Medlive Technology Co., Ltd. — Proxy Solicitation & Information Statement 2007

Dec 30, 2007

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 or registered institution in securities, a bank manager, solicitor, professional accountant, or other professional adviser.

If you have sold or transferred all your shares in HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED, you should at once hand this circular to the purchaser or transferee or to the licensed securities dealer or registered institution in securities 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.

This circular does not constitute an invitation or offer to acquire, purchase or subscribe for the securities of the Company.

HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED 海信科龍電器股份有限公司

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

MAJOR AND CONNECTED TRANSACTION:

ACQUISITION OF THE TARGET GROUP FROM QINGDAO HISENSE AIR-CONDITIONING COMPANY LIMITED CONTINUING CONNECTED TRANSACTIONS APPLICATION FOR WHITEWASH WAIVER AND PROPOSED AMENDMENTS TO ARTICLES OF ASSOCIATION

Financial Adviser to Qingdao Hisense

==> picture [62 x 32] intentionally omitted <==

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

A letter from the Board is set out from pages 10 to 50 of this circular.

A notice convening the EGM of the Company to be held at 2:00 p.m. on 15 February 2008 at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC is set out on pages N-1 to N-7 of this circular. A notice convening the CSM to be held at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC at 3:00 p.m. (or immediately after the conclusion or adjournment of the class meeting of A Shareholders) on 15 February 2008 is set out from pages N-8 to N-10 of this circular.

Form of proxies for use at the EGM and the class meeting of the H Shareholders are enclosed with this circular. If you are not able to attend the meeting in person, you are requested to complete and return the enclosed proxy form in accordance with the instructions printed thereon and lodge the same with the Company’s Branch Share Registrar in Hong Kong, Hong Kong Registrars Limited of Rooms 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, not less than 24 hours before the time fixed for holding the EGM or the class meeting of the H Shareholders or any adjournment thereof. Completion and delivery of the form of proxy will not preclude you from attending and voting at the meeting or any adjournment thereof if you so wish.

31 December 2007

CONTENTS

	Page
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
EXPECTED TIMETABLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
LETTER FROM THE BOARD
— Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
— The Acquisition Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
— Shareholding structure of the Company before and
after the Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
— Information of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
— Information of the Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
— Asset valuation of the Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
— Property interests of the Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
— Financial effect of the Acquisition on the Target Group. . . . . . . . . . . . . . . . . . .	28
— Reasons for and benefits of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32
— Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	34
— Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	34
— Financial and trading prospects of the Enlarged Group . . . . . . . . . . . . . . . . . . .	34
— Material change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
— Continuing Connected Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
— Information of Qingdao Hisense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	43
— Implications of the Takeovers Code and Whitewash Waiver . . . . . . . . . . . . . . .	44
— Implications of the Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	45
— CSRC Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	46
— Proposed amendments to the Articles of Association . . . . . . . . . . . . . . . . . . . . .	46
— Voting arrangement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	47
— EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	47
— Class meeting of the H Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	48
— Independent Board Committee and Independent Financial Adviser . . . . . . . . .	49
— Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	49
— Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	50
— Suspension of trading in the H Shares of the Company . . . . . . . . . . . . . . . . . . .	50

— i —

CONTENTS

	Page
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . .	51
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER. . . . . . . . . . . . . . . .	52
APPENDIX I: FINANCIAL INFORMATION OF THE KELON GROUP . . . . . . . .	I-1
APPENDIX II: ACCOUNTANTS’ REPORT OF THE TARGET GROUP. . . . . . . .	II-1
APPENDIX III: MANAGEMENT DISCUSSION AND
ANALYSIS OF THE TARGET GROUP . . . . . . . . . . . . . . . . . . . . .	III-1
APPENDIX IV: UNAUDITED PRO FORMA FINANCIAL INFORMATION
OF THE ENLARGED GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-1
APPENDIX V: IFRS 2007 PROFIT FORECASTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-1
APPENDIX VI: IFRS 2008 PROFIT FORECASTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .	VI-1
APPENDIX VII: VALUATION REPORT OF THE ENLARGED GROUP . . . . . . .	VII-1
APPENDIX VIII: GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	VIII-1
NOTICE OF EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	N-1
NOTICE OF CLASS MEETING OF H SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . .	N-8

— ii —

DEFINITIONS

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

• “A Shareholders” holders of A Shares “A Shares” domestic ordinary shares of the Company with a nominal value of RMB1.00 each and are listed on the Shenzhen Stock Exchange

• “Acquisition Agreement” the agreement entered into between the Company and Qingdao Hisense dated 28 December 2007

• “Acquisition” the acquisition of the Target Group by the allotment and issue of the Consideration Shares as contemplated under the Acquisition Agreement

• “Announcement” the announcement of the Company regarding the Acquisition dated 28 December 2007

• “Articles of Association” the articles of association of the Company as amended from time to time

• “Asset Valuer” 北京中威華德誠資產評估有限公司 (Beijing Zhongwei Huadecheng Asset Appraisal Company Limited), an independent firm of qualified PRC valuers

• “associate(s)” has the meaning ascribed to it in the Listing Rules “Board” the board of Directors “Borrowed Shares” the 4,742,863 Shares and 486,044 Shares advanced by Qingdao Hisense on behalf of SEC and Dongheng to eligible A Shareholders, respectively, under the Share Reform Proposal for their participation in the share reform

• “Business Co-operation the agreement dated 28 December 2007 and entered into Framework Agreement” between the Company and Hisense Group Co. and some of its Subsidiaries in relation to the business co-operation between the Enlarged Group and Hisense Group Co. and some of its Subsidiaries in respect of the purchase of moulds, raw materials and components, leasing of properties and provision of services to be carried out after Completion

• “Company” 海信科龍電器股份有限公司 (Hisense Kelon Electrical Holdings Co., Ltd), 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

“Completion”	the completion of the Acquisition
“Completion Date”	the date on which Completion takes place, which shall be the
	last business day of the month following the month in which
	last of all the Conditions to the Acquisition Agreement has
	been satisfied
“concert party” or	has the meaning given to the term “parties acting in concert”
“party acting in concert”	in the Takeovers Code
“Conditions”	conditions precedent to the Acquisition Agreement and
	“Condition” means any of them
“connected person(s)”	has the meaning ascribed to it under the Listing Rules
“Consideration Shares”	364,097,421 A Shares to be issued by the Company to Qingdao
	Hisense as contemplated under the Acquisition Agreement
“CSM”	the class meeting of H Shareholders to be held at the conference
	room of the Company’s head office, Shunde District, Foshan
	City, Guangdong Province, the PRC at 3:00 p.m. on 15 February
	2008 for the purpose of considering by the Independent
	Shareholders the Acquisition, notice of which is set out on
	pages N-8 to N-10 of this circular
“CSRC”	China Securities and Regulatory Commission
“CSRC Waiver”	the waiver in respect of the obligation of Qingdao Hisense to
	acquire further Shares by way of an offer which would
	otherwise arise under the Takeover Procedures as a result of
	the allotment and issue of the Consideration Shares by the
	Company to Qingdao Hisense and the resulting increase in the
	number of A Shares held by Qingdao Hisense
“Donation”	the donation by Qingdao Hisense of 9,725,050 A Shares,
	equivalent to 0.5 donated A Share per 10 A Shares on the
	basis of the total A Shares of 194,501,000 Shares, to eligible
	A Shareholders under certain circumstances pursuant to the
	Share Reform Proposal as set out in the announcement of the
	Company dated 19 December 2006
“Dongheng”	佛山市順德區東囱信息諮詢服務有限公司(Foshan City
	Shunde Dongheng information Consulting Service Company
	Limited), a limited liability company established under the laws
	of the PRC, the shareholding of which is owned by two
	individuals who are Independent Third Parties
“Director(s)”	the director(s) of the Company

— 2 —

DEFINITIONS

“EGM”

the extraordinary general meeting of the Company to be held at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC at 2:00 p.m. on 15 February 2008 for the purpose of considering by the Shareholders the Acquisition, the Non-exempt Continuing Connected Transaction, the Whitewash Waiver, the CSRC Waiver, the authorisation to the Board to deal with all matters relating to the allotment and issue of Consideration Shares and the amendment of Articles of Association, notice of which is set out on pages N-1 to N-7 of this circular

• “Enlarged Group” the Kelon Group as enlarged by, or taking into account the impact of, the interests in the Target Group pursuant to the Acquisition

• “Executive” the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director

• “Experts” the experts who have given their advice, letters or reports for the inclusion in this circular, including BDO McCabe Lo Limited, Access Capital Limited, Sallmanns (Far East) Limited, Tang Law Group and 北京中威華德誠資產評估有限公司 (Beijing Zhongwei Huadecheng Asset Appraisal Company Limited)

• “Financial Adviser to Daiwa Securities SMBC Hong Kong Limited, a corporation the Vendor” licensed under the SFO for carrying out type 1 (dealing in securities), type 4 (advising on securities) and type 6 (advising on corporate finance) regulated activities, being the financial adviser to Qingdao Hisense

• “GDP” gross domestic product “H Shareholders” holders of H Shares “H Shares” overseas listed foreign shares of the Company with a nominal value of RMB1.00 each and are listed on the Stock Exchange

“Hisense Beijing” 海信（北京）電器有限公司 (Hisense (Beijing) Electric Company Limited) , a company incorporated under the laws of the PRC with limited liability

“Hisense Electric” 青島海信電器股份有限公司 (Hisense Electric Co., Ltd.), a company incorporated under the laws of the PRC with limited liability and listed on the Shanghai Stock Exchange — 3 —

DEFINITIONS

“Hisense Electronic”	青島海信電子產業控股股份有限公司(Qingdao Hisense
	Electronic (Holding) Company Limited), a joint stock limited
	company incorporated in the PRC, the shareholding of which
	is owned as to 55.58% by Hisense Group Co., 39.84% by the
	management group of Hisense Group Co. and 4.58% by the
	labour union of Hisense Group Co.
“Hisense International”	海信國際控股有限公司(Hisense International (Holding)
	Company Limited), a limited company incorporated in the
	British Virgin Islands, a wholly-owned subsidiary of Hisense
	Electronic
“Hisense Group”	Hisense Group Co. and its Subsidiaries but excluding members
	of the Target Group
“Hisense Group Co.”	海信集團有限公司(Hisense Group Company), a state-owned
	enterprise incorporated under the laws of the PRC with limited
	liability and under the auspices of the Qingdao Municipal State-
	owned Assets Supervision and Administrative Committee（青
	島市國有資產監督管理委員會）
“Hisense Nanjing”	海信（南京）電器有限公司(Hisense (Nanjing) Electric
	Company Limited), a company incorporated under the laws of
	the PRC with limited liability
“Hisense Marketing”	青島海信營銷有限公司(Qingdao Hisense Marketing
	Company Limited), a company incorporated in the PRC with
	limited liability
“Hisense Marketing	The assets and business operation of Hisense Marketing for
Business”	and in relation to the operation of sales and marketing of the
	white goods products produced by Hisense Shandong, Hisense
	Zhejiang, Hisense Beijing and its subsidiary, Hisense Nanjing
“Hisense Shandong”	海信（山東）空調有限公司(Hisense (Shandong) Air-
	conditioning Company Limited), a company established under
	the laws of the PRC with limited liability
“Hisense Zhejiang”	海信浙江空調有限公司(Hisense Zhejiang Air-conditioning
	Company Limited), a limited liability company incorporated
	under the laws of the PRC
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“IASB”	International Accounting Standards Board
	— 4 —

DEFINITIONS

• “IFRS” International Financial Reporting Standards adopted by the IASB

• “IFRS 2007 Profit the profit forecasts of the Kelon Group and the Target Group Forecasts” and the pro forma profit forecast of the Enlarged Group for the year ending 31 December 2007 prepared in accordance with IFRS

• “IFRS 2008 Profit the profit forecasts of the Target Group and the Enlarged Group Forecasts” for the year ending 31 December 2008 prepared in accordance with IFRS

• “IFRS Profit Forecasts” the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts

• “Independent Financial Access Capital Limited, a corporation licensed under the SFO Adviser” for carrying out type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities, being the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver

• “Independent Shareholder(s)” Shareholders other than Qingdao Hisense, its associates and parties acting in concert with it and any person who is involved in, or interested in, the Acquisition and/or the Whitewash Waiver, who are entitled to attend and vote at the relevant shareholders’ meeting of the Company under the applicable laws and regulations and the Articles of Association

• “Independent Third Parties” to the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, third parties independent of the Company and its connected persons

• “Kelon Group” collectively, the Company and its subsidiaries from time to time

• “Latest Practicable Date” 28 December 2007, being the latest practicable date for ascertaining certain information contained in this circular prior printing of this circular

• “Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange

— 5 —

DEFINITIONS

“Nanjing Yilaite”	南京伊萊特高新科技工業園有限責任公司(Nanjing Yilaite
	High and New Technology Industrial Park Company Limited)
	(formerly known as南京蘇寧高新科技工業園有限公司
	(Nanjing Suning High-Tech Industrial Park Co. Ltd.), an
	independent third party
“Non-exempt Continuing	the continuing connected transactions to be carried out pursuant
Connected Transactions”	to the Business Co-operation Framework Agreement that are
	subject to the reporting, announcement and independent
	shareholders’ approval requirements under Chapter 14A of the
	Listing Rules
“PRC”	the People’s Republic of China
“PRC Enlarged Group	the pro forma forecasts of the net profit attributable to equity
Profit Forecasts”	holders of the Company for the two years ending 31 December
	2008 prepared in accordance with PRC GAAP and on the bases
	and assumptions set out in “PRC Target Group Profit Forecasts
	and PRC Enlarged Group Profit Forecasts” in the section headed
	“Letter from the Board” in this circular
“PRC GAAP”	generally accepted accounting principles in the PRC
“PRC Profit Forecasts”	the PRC Target Group Profit Forecasts and the PRC Enlarged
	Group Profit Forecasts
“PRC Report”	the report on the Acquisition in draft form dated 28 December
	2007 published by the Company in the PRC in accordance
	with PRC regulatory requirements
“PRC Target Group	the pro forma forecasts of the net profit attributable to equity
Profit Forecasts”	holders of the Company for the two years ending 31 December
	2008 prepared in accordance with PRC GAAP and on the bases
	and assumptions set out in “PRC Target Group Profit Forecasts
	and PRC Enlarged Group Profit Forecasts” in the section headed
	“Letter from the Board” in this circular
“Qingdao Hisense”	青島海信空調有限公司(Qingdao Hisense Air-conditioning
or “Vendor”	Company Limited), a company incorporated in the PRC with
	limited liability, the shareholding of which is owned as to
	93.33% by Hisense Electronic and 6.67% by Hisense
	International

— 6 —

DEFINITIONS

“Relevant Subsidiaries”	means Hisense Beijing, Hisense Nanjing, Hisense Shandong
	and Hisense Zhejiang which will become Subsidiaries of the
	Company upon Completion and “Relevant Subsidiary” shall
	mean any one of them
“RMB”	Renminbi yuan, the lawful currency of the PRC
“SEC”	佛山市順德區經濟諮詢公司(Shunde Economic Consultancy
	Company), a state-owned enterprise incorporated under the laws
	of the PRC with limited liability
“SFC”	Securities and Futures Commission of Hong Kong
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the Laws
	of Hong Kong)
“Share Reform Proposal”	the share reform proposal of the Company in relation to the
	conversion of the non-freely transferable Shares into listed
	Shares, which was approved by the Shareholders eligible to
	vote thereon on 29 January 2007 and implemented on 29 March
	2007. Particulars of the proposal were set out in the
	announcements of the Company dated 19 and 28 December
	2006, 29 January 2007 and 26 March 2007
“Shareholders”	holders of Shares
“Shares”	Share(s) of RMB1.00 each in the capital of the Company,
	comprising the A Shares and the H Shares
“Shenzhen Stock Exchange”	Shenzhen Stock Exchange（深圳證券交易所）of the PRC
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subsidiary” or	has the meaning defined in sections 2 and 2B of the Companies
“Subsidiaries”	Ordinance (Cap. 32 of the Laws of Hong Kong)
“substantial shareholder”	has the meaning ascribed to it under the Listing Rules
“Takeovers Code”	The Hong Kong Code on Takeovers and Mergers
“Takeover Procedures”	上市公司收購管理辦法(the Administration of the Takeover
	of Listed Companies Procedures) promulgated by CSRC on 31
	July 2006

— 7 —

DEFINITIONS

• “Target Group” 55% of the equity interests in Hisense Beijing which in turn holds 60% of the equity interests in Hisense Nanjing, 100% of the equity interests in Hisense Shandong, 51% of the equity interests in Hisense Zhejiang, and the Hisense Marketing Business

• “Tsingdao SASAC” 青島市國有資產監督管理委員會 (Tsingdao State-owned Assets Supervision and Administrative Committee)

• “White Goods” the general term by which white-coloured household electrical appliances are commonly known which include, but not limited to, air-conditioners and refrigerators

• “White Goods Business” the White Goods business operated by the Target Group

• “Whitewash Waiver” a waiver in respect of the obligation on Qingdao Hisense and parties acting in concert with it to make a mandatory offer to the Shareholders to acquire the Shares in issue not already owned or agreed to be acquired by Qingdao Hisense and parties acting in concert with it as a result of the issue of the Consideration Shares, in accordance with Note 1 on dispensations from Rule 26 of the Takeovers Code

• “Xuehua Group” Beijing Xuehua Group Company Limited（北京雪花電器集團 公司）, an independent third party

• “Zhejiang Xianke” Zhejiang Xianke Electrical Appliance Manufacturing Co., Ltd. （浙江先科電器製造有限公司）, an independent third party

• “%” Per cent.

EXCHANGE RATE CONVERSION

For reference purposes only and except as otherwise noted, this circular contains translations of Renminbi amounts into Hong Kong dollars at a rate of HK$1.00 = RMB0.95449. Such translations are for reference only and no representation is made, and none should be construed as being made, that the Renminbi amounts set out in this circular could have been or could be converted into Hong Kong dollars, as the case may be, at any particular rate on such date or any other date.

PRC COMPANY NAMES

The English names of companies incorporated or established in the PRC as disclosed in this circular are translation of their respective official Chinese names for identification purposes only.

— 8 —

EXPECTED TIMETABLE

Expected Timetable (Note)

Date of despatch of this circular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 December 2007

Latest time for lodging transfer of Shares in order to qualify for attendance at the EGM

and CSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 January 2008

Register of members of the Company closes (both dates inclusive) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 January 2008 to 15 February 2008

Latest time for returning the reply slip for the EGM . . . . . . . . . . . . 5:00 p.m., 25 January 2008

Latest time for returning the reply slip for the class meeting of the H Shareholders . . . . . . . . . . . . . . . . . . . . 5:00 p.m., 25 January 2008

Latest time for lodging proxy forms for the EGM . . . . . . . . . . . . . 2:00 p.m., 14 February 2008 Latest time for lodging proxy forms for the

class meeting of the H Shareholders . . . . . . . . . . . . . . . . . . . . . . 3:00 p.m., 14 February 2008 Time and date of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2:00 p.m., 15 February 2008 Time and date of the class meeting of the

A Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2:30 p.m., 15 February 2008 (or immediately after the conclusion or adjournment of the EGM) Time and date of the class meeting of the H Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3:00 p.m., 15 February 2008 (or immediately after the conclusion or adjournment of the class meeting of the A Shareholders)

Publication of results of the EGM and the class meetings . . . . . . . . . . . . . . . 18 February 2008

Note: If there is any change of the above expected timetable, a separate announcement will be made by the Company.

— 9 —

LETTER FROM THE BOARD

HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED 海信科龍電器股份有限公司

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

Executive Directors:

Mr. Tang Ye Guo

Mr. Yang Yun Duo

Mr. Wang Shi Lei Ms. Yu Shu Min Mr. Lin Lan

Ms. Liu Chun Xin

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 3104-06 Singga Commercial Centre No. 148 Connaught Road West Hong Kong

31 December 2007

To the Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION:

ACQUISITION OF THE TARGET GROUP FROM QINGDAO HISENSE AIR-CONDITIONING COMPANY LIMITED CONTINUING CONNECTED TRANSACTIONS APPLICATION FOR WHITEWASH WAIVER AND PROPOSED AMENDMENTS TO ARTICLES OF ASSOCIATION

INTRODUCTION

On 28 December 2007, the Company announced that, it (as purchaser) has entered into the Acquisition Agreement with Qingdao Hisense (as vendor), for the acquisition of the interest in the Target Group which operates the White Goods Business.

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LETTER FROM THE BOARD

The purpose of this circular is:

• (a) to provide you with further information on, among other things, the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver;

• (b) to provide you with the recommendations of the Independent Board Committee in respect of the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver;

• (c) to provide you with the advice of Access Capital Limited, the independent financial advisers, to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver; and

• (d) to provide you with the notices of the EGM and CSM which have been convened for the purposes of considering and, if thought fit, approving the Acquisition and the transactions contemplated thereunder, the Non-exempt Continuing Connected Transactions, the proposed amendments to the Articles of Association, the authorisation to the Board to deal with all matters relating to the allotment and issue of Consideration Shares, the Whitewash Waiver and the CSRC Waiver.

Shareholders should be aware that the Acquisition is conditional upon a number of Conditions as set out in the paragraph headed “Conditions to Completion” below and the Acquisition may or may not proceed. In particular, the granting of (i) the Whitewash Waiver by the Executive and (ii) the CSRC Waiver, is subject to the approval by the Independent Shareholders at the EGM by way of poll.

THE ACQUISITION AGREEMENT

Parties

Purchaser: The Company Vendor: Qingdao Hisense Date: 28 December 2007

Assets to be acquired:

• (1) 55% of the equity interests in Hisense Beijing, which in turn holds 60% of the equity interests in Hisense Nanjing;

• (2) 100% of the equity interests in Hisense Shandong;

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LETTER FROM THE BOARD

• (3) 51% of the equity interests in Hisense Zhejiang; and

• (4) Hisense Marketing Business

Consideration

The consideration for the Acquisition is RMB2,541,400,000 (equivalent to approximately HK$2,662,573,730), which has been arrived at after arm’s length negotiations between the parties with reference to various factors including, but not limited to, the financial results, the earnings potential and the prospects of the Target Group, the preliminary valuation of the Target Group by an independent firm of qualified PRC valuers, the interests of the A Share and H Share Shareholders of the Company and other similar transactions on the market. When considering such factors, the Vendor and the Company have reviewed various data available to them, for example, the financial information disclosed in the Announcement and this circular for this Acquisition, industry information, market trading data of comparable listed companies, analysis provided by their respective advisers, etc.

The Company and Qingdao Hisense agreed that, if the audited net asset value in accordance with PRC GAAP of the Target Group as at the Completion Date is less than its audited pro forma net asset value in accordance with PRC GAAP as at 30 June 2007, Qingdao Hisense shall pay for the amount of such shortfall in cash to the Company. If the audited net asset value in accordance with PRC GAAP of the Target Group as at the Completion Date is more than its audited pro forma net asset value in accordance with PRC GAAP as at 30 June 2007, the Company will pay such excess amount to Qingdao Hisense, where such cash payment will be satisfied by the internal resources of the Kelon Group.

The calculation of the difference is set out as follows:

The audited net asset value in accordance with PRC GAAP of the Target Group as at the Completion Date minus the audited pro forma net asset value in accordance with PRC GAAP of the Target Group as at 30 June 2007.

The “audited pro forma net asset value” is the audited net asset value attributable to equity holders of the Target Group, i.e. net asset value net of minority interests.

The audit for the net asset value of the Target Group will be carried out on the last day of the month in which the Acquisition has completed. Although it takes time for the audit work to perform on the net asset value of the Target Group and the audited net asset value will not be available upon Completion, the finalization of the audit on the net asset value of the Target Group will not affect the completion of the Acquisition as the adjustment to the consideration would be done after Completion.

Based on the information currently available to the Company, it is currently estimated that, subject to the audit for the net asset value of the Target Group to be carried out as specified above, the amount to be paid by the Company to Qingdao Hisense will be no more than approximately RMB53,500,000 (equivalent to approximately HK$56,050,875). A further announcement will be made by the Company if there is any adjustment to the consideration as required under the Acquisition Agreement.

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LETTER FROM THE BOARD

Payment method

The consideration will be satisfied in full by the allotment and issue of 364,097,421 Consideration Shares by the Company to Qingdao Hisense at the issue price of RMB6.98 (equivalent to approximately HK$7.31) per Consideration Share. The Consideration Shares shall be issued as fully paid and shall rank pari passu in all respects with the A Shares in issue (including the right to any dividend declared on or after the date on which the Consideration Shares will be issued).

The Consideration Shares represent approximately 36.70% of the Company’s existing issued share capital and approximately 26.85% of the Company’s issued share capital as enlarged by the issue of the Consideration Shares.

The issue price

The issue price of RMB6.98 (equivalent to approximately HK$7.31) per Consideration Share was determined after arm’s length negotiations between the Company and Qingdao Hisense with reference to the arithmetic average of the weighted average price of the Company’s A Shares as quoted on the Shenzhen Stock Exchange for the 20 trading days immediately preceding its suspension of trading on 4 September 2007. It represents

• (a) a discount of approximately 11.4% over RMB7.88 (equivalent to approximately HK$8.26), the closing price of the A Shares on the Shenzhen Stock Exchange on 3 September 2007, being the last trading day immediately prior to the suspension of trading in the A Shares on 4 September 2007;

• (b) a discount of approximately 2.93% over RMB7.191 (equivalent to approximately HK$7.53), the average closing price of the A Shares on the Shenzhen Stock Exchange for the last 10 trading days immediately prior to the suspension of trading in the A Shares on 4 September 2007;

• (c) a premium of approximately 0.22% over RMB6.965 (equivalent to approximately HK$7.30), the average closing price of the A Shares on the Shenzhen Stock Exchange for the last 30 trading days immediately prior to the suspension of trading in the A Shares on 4 September 2007; and

• (d) a premium of approximately 721% over HK$0.89 (equivalent to approximately RMB0.85), the closing price of the H Shares on the Stock Exchange on 15 June 2005, being the last trading day immediately prior to the suspension of trading in the H Shares on 16 June 2005.

Corporate Structure before and after Completion

The following diagrams illustrate the corporate and shareholding structure of the Kelon Group and Hisense Group immediately before and after Completion.

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LETTER FROM THE BOARD

Structure of the Hisense Group and the Kelon Group

Immediately before Completion

==> picture [353 x 170] intentionally omitted <==

==> picture [313 x 94] intentionally omitted <==

==> picture [62 x 100] intentionally omitted <==

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LETTER FROM THE BOARD

Immediately after Completion

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Conditions to Completion

Completion is subject to, among other things, the following Conditions set out in the Acquisition Agreement being satisfied or waived:

• (a) the continued listing of the A Shares and H Shares on the Shenzhen Stock Exchange and the Stock Exchange, respectively;

• (b) the approval by the Independent Shareholders at the EGM of (i) the Acquisition by the Company and (ii) the Whitewash Waiver and the CSRC Waiver;

• (c) the approval by the Independent Shareholders of H Shares eligible to attend and vote at the CSM of the Acquisition by the Company;

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LETTER FROM THE BOARD

• (d) the approval by the Independent Shareholders of A Shares eligible to attend and vote at the class meeting of A Shareholders of the Acquisition by the Company;

• (e) the Executive granting to Qingdao Hisense and parties acting in concert with it the Whitewash Waiver;

• (f) the granting of the following approvals from the relevant PRC regulatory authorities in accordance with the applicable PRC laws:

• (i) the approval to the Company by CSRC of the Acquisition and the issue of Consideration Shares and the granting of the CSRC Waiver; and

• (ii) the approval of the Acquisition by the Ministry of Commerce of the PRC;

• (g) the relevant approval from Hong Kong authorities in accordance with the rules and regulations in Hong Kong (if any);

• (h) the granting of the following third party consents:

• (i) the consent of major creditors of each of the Company and Qingdao Hisense to the Acquisition;

• (ii) the waiver by holders of pre-emptive rights in relation to the interests in the Target Group of their pre-emptive rights; and

• (iii) permission by any third party who has rights under the Acquisition.

• (i) the representations and warranties given by Qingdao Hisense and the Company to each other in the Acquisition Agreement remaining true and accurate.

Pursuant to the Acquisition Agreement, if any of the Conditions is not fulfilled by the parties to the Acquisition Agreement within 12 months from the approvals referred to in (b), (c) and (d) above (or such later date as the parties to the Acquisition Agreement may agree in writing), the Acquisition Agreement will lapse and all obligations and liabilities of all parties thereunder will cease.

Completion

Completion is expected to take place on the last business day of the month following the month in which the last of all the Conditions have been fulfilled.

Although the Completion is not subject to confirmation by Tsingdao SASAC, the valuation of the Target Group prepared by the Asset Valuer needs to be filed to Tsingdao SASAC.

Following Completion, Hisense Beijing, Hisense Nanjing, Hisense Shandong and Hisense Zhejiang will become subsidiaries of the Company and their financial results will be consolidated into the financial statements of the Kelon Group.

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LETTER FROM THE BOARD

Undertakings

Qingdao Hisense has undertaken that it will not dispose of the Consideration Shares within 36 months after the allotment and issue and the registration of the Consideration Shares with the Shenzhen branch of China Securities Depository and Clearing Corporation Limited.

Qingdao Hisense agreed that after Completion, it and its controlled entities will not participate or engage in any new businesses which compete or may compete with the existing businesses of the Target Group and the Kelon Group.

SHAREHOLDING STRUCTURE OF THE COMPANY BEFORE AND AFTER THE COMPLETION

Set out below is a table showing, for the purpose of illustration, the shareholding structure of the Company before and after the issue of the Consideration Shares and assuming completion of the Share Reform Proposal, and that save for the Consideration Shares, no further Shares will be issued by the Company after the date of this circular until Completion:

							Upon completion of	Upon completion of		Upon completion of
							the Share Reform Proposal			the Share Reform Proposal	and
				Upon completion of			and the	issue of Consideration		the issue of Consideration Shares
		As at the Latest		the Share Reform Proposal and			Shares and the repayment			and the repayment of
Shareholders		Practicable Date		the issue of Consideration Shares			of the Borrowed Shares			the Borrowed Shares and
								(Notes 1 and 2)		the Donation(Notes 1, 2 and		3)
	Type of			Type of			Type of			Type of
	Shares	Shares	%	Shares	Shares	%	Shares	Shares	%	Shares Shares		%
Qingdao Hisense	A Shares	238,872,074	24.08	A Shares	602,969,495	44.46	A Shares	608,198,402	44.85	A Shares 598,473,352		44.13
(and parties acting in
concert with it)
SEC	A Shares	68,666,667	6.92	A Shares	68,666,667	5.06	A Shares	63,923,804	4.71	A Shares 63,923,804		4.71
Dongheng	A Shares	7,036,894	0.71	A Shares	7,036,894	0.52	A Shares	6,550,850	0.48	A Shares 6,550,850		0.48
Public A Shareholders	A Shares	217,841,120	21.96	A Shares	217,841,120	16.07	A Shares	217,841,120	16.07	A Shares 227,566,170		16.79
Public H Shareholders	H Shares	459,589,808	46.33	H Shares	459,589,808	33.89	H Shares	459,589,808	33.89	H Shares 459,589,808		33.89
Total		992,006,563	100.00		1,356,103,984	100.00		1,356,103,984	100.00	1,356,103,984	100.00

Notes:

• (1) Please refer to the section headed “Implications of the Takeovers Code and Whitewash Waiver” below for details of the Share Reform Proposal.

• (2) As SEC and Dongheng, both being holders of the Company’s non-freely transferable Shares prior to the implementation of the Share Reform Proposal, did not explicitly express that they would involve in the share reform, Qingdao Hisense has advanced the Borrowed Shares on behalf of SEC and Dongheng for distribution to eligible A Shareholders. Subsequently, they should repay the Borrowed Shares advanced by Qingdao Hisense or obtain its consent before the Shares held by SEC and Dongheng can be listed and transferred.

• (3) Qingdao Hisense has undertaken to make a Donation under certain circumstances pursuant to the Share Reform Proposal as set out in the announcement of the Company dated 19 December 2006, including the circumstance where the Acquisition cannot be completed on or before 28 March 2008.

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LETTER FROM THE BOARD

As at the date of this circular, the Company has not issued any convertible securities, options, warrants or other similar rights.

As described in the paragraph headed “Payment method” above, the Company has agreed to issue 364,097,421 Consideration Shares to Qingdao Hisense to satisfy the consideration payable by the Company under the Acquisition Agreement. Qingdao Hisense is expected to be directly or indirectly interested in approximately 44.46% in the share capital of the Company immediately after the Completion as enlarged by the issue of the Consideration Shares. The issue of the Consideration Shares will result in Qingdao Hisense becoming the controlling shareholder (as defined under the Listing Rules) of the Company.

Save as disclosed above, Qingdao Hisense and parties acting in concert with it do not hold any other securities of the Company.

INFORMATION OF THE COMPANY

The Company is principally engaged in the manufacture and sales of refrigerators and airconditioners.

INFORMATION OF THE TARGET GROUP

The Target Group is principally engaged in manufacturing and sales of air-conditioners and refrigerators in the PRC.

Air-conditioner manufacturing

The Target Group’s air-conditioner manufacturing operation was primarily carried out through Hisense Shandong and Hisense Zhejiang.

In 2006, the annual output of air-conditioners of these two companies is over 1.6 million sets.

(1) Hisense Shandong

Background

Name:

Hisense Shandong

Address: Qingdao Pingdu Nanzhen Resident Hisense Road No. 1 Legal representative: Wang Shi Lei Registered capital: RMB500,000,000 Nature of the Enterprise: single person company with limited liability

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LETTER FROM THE BOARD

Business scope:

Research and development, manufacturing and sales of air-conditioning product, plastic injection mould and product after-sales maintenance services

Term of operation: 8 November 2007 to 7 November 2017

Hisense Shandong took over all the production and sales operations of air-conditioning business of Qingdao Hisense and is primarily engaged in manufacture and sale of airconditioners.

(2) Hisense Zhejiang

1. Background

Name: Hisense Zhejiang Address: Changxing County Economic and Technological Development Zone, north of Central Avenue Legal representative: Wang Shi Lei Registered capital: RMB110,000,000 Nature of the Enterprise: company with limited liability (foreign funded enterprises) Business scope: production of air-conditioners and the manufacturing and sales of other household appliances, provision of related technical services, import and export of goods and technology Term of operation: 22 April 2005 to 21 April 2020

2. History

On 8 April 2005, Qingdao Hisense and Zhejiang Xianke jointly established Hisense Zhejiang as a joint venture with a registered capital of RMB110,000,000. Qingdao Hisense contributed a total of RMB56,100,000, of which RMB34,100,000 in cash and RMB22,000,000 of which in intangible assets, (representing 51% of the registered capital of Hisense Zhejiang); Zhejiang Xianke contributed by way of land and tangible assets such as equipment and apparatus with the value of RMB53,900,000 (representing 49% of the registered capital of Hisense Zhejiang).

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LETTER FROM THE BOARD

3. Operating business

The major business of Hisense Zhejiang is the manufacturing of household airconditioners and related products. Hisense Zhejiang has equipment such as advanced auto Helium Leak Detectors, and equipped with advanced integrated production and inspection line, quality assurance system established according to international quality accreditation standard and reformed management system. It is the second largest variable-frequency air-conditioners production base in the PRC. Through continuous expansion, Hisense Zhejiang is expected to have an annual production capacity of 2 million sets of variable-frequency air-conditioners. Hisense Zhejiang produced 300,000 sets of vaicable-frequency air-conditioners in 2006 as compared to 100,000 sets in 2005.

Refrigerator manufacturing

The Target Group’s refrigerator manufacturing operation is primarily conducted through Hisense Beijing and its subsidiary, namely Hisense Nanjing.

(1) Hisense Beijing

1. Background

Name: Hisense Beijing

Address: Beijing Daxing District Qingyuan Road No. 36 Legal representative: Su Yu Tao Registered capital: RMB85,710,000 Nature of the Enterprise: company with limited liability Business scope: manufacture and sales of refrigerators products and other household appliances products; operation of the export business of self-produced products and technologies of the enterprise and other members enterprises; import of the raw materials, machines and facilities, equipment and apparatuses, parts and technologies required for the production processes of the enterprise and its member enterprise (except goods and technologies operated by enterprises specified by the government or prohibited for import and export); operation of raw material processing and compensation trade.

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LETTER FROM THE BOARD

2. History

On 13 June 2002, Hisense Group Co. and Xuehua Group jointly established Hisense Beijing Company as a joint venture with a registered capital of RMB85,710,000. Hisense Group Co. contributed a total of RMB47,140,500 in cash and intangible assets (representing 55% of the registered capital of the company), in which intangible assets accounted for RMB17,140,500; Xuehua Group contributed by way of land and equipment with the value of RMB38,569,500 (representing 45% of the registered capital of the company).

On 12 September 2002, Hisense Group Co. transferred its entire 55% equity interests in Hisense Beijing to Hisense Electric. On 12 October 2007, the transfer of the 55% equity interests in Hisense Beijing to Qingdao Hisense was approved at the general meeting of Hisense Electric.

3. Operating business

The major business of Hisense Beijing is the research and development and manufacture of refrigerator products. In 2006, the refrigerators production capacity of Hisense Beijing was 900,000 sets, and the refrigerators production capacity of 2007 reaches approximately 1,000,000 sets.

(2) Hisense Nanjing

1. Background

Name: Hisense Nanjing Legal representative: Su Yu Tao Registered capital: RMB128,691,500 Business scope: research and development, manufacture, sales and marketing of chlorine-free freezing products. Import and export business for self-operation and agency business of various goods and technologies (except goods and technologies operated by enterprises specified by the State or prohibited for import and export).

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LETTER FROM THE BOARD

2. History

Hisense Nanjing was established by Hisense Beijing and Nanjing Yilaite on 18 November 2004 as a joint venture with a registered capital of RMB80,580,000, of which Hisense Beijing contributed RMB36,260,000 in monies and RMB12,090,000 in non-patent assets (representing 60% of the registered capital of the company) and Nanjing Yilaite contributed by way of land use rights with the value of RMB32,230,000 (representing 40% of the registered capital of the company).

On 20 August 2006, Hisense Beijing and Nanjing Aipulaisi High and New Technology Industrial Park Company Limited entered into the “Hisense (Nanjing) Electric Company Limited Phase 2 Capital Injection Agreement”, pursuant to which Hisense Beijing injected additional capital to Hisense Nanjing with RMB21,650,200 in cash and RMB7,216,700 in intangible assets, while Nanjing Aipulaisi High and New Technology Industrial Park Company Limited contributed with equipment with the value of RMB19,244,600 to Hisense Nanjing. After this capital injection, the registered capital of Hisense Nanjing increased to RMB128,691,500 without changes to the respective proportion of interests of the two parties.

3. Operating business

The major business of Hisense Nanjing is the research and development and manufacture of refrigerator products. In 2006, the production capacity of Hisense Nanjing was 500,000 sets, and in 2007, the production capacity of Hisense Nanjing reaches approximately 550,000 sets.

White Goods sales and marketing

Hisense Marketing Business

Hisense Marketing Business comprise the assets of Hisense Marketing mainly for use in the sales and marketing operations of the White Goods products produced by Hisense Shandong, Hisense Zhenjiang, Hisense Beijing and its subsidiary, Hisense Nanjing.

The entities and businesses comprising the Target Group were commonly controlled by Hisense Group Co., the ultimate holding company of the Target Group, for the three years ended 31 December 2006 and the six months ended 30 June 2007. The unaudited combined financial information of the Target Group has been prepared on the basis as if the entities and the businesses comprising the Target Group had formed a group and such group structure had been in existence throughout the period, or since their respective dates of incorporation or establishment.

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LETTER FROM THE BOARD

The combined income statements of the Target Group have been prepared as if the current structure had been in existence throughout the period or since their respective dates of incorporation or establishment, whichever is earlier. The combined balance sheets of the Target Group as at 31 December 2004, 2005, 2006 and 30 June 2007 have been prepared to present the assets and liabilities as if the current structure of the Target Group had been in existence as at the above-mentioned dates.

Since Hisense Shandong took over the production and sales operations of air-conditioning business of Qingdao Hisense gradually from 8 November 2007, the combined financial information of the Target Group includes the track record of the air-conditioning business of Qingdao Hisense.

The Acquisition is considered as a business combination involving entities under common control because the Company and the Target Group are ultimately controlled by Hisense Group Co. both before and after the Acquisition, and that control is not transitory. Such business combination under common control is outside the scope of IFRS 3 “Business Combinations” issued by IASB. In the absence of a standard under IFRSs in relation to the accounting for business combinations under common control, Accounting Guideline 5 “Merger Accounting for Common Control Combinations” issued by Hong Kong Institute of Certified Public Accountants, being pronouncements of standard-setting bodies other than the IASB that use a similar conceptual framework, is referred to in accounting for the Acquisition.

Hisense Group Co. exercises its control over the Kelon Group through Qingdao Hisense, the largest shareholder of the Company who currently holds approximately 24.08% equity interest in the Company, and upon completion of the anticipated Acquisition will hold approximately 44.46% equity interest in the Company, is considered the ultimate holding company of the Kelon Group. Hisense Group Co. has control over the Kelon Group by virtue of Qingdao Hisense’s power to govern the financial and operating policies of the Kelon Group so as to obtain benefits from the activities of the Kelon Group through its power to cast majority votes at the meetings of the board of directors of the Company as prescribed under IFRS 3 and its de facto control over the majority of the voting rights of the Company’s shareholders’ meetings as commented by IASB in the IASB Update issued in October 2005.

The summary financial information of the Target Group for the three years ended 31 December 2004, 2005 and 2006 and the six months ended 30 June 2007, respectively as extracted or derived from the audited combined financial statements of the Target Group prepared in accordance with all applicable IFRS are set out as follows:

	As at	As at	As at	As at
	31 December	31 December	31 December	30 June
	2004	2005	2006	2007
	(RMB’000)	(RMB’000)	(RMB’000)	(RMB’000)
Total assets	1,522,948	2,314,463	2,156,318	3,470,192
Total liabilities	1,368,835	1,827,100	1,590,276	2,839,353
Net assets	154,113	487,363	566,042	630,839

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LETTER FROM THE BOARD

	For the year	For the year	For the year	For the
	ended	ended	ended	six months
	31 December	31 December	31 December	ended 30 June
	2004	2005	2006	2007
	(RMB’000)	(RMB’000)	(RMB’000)	(RMB’000)
Revenue	2,785,751	4,140,333	4,452,551	2,891,969
Gross Profit	611,321	814,247	1,073,100	716,363
Profit before taxation	78,261	144,862	96,213	107,791
Profit after taxation	77,340	109,500	59,435	67,027

Management’s discussion and analysis of financial condition and results of operation

Management’s discussion and analysis of the financial condition and results of operation of Target Group for the three years ended 31 December 2004, 2005 and 2006 and six months ended 30 June 2007, respectively is set out in Appendix III to this circular.

ASSET VALUATION OF THE TARGET GROUP

In accordance with PRC regulatory requirements including “上市公司重大購買、出售、置 換資產報送材料內容與格式 ” (the Required Documents and Format for the Notice for Arrangement regarding Major Acquisition, Disposal, Asset Swap) attaching to the “關於上市 公司重大購買、出售、置換資產若干問題的通知 ” (the Notice for Arrangement regarding Major Acquisition, Disposal, Asset Swap) and the “企業國有產權轉讓管理暫行辦法 ” (Provisional Measures for Transfer of State-owned Asset in Enterprises), a valuation of the Target Group has to be prepared by an independent firm of qualified PRC valuers, which valued 100% of Hisense Shandong, 51% of Hisense Zhejiang, 55% of Hisense Beijing (including the respective interests in Hisense Nanjing) and 100% of Hisense Marketing Business at approximately RMB1,498.07 million, approximately RMB168.84 million, approximately RMB365.55 million and approximately RMB508.95 million, as of 30 June 2007.

The Asset Valuer has used the income approach in its valuation of Hisense Shandong, Hisense Zhejiang and Hisense Beijing (including Hisense Nanjing). In addition, the Asset Valuer has used the cost approach in its valuation of Hisense Marketing Business. According to the Asset Valuer, both approaches are among the most recognised valuation approaches for state-owned assets in the PRC.

By adopting the income approach, the Asset Valuer has derived values of the businesses of each of Hisense Shandong, Hisense Zhejiang and Hisense Beijing (including Hisense Nanjing) by aggregating the net present value of a stream of five and half year projected net profit commencing from 1 July 2007 and the terminal value of such businesses. In addition, by adopting the cost approach, the Asset Valuer has derived a value of the business of Hisense Marketing Business by estimating the market value as at 30 June 2007 of each asset and liabilities of Hisense Marketing Business.

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LETTER FROM THE BOARD

The Asset Valuer has made the following major assumptions in the valuation:

1. The relevant entities continue as a going concern, and their senior management, business structure and major businesses are relatively stable;

2. All information provided by the relevant entities is true, legal and complete;

3. The accounting system adopted by the relevant entities is basically consistent with the accounting system applied in the calculation of relevant data in the course of valuation at all material aspects;

4. The scope of operation, ways of operation and modes of management of the relevant entities are consistent, subject to appropriate adjustments and innovations with economic development;

5. There is no dispute over property rights and other economic matters. Future lending rate, tax rate, additional tax rate and income tax rate change within the normal range provided by the State;

6. The economic behavior of the relevant entities comply with State requirements without material defaults;

7. There is no material change in the socio-economic environment of the relevant entities. There is no material change in the laws, regulations and policies of the State and the territory where the relevant entities are located in as compared to the prevailing laws, regulations and policies; and

8. There is no other force majeure and unforeseeable factors which may materially and adversely affect the enterprise.

The valuation of the Target Group has been prepared to provide an indication to the PRC regulators and PRC Shareholders of the business valuation of the Target Group and not as a representation of the level of profit that the Target Group will be able to achieve in any specific period.

Pursuant to Rule 14.61 of the Listing Rules and Rule 11.1(a) of the Takeovers Code, any valuation of assets (other than land and buildings) or businesses acquired by a listed issuer based on discounted cash flows or projections of profits, earnings or cash flows and where it is possible to derive a forecast of profits from such valuations, will normally be regarded as a profit forecast. Accordingly, such valuations of the Hisense Shandong, Hisense Zhejiang and Hisense Beijing (including Hisense Nanjing) will be regarded as profit forecasts, and therefore, the Company is required to comply with Rules 14A.56(8) and 14.62 of the Listing Rules and Rule 10 of the Takeovers Code.

