for determining the maximum value of the transactions contemplated under the Framework Agreements”.
(vii) Based on our review on the transactions which had been conducted by the Group with the Huayi Group since January 2005 and with certain subsidiaries of Hisense Group since October 2005 without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules (details of which are set out in the section headed “Continuing connected transactions which had been conducted by the Group with the Huayi Group and subsidiaries of Hisense Group without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules”), we are of the view that such transactions had been conducted in the ordinary course of business of the Group and on normal commercial terms and were fair and reasonable.

Based on the above, we are of the opinion that each of the Framework Agreements is in the interests of the Company and the Shareholders as a whole, the transactions to be contemplated under the Framework Agreements are in the ordinary and usual course of the business of the Group and the terms of which including the proposed annual caps are fair and reasonable. Accordingly, we would advise the Independent Board Committee and the Independent Shareholders that the Independent Shareholders should vote in favour of the resolution(s) to approve each of the Framework Agreements at the AGM. As regards the continuing connected transactions which had been conducted by the Group with the Huayi Group and subsidiaries of Hisense Group without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules since January 2005 and up to 31 July 2006, we have, where applicable, carried out a review on some random samples of such transactions (including their sales contracts and/or sales invoices) that were conducted up to July 2006 and are of the view that such transactions had been conducted in the ordinary course of business of the Group and on normal commercial terms. Assuming that such transactions will continue to be conducted in accordance with the terms similar to those under the Framework Agreements, in particular according to the principle of fairness and reasonableness with reference to the market price of the relevant products, and on normal commercial terms that are no less favourable to the Group, we would also advise the Independent Board Committee and the Independent Shareholders that the Independent Shareholders should vote in favour of the resolution(s) at the AGM to ratify those transactions conducted by the Group with the Huayi Group and subsidiaries of Hisense Group without complying with the requirements of reporting, announcements and/or obtaining independent shareholders’ approval under the Listing Rules since January 2005 and up to the date of the AGM.

Yours faithfully, For and on behalf of

AMS Corporate Finance Limited Jinny Mok Director

– 60 –

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. 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 in this circular misleading.

2. DISCLOSURE OF INTERESTS

Directors, supervisors and chief executive of the Company

As at the Latest Practicable Date, none of the Directors, supervisors and chief executive of the Company had interests and short positions in the Shares, underlying Shares and/or debentures (as the case may be) of the Company or any its associated corporations (within the meaning 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 any such Director or chief executive is taken or deemed to have under such provisions of the SFO) or which were required to be entered into the register required to be kept by the Company under section 352 of the SFO or which were otherwise required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

As at the Latest Practicable Date, none of the Directors or supervisors of the Company had any interest, direct or indirect, in any asset which have been since 31 December 2005, being the date to which the latest published audited financial statements of the Group were made up, 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.

As at the Latest Practicable Date, none of the Directors or supervisors of the Company was materially interested in any contract or arrangement entered into by any member of the Group since 31 December 2005, being the date to which the latest published audited financial statements of the Company were made up, and which was significant in relation to the business of the Group.

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GENERAL INFORMATION

APPENDIX

Interests of Substantial Shareholders

Interests in the Company

As at the Latest Practicable Date, so far as the Directors are aware, each of the following persons, not being a Director, supervisor or chief executive of the Company, had an interest in the Shares which falls to be disclosed to the Company and the Stock Exchange under the provisions of Division 2 and 3 of Part XV of the SFO:

			Proportion
			to the
			relevant class	Proportion
		Number of	of issued	to the total
		issued	share capital	issued share
		ordinary	of the	capital of the
Name	Class of Shares	shares held	Company	Company
Guangdong Greencool	Domestic legal	262,212,194	77.60%	26.43%
Enterprise Development	person shares
Company Limited
Shunde Economic	Domestic legal	68,666,667	20.32%	6.92%
Consultancy Company	person shares
Shenyin Wanguo Securities	H Shares	54,851,000	11.93%	5.53%
(H.K.) Limited
The Hong Kong and	H Shares	51,266,925	11.15%	5.17%
Shanghai Banking
Corporation Limited
Bank of China (Hong Kong)	H Shares	49,239,000	10.71%	4.96%
Limited
Guotai Junan Securities	H Shares	40,920,000	8.90%	4.12%
(Hong Kong) Limited
HSBC Nominees (Hong	H Shares	40,106,904	8.73%	4.04%
Kong) Limited
First Shanghai Securities	H Shares	25,868,000	5.63%	2.61%
Limited

– 62 –

GENERAL INFORMATION

APPENDIX

Interests in other members of the Group

As at Latest Practicable Date, so far as the Directors are aware, the following persons, not being a Director, supervisor or chief executive of the Company, 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 any other members of the Group:

		Percentage
		shareholding of
	Shareholders holding 10%	shareholders in
	or more in other members	other members
Other members of the Group	of the Group	of the Group
Guangdong Kelon Air-Conditioner	Weishi Investments	40%
Co., Ltd	Company Limited
Guangdong Kelon Mould Co., Ltd	Hua Yi Compressor	30%
	Company Limited
Foshan Shunde Rongsheng Plastic	Hua Yi Compressor	30%
Products Co., Ltd	Company Limited
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)	29.05%
	Company Limited
Jiangxi Kelon Combine Electrical	Jiangxi Fadasi Domestic	45%
Appliances Co., Ltd.	Electrical Appliances
	Company Limited
Kaifeng Kelon Air-Conditioner	Kaifeng Economic	30%
Co., Ltd.	Technique Development
	(Group) Company
Hua Yi Compressor Company	Huayi Electrical Appliances	40.67%
Limited	Company Limited
	A-share public shareholders	30.61%

– 63 –

GENERAL INFORMATION

APPENDIX

==> picture [402 x 512] intentionally omitted <==

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

||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|Percentage|
|shareholding|of|
|Shareholders|holding|10%|shareholders|in|
|or|more|in|other|members|other|members|
|Other|members|of|the|Group|of|the|Group|of|the|Group|
|Chongqing|Kelon|Rongsheng|Chongqing|Shang|She|24%|
|Refrigerator|Sales|Co.,|Ltd.|Group|
|Chongqing|Huaqing|24%|
|Commerce|Company|
|Chongqing|Department|24%|
|Building|
|Guangzhou|Antaida|Logistic|Guangzhou|Zhongyuan|30%|
|Co.,|Ltd.|International|Freight|
|Forwarding|Company|
|Limited|
|China|Far|Ocean|Network|25%|
|Company|Limited|
|Wuxi|Small|Swan|Holdings|20%|
|Company|Limited|
|Wuhu|Yingjia|Electrical|Machinery|Heavenly|King|Incorporated|20%|
|Co.,|Ltd|
|Sichuan|Rongsheng|Kelon|Xu|Wei|Ru|24%|
|Refrigerator|Sales|Co.,|Ltd.|
|Beijing|Hengsheng|Xin|Chuang|Foshan|City|Shunde|District|11%|
|Technology|Company|Yun|Long|Enquiry|
|Service|Company|Limited|
|Guangdong|Kelon|Weili|Electrical|Zhongshan|City|Fusha|20%|
|Appliances|Company|Limited|Zhen|Shunchang|
|Industrial|Company|
|Limited|
|(|
|)|

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

Save as disclosed above, as at the Latest Practicable Date, there was no other person (other than a Director, supervisor or chief executive of the Company or a member of the Group), who had an interest or short position in the Shares or underlying Shares 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 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 any other member of the Group.

– 64 –

GENERAL INFORMATION

APPENDIX

3. SERVICE AGREEMENTS

As at the Latest Practicable Date, none of the Directors, proposed directors, supervisors or proposed supervisors of the Company had any existing or proposed service contract with any member of the Group (excluding contracts expiring or determinable by the Company within one year without payment of compensation (other than statutory compensation).

4. MATERIAL CHANGES

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2005, being the date to which the latest published audited financial statements of the Group were made up.

5. COMPETING INTEREST

As at the Latest Practicable Date, the following directors of the Company or their respective associates have interests in the following businesses which are considered to compete or are likely to compete, either directly or indirectly, with the businesses of the Group other than those businesses where the Directors were appointed as directors to represent the interests of the Company and/or the Group pursuant to the Listing Rules:

		Description of
	Name of entity	business of the
	which business is	entity which is
	considered to	considered to
	compete or likely	compete or likely
	compete with the	to compete with	Nature of interest
	business of the	the business of	of the Director in
Name of Director	Group	the Group	the entity
Mr. Tang Ye Guo	The Subsidiaries of	Production of	Director
	Hisense Group	air-conditioning/
		electrical products
Ms. Yu Shu Min	The Subsidiaries of	Production of	Director and/or
	Hisense Group	air-conditioning/	senior
		electrical products	management
Mr. Su Yu Tao	The Subsidiaries of	Production of	Director
	Hisense Group	air-conditioning/
		electrical products
Mr. Xiao Jian Lin	Hisense Group or	Production of	Director
	its Subsidiaries	air-conditioning/
		electrical products
Mr. Lin Lan	Hisense Group	Production of	Senior management
		air-conditioning/
		electrical products

– 65 –

GENERAL INFORMATION

APPENDIX

As at the Latest Practicable Date, save as disclosed above, none of the directors of the Company or their respective associates has interests in the businesses which compete or are likely to compete, either directly or indirectly, with the businesses of the Group.