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LETTER FROM THE BOARD

However, such valuations of Hisense Shandong, Hisense Zhejiang and Hisense Beijing (including Hisense Nanjing) by using income approach as valuation method do not comply with the standards required by Rule 14.62 of the Listing Rules or Rule 10 of the Takeovers Code because: (i) the cash flow projections are based on the unaudited management accounts as at 30 September 2007 of Hisense Shandong, as well as unaudited management accounts as at 30 June 2007 of Hisense Zhejiang and Hisense Beijing (including Hisense Nanjing), which have been prepared in accordance with PRC GAAP and do not take into account any adjustments which may have to be made when those management accounts are audited; and (ii) in deriving an intrinsic discounted value, the projections of net profits have been prepared on the assumption that Hisense Shandong, Hisense Zhejiang and Hisense Beijing (including Hisense Nanjing) will operate on a normalised basis. In other words, events which do not arise out of the ordinary course of the existing business of Hisense Shandong, Hisense Zhejiang and Hisense Beijing (including Hisense Nanjing) have not been taken into account, whereas typically when preparing a profit forecast, all foreseeable events and their effects will be taken into consideration in its preparation.

Hence, it is not possible to simply adopt projections of net profits and regenerate a set of profit forecasts.

Furthermore, the Asset Valuer has made certain assumptions about projections of net profits of Hisense Shandong, Hisense Zhejiang and Hisense Beijing (including Hisense Nanjing) based on its own judgment as to what would be appropriate for a company in the same industry, as opposed to applying consistent accounting policies previously adopted by these companies. While the directors of the Target Group have provided information to the Asset Valuer to assist with the preparation of such valuation, neither they nor the Directors have any influence on the Asset Valuer in the preparation of such valuation, including in respect of any projections or estimates. Hence, such valuation should not be regarded as an indication of the forecast profit of the Target Group for any period.

The valuation of the Target Group has been prepared by the Asset Valuer in compliance with PRC regulatory requirements. It does not meet the standards required by Rule 14.62 of the Listing Rules or Rules 10 and 11 of the Takeovers Code. Nevertheless, having considered the information provided in relation to the PRC Valuation and on the basis that the Announcement and this circular contain the profit forecasts of the Target Group for the two years ending 31 December 2008 that are already subject to Rule 14.62 of the Listing Rules, the Stock Exchange is prepared to permit the publication of the result of such valuation in the Announcement and this circular with additional information explaining why such valuation does not meet the standards required by Rule 14.62 of the Listing Rules. In view of the PRC regulatory requirements, the Executive is prepared to permit the publication of the result of such valuation in the Announcement and this circular. Shareholders and potential investors should, however, exercise caution in placing reliance on the result of such valuation in assessing the merits and demerits of the Acquisition and the Whitewash Waiver. A further announcement will be made by the Company in accordance with Rule 13.09(2) of the Listing Rules if and when further information in respect of such valuation is published in the PRC.

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LETTER FROM THE BOARD

PROPERTY INTERESTS OF THE TARGET GROUP

The principal production facilities and administrative offices of the Target Group, being the properties numbered 30-35, 38 and 41 respectively as set out in Appendix VII in this circular, are located in Beijing, Shandong, Jiangsu and Zhejiang in PRC. Those facilities and offices occupy a total site area of approximately 752,499 sq.m. and as at the Latest Practicable Date, had a total gross floor area of approximately 350,195 sq.m..

As at the Latest Practicable Date, the Target Group had not obtained land use right certificate and building ownership certificates in relation to one piece of land and eleven buildings occupied by them in the PRC, the site area of the land and the total gross floor area of the buildings were approximately 50,202 sq.m. and 11,161.1 sq.m. respectively and no commercial value has been attributed to any of the properties mentioned above.

With respect to the above piece of land with site area of approximately 50,202 sq.m., being the property numbered 38, the land use right certificate of which has not been obtained, the Company’s PRC legal advisers have confirmed that the Target Group can not yet apply for the relevant land use right certificate as the Target Group has not fully settled the consideration in accordance with the land use right transfer agreements dated 12 November 2007 entered into between Hisense Zhejiang and Changxing County Bureau. The land is not currently used by the Target Group for production purposes. The Target Group will apply for the relevant land use right certificate once it has fully paid off the consideration.

With respect to two buildings with gross floor area of approximately 7,033.60 sq.m., being the property numbered 32 occupied for manufacturing purpose, the building ownership certificates of which have not been obtained, the Company’s PRC legal advisers have confirmed that the application of relevant building ownership certificates is currently under process.

With respect to four buildings with gross floor area of approximately 3,208.5 sq.m., being the property numbered 33 occupied for manufacturing purpose, the building ownership certificates of which have not been obtained, the Company’s PRC legal advisers have confirmed that such buildings were part of the temporary buildings attached to a piece of land that was contributed as registered capital into Hisense Zhejiang. As no values were attached to these four buildings at the time of transfer, no building ownership certificates were applied by the Target Group in respect of such buildings. Three of the buildings are currently used by the Target Group as temporary staff quarters (which will be demolished). The Target Group will apply for the relevant building ownership certificate for the other building which is currently used by the Target Group as a high voltage power distribution room.

With respect to one building with gross floor area of approximately 525.95 sq.m., being the property numbered 34 occupied for manufacturing purpose, building ownership certificates of which have not been obtained, the Company’s PRC legal advisers have confirmed that the application for relevant building ownership certificates is currently under process.

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LETTER FROM THE BOARD

With respect to four buildings with gross floor area of approximately 393.05 sq.m., being the property numbered 35 occupied for office use, building ownership certificates of which have not been obtained, the Company’s PRC legal advisers have confirmed that the Target Group leased but not owned the building. Therefore, the lack of building ownership certificates of such buildings were due to the fact that the landlord has not provided copy of building ownership certificates for the Target Group’s record.

The Directors are of the view that the lack of land use right certificates and building ownership certificates for the above piece land and buildings have no material effect on the normal production and operations of the Target Group, nor the interests of the Company and its shareholders as a whole.

Particulars of the property interests of the Target Group are set out in the property valuation report of the Enlarged Group in Appendix VII to this circular. Sallmanns (Far East) Ltd. has valued those property interests as at 31 October 2007.

The table below sets forth (i) the reconciliation of the property interests of the Target Group from its accountants’ report as at 30 June 2007 set out in Appendix II to this circular to the unaudited net book value of those property interests as at 31 October 2007; and (ii) the reconciliation of the unaudited net book value of the property interests of the Target Group and the valuation of those property interests as at 31 October 2007.

Net book value of property interests of the Target Group as at 30 June 2007 — Land and buildings — Land use rights Movements for the four months ended 31 October 2007 Additions Depreciation Net book value as at 31 October 2007 Valuation surplus as at 31 October 2007 Valuation as at 31 October 2007 per Appendix VII	RMB’000 277,733 105,862
	383,595
	2,140 4,027
	381,708 105,001
	486,709

Note: The Directors are of the view that the valuation surplus of the properties of the Target Group is due to the fact that the properties of the Target Group is recorded as property, plant and equipment in the accounts but not referring to open market valuation as adopted by the valuer.

FINANCIAL EFFECT OF THE ACQUISITION ON THE TARGET GROUP

In respect of the financial impact of the Acquisition to the Kelon Group, the Directors considered the relevant unaudited pro forma financial information prepared under IFRS as set out in Appendix IV to this circular.

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LETTER FROM THE BOARD

On a pro forma combined basis and compared with the relevant audited financial information of the Kelon Group,

• (i) total net assets as at 30 June 2007 would increase by approximately RMB630.8 million to approximately RMB(88.3) million; and

• (ii) the liabilities would increase by approximately RMB2,379.2 million to approximately RMB8,259.4 million for the year/period ended 30 June 2007.

Prospective financial information of the Target Group and the Enlarged Group

PRC Target Group Profit Forecasts and PRC Enlarged Group Profit Forecasts

In compliance with PRC laws and regulations and pursuant to the requirements of CSRC in respect of substantial acquisitions by PRC listed companies, the Company has published in the PRC Report the PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts prepared on the following assumptions:

• (1) the restructuring of the Target Group have been completed on 1 January 2007 and in the absence of unforeseen circumstances; the pro forma forecast net profit attributable to equity holders of the Target Group for the two years ending 31 December 2008 are approximately RMB79.49 million (equivalent to approximately HK$83.28 million) and RMB106.44 million (equivalent to approximately HK$111.52 million) respectively; and

• (2) the Company acquires the interest of the Target Group and the acquisition having been completed on 1 January 2007 and in the absence of unforeseen circumstances; the pro forma forecast net profit attributable to equity holders of the Enlarged Group for the two years ending 31 December 2008 are approximately RMB383.98 million (equivalent to approximately HK$402.29 million) and RMB236.50 million (equivalent to approximately HK$247.78 million) respectively.

The Directors have prepared the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts based, on the assumption that the Company’s acquisition of the interest of the Target Group having been completed on 1 January 2007 and 1 January 2008, respectively, as well as those assumptions stated respectively in Appendix V and Appendix VI in this circular.

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LETTER FROM THE BOARD

IFRS 2007 Profit Forecasts

The forecast profit of the Kelon Group, the Target Group and the Enlarged Group for the year ending 31 December 2007 will be not less than RMB304.50 million (equivalent to approximately HK$319.02 million), RMB79.49 million (equivalent to approximately HK$83.28 million) and RMB383.98 million (equivalent to approximately HK$402.29 million) respectively. The IFRS 2007 Profit Forecasts, together with the letters issued by the auditors of the Company, are set out in Appendix V to this circular.

IFRS 2008 Profit Forecasts

The forecast profit of the Target Group and the Enlarged Group for the year ending 31 December 2008 will be not less than RMB106.44 million (equivalent to approximately HK$111.52 million) and RMB236.50 million (equivalent to approximately HK$247.78 million) respectively. The IFRS 2008 Profit Forecasts, together with the letter issued by the auditors of the Company, are set out in Appendix VI to this circular.

The IFRS 2007 Profit Forecasts and IFRS 2008 Profit Forecasts are prepared for illustrative purposes only based on the judgments and assumptions of the Directors, and because of its nature, they do not provide any assurance or indication that any event will take place in the future and may not give a true picture of the results of the Enlarged Group for the two years ending 31 December 2008.

Since there was a convergence of PRC GAAP to IFRS starting from 1 January 2007, there is no material reconciling item between the profit forecasts prepared under the PRC GAAP and those prepared under IFRS. The auditors of the Company are of the same view in this regard.

The PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts have been prepared in compliance with PRC laws and regulations and pursuant to the requirements of CSRC. They constitute profit forecasts under Rule 10 of the Takeovers Code. However, the PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts do not meet the standards required by Rule 10 of the Takeovers Code, and the Independent Financial Adviser has not satisfied itself that the PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts have been prepared by the Directors after careful enquiry, due care and consideration and neither have the auditors of the Company satisfied themselves that the PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts, so far as the accounting policies and calculations are concerned, have been properly prepared on the basis of the assumptions made. Nevertheless, in view of the PRC regulatory requirements, the Executive is prepared to permit the publication of the PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts in this circular.

In addition, the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts also constitute profit forecasts under Rule 10 of the Takeovers Code. However, the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts do not meet the standards required by Rule 10 of the Takeovers Code as the Independent Financial Adviser has not satisfied itself that the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts have been

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LETTER FROM THE BOARD

prepared by the Directors after careful enquiry, due care and consideration. In compliance with the Listing Rules, the Directors have confirmed that they have made the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts after due and careful enquiry. The auditors of the Company have satisfied themselves that the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts have been prepared by the Directors, so far as the accounting policies and calculations are concerned and have been properly prepared on the basis of the assumptions made. Nevertheless, in view of the PRC regulatory requirements, the Executive is prepared to permit the publication of the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts in the Announcement and this circular. Shareholders and potential investors should, however, exercise caution in placing reliance on the PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts as well as the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts in assessing the merits and demerits of the Acquisition and the Whitewash Waiver.

Pro forma financial information of the Enlarged Group

The unaudited pro forma financial information of the Enlarged Group as at 30 June 2007, which has been prepared in accordance with IFRS and in compliance with Rule 4.29 of the Listing Rules, is set out in Appendix IV to this circular.

In compliance with PRC regulatory requirements, the Company has published the audited pro forma income statements for the three years ended 31 December 2004, 2005, 2006 and six months ended 30 June 2007 and audited pro forma balance sheets as at 31 December 2004, 2005, 2006 and 30 June 2007 of the Enlarged Group prepared in accordance with PRC GAAP in the PRC Report.

Shareholders and potential investors are advised to exercise caution in placing reliance on such pro forma financial information, and to refer, instead, to the unaudited pro forma financial information of the Enlarged Group for the six months ended 30 June 2007 prepared in accordance with IFRS and the IFRS 2007 Profit Forecasts prepared in accordance with IFRS as included in Appendix V to this circular in assessing the merits and demerits of the Acquisition and the Whitewash Waiver.

The Directors do not consider that the aforesaid audited pro forma financial information of the Enlarged Group, prepared in accordance with PRC GAAP, as disclosed in the PRC Report is material for Shareholders and potential investors to assess the merits and demerits of the Acquisition and the Whitewash Waiver because the pro forma statement of assets and liabilities of the Enlarged Group as at 30 June 2007 and the IFRS 2007 Profit Forecasts which comply with the relevant Listing Rules and are therefore more relevant have been included in appendices IV and V respectively in this circular. The Directors do not consider the non-inclusion of such information in the Announcement and this circular to be misleading.

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LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE ACQUISITION

(1) The Acquisition is expected to enable the Enlarged Group to become one of the most competitive market leaders in the White Goods industry of the PRC

The Directors believe that the Acquisition will enable the Enlarged Group to become one of the most competitive market leaders in the refrigerator and air-conditioner sectors of the PRC and further strengthen the leadership position of the Kelon Group in the White Goods industry of the PRC. Through integration with the White Goods Business of the Hisense Group, the Enlarged Group is expected to consolidate and rationalize its operation and resources allocation structure to optimize its product portfolio, production locations, technology development, brand promotion, and domestic and international channel management. The Directors believe that the Acquisition will lead to changes in the competitive landscape of the White Goods industry in the PRC with the Enlarged Group moving up to be one of the most competitive market leaders in the industry.

(2) The financial position of the Enlarged Group is expected to be significantly improved

The Enlarged Group will benefit from the relatively stronger balance sheet of the Target Group as compared with the Kelon Group. As compared to the negative equity position of the Company of approximately RMB(719.1) million, acquisition of the Target Group with positive net assets value of approximately RMB630.8 million as at 30 June 2007 will reduce the negative equity position of the Enlarged Group to approximately RMB(88.3) million. The bank borrowings to total assets ratio of the Enlarged Group will also be significantly reduced by combining the Target Group and the Company, which have corresponding ratios of approximately 3.01% and approximately 23.14% respectively as at 30 June 2007. Hence, the financial position of the Enlarged Group will be reinforced by the Acquisition.

(3) The Enlarged Group will benefit from economies of scale and cost-savings

Upon Completion, the Enlarged Group will have a consolidated production capacity of more than 8 million refrigerators and more than 6 million air-conditioners. The production facilities, including refrigerator production plants in Beijing, Liaoning, Jiangsu, Guangdong and Sichuan, and air-conditioner production plants in Shandong, Zhejiang, and Guangdong, are all strategically located in the most developed and populated areas in the PRC.

The Enlarged Group will strive to leverage such production capacity and geographic locations of its production facilities to achieve cost-savings and operation efficiencies from economies of scale, and synergies derived through integration in raw material procurement, production, sales and marketing, after sales services, working capital utilization, and research and development.

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LETTER FROM THE BOARD

(4) Overall brand recognition will be enhanced through combined strength of the multiple brands of the two groups

The Enlarged Group intends to adopt a multi-brand strategy to capitalize on the established goodwill of the existing brands of the two groups — “Hisense”, “Kelon” and “Rongshen”. Given the size and diversity of the PRC market, a multiple-brand strategy would better satisfy demand from various market segments. The combination of the three different brands will allow the Enlarged Group to extend its brand coverage to new market segments and lift its overall brand recognition in both the domestic and international market.

(5) Management efficiency will be improved through streamlining corporate and management structures

Upon Completion, the Enlarged Group will be able to consolidate the management of the two groups and improve management efficiency through streamlining corporate and management structures. The Enlarged Group intends to strengthen its supervision and internal control by establishing better alignment of the responsibilities, powers and economic rewards of the subsidiaries and associates. While the Enlarged Group will provide a centralized platform to support the operation of its subsidiaries and associates, the member companies will be required to be responsible for their own profits and loss.

(6) Competition with the Hisense Group will be eliminated

After Completion, the White Goods businesses including air conditioners and refrigerators would be operated under the Kelon Group. The Hisense Group will operate the multimedia businesses such as televisions, communications business and real estate businesses. The Acquisition will effectively eliminate competition between the Kelon Group and its largest shareholder, Hisense Group Co., in the White Goods business and therefore enhance the corporate governance of the Enlarged Group.

(7) Connected transactions between the Kelon Group and the Hisense Group will be substantially reduced

Under the current group structure, a large part of the sourcing, sales and other production and operation activities of the Kelon Group was made through the sourcing system and marketing channels of the Hisense Group, which has led to a large amount of connected transactions between the Kelon Group and the Hisense Group.

After Completion, the Kelon Group will be primarily engaged in the White Goods businesses while the Hisense Group will focus on, among others, multimedia businesses. It is expected that connected transactions between the Hisense Group and the Kelon Group in respect of White Goods businesses will be substantially reduced.

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LETTER FROM THE BOARD

INDEBTEDNESS

At the close of business on 31 October 2007, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of the circular, the Kelon Group had outstanding bank loans of approximately RMB1,053,910,000, comprising secured bank loans of approximately RMB575,787,000, bills discounted with recourse of approximately RMB128,950,000 and unsecured bank loans of approximately RMB349,173,000. The Target Group had outstanding bank and other loans of approximately RMB249,249,000, comprising secured bank loans of approximately RMB82,000,000, bills discounted with recourse of approximately RMB15,000,000, unsecured advance from the ultimate holding company of approximately RMB2,122,000 and unsecured advance from the intermediate holding company of approximately RMB150,127,000.

As at 31 October 2007, bank loans of the Kelon Group amounting to approximately RMB575,787,000 are secured by certain plant and machinery, land use right and bank deposits of the Kelon Group. Unsecured bank loans of the Kelon Group amounting to approximately RMB328,000,000 are guaranteed by Hisense Group Co.. Bank loans of the Target Group amounting to approximately RMB82,000,000 are secured by certain plant and machinery and land use right of the Target Group.

Save as aforesaid, the Enlarged Group did not have, at the close of business on 31 October 2007, outstanding liabilities or any mortgages, charges, debentures, loan capital, bank overdrafts, loans, liabilities under acceptance or other similar indebtedness, hire purchase of finance lease obligations or any guarantees or other material contingent liabilities.

WORKING CAPITAL

The Directors are satisfied after due and careful enquiry that after taking into account the existing banking facilities available, financial support from the Company’s ultimate holding company and the existing cash and bank balances, the Enlarged Group has sufficient working capital for its present requirements, that is for at least the next 12 months from the date of publication of this circular, in the absence of unforeseeable circumstances.

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

The Kelon Group is principally engaged in the production and sale of air-conditioners and refrigerators. It is currently one of the largest manufacturers in the White Goods industry in PRC.

The PRC economy has undergone a sustained economic growth over the past decades. China’s GDP increased substantially from approximately RMB 7,416 billion in 1996 to approximately RMB 20,668 billion in 2006, with compound annual growth rate of approximately 10.8% in accordance with CEIC Data Company Ltd., a company founded in 1993 and provides its clients with a number of databases with economic, country and sector information on a subscription basis. The PRC real GDP by expenditure approach is expected to grow annually at the rate of approximately 9.1% and 9.6% in 2007 and 2008 respectively. The strong

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LETTER FROM THE BOARD

purchasing power of the PRC resident is evidenced by the increase in the per capita GDP for the period from 2001 to 2005. Per capita GDP has increased from approximately RMB 8,622 in 2001 to approximately RMB 14,040 in 2005, representing compound annual growth rate of approximately 13.0%. The affluent PRC economy has brought about an invaluable opportunity for the development of the White Goods Industry in the PRC.

In anticipation of the increasing demand of white good products in the domestic markets as a result of the expected growth in the PRC GDP, the Board is optimistic about the future prospects of the Kelon Group’s business and operating results.

However, the Kelon Group, at present, does not have any concrete plan for capital expenditure for the year ending 31 December 2008.

Given its strength on its leading position in the PRC white goods industry, its production scale, its strong customer base, and professional management, the Board believes that the Completion will enable it to expand its domestic business, enhance its operation efficiencies from economies of scale, and further strengthen its financial position.

As a whole, the Kelon Group is expected to consolidate and rationalize its operation and resources allocation structure to optimize its product portfolio, production locations, technology development, brand promotion, and domestic and international channel management. The Directors believe that such strategy following the integration of the White Goods Business of the Hisense Group, the Enlarged Group will be able to be one of the most competitive market leaders in the industry.

However, save as the above and those information stated in this circular, the Shareholders and potential investors shall also evaluate the following risks relating to the White Goods industry in the PRC:

• (i) changes in existing government policies or political, legal (including changes in legislations, regulations or rules), regulatory, fiscal, economic, market conditions, or the macro-economy measures in the PRC may lead to a decrease in demand of white goods products, or changes in interest rates, and may have an adverse impact on the financial position of the Enlarged Group;

• (ii) the material costs as well as the salary of labor may increase which will increase the cost in the white goods manufacturing process, this may have a negative impact on the Enlarged Group’s results and financial position; and

• (iii) the product recalls and repurchases as a result of the change in the existing consumer laws and regulations or the adoption of the new laws and regulations in the future that have onerous compliance obligation, this may adversely affect the Enlarged Group’s operations and financial position.

In respect of the management, it is proposed that all existing directors of the Kelon Group and the Target Group will remain in their positions. Mr. Tang Ye Guo will continue to act as chairman of the Kelon Group.

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LETTER FROM THE BOARD

MATERIAL CHANGE

The Directors confirm that save as disclosed in the sections headed “The Acquisition Agreement”, “Shareholding structure of the Company before and after Completion”, “Information of the Company”, “Information of the Target Group”, “Financial effects of the Acquisition on the Target Group”, “Reasons for and benefits of the Acquisition”, “Indebtedness”, “Working Capital” and “Financial and trading prospects of the Enlarged Group” in the “Letter from the Board” set out in this circular, the financial information as included in the “Interim Report 2007” of the Company published in Hong Kong on 23 August 2007, the financial information as included in the “2007 Third Quarterly Report” of the Company published in Hong Kong on 24 October 2007, the “Announcement of estimated profit increase” published in Hong Kong on 24 October 2007 and the “Announcement on the progress of assets disposal” published in Hong Kong on 21 December 2007, they are not aware of any material change in the financial or trading position or outlook of the Kelon Group (whether adverse or otherwise) since 31 December 2006, being the date to which the latest published audited consolidated accounts of the Company were made up, and up to the Latest Practicable Date.

CONTINUING CONNECTED TRANSACTIONS

Hisense Beijing, Hisense Nanjing, Hisense Shandong and Hisense Zhejiang will become Subsidiaries of the Enlarged Group upon Completion. They have been engaging in certain transactions relating to the purchase of moulds, raw materials and components, leasing of properties and provision of services with the relevant Subsidiaries of Hisense Group Co. before Completion, based on the business planning of the Company, it is anticipated that they will continue such transactions with the relevant Subsidiaries of Hisense Group Co. after Completion. Therefore, the Company entered into the Business Co-operation Framework Agreement with Hisense Group Co. and some of its Subsidiaries on 28 December 2007 in relation to the purchase of moulds, raw materials and components, leasing of properties and provision of services to be carried out after Completion.

BUSINESS CO-OPERATION FRAMEWORK AGREEMENT

Date

28 December 2007

Parties

• (i) The Company; and

• (ii) Hisense Group Co. and some of its Subsidiaries.

Term

The transactions contemplated under the Business Co-operation Framework Agreement will only be carried out from the Completion Date to 31 December 2008, which can be terminated before its expiration by mutual agreement of the parties.

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LETTER FROM THE BOARD

The parties are entitled to terminate the Business Co-operation Framework Agreement before its expiration upon mutual agreement or in the event of occurrence of any breach of the Business Co-operation Framework Agreement, which include any non-compliance with the relevant Listing Rules in respect of connected transactions. In the event of any breach of any declaration, warranty and undertaking and non-fulfilment of its obligations by any party under the Business Co-operation Framework Agreement, the other party(ies) is(are) entitled to claim damages and compensation from such party.

Conditions

The continuing connected transactions contemplated under the Business Co-operation Framework Agreement are subject to the approval of the Independent Shareholders at the EGM and conditional upon Completion.

The Business Co-operation Framework Agreement is in connection with the following aspects of business co-operation between the Enlarged Group and Hisense Group Co. and some of its Subsidiaries:

(1) Purchase of Moulds

Pursuant to the Business Co-operation Framework Agreement, the Company has agreed that the Relevant Subsidiaries will purchase on a non-exclusive basis such quantities of moulds as the Relevant Subsidiaries may require from time to time after Completion for the purpose of the manufacture of household electrical appliances, including but not limited to air-conditioners, from the relevant Subsidiary of Hisense Group Co.. The relevant parties agreed to enter into individual mould purchase orders setting out specific terms including the price, payment terms, technological services and other terms of delivery, but such terms shall be consistent with the principles and the terms of the Business Co-operation Framework Agreement, including the pricing, operation and trading policies set out therein.

The Relevant Subsidiaries have the right to purchase moulds from suppliers other than the relevant Subsidiary of Hisense Group Co. from time to time according to their own needs. The Business Co-operation Framework Agreement does not restrict the rights of the relevant Subsidiary of Hisense Group Co. to sell its moulds to any other third parties.

Pricing

In response to the invitations to tender from the Relevant Subsidiaries (which are also extended to various Independent Third Parties) from time to time, the relevant Subsidiary of Hisense Group Co. may submit such tenders or bids to manufacture the moulds for such products requested by the Relevant Subsidiaries in their invitations to tender. Pricing for the manufacture of moulds is determined predominantly by the open bidding process.

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LETTER FROM THE BOARD

However, the prices to be paid by the Relevant Subsidiaries to the relevant Subsidiary of Hisense Group Co. for the purchase of moulds shall be on normal commercial terms and on terms no less favourable to the Company than terms available to or from (as appropriate) Independent Third Parties. Such transactions will be conducted in the ordinary and usual course of business of the Enlarged Group.

Payment Term

Payment for the purchase of moulds should be made by telegraphic transfer or bankissued bills by the Relevant Subsidiaries within 60 days from the receipt of delivery of the moulds.

Reasons for and Benefits of the Purchase of Moulds

The Relevant Subsidiaries are principally engaged in the manufacturing of household appliances, including air-conditioners and refrigerators. The relevant Subsidiary of Hisense Group Co. is principally engaged in the design and manufacture of large and medium size moulds for household electrical appliances.

Before Completion, the Relevant Subsidiaries have established long-term satisfactory co-operation relationship with the relevant Subsidiary of Hisense Group Co. which has been providing compatible moulds to the Relevant Subsidiaries for the manufacture of household appliances, including air-conditioners and refrigerators. After considering a range of factors including the quality, the price and the compatibility of the moulds manufactured by the relevant Subsidiary of Hisense Group Co. with the refrigerators and air-conditioners manufactured by the Relevant Subsidiaries, the level of services provided by, and the long-term business relationship with, the relevant Subsidiary of Hisense Group Co., as well as the limited number of suppliers available in the proximity, the Company considers that the relevant Subsidiary of Hisense Group Co. is in a good position to supply moulds to the Relevant Subsidiaries.

In light of the above, the Directors (including the independent non-executive Directors whose views are set out on page 51 of this circular) are of the view that the terms of the purchase of moulds under the Business Co-operation Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Historical Figures

The Relevant Subsidiaries have conducted similar transactions with the relevant Subsidiary of Hisense Group Co. in the past, the particulars of which are set out as follows:

For the ten months ended 31 October 2007

RMB6,117,100 (unaudited)

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LETTER FROM THE BOARD

Maximum Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement for the year ending 31 December 2008 in relation to the purchase of moulds are subject to the annual cap set out below:

For the year ending 31 December 2008

RMB20,000,000

The above annual cap was determined with reference to (a) similar transactions between the Relevant Subsidiaries with the relevant Subsidiary of Hisense Group Co. before Completion; (b) the prevailing market conditions about the increasing demand for electrical appliances in the PRC; (c) the projected rising level of production of household electrical appliances of the Enlarged Group for the year ending 31 December 2008 based on its forecast of the market demand taking into account the steady growth of the PRC economy and the increasing purchasing power of its citizens; and (d) the intention of the Relevant Subsidiaries to increase their purchases from, and to further enhance their business co-operation with, the relevant Subsidiary of Hisense Group Co. in 2008, in view of the confidence and trust the Relevant Subsidiaries have in the quality and compatibility of moulds manufactured by the relevant Subsidiary of Hisense Group Co., and the satisfactory co-operation relationship established between them in the past.

(2) Purchase of Raw Materials and Components

Pursuant to the Business Co-operation Framework Agreement, the Company has agreed that the Relevant Subsidiary will purchase on a non-exclusive basis such quantities of raw materials (including electronic control boards and plastic parts) and air-conditioners’ components as it may require from time to time after Completion for the purpose of the manufacture of air-conditioners, from the relevant Subsidiaries of Hisense Group Co..

The parties agreed to enter into individual raw materials purchase and supply orders setting out specific terms including the price, payment terms, technological services and other terms of delivery, but such terms shall be consistent with the principles and the terms of the Business Co-operation Framework Agreement, including the pricing, operation and trading policies set out therein.

The Relevant Subsidiary has the right to purchase raw materials and air-conditioners’ components from suppliers other than the relevant Subsidiaries of Hisense Group Co. from time to time according to its own needs. The Business Co-operation Framework Agreement does not restrict the rights of any of the relevant Subsidiaries of Hisense Group Co. to sell their raw materials and air-conditioners’ components to any other third parties.

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LETTER FROM THE BOARD

Pricing

Pricing for the purchase of raw materials and air-conditioners’ components is determined principally by arm’s length commercial negotiation between the parties according to the principle of fairness and reasonableness with reference to the market price of raw materials and components of air-conditioners from time to time.

The above transactions will be conducted in the ordinary and usual course of business of the Enlarged Group, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) Independent Third Parties.

Payment Term

Payment for the purchase of raw materials and air-conditioners’ components should be made by telegraphic transfer or bank-issued bills by the Relevant Subsidiary within 60 days from the receipt of delivery of the raw materials and air-conditioners’ components.

Reasons for and Benefits of the Purchase of Raw Materials and Components

The Relevant Subsidiary is principally engaged in the design and manufacture of airconditioners. The relevant Subsidiaries of Hisense Group Co. are principally engaged in the sales and manufacture of electrical appliances and electrical components for the production of electrical appliances.

The Relevant Subsidiary and the relevant Subsidiaries of Hisense Group Co. are located closed to each other. Before Completion, the Relevant Subsidiary has established longterm satisfactory co-operation relationship with the relevant Subsidiaries of Hisense Group Co. which have been providing compatible raw materials and components to the Relevant Subsidiary. After considering a range of factors including the quality, the reasonable price, the compatibility of the raw materials and components manufactured by the relevant Subsidiaries of Hisense Group Co. with the air-conditioners manufactured by the Relevant Subsidiary, the level of services provided by, and the long-term business relationship with, the relevant Subsidiaries of Hisense Group Co., as well as the limited number of suppliers available in the proximity and the relatively low transportation costs of raw materials and components to be incurred, the Company considers that the relevant Subsidiaries of Hisense Group Co. are in a good position to supply raw materials and components to the Relevant Subsidiary.

In light of the above, the Directors (including the independent non-executive Directors whose views are set out on page 51 of this circular) are of the view that the terms of the purchase of raw materials and components under the Business Co-operation Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

Historical Figures

The Relevant Subsidiary has conducted similar transactions with the relevant Subsidiaries of Hisense Group Co. in the past, the particulars of which are set out as follows:

For the ten months ended 31 October 2007

RMB44,670,000 (unaudited)

Maximum Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement for the year ending 31 December 2008 in relation to the purchase of raw materials and components are subject to the annual cap set out below:

For the year ending 31 December 2008

RMB83,750,000

The above annual cap was determined with reference to (a) similar transactions between the Relevant Subsidiary with the relevant Subsidiaries of Hisense Group Co. before Completion; (b) the prevailing market conditions about the increasing demand for electrical appliances in the PRC; (c) the projected rising level of production of household electrical appliances of the Enlarged Group for the year ending 31 December 2008 based on its forecast of the market demand taking into account the steady growth of the PRC economy and the increasing purchasing power of its citizens; and (d) the intention of the Relevant Subsidiary to increase its purchases from, and to further enhance its business co-operation with, the relevant Subsidiaries of Hisense Group Co. in 2008, in view of the confidence and trust the Relevant Subsidiary has in the quality and compatibility of the raw materials and components manufactured by the relevant Subsidiaries of Hisense Group Co., and the satisfactory co-operation relationship established between them in the past.

(3) Provision of Property Leasing and Management and Communication Services

Pursuant to the Business Co-operation Framework Agreement, the Company has agreed that the Relevant Subsidiaries will engage Hisense Group Co. and its Subsidiaries for the provision of property leasing, management and communication services. The parties agreed to enter into individual service provision orders setting out specific terms for the provision of services including fees, scope of the services, payment terms, but such terms shall be consistent with the principles and the terms of the Business Co-operation Framework Agreement, including the pricing, operation and trading policies set out therein.

The Relevant Subsidiaries have the right to engage from time to time according to their own needs other service providers to provide such services to the Relevant Subsidiaries, other than the relevant Subsidiaries of Hisense Group Co.. The Business Co-operation Framework Agreement also does not restrict the rights of Hisense Group Co. and its Subsidiaries to provide such services to any other third parties.

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LETTER FROM THE BOARD

Pricing

The fees payable by the Relevant Subsidiaries to Hisense Group Co. and its Subsidiaries for the provision of property leasing, management and communication services to the Relevant Subsidiaries are determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between the parties with reference to the market price for the provision of such services from time to time.

Such transactions will be 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.

Payment Term

The fees for the provision of property leasing, management and communication services will be calculated on a monthly basis and such monthly fees should be made by telegraphic transfer or bank-issued bills by the Relevant Subsidiaries within 15 days of the following month.

Reasons for and Benefits of the Engagement for the Services Provision

The Relevant Subsidiaries are principally engaged in the manufacture and sales of refrigerators and air-conditioners and White Goods sales and marketing. Hisense Group Co. and its Subsidiaries are principally engaged in the manufacture of electrical appliances and provision of property management services.

The Relevant Subsidiaries and Hisense Group Co. and its Subsidiaries are located closed to each other. In view of production and office operation needs and demands, the Relevant Subsidiaries have to lease properties from Hisense Group Co. and its Subsidiaries and engage Hisense Group Co. and its Subsidiaries for the provision of property management services (e.g. sanitary and security services) and communication services (e.g. telephone and web conference services) for their business operations.

In light of the above, the Directors (including the independent non-executive Directors whose views are set out on page 51 of this circular) are of the view that the terms of the leasing of properties and service engagement under the Business Co-operation Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Historical Figures

The Relevant Subsidiaries have conducted similar transactions with Hisense Group Co. and its Subsidiaries in the past, the particulars of which are set out as follows:

For the ten months ended 31 October 2007

RMB6,212,200

(unaudited)

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LETTER FROM THE BOARD

Maximum Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement for the year ending 31 December 2008 regarding the leasing of properties and service engagement are subject to the annual cap set out below:

For the year ending 31 December 2008

RMB13,700,000

The above annual cap was determined with reference to (a) similar transactions between the Relevant Subsidiaries with Hisense Group Co. and its Subsidiaries before Completion; (b) the projected rising level of production and business operation of the Enlarged Group for the year ending 31 December 2008 and as such, the increase in demand for the provision of the services; and (c) the intention to further enhance the business cooperation between the Relevant Subsidiaries and the relevant Subsidiaries of Hisense Group Co. in 2008, in view of the satisfactory co-operation relationship established between them in the past.

INFORMATION OF QINGDAO HISENSE

Qingdao Hisense is a limited liability company established on 17 November 1995 in the PRC. After Completion, Qingdao Hisense will mainly be a holding company with the shareholdings in the Company as major asset. Qingdao Hisense is currently owned as to 93.33% by Hisense Electronic and as to 6.67% by Hisense International.

Hisense Electronic is a limited liability company established on 1 May 2005 in the PRC. It is a holding company. Hisense Electronic is currently owned as to 55.58% by Hisense Group Co., 39.84% by the management group of Hisense Group Co. and 4.58% by the labour union of Hisense Group Co..

Hisense International is a limited liability company established on 9 March 2005 in the British Virgin Islands. It is a holding company and is a wholly-owned subsidiary of Hisense Electronic.

Hisense Group Co. is a limited liability company established on 2 August 1979 in the PRC and is under the auspices of the 青島市國資委 (Tsingdao State-owned Assets Supervision and Administrative Committee). It is a holding company.

It is the intention of Qingdao Hisense to continue to carry on the business of the Company and to continue the employment of the employees of the Kelon Group. Qingdao Hisense does not intend to introduce any material change to the existing businesses, operations or assets of the Kelon Group (including any deployment of the fixed assets of the Group).

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LETTER FROM THE BOARD

IMPLICATIONS OF THE TAKEOVERS CODE AND WHITEWASH WAIVER

The shareholding interest of Qingdao Hisense in the Company will increase from approximately 24.08% as at the Latest Practicable Date to approximately 44.46% immediately after the Completion as enlarged by the issue of the Consideration Shares. As such, Qingdao Hisense and its concert parties will, upon Completion, be required to make a mandatory general offer to the Shareholders to acquire the Shares in issue not already owned or agreed to be acquired by Qingdao Hisense and parties acting in concert with it under Rule 26.1 of the Takeovers Code unless a waiver pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code is granted by the Executive.

None of Qingdao Hisense or its concert parties has dealt in any securities of the Company in the 6 months prior to the date of the Announcement and up to the Latest Practicable Date. According to the Share Reform Proposal, Qingdao Hisense has undertaken to make a Donation under certain circumstances, including the circumstance where the Acquisition cannot be completed by 28 March 2008. In the event that the Company issues bonus A Shares, transfer to share capital or reduce its numbers of share capital during this period, the number of donated Shares under the Donation shall, on the basis of 9,725,050 A Shares, be increased or decreased in the same proportion. The criteria to recognize the Completion includes the completion of all transfer registration (including asset, shareholding, credit and debts) procedures for injecting the related assets (or shareholdings) of the White Goods Business into the Company. As SEC and Dongheng, both being holders of the Company’s non-freely transferable Shares prior to the implementation of the Share Reform Proposal, did not explicitly express that they would involve in the share reform, Qingdao Hisense has advanced the Borrowed Shares on behalf of SEC and Dongheng for distribution to eligible A Shareholders. Subsequently, they should repay the Borrowed Shares advanced by Qingdao Hisense or obtain its consent before the Shares held by SEC and Dongheng can be listed and transferred. As at the Latest Practicable Date, the Company is negotiating with SEC with respect to the return of the Borrowed Shares while it is still trying to contact Dongheng. Further announcement will be made by the Company once further information is available.

An application has been made to seek confirmation from the Executive that the possible Donation and the return of the Borrowed Shares would not constitute disqualifying transactions under paragraph 3(b) of Schedule VI of the Takeovers Code.

A formal application has been made by Qingdao Hisense to the Executive for the Whitewash Waiver pursuant to Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code. The Whitewash Waiver, if granted by the Executive, would be subject to, among other things, the approval of the Independent Shareholders at the EGM by way of poll. It is a condition precedent to Completion that the Whitewash Waiver is granted by the Executive. If the Whitewash Waiver is not granted by the Executive or if the conditions (if any) imposed thereon are not fulfilled, the Acquisition will not proceed. In such case, the requirement for Qingdao Hisense to make a mandatory general offer under Rule 26 of the Takeovers Code as a result of the Acquisition will not be triggered.

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LETTER FROM THE BOARD

The Executive has indicated that it will agree, subject to the approval by the Independent Shareholders at the EGM by way of poll, to waive Qingdao Hisense and parties acting in concert with it from any obligation to make a general offer for all the Shares under Rule 26 of the Takeovers Code as a result of the Company’s allotment and issue of the Consideration Shares for payment of the consideration for the Acquisition.

As at the Latest Practicable Date, there was no agreement, arrangement or understanding between Qingdao Hisense or any of its concert parties and any other person that the Consideration Shares to be acquired by Qingdao Hisense under the Acquisition Agreement would be transferred, charged or pledged to that person.

IMPLICATIONS OF THE LISTING RULES

As each of the applicable percentage ratio (as defined in Rule 14.07 of the Listing Rules) is 25% or more, the Acquisition constitutes a major transaction for the Company under Rule 14.06 of the Listing Rules. As at the Latest Practicable Date, Qingdao Hisense is a substantial shareholder of the Company holding approximately 24.08% of the issued shares of the Company and is a connected person of the Company under the Listing Rules, and as such, the Acquisition also constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. The Acquisition is therefore subject to the announcement, reporting and independent shareholders’ approval requirements under Chapters 14 and 14A of the Listing Rules.

Qingdao Hisense is a substantial shareholder of the Company, holding approximately 24.08% of the issued shares of the Company as at the Latest Practicable Date. Each of Hisense Group Co. and its Subsidiaries are associates of Qingdao Hisense, and therefore connected persons of the Company. As such, the transactions contemplated under the Business Co-operation Framework Agreement will constitute continuing connected transactions of the Company under the Listing Rules. Since the relevant Subsidiaries of Hisense Group Co. are connected or otherwise associated with each other, the transactions contemplated under the Business Cooperation Framework Agreement should be aggregated with the continuing connected transactions occurring in the ordinary course of business between the Company and the relevant Subsidiaries of Hisense Group Co. before the Completion (particulars of which will be set out in a separate announcement).

Given that the applicable percentage ratios (other than the profit ratio) for the aggregated amount of the transactions is more than 2.5%, the continuing connected transactions contemplated under the Business Co-operation Framework Agreement are subject to reporting, announcement and independent shareholders’ approval requirements under Rule 14A.35 of the Listing Rules.

Since the Non-exempt Continuing Connected Transactions are contemplated as a result of the Acquisition, in the event that the Acquisition does not proceed resulting in a change of circumstances of the Company, the Company will make appropriate disclosures and comply with all relevant requirements, where applicable, under Chapter 14A of the Listing Rules.

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LETTER FROM THE BOARD

Accordingly, the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver are subject to approval of the Independent Shareholders at the EGM while the Acquisition is also subject to the approval of the A Shareholders and H Shareholders in separate class meetings, and in each case, by way of poll. Qingdao Hisense and its associates and parties acting in concert with it will abstain from voting for the approval of the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver at the EGM. Qingdao Hisense’s associates do not hold any Shares as at the Latest Practicable Date. An independent board committee has been formed to advise the Independent Shareholders on the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver and the Independent Financial Adviser has been appointed to advise the independent board committee and the Independent Shareholders on the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver.

CSRC WAIVER

The allotment and issue of the Consideration Shares by the Company to Qingdao Hisense under the Acquisition and the resulting increase in the number of A Shares held by Qingdao Hisense would, unless the CSRC Waiver is obtained, result in Qingdao Hisense having to acquire further Shares by way of an offer in accordance with the Takeover Procedures. Subject to the approval of the Acquisition by the Shareholders (other than Qingdao Hisense, its associates, concert parties and any person who is involved or interested in the Acquisition and/or the Whitewash Waiver) in the EGM, Qingdao Hisense will apply to CSRC for the grant of the CSRC Waiver.

PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION

In light of the issue of the Consideration Shares and pursuant to the requirements of the applicable PRC laws and regulations, certain amendments are proposed to be made to the Articles of Association. Such proposed amendments to be made to the Articles of Association are subject to approval by the Shareholders at the EGM, and are conditional upon obtaining any approval, endorsement or registration as may be necessary from the relevant PRC authorities.

The proposed amendments deal with matters consequential to the Completion including, among other things, the increase of the registered capital and change of business scope of the Company and the change in the number of A Shares and the proportion between the number of A Shares and H Shares pursuant to the issue of the Consideration Shares.

The proposed amendments to the Articles of Association are proposed in accordance with the laws and regulations prescribed by the relevant PRC authorities. The proposed amended Articles of Association will only be adopted for use by the Company after Completion.

The proposed amendments to the Articles of Association are set out in the notice of EGM dated 31 December 2007.

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LETTER FROM THE BOARD

VOTING ARRANGEMENT

Under the requirements of the Articles of Association, the Listing Rules and the Shenzhen Listing Rules, the Acquisition is subject to the following approvals by way of poll where Qingdao Hisense, its associates and parties acting in concert with it will abstain from voting on the relevant resolutions:

• (i) the approval of more than two-thirds of the Independent Shareholders exercising valid voting rights on the relevant resolutions and present (in person or by proxy) at the EGM;

• (ii) the approval of more than two-thirds of the holders of H Shares and exercising valid voting rights on the relevant resolutions present (in person or by proxy) at the CSM; and

• (iii) the approval of more than two-thirds of the holders of A Shares and exercising valid voting rights on the relevant resolutions present (in person or by proxy) at a class meeting of A Shareholders.

Qingdao Hisense, its associates and parties acting in concert with it will also abstain from voting on the resolutions relating to the Acquisition, the allotment and issue of the Consideration Shares, the authorisation of the Board to deal with all matters relating to the allotment and the issue of the Consideration Shares, the Non-exempt Continuing Connected Transactions, the Whitewash Waiver and the CSRC Waiver in the EGM, and on the resolutions relating to the Acquisition and the allotment and issue of the Consideration Shares in the CSM.

The Whitewash Waiver, if granted by the Executive, will be subject to, among other things, the approval of the Independent Shareholders at the EGM by way of poll, where Qingdao Hisense, associates and parties acting in concert with it and any person who is interested or involved in the Acquisition and/or the Whitewash Waiver will abstain from voting on the relevant resolution under the requirements of the Takeovers Code.

The CSRC Waiver, other than subject to the approval of the CSRC, will also be subject to, among other things, the approval of the Shareholders other than Qingdao Hisense, parties acting in concert with it and parties considered to be in association with it under the Shenzhen Listing Rules at the EGM by way of poll.

EGM

A notice of the EGM to be held at 2:00 p.m. on 15 February 2008 at the conference room of the Company at Shunde District, Foshan City, Guangdong Province, the PRC, at which relevant resolutions will be proposed to approve, among other things, the Acquisition and the issue of Consideration Shares to Qingdao Hisense, the Non-exempt Continuing Connected Transactions, the Whitewash Waiver, the CSRC Waiver, the authorisation to the Board to deal with all matters relating to the allotment and issue of Consideration Shares and the proposed amendment to the Articles of Association, is enclosed.

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LETTER FROM THE BOARD

Form of proxy for use at the EGM is enclosed with this circular. Whether or not you are able to attend the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar for H Shares, Hong Kong Registrars Limited at Rooms 1712-1716, 17th floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not less than 24 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so desire.

In accordance with Article 8.28 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.

In accordance with the Articles of Association and/or Rule 13.39(4) of the Listing Rules, the Chairman will demand a poll in relation to the special resolutions approving the Acquisition and the issue of Consideration Shares to Qingdao Hisense and the proposed amendments to the Articles of Association, and in relation to the ordinary resolutions approving the authorisation to the Board to do such things or make such arrangements relating to, or incidental to, the allotment and issue of the Consideration Shares as they may consider necessary or expedient, the Non-exempt Continuing Connected Transactions, the CSRC Waiver and the Whitewash Waiver at the EGM, the results of which will be announced after the EGM.

CLASS MEETING OF THE H SHAREHOLDERS

A notice of the CSM to be held at 3:00 p.m. (or immediately after the conclusion or adjournment of the class meeting of the A Shareholders) on 15 February 2008 at the conference room of the Company at Shunde District, Foshan City, Guangdong Province, the PRC, at which relevant resolutions will be proposed to approve the Acquisition and the allotment and issue of the Consideration Shares to Qingdao Hisense is enclosed.

Form of proxy for use at the CSM is enclosed with this circular. Whether or not you are able to attend the CSM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar for H Shares, Hong Kong Registrars Limited at Rooms 1712-1716, 17th floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not less than 24 hours before the time appointed for the holding of the CSM or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the CSM or any adjourned meeting should you so desire.

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LETTER FROM THE BOARD

In accordance with Article 8.28 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.

In accordance with the Articles of Association and Rule 13.39(4) of the Listing Rules, the Chairman will demand a poll in relation to the special resolutions approving the Acquisition and the issue of Consideration Shares to Qingdao Hisense at the CSM, the results of which will be announced after the CSM.

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee, comprising Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren, the three independent non-executive directors of the Company, has been established for the purpose of advising the Independent Shareholders on the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver. No member of the Independent Board Committee has any interest or involvement in the transactions contemplated under the Acquisition Agreement, the Non-exempt Continuing Connected Transactions or the Whitewash Waiver. The full text of the letter from the Independent Board Committee is set out on page 51 of this circular.

Access Capital Limited has been appointed by the Company, with the approval of the Independent Board Committee, as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver. The text of the letter of advice from the Independent Financial Adviser containing their recommendations and the principal factors they have taken into account in arriving at their recommendation is set out from pages 52 to 87 of this circular.

RECOMMENDATION

The Directors (including the independent non-executive Directors) consider that the terms of the Acquisition and the Non-exempt Continuing Connected Transactions are normal commercial terms, fair and reasonable, and the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver are in the best interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the special and ordinary resolutions to be proposed at the EGM and/or the CSM. The Board also considers that the CSRC Waiver and the proposed amendments to the Articles

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LETTER FROM THE BOARD

of Association are in the interests of the Company and the Shareholders as a whole and recommends the Shareholders to vote in favour of the relevant resolutions at the EGM.

ADDITIONAL INFORMATION

Your attention is drawn to the letter from the Independent Board Committee, the letter from Independent Financial Adviser, the financial information of the Kelon Group as well as other information contained in the appendices to this circular before considering whether to vote for or against the resolutions to be proposed at the EGM and/or the CSM for approving the Acquisition, the Non-exempt Continuing Connected Transactions, the Whitewash Waiver, the CSRC Waiver, the authorisation to the Board to deal with all matters relating to the allotment and issue of Consideration Shares and the proposed amendments to the Articles of Association as set out in the notice of the EGM and notice of the CSM contained in this circular.

SUSPENSION OF TRADING IN THE H SHARES OF THE COMPANY

At the request of the Company, trading in the H shares of the Company was suspended from 28 April 2005 to 10 May 2005, and has remained suspended since 10:00 a.m. on 16 June 2005, initially following various press releases regarding the investigation by the CSRC on Greencool Technology Holdings Limited in connection with the possible misappropriation of funds of the Company. Greencool Technology Holdings Limited was then an indirect shareholder of the Company controlled by Mr. Gu Chu Jun, who was the then executive director and chairman of the Company and the controlling shareholder of Guangdong Greencool Enterprise Development Company Limited, the then single largest shareholder of the Company.

The Company is currently reviewing the relevant documents in relation to the suspension of H Shares, the events leading to such suspension and the actions taken by the Company and will submit a resumption proposal to the Stock Exchange as soon as practicable.

Yours faithfully,

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

— 50 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED 海信科龍電器股份有限公司

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

31 December 2007

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION:

ACQUISITION OF THE TARGET GROUP FROM QINGDAO HISENSE AIR-CONDITIONING COMPANY LIMITED CONTINUING CONNECTED TRANSACTIONS AND APPLICATION FOR WHITEWASH WAIVER

We refer to the circular issued by the Company to Shareholders dated 31 December 2007 (the “Circular”) of which this letter forms part. Terms defined in the Circular shall have the same meanings in this letter unless the context otherwise requires.

Access Capital Limited has been appointed to act as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders with regard to the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver. The text of the letter of advice from the Independent Financial Adviser containing their recommendations and the principal factors they have taken into account in arriving at their recommendation are set out from pages 52 to 87 of the Circular. Independent Shareholders are recommended to read the letter of advice from the Independent Financial Adviser, the letter from the Board contained in the Circular as well as the additional information set out in the appendices to the Circular.

Having considered the terms of each of the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver and the advice of the Independent Financial Adviser, we are of the opinion that the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole. We also consider that the terms of the Acquisition and the Non-exempt Continuing Connected Transactions are fair and reasonable so far as the Independent Shareholders are concerned. We therefore recommend that the Independent Shareholders vote in favour of the relevant resolutions to be proposed at the EGM and/or the CSM to approve the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver.

Yours faithfully, For and on behalf of

Independent Board Committee

Mr. Zhang Sheng Ping Mr. Lu Qing Mr. Cheung Yui Kai, Warren Independent non-executive Directors

— 51 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Set out below is the text of the letter of advice from Access Capital Limited to the Independent Board Committee and the Independent Shareholders prepared for inclusion in this Circular.

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Suite 606, 6th Floor Bank of America Tower 12 Harcourt Road Central Hong Kong

31 December 2007

To the Independent Board Committee and

the Independent Shareholders of Hisense Kelon Electrical Holdings Company Limited

Dear Sirs,

MAJOR AND CONNECTED TRANSACTION, NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS AND THE WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver, details of which are set out in the circular to the Shareholders dated 31 December 2007 (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 Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver. Unless otherwise stated, terms defined in the Circular have the same meanings in this letter.

On 28 December 2007, the Board announced that the Company entered into (i) the Acquisition Agreement with Qingdao Hisense on 28 December 2007, pursuant to which the Company has conditionally agreed to acquire from Qingdao Hisense the Target Group at a consideration of RMB2,541,400,000 (equivalent to approximately HK$2,662,573,730) which will be satisfied by the issue of 364,097,421 new A Shares at RMB6.98 per Consideration Share to Qingdao

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Hisense; and (ii) the Business Co-operation Framework Agreement with Hisense Group Co. and certain of its subsidiaries on 28 December 2007 in relation to the purchase of moulds, raw materials and components, leasing of properties and provision of services which are expected to be carried out between the Enlarge Group and the relevant subsidiaries of Hisense Group Co. after Completion.

As at the date of the Acquisition Agreement and the Latest Practicable Date, Qingdao Hisense is a substantial shareholder of the Company holding approximately 24.08% interest in the Company. Accordingly, Qingdao Hisense is a connected person of the Company and the Acquisition constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules. Since each of the applicable percentage ratios (as defined in Rule 14.07 of the Listing Rules) is 25% or more, the Acquisition is subject to the reporting, announcement and independent shareholders’ approval requirements of the Listing Rules. As Qingdao Hisense is a non-wholly owned subsidiary of Hisense Group Co., Hisense Group Co. and its subsidiaries are associates of Qingdao Hisense and each of them is therefore a connected person of the Company. Accordingly, the transactions contemplated under the Business Co-operation Framework Agreement constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules. Since the relevant percentage ratios as represented by the aggregate estimated amount of the transactions contemplated under the Business Co-operation Framework Agreement exceed the relevant thresholds set out in Rule 14A.34 of the Listing Rules, the continuing connected transactions under the Business Co-operation Framework Agreement are also subject to, among other things, the approval of the Independent Shareholders at a general meeting of the Company.

In addition, since the shareholding interest of Qingdao Hisense in the Company will increase to approximately 44.46% as a result of the issue of the Consideration Shares, Qingdao Hisense and parties acting in concert with it is obliged under Rule 26.1 of the Takeovers Code to make a conditional mandatory general offer for all of the issued Shares and all other securities of the Company in issue which are not already owned or agreed to be acquired by Qingdao Hisense and parties acting in concert with it. Qingdao Hisense has applied to the Executive for the Whitewash Waiver under Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code. The Whitewash Waiver, if granted by the Executive, will be subject to, among other things, the approval by way of poll by the independent shareholders who are not involved or interested in the Acquisition at a general meeting of the Company.

As at the date hereof, the Company has three non-executive directors, all being independent non-executive Directors, namely Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren. The Independent Board Committee, comprising all three aforementioned independent non-executive Directors, has been established for the purpose of advising the Independent Shareholders on the terms of the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver. Each of Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren has confirmed that he does not have any direct or

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indirect conflict of interest in the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver. Based on such confirmation, we consider that all three independent non-executive Directors are eligible to be members of the Independent Board Committee to advise the Independent Shareholders in respect of the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver.

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 whether or not the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and how the Independent Shareholders should vote in respect of the resolutions to approve the Acquisition, the Nonexempt Continuing Connected Transactions and the Whitewash Waiver at the EGM.

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 advice, we have relied solely on the statements, information, opinions and representations contained in the Circular and the information and representations provided to us by the Company and/or the Directors. We have assumed that all such statements, information, opinions and representations contained or referred to in the Circular or otherwise provided or made or given by the Company and/or its senior management staff and/or the Directors and for which it is/they are solely responsible were true and accurate and valid at the time they were made and given and continue to be true and valid as at the date of the Circular. We have assumed that all the opinions and representations made or provided by the Directors and/or the senior management staff of the Company contained in the Circular have been reasonably made after due and careful enquiry. We have also sought and obtained confirmation from the Company and/or its senior management staff and/or the Directors that no material facts have been omitted from the information provided and referred to in the Circular.

We consider that we have reviewed all information and documents which are made available to us to enable us to reach an informed view and to justify our reliance on the information provided so as to provide a reasonable basis for our advice. We have no reason to doubt the truth, accuracy and completeness of the statements, information, opinions and representations provided to us by the Company and/or its senior management staff and/or the Directors and their respective advisers or to believe that material information has been withheld or omitted

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from the information provided to us or referred to in the aforesaid documents. We have not, however, carried out any independent verification of the information provided, nor have we conducted any independent investigation into the business and affairs of the Kelon Group or the Target Group.

PRINCIPAL FACTORS CONSIDERED

In formulating our opinion regarding the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver, we have taken into consideration the following principal factors:

I. The Acquisition

1. Background information and reasons for the Acquisition

• (a) Information on the Kelon Group

The Company was incorporated in the PRC on 16 December 1992 and, together with its subsidiaries, 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 2006 (the “Annual Report”) and interim report for the six months ended 30 June 2007 (the “Interim Report”), the Kelon Group’s operations were carried out in the PRC and almost all of the production facilities of the Kelon Group were located in the PRC. For each of the year ended 31 December 2006 and the six months ended 30 June 2007, approximately 69.5% and 58.7%, respectively, of the Kelon Group’s turnover was derived from the PRC market (including Hong Kong) with the rest derived from European, American and other overseas markets.

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Set out below is a summary of the Kelon 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 income and gains Distribution costs Administrative expenses Other operating expenses (Loss)/profit from operations (Loss)/profit for the year/period	For the year ended 31 December 2005 2006 RMB’000 RMB’000 (Audited and (Audited) restated) 2,542,839 3,327,896 3,600,489 2,533,360 261,113 231,972 573,931 471,029 6,978,372 6,564,257 160,598 1,089,472 73,328 409,305 (1,517,946) (869,207) (1,495,596) (391,749) (815,931) (56,815) (3,595,520) 181,006 (3,790,636) 48,478	For the six months ended 30 June 2006 2007 RMB’000 RMB’000 (Unaudited) (Unaudited) 1,663,016 2,286,915 1,585,540 2,192,929 143,696 157,912 193,925 216,225 3,586,177 4,853,981 703,809 831,430 53,286 203,287 (558,786) (648,747) (136,206) (229,567) (13,414) (11,411) 48,689 144,992 (37,645) 96,592

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	As at 31	December	As at 30 June	As at 30 June
	2005	2006	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000
	(Audited and	(Audited)	(Unaudited)	(Unaudited)
	restated)
Non-current assets	2,547,460	2,226,501	2,485,788	2,022,907
Non-current assets held for sale	—	—	—	49,767
Current assets	2,935,939	2,430,901	3,553,199	3,088,444
Current liabilities	(6,252,654)	(5,382,881)	(6,824,675)	(5,880,237)
Non-current liabilities	(30,818)	(13,594)	(25,025)	—
Net current liabilities	(3,316,715)	(2,951,980)	(3,271,476)	(2,791,793)
Total net liabilities	(800,073)	(739,073)	(810,713)	(719,119)

We have noted from the Annual Report that BDO McCabe Lo Limited (the “Auditors”) had expressed a qualified opinion on the financial statements of the Company and its subsidiaries for the year ended 31 December 2005 arising from limitation of audit scope. In particular, due to the limitation of information available on and the irregularity of a series of activities/ transactions entered into by the previous controlling shareholder of the Company, namely Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”), its affiliates and/or companies suspected to be connected with the Company’s former chairman, Mr. Gu Chu Jun (“Mr. Gu”), during the period from 2001 to 2005 including but not limited to unauthorised use of the Kelon Group’s funds, fictitious sales of goods and scrap materials, unreasonable prepayments and purchases of raw materials and property, plant and equipment at unreasonable quantities and prices, the Auditors were unable to satisfy themselves concerning the validity of the aforesaid transactions and the appropriateness of the accumulated impairment and the recoverability of the carrying amounts of the receivables and payables due from/to the suspected companies at approximately RMB286 million (net of an accumulated impairment loss of RMB364 million) and RMB132 million, respectively, as at 31 December 2006. Any adjustments found to be necessary would affect the net liabilities of the Kelon Group as at 31 December 2006 and the profit for the year then ended.

For details of the Auditors’ opinion on the Company’s financial statements for the year ended 31 December 2006, Shareholders are advised to read the Annual Report.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

For the year ended 31 December 2006, the Kelon Group recorded an audited turnover of approximately RMB6,564.3 million (representing a slight decrease of approximately 6% from the turnover of approximately RMB6,978.4 million for the preceding year) and a net profit of approximately RMB48.5 million. As compared to the substantial amount of the net loss of approximately RMB3,790.6 million for the year 2005, the positive financial results for the year 2006 represents a significant turnaround of the Kelon Group’s financial performance. As explained in the Annual Report, such turnaround was mainly due to the fact that (i) the costs and expenses incurred by the Company were significantly lower than the preceding year as a result of the gradual implementation and adoption of various costs control measures during 2006 and the substantial improvement in gross profit margin; (ii) the Company received subsidies for technological upgrade and innovation in the sum of RMB70 million during the year; and (iii) there were revenues from the disposal of idle assets by the Company.

As noted from the Company’s annual report for 2005, the substantial net loss of approximately RMB3,790.6 million was mainly due to (i) concurrent recognition of 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 during the year; (ii) the suspension in nearly all of the Kelon Group’s production activities during the period from May to September 2005 (which is the peak season for the production and sale of refrigerators and air-conditioners in the financial year) as a result of the adverse impact on the confidence of the financial institutions, suppliers and customers on the Company caused by the incident of the investigation by the CSRC on the Kelon Group 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 economic crimes suspected to be committed by Mr. Gu, a former executive Director and a former vice president and other former senior management officers responsible for the finance of the Kelon Group; and (iii) lower gross profit margin due to the sales of older models by the Kelon Group as it could not manufacture or introduce new product models to the market during the suspension in production activities.

We have noted from the Annual Report that despite the adverse impact of the incident of investigation as briefly discussed above, the Kelon Group was able to improve gradually its production and sales activities with the profit margin of products and the liquidity of assets being further enhanced during 2006 and as at the end of the financial year, the Company has resumed normal business operations in all aspects.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

For the six months ended 30 June 2007, the Kelon Group recorded an unaudited turnover of approximately RMB4,854.0 million, representing an significant increase of approximately 35.4% from the turnover of approximately RMB3,586.2 million for the corresponding period in 2006. For the six months ended 30 June 2007, the Kelon Group recorded an unaudited profit from operations of approximately RMB145.0 million and a net profit of approximately RMB96.6 million, which also represents a substantial improvement over the profit from operations of approximately RMB48.7 million and a net loss of approximately RMB37.6 million for the six months ended 30 June 2006.

As noted in the Interim Report, despite the increase in domestic sales of air-conditioners as compared with the same period of the previous year, its growth fell below the average growth of the whole industry and the Company remained a significant distance behind its major competitors due to the insufficiency of purchase and production at the beginning of the year, which left the Company unable to stock sufficient supply for channel distribution during March and April of 2007, being the peak season for sales. As regarding the refrigerator market, the Company was aggressively exploring the overseas markets and established closer strategic relationship with its major customers and increased its investment in advertising during the six months ended 30 June 2007. However, as a result of the labour shortage all over the country in the beginning of the year and the difficulties encountered by the Company in recruiting staff, the Company failed to enhance its production capacity efficiently to fill the stock, therefore failing to accomplish the targeted sales volume of its refrigerators.

Furthermore, there were challenges to the domestic refrigerator market as a result of the sudden emergence of a large number of small-scale refrigerator manufacturers. Despite the significant growth in export sales of the Kelon Group’s refrigerators, the gross profit margin decreased as such sales mainly consisted of small-volume refrigerators with low sales prices. As a result of the increase in the price of major raw materials for refrigerators and the appreciation of RMB, the gross profit margin for refrigerator export business had remained low.

As set out in the Interim Report, the management of the Company considered that the rise in the revenues from the principal operation and the net profit of the Company during the six months ended 30 June 2007 was mainly due to the overall growth of the domestic economy and the industry as well as the numerous measures adopted by the Company during the period to improve the operational effectiveness, which facilitated the Company to achieve a better performance. However, as a number of historical problems have brought numerous difficulties to the Company, the Company still failed to achieve its sales and earnings targets during the six months period.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As at 30 June 2007, the Kelon Group had unaudited current assets of approximately RMB3,088.4 million and unaudited current liabilities of approximately RMB5,880.2 million, representing net current liabilities of approximately RMB2,791.8 million. As at 30 June 2007, the Kelon Group had outstanding bank loans of approximately RMB1,194 million of which approximately RMB176 million were overdue as at 30 June 2007. As mentioned in the Interim Report, the Kelon Group was in the process of negotiating with certain banks to restructure the amounts due to them and the Company’s management confirmed that most of the Kelon Group’s bankers have expressed their intention to reschedule the overdue bank borrowings and/or renew/grant the credit facilities to the Kelon Group. As at 30 June 2007, the unaudited total net liabilities of the Kelon Group amounted to approximately RMB719.1 million.

(b) Information on Hisense Group Co.

As noted in the Circular, Hisense Group Co. is the ultimate holding company of the Vendor. Based on the information available from the website of Hisense Group Co., the Hisense Group is one of the major electronic companies in the PRC. Hisense Group Co. is headquartered in Qingdao, the PRC and has 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, of which Hisense Group Co. was beneficially interested in approximately 48.4% 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 2006 are extracted from its 2005 and 2006 annual reports.

	For the	year ended 31	December
	2004	2005	2006
	RMB’000	RMB’000	RMB’000
	(Audited)	(Audited)	(Audited)
Turnover	7,500,208	10,163,432	11,824,706
Net profit	58,424	102,400	125,092
Net assets as at year end	2,408,199	2,480,111	2,650,602

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As indicated above, Hisense Electric reported an average annual compound growth of approximately 25.6% and approximately 46.3% for its turnover and net profit, respectively, from 2004 to 2006. As stated in its latest annual report for the year ended 31 December 2006, the turnover of Hisense Electric mainly represented sales of televisions and refrigerators and approximately 81.7% of its turnover was generated from domestic sales in the PRC. As at 31 December 2006, Hisense Electric had audited net assets of approximately RMB2,650.6 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 2006, we consider that it has demonstrated a good track record and is one of the major electronic companies in the PRC.

• (c) Reasons for the Acquisition

As set out in the Letter from the Board, the Directors consider that the Acquisition will have the following benefits:

• the Acquisition is expected to enable the Enlarged Group to become one of the most competitive market leaders in the White Goods industry of the PRC;

• the financial position of the Enlarged Group is expected to be significantly improved;

• the Enlarged Group will benefit from economies of scale and costsavings;

• overall brand recognition will be enhanced through combined strength of the multiple brands of the two groups;

• management efficiency will be improved through streamlining corporate and management structures;

• competition with the Hisense Group will be eliminated, and

• connected transactions between the Kelon Group and the Hisense Group will be substantially reduced.

In addition, as set out in the Letter from the Board, Qingdao Hisense has agreed that after Completion, it and its controlled entities will not participate or engage in any new businesses which compete or may compete with the existing businesses of the Target Group and the Kelon Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Based on the above benefits, the Directors are of the view that the entering into of the Acquisition Agreement is in the interests of the Company and the Shareholders as a whole.

Following completion of the relevant share transfer in December 2006, Qingdao Hisense has become the largest shareholder of the Company holding 238,872,074 domestic legal person shares in the Company (representing approximately 24.08% of the Company’s total issued share capital) as at the Latest Practicable Date. In view of the substantial interest of Hisense Group Co. in the Company, we consider it commercially reasonable and sensible for Hisense Group Co. to assist the Company in rebuilding its market position as well as the confidence of the financial institutions, suppliers and customers on the Company which has been adversely affected by the CSRC’s investigation on the Company for alleged breaches of the securities laws and regulations in the PRC.

Given that (i) the Hisense Group is currently one of the major electronic companies in the PRC and has the relevant expertise in the domestic electrical appliances market in the PRC as well as strong financial resources; (ii) the Target Group has demonstrated a profitable track record during the three years ended 31 December 2006 and the six months ended 30 June 2007; and (iii) the Acquisition is expected to have a positive impact on the financial position of the Kelon Group (particulars of the Target Group and the financial effects of the Acquisition are set out in the sections headed “Information on the Target Group” and “Financial effects of the Acquisition”, respectively, below), we consider that the Acquisition is in the interests of the Company and the Shareholders as a whole.

2. Terms of the Acquisition Agreement

Pursuant to the Acquisition Agreement, the Company has conditionally agreed to acquire from Qingdao Hisense the Target Group at a consideration of RMB2,541,400,000 (equivalent to approximately HK$2,662,573,730) (the “Consideration”). As set out in the Letter from the Board, the Consideration under the Acquisition Agreement has been arrived at after arm’s length negotiations between the parties with reference to various factors including, but not limited to, the financial results, the earnings potential and the prospects of the Target Group, the preliminary valuation of the White Goods Business, the interests of the A Share and H Share Shareholders of the Company and other similar transactions on the market.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In addition, the Company and Qingdao Hisense agreed that, if the audited pro forma net asset value of the Target Group (prepared in accordance with PRC GAAP) of the Target Group as at the Completion Date is less than the Target Group’s audited net asset value (prepared in accordance with PRC GAAP) as at 30 June 2007, Qingdao Hisense shall pay for the amount of such shortfall. If the audited pro forma net asset value in accordance with PRC GAAP of the Target Group as at the Completion Date is more than its audited net asset value in accordance with PRC GAAP as at 30 June 2007, the Company will pay the amount in excess in cash to Qingdao Hisense.

The Consideration will be satisfied in full by the allotment and the issue of 364,097,421 Consideration Shares by the Company to Qingdao Hisense at the issue price of RMB6.98 (equivalent to approximately HK$7.31) per Consideration Share. The Consideration Shares represent approximately 36.70% of the Company’s existing issued share capital and approximately 26.85% of the Company’s issued share capital as enlarged by the issue of the Consideration Shares. The Consideration Shares shall be issued as fully paid and shall rank pari passu in all respects with the A Shares in issue.

As set out in the Letter from the Board, the issue price of RMB 6.98 (equivalent to approximately HK$7.31) per Consideration Share (the “Issue Price”) was determined after arm’s length negotiations between the Company and Qingdao Hisense with reference to the arithmetic average of the daily weighted average price of the Company’s A Shares as quoted on Shenzhen Stock Exchange for the 20 trading days immediately preceding its suspension of trading on 4 September 2007 and represents:

• (i) a discount of approximately 11.42% to the closing price of RMB7.88 per A Share as quoted on Shenzhen Stock Exchange on 3 September 2007, being the last trading day (the “Last Trading Day”) immediately prior to the suspension of trading in the A Shares on 4 September 2007;

• (ii) a discount of approximately 2.93% to the average closing price of approximately RMB7.191 per A Share for the 10 consecutive trading days up to and including the Last Trading Day;

• (iii) a premium of approximately 0.22% over the average closing price of approximately RMB6.965 per A Share for the 30 consecutive trading days up to and including the Last Trading Day;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

• (iv) a discount of approximately 16.11% to the closing price of 8.32 per A Share as at the Latest Practicable Date; and

• (v) a premium of approximately 721.18% over the closing price of HK$0.89 (equivalent to approximately RMB0.85) per H Share as quoted on the Stock Exchange on 15 June 2005, being the last trading day immediately prior to the suspension of trading in the H Shares on 16 June 2005.

As set out in the Letter from the Board, Qingdao Hisense has undertaken that it will not dispose of the Consideration Shares within 36 months after the registration of the Consideration Shares with the Shenzhen branch of China Securities Depository and Clearing Corporation Limited.

Given the Consideration of approximately RMB2,541.4 million and the current financial position of the Kelon Group with unaudited total net liabilities of approximately RMB719.1 million as at 30 June 2007, we consider the satisfaction of the Consideration by way of the issue of the Consideration Shares to be fair and reasonable and in the interests of the Company and the Shareholders as a whole. As regard the cash payment to adjust for the difference in the net asset value of the Enlarged Group as at 30 June 2007 and the date of Completion, we also consider such arrangement under the Acquisition Agreement to be fair and reasonable given the fact that (i) the total number of the Consideration Shares to be issued has to be fixed as at the date of the Acquisition Agreement and the Company cannot after Completion issue more Consideration Shares, or revoke any Consideration Shares that have been issued, to cater for the excess or the shortfall (as the case may be) of the net asset value of the Enlarged Group as at the date of Completion and (ii) such cash payment will be determined objectively based on an audit to be conducted by independent auditors.

As advised by the management of the Company, in the event that the Company is required to pay to Qingdao Hisense in cash for any excess of the audited pro forma net asset value of the Target Group as at the Completion Date, such cash payment will be satisfied by the internal resources of the Kelon Group. Given that Qingdao Hisense will become the controlling shareholder of the Company upon Completion and will continue to provide all necessary financial support to the Kelon Group for its ongoing operations, we do not consider that the aforesaid cash payment, if any, will result in any material adverse impact on the operations or financial position of the Kelon Group.

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3. Information on the Target Group

The Target Group is principally engaged in the manufacture and sale of airconditioners and refrigerators in the PRC. The Target Group is also engaged in the trading of other electronic appliances. Pursuant to the Acquisition Agreement, the Target Group consists of:

• (i) 55% of the shareholding interests in Hisense Beijing, which in turn holds 60% of the registered capital in Hisense Nanjing;

• (ii) 100% of the shareholding interests in Hisense Shandong;

• (iii) 51% of the shareholding interests in Hisense Zhejiang; and

• (iv) Hisense Marketing Business.

As at the date of the Acquisition Agreement, the Target Group had interests in four production plants and their aggregate annual production capacity amounted to approximately three million units of air-conditioners and two million units of refrigerators in 2006.

The Target Group’s air-conditioner manufacturing operation is primarily carried out through Hisense Shandong and Hisense Zhejiang, whereas its refrigerator manufacturing operation is primarily carried out through Hisense Beijing and its subsidiary, namely Hisense Nanjing. In addition to the equity interests in Hisense Shandong, Hisense Zhejiang, Hisense Beijing and Hisense Nanjing, the Target Group has assets transferred from Hisense Marketing which are mainly for use in the sales and marketing operations of the White Goods products produced by Hisense Shandong, Hisense Zhejiang, Hisense Beijing and its subsidiary. Set out below are the particulars of the aforesaid companies which comprise the Target Group.

Hisense Shandong

Hisense Shandong was established on 8 November 2007 as a limited liability company in the PRC with a registered capital of RMB500,000,000. The business scope of Hisense Shangdong includes research and development, manufacture and sale of air-conditioning products, plastic injection mould and product aftersales maintenance services.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Hisense Zhejiang

Hisense Zhejiang was established on 22 April 2005 as a limited liability company in the PRC with a registered capital of RMB110,000,000. As at the Latest Practicable Date, the registered capital of Hisense Zhejiang was held as to 51% and 49% by Qingdao Hisense and Zhejiang Xianke, respectively. The business scope of Hisense Zhejiang includes production of air-conditioners and the manufacture and sale of other household appliances, provision of related technical services, import and export of goods and technology. As set out in the Letter from the Board, the major business of Hisense Zhejiang is the manufacture of household air-conditioners and related products. It has the second largest variablefrequency air-conditioners production base in the PRC. The annual productivity of Hisense Zhejiang with respect to air-conditioners was 300,000 sets in 2006.

Hisense Beijing

Hisense Beijing was established on 13 June 2002 as a limited liability company in the PRC with a registered capital of RMB85,710,000. As at the Latest Practicable Date, the registered capital of Hisense Beijing was held as to 55% and 45% by Qingdao Hisense and Xuehua Group, respectively. The business scope of Hisense Beijing includes manufacture and sale of refrigerator products and other household appliance products; operation of the export business of self-produced products and technologies of the enterprise and other members enterprises; import of the raw materials, machines and facilities, equipment and apparatuses, parts and technologies required for the production processes of the enterprise and its member enterprise (except goods and technologies operated by enterprises specified by the government or prohibited for import and export); and operation of raw material processing and compensation trade. As set out in the Letter from the Board, the major business of Hisense Beijing is the research and development and manufacture of refrigerator products. The annual productivity of Hisense Beijing with respect to refrigerators was 900,000 sets in 2006.

Hisense Nanjing

Hisense Nanjing was established on 18 November 2004 as a joint venture with a registered capital of RMB80,580,000 by Hisense Beijing and Nanjing Yilaite. Following a capital injection pursuant to an agreement dated 20 August 2006 made between Hisense Beijing and Nanjing Aipulaisi High and New Technology Industrial Park Company Limited, the registered capital of Hisense Nanjing increased to RMB128,691,500 was held effectively as to 60% and 40% by Hisense Beijing and Nanjing Yilaite, respectively. The business scope of Hisense Nanjing includes research and development, manufacture, sale and marketing of chlorine-

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free freezing products; import and export business for self-operation; and agency business of various goods and technologies (except goods and technologies operated by enterprises specified by the State or prohibited for import and export). As set out in the Letter from the Board, the major business of Hisense Nanjing is the research and development and manufacture of refrigerator products. The annual productivity of Hisense Nanjing with respect to refrigerators was 500,000 sets in 2006.

Set out below is a summary of the Target Group’s results of operations for each of the three years ended 31 December 2006 and the six months ended 30 June 2007 (the “Reporting Period”) extracted from the accountants’ report on the Target Group (the “Accountants’ Report”) contained in Appendix II to the Circular:

Turnover sales of air-conditioners Sales of refrigerators Sales of other electronic appliances Cost of sales Gross Profit Profit from operations Profit for the year/period Profit attributable to equity shareholders of the Target Group	Year ended 31 December 2004 2005 2006 (Audited) (Audited) (Audited) RMB’000 RMB’000 RMB’000 2,188,637 2,878,792 2,651,347 580,034 1,159,039 1,696,112 17,080 102,502 105,092 2,785,751 4,140,333 4,452,551 (2,174,430) (3,326,086) (3,379,451) 611,321 814,247 1,073,100 89,934 160,515 112,242 77,340 109,500 59,435 72,657 101,921 53,993	Six months ended 30 June 2006 2007 (Unaudited) (Audited) RMB’000 RMB’000 1,399,724 1,949,200 925,186 910,136 57,217 32,633 2,382,127 2,891,969 (1,710,376) (2,175,606) 671,751 716,363 78,607 126,208 34,527 67,027 25,098 51,512

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As noted from the above table, the Target Group was operating profitably for each of the three years ended 31 December 2006 and the six months ended 30 June 2007. The turnover of the Target Group represented the net amounts received and receivable for the sales of air-conditioners, refrigerators and other electronic appliances during the Reporting Period and the Target Group’s business operations, customers and production facilities are all located in the PRC. Sale of airconditioners represented the largest business segment of the Target Group throughout the Reporting Period and accounted for over 60% of the total turnover for the year ended 31 December 2006 and the six months ended 30 June 2007. The turnover of the Target Group increased from approximately RMB2,785.8 million for 2004 to approximately RMB4,452.6 million for 2006, representing a compound average growth rate of about 26.5% per annum. The Target Group recorded a gross profit of approximately RMB611.3 million, RMB814.2 million, RMB1,073.1 million and RMB716.4 million, representing a gross profit margin of approximately 21.9%, 19.7%, 24.1% and 24.8%, for each of the three years ended 31 December 2006 and the six months ended 30 June 2007, respectively. During the same periods, the profit attributable to the equity holders of the Target Group was approximately RMB72.7 million, RMB101.9 million, RMB54.0 million and RMB51.5 million, respectively.

As explained in Appendix III to the Circular, the substantial increase in the Target Group’s turnover in 2005 was mainly due to the introduction of the vector inverter refrigerators and the expansion in the Target Group’s distribution channel coverage. The turnover of the refrigerator business has increased significantly since 2005 as a result of the popularity of the newly introduced vector inverter refrigerators in the PRC. The increase in the net profit in 2005 was mainly due to the significant increase in the total turnover contributed from the sales of highend white goods products such as the vector inverter refrigerators and side-byside door refrigerators. The net profit margin remained stable in 2005. Due to the substantial increase in the selling and distribution expenses as well as advertising and marketing expenses in connection with the Target Group’s policy to adjust its product mix to high-end products and to upgrade the product image, the Target Group recorded a substantial decrease in its net profit and net profit margin in 2006. As compared to the six months ended 30 June 2006, the increase in the Target Group’s turnover for the six months ended 30 June 2007 was mainly due to the sales of a greater variety of products being offered by the Target Group to its customers and a wider coverage of its distribution channels in the PRC during the period. In addition, the Target Group recorded a higher turnover growth in the refrigerator business as a result of the introduction of the Multi-DC Inverter airconditioners in the first half of 2007.

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Based on the audited combined balance sheet of the Target Group as at 30 June 2007, its principal assets were trade and other receivables of approximately RMB1,782.5 million, inventories of approximately RMB837.9 million, property, plant and equipment of approximately RMB672.0 million and cash and cash equivalents of approximately RMB43.4 million. The Target Group also had payments for leasehold land held for own use under operating leases amounted to approximately RMB105.9 million as at 30 June 2007. The current liabilities of the Target Group as at 30 June 2007 were mainly trade and other payables of approximately RMB2,406.2 million and trade deposits received of approximately RMB203.8 million. The Target Group had bank borrowings of RMB104.5 million as at 30 June 2007, of which RMB76.5 million was payable on demand or within one year with the remaining balance of RMB28.0 million not exceeding five years. As at 30 June 2007, the Target Group had net assets of approximately RMB630.8 million which comprised the minority interests of approximately RMB176.9 million and the capital and reserves attributable to the equity shareholders of the Target Group of approximately RMB454.0 million.

Further details of the analysis on the financial performance and financial position of the Target Group during the Reporting Period are set out in the Accountants’ Report and Appendix III to the Circular.

4. Evaluation of the Consideration and the Issue Price

Based on the audited profits attributable to the equity shareholders of the Target Group of approximately RMB54.0 million for the financial year ended 31 December 2006 as shown in the Accountants’ Report, the consideration of approximately RMB2,541.4 million for the acquisition of the Target Group under the Acquisition Agreement represents a price-to-earnings ratio (“PER”) of approximately 47.1 times. In addition, based on the audited net assets of the Target Group (which is equivalent to the capital and reserves attributable to the equity shareholders of the Target Group) of approximately RMB454.0 million as at 30 June 2007, the Consideration represents a premium of approximately 459.8% over such audited net assets.

In order to assess the reasonableness of the Consideration, we have attempted to compare it with the market statistics of companies which have A shares listed on either Shanghai Stock Exchange or Shenzhen Stock Exchange, the principal businesses of which include the manufacture and sales of air-conditioners, refrigerators, freezers and other electronic appliances in the PRC and which

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recorded profitable results in their latest financial year (the “Comparable Companies”). Details of our findings on the Comparable Companies are summarised in the table below.

			Earnings	Net asset
			per share set	value per
			out in the	share set out
			latest	in the latest
			published	published	PER	PBR	Market
	Closing price		audited	audited	as at the	as at the	Capitalisation
	as at the Last		financial	financial	Last Trading	Last Trading	as at the Last
Company	Trading Day		statements	statements	Day	Day	Trading Day
		(RMB)	(RMB)	(RMB)	(times)	(%)	(RMB’ million)
Gree Electric Appliances,		40.05	0.78	3.87	51.3	934.9	32,256.7
Inc. of Zhuhai
GuangDong Media Electric		34.06	0.80	5.53	42.6	515.9	42,939.8
Appliances Co., Ltd.
Hefei Meiling Co., Ltd.		9.17	0.0289	2.12	317.3	332.5	2,756.0
Hisense Electric Co., Ltd.		12.57	0.253	5.37	49.7	134.1	6,206.7
Qingdao Aucma Company		10.91	0.0286	3.02	381.5	261.3	3,720.7
Limited
Qingdao Haier Co., Ltd.		24.38	0.262	4.84	93.1	403.7	32,633.1
Wuxi Little Swan Company		17.45	0.11	3.25	158.6	436.9	4,148.7
Limited
Average		N/A	N/A	N/A	156.3	431.3	17,808.8
The Target Group		N/A	N/A	N/A	47.1	459.8	N/A

As shown in the above table, the PER of the Comparable Companies ranges from approximately 42.6 times to 381.5 times, with an average of approximately 156.3 times. On this basis, the PER of approximately 47.1 times as represented by the Consideration of approximately RMB2,541.4 million over the profit attributable to the equity shareholders of the Target Group of approximately RMB54.0 million for the financial year ended 31 December 2006 represents the second lowest ratio among all the PER of the Comparable Companies and is significantly less than their average ratio of approximately 156.3 times.

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As regards the price-to-book ratio (“PBR”), i.e. the closing price of the share over its net asset value, of the Comparable Companies, we note that they all represented a premium ranging from approximately 134.1% to 934.9% and had a average of approximately 431.3%. The equivalent PBR at a premium of approximately 459.8% as represented by the Consideration over the audited net assets of the Target Group falls within such range of the Comparable Companies and is slightly higher than their average of approximately 431.3%. Since the market prices of a majority of the Comparable Companies represented a premium over their respective net asset values, we consider the Consideration to be comparable and in line with the general market valuation of companies in a business similar to that of the Target Group.

In general, valuation based on asset values is more appropriate when valuing businesses under liquidation or asset-based businesses such as property investment companies. Given the industrial business nature and profitable track record of the Target Group, we consider that the use of PER, being one of the most commonly used references for valuing industrial companies with profitable operating results, to be more relevant in assessing the reasonableness and fairness of the Consideration. In the present case, the PER of about 47.1 times represented by the Consideration is less than any of the respective PER of the Comparable Companies and is substantially lower than their average of approximately 156.3 times of the Comparable Companies. Accordingly, we are of the view that the Consideration of approximately RMB2,541.4 million under the Acquisition Agreement is fair and reasonable.

Although the Company has both H Shares and A Shares, the Consideration will be satisfied in full by the issue of the A Shares as the Consideration Shares only. In addition, as the trading in the H Shares had been suspended for more than two years since 16 June 2005, the historical market prices of the H Shares are unlikely to provide any meaningful analysis in terms of PER or PBR.

As noted in the Letter from the Board, a valuation report on the Target Group has been prepared in compliance with the relevant PRC regulatory requirements to provide an indication to the PRC regulators and the PRC Shareholders of the business values of the Target Group (the “PRC Valuation Report”). In addition, in accordance with the relevant requirements of the Listing Rules, the Directors have prepared the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts, which are set out, respectively, in Appendices V and VI to the Circular and of which the auditors of the Company have opined that, so far as the accounting policies and calculations are concerned, the IFRS 2007 Profit Forecasts and the IFRS 2008 Profit Forecasts have been properly compiled on the bases and

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assumptions made by the Directors and presented on a basis consistent in all material respects with the accounting policies adopted by the Kelon Group and the Target Group in their respective annual audited financial statements for the year ended 31 December 2006 in accordance with IFRS. The Directors have confirmed that they have prepared the IFRS Profit Forecasts after due and careful enquiry.

However, as stated in the Letter from the Board, the PRC Valuation Report does not meet the standards required by Rule 14.62 of the Listing Rules or Rules 10 and 11 of the Takeovers Code and the IFRS Profit Forecasts do not meet the standards required by Rule 10 of the Takeovers Code. The IFRS Profit Forecasts are prepared for illustrative purposes only and does not provide any assurance or indication that any event will take place in the future and may not give a true picture of the results of the Enlarged Group for the two years ending 31 December 2008. There is a warning statement in the Letter from the Board that the Shareholders and potential investors should exercise caution in placing reliance on the PRC Valuation Report or the IFRS Profit Forecasts in assessing the merits and demerits of the Acquisition and the Whitewash Waiver. In this connection, we have not placed any reliance on the PRC Valuation Report or the IFRS Profit Forecasts in assessing the fairness and reasonableness of the Acquisition. In forming our opinion regarding the Acquisition, we do not consider either the PRC Valuation Report or the IFRS Profit Forecasts to be relevant to our analysis.

As mentioned above, the Consideration will be satisfied in full by the allotment and the issue of 364,097,421 Consideration Shares by the Company to Qingdao Hisense and the Issue Price of RMB6.98 was determined after arm’s length negotiations between the Company and Qingdao Hisense with reference to the average closing price of the Company’s A Shares as quoted on Shenzhen Stock Exchange for the 20 trading days immediately preceding its suspension of trading on 4 September 2007.

Having considered that (i) as the Kelon Group had net liabilities of approximately RMB719.1 million as at 30 June 2007, the Shares had no value as far as net assets are concerned; (ii) based on the earning per Share of RMB0.07 for the year ended 31 December 2006 as set out in the Annual Report, the Issue Price of RMB6.98 would represent a PER of approximately 99.7 times, which is substantially higher than the PER of approximately 47.1 times as represented by the Consideration over the profit attributable to the equity shareholders of the Target Group for the year ended 31 December 2006; (iii) the Issue Price represented a slight premium of approximately 0.22% over the average closing price of approximately RMB6.965 per A Share for the 30 consecutive trading days up to and including the Last Trading Day; and (iv) the expected positive effect of the Acquisition on the Kelon Group’s financial position (details of which are set out in the section headed “Possible financial effects of the Acquisition” below), we are also of the view that the Issue Price is fair and reasonable.

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5. General prospects of the White Goods market in the PRC

According to the China Statistical Yearbook 2006 (中國統計年鑑2006) compiled by the National Bureau of Statistics of China (中華人民共和國國家統計局 ), the total population in China amounted to 1.31 billion at the year end of 2005 with an average annual compound growth rate of approximately 0.8% over the years from 1995 to 2005. With a population of over 1.3 billion, China represents a huge consumer market with enormous potential by its sheer size alone. On the other hand, China’s gross domestic product (“GDP”) has grown from approximately RMB6,079.4 billion to RMB18,308.5 billion from 1995 till 2005, representing a threefold increase since 1995. Based on the information published by Asian Development Bank (“ADB”) on 17 September 2007, the GDP growth of China reached 11.5% in the first half of 2007 and ADB forecasted that the GDP of China would achieve an annual growth of 11.2% and 10.8% for 2007 and 2008, respectively.

In addition, according to the China Statistical Yearbook 2006, the per capita annual disposable income of the PRC’s urban households grew from approximately RMB4,283 to RMB10,493 from 1995 till 2005 (representing an average annual compound growth rate of approximately 11%), whereas the per capita annual net income of the PRC’s rural households grew from approximately RMB1,578 to RMB3,255 during the same period (representing an average annual compound growth rate of approximately 7.5%). With household income increasing, consumer spending is expected to rise. Based on the information published on the website of the National Bureau of Statistics of China, the total retail sales of household appliances and video appliances in the PRC grew from approximately RMB83.2 billion to RMB161.3 billion from 2001 till 2005, representing an average annual compound growth rate of approximately 18.0%. In particular, the total number of air-conditioners and refrigerators produced in China in 2005 was estimated to be approximately 67.6 million and 29.9 million, respectively, as compared to 23.3 million air-conditioners and 13.5 million refrigerators produced in 2001. As China has been experiencing continuous and steady economic growth over the years and with rising household income and spending power and improving living standard in China, we believe that the demand for household electrical appliances in China market remains strong.

Greater home ownership levels and increasing floor space of residential buildings in the urban and rural areas of the PRC in recent years have also generated higher demand for and spending on household electrical appliances. In particular, according to the China Statistical Yearbook 2006, the per capita floor space of residential buildings in the PRC’s urban areas grew from approximately 16.3 square metres to 26.1 square metres from 1995 till 2005 (representing an average annual compound growth rate of approximately 4.8%), whereas that in the rural

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areas grew from approximately 21.0 square metres to 29.7 square metres during the same period (representing an average annual compound growth rate of approximately 3.5%). On the other hand, we note from the relevant statistics on the total living expenditure of the PRC’s urban households that one of the major spending areas was on household facilities, articles and services, and that the per capita annual consumption on household facilities, articles and services of the PRC’s urban households increased from approximately RMB263 to RMB447 from 1995 till 2005, representing an average annual compound growth rate of approximately 5.5%.