6. EXPERT

(a) The following sets out the qualifications of the expert which has given its opinion or advice as contained in this circular:

Name

Qualifications

AMS Corporate Finance 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 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 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 2005, the date to which the latest published audited financial statements of the Company were made up.
(d) AMS Corporate Finance 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.
(e) The letter and recommendation given by AMS Corporate Finance are given as of the date of this circular for incorporation herein.

7. 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 25 October 2006:

(a) Compressors Purchase and Supply Framework Agreements;
(b) Mould Purchase Framework Agreement;
(c) Air-Conditioners Production and Purchase Framework Agreement;
(d) Raw Materials Purchase and Supply Framework Agreement; and
(e) Air-Conditioners Production and Supply Framework Agreement.

8. MISCELLANEOUS

The English text of this circular shall prevail over its Chinese text.

– 66 –

AI assistant

Medlive Technology Co., Ltd. — Proxy Solicitation & Information Statement 2006

50436_rns_2006-10-11_abbd8e79-6506-4517-9a93-002da9ec2846.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

CONTINUING CONNECTED TRANSACTIONS

CONTENTS

“AGM”

DEFINITIONS

DEFINITIONS

DEFINITIONS

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

Compressors Purchase and Supply Framework Agreements

Mould Purchase Framework Agreement

Air-Conditioners Production and Purchase Framework Agreement and Raw Materials Purchase and Supply Framework Agreement

Air-Conditioners Production and Supply Framework Agreement

CONTINUING CONNECTED TRANSACTIONS

Compressors Purchase and Supply Framework Agreements

Mould Purchase Framework Agreement, Raw Materials Purchase and Supply Framework Agreement, Air-Conditioners Production and Purchase Framework Agreement and Air-Conditioners Production and Supply Framework Agreement

LETTER FROM THE BOARD

(A) COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENTS

Date and Parties

1. Compressors Purchase and Supply Framework Agreement I

2. Compressors Purchase and Supply Framework Agreement II

3. Compressors Purchase and Supply Framework Agreement III

4. Compressors Purchase and Supply Framework Agreement IV

5. Compressors Purchase and Supply Framework Agreement V

6. Compressors Purchase and Supply Framework Agreement VI

7. Compressors Purchase and Supply Framework Agreement VII

8. Compressors Purchase and Supply Framework Agreement VIII

9. Compressors Purchase and Supply Framework Agreement IX

10. Compressors Purchase and Supply Framework Agreement X

11. Compressors Purchase and Supply Framework Agreement XI

12. Compressors Purchase and Supply Framework Agreement XII

Term

Sale and Purchase of Compressors

LETTER FROM THE BOARD

Pricing

Maximum Aggregate Annual Caps

LETTER FROM THE BOARD

Reasons For and Benefits of the Compressors Purchase and Supply Framework Agreements

(B) MOULD PURCHASE FRAMEWORK AGREEMENT

Term

Mould Purchase

Pricing

Maximum Aggregate Annual Cap

Reasons For and Benefits of the Mould Purchase Framework Agreement

Term

Air-Conditioners Purchase

Pricing

Maximum Aggregate Annual Cap

Reasons For and Benefits of the Air-conditioners Production and Purchase Framework Agreement

LETTER FROM THE BOARD

(ii) Raw Materials Purchase and Supply Framework Agreement

Term

Raw Materials Purchase

Pricing

Maximum Aggregate Annual Cap

Reasons For and Benefits of the Raw Materials Purchase and Supply Framework Agreement

(D) AIR-CONDITIONERS PRODUCTION AND SUPPLY FRAMEWORK AGREEMENT

Term

Air-Conditioners Supply

Pricing

Maximum Aggregate Annual Cap

Reasons For and Benefits of the Air-conditioners Production and Supply Framework Agreement

AGGREGATION

ANALYSIS OF ABILITY TO PERFORM OBLIGATIONS UNDER THE COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT AND THE HISENSE AGREEMENTS

THE EFFECT OF THE ABOVE CONNECTED TRANSACTIONS ON THE INDEPENDENCE OF THE COMPANY AND ITS SUBSIDIARIES

INFORMATION RELATING TO THE COMPANY

INFORMATION RELATING TO HUAYI COMPRESSOR

INFORMATION ON JIAXI BEILA

INFORMATION ON HUAYI JINGZHOU

INFORMATION ON HISENSE AIR-CONDITIONING

INFORMATION ON HISENSE ZHEJIANG

INFORMATION ON HISENSE MARKETING

CONTINUING CONNECTED TRANSACTIONS

The Compressors Purchase and Supply Framework Agreements

LETTER FROM THE BOARD

Medlive Technology Co., Ltd. Proxy Solicitation & Information Statement 2006