According to the China Statistical Yearbook 2006, it has been estimated that, on average, every 100 rural households in China only owned approximately 20.1 refrigerators and 6.4 air-conditioners in 2005, whereas every 100 urban households in China owned approximately 90.7 refrigerators and 80.7 air-conditioners. In view of the existing consumption level of refrigerators and air-conditioners by the PRC’s rural households, we are of the view that the demand for household appliances, especially refrigerators and air-conditioners, of the rural households in China can be enormous and the consumer market for these households has a great potential. In this connection, we note that the year 2007 is the second year of the 11th Five-Year Program for Economic and Social Development (20062010) promulgated by the National People’s Congress of the PRC. In general, the goal of the 11th Five-Year Program is to promote a more balanced, equitable, and sustainable growth of the PRC’s economy through strategies directed at boosting private consumption, and promoting income equality, rural development, and environmental protection. In particular, rural development is one of the main emphases of the Chinese Government and it pledges to raise the income level of the rural households and promote public services in the countryside. In addition to abolishing the agricultural tax in 2006, the Chinese Government will eliminate all tuition and miscellaneous fees for nine years of compulsory education in rural areas of China in 2007. With the expectation that there will be an increase in the income level of the PRC’s rural households, their spending power is likely to increase in the future.

With a population of 1.31 billion and an expected continuous and steady economic growth in the future as well as rising household income and spending power and improving living standard, China represents a huge consumer market with enormous potential. Accordingly, we are generally of the view that the demand for household electrical appliances including air-conditioners and refrigerators in China market is promising.

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6. Possible financial effects of the Acquisition

• (i) Accounting effect

Following completion of the Acquisition, each of Hisense Beijing, Hisense Nanjing, Hisense Shandong and Hisense Zhejiang will become a subsidiary of the Company and their financial results will be consolidated into the Kelon Group’s financial results with the corresponding treatment of the equity interests not owned by the Kelon Group as minority interests in its consolidated financial statements.

• (ii) Liquidity and sufficiency of working capital

Based on the Company’s unaudited condensed consolidated balance sheet as at 30 June 2007 set out in the Interim Report, the Kelon Group had current assets of approximately RMB3,088.4 million and current liabilities of approximately RMB5,880.2 million, representing a net-current-liabilities position of approximately RMB2,791.8 million or a current ratio of approximately 0.53. In addition, the Kelon Group had total net liabilities of approximately RMB719.1 million as at 30 June 2007 and the gearing ratio of the Kelon Group as at 30 June 2007 was approximately 113.9%, as represented by the Kelon Group’s total liabilities of approximately RMB5,880.2 million over its total assets of approximately RMB5,161.1 million.

As mentioned above, the Consideration will be satisfied in full by the allotment and the issue of 364,097,421 Consideration Shares by the Company to Qingdao Hisense. Based on the unaudited pro forma financial information of the Enlarged Group set out in Appendix IV to the Circular, prepared on the assumption that the Acquisition had been completed as at 30 June 2007, the Kelon Group’s net current liabilities and total net liabilities would be approximately RMB2,939.3 million and RMB88.3 million, respectively. On such basis, while the pro forma net current liabilities of the Enlarged Group would increase by approximately RMB147.5 million, its current ratio would improve slightly from approximately 0.53 to approximately 0.64 as a result of the Acquisition. In addition, the total net liabilities of the Enlarged Group would decrease significantly by approximately RMB630.8 million from approximately RMB719.1 million to RMB88.3 million as a result of the Acquisition, and the gearing ratio of the Enlarged Group would also significantly decrease to approximately 1.01%.

As stated in Appendix IV to the Circular regarding the working capital of the Enlarged Group, the Directors, after due and careful enquiry, are satisfied that after taking into account the banking facilities available and the existing cash and bank balances, the Enlarged Group has sufficient working capital for at least twelve months from the date of the Circular.

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(iii) Capital and reserves attributable to equity holders of the Company

As mentioned above, based on the unaudited pro forma financial information of the Enlarged Group prepared on the assumption that the Acquisition had been completed as at 30 June 2007, the total net liabilities of the Enlarged Group would be reduced significantly by approximately RMB630.8 million from RMB719.1 million to RMB88.3 million. Accordingly, we are of the view that the Acquisition is expected to have a positive effect on the capital and reserves attributable to equity holders of the Company, which is in the interests of the Company and the Shareholders as a whole.

In summary, although the net current liabilities of the Enlarged Group may increase as a result of the Acquisition, it is expected that the total net liabilities of the Enlarged Group will be reduced significantly. In addition, the Acquisition is expected to improve the current ratio and gearing ratio of the Enlarged Group. Given the overall favourable impact expected to be brought by the Acquisition, we are of the view that the Acquisition is in the interests of the Company and the Shareholders as a whole.

7. Dilution effect on shareholding

As at the Latest Practicable Date, the Independent Shareholders were interested in approximately 68.29% (comprising approximately 21.96% and 46.33% held by the A Share Shareholders and the H Share Shareholders, respectively) of the issued share capital of the Company. If the Acquisition Agreement is approved and becomes unconditional, the Company will issue 364,097,421 Consideration Shares to Qingdao Hisense, representing approximately 36.70% of the existing issued share capital of the Company or approximately 26.85% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares. On this basis, the aggregate shareholding interests of the Independent Shareholders in the Company will be reduced to approximately 49.96% (comprising approximately 16.07% and 33.89% held by the A Share Shareholders and the H Share Shareholders, respectively), representing a dilution of approximately 26.84% from their existing holdings of 68.29%.

Having considered (i) Qingdao Hisense is currently the largest shareholder of the Company and Hisense Group Co., being the ultimate holding company of Qingdao Hisense, is one of the major electronic companies in the PRC and has the relevant expertise in the domestic electrical appliances market in the PRC as well as strong financial resources; (ii) the Target Group has demonstrated a profitable track record; (iii) the Acquisition is expected to have a positive impact on the financial position of the Kelon Group; and (iv) the issue price for the Consideration Shares at RMB6.98 per Consideration Share is fair and reasonable having taken

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into account the existing net liabilities of the Kelon Group, the slight premium represented by the Issue Price over the 30-day average closing price of the A Shares and the PER of approximately 99.7 times for the Issue Price, we are of the view that the dilution on the shareholding interests of the Independent Shareholders in the Company is acceptable.

II. The non-exempt continuing connected transactions

1. Principal terms of the Business Co-operation Framework Agreement

The Business Co-operation Framework Agreement is valid for the period commencing from the date of Completion to 31 December 2008 (which can be terminated before its expiration by mutual agreement of the parties or in the event of any breaches of the agreement) and covers the following aspects of business co-operation between the Enlarged Group and the Hisense Group:

a. Purchase of moulds

Under the Business Co-operation Framework Agreement, the Company has agreed the Relevant Subsidiaries will purchase from a subsidiary of Hisense Group Co. on a non-exclusive basis such quantities of moulds as such subsidiary of Hisense Group Co. may require from time to time after Completion for the manufacture of household electrical appliances, including but not limited to air-conditioners. Individual mould purchase orders setting out specific terms including the price, payment terms, technological services and terms of delivery will be entered into by the relevant contracting parties and such terms must be consistent with the principles and the terms of the Business Co-operation Framework Agreement, including the pricing, operation and trading policies set out therein.

Pursuant to the Business Co-operation Framework Agreement, the market price for the manufacture of moulds is determined by open tender invited by the Relevant Subsidiaries. As advised by the Company, the relevant subsidiary of Hisense Group Co. may from time to time submit tenders or bids to manufacture the moulds for such products as requested by the Relevant Subsidiaries in their invitations to tender (which are also extended to various independent third parties). In addition, the purchase prices to be paid by the Relevant Subsidiaries to the relevant subsidiary of Hisense Group Co. shall be on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) Independent Third Parties. Such transactions will be conducted in the ordinary and usual course of business of the Enlarged Group. The Business Co-operation Framework Agreement will not restrict the Relevant

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Subsidiaries from purchasing moulds from other suppliers, nor will it restrict the relevant subsidiary of Hisense Group Co. from supplying its moulds to any other third parties. Payment for the purchase of moulds should be made by telegraphic transfer or bank-issued bills by the Relevant Subsidiaries within 60 days from the receipt of delivery of the moulds.

In view of (i) the pricing for the manufacture of moulds will be determined by open tendering process which is a transparent pricing mechanism; (ii) the purchase prices to be paid by the Relevant Subsidiaries to the relevant subsidiary of Hisense Group Co. will be 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 (iii) the non-exclusive arrangement under the Business Co-operation Framework Agreement provides the Company with the flexibility without any commitment on the purchase amount, we are of the view that the terms of the Business Cooperation Framework Agreement, including the payment terms, with respect to the purchase of moulds by the Relevant Subsidiaries from the relevant subsidiary of Hisense Group Co. are fair and reasonable, on normal commercial terms and in the interests of the Company and the Shareholders as a whole.

b. Purchase of raw materials and components

Under the Business Co-operation Framework Agreement, the Company has agreed the Relevant Subsidiaries will purchase from the relevant subsidiaries of Hisense Group Co. on a non-exclusive basis such quantities of raw materials (including electronic control board and plastic parts) and components of air-conditioners as they may require from time to time for the manufacture of air-conditioners.

Individual raw materials purchase and supply orders setting out specific terms including the price, payment terms, technological services and terms of delivery will be entered into by the relevant contracting parties from time to time and such terms must be consistent with the principles and the terms of the Business Co-operation Framework Agreement including the pricing, operation and trading policies set out therein. The purchase price of the raw materials and 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 the raw materials and components of air-conditioners

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from time to time. Such transactions will be conducted in the ordinary and usual course of business of the Enlarged Group, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) Independent Third Parties.

The Business Co-operation Framework Agreement will not restrict the Relevant Subsidiaries from purchasing raw materials or components of airconditioners from other suppliers, nor will it restrict the relevant subsidiaries of Hisense Group Co. from selling its raw materials or components of airconditioners to any other third parties. Payment for the purchase of raw materials and air-conditioners’ components should be made by telegraphic transfer or bank-issued bills by the Relevant Subsidiaries within 60 days from the receipt of delivery of the raw materials and air-conditioners’ components.

On the basis that (i) the terms (including the price, payment terms, technological services and terms of delivery) of the raw materials purchase and supply orders entered into between the relevant contracting parties will be consistent with those of the Business Co-operation Framework Agreement and will be determined in accordance with the principle of fairness and reasonableness and on terms not less favourable to the Company than those available to or from (as appropriate) Independent Third Parties and (ii) the non-exclusive arrangement under the Business Co-operation Framework Agreement provides the Company with the flexibility without any commitment on the purchase amount, we are of the view that the terms of the Business Co-operation Framework Agreement, including the payment terms, with respect to the purchase of raw materials and components are fair and reasonable, on normal commercial terms and in the interests of the Company and the Shareholders as a whole.

• c. Provision of property leasing and management and communication services

Under the Business Co-operation Framework Agreement, the Company has agreed that the Relevant Subsidiaries will engage Hisense Group Co. and certain of its subsidiaries for the provision of property leasing, management and communication services by Hisense Group Co. and certain of its subsidiaries to the Relevant Subsidiaries. The contracting parties have also agreed to enter into individual service provision orders setting out specific terms for the provision of services including scope of the services, fees and payment terms and such terms must be consistent with the principles and the terms of the Business Co-operation Framework Agreement.

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The fees payable by the Relevant Subsidiaries for the provision of property leasing, management and communication services will be determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between the contracting parties with reference to the market price for the provision of such services from time to time. Such transactions will be conducted in the ordinary and usual course of business of the Enlarged Group, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) Independent Third Parties. The Business Co-operation Framework Agreement will not restrict the Relevant Subsidiaries from engaging other services providers to provide such property leasing, management and communication services, nor will it restrict relevant subsidiaries from providing their services to any other third parties. The fees for the provision of property leasing, management and communication services will be calculated on a monthly basis and such monthly fee should be made by telegraphic transfer or bank-issued bills by the Relevant Subsidiaries within 15 days from the next following month.

On the basis that the terms (including the fees and payment terms) of the service provision orders to be entered into between the contracting parties will be consistent with those of the Business Co-operation Framework Agreement and will be determined in accordance with the principle of fairness and reasonableness with reference to the market price for the provision of such services from time to time, we are of the view that the terms of the Business Co-operation Framework Agreement, including the payment terms, with respect to the provision of property leasing, management and communication services are fair and reasonable, on normal commercial terms and in the interests of the Company and the Shareholders as a whole.

2. Reasons for the Business Co-operation Framework Agreement

We understand from the Company that as the existing subsidiaries of Hisense Group Co., the members of the Target Group have been carrying out certain transactions in relation to purchase of moulds, materials and components and provision of property leasing, management and communication services with other subsidiaries of Hisense Group Co. in the ordinary and usual course of business. Upon Completion, each member of the Target Group will become a subsidiary of the Enlarged Group and it is anticipated that such members of the Target Group will continue to carry out the relevant transactions with the subsidiaries of Hisense Group Co. which will constitute non-exempt continuing connected transactions of the Company under the Listing Rules. Accordingly, for the purposes of governing

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such Non-Exempt Continuing Connected Transactions for the financial year ending 31 December 2008 and ensuring compliance with Chapter 14A of the Listing Rules, the Company entered into the Business Co-operation Framework Agreement with Hisense Group Co. and certain of its subsidiaries which will be subject to reporting, announcement and independent shareholders’ approval requirements under Rule 14A.35 of the Listing Rules. In addition, having taken into account the relevant requirement of the Listing Rules that the Non-Exempt Continuing Connected Transactions will also be subject to an annual cap for each of the relevant financial years to be covered by the Business Co-operation Framework Agreement and the fact that the estimation of the relevant annual caps for any financial years beyond 2008 may involve greater uncertainty, the Company currently proposes that the Business Co-operation Framework Agreement will only be valid for the period commencing from the date of Completion to 31 December 2008.

The principal businesses of the Relevant Subsidiaries are mainly the manufacture of air-conditioners and refrigerators as well as sales and marketing of White Goods, whereas the principal businesses of the relevant subsidiaries of Hisense Group Co. include those in relation to the manufacture of household appliances including the design and manufacture of moulds and electrical components. In addition, the Relevant Subsidiaries have been leasing properties and engaging the related property management and communication services from the relevant subsidiaries of Hisense Group Co. because of the closed location of the relevant parties. Having considered the past business co-operation between the Relevant Subsidiaries and the relevant subsidiaries of Hisense Group Co., we are of the view that the entering into of the Business Co-operation Framework Agreement will facilitate the Enlarged Group in the continuation of its core business in the manufacture and sale of household appliances and is therefore in the interests of the Company and the Shareholders as a whole.

3. Rationale for determining the maximum value of the transactions contemplated under the Business Co-operation Framework Agreement

Pursuant to Rule 14A.35(2) of the Listing Rules, the transactions contemplated under the Business Co-operation Framework Agreement during the period commencing from the Completion Date to 31 December 2008 will be subject to an annual cap for the financial year ending 31 December 2008 of the Company. The proposed maximum aggregate values, or “caps”, of the transactions

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

contemplated under the Business Co-operation Framework Agreement for the year ending 31 December 2008 and the unaudited value of similar transactions between the relevant parties in 2007 are summarised below:

		Unaudited value	Increase of the
		of similar	proposed caps as
		transactions	compared to the
		between the	value of similar
		relevant parties	transactions
	Proposed caps for	for the	for the
	**the year ending **	**ten months ended **	ten months ended
	31 December 2008	31 October 2007	31 October 2007
	(RMB’ million)	(RMB’ million)	(%)
Maximum aggregate value of
purchase of moulds:	20.00	6.12	226.8
Maximum aggregate value of purchase of
raw materials and components:	83.75	44.67	87.5
Maximum aggregate value of provision of
property leasing, management and
communication services:	13.70	6.21	121.0

The table below summarises the basis for the proposed maximum value for each category of transactions contemplated under the Business Co-operation Framework Agreement:

Category

Basis for the proposed annual cap

Purchase of moulds

(i) similar transactions between the Relevant Subsidiaries with the relevant subsidiary of Hisense Group Co. before Completion; (ii) the prevailing market conditions about the increasing demand for electrical appliances in the PRC; (iii) the projected rising level of production of household electrical appliances of the Enlarged Group for the year ending 31 December 2008 based on its forecast of the market demand which has taken into account the steady growth of the PRC economy and increasing purchasing power of its citizens; and (iv) the intention of the Relevant Subsidiaries to increase their purchases from, and to further enhance the business co-operation with, the relevant subsidiary of Hisense Group Co. in 2008 as a result of the satisfactory co-operation relationship established between the parties in the past and the quality and compatibility of moulds manufactured by the relevant subsidiary of Hisense Group Co.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Category

Basis for the proposed annual cap

• Purchase of raw materials (i) similar transactions between the Relevant and Components Subsidiaries with the relevant subsidiaries of Hisense Group Co. before Completion; (ii) the prevailing market conditions about the increasing demand for electrical appliances in the PRC; (iii) the projected level of production of household electrical appliances of the Enlarged Group for the year ending 31 December 2008 based on its forecast of the market demand which has taken into account the steady growth of the PRC economy and increasing purchasing power of its citizens; and (iv) the intention of the Relevant Subsidiaries to increase their purchases from, and to further enhance the business co-operation with, the relevant subsidiaries of Hisense Group Co. in 2008 as a result of the satisfactory co-operation relationship established between the parties in the past and the quality and compatibility of the raw materials and components manufactured by the relevant subsidiaries of Hisense Group Co.

• Provision of property (i) similar transactions between the Relevant leasing, management Subsidiaries with the relevant subsidiaries of Hisense and communication Group Co. before the Completion; (ii) the increase in services demand for the provision of the relevant services due to the projected rising level of production and business operation of the Enlarged Group for the year ending 31 December 2008; and (iii) the intention to further enhance the business co-operation between the Relevant Subsidiaries and relevant subsidiaries of Hisense Group Co. in 2008 as a result of the satisfactory co-operation relationship established between the parties in the past.

As indicated from above, all the proposed annual caps have been arrived at after taking into account the similar transactions conducted between the relevant parties for the ten months ended 31 October 2007, and we note that such annual caps all represent a significant increase over the actual value of such transactions. In particular, the proposed annual cap of RMB20.0 million for the purchase of moulds for the year ending 31 December 2008 represents an increase of approximately 226.8% from the historical unaudited value of such transactions of approximately RMB6.1 million for the ten months ended 31 October 2007.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We understand from the management of the Company that, as far as the purchases of moulds and raw materials and components are concerned, the relevant proposed annual caps have been largely arrived at based on the projected rising level of production of household electrical appliances of the Enlarged Group for the year ending 31 December 2008 which is in turn based on the Company’s forecast of the market demand for electrical appliances in the PRC. In arriving at the relevant forecast, the Company has taken into account the steady growth of the PRC economy as well as the increasing purchasing power of its citizens. For the purpose of evaluating the fairness and reasonableness of the proposed annual caps for the Non-exempt Continuing Connected Transactions, we have carried out a review on the worksheet prepared by the management of the Company for calculation of the relevant annual caps including the review of the quantities and the unit prices of the subject items. Based on the result of our review, we are satisfied that the calculation of the proposed annual caps has been conducted on a fair and reasonable basis.

Regarding the projected rising level of production of household electrical appliances of the Enlarged Group for the year ending 31 December 2008, as mentioned in the section headed “General prospects of the White Goods market in the PRC” above, under which we have sought to consider the statistics relating to the PRC economy that are relevant to the household appliances business in general, we are of the view that the demand for household electrical appliances in China market is promising given China’s huge consumer market and its expected continuous and steady economic growth in the future as well as rising household income and spending power and improving living standard. Accordingly, we are also of the view that it is fair and reasonable to expect that there will be an increase in the production of household electrical appliances of the Enlarged Group for the year ending 31 December 2008.

While the proposed annual caps under the Business Co-operation Framework Agreement for the year ending 2008 appear to represent a significant increase over the historical unaudited value of the similar transactions between the relevant parties, it should be noted that (i) the proposed transactions contemplated under the Business Co-operation Framework Agreement will continue to be conducted in the ordinary and usual course of business of the Enlarged Group, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) Independent Third Parties; (ii) given the promising market demand for household electrical appliances in China market in the coming future, it is generally in the interest of the Company to maximise the value of the transactions to be contemplated under the Business Co-operation Framework Agreement so as to provide for its expected utilisation as well as possible expansion in the business operations in the coming financial year; and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iii) the non-exclusive arrangement under the Business Co-operation Framework Agreement provides the Kelon Group with the flexibility without any commitment on the actual transaction values. Accordingly, we are of the view that the entering into of the Business Co-operation Framework Agreement is in the interests of the Company and the Shareholders as a whole and the proposed annual caps under the Business Co-operation Framework Agreement have been arrived at on a fair and reasonable basis.

III. The whitewash waiver

Following the Completion, Qingdao Hisense together with parties acting in concert with it will be interested in approximately 44.46% of the enlarged issued share capital of the Company. In accordance with Rule 26.1 of the Takeovers Code, Qingdao Hisense and parties acting in concert with it are obliged to make a conditional mandatory general offer for all of the issued Shares and all other securities of the Company in issue which are not already owned or agreed to be acquired by Qingdao Hisense and parties acting in concert with it. Qingdao Hisense has applied to the Executive for the Whitewash Waiver under Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code. The Acquisition Agreement is conditional on, among other things, the approval of the Whitewash Waiver by the Independent Shareholders by way of a poll at the EGM and on the grant of the Whitewash Waiver by the Executive. The Executive has indicated, subject to the approval by the Independent Shareholders on a vote taken by way of a poll, to waive any obligations of Qingdao Hisense and the parties acting in concert with it to make a general offer which might result from the Completion.

Based on our analysis of the terms of the Acquisition Agreement, the background of the Company, the business and financial performance of the Target Group and the basis for the Consideration and the Issue Price as set out above, we consider that the Acquisition is in the interests of the Company and the Shareholders as a whole. If the Whitewash Waiver is not granted by the Executive or if the Whitewash Waiver is not approved by the Independent Shareholders, the Acquisition Agreement will be terminated in accordance with its terms and the Company will lose all the benefits and business opportunities that are expected to be brought by the successful completion of the Acquisition. In addition, we note that the trading in the H Shares had been suspended for more than two years since 16 June 2005. While it is not certain as to whether or when the Company will be able to resume the trading in the H Shares on the Stock Exchange, we consider that the successful implementation of the Acquisition will assist the Kelon Group in strengthening its operations and rebuilding the stakeholders’ confidence on the Kelon Group, which may be a positive factor in any resumption proposal that the Company may have in the future. Accordingly, we are of the view that for the purposes of implementing the Acquisition as discussed above, the grant of the Whitewash Waiver is in the interests of the Company and the Shareholders as a whole and is fair and reasonable as far as the Independent Shareholders are concerned.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

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 Kelon Group have been significantly deteriorated following the severe disruption to its operations as a result of the CSRC’s investigation. The Hisense Group is 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. Given the substantial interests of Hisense Group Co. in the Company, it is commercially sensible for Hisense Group Co. to assist the Kelon Group in rebuilding its market position by way of the injection of the White Goods Business through the Acquisition.

• (ii) The Target Group has demonstrated a profitable track record during the Reporting Period and the demand for household electrical appliances including air-conditioners and refrigerators in China market appears to be promising.

• (iii) The terms of the Acquisition Agreement including the Consideration and the Issue Price are fair and reasonable.

• (iv) In view of the expected benefits of the Acquisition and in particular, the expected improvement in the financial position of the Kelon Group as set out in the section headed “Possible financial effects of the Acquisition” in this letter, the resulting dilution on the existing shareholding interests of the Independent Shareholders in the Company is acceptable.

• (v) For the purposes of implementing the Acquisition, the grant of the Whitewash Waiver is in the interests of the Company and the Shareholders as a whole and is fair and reasonable as far as the Independent Shareholders are concerned.

• (vi) the Non-exempt Continuing Connected Transactions will be carried out in accordance with the principle of fairness and reasonableness and on terms not less favourable to the Kelon Group than those available to or from (as appropriate) independent third parties.

Based on the above, we are of the opinion that the Acquisition and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole and their respective terms are fair and reasonable. We are also of the opinion that the Non-exempt Continuing Connected Transactions are on normal commercial terms, in the ordinary and usual course of business, fair and reasonable and in the interests of the Company and the Shareholder as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Accordingly, we would advise the Independent Board Committee and the Independent Shareholders that the Independent Shareholders should vote in favour of the relevant resolutions to approve the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver at the EGM.

Yours faithfully,

For and on behalf of

Access Capital Limited Alexander Tai Executive Director

— 87 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

A. SUMMARY OF FINANCIAL STATEMENTS

The following is a summary of the audited consolidated results, assets and liabilities of the Kelon Group prepared under IFRS for the three years ended 31 December 2006 which are extracted from the respective annual reports of the Kelon Group. All such financial information should be read in conjunction with the audited consolidated financial statements and accompanying notes, which are included in the Kelon Group’s annual reports. There were qualifications to each of the auditors’ reports in respect of the Kelon Group’s financial statements for the three years ended 31 December 2006. The qualified audit opinions for each of the Kelon Group’s financial statements for the three years ended 31 December 2006 are set out in Part D of this Appendix. The audited financial statements and accompanying notes of the Kelon Group for the year ended 31 December 2006, as extracted from the Group’s 2006 annual report, are set out in Part B of this Appendix.

In addition, the following summary of the unaudited consolidated results, assets and liabilities of the Kelon Group for the six-month period ended 30 June 2006 and 2007 is derived from the unaudited interim financial report of the Kelon Group prepared under IFRS. All such financial information should be read in conjunction with the unaudited interim financial statement and accompanying notes, which are included in the Kelon Group’s interim report. The unaudited interim financial statements and accompanying notes of the Kelon Group for the six-month period ended 30 June 2007, as extracted from the Kelon Group’s 2007 interim report, are set out in Part C of this Appendix.

— I-1 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Consolidated Income Statements

Turnover Cost of sales Gross profit Other income and gains Distribution costs Administrative expenses Other operating expenses Profit/(loss) from operations Dilution loss on share reform of an associate Finance costs Share of results of associates (Loss)/profit before taxation Income tax (expense)/credit (Loss)/profit after taxation Attributable to: Equity holders of the Company Minority interests Dividends Basic (loss)/earnings per share	Year ended 31 December 2004 2005 2006 RMB’000 RMB’000 RMB’000 (Audited (Audited (Audited) & restated) & restated) 7,923,001 6,978,372 6,564,257 (6,265,943) (6,817,774) (5,474,785) 1,657,058 160,598 1,089,472 73,104 73,328 409,305 (1,182,555) (1,517,946) (869,207) (507,875) (1,495,569) (391,749) (9,374) (815,931) (56,815) 30,358 (3,595,520) 181,006 — — (16,317) (159,138) (162,524) (140,672) (84,252) (31,571) 3,590 (213,032) (3,789,615) 27,607 (23,718) (1,021) 20,871 (236,750) (3,790,636) 48,478 (226,294) (3,726,095) 69,218 (10,456) (64,541) (20,740) (236,750) (3,790,636) 48,478 — — — RMB(0.23) RMB(3.76) RMB0.07	For the six months ended 30 June 2006 2007 RMB’000 RMB’000 (Unaudited) (Unaudited) 3,586,177 4,853,981 (2,882,368) (4,022,551) 703,809 831,430 53,286 203,287 (558,786) (648,747) (136,206) (229,567) (13,414) (11,411) 48,689 144,992 — — (83,068) (48,019) (2,256) (966) (36,635) 96,007 (1,010) 585 (37,645) 96,592 (29,153) 117,374 (8,492) (20,782) (37,645) 96,592 — — RMB(0.03) RMB0.12

Note: There is no extraordinary items nor exceptional items in any of the period shown above.

— I-2 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

As at 31 December 2004 2005 RMB’000 RMB’000 (Audited (Audited & restated) & restated) ASSETS Non-current assets Property, plant and equipment 2,309,454 1,828,689 Investment properties — 27,723 Other intangible assets 469,981 128,782 Payments for leasehold land held for own use under operating leases 720,754 470,080 Interests in associates 124,138 92,186 Goodwill 39,195 — Negative goodwill (76,636) — Amount due from a related company 34,000 — Other investments 7,249 — Available-for-sale financial assets — — Deferred tax assets — — 3,628,135 2,547,460 Current assets Inventories 3,320,116 1,232,979 Trade and other receivables 2,428,907 1,414,388 Taxation recoverable 102 1,474 Pledged bank deposits 1,302,587 102,814 Cash and cash equivalents 1,017,534 184,284 8,069,246 2,935,939 Non-current assets held for sale — — Total assets 11,697,381 5,483,399 LIABILITIES Current liabilities Trade and other payables 4,348,549 3,534,418 Trade deposits received 848,041 277,845 Provisions 119,338 209,916 Taxation payable 29,944 26,846 Other liabilities — 43,106 Bank borrowings 3,351,445 2,160,523 8,697,317 6,252,654	2006 RMB’000 (Audited) 1,601,625 26,144 125,831 372,533 78,981 — — — — — 21,387 2,226,501 919,837 1,119,733 827 248,257 142,247 2,430,901 — 4,657,402 3,093,956 488,587 169,995 26,663 46,978 1,556,702 5,382,881	As at 30 June 2007 RMB’000 (Unaudited) 1,415,813 37,200 123,478 343,437 77,972 — — — — — 25,007
		2,022,907 1,131,798 1,695,099 103 30,797 230,647
		3,088,444
		49,767
		5,161,118
		3,960,295 461,812 178,176 28,980 56,884 1,194,090
		5,880,237

— I-3 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Non-current liabilities Bank borrowings-amount due after one year Other liabilities Total liabilities Net current liabilities Total assets less current liabilities Total Net Liabilities Capital and reserves attributable to equity holders of the Company Share Capital Share premium Statutory reserves Capital reserve Foreign exchange reserve Accumulated losses Minority interests Total Equity	As at 31 December 2004 2005 RMB’000 RMB’000 (Audited (Audited & restated) & restated) 16,723 — 69,963 30,818 86,686 30,818 8,784,003 6,283,472 (628,071) (3,316,715) 3,000,064 (769,255) 2,913,378 (800,073) 992,007 992,007 1,195,597 1,195,597 114,581 114,581 403,143 403,143 1,103 4,954 (150,984) (3,794,745) 2,555,447 (1,084,463) 357,931 284,390 2,913,378 (800,073)	2006 RMB’000 (Audited) — 13,594 13,594 5,396,475 (2,951,980) (725,479) (739,073) 992,007 1,195,597 114,581 402,666 14,956 (3,725,527) (1,005,720) 266,647 (739,073)	As at 30 June 2007 RMB’000 (Unaudited) — —
			—
			5,880,237
			(2,791,793) (719,119) (719,119)
			992,007 1,195,597 114,581 357,951 19,749 (3,608,153)
			(928,268) 209,149
			(719,119)

— I-4 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

B. FINANCIAL STATEMENTS OF THE KELON GROUP FOR THE YEAR ENDED 31 DECEMBER 2006

Consolidated Income Statement

For the year ended 31 December 2006

Notes Revenue 4 Cost of sales Gross profit Other income and gains 6 Distribution costs Administrative expenses Other operating expenses 7 Profit/(loss) from operations Dilution loss on share reform of an associate Share of results of associates Finance costs 9 Profit/(loss) before income tax 10 Income tax credit/(expense) 13 Profit/(loss) for the year Attributable to: Equity holders of the Company Minority interests Dividends Basic earnings/(loss) per share attributable to equity holders of the Company 14	2006 RMB’000 6,564,257 (5,474,785) 1,089,472 409,305 (869,207) (391,749) (56,815) 181,006 (16,317) 3,590 (140,672) 27,607 20,871 48,478 69,218 (20,740) 48,478 — RMB0.07	2005 RMB’000 (Restated) 6,978,372 (6,817,774) 160,598 73,328 (1,517,946) (1,495,569) (815,931) (3,595,520) — (31,571) (162,524) (3,789,615) (1,021) (3,790,636) (3,726,095) (64,541) (3,790,636) — RMB(3.76)

— I-5 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Consolidated Balance Sheet

As at 31 December 2006

Notes Assets Non-current assets Property, plant and equipment 15 Investment properties 16 Payments for leasehold land held for own use under operating leases 17 Interests in associates 19 Intangible assets 21 Goodwill 22 Deferred tax assets Available-for-sale financial assets 20 Current assets Inventories 23 Trade and other receivables 24 Taxation recoverable Pledged bank deposits Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables 26 Trade deposits received Provisions 27 Taxation payable Other liabilities 28 Bank borrowings 29	2006 RMB’000 1,601,625 26,144 372,533 78,981 125,831 — 21,387 — 2,226,501 ------------------- 919,837 1,119,733 827 248,257 142,247 2,430,901 ------------------- 4,657,402 3,093,956 488,587 169,995 26,663 46,978 1,556,702 5,382,881 -------------------	2005 RMB’000 (Restated) 1,828,689 27,723 470,080 92,186 128,782 — — —
		2,547,460 ------------------- 1,232,979 1,414,388 1,474 102,814 184,284
		2,935,939 ------------------- 5,483,399
		3,534,418 277,845 209,916 26,846 43,106 2,160,523
		6,252,654 -------------------

— I-6 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Consolidated Balance Sheet

As at 31 December 2006

Notes Non-current liabilities Other liabilities 28 Total liabilities Net current liabilities Total assets less current liabilities TOTAL NET LIABILITIES Capital and reserves attributable to equity holders of the Company Share capital 30 Share premium Statutory reserves 35(a) Capital reserve Revaluation reserve Foreign exchange reserve Accumulated losses Minority interests TOTAL EQUITY	2006 RMB’000 13,594 13,594 ------------------- 5,396,475 ------------------- (2,951,980) (725,479) (739,073) 992,007 1,195,597 114,581 29,096 373,570 14,956 (3,725,527) (1,005,720) 266,647 (739,073)	2005 RMB’000 (Restated) 30,818 30,818 ------------------- 6,283,472 ------------------- (3,316,715) (769,255) (800,073) 992,007 1,195,597 114,581 29,573 373,570 4,954 (3,794,745) (1,084,463) 284,390 (800,073)

— I-7 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Consolidated Statement of Changes in Equity

For the year ended 31 December 2006

As at 1 January 2005, as previously reported Effect on retrospective restatement of errors_(Note 2) As at 1 January 2005, as restated Exchange differences on translation Effect of deconsolidation of a subsidiary(Note 18 (iii)) Loss for the year As at 31 December 2005, as restated As at 31 December 2005, as previously reported Effect of retrospective restatement of errors(Note 2)_ As at 1 January 2006, as restated Share of reserves of associates Exchange differences on translation Profit for the year As at 31 December 2006	Share capital RMB’000 992,007 — 992,007 — — — 992,007 992,007 — 992,007 — — — 992,007	Share premium RMB’000 1,195,597 — 1,195,597 — — — 1,195,597 1,195,597 — 1,195,597 — — — 1,195,597	Statutory reserves (Note 35(a)) RMB’000 114,581 — 114,581 — — — 114,581 114,581 — 114,581 — — — 114,581	Capital reserve RMB’000 29,573 — 29,573 — — — 29,573 29,573 — 29,573 (477) — — 29,096	Revaluation reserve RMB’000 373,570 — 373,570 — — — 373,570 373,570 — 373,570 — — — 373,570	Foreign exchange reserve RMB’000 1,103 — 1,103 3,851 — — 4,954 4,954 — 4,954 — 10,002 — 14,956	Accumulated losses RMB’000 (74,348) 5,698 (68,650) — — (3,726,095) (3,794,745) (3,776,520) (18,225) (3,794,745) — — 69,218 (3,725,527)	Equity attributable to equity holders of Company RMB’000 2,632,083 5,698 2,637,781 3,851 — (3,726,095) (1,084,463) (1,066,238) (18,225) (1,084,463) (477) 10,002 69,218 (1,005,720)	Minority interests RMB’000 357,931 — 357,931 — (9,000) (64,541) 284,390 284,390 — 284,390 — 2,997 (20,740) 266,647	Total equity RMB’000 2,990,014 5,698
										2,995,712 3,851 (9,000) (3,790,636)
										(800,073)
										(781,848) (18,225)
										(800,073) (477) 12,999 48,478
										(739,073)

— I-8 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Consolidated Cash Flow Statement

For the year ended 31 December 2006

Operating activities Profit/(loss) before income tax Adjustments for: Share of results of associates Dilution loss on share reform of an associate Interest income Interest expense Depreciation of property, plant and equipment Depreciation of investment properties Amortisation of intangible assets Amortisation of payments for leasehold land held for own use under operating leases Impairment loss on investment in a deconsolidated subsidiary Impairment loss on goodwill Revaluation decrease of property, plant and equipment Impairment loss on intangible assets Impairment loss on payments for leasehold land held for own use under operating leases Impairment loss on available-for-sale financial assets (Gain)/loss on disposal of property, plant and equipment, net Impairment loss on trade and other receivables Reversal of impairment loss on trade and other receivables Write down of inventories to net realisable value Write off of inventories Reversal of provision for sales rebates Loss on write off of intangible assets Gain on disposal of payments for leasehold land held for own use under operating leases Operating profit/(loss) before working capital changes Decrease in inventories Decrease in trade and other receivables Decrease in trade and other payables Increase/(decrease) in trade deposits received (Decrease)/increase in provisions (Decrease)/increase in other liabilities Cash generated from/(used in) operations Interest received Interest paid Tax paid Net cash flows from/(used in) operating activities	2006 RMB’000 27,607 (3,590) 16,317 (5,238) 121,321 248,283 641 4,126 14,449 — — 25,159 — — — (5,180) — (61,012) 42,700 — (37,593) — (38,597) 349,393 270,443 396,716 (289,972) 210,741 (39,921) (13,352) 884,048 5,238 (121,321) (52) 767,913 -------------------	2005 RMB’000 (Restated) (3,789,615) 31,571 — (29,443) 154,431 383,854 1,513 4,551 20,422 11,000 39,195 269,660 338,677 18,207 7,249 100,673 479,006 — 292,976 15,787 — 71 (12,083) (1,662,298) 1,777,544 772,754 (1,100,987) (569,093) 90,662 3,961 (687,457) 29,443 (154,431) (5,491) (817,936) -------------------

— I-9 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Investing activities Purchase of property, plant and equipment Purchase of intangible assets Proceeds on disposal of property, plant and equipment (Increase)/decrease in pledged bank deposits Proceeds on disposal of payments for leasehold land held for own use under operating leases Net cash flows (used in)/generated from investing activities Financing activities Bank borrowings raised Repayment of bank borrowings (Repayment to)/advance from a shareholder Net cash flows used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the year Decrease in cash and cash equivalents due to deconsolidation of a subsidiary (Note 18(iii)) Effect of foreign exchange rate changes Cash and cash equivalents at end of year representing bank balances and cash	2006 RMB’000 (141,477) (1,175) 88,372 (145,443) 90,646 (109,077) ------------------- 1,520,864 (2,124,009) (110,000) (713,145) ------------------- (54,309) 184,284 — 12,272 142,247	2005 RMB’000 (Restated) (334,736) (2,100) 29,989 1,199,773 — 892,926 ------------------- 2,262,171 (3,468,863) 301,004 (905,688) ------------------- (830,698) 1,017,534 (1,307) (1,245) 184,284

— I-10 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Notes to the Financial Statements

31 December 2006

1. General information

Guangdong Kelon Electrical Holdings Company Limited (the “Company”) was incorporated in the People’s Republic of China (hereinafter referred to as the “PRC”) on 16 December 1992. Its H shares were listed on The Stock Exchange of Hong Kong Limited on 23 July 1996 and its A shares were listed on the Shenzhen Stock Exchange on 13 July 1999.

Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”), a company incorporated in the PRC, was the single largest shareholder of the Company. As at 31 December 2005, Greencool Enterprise held 262,212,194 domestic legal person shares of the Company, representing 26.43% of the Company’s total share capital.

On 9 September 2005, Greencool Enterprise entered into an equity transfer agreement with Qingdao Hisense Air-Conditioner Company Limited (“Hisense Air-Conditioner”) in connection with the transfer of 262,212,194 shares of domestic legal person shares of the Company, representing 26.43% of total share capital of the Company. The equity transfer was completed on 13 December 2006. Therefore, Hisense Air-Conditioner has become the single largest shareholder of the Company as at 31 December 2006.

The Group is principally engaged in the manufacture and sale of refrigerators and air-conditioners.

The address of the registered office and principal place of business of the Company is No. 8 Ronggang Road, Ronggui, Shunde, Foshan, the PRC.

The English names by which some of the companies are referred to in these financial statements represent management’s best efforts in translating their Chinese names as no English names have been registered for these companies.

The financial statements are presented in Renminbi (“RMB”), which is the same as the functional currency of the Group.

2. Retrospective restatement of errors

The financial statements for the year ended 31 December 2006 include a restatement of the 2005 financial statements to correct the errors noted by the Company. The effects of the restatement on the 2005 financial statements are summarised below:

Income statement: Increase in administrative expenses_(i) Increase in other operating expenses(i)_ Increase in loss for the year Increase in basic loss per share	Effect on 2005 RMB’000 (15,787) (8,136) (23,923) RMB (0.03)

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Balance sheet: Decrease in inventories_(i) Decrease in trade and other receivables(ii) Decrease in property, plant and equipment(i) Decrease in total assets Decrease in trade and other payables(ii) Decrease in trade deposits received(ii) Decrease in total liabilities Increase in net liabilities Decrease in accumulated losses as at 1 January(ii) Increase in loss for the year(i)_ Decrease in equity as at 31 December

Effect on 2005 RMB’000 (15,787) (26,708) (8,136) (50,631) -------------------- 9,372 23,034 32,406 (18,225) 5,698 (23,923) (18,225)

• (i) This represents the effect arising from loss of inventories and property, plant and equipment in a subsidiary, Jiangxi Kelon Industrial Development Co., Ltd. (“Jiangxi Kelon”) in 2005 due to the business of Jiangxi Kelon was interrupted after the freezure of its assets by the Higher People’s Court of Jiangxi Province in August 2005.

• (ii) This represents other operating income in connection with a write back of unidentified net credit balances brought forward from prior years.

3. Principal accounting policies

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) of the IASB. IFRSs include International Accounting Standards (“IAS”) and Interpretations (collectively referred to as “IFRSs”). In addition, the consolidated financial statements also comply with the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

(b) Basis of preparation

As at 31 December 2006, the Group’s current liabilities exceeded its current assets by approximately RMB2,952 million (2005: RMB3,317 million (restated)). In addition, the Group has outstanding short-term loans in the aggregate of approximately RMB1,557 million (2005: RMB2,161 million) of which approximately RMB255 million (2005: RMB1,233 million) were overdue as at 31 December 2006. The management has implemented various measures including: (1) streamlining operational processes and improving internal management mechanism; (2) introducing cost reduction plans; (3) rationalising business

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

structures of the Group; and (4) rebuilding the image and reputation of the Group. In addition, the Group negotiated with certain banks to restructure the amounts due to them and the Company’s management confirmed that most of the Group’s bankers have expressed their intention to reschedule overdue bank borrowings and/or renew/grant credit facilities to the Group. Based on the above assessment, the directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis.

The consolidated financial statements for the year ended 31 December 2006 comprise the Company and its subsidiaries and the Group’s interests in associates. The measurement basis used in the preparation of the financial statements is the historical cost basis, as modified by the revaluation of certain of its property, plant and equipment and financial instruments at fair value. The accounting policies and bases adopted in the preparation of these financial statements differ from those used in the statutory accounts of the Group which are prepared in accordance with generally accepted accounting principles and relevant financial regulations in the PRC (“PRC GAAP”). The differences arising from the restatement of the results of operations for compliance with IFRSs, if any, are adjusted in these financial statements but will not be taken up in the accounting books of the Group.

The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next financial year are disclosed in Note 39.

(c) Application of International Financial Reporting Standards

In the current year, the Group has applied all the new and revised standards, amendments and interpretations (“new IFRSs”) issued by the IASB, that are relevant to its operation and effective for accounting periods beginning on or after 1 January 2006. The adoption of the new IFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented.

(d) Potential impact arising from the new accounting standards not yet effective

The Group has not yet applied the following new standards, amendment or interpretations that have been issued but are not yet effective. The directors of the Company anticipated that the application of these new IFRSs will have no material impact on the financial statements of the Group.

• IFRS 7, “Financial instruments: Disclosures”, effective for annual periods beginning or after 1 January 2007. The directors considered that this standard has no significant impact to the Group and the Group will take action to assess the impact of this standard to the Group for the financial year ending 31 December 2007 when they considered appropriate;

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• IFRS 8, “Operating segments”, effective for annual periods beginning on or after 1 January 2009. The directors considered that this standard has no significant impact to the Group and the Group will take action to assess the impact of this standard to the Group for the financial year ending 31 December 2007 when they considered appropriate;

• Amendment to IAS 1, “Capital disclosures”, effective for annual periods beginning on or after 1 January 2007. This amendment would result in more disclosure on the Group’s capital management;

• IFRIC – Int 7, “Applying the restatement approach under IAS 29 financial reporting in hyperinflationary economies”, effective for annual periods beginning on or after 1 March 2006. This interpretation is not relevant for the Group;

• IFRIC – Int 8, “Scope of IFRS 2”, effective for annual periods beginning on or after 1 May 2006. This interpretation is not relevant for the Group;

• IFRIC – Int 9, “Reassessment of embedded derivatives”, effective for annual periods beginning on or after 1 June 2006. This interpretation is not relevant for the Group;

• IFRIC – Int 10, “Interim financial reporting and impairment”, effective for annual periods beginning on or after 1 November 2006. This interpretation has no significant impact to the Group;

• IFRIC – Int 11, “IFRS 2 – Group and treasury share transactions”, effective for annual periods beginning on or after 1 March 2007. This interpretation is not relevant for the Group; and

• IFRIC – Int 12, “Service concession arrangements”, effective for annual periods beginning on or after 1 January 2008. This interpretation has no significant impact to the Group.

• (e) Basis of consolidation

Where the Company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The consolidated financial statements present the results of the Company and its subsidiaries (“the Group”) as if they formed a single entity. Inter-company transactions and balances between group companies are therefore eliminated in full in preparing the consolidated financial statements.

On acquisition, the assets and liabilities of the relevant subsidiaries are measured at their fair values at the date of acquisition. The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective dates of acquisition or up to the effective dates of disposal, as appropriate.

Minority interests represent the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Minority interests are presented in the consolidated balance sheet within equity, separately from equity attributable to the equity holders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered.

(f)

Associates

Where the Group has the power to participate in (but not control) the financial and operating policy decisions of another entity, that entity is classified as an associate. Associates are initially recognised in the consolidated balance sheet at cost and thereafter adjusted for Group’s share of the post-acquisition change in the associate’s net assets. The Group’s share of post-acquisition after tax profits and losses is recognised in the consolidated income statement, except that losses in excess of the Group’s investment in the associate are not recognised unless there is an obligation to make good those losses.

Profits and losses arising on transactions between the Group and its associates are recognised only to the extent of unrelated investors’ interests in the associate. The investor’s share in the associate’s profits and losses resulting from these transactions is eliminated against the carrying value of the associate.

Any premium paid for an associate above the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the associate and subject to impairment testing in the same way as goodwill arising on a business combination described below.

(g) Goodwill

Goodwill represents the excess of the cost of a business combination over the interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired. Cost comprises the fair values of assets given, liabilities assumed and equity instruments issued, plus any direct costs of acquisition.

Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated income statement.

Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated income statement.

For the purpose of impairment testing, goodwill arising from an acquisition is allocated to each of the relevant cash-generating units that are expected to benefit from the synergies of the acquisition. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

For goodwill arising on an acquisition in a financial year, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that financial year. When the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the unit first, and then to the other assets of the unit pro rata on the basis of the carrying amount to each asset in the unit. Any impairment loss for goodwill is recognised directly in the consolidated income statement. An impairment loss for goodwill is not reversed in subsequent periods.

(h) Property, plant and equipment

Property, plant and equipment are stated at cost or valuation less accumulated depreciation and accumulated impairment losses.

Certain property, plant and equipment held for use in the production or supply of goods or services, or for administrative purposes are stated in the balance sheet at their revalued amounts, being the fair value on the basis of their existing use at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially for that which would be determined using fair values at the balance sheet date.

Any revaluation increase arising on the revaluation of such property, plant and equipment is credited to the property revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to the income statement to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of property, plant and equipment is charged as an expense to the extent that it exceeds the balance, if any, held in the property revaluation reserve relating to a previous revaluation of that asset.

Depreciation is charged to write off the carrying value of property, plant and equipment other than construction in progress over their estimated useful lives, after taking into account their estimated residual value, using the straight-line method. The estimated useful lives are as follows:

Leasehold land and buildings	20 to 50 years
Plant, machinery and equipment	5 to 10 years
Moulds	3 years
Motor vehicles	5 years

Construction in progress represents buildings, plant and machinery on which construction work has not been completed and which, upon completion, management intends to hold for production purposes. Construction in progress is carried at costs which include development and construction expenditure incurred and interest and other direct costs attributable to the development less any accumulated impairment losses. On completion, constructions in progress are transferred to other property, plant and equipment at cost or valuation less accumulated impairment losses. No depreciation is provided in respect of construction in progress until it is completed and is ready for its intended use.

The gain or loss on disposal of an asset item other than leasehold land and buildings is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the income statement.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(i) Investment properties

Investment properties, principally comprising office buildings, are held for long-term rental yields and are not occupied by the Group. Investment properties are carried at cost less accumulated depreciation and accumulated impairment losses, if any.

Depreciation is provided using the straight-line method to write off the cost of the investment properties over their estimated useful lives of 20 to 50 years. Where the carrying amount of an investment property is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

(j) Payments for leasehold land held for own use under operating leases

Payments for leasehold land held for own use under operating leases represent up-front payments to acquire long-term interests in lessee-occupied properties. These payments are stated at cost and are amortised over the period of the lease on a straight-line basis to the income statement.

(k) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to lessee. All other leases are classified as operating leases.

The Group as lessor

Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.

Rental income from operating leases is recognised in the consolidated income statement on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term.

The Group as lessee

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a “finance lease”), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the income statement over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are retained by the lessor (an “operating lease”), the total rentals payable under the lease are charged to the income statement on a straight-line basis over the lease term.

The land and buildings elements of property leases are considered separately for the purposes of lease classification.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(l) Intangible assets (other than goodwill)

• (i) Externally acquired intangible assets

Externally acquired intangible assets are initially recognised at cost. Subsequently, intangible assets with finite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is provided on a straight-line basis over their useful lives. Intangible assets with indefinite useful lives are carried at cost less any accumulated losses. The amortisation expense is included within administrative expenses in the income statement.

Intangible assets, separate from goodwill, are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques.

The significant intangibles recognised by the Group, their useful economic lives and the methods used to determine the cost of intangibles acquired in a business combination are as follows:

Intangible		Useful economic life	Valuation method
Trademarks		Indefinite	Multiple of estimated revenues
			and profits
Software		4 years	Estimated replacement cost
Non-patent	technologies	4 years	Estimated discounted cashflow

• (ii) Internally generated intangible assets (research and development costs)

Expenditure on internally developed products is capitalised if it can be demonstrated that:

• It is technically feasible to develop the product for it to be sold;

• Adequate resources are available to complete the development;

• There is an intention to complete and sell the product;

• The Group is able to sell the product;

• Sale of the product will generate future economic benefits; and

• Expenditure on the project can be measured reliably.

Capitalised development costs are amortised over the periods the Group expects to benefit from selling the products developed. The amortisation expense is included within cost of sales in the income statement.

Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the income statement as incurred.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(m) Impairment of other assets

At each balance sheet date, the Group reviews the carrying amounts of the following assets to determine whether there is any indication that those assets have suffered an impairment loss or an impairment loss previously recognised no longer exists or may have decreased:

• property, plant and equipment (other than properties carried at revalued amounts);

• payments for leasehold land held for own use under operating lease; and

• investments in associates

If the recoverable amount (i.e. the greater of the net selling price and value in use) of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount under another IFRS, in which case the impairment loss is treated as a revaluation decrease under that IFRS.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount under another IFRS, in which case the reversal of the impairment loss is treated as a revaluation increase under that IFRS.

(n) Financial instruments

• (i) Financial assets

The Group classifies its financial assets into one of the following categories, depending on the purpose for which the asset was acquired. The Group’s accounting policy for each category is as follows:

Financial assets at fair value through profit or loss: include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Gains or losses on investments held for trading are recognised in the income statement.

Financial assets may be designated upon initial recognition as at fair value through profit or loss if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or loss on them on a different basis; (ii) the assets are part of a group of financial assets which is managed and its performance evaluated on a fair value basis according to a documented management strategy; or (iii) the financial asset contains an embedded derivative that would need to be separately recorded.

At each balance sheet date subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value, with changes in fair value recognised directly in the income statement in the period in which they arise.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Loans and receivables: These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (trade debtors), but also incorporate other types of contractual monetary asset. At each balance sheet date subsequent to initial recognition, they are carried at amortised cost using the effective interest method, less any identified impairment losses.

An impairment loss is recognised in the income statement when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Held-to-maturity investments: These assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. At each balance sheet date subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method, less any identified impairment losses.

An impairment loss is recognised in the income statement when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Available-for-sale financial assets: Non-derivative financial assets not included in the above categories are classified as available-for-sale and comprise the Group’s strategic investments in entities not qualifying as subsidiaries, associates or jointly controlled entities. They are carried at fair value with changes in fair value recognised directly in equity. Where a decline in the fair value of an available-for sale financial asset constitutes objective evidence of impairment, the amount of the loss is removed from equity and recognised in the income statement.

Any impairment losses on available-for-sale financial assets are recognised in the income statement on available-for-sale debt investments, impairment losses are subsequently reversed if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, they are measured at cost less any identified impairment losses at each balance sheet date subsequent to initial recognition. An impairment loss is recognised in the income

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

statement when there is objective evidence that the asset is impaired. The amount of the impairment loss is measured as the difference between the carrying amount rate of return for a similar financial asset. Such impairment losses will not reverse in subsequent periods.

• (ii) Financial liabilities

The Group classifies its financial liabilities as other financial liabilities based on the purpose for which the liabilities was incurred.

Other financial liabilities include the following items:

• Trade payables and other short-term monetary liabilities, which are recognised at amortised cost.

• Bank borrowings and the debt element of convertible debt issued by the Group, which are initially recognised at the amount advanced net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance sheet. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

• (iii) Derecognition

The Group derecognises a financial asset when the contractual rights to the future cash flows in relation to the financial asset expire or when the financial asset has been transferred and the transfer meets the criteria for derecognition in accordance with IAS 39.

Financial liabilities are derecognised when the obligation specified in the relevant contact is discharged, cancelled or expires.

(o) Inventories

Inventories are initially recognised at cost, and subsequently at the lower of cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

(p) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes. Sales of goods are recognised when goods are delivered and title has passed.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Rental income under operating leases is recognised on a straight-line basis over the term of the relevant lease.

Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.

Subsidy income is recognised when the rights to receive the income is established and approved.

Penalty income is recognised when triggering events to receive payment occur and the amount of payment can be reliably measured.

(q)

Income taxes

Income taxes for the year comprise current tax and deferred tax.

Current tax is based on the profit or loss from ordinary activities adjusted for items that are nonassessable or disallowable for income tax purposes and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.

Deferred tax arises from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for tax purposes and is accounted for using the balance sheet liability method. Except for recognised assets and liabilities that affect neither accounting nor taxable profits, deferred tax liabilities are recognised for all temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is measured at the tax rates expected to apply in the period when the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted at the balance sheet date.

Income taxes are recognised in the income statement except when they relate to items directly recognised to equity in which case the taxes are also directly recognised in equity.

(r)

Foreign currency

Transactions entered into by Group entities in currencies other than the currency of the primary economic environment in which it operates (the “functional currency”) are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are similarly recognised immediately in the income statement, except for foreign currency borrowings qualifying as a hedge of a net investment in a foreign operation.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in the income statement in the period in which they arise, except for exchange differences arising on a monetary item that forms part of the Company’s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated financials statements. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the income statement for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

On consolidation, the results of foreign operations are translated into the presentation currency of the Group (i.e. RMB) at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the rate approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations are translated at the rate ruling at the balance sheet date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised directly in equity (the “foreign exchange reserve”). Exchange differences recognised in the income statement of group entities’ separate financial statements on the translation of long-term monetary items forming part of the Group’s net investment in the overseas operation concerned are reclassified to the foreign exchange reserve if the item is denominated in the functional currency of the Group or the overseas operation concerned.

On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the income statement as part of the profit or loss on disposal.

Goodwill and fair value adjustments on identifiable assets acquired arising on an acquisition of a foreign operation on or after 1 January 2005 are treated as assets and liabilities of that foreign operation and translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising are recognised in the foreign exchange reserve.

(s)

Employee benefits

Pursuant to the PRC laws and regulations, the Group established in the PRC makes monthly contributions to the basic old age pension for the local staff to a government agency. The contributions are made at a specific percentage on the standard salary set by the provincial government. The government agency is responsible for the pension liabilities relating to such staff on their retirement.

In addition, the Group manages a defined contribution pension scheme for its employees. The Group makes contributions based on a percentage of the eligible employees’ salaries plus a pre-determined amount funded by the Group and are charged to the income statement as they become payable in accordance with the rules of the scheme. When an employee leaves the scheme before his/her interest in the employer contributions is fully vested, the ongoing contributions payable by the Group may be reduced by the relevant amount of forfeited contributions.

The Group accounts for pension contributions on an accrual basis. Accrued contributions are shown as pension liabilities in the consolidated balance sheet.

(t) Borrowing costs

Borrowing costs attributable directly to the acquisition, construction or production of assets which require a substantial period of time to be ready for their intended use or sale, are capitalised as part of the cost of those assets. Income earned on temporary investments of specific borrowings pending their expenditure on those assets is deducted from borrowing costs capitalised.

All other borrowing costs are recognised in the income statement in the period in which they are incurred.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(u) Government grants

Government grants are recognised when there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments.

(v) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, which will probably result in an outflow of economic benefits that can be reasonably estimated.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, the existence of which will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(w) Warranty obligation

The Group provides free repairing services for its products and free replacement of the major components of its products for one or three years after sales.

The costs of the warranty obligation under which the Group agrees to remedy defects in its products are accrued at the time the related sales are recognised. Provision for warranty is accrued based on the estimated costs of fulfilling the total obligation, including handling and transportation costs. The costs are estimated by management based on past experience. The assumptions used to estimate the warranty provision are reviewed periodically in light of actual results.

4. Revenue

Revenue represents the net amounts received and receivable for goods sold during the year. An analysis of the Group’s revenue for the year is as follows:

Sales of refrigerators Sales of air-conditioners Sales of freezers Sales of product components	2006 RMB’000 3,327,896 2,533,360 231,972 471,029 6,564,257	2005 RMB’000 2,542,839 3,600,489 261,113 573,931
		6,978,372

— I-24 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

5. Business and geographical segments

Business segments

The Group is organised into four main operating divisions – refrigerators, air-conditioners, freezers and product components. These divisions are the basis on which the Group reports its primary segment information.

Segment information about these businesses is presented below:

Year ended 31 December 2006

• (i) Consolidated income statement

Refrigerators RMB’000 Turnover External sales 3,327,896 Inter-segment sales — Total revenue 3,327,896	Air- conditioners RMB’000 2,533,360 — 2,533,360	Freezers RMB’000 231,972 — 231,972	Product components RMB’000 471,029 671,840 1,142,869	Elimination RMB’000 — (671,840) (671,840)	Consolidated RMB’000 6,564,257 —
					6,564,257

Inter-segment sales are charged at prevailing market rates.

Result Segment result 150,644 Unallocated corporate income Profit from operations Dilution loss on share reform of an associate Share of results of associates 1,819 Finance costs Profit before income tax Income tax credit Profit for the year	22,395 1,385	10,000 127	(11,834) 259	— —	171,205 9,801
					181,006 (16,317) 3,590 (140,672)
					27,607 20,871
					48,478

— I-25 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(ii) Consolidated balance sheet

			Air-		Product
		Refrigerators	conditioners	Freezers	**components **	Consolidated
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
	Assets
	Segment assets	1,909,175	1,509,343	416,819	666,897	4,502,234
	Interests in associates	40,041	30,481	2,791	5,668	78,981
	Unallocated corporate assets					76,187
	Consolidated total assets					4,657,402
	Liabilities
	Segment liabilities	1,752,636	1,621,186	184,471	275,021	3,833,314
	Unallocated corporate
	liabilities					1,563,161
	Consolidated total liabilities					5,396,475
(iii)	Other information
			Air-		Product
		Refrigerators	conditioners	Freezers	**components **	Consolidated
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
	Additions of property,
	plant and equipment	79,256	47,244	8,261	6,716	141,477
	Additions of intangible
	assets	486	443	141	105	1,175
	Depreciation of property,
	plant and equipment	153,127	66,961	15,575	12,620	248,283
	Depreciation of investment
	properties	—	—	—	641	641
	Amortisation of intangible
	assets	3,232	713	125	56	4,126
	Amortisation of payments
	for leasehold land held
	for own use under
	operating leases	8,099	4,522	879	949	14,449
	Revaluation decrease of
	property, plant and
	equipment	12,999	12,149	6	5	25,159
	Write down of inventories
	to net realisable value	35,867	6,434	—	399	42,700

— I-26 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Year ended 31 December 2005 (Restated)

(i) Consolidated income statement

Refrigerators RMB’000 Turnover External sales 2,542,839 Inter-segment sales — Total revenue 2,542,839	Air- conditioners RMB’000 3,600,489 — 3,600,489	Freezers RMB’000 261,113 — 261,113	Product components RMB’000 573,931 1,190,854 1,764,785	Elimination RMB’000 — (1,190,854) (1,190,854)	Consolidated RMB’000 6,978,372 —
					6,978,372

Inter-segment sales Result Segment result Unallocated corporate expenses Loss from operations Share of results of associates Finance costs Loss before income tax Income tax expense Loss for the year	are charged (1,451,864) (11,504)	at prevailing market rates. (1,602,663) (94,264) (413,735) (16,289) (1,181) (2,597)	— —	(3,562,526) (32,994)
				(3,595,520) (31,571) (162,524)
				(3,789,615) (1,021)
				(3,790,636)

— I-27 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(ii) Consolidated balance sheet

			Air-		Product
		Refrigerators	conditioners	Freezers	**components **	Consolidated
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
	Assets
	Segment assets	2,147,174	2,066,972	227,588	882,484	5,324,218
	Interests in associates	33,535	47,639	3,444	7,568	92,186
	Unallocated corporate
	assets					66,995
	Consolidated total assets					5,483,399
	Liabilities
	Segment liabilities	1,665,300	1,671,603	180,271	581,140	4,098,314
	Unallocated corporate
	liabilities					2,185,158
	Consolidated total liabilities					6,283,472
(iii)	Other information

		Air-		Product
	Refrigerators	conditioners	Freezers	**components **	Consolidated
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Additions of property,
plant and equipment	119,416	150,626	17,331	47,363	334,736
Additions of intangible
assets	1,688	279	10	123	2,100
Depreciation of property,
plant and equipment	139,213	131,513	17,324	95,804	383,854
Depreciation of investment
property	—	—	—	1,513	1,513
Amortisation and
impairment of intangible
assets	143,467	173,670	7,306	18,785	343,228
Amortisation of payments
for leasehold land held
for own use under
operating leases	8,387	8,233	921	2,881	20,422
Revaluation decrease of
property, plant and
equipment	114,520	94,593	11,377	49,170	269,660
Impairment loss on trade
and other receivables	160,209	197,817	690	120,290	479,006
Write down of inventories
to net realisable value	33,468	182,903	38,813	37,792	292,976
Write off of inventories	3,631	11,998	158	—	15,787

— I-28 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Geographical segments

The following table provides an analysis of the Group’s turnover by geographical markets with reference to locations of customers:

The PRC Mainland China Hong Kong Europe America Others	2006 RMB’000 4,300,110 259,792 4,559,902 525,854 613,349 865,152 6,564,257	2005 RMB’000 4,154,957 19,518
		4,174,475 1,258,611 824,541 720,745
		6,978,372

The Group’s operations are carried out in the PRC and almost all of the production facilities of the Group are located in the PRC. Therefore, presentation of segment assets by geographical locations is not shown.

6. Other income and gains

An analysis of the Group’s other income and gains is as follows:

Gain on disposal of raw materials Gain on disposal of property, plant and equipment Gain on disposal of payments for leasehold land held for own use under operating leases Gain on debts settlement with suppliers Interest income Penalty income Rental income Reversal of impairment loss on trade and other receivables Reversal of provision for sales rebates Subsidy income Others	2006 RMB’000 114,139 24,588 38,597 10,231 5,238 7,843 7,723 61,012 37,593 70,511 31,830 409,305	2005 RMB’000 — 5,609 11,984 — 29,443 2,831 6,476 — — 4,780 12,205
		73,328

— I-29 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

7. Other operating expenses

An analysis of the Group’s other operating expenses is as follows:

Loss on disposal of property, plant and equipment Revaluation decrease of property, plant and equipment Impairment loss on payments for leasehold land held for own use under operating leases Impairment loss on intangible assets Impairment loss on investment in a deconsolidated subsidiary Impairment loss on goodwill Loss on disposal of scrap materials Penalty Others	2006 RMB’000 19,408 25,159 — — — — 10,047 1,145 1,056 56,815	2005 RMB’000 (Restated) 106,282 269,660 18,207 338,677 11,000 39,195 12,032 12,712 8,166
		815,931

8. Depreciation and amortisation

An analysis of the Group’s depreciation of property, plant and equipment and investment properties is as follows:

Amount charged as cost of sales Amount included in distribution costs Amount included in administrative expenses Amount included in other operating expenses	2006 RMB’000 179,174 11,749 55,048 2,953 248,924	2005 RMB’000 266,622 59,362 59,383 —
		385,367

An analysis of the Group’s amortisation of intangible assets and payments for leasehold land held for own use under operating lease is as follows:

	2006	2005
	RMB’000	RMB’000
Amount included in administrative expenses	18,575	24,973

— I-30 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

9. Finance costs

Interest on: — bank borrowings wholly repayable within five years — discounted note receivables Others 10. Profit/(loss) before income tax	2006 RMB’000 100,196 21,125 121,321 19,351 140,672	2005 RMB’000 122,306 32,125
		154,431 8,093
		162,524

2006 RMB’000 Profit/(loss) before income tax is stated after charging/(crediting): Inventories recognised as an expense 5,465,345 Staff costs (including directors’ and supervisors’ remuneration) — Basic salaries, housing and other allowances and benefits in kind 506,843 — Defined contribution pension cost 31,223 538,066 Depreciation of property, plant and equipment 248,283 Depreciation of investment properties 641 Amortisation of payments for leasehold land held for own use under operating leases 14,449 Amortisation of intangible assets 4,126 Auditors’ remuneration 5,551 Research and development costs 11,925 Impairment loss on trade and other receivables — Write down of inventories to net realisable value 42,700 Write off of inventories — Operating lease charges — land and buildings 63,855 — plant and machinery 6,500 Foreign exchange loss, net 28,619 Rental income from investment properties (net of direct operating expenses) (7,723) Share of income tax of associates 6,091

2005 RMB’000 (Restated) 6,515,161 562,167 25,129

587,296 383,854 1,513 20,422 4,551 5,824 8,025 479,006 292,976 15,787 64,153 6,000 35,309 (6,476) 2,372

— I-31 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

11. Directors’ and supervisors’ emoluments

The amounts of emoluments paid and payable to the directors and supervisors of the Company by the Group are as follows:

2006

Executive directors Tang Ye Guo Yu Shu Min Lin Lan Xiao Jian Lin Liu Chong Meng_(i) Li Zhen Hua(i) Fang Zhi Guo(i) Gu Chu Jun(i) Yan You Song(i) Zhang Hong(i) Zhang Ming(ii) Su Yu Tao(iii) Independent non-executive directors Zhan Sheng Ping Lu Qing Cheung Yui Kai, Warren Xu Xiao Lu(i) Li Kung Man(i) Chan Pei Cheong(iv) Supervisors Guo Qing Cun Zhou Zhao Li Liu Zhan Cheng He Si(v) Bai Yun Feng(vi)_	Basic salaries, housing and other allowances Defined and benefits contribution Discretionary Fees in kind pension cost bonuses RMB’000 RMB’000 RMB’000 RMB’000 — 493 4 — — — — — — 248 — — — 322 3 — — — — — — — — — — — — — — — — — — — — — — — — — — 85 3 — — 302 3 — 30 — — — 30 — — — 120 — — — — — — — — — — — — — — — — — — — — — — — — 60 1 133 — 48 1 — — 50 — — 180 1,608 15 133	Total RMB’000 497 — 248 325 — — — — — — 88 305 30 30 120 — — — — — 194 49 50
		1,936

• (i) The above individuals resigned on 26 June 2006.

• (ii) Mr. Zhang Ming resigned on 13 November 2006.

• (iii) Mr. Su Yu Tao resigned on 14 November 2006.

• (iv) Mr. Chan Pei Cheong resigned on 23 January 2006.

• (v) Mr. He Si resigned on 23 June 2006.

• (vi) Mr. Bai Yun Feng resigned on 5 December 2006.

— I-32 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

The amounts of emoluments paid and payable to the directors and supervisors of the Company by the Group are as follows:

2005

Basic salaries, housing and other allowances and benefits Fees in kind RMB’000 RMB’000 Executive directors Liu Cong Meng — 1,891 Li Zhen Hua — 1,891 Fang Zhi Guo — 1,009 Gu Chu Jun_(i) — 2,627 Yan You Song(i) — 735 Zhang Hong(i) — 588 Independent non-executive directors Li Kung Man 378 — Xu Xiao Lu 378 — Chan Pei Cheong(ii) 378 — Supervisors He Si — 111 Bai Yun Feng — 85 Zeng Jun Hong(i)_ — 53 1,134 8,990	Discretionary bonuses RMB’000 — — — — — — — — — 176 137 — 313	Total RMB’000 1,891 1,891 1,009 2,627 735 588 378 378 378 287 222 53
		10,437

(i) On 1 August 2005, the Company announced that Mr. Gu Chu Jun, Mr. Yan You Song and Mr. Zhang Hong have been formally investigated by the PRC police department and are subject to procedures adopted by the PRC police department in connection with criminal offences for alleged economic crime. Since then and up to the date of this report, none of them could be contacted. In addition, the Company was also unable to contact Mr. Zeng Jun Hong. No emolument was paid to Mr. Gu Chun Jun subsequent to May 2005 and no emoluments were paid to Mr. Yan You Song, Mr. Zhang Hong and Mr. Zeng Jun Hong subsequent to July 2005.

• (ii) Mr. Chan Pei Cheong resigned on 23 January 2006.

Bonus granted to directors and supervisors are based on performance and subject to directors’ discretion.

There was no arrangement under which a director or a supervisor waived or agreed to waive any remuneration for the years 2005 and 2006.

None of the directors and supervisors received compensation for the loss of office as director or a supervisor of the Group in connection with the management of the affairs of the Group for the years 2005 and 2006.

— I-33 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

12. Individuals with highest emoluments

Of the five highest paid individuals of the Group, four (2005: three) are directors of the Company. The remaining individual (2005: two) is not a director or a supervisor of the Company.

The following table sets out the emoluments of the Group’s five (2005: two) highest paid individuals for the year ended 31 December 2006 of which four of these individuals were appointed as directors of the Company during the year and their emoluments paid for the period from the dates of being appointed as directors during the year to the end of the year are included in Note 11 above.

2006 RMB’000 Basic salaries, housing and other allowances and benefits in kind 4,695 Discretionary bonuses — 4,695 The emoluments set out above of these individuals are within the following band: 2006 Number of staff RMB511,000 — RMB1,022,000 (2005: RMB525,350 — RMB1,050,700) (equivalent to HKD500,000 — HKD1,000,000) 4 RMB1,022,001 — RMB1,533,000 (2005: RMB1,050,701 — RMB1,576,050) (equivalent to HKD1,000,001 — HKD1,500,000) 1 RMB1,533,001 — RMB2,044,000 (2005: RMB1,576,051 — RMB2,101,400) (equivalent to HKD1,500,001 — HKD2,000,000) — 5 13. Income tax (credit)/expense 2006 RMB’000 Income taxes consist of: Current tax — PRC enterprise income tax (“EIT”) 516 — Hong Kong Profits Tax — Deferred tax (21,387) (20,871)	2005 RMB’000 2,858 —
	2,858
	2005 Number of staff — 1 1
	2
	2005 RMB’000 1,006 15 —
	1,021

Taxation is calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

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

— I-34 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

The Company and its subsidiaries which are established and operating in the PRC are subject to EIT at a statutory rate of 33%.

The Company was established in Shunde, Guangdong Province and, pursuant to the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises” (“Income Tax Law”), is normally subject to EIT at a rate of 24%, which is applicable to enterprises located in coastal open economic zones. Together with the local EIT rate of 3%, the aggregate EIT is at a rate of 27%. In June 2003, the Company is classified as a high new technology enterprise and is subject to EIT at a rate of 15%. Together with the local EIT at a rate of 3%, the aggregate EIT is at a rate of 18%.

The Company’s subsidiaries, Guangdong Kelon Refrigerator Ltd. (“Kelon Refrigerator”), Guangdong Kelon Air-Conditioner Co., Ltd. (“Kelon Air-Conditioner”), Guangdong Kelon Freezer Co., Ltd. (“Kelon Freezer”), Guangdong Kelon Fittings Co., Ltd. (“Kelon Fittings”), Shunde Rongsheng Plastic Products Co., Ltd. (“Rongsheng Plastic”), Guangdong Kelon Mould Co., Ltd. (“Kelon Mould”) and Yingkou Kelon Refrigerator Co. Ltd. (“Yingkou Kelon”), established in coastal open economic zones, are subject to EIT at a rate of 24%. Together with the local EIT at a rate of 3%, the aggregate EIT is at a rate of 27%. Kelon Mould, as a company established in coastal open economic zones, is also classified as a high new technology enterprise and subject to EIT at a rate of 15%. Together with the local EIT at a rate of 3%, the aggregate EIT is at a rate 18%. Pursuant to Income Tax Law, they are entitled to preferential tax treatment with full exemption from EIT for two years starting from the first profitable year of operations, after offsetting all tax losses brought forward from the previous years (for a maximum period of five years), followed by a 50% reduction in tax rate for the next three years.

Pursuant to the Income Tax Regulations related to Development Strategy of Western Region of Mainland China, Chengdu Kelon Refrigerator Co., Ltd. (“Chengdu Kelon”), a subsidiary of the Company is subject to a preferential EIT at a rate of 24%. Together with the local EIT at a rate of 3%, Chengdu Kelon is subject to the aggregate EIT at a rate of 27%.

Other subsidiaries of the Group which are established and operating in the PRC are subject to EIT at a statutory rate of 33%.

Pursuant to the PRC EIT law passed by the Tenth National People’s Congress on 16 March 2007, the new EIT rates for domestic and foreign enterprises are unified at 25% and will be effective from 1 January 2008. The impact of this change in EIT rates on the Group’s consolidated financial statements will depend on detailed implementation pronouncements that are to be issued subsequently. The Group is currently assessing the impact on the Group’s results of operations and financial position of this change in EIT rates.

No provision for Hong Kong Profits Tax has been made as the subsidiaries in Hong Kong did not generate assessable profits during the year. Hong Kong Profits Tax has been provided at the rate of 17.5% on the estimated assessable profit last year.

— I-35 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

A reconciliation between income tax (credit)/expense and accounting profit/(loss) at applicable tax rate is as follows:

Profit/(loss) before tax _Less:_Share of results of associates Tax at the PRC statutory rate of 33% Effect of different tax rates of subsidiaries operating in other jurisdictions Effect of exemption granted and preferential tax treatment Tax effect of expenses not deductible for tax purposes Tax effect of revenue not taxable for tax purposes Tax effect of tax losses and deductible temporary differences not recognised Utilisation of tax losses and deductible temporary differences previously not recognised Income tax (credit)/expense	2006 RMB’000 27,607 3,590 24,017 7,926 1,560 (18,718) 1,826 (290) 166,098 (179,273) (20,871)	2005 RMB’000 (Restated) (3,789,615) (31,571)
		(3,758,044) (1,240,155) 23,293 681,311 162,979 (964) 375,652 (1,095)
		1,021

At the balance sheet date, deferred tax assets arising on tax losses carried forward had been recognised to the extent it is probable that future taxable profit will be available against which the unused tax losses can be utilised.

The unused tax losses carried forward and deductible temporary differences not recognised in the consolidated financial statements due to unpredictability of future profit streams are as follows:

Unused tax losses Deductible temporary differences	2006 RMB’000 1,846,123 691,429 2,537,552	2005 RMB’000 2,294,364 678,219
		2,972,583

— I-36 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

The PRC tax losses can only be carried forward for a maximum period of five years and the Hong Kong tax losses can be carried forward indefinitely. The expiry of unused tax losses is as follows:

Tax losses will expire in 2006 Tax losses will expire in 2007 Tax losses will expire in 2008 Tax losses will expire in 2009 Tax losses will expire in 2010 Tax losses will expire in 2011 Tax losses can be carried forward indefinitely	2006 RMB’000 — 15,179 25,601 55,489 1,315,082 276,859 237,124 1,925,334	2005 RMB’000 391,513 15,179 47,606 73,440 1,646,898 — 119,728
		2,294,364

14. Basic earnings/(loss) per share

The calculation of basic earnings per share attributable to equity holders of the Company for the year is based on the net profit attributable to equity holders of the Company for the year of RMB69,218,000 (2005: net loss attributable to equity holders of the Company for the year of RMB3,726,095,000 (restated)) and 992,006,563 shares (2005: 992,006,563 shares) outstanding during the year.

No diluted earnings per share have been presented as there were no dilutive potential ordinary shares in issue in both years.

— I-37 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

15. Property, plant and equipment

Year ended 31 December 2006

Cost or valuation At 1 January 2006 (Restated) Exchange differences Additions at cost Disposals Revaluation decrease Reclassification At 31 December 2006 Comprising: At cost At directors’ valuation Accumulated depreciation At 1 January 2006 Exchange differences Depreciation for the year Elimination on disposals Reclassification At 31 December 2006 Net book value At 31 December 2006	Leasehold land and buildings RMB’000 1,548,947 (2,267) 1,290 (64,152) (3,217) (240,675) 1,239,926 131,457 1,108,469 1,239,926 419,045 (713) 76,970 (27,380) 2,164 470,086 769,840	Plant, machinery and equipment RMB’000 1,892,728 (74) 22,015 (115,959) (13,442) 270,484 2,055,752 53,861 2,001,891 2,055,752 1,537,641 363 112,406 (102,445) 6,732 1,554,697 501,055	Moulds RMB’000 168,054 — 80,707 (37,500) (6,691) 265 204,835 80,707 124,128 204,835 95,867 — 54,174 (33,411) (100) 116,530 88,305	Motor vehicles RMB’000 69,811 (95) 1,211 (28,020) (313) 1,002 43,596 1,211 42,385 43,596 65,558 (80) 4,733 (23,324) (8,796) 38,091 5,505	Construction in progress RMB’000 267,260 — 36,254 (34,022) (1,496) (31,076) 236,920 36,254 200,666 236,920 — — — — — — 236,920	Total RMB’000 3,946,800 (2,436) 141,477 (279,653) (25,159) —
						3,781,029
						303,490 3,477,539
						3,781,029
						2,118,111 (430) 248,283 (186,560) —
						2,179,404
						1,601,625

— I-38 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Year ended 31 December 2005

Cost or valuation At 1 January 2005 Exchange differences Additions at cost Disposals Transfer to investment properties_(Note 16) Revaluation decrease Retrospective restatement of errors(Note 2) Reclassification At 31 December 2005 (Restated) Comprising: At cost At directors’ valuation (Restated) Accumulated depreciation At 1 January 2005 (restated) Exchange differences Depreciation for the year Elimination on disposals Transfer to investment properties(Note 16)_ Reclassification At 31 December 2005 Net book value At 31 December 2005 (Restated)	Leasehold land and buildings RMB’000 1,457,441 (1,936) 203 (12,284) (29,881) (5,858) (225) 141,487 1,548,947 141,690 1,407,257 1,548,947 448,350 (492) 110,393 (4,482) (1,513) (133,211) 419,045 1,129,902	Plant, machinery and equipment RMB’000 2,588,136 — 69,400 (530,807) — (143,531) (2,288) (88,182) 1,892,728 — 1,892,728 1,892,728 1,680,275 — 194,241 (460,115) — 123,240 1,537,641 355,087	Moulds RMB’000 211,376 — 101,018 (117,458) — (26,290) — (592) 168,054 — 168,054 168,054 89,730 — 72,848 (66,711) — — 95,867 72,187	Motor vehicles RMB’000 79,643 — 534 (6,834) — (1,043) (797) (1,692) 69,811 — 69,811 69,811 56,203 — 6,372 (6,988) — 9,971 65,558 4,253	Construction in progress RMB’000 247,416 — 163,581 (3,088) — (84,802) (4,826) (51,021) 267,260 — 267,260 267,260 — — — — — — — 267,260	Total RMB’000 4,584,012 (1,936) 334,736 (670,471) (29,881) (261,524) (8,136) —
						3,946,800
						141,690 3,805,110
						3,946,800
						2,274,558 (492) 383,854 (538,296) (1,513) —
						2,118,111
						1,828,689

The directors’ valuation at 2006 on plant, machinery and equipment, moulds, motor vehicles and construction in progress was made by reference to independent valuations at 31 December 2005 carried out by Dalian Zhong Hua Asset Appraisal Company Limited and Beijing Luihe Zhengxu Asset Appraisal Company Limited on the basis of fair market value in continued use.

The directors’ valuation at 2006 on leasehold land and buildings was made by reference to independent valuations at 31 December 2005 carried out by Sallmanns (Far East) Limited and at 31 December 2002 by Greater China Appraisal Limited on the basis of fair market value in continued use.

— I-39 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Had the property, plant and equipment been carried at cost less accumulated depreciation and impairment, their carrying value would have been stated as follows:

Cost Accumulated deprecation and impairment Net book value at 31 December 2006 Net book value at 31 December 2005	Leasehold land and buildings RMB’000 1,375,024 (544,341) 830,683 1,190,745	Plant, machinery and equipment RMB’000 2,126,065 (1,642,874) 483,191 337,223	Moulds RMB’000 237,817 (149,511)	Motor vehicles RMB’000 44,467 (29,197) 15,270 14,018	Construction in progress RMB’000 328,044 (91,123) 236,921 267,260	Total RMB’000 4,111,417 (2,457,046)
			88,306			1,654,371
			72,187			1,881,433

The management performed self-assessment on impairment of property, plant and equipment as at 31 December 2006 and conclude that no impairment has been identified.

The net book value of the Group’s leasehold land and buildings comprise properties situated on land held under medium-term leases in:

PRC, other than in Hong Kong Hong Kong Japan	2006 RMB’000 704,197 41,990 23,653 769,840	2005 RMB’000 (Restated) 1,057,225 44,874 27,803
		1,129,902

“Leasehold land and buildings” and “Plant, machinery and equipment” with net book values of approximately RMB441,380,000 (2005: RMB625,469,000 (restated)) and RMB134,584,000 (2005: RMB21,712,000) respectively, have been pledged as security for the Group’s bank borrowings.

— I-40 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

16. Investment properties

Cost At 1 January Reclassification from property, plant and equipment_(Note 15)_ Exchange differences At 31 December Accumulated depreciation and impairment At 1 January Depreciation for the year Exchange differences At 31 December Carrying amount at 31 December Directors’ valuation at fair value	2006 RMB’000 29,201 — (1,000) 28,201 1,478 641 (62) 2,057 26,144 40,030	2005 RMB’000 — 29,881 (680) 29,201 — 1,513 (35) 1,478 27,723 38,959

The Group’s investment properties are situated in Hong Kong under medium term leases. The valuation for the investment properties at 31 December 2006 were determined by the directors by reference to a valuation report at 15 July 2006 prepared by Vigers Appraisal & Consulting Ltd..

17. Payments for leasehold land held for own use under operating leases

The Group’s payments for leasehold land held for own use under operating leases comprises:

Leasehold land in PRC: — Medium-term leases Carrying amount at 1 January Amortisation charge Impairment loss Other adjustments Disposals Carrying amount at 31 December	2006 RMB’000 372,533 2006 RMB’000 470,080 (14,449) — — (83,098) 372,533	2005 RMB’000 470,080 2005 RMB’000 720,754 (20,422) (18,207) (55,274) (156,771) 470,080

— I-41 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• (i) Included in payments for leasehold land held for own use under operating leases is a land use right in Kaifeng which was acquired as capital contribution by a minority interest of a subsidiary. As at 31 December 2006, this land use right with carrying amount of approximately RMB13.4 million (2005: RMB13.6 million) has not yet been registered in the name of the subsidiary. The management is in the process of completing the legal title registration.

• (ii) As at 31 December 2006, included in this account is a land use right with carrying value of approximately RMB27.6 million (2005: RMB28 million) which has been frozen by the court of Shangqiu since August 2005. In July 2004, Shangqiu Kelon Electrical Company Limited (“Shangqiu Kelon”), Shangqiu Bing Xiong Freezing Facilities Company Limited (“Shangqiu Bing Xiong”), and the Administration Committee of Shangqiu Economic and Technological Development Zone （商丘經濟技術開發區管委會）(“Shangqiu Administrative Committee”) entered into a three-party land transfer agreement under which all parties agreed that Shangqiu Kelon acquires the land use right (200 acres) from Shangqiu Bing Xiong at a consideration of approximately RMB36 million. Under the land transfer agreement, it was agreed that Shangqiu Kelon develops the land and meets minimum production and sales requirements after the development is completed. At date of this report, the land has not yet been developed nor has Shangqiu Kelon met the minimum production and sales requirements.

In August 2005, Shangqiu Kelon received a notice from Shangqiu Administrative Committee claiming that it has breached the three-party land transfer agreement for not fulfilling the minimum production and sales requirements and requesting that Shangqiu Kelon surrenders the land use right (200 acres). The local court froze the land accordingly.

At the date of this report, the case is being handled by the Group’s lawyer and has not yet been resolved. The Company has made an impairment loss of approximately RMB18 million against the carrying amount of the land use right for possible loss that may arise as a result of the event.

• (iii) At 31 December 2006, the carrying amount of payments for leasehold land held for own use under operating leases pledged as security for the Group’s bank borrowings amounted to approximately RMB245,559,000 (2005: RMB352,614,000).

— I-42 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

18. Interests in subsidiaries

Details of the Company’s principal subsidiaries as at 31 December 2006 are listed under a table as follows:

			Percentage of	Percentage of	Percentage of
	Place and date of		ownership	interested
	incorporation/	Registered	voting	rights/
Name	establishment	capital	profit	share		Principal activities
			**Directly **	Indirectly
Entities operating in the PRC:
Shunde Rongsheng Plastic	PRC_(i)_	US$15,800,000	45%		25%	Manufacture of
Products Co., Ltd.	18 October 1991					plastic parts
Guangdong Kelon Mould	PRC_(i)_	US$15,000,000	40%		30%	Manufacture of moulds
Co,. Ltd.	20 July 1994
Guangdong Kelon	PRC_(i)_	US$26,800,000	70%		30%	Manufacture and
Refrigerator Ltd.	25 December 1995					sale of refrigerators
Guangdong Kelon	PRC_(i)_	RMB237,000,000	44%		56%	Manufacture and
Freezer Co., Ltd.	25 December 1995					sale of freezers
Guangdong Kelon	PRC_(i)_	US$36,150,000	60%		—	Manufacture and sale
Air-Conditioner Co., Ltd.	19 March 1996					of air-conditioners
Chengdu Kelon Refrigerator	PRC_(i)_	RMB200,000,000	45%		25%	Manufacture and sale
Co., Ltd.	19 November 1996					of refrigerators
Yingkou Kelon Refrigerator	PRC_(i)_	RMB200,000,000	42%	36.79%		Manufacture and sale
Co., Ltd.	15 December 1996					of refrigerators
Yangzhou Kelon Electrical	PRC_(i)_	US$29,800,000	74.33%	25.67%		Manufacture and sale
Company Limited	23 December 1996					of refrigerators
(“Yangzhou Kelon”)
Shunde Kelon Household	PRC_(ii)_	RMB10,000,000	25%		75%	Manufacture and sale
Electrical Applicance	16 July 1999					of electrical household
Company Limited						appliances
Guangdong Kelon Fittings	PRC_(i)_	US$5,620,000	70%		30%	Manufacture and sale
Co., Ltd.	24 November 1999					of spare parts for
						air-conditioners
						and refrigerators
Shunde Huaao Electronics	PRC_(ii)_	RMB10,000,000	—		70%	Manufacture and sale
Co., Ltd.	23 November 2000					of electronic products
Shunde Wangao Import &	PRC_(ii)_	RMB3,000,000	20%		80%	Import and export
Export Co., Ltd.	7 June 2001					business

— I-43 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

				Percentage of	Percentage of	Percentage of
	Place and date of			ownership interested
	incorporation/		Registered	voting rights/
Name	establishment		capital	profit share			Principal activities
				Directly Indirectly
Shunde Jiake Electronic	PRC_(ii)_		RMB60,000,000	70%		30%	IT and communication
Company Limited	12 October 2001						technology and
							micro-electronics
							technology
							development
Xi’an Kelon Refrigeration	PRC_(ii)_	RMB202,000,000		60%		—	Manufacture and sale
Co., Ltd. (“Xi’an Kelon”)	20 March 2002						of refrigerators
Jiangxi Kelon Industrial	PRC_(i)_		US$29,800,000	60%		40%	Manufacture and sale
Development Co., Ltd.	24 June 2003						of refrigerators,
(“Jiangxi Kelon”)							air-conditioners
							and other
							household appliances
Shangqiu Kelon Electrical	PRC_(ii)_	RMB150,000,000		—	100%		Manufacture and sale
Company Limited	23 September 2003						of refrigerators
Zhuhai Kelon Industrial	PRC_(i)_		US$29,980,000	75%		25%	Manufacture and sale
Development Co., Ltd.	3 December 2003						of refrigerators
Entities operating in Hong	Kong:
Pearl River Electric	Hong Kong		HK$400,000	—	100%		Trading in materials and
Refrigerator Company	26 July 1985						parts for refrigerators
Limited							and import and
							export business
Kelon Electric Appliances	Hong Kong		HK$10,000	—	100%		Property investment
Co., Ltd.	29 August 1991
Kelon Development	Hong Kong		HK$5,000,000	100%		—	Investment holding
Company Limited	17 August 1993
Kelon International Inc.	British Virgin Islands		US$50,000	—	100%		Investment holding
	13 January 1999						and sale of
							refrigerators and
							air-conditioners

• (i) Established as a sino-foreign equity joint venture in the PRC.

• (ii) Established as a limited liability company in the PRC.

• (iii) The financial statements of Jiangxi Combine Electrical Appliance Co., Ltd. (“Jiangxi Combine”) and Kelon Europe Industrial Design Limited (“Kelon Europe”) were excluded from the consolidated financial statements. Jiangxi Combine has not commenced active business since its establishment and Kelon Europe was insignificant to the Group. The management considers that the impact of not consolidating Jiangxi Combine and Kelon Europe is insignificant to the Group.

— I-44 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

None of the subsidiaries had issued any debt securities at the end of the year.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

19. Interests in associates

Share of net assets Goodwill_(Note) Listed investment Unlisted investment Fair value of listed investment _Note: Goodwill Cost At 1 January Release on dilution in share reform At 31 December Impairment At 1 January Release on dilution in share reform At 31 December Carrying amount At 31 December	2006 RMB’000 78,981 — 78,981 74,478 4,503 78,981 43,241 2006 RMB’000 137,346 (6,139) 131,207 137,346 (6,139) 131,027 —	2005 RMB’000 92,186 —
		92,186
		88,286 3,900
		92,186
		49,474
		2005 RMB’000 137,346 —
		137,346
		137,346 —
		137,346
		—

— I-45 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Details of the Group’s principal associates as at 31 December 2006 are listed under a table as follows:

			Percentage of
	Place and date of		ownership
	incorporation/		interested voting
Name	establishment	Registered capital	rights/profit share		Principal activities
			Directly Indirectly
Name of associate
Huayi Compressor Holdings	PRC_(i)_	RMB324,581,218	18.26%	—	Manufacture and
Company Limited	13 June 1996		(iii)		sale of compressors
(“Huayi”)
Attend Logistic Co., Ltd.	PRC_(ii)_	RMB10,000,000	20%	—	Provision of logistics and
(“Attend Logistic”)	11 July 2001				storage services

• (i) Established as a joint stock limited company.

• (ii) Established as a limited liability company.

• (iii) On 20 December 2006, Huayi completed a share reform and converted all of its non-freely transferable shares into listed shares by the allocation of 6.674 newly issued shares to each holder of transferable shares for every 10 shares held by such holder. Accordingly, the shares of Huayi held by the Company, which were previously non-transferable, were converted into freely transferable shares of Huayi and the Company’s equity interest in Huayi was reduced from 22.73% to 18.26%. A dilution loss incurred on share reform of the associate arising thereon was charged to the income statement. Notwithstanding the share reform of Huayi, the Company continues to possess the power to participate in the financial and operating policy decision of Huayi and account for its interest in Huayi as an associate.

The above table lists the associates of the Group which, in the opinion of the directors, principally affected the results of the year or formed a substantial portion of the net assets of the Group. To give details of other associates would, in the opinion of the directors, result in particulars of excessive length.

The summarised financial information in respect of the Group’s associates is set out below:

Total assets Total liabilities Net assets Revenue Profit/(loss) for the year	2006 RMB’000 2,158,965 (1,572,054) 586,911 1,842,149 16,017	2005 RMB’000 1,825,999 (1,279,730)
		546,269
		1,306,092
		(129,652)

The financial statements of Huayi and Attend Logistic have been audited by Guang Dong Heng Xin Delu Certified Public Accountants Co., Ltd. and Guangzhou Lantao Certified Public Accountants Co. Ltd., respectively.

— I-46 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

20. Available-for-sale financial assets

Unquoted long-term equity investments, at cost Impairment loss	2006 RMB’000 7,249 (7,249) —	2005 RMB’000 7,249 (7,249) —

21. Intangible assets

Non-patented Trademarks(i) technologies(ii) RMB’000 RMB’000 Year ended 31 December 2006 Cost At 1 January 2006 521,858 537 Additions at cost — — Write off — — At 31 December 2006 521,858 537 Amortisation and impairment At 1 January 2006 403,480 241 Charge for the year — 136 Elimination on write off — — At 31 December 2006 403,480 377 Carrying amount At 31 December 2006 118,378 160 Non-patented Trademarks(i) technologies(ii) RMB’000 RMB’000 Year ended 31 December 2005 Cost At 1 January 2005 521,858 557 Additions at cost — — Write off — (20) At 31 December 2005 521,858 537 Amortisation and impairment At 1 January 2005 65,233 104 Charge for the year — 137 Impairment loss 338,247 — Elimination on write off — — At 31 December 2005 403,480 241 Carrying amount At 31 December 2005 118,378 296	Software systems(ii) RMB’000 32,580 1,175 (4) 33,751 22,472 3,990 (4) 26,458 7,293 Software systems(ii) RMB’000 30,578 2,100 (98) 32,580 17,675 4,414 430 (47) 22,472 10,108	Total RMB’000 554,975 1,175 (4) 556,146 426,193 4,126 (4) 430,315 125,831 Total RMB’000 552,993 2,100 (118) 554,975 83,012 4,551 338,677 (47) 426,193 128,782

— I-47 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(i) Trademarks represent the rights of using “科龍 ”, “容聲 ” and “容升 ” brands in producing refrigerators recognised in October 2003.

Prior to 1 January 2005, the cost of trademarks is amortised on a straight-line basis over their estimated useful lives of 10 years. With effect from 1 January 2005 and in accordance with the provisions of IAS 38, trademarks are assessed to have indefinite useful lives and therefore are not amortised but tested for impairment for each reporting date and where an indicator of impairment exists.

Due to the significant loss incurred in 2005 and the business interruption in May 2005, the management conducted an impairment assessment on the trademarks. The recoverable amount of trademarks was determined based on value-in-use calculations with the support of valuation performed by independent third party valuer. As a result of such assessment, trademarks had been assessed to be impaired by approximately RMB338 million as at 31 December 2005.

As at 31 December 2006, the management performed self-assessment and concluded that there was no further impairment identified.

• (ii) Non-patented technologies and software systems are amortised over their estimated useful lives of 4 years.

22. Goodwill Year ended 31 December 2006 Cost At 1 January 2006 and 31 December 2006 Impairment At 1 January 2006 and 31 December 2006 Carrying amount At 31 December 2006 Year ended 31 December 2005 Cost At 1 January 2005 and 31 December 2005 Impairment At 1 January 2005 Impairment loss At 31 December 2005 Carrying amount At 31 December 2005	RMB’000 47,033 47,033
	—
	RMB’000 47,033 7,838 39,195
	47,033
	—

— I-48 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

The above goodwill arose from the acquisition of subsidiaries. Prior to 1 January 2005, goodwill was amortised over their estimated useful life ranging from 10 to 20 years. With effect from 1 January 2005 and in accordance with IFRS 3, the goodwill is not amortised but is tested for impairment on an annual basis.

Goodwill is allocated to the cash-generating units for impairment testing. The recoverable amounts of the cash-generating units have been determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by the management covering a financial year period. Cash flows beyond the financial year period are extrapolated using the estimates made by management. The discount rate applied to the cash flow projections beyond a one-year period is 5.6%. As a result of such testing, the goodwill was assessed to be impaired in full.

23. Inventories

Raw materials Work in progress Finished goods	2006 RMB’000 184,013 33,745 702,079 919,837	2005 RMB’000 597,638 78,762 556,579
		1,232,979

At 31 December 2006, the carrying amount of inventories pledged for bank borrowings amounted to approximately RMB140,236,000 (2005: RMB41,899,000).

24. Trade and other receivables

Trade receivables Notes receivable_(i) Other receivables(ii) Amounts due from Greencool Enterprise and its affiliates(Note 32 III a) Amounts due from companies suspected to be connected with Mr. Gu(Note 32 III b) Amounts due from Hisense Group(Note 32 III c) Amounts due from associates(Note 32 III d) Amounts due from other related companies(Note 32 III e)_	2006 RMB’000 290,166 77,317 376,838 72,061 214,217 2,187 40 86,907 1,119,733	2005 RMB’000 (Restated) 238,786 140,819 489,306 71,879 227,361 204,349 140 41,748
		1,414,388

(i) At 31 December 2006, included in notes receivable was an amount of nil (2005: RMB11,217,000) of notes discounted to banks with recourse. The transaction has been accounted for as short-term bank borrowings. The amount of notes receivable pledged for bank borrowings amounted to approximately RMB28,200,000 (2005: RMB21,900,000).

(ii) At 31 December 2006, included in other receivables was an amount of nil (2005: RMB80,043,000) of intra-group receivables resulted from an inability to eliminate balances among companies within the Group on consolidation.

— I-49 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

The aging analysis of trade receivables is as follows:

Gross amount RMB’000 As at 31 December 2006 Within 3 months 252,966 Three to six months 30,938 Six months to one year 9,691 One to two years 19,591 Two to three years 66,405 Over three years 108,215 487,806 As at 31 December 2005 Within 3 months 164,445 Three to six months 47,338 Six months to one year 89,803 One to two years 12,058 Two to three years 51,618 Over three years 144,444 509,706	Impairment loss RMB’000 — (954) (4,854) (17,212) (66,405) (108,215) (197,640) — — (62,830) (12,028) (51,618) (144,444) (270,920)	Net amount RMB’000 252,966 29,984 4,837 2,379 — —
		290,166
		164,445 47,338 26,973 30 — —
		238,786

Normal credit term of 30 days is granted to customers. The Group allows a credit period of up to one year for large and well established customers. Sales are usually settled by cash on delivery for small and new customers. Trade receivables are non-interest bearing.

As at 31 December 2006, the Group has trade and other receivables denominated in USD of approximately RMB179 million (2005: RMB13 million).

25. Financial risk management objectives and policies

The Group is exposed through its operations to one or more of the following financial risks:

• Interest rate risk

• Foreign currency risk

• Liquidity risk

• Credit risk

The Group does not hold or issue any financial derivatives for trading purpose nor use any derivative or other instruments for hedging purpose.

Interest rate risk

The Group is exposed to interest rate risks due to changes in interest rates of interest-bearing financial assets and liabilities. Interest-bearing financial assets are mainly deposits with banks which are mostly short-term in nature whereas interest-bearing financial liabilities are primarily short-term bank borrowings. As at 31 December 2006, the Group’s short-term bank borrowing was carried at fixed interest rates ranging from 4.65% to 7.84% per annum. The Group is therefore not significantly exposed to both fair value and cash flow interest rate risks.

— I-50 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Foreign currency risk

Foreign exchange risk is the risk of loss due to adverse movements in exchange rates relating to investments and transactions denominated in foreign currencies. The Group’s monetary assets and transactions are mainly denominated in RMB and USD. The exchange rates between RMB and USD are not pegged, and there is fluctuation of exchange rates between RMB and USD. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise.

Liquidity risk

In the management of liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by management to finance the Group’s operations and mitigate the effects of short-term fluctuations in cash flows. The Group’s treasury department is responsible for maintaining a balance between continuity and flexibility of funding through the use of bank facilities in order to meet the Group’s liquidity requirements. All of the debts of the Group would mature in less than one year as at 31 December 2006.

Credit risk

It is the risk that a counterparty is unable to pay amount in full when due. It arises primarily from the Group’s trade receivables and amounts due from related parties. The Group limits its exposure to credit risk by vigorously selecting counterparties. The Group mitigates its exposure to risk relating to accounts receivable by dealing with diversified customers with sound financial standing. Certain new customers are required to place cash deposits with the Group to reduce the maximum exposure to credit risk. The Group seeks to maintain strict control over its outstanding receivables and has a credit control policy to minimise credit risk. In addition, all receivable balances are monitored on an ongoing basis and overdue balances are followed up by senior management.

Fair value

All financial instruments are carried at amounts not materially different from their fair values.

26. Trade and other payables

Trade payables Notes payable Other payables_(i) Accruals Amounts due to Greencool Enterprise and its affiliates(Note 32 III a) Amounts due to companies suspected to be connected with Mr. Gu(Note 32 III b) Amounts due to Hisense Group(Note 32 III c) Amounts due to associates(Note 32 III d) Amounts due to other related companies(Note 32 III e)_	2006 RMB’000 1,415,803 507,918 486,073 140,678 13,050 119,316 319,526 51,680 39,912 3,093,956	2005 RMB’000 (Restated) 1,993,906 159,650 813,168 324,303 13,017 118,155 17,257 75,331 19,631
		3,534,418

— I-51 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• (i) At 31 December 2006, included in other payables were intra-group payables of nil (2005: RMB51,504,000) resulting from an inability to eliminate balances among companies within the Group on consolidation.

The aging analysis of trade payables is as follows:

Within one year One to two years Two to three years Over three years	2006 RMB’000 1,177,093 196,857 30,937 10,916 1,415,803	2005 RMB’000 1,645,415 83,768 59,097 205,626
		1,993,906

Normal credit term ranging from 30 to 120 days was granted to the Group. Trade payables within normal credit period are non-interest bearing.

As at 31 December 2006, the Group has trade and other payables denominated in USD of approximately RMB31 million (2005: RMB89 million).

27. Provisions

At 1 January 2006 Additional provision in the year Utilisation of provision At 31 December 2006 At 1 January 2005 Additional provision in the year Utilisation of provision At 31 December 2005	Warranty(i) RMB’000 204,179 90,427 (128,823) 165,783 119,338 167,874 (83,033) 204,179	Legal(ii) RMB’000 5,737 5,444 (6,969) 4,212 — 5,737 — 5,737	Total RMB’000 209,916 95,871 (135,792)
			169,995
			119,338 173,611 (83,033)
			209,916

(i) The Group provides free repairing services on its products and free replacement of the major components of its products for one to three years after date of sale. The warranty provision is estimated by management based on past experience. The assumptions used to estimate the warranty provision are reviewed periodically in light of actual results.

• (ii) The Group is currently involved in a number of legal disputes. The amount provided represents the directors’ best estimate of the Group’s liability having taken legal advice. Uncertainties exist as to whether claims will be settled out of court or if not whether the Group is successful in defending any action.

— I-52 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

28. Other liabilities

Employee benefits_(i) Government grants(ii) Amounts due within one year: — Employee benefits(i) — Government grants(ii)_ Amounts due after one year	2006 RMB’000 32,620 27,952 60,572 19,026 27,952 46,978 13,594	2005 RMB’000 44,026 29,898
		73,924
		13,208 29,898
		43,106
		30,818

• (i) The amounts represent accrued contributions to a defined contribution pension scheme for its employees during the period from 1993 to 2001. Settlement of employee benefits payable was mutually agreed by the Company and the committee of the Company’s staff union.

• (ii) The amounts represent government grants received for the Group’s research and development activities. Government grants recognised as income for the year amounted to approximately RMB70,511,000 (2005: RMB3,657,000).

29. Bank borrowings

Short-term bank loans due within one year Analysed as: Secured Unsecured	2006 RMB’000 1,556,702 1,233,294 323,408 1,556,702	2005 RMB’000 2,160,523
		819,772 1,340,751
		2,160,523

The Group is now in the process of negotiating with bankers to refinance the short-term bank loans which are due in 2006. Based on discussion with the Group’s bankers to date, the directors expect that these borrowings will be renewed in due course.

The bank borrowings carry interest at fixed rates ranging from 4.65% to 7.84% (2005: 4.35% to 6.91%) per annum. Bank borrowings of approximately RMB1,233,294,000 (2005: RMB819,772,000) were secured by pledge of property, plant and equipment (see note 15), inventories (see note 23) and notes receivable (see note 24).

At 31 December 2006, included in bank borrowings was an amount of approximately RMB218,000,000 (2005: RMB286,218,000) in respect of notes discounted to banks with recourse.

— I-53 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

30. Share capital

Share of RMB1 each: 337,915,755 Domestic shares 459,589,808 H shares 194,501,000 A shares	2006 RMB’000 337,916 459,590 194,501 992,007	2005 RMB’000 337,916 459,590 194,501
		992,007

Except for the currency in which dividends are paid and the restrictions as to whether the shareholders can be PRC investors or foreign investors, Domestic shares, H shares and A shares rank pari passu in all respects with each other.

31. Leases

The Group leases certain of its leasehold land and buildings and plant and machinery under operating lease arrangements with lease terms ranging from one to five years.

The total future of minimum lease payments are due as follows:

Not later than one year Later than one year and not later than five years	2006 RMB’000 2,590 1,116 3,706	2005 RMB’000 25,625 9,740
		35,365

32. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.

As at 31 December 2006, the Company’s single largest shareholder is Qingdao Hisense AirConditioning Company Limited (“Hisense Air-Conditioner”), which exercised the equity transfer agreement with Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”) dated 9 September 2005, and completed the share transfer of 262,212,194 domestic legal person shares of the Company, representing 26.43% of the Company’s total issued share capital, from Greencool Enterprise to Hisense Air-Conditioner on 13 December 2006. Upon the completion of share transfer, Greencool Enterprise no longer owns any shares in the Company.

The beneficial owner of Greencool Enterprise is Mr. Gu Chu Jun (“Mr. Gu”), who was also the executive director of the Company during the reporting period, had resigned as an executive director of the Company on 22 May 2006. During the period from 2001 to 2005, the Group had significant transactions and relationships with Greencool Enterprise and companies controlled by Mr. Gu (collectively refer to “Greencool Enterprise and its affiliates”). The Group also had entered into a series of activities/transactions with companies suspected to be connected with Mr. Gu (Defined in I(i) below).

— I-54 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

On 16 September 2005, the Company entered into a sales agreement with Hisense Agent as amended by the first supplemental agency agreement on 26 September 2005 and the second supplemental agency agreement on 1 April 2006. Under the agreement, Hisense Agent acts as sales agent of the Company’s domestic sales products by way of distribution within the entire PRC domestic market. The agency agreement started from 16 September 2005 and ended on 10 May 2006.

The principal terms of the sales agency agreement (as amended by the first supplemental agency agreement on 26 September 2005 and the second supplemental agency agreement on 1 April 2006) are as follows:

• Hisense Agent agreed that it would advance an aggregate prepayment for purchases of the Company’s products in an amount not exceeding RMB600 million;

• An interest (at the rate equivalent to the annual interest rates on working capital loans announced by the People’s Bank of China from time to time) would be calculated by reference to the amount of prepayments received by the Company and would be confirmed and settled upon the expiry of the sales agency agreement;

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

• In the event that Hisense Agent is unable to recover any proceeds from sale of products under the sales agency agreement to any distributor, Hisense Agent and/or the distributor has no right to claim against the Company pursuant to the sales agency agreement;

• Hisense Agent will receive 1% of the total amount of sales proceeds of products under the sales agency agreement as agency fee from the Company;

• The effective turnover period for the proceeds of products commissioned by the Company to Hisense Agent is 60 days; and

• The price of the products that the Company sells to Hisense Agent will be equivalent to the price Hisense Agent sells to the distributors, which price shall be determined by the Company and the distributors.

Because of the above relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.

On 15 September 2006 Kelon Air-Conditioner entered into the Air-Conditioner Production and Supply Framework Agreement with Qingdao Hisense Marketing Company Limited (“Hisense Agent”) in connection with manufacture and sale of air conditioners by Kelon Air-Conditioner to Hisense Agent for a term of one year starting from 1 January 2006 to 31 December 2006.

On 15 September 2006 Kelon Air-Conditioner entered into the Air-Conditioner Production and Purchase Framework Agreement with Hisense (Zhejiang) Air-Conditioner Company Limited (“Hisense Zhejiang”) for a term of one year ending on 31 December 2006 in connection with manufacture and sale of air-conditioners by Hisense Zhejiang. Kelon Air-Conditioner also entered into the Raw Materials Purchase and Supply Framework Agreement with Hisense Zhejiang for a term of one year ended on 31 December 2006 in connection with the provision of air-conditioners’ components by Kelon Air-Conditioner to Hisense Zhejiang.

— I-55 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

I. Relationship with related parties

During the year, for the purpose of this report, the directors are of the view that the following companies are related parties of the Group:

Name of related parties Notes Relationship Greencool Enterprise The single largest shareholder of the Company as at 31 December 2005 Mr. Gu The beneficial owner of Greencool Enterprise and also the executive director of the Company as at 31 December 2005

Greencool Technology A company controlled by Mr. Gu Development (Shenzhen) Company Limited (“Shenzhen Greencool Technology”) Greencool Environmental A company controlled by Mr. Gu Protection Engineering (Shenzhen) Company Limited (“Shenzhen Greencool Environmental”) Greencool Regrigerant (China) A company controlled by Mr. Gu Company Limited (“Greencool China”) Hainan Greencool Environmental A company controlled by Mr. Gu Protection Engineering Company Limited (“Hainan Greencool”) Greencool Procurement (Shenzhen) A company controlled by Mr. Gu Co., Ltd. (“Greencool Procurement”) Hefei Meiling Holdings Limited A company controlled by Mr. Gu (“Hefei Meiling”) Jiangxi Greencool Electrical A company controlled by Mr. Gu Appliance Company Limited (“Jiangxi Greencool”) Yangzhou Yaxing Motor Coach A company controlled by Mr. Gu Company Limited (“Yangzhou Yaxing”) Chengdu Refrigerating (i) A company suspected to be connected Components Factory with Mr. Gu (“Chengdu Refrigerating”) Hefei Weixi Electrical Appliance (i), (ii) A company suspected to be connected Company Limited (“Hefei Weixi”) with Mr. Gu

— I-56 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Name of related parties Notes Relationship Jiangxi Keda Plastic Technology (i) A company suspected to be connected Company Limited (“Jiangxi Keda”) with Mr. Gu Jiangxi Kesheng Trading (i) A company suspected to be connected Company Limited (“Jiangxi Kesheng”) with Mr. Gu Jinan San’ai’fu Chemical (i) A company suspected to be connected Company Limited (“Jinan San’ai’fu) with Mr. Gu Tianjin Lixin Trading Development (i) A company suspected to be connected Company Limited (“Tianjin Lixin”) with Mr. Gu Tianjin Taijin Yunye Company (i) A company suspected to be connected Limited (“Tianjin Taijin Yunye”) with Mr. Gu Tianjin Xiangrun Trading (i) A company suspected to be connected Development Company Limited with Mr. Gu (“Tianjin Xiangrun”) Wuhan Changrong Electrical (i), (ii) A company suspected to be connected Appliance Company Limited with Mr. Gu (“Wuhan Changrong”) Zhongshan Dongyue Electrical (i) A company suspected to be connected Company Limited with Mr. Gu (“Zhongshan Dongyue”) Zhejiang Guoda Trading Company (i) A company suspected to be connected Limited (“Zhejiang Guoda”) with Mr. Gu Zhejiang Yuhuan Compressor (i) A company suspected to be connected Factory (“Zhejiang Yuhuan”) with Mr. Gu Beijing De Heng Solicitors (i) A company suspected to be connected (“Beijing De Heng”) with Mr. Gu Zhuhai Defa Air-conditioner Fittings (i) A company suspected to be connected Company Limited (“Zhuhai Defa”) with Mr. Gu Zhuhai Longjia Refrigerating Plant (i) A company suspected to be connected Company Limited (“Zhuhai Longjia”) with Mr. Gu Hisense Air-Conditioner The successor single largest shareholder of the Company Hisense Group The holding company of Hisense Air-Conditioner Hisense Agent A fellow subsidiary of Hisense

• A fellow subsidiary of Hisense Air-Conditioner

Hisense Electric Co., Ltd. (“Hisense Electric”)

• A fellow subsidiary of Hisense Air-Conditioner

— I-57 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Name of related parties

Notes Relationship

Hisense Zhejiang A subsidiary of Hisense Air-Conditioner Hisense (Nanjing) Electric Co., A fellow subsidiary of Ltd. (“Hisense Nanjing”) Hisense Air-Conditioner Hisense (Beijing) Electric Co., Ltd. A fellow subsidiary of (“Hisense Beijing”) Hisense Air-Conditioner Hisense (Qingdao) Import & A fellow subsidiary of Export Co., Ltd. Hisense Air-Conditioner Hisense Hitachi Air Conditioning A fellow subsidiary of Co., Ltd. (“Hisense Hitachi”) Hisense Air-Conditioner Chongqing Kelon Rongsheng An associate of the Group Refrigerator Sales Co., Ltd. (“Chongqing Rongsheng”) Attend Logistic An associate of the Group Huayi An associate of the Group Jiaxibeila Compressor Company A subsidiary of an associate of the Group Limited (“Jiaxibeila”) Kelon Europe An unconsolidated subsidiary of the Company Jiangxi Combine An unconsolidated subsidiary of the Company Chengdu Engine (Group) Company A minority investor of Chengdu Kelon Limited (“Chengdu Engine”) Chengdu Xinxing Electrical Applicance A subsidiary of Chengdu Engine Holdings Company Limited (“Chengdu Xinxing”) Hangzhou Xileng Group Company A minority investor of Hangzhou Kelon Limited (“Hangzhou Xileng”) Xi’an Gaoke (Group) Limited A minority investor of Xi’an Kelon (“Xi’an Gaoke”) Shunde Yunlong Consultancy A minority investor of Huaao Electronics (“Shunde Yunlong”)

(i) The directors suspected that these companies are connected with Mr. Gu in view of the following reasons: (a) certain transactions (cash flows) were incurred through some off balance sheet bank accounts or were off balance sheet transactions with some members of the Group, and other dealings in such off balance sheet bank accounts have been proved to be connected with Greencool Enterprise and its

— I-58 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

affiliates; (b) through interviews and enquiries conducted by an external professional firm, staff of some of the members of the Group have confirmed that certain transactions (cash flows) of these companies are connected with Greencool Enterprise and its affiliates; (c) although there are no documents to prove that certain cash flows of these companies are connected with Greencool Enterprise and its affiliates, such cash flows were incurred pursuant to the instructions of the former members of the management of the Company who are connected with Greencool Enterprise and its affiliates; (d) the raw materials which were the subject of certain prepayments were patented products manufactured by Greencool Enterprise and its affiliates; and (e) according to the members of senior management of certain members of the Group, certain prepayments were transferred to Greencool Enterprise and its affiliates subsequent to such prepayments being made to the relevant suppliers.

(ii) Hefei Weixi and Wuhan Changrong were frequently used by Mr. Gu as the vehicle to manipulate the Group’s results in prior years by way of creating abnormal sales transactions and sales returns. The directors considered, by the reference to the findings of an external professional firm, that Hefei Weixi and Wuhan Changrong are suspected to be connected with Mr. Gu.

II. Transactions with related parties

(a) Transactions with Greencool Enterprise and its affiliates

• (i) The Group had the following significant transactions with Greencool Enterprise and its affiliates that were carried out in the normal course of business:

	2006	2005
	RMB’000	RMB’000
Sales of goods/raw materials of
Hefei Meiling	—	99
Loan guarantee provided by
Greencool Enterprise
— maximum amount during the year	327,971	327,971
— amount as at 31 December	85,709	327,971

(ii) Licence agreement on the use of trademark: Under a licence agreement (“Licence Agreement”) dated 3 April 2003 entered into between the Company and Greencool China, Greencool China granted to the Company an exclusive right to use the trademark “Combine” for no consideration (a) as registered in the PRC and Hong Kong; and/or (b) as may from time to time be registered and/or in respect of which applications for registration may be made with the trademarks registry of any other territory by Greencool China; and/or (c) all “Combine” trademark registrations as may be assigned to Greencool China from time to time on freezers, refrigerators and other similar or related products and such other products as may be requested by the Company from time to time which are not objected by Greencool China, on a worldwide basis, for a term equivalent to the period of validity of the relevant registration. With the prior written consent of the Company, Greencool China may use and allow third party to use, such trademarks on production other than the types of products covered by the Licence Agreement.

— I-59 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• (iii) Use of land and buildings: Starting from October 2003, Jiangxi Kelon occupied a piece of land and manufacturing facilities of Jiangxi Greencool free of charge. Part of the production facilities of Zhuhai Kelon were constructed on the land and buildings controlled by Mr. Gu for no consideration. As at 31 December 2006, none of Jiangxi Kelon nor Zhuhai Kelon had entered into lease agreement with the respective related parties.

• (iv) A series of transactions were conducted through a bank account of one of the Company’s wholly-owned subsidiaries, Kelon Air-Conditioner during the period between March 2003 and February 2004. Such transactions involved the unauthorised use of a company chop of Kelon Air-Conditioner and the relevant chop authorizing financial transactions. The following balances were not reflected in the financial statements of Kelon AirConditioner in 2003 and 2004:

  • an amount of RMB32 million receivable from Shenzhen Greencool Technology;

  • an amount of RMB33 million receivable from Shenzhen Greencool Environmental; and

  • an amount of RMB65 million payable to Tianjin Taijin Yunye.

• (v) On 10 March 2005, a subsidiary of the Company entered into a purchase agreement relating to refrigerants with Hainan Greencool. The transaction had not been approved by the board of directors of the Company and involved an amount of approximately RMB13.5 million. The purchase price was paid on 29 April 2005 but not in accordance with the Company’s normal payment approval procedures. As at 31 December 2006, most of the relevant refrigerants have been received.

• (b) Transactions with companies suspected to be connected with Mr. Gu

The Company suspected that Mr. Gu had entered into a series of activities/transactions during the period from 2001 to 2005 which had been harmful to the Group, including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, unreasonable prepayments made to Greencool Enterprise and/or its affiliates and purchase of raw materials and property, plant and equipment at an unreasonable quantity and price from Greencool Enterprise and/or its affiliates.

• (i) Jinan San’ai’fu — During the period between 6 and 14 April 2005, Jianxi Kelon made advance payment in an amount of RMB81.6 million to Jinan San’ai’Fu, a new supplier, for purchase of R411C refrigerants. The goods were to be delivered during the period between 1 May and 31 August 2005 with payment on delivery. As at 31 December 2005, the Group has not received any of the refrigerants. On 7 April 2005, Jiangxi Kelon made advance payment, on behalf of Kelon Air-conditioner, to Jinan San’ai’fu in an amount of RMB40.8 million for purchase of refrigerants. As at 31 December 2006, less than one-third of the refrigerants have been received by the Group. The directors considered that the above transactions were not conducted in accordance with the Company’s purchase policy and normal procedures in respect of purchase of goods. The directors, with the assistance with an external professional firm, suspected that Jinan San’ai’fu was connected with Mr. Gu.

— I-60 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• (ii) Tianjin Xiangrun — Kelon Fittings had during the period between 26 and 28 April 2005 made five advance payments in an aggregate amount of approximately RMB97.4 million, to Tianjin Xiangrun, a new supplier, for purchase of raw materials. As at 31 December 2006, only a small portion of the goods were delivered to the Group. The directors considered that the above transactions were not conducted in accordance with the Company’s purchase policy and normal procedures in respect of purchase of goods. The directors, with the assistance with an external professional firm, revealed that Tianjin Xiangrun has transferred the fund to Greencool Procurement, a company controlled by Mr. Gu. The directors suspected that Tianjin Xiangrun was connected with Mr. Gu.

• (iii) Tianjin Lixin — On 26 and 27 April 2005, the Company’s wholly-owned subsidiary, Shenzhen Kelon Purchase Company Limited made two advance payments in an aggregate amount of RMB89.6 million to a new supplier called Tianjin Lixin. The goods were to be delivered during the period between 1 May 2005 and 31 August 2005 with payment on delivery. As at 31 December 2006, only a small portion of the goods were delivered to the Group. The directors considered that the above transactions were not conducted in accordance with the Company’s purchase policy and normal procedures in respect of purchase of goods. The directors, with the assistance with an external professional firm, revealed that Tianjin Lixin has transferred the fund to Greencool Procurement. The directors suspected that Tianjin Lixin was connected with Mr. Gu.

• (iv) Zhongshan Dongyue — Jiangxi Kelon has, on behalf of Kelon Air-conditioner, made two prepayments to Zhongshan Dongyue amounted to RMB30 million and RMB50 million for purchase of raw materials on 4 April and 6 April 2005, respectively. The directors considered that the above transactions were not conducted in accordance with the Company’s purchase policy and normal procedures in respect of purchase of goods. The directors, with the assistance of an external professional firm, revealed that Zhongshan Dongyue has transferred the prepayments in an aggregate amount of RMB80 million to Greencool Procurement at the same date. As at 31 December 2006, all of the raw materials, in connection to the prepayment made in 2005, have been delivered to the Group. In 2006, the Group purchased raw materials from Zhongshan Dongyue in accordance with the Company’s purchase policy and normal procedures.

• (v) Jiangxi Keda — Jiangxi Kelon has made prepayments amounting to RMB13 million to Jiangxi Keda in May 2005 for purchases of raw materials/parts. As at 31 December 2006, the Group has not received any of the raw materials/ parts. The directors considered that the above transactions were not conducted in accordance with the Company’s purchase policy and normal procedures in respect of purchase of goods. The directors, with the assistance of an external professional firm, revealed that the prepayments have subsequently been transferred to Greencool Enterprise and/or its affiliates.

• (vi) Jiangxi Kesheng — Kelon Air-Conditioner has made advance payments of approximately RMB12.8 million and RMB18.6 million to Jiangxi Kesheng for purchase of refrigerants on 6 April and 19 April 2005 respectively. As at 31 December 2006, most of the refrigerants have been delivered to the Group. The directors considered that the above transactions were not conducted in accordance with the Company’s purchase policy and normal procedures in

— I-61 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

respect of purchase of goods. The directors, with the assistance with an external professional firm, suspected that Jiangxi Kesheng was connected with Greencool and/or its affiliates.

• (vii) Zhejiang Yuhuan – Kelon Refrigerator, Yangzhou Kelon, Chengdu Kelon and Yingkou Kelon has made prepayment amounting to RMB10 million to Zhejiang Yuhuan for purchase of raw materials in 2005. The directors considered that the above transactions were not conducted in accordance with the Company’s policy and normal procedure in respect of purchase of goods. The directors, with the assistance of an external professional firm, revealed that prepayments have subsequently been transferred to Greencool Enterprise and/or its affiliates. As at 31 December 2005, Zhejiang Yuhuan was in the process of liquidation.

In 2006, Kelon Refrigerator entered into a settlement agreement with Zhejiang Yuhuan that Zhejiang Yuhuan agreed to settle up to an amount of RMB1.93 million to Kelon Refrigerator and the Group agreed to forfeit its right on further claiming Zhejiang Yuhuan. The settlement was received on 12 December 2006. As at balance sheet date, the Group has no outstanding balance due from Zhejiang Yuhuan.

• (viii) Certain off book transactions involving the Company’s wholly-owned subsidiary, Jiangxi Kelon were conducted in 2003 and 2004 resulting in net outstanding receivables of approximately RMB57 million from the following entities as at 31 December 2006:

• an amount of RMB20 million receivable from Wuhan Changrong;

• an amount of RMB21.4 million receivable from Zhuhai Defa;

• an amount of RMB28.6 million receivable from Zhuhai Longjia; and

• an amount of RMB13 million payable to Jiangxi Greencool.

• (ix) In June 2003, the Company entered into a “Project Investment and Cooperation Contract” with Yangzhou Economic Development Zone, stipulating that Yangzhou Economic Development Zone provides the land of 729,000 square meters in area in the Development Zone; the consideration of the land use right transfer was RMB45 million and that the Company would obtain the Land Use Certificate in 12 December 2003. In August 2003, the Company’s subsidiary Yangzhou Kelon entered into a “State-owned Land Use Right Transfer Contract” with Yangzhou State Land Resources Bureau Development Zone Branch, stipulating that the transferor transfers the land of 729,000 square meters in a consideration of RMB102 million. Yangzhou Kelon paid RMB45 million land premium to Yangzhou State Land Resources Bureau Development Zone Branch, and in April 2004, Yangzhou Kelon further paid RMB40 million to Finance Bureau of Yangzhou Economic Development Zone again. The management (having sought legal advice) considers that the “State-owned Land Use Right Transfer Contract” signed in August 2003 would have been invalid and the management suspected that the RMB40 million paid would have eventually been transferred to companies connected with Mr. Gu.

— I-62 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(x) An assets transfer agreement was entered into between Shangqiu Kelon and Shangqiu Bing Xiong on 6 July 2004, Mr. Gu Chu Jun and Mr. Wang Zhan Min, were the respective legal representatives. Pursuant to the agreement, Shangqiu Bing Xiong transferred the assets purchased from Henan Bing Xiong Ice Maker Company Limited (“Bing Xiong Ice Maker”) and Henan Bing Xiong Air-Conditioner Company Limited and the state-owned land use rights transferred from the Shangqiu Administration Committee to Shangqiu Kelon at a consideration of RMB58,030,000. The directors, with the assistance of an external professional firm, suspected that Shangqiu Bing Xiong was connected with Mr. Gu.

(c) Transactions with Hisense Group

The Group had the following significant transactions with Hisense Group:

		2006	2005
	Notes	RMB’000	RMB’000
Sales of goods/raw materials to
— Hisense Agent	(i)	1,572,695	868,235
— Hisense Zhejiang	(i)	7,253	—
— Qingdao Hisense Import &
Export Co., Ltd.	(i)	266	—
— Hisense Hitachi	(i)	286	—
Sales of equipment to
— Hisense Zhejiang		300	—
Agency fee paid/payable to
— Hisense Agent	(ii)	13,178	8,773
Loan interest payable to
— Hisense Agent		16,390	3,410
Purchase of goods/raw materials from
— Hisense Air-Conditioner	(i)	18	2,571
— Hisense Agent	(i)	209,729	—
— Hisense Zhejiang	(i)	69,854	—
— Hisense Nanjing	(i)	1,830	—
— Hisense Beijing	(i)	5,520	—
Sales of moulds to
— Hisense Electric	(i)	2,554	2,081
— Hisense Agent	(i)	649	—

(i) Sales and purchases were conducted in accordance with mutually agreed terms with reference to the market rates.

(ii) Agency fee was based on 1% of the total amount of sales proceeds of products under the sales agency agreement.

— I-63 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(d) Transactions with associates

The Group had the following significant transactions with associates:

		2006	2005
	Notes	RMB’000	RMB’000
Sales of goods/raw materials to
— Chongqing Rongsheng	(i)	39,601	761
— Huayi and Jiaxibeila	(i)	356	—
Purchases of goods/raw materials from
— Huayi and Jiaxibeila	(ii)	127,978	105,288
Service fee charged to
— Attend Logistic		103	—
Logistics management fee/warehouse
rental paid to — Attend Logistic	(iii)	51,538	6,375

• (i) Sales were conducted in accordance with mutually agreed terms with reference to the market rates.

• (ii) Huayi and Jiaxibeila mainly provide compressors to the Group for production of air-conditioners and refrigerators.

• (iii) The Group and Attend Logistic entered into a logistics service agreement, pursuant to which Attend Logistic provides transportation and warehousing service to the Group. The service fee is based on the actual volume of goods, the distance delivered, the occupancy space of warehouse and discharged at a pre-determined rate agreed by both parties.

(e) Transactions with other related parties

The Group had the following significant transactions with other related parties:

		2006	2005
	Notes	RMB’000	RMB’000
Sales of goods/raw materials to
— Chengdu Xinxing		3,337	26,522
Purchases of goods/raw materials from
— Chengdu Xinxing		25,236	28,805
— Chengdu Engine		—	4,390
Interest charged to
— Chengdu Xinxing	(i)	—	1,986
Water and electricity expenses paid to
— Chengdu Engine	(ii)	6,468	5,072
Lease payment in respect of plant and
equipment to — Hangzhou Xileng	(iii)	6,000	6,000

— I-64 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(i) The Company made prepayments in an aggregate of RMB34,000,000 indirectly through its subsidiary, Chengdu Kelon, to Chengdu Xinxing, which is an associate of Chengdu Engine, the minority investor of Chengdu Kelon. As consideration for such prepayment, Chengdu Xinxing agreed to repay Chengdu Kelon by supplying an agreed number of refrigeration parts. No interest was charged to Chengdu Xinxing due to mutual agreement in 2006 (2005: interest payment at an annual rate of approximately 5.8%).

• (ii) Water and electricity expenses are charged at cost.

• (iii) Lease payment in respect of plant and equipment to Hangzhou Xileng is determined by reference to an equipment lease agreement entered into between Hangzhou Kelon and Hangzhou Xileng.

III. Balances with related parties

(a) Balances with Greencool Enterprise and its affiliates

2006 Notes RMB’000 Included in trade and other receivables, net — Greencool Enterprise 6,085 — Hainan Greencool II(a)(v) 976 — Hefei Meiling — — Shenzhen Greencool Technology II(a)(iv) 32,000 — Shenzhen Greencool Environmental II(a)(iv) 33,000 72,061 Included in trade and other payables — Hefei Meiling 50 — Jiangxi Greencool 13,000 13,050	2005 RMB’000 (Restated) 5,787 976 116 32,000 33,000
	71,879
	17 13,000
	13,017

Amounts due from/to Greencool Enterprise and its affiliates are unsecured, interestfree and repayable on demand.

As at 31 December 2006, impairment loss of approximately RMB18,985,000 (2005: RMB19,276,000) were recorded in respect of amounts due from Greencool Enterprise and its affiliates.

— I-65 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(b) Balances with companies suspected to be connected with Mr. Gu

2006 Notes RMB’000 Included in trade and other receivables, net — Beijing De Heng 1,000 — Hefei Weixi I(ii) 10,424 — Jiangxi Keda II(b)(v) 6,500 — Jiangxi Kesheng II(b)(vi) 6,072 — Jinan San’ai’fu II(b)(i) 56,683 — Tianjin Lixin II(b)(iii) 44,800 — Tianjin Xiangrun II(b)(ii) 48,199 — Wuhan Changrong I(ii), II(b)(viii) 15,539 — Zhongshan Dongyue II(b)(iv) — — Zhuhai Defa II(b)(viii) 10,700 — Zhuhai Longjia II(b)(viii) 14,300 214,217 Included in trade and other payables — Jiangxi Keda II(b)(v) — — Tianjin Taijin Yunye II(a)(iv) 65,000 — Zhongshan Dongyue II(b)(iv) 4,377 — Zhuhai Longjia (i) 28,316 — Zhuhai Defa (i) 21,400 — Zhejiang Yuhuan II(b)(vii) 223 119,316	2005 RMB’000 (Restated) 1,000 10,890 6,500 6,072 56,683 44,800 48,199 15,539 12,678 10,700 14,300
	227,361
	622 65,000 2,594 28,316 21,400 223
	118,155

(i) Certain of the Company’s subsidiaries have recorded sales of scrapped materials to Zhuhai Longjia and Zhuhai Defa in aggregate of approximately RMB40 million in 2003 and 2004. The findings of an external professional firm revealed that the amounts have been received by the respective subsidiaries but the materials were never delivered to Zhuhai Longjia and Zhuhai Defa. It was suspected that these transactions were not supported by business substance but for the purpose of manipulation of the Group’s results. These transactions were executed by Yan Guo Ru (晏果如 ), the former vice financial controller (前任財務資源部副總監 ), who together with the exchairman Mr. Gu and certain of the ex-senior management were arrested by the PRC Police Department in connection with criminal offences for alleged economic crime. The directors suspected that Zhuhai Longjia and Zhuhai Defa are connected with Greencool and/or its affiliates and the balances were included in “Amounts due to companies suspected to be connected with Mr. Gu”.

Amounts due from/to companies suspected to be connected with Mr. Gu are unsecured, interest-free and repayable on demand.

As at 31 December 2006, impairment loss of approximately RMB344,968,000 (2005: RMB354,724,000) were recorded in respect of amounts due from Greencool Enterprise and its affiliates.

— I-66 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(c) Balances with Hisense Group

Included in trade and other receivables, net — Hisense Agent — Hisense Air-Conditioner — Hisense Zhejiang — Hisense Nanjing Included in trade and other payables — Hisense Air-Conditioner — Hisense Agent — Hisense Beijing — Hisense Nanjing	2006 RMB’000 540 335 582 730 2,187 9,281 309,965 1 279 319,526	2005 RMB’000 204,349 — — —
		204,349
		3,846 13,411 — —
		17,257

Amounts due from Hisense Group are unsecured, interest-free and are repayable in accordance with normal commercial terms. Included in amount due to Hisense Group was an amount of RMB291 million of advance received from Hisense Agent in connection with the sales agency agreement dated on 16 September 2005 (as amended by the first supplemental agency agreement on 26 September 2005 and the second supplemental agency agreement on 1 April 2006). The advance received from Hisense agent is unsecured, interest bearing at the interest rate as quoted by the People’s Bank of China for one-year loans and repayable on demand.

All other amounts due to Hisense Group is unsecured, interest-free and repayable on demand.

(d) Balances with associates

Included in trade and other receivables, net — Chongqing Rongsheng — Attend Logistic Included in trade and other payables — Attend Logistic — Chongqing Rongsheng — Huayi and Jiaxibeila	2006 RMB’000 — 40 40 20,652 4,083 26,945 51,680	2005 RMB’000 137 3
		140
		24 — 75,307
		75,331

Amounts due from/to associates are unsecured, interest-free and are repayable in accordance with normal commercial terms.

— I-67 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(e) Balances with other related companies

Included in trade and other receivables, net — Chengdu Engine — Chengdu Xinxing — Kelon Europe Included in trade and other payables — Chengdu Engine — Chengdu Xinxing — Hangzhou Xileng — Jiangxi Combine — Xi’an Gaoke	2006 RMB’000 47,191 34,000 5,716 86,907 5,309 11,946 15,772 5,100 1,785 39,912	2005 RMB’000 27 35,802 5,919
		41,748
		434 2,538 9,774 5,100 1,785
		19,631

All amounts due from/to other related companies are unsecured, interest-free and are repayable on demand.

As at 31 December 2006, impairment losses of approximately RMB4,526,000 (2005: RMB4,686,000) were recorded in respect of amounts due from other related companies.

IV. Key management personnel emoluments

Basic salaries, allowances and benefits-in-kind Defined contribution pension cost	2006 RMB’000 7,422 34 7,456	2005 RMB’000 15,797 —
		15,797

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, including directors and other senior management, totaling 33 individuals (2005: 19 individuals).

33. Capital commitments

	2006	2005
	RMB’000	RMB’000
Capital expenditure for acquisition of property,
plant and equipment contracted for but not
provided in the financial statements	14,004	23,309

— I-68 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Other than the above, the Group has the following capital commitments as at year-end:

During the year, the Company entered into agreements with Administrative Committee of Chengdu Economic and Technological Development Zone （成都經濟技術開發區管理委員會）for setting up a subsidiary in Chengdu. The total expected cost of investment is approximately RMB350 million. RMB4 million has been paid during the year and included in trade and other receivables.

The Company has entered into an agreement to acquire an additional 30% of shareholding in Chengdu Kelon from Chengdu Engine at a total consideration of approximately RMB81 million. A deposit for the consideration amounted to RMB47 million has been paid during the year and included in trade and other receivables and the remaining balance will be settled by off-setting the amounts owing to the Group by a subsidiary of the minority shareholder of Chengdu Kelon.

34. Retirement benefits schemes

The Group contributes mainly to a defined contribution pension scheme, which is administered by the provincial government, in respect of employees of the Group. According to such scheme, the Group shall pay an amount, calculated at a percentage of the total salaries and wages of the employees, to a retirement reserve.

The total cost charged to the consolidated income statement of approximately RMB31,223,000 (2005: RMB25,129,000) represents contributions payable to the scheme by the Group at rates specified in the rules of the scheme.

35. Reserves

(a) Statutory reserves

According to the Articles of Association of the Company, when distributing net profit of each year, the Company shall set aside 10% of its after tax profits for the statutory common reserve fund (except where the fund has reached 50% of the Company’s registered capital) and 5% to 10% of after tax profits for the statutory common welfare fund. These reserves cannot be used for purposes other that those for which they are created and are not distributable as cash dividends.

(b) Distributable reserves of the Company

In accordance with the Articles of Association of the Company, the accumulated profits of the Company for the purpose of profit distribution will be deemed to be the lesser of (i) the amount determined in accordance with PRC accounting standards and regulations (“PRC GAAP”) and (ii) the amount determined in accordance with IFRS.

As at 31 December 2006, the Company did not have reserve available for distribution to its shareholders. (2005: Nil).

36. Contingencies

The Group is a defendant in certain lawsuits as well as the plaintiff in other proceedings arising in the ordinary course of business. The amount involved in the litigations against the Group relate mainly to bank loans, purchases and expenditures incurred by the Group and most of them were recorded as liabilities of the Group as at the balance sheet date. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have material adverse effect on the financial position or operating results of the Group.

— I-69 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

37. Subsequent events

The following significant events took place subsequent to 31 December 2006:

• (a) In March 2007, Kelon Electric Appliances Co., Ltd., a wholly-owned subsidiary of the Company, entered into a sale and purchase agreement with the purchaser to dispose of a property which was partly recorded as investment properties and partly as land and buildings of the Group of aggregate net carrying value of HK$67,100,000 as at the balance sheet date for a consideration of HK$123,295,400. The transfer of property was completed in March 2007.

• (b) In February 2007, the Group entered into a Business Cooperation Framework Agreement with certain subsidiaries of Hisense Group for a term of one year ending on 31 December 2007, which can be terminated before its expiration by mutual agreement of the parties, in connection with the sale of refrigerators, air-conditioners, raw materials and sale of moulds to the subsidiaries of Hisense Group, subject to a maximum cap of RMB212,500,000, RMB580,000,000, RMB35,000,000 and RMB18,000,000, respectively; and purchase of airconditioners, purchase of refrigerators and purchase of raw materials, and receipt of aftersale maintenance and repair service from the subsidiaries of Hisense Group, subject to a maximum cap of RMB607,500,000, RMB270,000,000, RMB55,000,000 and RMB10,000,000, respectively.

• (c) The Company has approved in the general meeting of the Company held on 19 March 2007 to provide guarantees in favour of the Group’s distributors at an aggregate amount of RMB267,000,000. The amount of guarantee can be used on a revolving basis from the date of approval to 31 December 2007.

• (d) In December 2006, the Company announced a proposed share reform including conversion of all the non-freely transferable shares into transferable shares of the Company and allocation of 1.2 newly issued shares to each holders of transferable A shares for every 10 transferable shares held by such holders of A shares and such share reform was completed in March 2007 and immediately after the share reform, the total number of issued shares of the Company are as follows:

Transferable shares that are subject to selling restrictions H shares A shares	314,575,635 459,589,808 217,841,120
	992,006,563

As a result of the share reform, the 262,212,194 Domestic shares which are non-freely transferable shares held by Hisense Air-Conditioner was converted into 238,872,074 transferable shares that are subject to certain selling restrictions of the Company, representing 24.08% of the Company’s total capital.

• (e) Included in trade and other receivables as at 31 December 2006 was a receivable arising from the sale of a piece of land, previously included in payments for leasehold land held for own use under operating lease, in Shunde, the PRC made by the Group in 2005, of gross amount and carrying amount of approximately RMB169 million and RMB85 million respectively. No settlement of receivable has been recorded in the Company’s books up to the date of this report. The carrying amount was stated at net of an accumulated impairment loss of approximately RMB84 million. The Company lodged a legal claim against the purchaser in August 2006 and a court order was issued by the Guangdong Provincial Higher

— I-70 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

People’s Court of the PRC in December 2006 in favour of the Company and the Company is entitled to recover from the purchaser the gross amount and interest accrued thereon. After the disposal of the land to the purchaser in 2005, the land became registered under the name of the purchaser. In February 2006, a creditor of the purchaser (the “Creditor”) lodged a legal claim against the purchaser and a court order entitling the Creditor all assets not exceeding RMB200,000,000 of the purchaser was issued consequently. In April 2007, the Company and the Creditor agreed in writing that the land will be disposed of at market price and the Company is entitled to 50% of the disposal proceed net of relevant and necessary legal costs incurred by the Creditor. With reference to the prevailing market price, the directors considered that the Company’s share of the net proceed from the disposal approximates and will not be less than the carrying value of the underlying receivable as at year-end.

38. Comparative figures

Certain comparative figures have been adjusted as a result of the retrospective restatement of errors as disclosed in Note 2 and certain comparative figures in the consolidated cash flow statement have been reclassified to conform with current year’s presentation.

39. Critical accounting judgements and key sources of uncertainty

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Impairment

In considering the impairment losses that may be required for certain of the Group’s assets which include property, plant and equipment, construction in progress, investment properties, payments for leasehold land held for own use under operating leases, intangible assets, goodwill and interests in associates, recoverable amounts of the assets need to be determined. The recoverable amount is the greater of the fair value less costs to sell and the value in use. It is difficult to precisely estimate fair value less costs to sell because quoted market prices for these assets may not be readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which require significant judgment relating to items such as level of sales, selling price and amount of operating costs. The Group uses all readily available information in determining amounts that are reasonable approximations of recoverable amounts, including estimates based on reasonable and supportable assumptions and projections of items such as sales volume, selling price and amount of operating costs.

In considering the impairment losses that may be required for current receivables, future cash flows need to be determined. One of the key assumptions that has to be applied is the ability of the debtors to settle the receivables. Although the Group has used all available information to make this estimation, inherent uncertainty exists and actual may be different from the amount estimated.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Depreciation

Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account their estimated residual values. The Group reviews the estimated useful lives of the assets regularly. The useful lives are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Warranty provision

As explained in noted 27(i), the Group makes provisions under the warranties it gives on sales of its electrical products taking into account the Group’s recent claim experience. As the Group is continuously upgrading its product designs and launching new models, it is possible that recent claim experience is not indicative of the future claims that it will receive in respect of past sales. Any increase or decrease in the provision would affect profit or loss in future years.

40. Approval of financial statements

The financial statements were approved and authorised for issue by the Board of Directors on 26 April 2007.

— I-72 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

C. UNAUDITED INTERIM FINANCIAL REPORT OF THE KELON GROUP FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2007

Condensed Consolidated Income Statement

For the six months ended 30 June 2007

Notes Revenue 4 Cost of sales Gross profit Other income and gains Distribution costs Administrative expenses Other operating expenses Profit from operations Share of results of associates Finance costs Profit/(loss) before income tax 5 Income tax credit/(expense) 6 Profit/(loss) for the period Attributable to: Equity holders of the Company Minority interests Dividends 7 Earnings/(loss) per share attributable to equity holders of the Company 8 — Basic — Diluted

For the six months ended 30 June 2007 2006 RMB’000 RMB’000 (Unaudited) (Unaudited) 4,853,981 3,586,177 (4,022,551) (2,882,368) 831,430 703,809 203,287 53,286 (648,747) (558,786) (229,567) (136,206) (11,411) (13,414) 144,992 48,689 (966) (2,256) (48,019) (83,068) 96,007 (36,635) 585 (1,010) 96,592 (37,645) 117,374 (29,153) (20,782) (8,492) 96,592 (37,645) — — RMB0.12 RMB(0.03) N/A N/A

— I-73 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Condensed Consolidated Balance Sheet

At 30 June 2007

Notes ASSETS Non-current assets Property, plant and equipment 9 Investment properties Other intangible assets Payments for leasehold land held for own use under operating leases Interests in associates Available-for-sale financial assets Deferred tax assets Current assets Inventories Trade and other receivables 10 Taxation recoverable Pledged bank deposits Cash and cash equivalents Non-current assets held for sale 11 Total assets LIABILITIES Current liabilities Trade and other payables 12 Trade deposits received Provisions Taxation payable Other liabilities Bank borrowings Non-current liabilities Other liabilities Total liabilities Net current liabilities Total assets less current liabilities TOTAL NET LIABILITIES	30 June 2007 RMB’000 (Unaudited) 1,415,813 37,200 123,478 343,437 77,972 — 25,007 2,022,907 1,131,798 1,695,099 103 30,797 230,647 3,088,444 49,767 5,161,118 3,960,295 461,812 178,176 28,980 56,884 1,194,090 5,880,237 — 5,880,237 (2,791,793) (719,119) (719,119)	31 December 2006 RMB’000 (Audited) 1,601,625 26,144 125,831 372,533 78,981 — 21,387 2,226,501 919,837 1,119,733 827 248,257 142,247 2,430,901 — 4,657,402 3,093,956 488,587 169,995 26,663 46,978 1,556,702 5,382,881 13,594 5,396,475 (2,951,980) (725,479) (739,073)

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Capital and reserves attributable to equity holders of the Company Share capital Share premium Statutory reserves Capital reserve Foreign exchange reserve Accumulated losses Minority interests TOTAL EQUITY	30 June 2007 RMB’000 (Unaudited) 992,007 1,195,597 114,581 357,951 19,749 (3,608,153) (928,268) 209,149 (719,119)	31 December 2006 RMB’000 (Audited) 992,007 1,195,597 114,581 402,666 14,956 (3,725,527) (1,005,720) 266,647 (739,073)

— I-75 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 June 2007

As at 1 January 2007 (Audited) Share of reserves of associates Exchange differences on translation Acquisition of additional interest in a subsidiary from minority interest Profit/(loss) for the period As at 30 June 2007 (Unaudited) At 1 January 2006 (Audited) Share of reserves of associates Exchange differences on translation Loss for the period As at 30 June 2006 (Unaudited)	Share capital RMB’000 992,007 — — — — 992,007 992,007 — — — 992,007	Share premium RMB’000 1,195,597 — — — — 1,195,597 1,195,597 — — — 1,195,597	Statutory reserves RMB’000 114,581 — — — — 114,581 114,581 — — — 114,581	Capital reserve RMB’000 402,666 (43) — (44,672) — 357,951 403,143 6 — — 403,149	Foreign exchange reserve RMB’000 14,956 — 4,793 — — 19,749 4,954 — 8,774 — 13,728	Equity attributable to equity Accu- holders mulated of the losses Company RMB’000 RMB’000 (3,725,527) (1,005,720) — (43) — 4,793 — (44,672) 117,374 117,374 (3,608,153) (928,268) (3,794,745) (1,084,463) — 6 — 8,774 (29,153) (29,153) (3,823,898) (1,104,836)	Minority interests RMB’000 266,647 — — (36,716) (20,782) 209,149 284,390 — — (8,492) 275,898	Total equity RMB’000 (739,073) (43) 4,793 (81,388) 96,592
								(719,119)
								(800,073) 6 8,774 (37,645)
								(828,938)

— I-76 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2007

	For the six months	For the six months
	ended 30 June
	2007	2006
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Net cash generated from operating activities	119,168	111,235
Net cash generated from/(used in) investing activities	418,137	(34,015)
Net cash used in financing activities	(447,776)	(69,828)
Net increase in cash and cash equivalents	89,529	7,392
Cash and cash equivalents at beginning of the period	142,247	184,284
Effect of foreign exchange rate changes	(1,129)	(429)
Cash and cash equivalents at end of the
period representing bank balances and cash	230,647	191,247

— I-77 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Notes to the Condensed Consolidated Financial Statements

30 June 2007

1. General information

Hisense Kelon Electrical Holdings Company Limited (the “Company”) was incorporated in the People’s Republic of China (hereinafter referred to as the “PRC”) on 16 December 1992. Its H shares were listed on The Stock Exchange of Hong Kong Limited on 23 July 1996 and its A shares were listed on the Shenzhen Stock Exchange on 13 July 1999.

The Company was formerly named Guangdong Kelon Electrical Holdings Company Limited （廣東 科龍電器股份有限公司）and has changed its name to Hisense Kelon Electrical Holdings Company Limited （海信科龍電器股份有限公司）since 21 June 2007.

As at 31 December 2006, Qingdao Hisense Air-Conditioner Company Limited (“Hisense AirConditioner”) held 262,212,194 shares of domestic legal person shares of the Company, representing 26.43% of total share capital of the Company.

On 29 March 2007, the share reform proposed on 19 December 2006 was completed. Upon its completion, the 262,212,194 domestic shares which were non-freely transferable A shares held by Hisense Air-Conditioner were converted into 238,872,074 transferable shares, representing 24.08% of the Company’s total capital. Hisense Air-Conditioner was the single largest shareholder of the Company as at 30 June 2007.

The English names by which some of the companies are referred to in these condensed consolidated financial statements represent management’s best efforts in translating their Chinese names as no English names have been registered for these companies.

The Group is principally engaged in the manufacture and sale of refrigerators and air-conditioners.

The address of the registered office of the Company is No.8 Ronggang Road, Ronggui, Shunde, Foshan, the PRC.

The condensed consolidated financial statements are presented in Renminbi (“RMB”), which is also the functional currency of the Group.

2. Basic of preparation

As at 30 June 2007, the Group’s current liabilities exceeded its current assets by approximately RMB2,792 million. In addition, the Group has outstanding short-term loans in the aggregate of approximately RMB1,194 million of which approximately RMB176 million were overdue as at 30 June 2007. The Group negotiated with certain banks to restructure the amounts due to them and the Company’s management confirmed that most of the Group’s bankers have expressed their intention to reschedule overdue bank borrowings and/or renew/grant credit facilities to the Group. Based on the above assessments, the directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the condensed consolidated financial statements on a going concern basis.

These condensed consolidated financial statements have been prepared in accordance with the applicable disclosure requirements of Appendix 16 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and with International Accounting Standard (“IAS”) 34 “Interim Financial Reporting” issued by the International Accounting Standards Board (“IASB”).

— I-78 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

The preparation of these condensed consolidated financial statements in conformity with IAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses on a year to date basis. Actual results may differ from these estimates.

These condensed consolidated financial statements include selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since 31 December 2006. These condensed consolidated financial statements and notes thereon do not include all of the information required for full set of financial statements prepared in accordance with International Financial Reporting Standards (“IFRSs”) promulgated by the IASB. IFRSs include all applicable IFRSs, IASs and related interpretations. These condensed consolidated financial statements should be read in conjunction with the 2006 annual financial statements.

3. Significant accounting policies

These condensed consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments, which are measured at fair values, as appropriate.

These condensed consolidated financial statements have been prepared in accordance with substantially the same accounting policies adopted in the 2006 annual financial statements except as stated in note 3(a) below.

IASB has issued a number of new and revised IFRSs that are effective or available for early adoption for accounting periods beginning on or after 1 January 2007. The adoption of the new and revised IFRSs that are effective for accounting periods beginning on or after 1 January 2007 did not result in significant changes to the Group’s accounting policies applied in these condensed consolidated financial statements for the periods presented. Accordingly, no prior period adjustment has been recognised.

The Group has not early applied the new and revised IFRSs that have been issued but are not yet effective. The directors anticipated that the application of these new and revised IFRSs will have no material impact on the Group’s results of operations and financial position.

(a) Summary of the effects of the changes in accounting policies

In prior years, certain property, plant and equipment held for use in production or supply of goods or services, or for administrative purpose are stated in the balance sheet at their revalued amounts, being the fair value on basis of their existing use at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment loss (revaluation model) in accordance with the provisions of IAS 16. During the period, the Company restated these property, plant and equipment at cost less any subsequent accumulated depreciation and subsequent accumulated impairment loss (cost model) in accordance with the provisions of IAS 16, to be in alignment with the accounting policy for property, plant and equipment adopted in its PRC statutory financial statements.

The changes resulted in an increase in the cost, accumulated depreciation and impairment of property, plant and equipment by the same amount of RMB246,429,000 and there was no material impact to the carrying amounts of these property, plant and equipment for current and prior periods.

— I-79 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(b) Reclassification of revaluation reserve

The revaluation reserve brought forward of RMB373,570,000 as at 31 December 2006 and 2005 arose from the restructuring of the Company. This amount was reclassified as capital reserve in order to conform with current period’s presentation of financial statements.

4. Segment information

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

For the six months ended 30 June 2007 (Unaudited) Air- Product Refrigerators conditioners Freezers components Elimination RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 REVENUE External sales 2,286,915 2,192,929 157,912 216,225 — Inter-segment sales — — — 433,942 (433,942) Total revenue 2,286,915 2,192,929 157,912 650,167 (433,942) Inter-segment sales are charged at prevailing market rates. RESULT Segment result 95,482 22,544 (1,976) 40,047 — Unallocated corporate expenses Profit from operations Share of results of associates (456) (436) (31) (43) — Finance costs Profit before income tax Income tax credit Profit for the period	Consolidated RMB’000 4,853,981 —
	4,853,981
	156,097 (11,105)
	144,992 (966) (48,019)
	96,007 585
	96,592

— I-80 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Refrigerators RMB’000 REVENUE External sales 1,663,016 Inter-segment sales — Total revenue 1,663,016	For the six months ended 30 June 2006 (Unaudited) Air- Product conditioners Freezers components Elimination RMB’000 RMB’000 RMB’000 RMB’000 1,585,540 143,696 193,925 — — — 439,884 (439,884) 1,585,540 143,696 633,809 (439,884)	Consolidated RMB’000 3,586,177 —
		3,586,177

Inter-segment sales are charged at prevailing market rates.

RESULT Segment result Unallocated corporate expenses Profit from operations Share of results of associates Finance costs Loss before income tax Income tax expense Loss for the period	47,600 (1,046)	(15,966) (997)	5,635	11,867 (122)	— —	49,136 (447)
			(91)
						48,689 (2,256) (83,068)
						(36,635) (1,010)
						(37,645)

The following table provides an analysis of the Group’s revenue by geographical markets with reference to locations of customers:

The PRC Mainland China Hong Kong Europe America Others	For the six months ended 30 June 2007 2006 RMB’000 RMB’000 (Unaudited) (Unaudited) 2,678,696 2,399,172 172,297 1,309 2,850,993 2,400,481 591,011 346,988 765,231 294,426 646,746 544,282 4,853,981 3,586,177	For the six months ended 30 June 2007 2006 RMB’000 RMB’000 (Unaudited) (Unaudited) 2,678,696 2,399,172 172,297 1,309 2,850,993 2,400,481 591,011 346,988 765,231 294,426 646,746 544,282 4,853,981 3,586,177
		2,400,481 346,988 294,426 544,282
		3,586,177

The Group’s operations are carried out in the PRC and almost all of the production facilities of the Group are located in the PRC.

— I-81 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

5. Profit/(loss) before income tax

Profit/(loss) before income tax in the condensed consolidated income statement was determined after charging/(crediting) the following items:

	For the	six months	six months
	ended 30 June
	2007		2006
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Depreciation of property, plant and equipment	123,419		112,771
Depreciation of investment properties	1,247		324
Amortisation of payments for leasehold land held for own
use under operating leases	7,390		7,916
Amortisation of other intangible assets	2,028		2,127
Impairment loss/(reversal of impairment loss) on trade and
other receivables	8,472		(17,522)
Write down of inventories to net realisable value	1,540		—
Rental income from investment properties
(net of direct operating expenses)	(5,659)		(894)
Share of income tax of associates	1,790		4,067
Loss on disposal of property, plant and equipment, net	28		2,161
Gain on disposal of payments for leasehold land held for own
use under operating leases	(9,304)		—
Gain on disposal of investment properties	(57,679)		—
Partial recovery of an impaired receivable	(57,072)		—

6. Income tax (credit)/expense

Income taxes consist of: Current tax — PRC enterprise income tax — Hong Kong Profits Tax Deferred tax Income tax (credit)/expense	For the six months ended 30 June 2007 2006 RMB’000 RMB’000 (Unaudited) (Unaudited) 2,950 1,010 85 — (3,620) — (585) 1,010	For the six months ended 30 June 2007 2006 RMB’000 RMB’000 (Unaudited) (Unaudited) 2,950 1,010 85 — (3,620) — (585) 1,010
		1,010

Taxation is calculated at the rates of tax prevailing at the locations the Group operates, based on existing legislation, interpretations and practices in respect thereof.

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

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

On 1 March 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC (“new tax law”) which will take effect on 1 January 2008. As a result of the new tax law, the statutory income tax rate will change from 33% to 25% with effect from 1 January 2008. The preferential tax rate currently enjoyed by the Company will be gradually transitioned to the new standard rate of 25% over a five-year transitional period. The detailed instruction for the transition to the new tax rate is yet to be issued. The Group estimates that the preferential income tax rate currently enjoyed by the Group will expire at the earlier of the end of the existing preferential tax period or the five-year transitional period. The change in the carrying amount of the deferred tax assets and liabilities, as a result of the change in tax rate, is reflected in the condensed consolidated financial statements of the Group for the six months ended 30 June 2007.

7. Dividends

The directors do not recommend the payment of an interim dividend for the six months ended 30 June 2007 (six months ended 30 June 2006: Nil).

8. Earnings/(loss) per share

The calculation of basic earnings per share attributable to equity holders of the Company is based on the net profit attributable to equity holders of the Company for the six months ended 30 June 2007 of RMB117,374,000 (six months ended 30 June 2006: net loss attributable to equity holders of the Company of RMB29,153,000) and 992,006,563 shares (six months ended 30 June 2006: 992,006,563 shares) outstanding during the period.

No diluted earnings/(loss) per share has been presented as there were no dilutive potential ordinary shares in issue in both periods.

9. Acquisition and disposal of property, plant and equipment

During the period, the Group acquired property, plant and equipment of approximately RMB95,147,000 (six months ended 30 June 2006: RMB79,988,000) and disposed property, plant and equipment of approximately RMB59,568,000 (six months ended 30 June 2006: RMB48,950,000). During the period, certain properties of the Group have been reclassified as non-current assets held for sale as disclosed in note 11 to the condensed consolidated financial statements.

10. Trade and other receivables

Trade receivables Notes receivable_(i) Other receivables Amounts due from Greencool Enterprise and its affiliates(ii) Amounts due from companies suspected to be connected with Mr. Gu(ii) Amounts due from Hisense Group(Note 15 III (c)) Amounts due from associates(Note 15 III (d)) Amounts due from other related companies(Note 15 III (e))_	30 June 2007 RMB’000 (Unaudited) 707,168 138,693 545,282 72,061 214,217 12,125 17 5,536 1,695,099	31 December 2006 RMB’000 (Audited) 290,166 77,317 376,838 72,061 214,217 2,187 40 86,907
		1,119,733

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• (i) The amounts of notes receivable pledged for bank borrowings amounted to approximately RMB8,340,000 (2006: RMB28,200,000).

• (ii) On 13 December 2006, the share transfer transaction between Greencool Enterprise and Hisense Air-Conditioner was completed. Upon the completion, Mr. Gu, Greencool Enterprise and its affiliates and companies suspected to be connected with Mr. Gu were no longer connected with the Group. Accordingly, no related party disclosure was made in respect of Greencool Enterprise and its affiliates and companies suspected to be connected with Mr. Gu for the period (Note 15). As at 30 June 2007, accumulated impairment loss of approximately RMB18,985,000 (2006: RMB18,985,000) and RMB344,968,000 (2006: RMB344,968,000) were recorded in respect of amounts due from Greencool Enterprise and its affiliates and amounts due from companies suspected to be connected with Mr. Gu respectively.

The aging analysis of trade receivables is as follows:

As at 30 June 2007 (Unaudited) Within three months Three to six months Six months to one year One to two years Two to three years Over three years As at 31 December 2006 (Audited) Within three months Three to six months Six months to one year One to two years Two to three years Over three years	Gross amount RMB’000 695,632 6,909 7,971 29,146 46,650 125,693 912,001 252,966 30,938 9,691 19,591 66,405 108,215 487,806	Impairment loss RMB’000 (8) (1,816) (2,068) (28,598) (46,650) (125,693) (204,833) — (954) (4,854) (17,212) (66,405) (108,215) (197,640)	Net amount RMB’000 695,624 5,093 5,903 548 — —
			707,168
			252,966 29,984 4,837 2,379 — —
			290,166

Normal credit term of 30 days is granted to customers. The Group allows a credit period of up to one year for large and well-established customers. Sales are usually settled by cash on delivery for small and new customers. Trade receivables are non-interest bearing.

11. Non-current assets held for sale

The Group classifies non-current assets held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. They are measured at the lower of their carrying amounts and fair value less cost to sell upon initial classification.

In May 2007, the directors marketed the Group’s certain factories, warehouses and offices in anticipation of moving into new premises. The directors have also obtained sales contracts in May 2007 and the sale transactions will be completed with a significant profit on disposal to be realised. As at 30 June 2007, the properties with carrying amount of RMB49,767,000 have been classified as non-current assets held for sale in the condensed consolidated balance sheet.

— I-84 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

12. Trade and other payables

Trade payables Notes payable Other payables Accruals Amounts due to Greencool Enterprise and its affiliates_(i) Amounts due to companies suspected to be connected with Mr. Gu(i) Amounts due to Hisense Group(Note 15 III (c)) Amounts due to associates(Note 15 III (d)) Amounts due to other related companies(Note 15 III (e))_	30 June 2007 RMB’000 (Unaudited) 2,153,524 302,930 540,038 292,978 13,050 125,374 439,625 66,510 26,266 3,960,295	31 December 2006 RMB’000 (Audited) 1,415,803 507,918 486,073 140,678 13,050 119,316 319,526 51,680 39,912
		3,093,956

(i) On 13 December 2006, the share transfer transaction between Greencool Enterprise and Hisense Air-Conditioner was completed. Upon the completion, Mr. Gu, Greencool Enterprise and its affiliates and companies suspected to be connected with Mr. Gu were no longer connected with the Group. Accordingly, no related party disclosure was made in respect of Greencool Enterprise and its affiliates and companies suspected to be connected with Mr. Gu for the period (Note 15).

The aging analysis of trade payables is as follows:

Within one year One to two years Two to three years Over three years	30 June 2007 RMB’000 (Unaudited) 1,996,073 107,601 37,425 12,425 2,153,524	31 December 2006 RMB’000 (Audited) 1,177,093 196,857 30,937 10,916
		1,415,803

13. Litigation settlement

The Group is currently involved in a number of legal disputes. During the period, the Group paid RMB1,863,000 (six months ended 30 June 2006: RMB2,049,196) for litigation settlement.

— I-85 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

14.

Acquisition during the period

On 24 April 2007, the Company acquired an additional 30% shareholding in a subsidiary, Chengdu Kelon Refrigerator Co., Ltd. (“Chengdu Kelon”) after which it became a wholly-owned subsidiary.

Details of the identifiable assets and liabilities acquired, and the purchase consideration are as follows:

Property, plant and equipment Payments for leasehold land held for own use under operating leases Trade and other receivables Inventories Cash and cash equivalents Trade and other payables Taxation payable Bank borrowings Net assets Net assets acquired Consideration: Cash Off-setting with receivables Total consideration Net assets acquired Debited to capital reserve	RMB’000 84,365 19,450 183,516 7,361 7,525 (150,950) (3,981) (24,900) 122,386 36,716 47,388 34,000 81,388 (36,716) 44,672

15. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.

As at 30 June 2007, Qingdao Hisense Air-Conditioner Company Limited (“Hisense Air-Conditioner”) held 238,872,074 shares of the Company, representing 24.08% of total share capital of the Company.

During the period from 2001 to 2005, the Group had significant transactions and relationships with Greencool Enterprise and its affiliates. The Group also had entered into a series of activities/ transactions with companies suspected to be connected with Mr. Gu. Upon the completion of share transfer, Mr. Gu, Greencool Enterprise and its affiliates were no longer connected with the Group. Accordingly, no related party disclosure was made in respect of Mr. Gu, Greencool Enterprise and its affiliates for the period.

— I-86 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

During the period, the Group entered into a Business Co-operation Framework Agreement with Hisense Group (Note 15 I). The Business Co-operation Framework Agreement is valid for a term of one year commencing from 1 January 2007 to 31 December 2007, but can be terminated before its expiration by mutual agreement of the parties or in the event of any breaches of the agreement. Pursuant to the Business Co-operation Framework Agreement, the Group agrees to sell and supply moulds, air-conditioners, refrigerators and raw materials to Hisense Group, purchase air-conditioners, refrigerators and raw materials from Hisense Group and Hisense Group agrees to render repair and maintenance services for electrical appliances to the Group. The details of the transactions with Hisense Group are disclosed in note 15 II(b).

I. Relationship with related parties

During the period, for the purpose of this report, the directors are of the view that the following companies are related parties of the Group:

Name of related parties	Relationship
Hisense Air-Conditioner	Single largest shareholder of the Company
Hisense Group	The holding company of Hisense
	Air-Conditioner and its subsidiaries
Qingdao Hisense Marketing	A fellow subsidiary of Hisense Air-Conditioner
Company Limited (“Hisense Agent”)
Hisense Electric Co., Ltd.	A fellow subsidiary of Hisense Air-Conditioner
(“Hisense Electric”)
Hisense (Zhejiang) Air-Conditioner	A subsidiary of Hisense Air-Conditioner
Company Limited
(“Hisense Zhejiang”)
Hisense (Nanjing) Electric	A fellow subsidiary of Hisense Air-Conditioner
Co., Ltd. (“Hisense Nanjing”)
Hisense (Beijing) Electric	A fellow subsidiary of Hisense Air-Conditioner
Co., Ltd. (“Hisense Beijing”)
Hisense (Qingdao) Import & Export	A fellow subsidiary of Hisense Air-Conditioner
Co., Ltd. (“Hisense Import
& Export”)
Hisense Hitachi Air Conditioning	A fellow subsidiary of Hisense Air-Conditioner
Co., Ltd. (“Hisense Hitachi”)
Savor Household Electrical Appliance	A fellow subsidiary of Hisense Air-Conditioner
Service Industry Co., Ltd.
(“Savor Service”)
Chongqing Kelon Rongsheng	An associate of the Group
Refrigerator Sales Co., Ltd.
(“Chongqing Rongsheng”)
Attend Logistic Co., Ltd.	An associate of the Group
(“Attend Logistic”)

— I-87 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Name of related parties

Relationship

Huayi Compressor Holdings Company Limited (“Huayi”)

An associate of the Group

Jiaxibeila Compressor Company Limited (“Jiaxibeila”)

A subsidiary of an associate of the Group

Kelon Europe Industrial Design Limited (“Kelon Europe”)

An unconsolidated subsidiary of the Company

Jiangxi Combine Electrical Appliance Co., Ltd. (“Jiangxi Combine”)

An unconsolidated subsidiary of the Company

Chengdu Engine (Group) Company Limited (“Chengdu Engine”)

A minority investor of Chengdu Kelon before 24 April 2007

Chengdu Xinxing Electrical Appliance Holdings Company Limited (“Chengdu Xinxing”)

A subsidiary of Chengdu Engine

Hangzhou Xileng Group Company Limited (“Hangzhou Xileng”)

A minority investor of Hangzhou Kelon

Xi’an Gaoke (Group) Limited (“Xi’an Gaoke”)

A minority investor of Xi’an Kelon

Shunde Yunlong Consultancy (“Shunde Yunlong”)

A minority investor of Huaao Electronics

For the purpose of this report, the directors are of the views that the following companies controlled by or suspected to be connected with Mr. Gu are no longer related to the Group starting from 13 December 2006 due to the completion of the share transfer transaction between Greencool Enterprise and Hisense Air-Conditioner. As a result, transactions with Mr. Gu, Greencool Enterprise and its affiliates and companies suspected to be connected with Mr. Gu for the period ended 30 June 2007 are not classified as related party transactions.

Name of related parties Relationship Guangdong Greencool Enterprise The previous single largest shareholder Development Company Limited of the Company (“Greencool Enterprise”)

Mr. Gu

The beneficial owner of Greencool Enterprise and also the past executive director of the Company

Greencool Technology A company controlled by Mr. Gu Development (Shenzhen) Company Limited (“Shenzhen Greencool Technology”)

— I-88 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Name of related parties Relationship Greencool Environmental Protection A company controlled by Mr. Gu Engineering (Shenzhen) Company Limited (“Shenzhen Greencool Environmental”) Greencool Refrigerant (China) Company A company controlled by Mr. Gu Limited (“Greencool China”) Hainan Greencool Environmental A company controlled by Mr. Gu Protection Engineering Company Limited (“Hainan Greencool”) Greencool Procurement (Shenzhen) A company controlled by Mr. Gu Co., Ltd. (“Greencool Procurement”) Hefei Meiling Holdings Limited A company controlled by Mr. Gu (“Hefei Meiling”) Jiangxi Greencool Electrical A company controlled by Mr. Gu Appliance Company Limited (“Jiangxi Greencool”) Yangzhou Yaxing Motor A company controlled by Mr. Gu Coach Company Limited (“Yangzhou Yaxing”) Chengdu Refrigerating Components A company suspected to be connected with Factory (“Chengdu Refrigerating”) Mr. Gu Hefei Weixi Electrical Appliance A company suspected to be connected with Company Limited (“Hefei Weixi”) Mr. Gu Jiangxi Keda Plastic Technology A company suspected to be connected with Company Limited (“Jiangxi Keda”) Mr. Gu Jiangxi Kesheng Trading Company A company suspected to be connected with Limited (“Jiangxi Kesheng”) Mr. Gu Jinan San’ai’fu Chemical A company suspected to be connected with Company Limited (“Jinan San’ai’fu) Mr. Gu Tianjin Lixin Trading A company suspected to be connected with Development Company Limited Mr. Gu (“Tianjin Lixin”) Tianjin Taijin Yunye Company A company suspected to be connected with Limited (“Tianjin Taijin Yunye”) Mr. Gu Tianjin Xiangrun Trading A company suspected to be connected with Development Company Limited Mr. Gu (“Tianjin Xiangrun”)

A company suspected to be connected with Mr. Gu

A company suspected to be connected with Mr. Gu

A company suspected to be connected with Mr. Gu

A company suspected to be connected with Mr. Gu

• A company suspected to be connected with Mr. Gu

• A company suspected to be connected with Mr. Gu

• A company suspected to be connected with Mr. Gu

— I-89 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Name of related parties	Relationship
Wuhan Changrong Electrical	A company suspected to be connected with
Appliance Company Limited	Mr. Gu
(“Wuhan Changrong”)
Zhongshan Dongyue Electrical	A company suspected to be connected with
Company Limited	Mr. Gu
(“Zhongshan Dongyue”)
Zhejiang Guoda Trading	A company suspected to be connected with
Company Limited (“Zhejiang Guoda”)	Mr. Gu
Zhejiang Yuhuan Compressor Factory	A company suspected to be connected with
(“Zhejiang Yuhuan”)	Mr. Gu
Beijing De Heng Solicitors	A company suspected to be connected with
(“Beijing De Heng”)	Mr. Gu
Zhuhai Defa Air-conditioner Fittings	A company suspected to be connected with
Company Limited (“Zhuhai Defa”)	Mr. Gu
Zhuhai Longjia Refrigerating Plant	A company suspected to be connected with
Company Limited (“Zhuhai Longjia”)	Mr. Gu

II. Transactions with related parties

(a) Transactions with Greencool Enterprise and its affiliates

The Group had the following significant transactions with Greencool Enterprise and its affiliates that were carried out in the normal course of business:

	31 December
	2006
	RMB’000
	(Audited)
Loan guarantee provided by
Greencool Enterprise
— maximum amount during the year	327,971
— amount as at end of year	85,709

— I-90 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(b) Transactions with Hisense Group

The Group had the following significant transactions with Hisense Group:

		For the six months	For the six months
		ended 30 June
		2007	2006
	Notes	RMB’000	RMB’000
		(Unaudited)	(Unaudited)
Sales of goods/raw materials to
— Hisense Air-Conditioner	(i)	58,197	—
— Hisense Agent	(i)	—	63,751
— Hisense Zhejiang	(i)	7,471	7,039
— Hisense Beijing	(i)	34,564	—
Sales of goods to Hisense Agent under
the agency agreement		—	1,689,359
Agency fee paid/payable to
— Hisense Agent	(ii)	—	13,178
Loan interest payable to
— Hisense Agent		5,543	8,445
Purchases of goods/raw materials from
— Hisense Air-Conditioner	(i)	48,971	57
— Hisense Zhejiang	(i)	289,575	53,526
— Hisense Nanjing	(i)	29,550	2,454
— Hisense Beijing	(i)	—	5,520
Sales of moulds to
— Hisense Electric	(i)	—	2,554
— Hisense Air-Conditioner	(i)	3,079	—

(i) Sales and purchases were conducted in accordance with mutually agreed terms with reference to the market rates.

(ii) Agency fee was based on 1% of the total amount of sales proceeds of products under the sales agency agreement.

— I-91 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(c) Transactions with associates

The Group had the following significant transactions with associates:

		For the	six months
		ended 30 June
		2007	2006
	Notes	RMB’000	RMB’000
		(Unaudited)	(Unaudited)
Sales of goods/raw materials to
— Chongqing Rongsheng	(i)	42,550	—
— Huayi and Jiaxibeila	(i)	18	113
Purchases of goods/raw materials from
— Huayi and Jiaxibeila	(ii)	112,235	66,774
Service fee charged to
— Attend Logistic		16	—
Logistics management fee/warehouse
rental paid to
— Attend Logistic	(iii)	29,553	19,381
Water and electricity expenses paid to
— Attend Logistic		26	—

(i) Sales were conducted in accordance with mutually agreed terms with reference to the market rates.

(ii) Huayi and Jiaxibeila mainly provide compressors to the Group for production of air-conditioners and refrigerators.

• (iii) The Group and Attend Logistic entered into a logistics service agreement, pursuant to which Attend Logistic provides transportation and warehousing service to the Group. The service fee is based on the actual volume of goods, the distance delivered, the occupancy space of warehouse and discharged at a pre-determined rate agreed by both parties.

— I-92 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(d) Transactions with other related parties

The Group had the following significant transactions with other related parties:

		For the	six months
		ended 30 June
		2007	2006
	Notes	RMB’000	RMB’000
		(Unaudited)	(Unaudited)
Sales of goods/raw materials to
— Chengdu Xinxing		—	3,320
Purchases of goods/raw materials from
— Chengdu Xinxing		—	6,458
Interest charged to
— Chengdu Xinxing		—	993
Water and electricity expenses paid to
— Chengdu Engine	(i)	4,441	—
Lease payment in respect of plant and
equipment to
— Hangzhou Xileng	(ii)	3,000	3,000

(i) Water and electricity expenses are charged at cost.

(ii) Lease payment in respect of plant and equipment to Hangzhou Xileng is determined by reference to an equipment lease agreement entered into between Hangzhou Kelon and Hangzhou Xileng.

— I-93 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

III. Balances with related parties

(a) Balances with Greencool Enterprise and its affiliates

Included in trade and other receivables, net — Greencool Enterprise — Hainan Greencool — Shenzhen Greencool Technology — Shenzhen Greencool Environmental Included in trade and other payables — Hefei Meiling — Jiangxi Greencool	31 December 2006 RMB’000 (Audited) 6,085 976 32,000 33,000
	72,061
	50 13,000
	13,050

Amounts due from/to Greencool Enterprise and its affiliates are unsecured, interestfree and repayable on demand.

As at 31 December 2006, accumulated impairment loss of approximately RMB18,985,000 was recorded in respect of amounts due from Greencool Enterprise and its affiliates.

— I-94 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(b) Balances with companies suspected to be connected with Mr. Gu

Included in trade and other receivables, net — Beijing De Heng — Hefei Weixi — Jiangxi Keda — Jiangxi Kesheng — Jinan San’ai’fu — Tianjin Lixin — Tianjin Xiangrun — Wuhan Changrong — Zhuhai Defa — Zhuhai Longjia Included in trade and other payables — Tianjin Taijin Yunye — Zhongshan Dongyue — Zhuhai Longjia — Zhuhai Defa — Zhejiang Yuhuan	31 December 2006 RMB’000 (Audited) 1,000 10,424 6,500 6,072 56,683 44,800 48,199 15,539 10,700 14,300
	214,217
	65,000 4,377 28,316 21,400 223
	119,316

Amounts due from/to companies suspected to be connected with Mr. Gu are unsecured, interest-free and repayable on demand.

As at 31 December 2006, accumulated impairment loss of approximately RMB344,968,000 was recorded in respect of amounts due from companies suspected to be connected with Mr. Gu.

— I-95 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(c) Balances with Hisense Group

Included in trade and other receivables, net — Hisense Agent — Hisense Air-Conditioner — Hisense Zhejiang — Hisense Nanjing — Hisense Beijing — Hisense Import & Export Included in trade and other payables — Hisense Air-Conditioner — Hisense Agent — Hisense Beijing — Hisense Nanjing — Hisense Zhejiang — Savor Service	30 June 2007 RMB’000 (Unaudited) 2 1,602 2,284 — 8,233 4 12,125 10,069 231,303 2 13,376 184,766 109 439,625	31 December 2006 RMB’000 (Audited) 540 335 582 730 — —
		2,187
		9,281 309,965 1 279 — —
		319,526

Amounts due from Hisense Group are unsecured, interest-free and are repayable in accordance with normal commercial terms.

Included in amount due to Hisense Group was an amount of RMB106 million of advance received from Hisense Agent in connection with the sales agency agreement dated on 16 September 2005 (as amended by the first supplemental agency agreement on 26 September 2005 and the second supplemental agency agreement on 1 April 2006). The advance received from Hisense agent is unsecured, interest bearing at the interest rate as quoted by the People’s Bank of China for one-year loans and repayable on demand.

All other amounts due to Hisense Group are unsecured, interest-free and repayable on demand.

— I-96 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(d) Balances with associates

30 June 2007 RMB’000 (Unaudited) Included in trade and other receivables, net — Attend Logistic 17 Included in trade and other payables — Attend Logistic 7,117 — Chongqing Rongsheng 3,948 — Huayi and Jiaxibeila 55,445 66,510 Amounts due from/to associates are unsecured, interest-free and accordance with normal commercial terms. Balances with other related companies 30 June 2007 RMB’000 (Unaudited) Included in trade and other receivables, net — Chengdu Engine — — Chengdu Xinxing — — Kelon Europe 5,536 5,536 Included in trade and other payables — Chengdu Engine 109 — Chengdu Xinxing — — Hangzhou Xileng 19,272 — Jiangxi Combine 5,100 — Xi’an Gaoke 1,785 26,266	31 December 2006 RMB’000 (Audited) 40
	20,652 4,083 26,945
	51,680
	are repayable in 31 December 2006 RMB’000 (Audited) 47,191 34,000 5,716
	86,907
	5,309 11,946 15,772 5,100 1,785
	39,912

(e) Balances with other related companies

All amounts due from/to other related companies are unsecured, interest-free and are repayable on demand.

As at 30 June 2007, accumulated impairment loss of approximately RMB4,455,000 (2006: RMB4,526,000) was recorded in respect of amounts due from other related companies.

— I-97 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

IV. Key management personnel compensation

Basic salaries, allowances and benefits-in-kind Defined contribution pension cost	For the six months ended 30 June 2007 2006 RMB’000 RMB’000 (Unaudited) (Unaudited) 1,529 3,664 45 — 1,574 3,664	For the six months ended 30 June 2007 2006 RMB’000 RMB’000 (Unaudited) (Unaudited) 1,529 3,664 45 — 1,574 3,664
		3,664

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, including directors and other senior management, totaling 11 individuals (six months ended 30 June 2006: 8 individuals).

16. Capital commitments

	30 June	31 December
	2007	2006
	RMB’000	RMB’000
	(Unaudited)	(Audited)
Capital expenditure for acquisition of property,
plant and equipment contracted for but not
provided in the financial statements	33,676	14,004

Other than the above, the Group has the following capital commitments as at 30 June 2007:

During 2006, the Company entered into agreements with Administrative Committee of Chengdu Economic and Technological Development Zone （成都經濟技術開發區管理委員會）for setting up a subsidiary in Chengdu. The total expected cost of investment is approximately RMB350 million. An initial payment of RMB16 million has been made as at 30 June 2007 and is included in trade and other receivables.

17. Contingencies

The Group is a defendant in certain lawsuits as well as the plaintiff in other proceedings arising in the ordinary course of business. The amounts involved in the litigations against the Group relate mainly to bank loans, purchases and expenditures incurred by the Group and most of them were recorded as liabilities of the Group as at the balance sheet date. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have material adverse effect on the financial position or operating results of the Group.

— I-98 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

18. Overdue bank loans

As at 30 June 2007, the Group has outstanding short-term loans in the aggregate of approximately RMB1,194 million (2006: RMB1,557 million) of which approximately RMB176 million (2006: RMB255 million) were overdue. The Group negotiated with certain banks to restructure the amounts due to them and the Company’s management confirmed that most of the Group’s bankers have expressed their intention to reschedule overdue bank borrowings and/or renew/grant credit facilities to the Group.

19. Subsequent events

On 27 July 2007, the Company entered into a joint venture agreement (the “Joint Venture Agreement”) with Hisense Import & Export, Hisense Electric and certain third parties to establish a joint venture company for the purpose of conducting export of electrical appliances to overseas markets. Pursuant to the Joint Venture Agreement the Company agreed to invest the sums of RMB3,800,000 in cash representing 19% equity interest in the joint venture company.

— I-99 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

• D. AUDITOR’S REPORTS AND QUALIFIED AUDIT OPINIONS EXTRACTED FROM PUBLISHED ANNUAL REPORTS

• (i) Qualified audit opinion on the Kelon Group’s financial statements for the year ended 31 December 2004 (“2004 Annual Report”) as extracted from the Kelon Group’s 2004 annual report. The page references in the following extract are the same as those in the 2004 Annual Report.

==> picture [100 x 45] intentionally omitted <==

TO THE SHAREHOLDERS OF

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

(A Sino-foreign joint venture joint stock limited company established in the People’s Republic of China)

We have audited the financial statements on pages 4 to 48 which have been prepared in accordance with International Financial Reporting Standards.

Respective responsibilities of directors and auditors

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Basis of opinion

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants except that the scope of our work was limited as explained below.

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

— I-100 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited as follows:

• (a) Included in turnover for the year ended 31 December 2004 of approximately RMB8,436 million were recorded sales to two customers in the People’s Republic of China in the aggregate amount of approximately RMB576 million of which approximately RMB427 million were recorded in December 2004. One of these customers for which sales of RMB297 million were recorded in December was a new customer with which the Group had not previously traded. We sought but were unable to obtain direct confirmations from these customers. We were unable to satisfy ourselves as to the validity of the sales to this new customer. Of the aggregate amount of sales to these two customers during the year, approximately RMB576 million had not been settled at the balance sheet date and approximately RMB556 million remained unsettled as at the date of this report. Against this background, we were unable to obtain sufficient evidence to satisfy ourselves concerning either the validity of the above sales or the validity of the related trade receivables included in the consolidated balance sheet as at 31 December 2004. Accordingly, we were unable to satisfy ourselves that sales for the year ended 31 December 2004 and trade receivables as at that date were free from material misstatement.

• (b) The Group has recorded sales returns of over RMB200 million during the year ended 31 December 2004. Notwithstanding this, the management of the Group considered that no allowance for sales returns at 31 December 2004 is necessary. However, we were unable to obtain sufficient information and explanation to satisfy ourselves that no allowance for sales returns at 31 December 2004 is required to be made.

Any adjustments found to be necessary to the above amounts would affect the net assets of the Group as at 31 December 2004 and the loss of the Group for the year then ended.

In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

— I-101 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Qualified opinion arising from limitations of audit scope

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence concerning the matter described in the basis of opinion section of the report, in our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2004 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

In respect alone of the limitations on our work described in the basis of opinion section of this report:

• we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and

• we were unable to determine whether proper books of account had been kept.

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong 28 April 2005

— I-102 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

• (ii) Qualified audit opinion on the Kelon Group’s financial statements for the year ended 31 December 2005 as extracted from the Kelon Group’s 2005 annual report

==> picture [79 x 55] intentionally omitted <==

==> picture [121 x 52] intentionally omitted <==

TO THE SHAREHOLDERS OF

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

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

We have audited the financial statements which have been prepared in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board.

Respective responsibilities of directors and auditors

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Basis of opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants except that the scope of our work was limited as explained below.

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and its subsidiaries (collectively “the Group”), consistently applied and adequately disclosed.

— I-103 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited as follows:

• a. The consolidated financial statements include the financial statements of Jiangxi Kelon Industrial Development Co., Ltd. (“Jiangxi Kelon”), the business of which was interrupted after the freezure of its assets by the Higher People’s Court of Jiangxi Province in August 2005. The scope of our audit on Jiangxi Kelon was limited as personnel responsible for the operations of Jiangxi Kelon had left during the year and the management of the Group were unable to ascertain the accuracy and completeness of the books and records of Jiangxi Kelon. Due to this limitation, we were unable to obtain sufficient reliable evidence to assess whether the carrying amounts of the following significant financial statement areas (after elimination of intra-group balances and transactions), relating to Jiangxi Kelon, were free from material misstatements:

• Property, plant and equipment of approximately RMB60 million;

• Inventories of approximately RMB44 million;

• Other receivables of approximately RMB49 million;

• Amounts due from companies suspected to be connected with Mr. Gu (as defined in point (f) below) of approximately RMB85 million;

• Cash and bank balances of approximately RMB1.5 million;

• Trade payables of approximately RMB172 million;

• Other payables of approximately RMB18 million;

• Amounts due to companies suspected to be connected with Greencool Enterprise (as defined in point (f) below) of approximately RMB13 million;

• Taxation payable of approximately RMB23 million;

• Short-term bank borrowings of approximately RMB151 million; and

• Net loss attributable to the Group of approximately RMB244 million.

— I-104 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• b. Included in leasehold land and buildings at 31 December 2005 were asset appreciation adjustments made in prior years of an aggregate gross amount and net book value of approximately RMB133 million and RMB96 million respectively. Those asset appreciation adjustments were initially recorded in lump sums without sufficient details as to the individual asset items they relate to. As no further information was available to us with respect to the lump sums, we were unable to determine with reasonable certainty whether the carrying amounts of the property, plant and equipment and revaluation reserve at 31 December 2005 were free from material misstatements and the possible impact on the Group’s income statements in the current year and prior periods should adjustments be found necessary.

• c. The Company and certain of its subsidiaries did not maintain a proper costing system in respect of finished goods of sufficient reliability for financial reporting purpose. There were numerous negative quantities and negative unit costs in the inventory ledgers for certain of the Company’s subsidiaries throughout the year. The carrying amounts of inventories at the balance sheet date were re-calculated based on the physical quantities at the balance sheet date and the weighted average cost of production in the year. Since both the carrying amounts of finished goods at 1 January 2005 and 31 December 2005 have direct impact on the cost of sales figure for the current year, and we could not place reliance on the Group’s inventory system nor was it practical for us to perform other audit procedures to verify the carrying value of the Group’s inventories at 1 January 2005, we were therefore unable to obtain sufficient information to assess whether the cost of sales for the current year was free from material misstatement. We have, however, performed alternative audit procedures to ascertain the existence, completeness and valuation of the closing inventories as at 31 December 2005 and our opinion is not qualified in this respect.

• d. At 31 December 2005, included in trade and other receivables under current assets were intra-group receivables of approximately RMB80 million and included in trade and other payables under current liabilities were intragroup payables of approximately RMB52 million. This resulted from an inability to eliminate balances among companies within the Group on consolidation. We were unable to obtain sufficient information and explanation concerning the timing and nature underlying the unreconciled receivables and payables. We were therefore unable to assess the validity and recoverability of the unreconciled receivables amount of approximately RMB80 million and the validity and completeness of the unreconciled payables amount of approximately RMB52 million and the possible impact on the Group’s income statements in the current year and prior periods should adjustments be found necessary.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• e. Included in trade and other receivables at 31 December 2005 was a receivable arising from the sale of an interest in leasehold land under operating lease in Shunde, the People’s Republic of China (the “PRC”), of gross amount and carrying amount of approximately RMB169 million and RMB85 million respectively. Although the land use right was registered in the name of the purchaser in June 2005, no settlement of the receivable has been recorded in the Company’s books up to the date of this report. The carrying amount was stated net of an impairment loss, made in the current year, of approximately RMB84 million. During the course of our audit, we sought but were unable to obtain direct confirmation from the purchaser concerning the existence of the receivable. There were no other satisfactory audit procedures that we could adopt to satisfy ourselves concerning the continued existence of the receivable nor for us to assess its recoverability. Accordingly, we were unable to assess with reasonable certainty whether the carrying amount of such receivable at 31 December 2005 as well as the impairment loss made in the current year were free from material misstatement.

• f. It was reported by the Company that the controlling shareholder, Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”), had entered into a series of activities/transactions during the period from 2001 to 2005 which had been harmful to the Group, including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, unreasonable prepayments and purchases of raw materials and property, plant and equipment at unreasonable quantities and prices. These transactions were conducted through Greencool Enterprise, its affiliates and/or companies suspected to be connected with the Company’s former chairman, Mr. Gu Chu Jun (“Mr. Gu”). As at 31 December 2005, the aggregate amount of receivables and aggregate amount of payables due from/to these companies were approximately RMB680 million and RMB131 million respectively which are reflected in the consolidated balance sheet at 31 December 2005 as “Amounts due from Greencool Enterprise and its affiliates” and “Amounts due from companies suspected to be connected with Mr. Gu” within current assets and “Amounts due to Greencool Enterprise and its affiliates” and “Amounts due to companies suspected to be connected with Mr. Gu” within current liabilities. The management have made an impairment loss of approximately RMB374 million on the receivables. Due to the irregularity of the transactions mentioned above and limitation of information available to us, we were unable to satisfy ourselves concerning the validity of these transactions, the appropriateness of the impairment amount and the recoverability of the net carrying amounts.

— I-106 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

• g. As a result of the alleged breaches of PRC securities laws and regulations and consequent upon the alleged economic crimes committed by the former chairman of the Company, the Company had appointed an independent professional firm to carry out an investigation on the material cash flows of the Group during the period from 1 October 2001 to 31 July 2005 (the “Investigation Period”). The results of the investigation, announced by the Company on 20 January 2006, revealed that there were significant cash flows which were inconsistent with or were irrelevant to the business of the Group: (1) between the Group and Greencool Enterprise and its affiliates (“Greencool Companies”); (2) between the Group and companies suspected to be connected with Greencool Companies; (3) between the Group and other companies; and (4) within the Group, during the Investigation Period.

The management considered that the results of the investigation indicated that (1) there could have been omissions of recording and disclosure of material related party transactions during the year ended 31 December 2005 and prior periods and (2) there could have been material misstatements under the cash flow statements in distinguishing operating, investing and financing cash flows during the year ended 31 December 2005 and prior periods.

In consequence, we were unable to obtain sufficient reliable information and explanations to assess (1) whether all material related party transactions have been properly disclosed in the financial statements during the year ended 31 December 2005; and (2) whether all material cash flows have been properly reflected in operating, investing and financing activities under the cash flow statement for the year ended 31 December 2005.

• h. Following a formal investigation into the Company for alleged breaches of securities laws and regulations in the PRC by the China Securities and Regulatory Commission, the management noted certain errors that had significant impact on the Group’s prior years’ financial statements. The financial statements for the year ended 31 December 2005 included a restatement of the 2004 financial statements to correct the errors noted by the management. The above restatements have, in aggregate, reduced the net assets of the Group as at 31 December 2004 by approximately RMB209 million, profit for the year ended 31 December 2004 by approximately RMB181 million and opening retained earnings as at 1 January 2004 by approximately RMB27 million. Details of the income statement and balance sheet line items being affected are disclosed in note 2 to the financial statements. Due to the irregularity of the transactions entered into by the Company as mentioned in the foregoing and in points (f) and (g) above, we were unable to obtain sufficient reliable evidence to satisfy ourselves concerning the appropriateness, completeness and accuracy of the prior

— I-107 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

year restatements. Further this will have a material impact on the financial statements for the year ended 31 December 2005. In addition, we were also unable to ascertain with reasonable accuracy as to whether the impairment losses on inventories of approximately RMB293 million and receivables of approximately RMB479 million as included in administrative expenses were under conditions that did not exist prior to 1 January 2005 and thus would not have led to prior year restatements.

Any adjustments found to be necessary to the matters set out in points (a) to (h) above would affect the net liabilities of the Group as at 31 December 2005 and/or the loss and cash flows of the Group for the year then ended.

Fundamental uncertainty relating to the going concern basis

In forming our opinion, we have considered the adequacy of the disclosures made in note 3(b) to the financial statements concerning the adoption of the going concern basis, being the basis on which the financial statements have been prepared. As explained in note 3(b) to the financial statements, the Group incurred losses of approximately RMB3,767 million and RMB237 million (restated) for the year ended 31 December 2005 and year ended 31 December 2004 respectively. As at 31 December 2005, the Group’s current liabilities exceeded its current assets by approximately RMB3,307 million. In addition, the Group had outstanding short-term loans in the aggregate of approximately RMB2,161 million of which approximately RMB1,233 million were overdue as at 31 December 2005. The Group is in the process of negotiating with certain banks to restructure the amounts due to them and the Company’s management confirmed that most of the Group’s bankers have expressed their intention to reschedule overdue bank borrowings and/or renew/grant credit facilities to the Group. In addition, the successor single largest shareholder of the Company, Hisense Air-Conditioner Company Limited has expressed its intention to provide necessary financial support to the Group so as to enable it to continue as a going concern. Based on the above assessments, the directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis. We consider that appropriate estimates and disclosures have been made herein and our opinion is not qualified in this respect.

In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Qualified opinion arising from limitation of audit scope and disclaimer on view given by consolidated income statement and consolidated cash flow statement

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence concerning the matters set out in the basis of opinion section of this report, in our opinion the financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2005 and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

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 matters set out in points (f) to (h) above, we are 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.

In respect alone of the limitations on our work described in the basis of opinion section of this report:

• we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and

• we were unable to determine whether proper books of account had been kept.

BDO McCabe Lo Limited

Certified Public Accountants Chow Tak Sing, Peter Practising Certificate Number P04659

Hong Kong, 11 August 2006

— I-109 —

APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(iii) Qualified audit opinion on the Kelon Group’s financial statements for the year ended 31 December 2006 as extracted from the Kelon Group’s 2006 annual report

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THE SHAREHOLDERS OF

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

（廣東科龍電器股份有限公司）

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

We have audited the financial statements of Guangdong Kelon Electrical Holdings Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated balance sheet as at 31 December 2006, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements

The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the disclosure requirements of the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the content of this report.

Except as described in the basis for qualified opinion paragraph, we conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Basis for qualified opinion

It was reported by the Company that the previous controlling shareholder, Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”), had entered into a series of activities/transactions during the period from 2001 to 2005 which had been harmful to the Group, including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, unreasonable prepayments and purchases of raw materials and property, plant and equipment at unreasonable quantities and prices. These transactions were conducted through Greencool Enterprise, its affiliates and/or companies suspected to be connected with the Company’s former chairman, Mr. Gu Chu Jun (“Mr. Gu”). As at 31 December 2006, the aggregate amount of receivables and aggregate amount of payables due from/to these companies were approximately RMB286 million (net of an accumulated impairment loss of RMB364 million) and RMB132 million respectively which were reflected in the consolidated balance sheet at 31 December 2006 as “Amounts due from Greencool Enterprise and its affiliates” and “Amounts due from companies suspected to be connected with Mr. Gu” within current assets and “Amounts due to Greencool Enterprise and its affiliates” and “Amounts due to companies suspected to be connected with Mr. Gu” within current liabilities. Due to the irregularity of the transactions mentioned above and limitation of information available to us, we were unable to satisfy ourselves concerning the validity of these transactions, the appropriateness of the accumulated impairment and the recoverability of the carrying amounts. Any adjustments found to be necessary would affect the net liabilities as at 31 December 2006 and the profit for the year then ended.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

Qualified opinion arising from limitation of audit scope

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to the matters set out in the basis for qualified opinion section of this report, the financial statements give a true and fair view of the state of the Group’s affairs as at 31 December 2006 and of its profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Without qualifying our opinion, we draw attention to note 3(b) to the financial statements which indicates that the Group’s current liabilities exceeded its current assets by approximately RMB2,952 million as at 31 December 2006. These conditions, along with other matters as set forth in note 3(b) to the financial statements, include the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern. The directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis.

BDO McCabe Lo Limited

Certified Public Accountants

Chow Tak Sing, Peter Practising Certificate Number P04659

Hong Kong, 26 April 2007

— I-112 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

The following is the text of a report prepared for the purpose of inclusion in this circular received from the reporting accountants, BDO McCabe Lo Limited, Certified Public Accountants.

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The Directors

Hisense Kelon Electrical Holdings Company Limited

31 December 2007

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) regarding the Target Group (as defined herein as below), which were principally engaged in the manufacture and sale of air-conditioners and refrigerators in the People’s Republic of China (the “PRC”) for each of the three years ended 31 December 2004, 2005 and 2006 and the six months ended 30 June 2007 (the “Relevant Periods”), prepared on the basis set out in note 1 of section B below, for the inclusion in the circular of 海信科龍電器股份有限公司 (Hisense Kelon Electrical Holdings Company Limited) (the “Company”, together with its subsidiaries, collectively defined as the “Kelon Group”) dated 31 December 2007 (the “Circular”) issued in connection with the proposed acquisition of the Target Group (“Proposed Acquisition”).

As at the date of this report, the Target Group comprises the following:

• (a) 100% of the air-conditioning business and related net assets of 青島海信空調有限公 司 (Qingdao Hisense Air-conditioning Company Limited) (“Qingdao Hisense”). This business is referred to as the “Qingdao Hisense Air-conditioning Business” and was subsequently transferred to a newly established wholly owned subsidiary of Qingdao Hisense 海信（山東）空調有限公司 (Hisense (Shandong) Air-conditioning Company Limited) (“Hisense Shandong”) after the Relevant Periods on 27 November 2007 (please refer to note 1 of section B for details);

• (b) 51% of the equity interests of 海信浙江空調有限公司 (Hisense Zhejiang Airconditioning Company Limited) (“Hisense Zhejiang”);

• (c) 55% of the equity interests of 海信（北京）電器有限公司 (Hisense (Beijing) Electric Company Limited) (“Hisense Beijing”), which in turn holds 60% of the equity interests of 海信（南京）電器有限公司 (Hisense (Nanjing) Electric Company Limited) (“Hisense Nanjing”);

— II-1 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

• (d) 100% of the business and the related net assets of 青島海信營銷有限公司 (Qingdao Hisense Marketing Company Limited) (“Hisense Marketing”) that are related to the sale and marketing of air-conditioners and refrigerators mainly produced by Qingdao Hisense Air-conditioning Business, Hisense Zhejiang, Hisense Beijing and Hisense Nanjing (the “Hisense Marketing Business”); and

• (e) 100% of the equity interests of Hisense Shandong.

• The details of the entities and businesses comprising the Target Group are as follows:

Issued and fully paid-up registered capital Name of Place of Place of Date of as at the date entity/business incorporation operation incorporation of this report RMB Qingdao Hisense N/A PRC N/A 674,792,903_(i) Business Hisense Zhejiang(ii) PRC PRC 22 April 2005 110,000,000 Hisense Beijing(ii) PRC PRC 13 June 2002 85,710,000 Hisense Nanjing(ii) PRC PRC 12 January 2005 128,691,500 Hisense Marketing N/A PRC N/A 30,000,000(v)_ Business Hisense Shandong PRC PRC 8 November 2007 500,000,000

Effective equity interests At At 31 December 30 June 2004 2005 2006 2007 Principal activities 100% 100% 100% 100% Manufacture of air-conditioners N/A_(iii) 51% 51% 51% Manufacture of air-conditioners 55% 55% 55% 55% Manufacture of refrigerators N/A(iii) 33%(iv) 33%(iv) 33%(iv)_ Manufacture of refrigerators 100% 100% 100% 100% Sale of air-conditioners, refrigerators and other white-coloured household electrical appliances N/A N/A N/A N/A Manufacture of air-conditioners

Notes:

• (i) The amount represents the issued and fully paid-up registered capital of Qingdao Hisense, which is attributable to the operation of the Qingdao Hisense Air-conditioning Business.

• (ii) These companies are limited liabilities companies established in the PRC.

• (iii) These companies were not established as at 31 December 2004.

• (iv) Hisense Nanjing is a 60% owned subsidiary of Hisense Beijing.

• (v) The amount represents the issued and fully paid-up registered capital of Hisense Marketing, which is attributable to the operation of the Hisense Marketing Business.

— II-2 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

All entities and businesses comprising the Target Group have adopted 31 December as their financial year end date. The statutory financial statements of entities comprising the Target Group for the Relevant Periods were prepared in accordance with the relevant accounting principles and financial regulations in the PRC and were audited by the following certified public accountants registered in the PRC:

Name of entities	Financial periods	Auditors
Hisense Zhejiang	Period from 22 April 2005	山東㶅德會計師事務所有限公司
	(date of incorporation)
	to 31 December 2005
	and year ended
	31 December 2006
Hisense Beijing	Years ended 31 December	山東㶅德會計師事務所有限公司
	2004, 2005 and 2006
Hisense Nanjing	Period from 12 January 2005	山東㶅德會計師事務所有限公司
	(date of incorporation)
	to 31 December 2005
	and year ended
	31 December 2006

No financial statements of the Qingdao Hisense Air-conditioning Business and the Hisense Marketing Business have been previously prepared on a standalone basis as they were an integral part of Qingdao Hisense and Hisense Marketing respectively, of which their statutory financial statements for the Relevant Periods have been audited by 山東㶅德會計師事務所 有限公司 .

For the purpose of this report, the management of Qingdao Hisense has prepared the combined financial statements of the Target Group for the Relevant Periods in accordance with International Financial Reporting Standards (the “Underlying Financial Statements”) on the basis set out in note 1 of section B for which the management of Qingdao Hisense are solely responsible for. We have carried out an independent audit on the Underlying Financial Statements of the Target Group for the Relevant Periods in accordance with Hong Kong Standards on Auditing (“HKSA”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

The Financial Information set out in this report has been prepared from the Underlying Financial Statements in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountants” issued by the HKICPA. No adjustment was considered necessary for the purpose of preparing our report for the inclusion in this Circular.

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APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The Underlying Financial Statements are the responsibility of the management of Qingdao Hisense. The directors of the Company are responsible for the contents of this Circular in which this report is included. It is our responsibility to compile the Financial Information as set out in this report from the Underlying Financial Statements to form an independent opinion on the Financial Information and to report our opinion to you.

In our opinion, on the basis of preparation set out in note 1 of section B below, the Financial Information gives, for the purpose of this report, a true and fair view of the state of affairs of the Target Group as at 31 December 2004, 2005, 2006 and 30 June 2007 and of the combined results and cash flows of the Target Group for the Relevant Periods.

The comparative combined income statements, combined cash flow statements and combined statement of changes in equity of the Target Group for the six months ended 30 June 2006 together with the notes thereon (the “30 June 2006 Financial Information”) were prepared by the management of Qingdao Hisense solely for the purpose of this report. We have reviewed the 30 June 2006 Financial Information in accordance with the Statement of Auditing Standard 700 “Engagements to Review Interim Financial Reports” issued by the HKICPA. Our review consisted principally of making enquiries of the management of Qingdao Hisense and applying analytical procedures to the 30 June 2006 Financial Information and basis thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on 30 June 2006 Financial Information. On that basis of our review which does not constitute an audit, we are not aware of any material modifications that should be made to the 30 June 2006 Financial Information.

— II-4 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

A. FINANCIAL INFORMATION

Combined income statements

Notes Revenue 5 Cost of sales Gross profit Other income and gains 7 Selling and distribution costs Administrative expenses Profit from operations Finance costs 8 Profit before income tax 9 Income tax expense 12 Profit for the year/period Attributable to: Equity holders of the Target Group Minority interests Dividends 13	Year ended 31 December 2004 2005 2006 RMB’000 RMB’000 RMB’000 2,785,751 4,140,333 4,452,551 (2,174,430) (3,326,086) (3,379,451) 611,321 814,247 1,073,100 56,394 48,146 77,131 (515,375) (603,268) (928,969) (62,406) (98,610) (109,020) 89,934 160,515 112,242 (11,673) (15,653) (16,029) 78,261 144,862 96,213 (921) (35,362) (36,778) 77,340 109,500 59,435 72,657 101,921 53,993 4,683 7,579 5,442 77,340 109,500 59,435 — 1,264 —	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) 2,382,127 2,891,969 (1,710,376) (2,175,606) 671,751 716,363 34,268 41,262 (567,588) (575,224) (59,824) (56,193) 78,607 126,208 (11,501) (18,417) 67,106 107,791 (32,579) (40,764) 34,527 67,027 25,098 51,512 9,429 15,515 34,527 67,027 — 1,227

— II-5 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Combined balance sheets

Notes Assets Non-current assets Property, plant and equipment 15 Payments for leasehold land held for own use under operating leases 16 Intangible assets 17 Total non-current assets Current assets Inventories 18 Trade and other receivables 19 Taxation prepaid Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables 20 Trade deposits received Provisions 21 Taxation payable Bank borrowings 22 Total current liabilities	2004 RMB’000 475,387 28,481 13,116 516,984 ---------------- 454,873 451,981 2,472 96,638 1,005,964 ---------------- 1,522,948 ---------------- 1,118,851 126,274 76,710 — 47,000 1,368,835 ----------------	At 31 December 2005 2006 RMB’000 RMB’000 571,275 672,200 102,563 100,359 32,455 30,184 706,293 802,743 ---------------- ---------------- 597,212 413,609 924,986 912,416 4,675 — 81,297 27,550 1,608,170 1,353,575 ---------------- ---------------- 2,314,463 2,156,318 ---------------- ---------------- 1,456,001 1,197,247 124,409 208,806 74,479 60,930 1,642 30,787 170,569 60,506 1,827,100 1,558,276 ---------------- ----------------	At 30 June 2007 RMB’000 672,033 105,862 28,459
			806,354 ---------------- 837,935 1,782,533 — 43,370
			2,663,838 ---------------- 3,470,192 ----------------
			2,406,237 203,796 65,622 59,198 76,500
			2,811,353 ----------------

— II-6 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Notes Non-current liabilities Bank borrowings 22 Total non-current liabilities Total liabilities Net current liabilities Total assets less current liabilities NET ASSETS Capital and reserves attributable to the Target Group Combined capital 23 Reserves Minority interests TOTAL EQUITY	2004 RMB’000 — — ---------------- 1,368,835 ---------------- (362,871) ---------------- 154,113 ---------------- 154,113 226,274 (117,146) 109,128 44,985 154,113	At 31 December 2005 2006 RMB’000 RMB’000 — 32,000 — 32,000 ---------------- ---------------- 1,827,100 1,590,276 ---------------- ---------------- (218,930) (204,701) ---------------- ---------------- 487,363 598,042 ---------------- ---------------- 487,363 566,042 366,190 366,190 (16,489) 37,504 349,701 403,694 137,662 162,348 487,363 566,042	At 30 June 2007 RMB’000 28,000
			28,000 ---------------- 2,839,353 ----------------
			(147,515) ----------------
			658,839 ----------------
			630,839
			366,190 87,789
			453,979 176,860
			630,839

— II-7 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Combined statement of changes in equity

At 1 January 2004 Profit for the year, representing total recognised income for the year Transfer of retained earnings At 31 December 2004 and 1 January 2005 Profit for the year, representing total recognised income for the year Capital injection Contribution from a minority owner Transfer of retained earnings Dividend paid At 31 December 2005 and 1 January 2006 Profit for the year, representing total recognised income for the year Contribution from a minority owner Transfer of retained earnings At 31 December 2006 and 1 January 2007 Profit for the period, representing total recognised income for the period Transfer of retained earnings Dividend paid At 30 June 2007 At 1 January 2006 Profit for the period, representing total recognised income for the period Transfer of retained earnings At 30 June 2006 (unaudited)	Combined capital (note 23) RMB’000 226,274 — — 226,274 — 139,916 — — — 366,190 — — — 366,190 — — — 366,190 366,190 — — 366,190	Retained Statutory profits/ reserves (Accumulated (note (i)) loss) RMB’000 RMB’000 6,969 (196,772) — 72,657 12,097 (12,097) 19,066 (136,212) — 101,921 — — — — 12,242 (12,242) — (1,264) 31,308 (47,797) — 53,993 — — 13,948 (13,948) 45,256 (7,752) — 51,512 8,907 (8,907) — (1,227) 54,163 33,626 31,308 (47,797) — 25,098 1,702 (1,702) 33,010 (24,401)	Capital and reserves attributable to the Target Group RMB’000 36,471 72,657 — 109,128 101,921 139,916 — — (1,264) 349,701 53,993 — — 403,694 51,512 — (1,227) 453,979 349,701 25,098 — 374,799	Minority interests RMB’000 40,302 4,683 — 44,985 7,579 — 86,132 — (1,034) 137,662 5,442 19,244 — 162,348 15,515 — (1,003) 176,860 137,662 9,429 — 147,091	Total equity RMB’000 76,773 77,340 —
					154,113 109,500 139,916 86,132 — (2,298)
					487,363 59,435 19,244 —
					566,042 67,027 — (2,230)
					630,839
					487,363 34,527 —
					521,890

— II-8 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Note:

• (i) As stipulated by the relevant laws in the PRC, the entities registered in the PRC are required to maintain three statutory reserves, being statutory surplus reserve fund, statutory welfare reserve fund and discretionary surplus reserve fund which are all non-distributable.

Appropriations to such reserves are made out of net profit after taxation as determined in accordance with PRC accounting rules and regulations while the amounts and allocation basis are decided by their board of directors annually. The statutory surplus reserve fund can be used to make up prior year losses, if any, and can be applied in conversion into paid-up capital by means of capitalisation issue.

During the Relevant Periods, the allocation of statutory surplus reserve fund and statutory welfare reserve fund is based on rates as determined by the board of directors and in accordance with the local rules and regulations.

The entities comprising the Target Group have not contributed to the discretionary surplus reserve fund during the Relevant Periods.

— II-9 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Combined Cash Flow Statement

Notes Operating activities Profit before income tax Adjustments for: Interest income Interest expense Depreciation of property, plant and equipment Amortisation of payments for leasehold land held for own use under operating leases Amortisation of intangible assets Loss/(gain) on disposal of property, plant and equipment, net Loss on write off of intangible assets (Reversal of impairment loss)/ impairment loss on trade and other receivables Write down of inventories to net realisable value Reversal of write down of inventories to net realisable value Operating profit before working capital changes (Increase)/decrease in inventories Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in trade deposits received from customers (Decrease)/increase in provisions Cash generated from/(used in) operations Interest received Tax refund/(paid) Net cash flows from/(used in) operating activities	Year ended 31 December 2004 2005 2006 RMB’000 RMB’000 RMB’000 78,261 144,862 96,213 (3,138) (5,558) (3,255) 11,673 15,653 16,029 30,767 53,855 64,980 599 1,887 2,204 1,993 3,373 4,357 2,563 625 1,761 1,133 — — (2,210) 6,720 6,385 4,386 5,490 6,094 (9,325) (4,386) (5,490) 116,702 222,521 189,278 (7,335) (143,443) 182,999 94,482 (178,789) 293,723 (53,293) 29,790 (168,613) (65,754) (1,865) 84,397 (9,704) (2,231) (13,549) 75,098 (74,017) 568,235 3,138 5,558 3,255 204 (35,923) (2,958) 78,440 (104,382) 568,532 --------------- --------------- ---------------	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) 67,106 107,791 (1,975) (1,832) 11,501 18,417 39,866 37,903 1,102 1,429 1,509 2,278 1,223 (1,238) — — 3,246 6,944 — 7,784 (5,490) (6,094) 118,088 173,382 (146,343) (426,016) (953,044) (543,027) 1,710,133 1,326,369 5,358 (5,010) (7,535) 4,692 726,657 530,390 1,975 1,832 (2,368) (12,353) 726,264 519,869 --------------- ---------------	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) 67,106 107,791 (1,975) (1,832) 11,501 18,417 39,866 37,903 1,102 1,429 1,509 2,278 1,223 (1,238) — — 3,246 6,944 — 7,784 (5,490) (6,094) 118,088 173,382 (146,343) (426,016) (953,044) (543,027) 1,710,133 1,326,369 5,358 (5,010) (7,535) 4,692 726,657 530,390 1,975 1,832 (2,368) (12,353) 726,264 519,869 --------------- ---------------
			173,382 (426,016) (543,027) 1,326,369 (5,010) 4,692
			530,390 1,832 (12,353)
			519,869 ---------------

— II-10 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Notes Investing activities Purchase of property, plant and equipment Payment of leasehold land held for own use under operating leases Purchase of intangible assets Proceeds on disposal of property, plant and equipment (Advance to)/repayment from intermediate holding companies (Advance to)/repayment from ultimate holding company (Advance to)/repayment from minority owners Net cash flows used in investing activities Financing activities Interest paid Bank borrowings raised Repayment of bank borrowings (Repayment to)/advance from ultimate holding company Advance from/(repayment to) intermediate holding company Injection of capital Contribution from minority owners Dividend paid Net cash flows generated from/ (used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year/period Cash and cash equivalents at end of year/period representing bank balances and cash	Year ended 31 December 2004 2005 2006 RMB’000 RMB’000 RMB’000 (54,107) (164,880) (182,350) — (75,969) — — (22,712) (2,086) 22,493 14,512 14,684 (45,221) (252,409) (330,458) (6,043) (60,244) 41,326 (821) (2,639) 1,594 (83,699) (564,341) (457,290) --------------- --------------- --------------- (11,673) (15,653) (16,029) 47,000 170,569 92,506 — (47,000) (170,569) 31,703 304,105 (86,886) — 17,611 (3,255) — 139,916 — — 86,132 19,244 — (2,298) — 67,030 653,382 (164,989) --------------- --------------- --------------- 61,771 (15,341) (53,747) 34,867 96,638 81,297 96,638 81,297 27,550	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) (127,122) (39,093) — (6,932) (2,029) (553) 3,669 2,595 (218,846) 11,022 75,726 (345,056) 1,531 — (267,071) (378,017) --------------- --------------- (11,501) (18,417) 20,000 74,500 (130,569) (62,506) (332,504) (268,087) (3,255) 150,708 — — — — — (2,230) (457,829) (126,032) --------------- --------------- 1,364 15,820 81,297 27,550 82,661 43,370	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) (127,122) (39,093) — (6,932) (2,029) (553) 3,669 2,595 (218,846) 11,022 75,726 (345,056) 1,531 — (267,071) (378,017) --------------- --------------- (11,501) (18,417) 20,000 74,500 (130,569) (62,506) (332,504) (268,087) (3,255) 150,708 — — — — — (2,230) (457,829) (126,032) --------------- --------------- 1,364 15,820 81,297 27,550 82,661 43,370
			(378,017) --------------- (18,417) 74,500 (62,506) (268,087) 150,708 — — (2,230)
			(126,032) --------------- 15,820 27,550
			43,370

— II-11 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

B. NOTES TO THE FINANCIAL INFORMATION

1. Description of the Target Group

The Target Group is principally engaged in the manufacture and sale of air-conditioners and refrigerators. It is also engaged in trading of other white-coloured household electrical appliances. The Target Group operated in the PRC during the Relevant Periods. The principal place of business of the Target Group is 山東省青島市東海路海信大廈 and the registered office of each of the entities and businesses comprising the Target Group is as follows:

Qingdao	Hisense Air-conditioning Business	山東省青島市高科技工業園長沙路
Hisense	Zhejiang	浙江省長興縣經濟技術開發區中央大道北側
Hisense	Beijing	北京市大興區清源路36號
Hisense	Nanjing	江蘇省南京市經濟技術開發區囱飛路19號
Hisense	Marketing Business	山東省青島經濟技術開發區前灣港路218號
		海信信息產業園
Hisense	Shandong	山東省青島平度南村鎮駐地海信路1號

The ultimate holding company of the Target Group is 海信集團有限公司 (Hisense Group Company) (“Hisense Group Co.”), the parent company of Qingdao Hisense.

As mentioned earlier, the Qingdao Hisense Air-conditioning Business is part of Qingdao Hisense and the equity interests of Hisense Zhejiang, which is a limited liability company, has been wholly owned by Qingdao Hisense since incorporation.

During the Relevant Periods, 55% equity interests of Hisense Beijing was owned by 青島海信電器 股份有限公司 (Hisense Electric Company Limited)(“Hisense Electric”), a company incorporated under the laws of the PRC with limited liability and is also controlled by Hisense Group Co.

Further, during the Relevant Periods, 71.5% equity interests of Hisense Marketing was owned by青 島海信電子產業控股股份有限公司 (Qingdao Hisense Electronic (Holding) Company Limited) (“Hisense Electronic”), a company incorporated under the laws of the PRC with limited liability and is controlled by Hisense Group Co.

In 2007, the following transactions were undergone (collectively referred as the “Reorganisation”):

• On 21 September 2007, all equity holders of Hisense Marketing transferred 100% equity interests of Hisense Marketing to Qingdao Hisense. Accordingly, Hisense Marketing, being the legal entity owning the Hisense Marketing Business, became a wholly owned subsidiary of Qingdao Hisense.

• On 25 September 2007, Hisense Electric transferred its 55% equity interests of Hisence Beijing to Qingdao Hisense, and accordingly, Hisense Beijing, and Hisense Nanjing which is a 60% owned subsidiary of Hisense Beijing, became subsidiaries of Qingdao Hisense.

• On 8 November 2007, Hisense Shandong was established as a limited liability company in the PRC. On 27 November 2007, Qingdao Hisense, a 100% holding company of Hisense Shandong, transferred all the assets and liabilities relating to the Qingdao Hisense Airconditioning Business to Hisense Shandong as part of the capital contribution.

— II-12 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

As a result of the Reorganisation, the entities and businesses comprising the Target Group are substantially controlled and owned, either directly or indirectly, by Qingdao Hisense as at the date of this report.

The English names by which some of the entities are referred to in the Financial Information represent management’s best efforts in translating their Chinese names as no English names have been registered for these entities.

The Target Group’s operations are conducted in the PRC and the Financial Information has been presented in Renminbi (“RMB”), which is the functional currency of the Target Group.

The Target Group finances its operations by short-term and long-term bank borrowings and equity holders’ equity. The net current liabilities as at 31 December 2004, 2005 and 2006 and 30 June 2007 consisted of trade deposits received from customers that would not trigger cash outflow in the ordinary course of business and the management of Qingdao Hisense believes the short term bank borrowings could be renewed on an annual basis. The management of Qingdao Hisense is of the opinion that, taking into account the present available banking facilities and internal financial resources of the Target Group, the Target Group has sufficient working capital for its present business requirements. Hence, the Financial Information has been prepared on a going concern basis.

2. Application of international financial reporting standards

• (a) For the purpose of preparing and presenting Financial Information, the Target Group has applied all the new and revised standards, amendments and interpretations (hereinafter collectively referred to as “new IFRSs”) issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (the “IFRIC”) of the IASB that are relevant to its operations and effective for the accounting period beginning on or after 1 January 2007 throughout the Relevant Periods.

• (b) Potential impact arising on the new accounting standards not yet effective

The Target Group has not applied the following new standards, amendments and interpretations that have been issued but not yet effective. The management of Qingdao Hisense anticipated that the application of these new IFRSs will have no material impact on the Financial Information.

IAS 1 (Revised) Presentation of Financial Statements[1] IAS 23 (Revised) Borrowing Costs[1] IFRS 8 Operating Segments[1] IFRIC 11 IFRS 2 — Group and Treasury Share Transactions[3] IFRIC 12 Service Concession Arrangements[2] IFRIC 13 Customer Loyalty Programmes[4] IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction[3]

• 1 Effective for annual periods beginning on or after 1 January 2009. 2 Effective for annual periods beginning on or after 1 March 2007. 3 Effective for annual periods beginning on or after 1 January 2008. 4 Effective for annual periods beginning on or after 1 July 2008.

— II-13 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

3. Principal accounting policies

(a) Statement of compliance

The Financial Information has been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”), International Accounting Standards (“IASs”) and Interpretations (collectively referred to as “IFRSs”) issued by the IASB and the IFRIC. In addition, the Financial Information also complies with the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

(b) Basis of preparation

The business resulting from the Reorganisation is regarded as a continuing business since the entities and the businesses comprising the Target Group were commonly controlled by Hisense Group Co., the ultimate equity holder of the Target Group, before and immediately after the Reorganisation. The management of Qingdao Hisense has therefore applied Accounting Guideline 5 “Merger Accounting for Common Control Combinations” issued by the HKICPA to prepare the Financial Information, on the basis as if the entities and the businesses comprising the Target Group had formed a group and such group structure had been in existence throughout the Relevant Periods, or since their respective dates of incorporation or establishment.

The combined income statements, combined statements of changes in equity and combined cash flow statements of the Target Group have been prepared as if the current structure had been in existence throughout the Relevant Periods or since their respective dates of incorporation or establishment where this is a shorter period. The combined balances sheets of the Target Group as at 31 December 2004, 2005, 2006 and 30 June 2007 have been prepared to present the assets and liabilities as if the current structure of the Target Group had been in existence as at those dates.

The Qingdao Hisense Air-conditioning Business and the Hisense Marketing Business were directly owned by Qingdao Hisense and Hisense Marketing respectively, and such engaged in extensive intercompany transactions, and these businesses have placed reliance on its respective parents for all of its operational and administrative support for which it is allocated costs on a basis that the directors of Qingdao Hisense believe to be appropriate in the circumstances. The amounts recorded for these transactions and allocations are not necessarily representative of the amounts that would have been reflected in the Financial Information had these businesses been operated independently of the parents.

All intra-group transactions, balances, income and expenses are eliminated on combination.

The Financial Information has been prepared using the accounting policies which are materially consistent with those of the Company.

The measurements basis used in the preparation of the Financial Information is the historical cost.

The preparation of Financial Information in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

— II-14 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments made by management in the application of IFRSs that have significant effect on the Financial Information and estimates with a significant risk of material adjustment in the next financial year are disclosed in note 27.

(c)

Basis of consolidation

Where the entity or business comprising the Target Group has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The combined financial statements present the results of the entity or business and its subsidiaries as if they formed a single entity. Inter-company transactions and balances between group companies are therefore eliminated in full in preparing the combined financial statements.

Minority interests represent the portion of the net assets of subsidiaries attributable to interests that are not owned by the entity or business comprising the Target Group, whether directly or indirectly through subsidiaries, and in respect of which the Target Group has not agreed any additional terms with the holders of those interests which would result in the Target Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are presented in the combined balance sheet within equity, separately from equity attributable to the equity holders of the Target Group. Minority interests in the results of the Target Group are presented on the face of the combined income statement as an allocation of the total profit or loss for the year/ period between minority interests and the equity holders of the Target Group.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Target Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Target Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Target Group has been recovered.

(d) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.

Depreciation is charged to write off the carrying value of property, plant and equipment other than construction in progress over their estimated useful lives, after taking into account their estimated residual value, using the straight-line method. The estimated useful lives are as follows:

Buildings 20 to 40 years Plant, machinery and equipment 5 to 20 years Moulds 3 years Motor vehicles 5 to 8 years

— II-15 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Construction in progress represents buildings, plant and machinery on which construction work has not been completed and which, upon completion, management intends to hold for production purposes. Construction in progress is carried at costs which include development and construction expenditure incurred and interest and other direct costs attributable to the development less any accumulated impairment losses. On completion, construction in progress are transferred to other property, plant and equipment at cost or valuation less accumulated impairment losses. No depreciation is provided in respect of construction in progress until it is completed and is ready for its intended use.

The gain or loss on disposal of an asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the income statement.

(e) Payments for leasehold land held for own use under operating leases

Payments for leasehold land held for own use under operating leases represent up-front payments to acquire long-term interests in lessee-occupied properties. These payments are stated at cost and are amortised over the period of the lease on a straight-line basis to the income statement.

(f) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to lessee. All other leases are classified as operating leases.

The Target Group as lessee

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Target Group (a “finance lease”), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the fair value of the leased asset or, if lower, the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the income statement over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are retained by the lessor (an “operating lease”), the total rentals payable under the lease are charged to the income statement on a straight-line basis over the lease term.

The land and buildings elements of property leases are considered separately for the purposes of lease classification.

(g) Intangible assets (other than goodwill)

(i) Acquired intangible assets

Acquired intangible assets are initially recognised at cost. Subsequently, intangible assets with finite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is provided on a straight-line basis over their useful lives. Intangible assets with indefinite useful lives are carried at cost less any accumulated losses. The amortisation expense is included within administrative expenses in the income statement.

— II-16 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The useful economic lives of the intangible assets are as follows:

Non-patent technologies 10 years Software systems 4 years

• (ii) Internally generated intangible assets (research and development costs)

Expenditure incurred on development activities, which involve the application of research findings to a plan or design for the production of new or substantially improved products and processes, are capitalised if it can be demonstrated that:

• It is technically feasible to develop the product for it to be sold;

• Adequate resources are available to complete the development;

• There is an intention to complete and sell the product;

• The Target Group is able to sell the product;

• Sale of the product will generate future economic benefits; and

• Expenditure on the project can be measured reliably.

Capitalised development costs are amortised over the periods the Target Group expects to benefit from selling the products developed. The amortisation expense is included within cost of sales in the income statement.

Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the income statement as incurred.

(h) Impairment of non-financial assets

At each balance sheet date, the Target Group reviews the carrying amounts of the following assets to determine whether there is any indication that those assets have suffered an impairment loss or an impairment loss previously recognised no longer exists or may have decreased:

• property, plant and equipment;

• payments for leasehold land held for own use under operating leases; and

• intangible assets.

If the recoverable amount (i.e. the greater of the fair value less costs to sale and value in use) of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but limited to the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years/periods. A reversal of an impairment loss is recognised as income immediately.

— II-17 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(i)

Financial instruments

(i) Financial assets

The Target Group classifies its financial assets into loans and receivables based on the purpose for which the assets were acquired.

Loans and receivables, consist of trade and other receivables, are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (trade debtors), but also incorporate other types of contractual monetary asset. Loans and receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement. When a loan or receivable is uncollectible, it is written off against the allowance account. The amount of provision is recognised when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

Significant financial difficulties of the debtors, probability that the debtors will enter into bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the loans and receivables are impaired. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

(ii) Financial liabilities

The Target Group classifies its financial liabilities as other financial liabilities based on the purpose for which the liabilities were incurred.

Other financial liabilities include the following items:

• Trade payables and other short-term monetary liabilities are recognised at amortised cost.

• Bank borrowings and the debt element of convertible debt issued by the Target Group, which are initially recognised at the amount advanced net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance sheet. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

(iii) Derecognition

The Target Group derecognises a financial asset when the contractual rights to the future cash flows in relation to the financial asset expire or when the financial asset has been transferred and the transfer meets the criteria for derecognition in accordance with IAS 39.

— II-18 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Financial liabilities are derecognised when the obligation specified in the relevant contact is discharged, cancelled or expires.

(j) Inventories

Inventories are initially recognised at cost, and subsequently at the lower of cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

(k) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes. Sale of goods are recognised when goods are delivered and title has passed.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

(l) Income taxes

Income taxes for the year/period comprise current tax and deferred tax.

Current tax is based on the profit or loss from ordinary activities adjusted for items that are nonassessable or disallowable for income tax purposes and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.

Deferred tax arises from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for tax purposes and is accounted for using the balance sheet liability method. Except for recognised assets and liabilities that affect neither accounting nor taxable profits, deferred tax liabilities are recognised for all temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is measured at the tax rates expected to apply in the period when the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted at the balance sheet date.

Income taxes are recognised in the income statement except when they relate to items directly recognised to equity in which case the taxes are also directly recognised in equity.

(m) Foreign currency

Transactions entered into by the Target Group in currencies other than the currency of the primary economic environment in which it operates (the “functional currency”) are recorded at the rates ruling when the transactions occur.

— II-19 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Exchange differences arising on the settlement of monetary items, and on the retranslation of unsettled monetary items at the rates ruling at the balance sheet date are recognised in the income statement in the period in which they arise, except for foreign currency borrowings qualifying as a hedge of a net investment in a foreign operation. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined and gains or losses on retranslation are included in the income statement for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity. Non-monetary items that are measured at historical cost in a foreign currency are not retranslated.

(n)

Employee benefits

Pursuant to the PRC laws and regulations, the Target Group established in the PRC makes monthly contributions to the basic old age pension for the local staff to a government agency. The contributions are made at a specific percentage on the standard salary set by the provincial government, of which 10% to 20% is borne by the Target Group and the remainder is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff on their retirement.

The Target Group accounts for pension contributions on an accrual basis. Accrued contributions are shown as pension liabilities in the balance sheet.

(o) Borrowing costs

Borrowing costs attributable directly to the acquisition, construction or production of assets which require a substantial period of time to be ready for their intended use or sale, are capitalised as part of the cost of those assets. Income earned on temporary investments of specific borrowings pending their expenditure on those assets is deducted from borrowing costs capitalised.

All other borrowing costs are recognised in the income statement in the period in which they are incurred.

(p) Government grants

Government grants are recognised when there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments.

(q) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Target Group has a legal or constructive obligation arising as a result of a past event, which will probably result in an outflow of economic benefits that can be reasonably estimated.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, the existence of which will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

— II-20 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(r) Warranty obligation

The Target Group provides free repairing services for its products and free replacement of the major components of its products for one or three years after sales.

The costs of the warranty obligation under which the Target Group agrees to remedy defects in its products are accrued at the time the related sales are recognised. Provision for warranty is accrued based on the estimated costs of fulfilling the total obligation, including handling and transportation costs. The costs are estimated by management based on past experience. The assumptions used to estimate the warranty provision are reviewed periodically in light of actual results.

(s) Dividends

Interim dividends are recognised directly as a liability when they are proposed and declared by the directors.

Final dividends proposed by the directors are classified as a separate allocation of retained profits within capital and reserves in the balance sheet. Final dividends are recognised as a liability when they are approved by the equity holders.

4. Financial risk management objectives and policies

(a) Capital management

The management of the entities and businesses comprising the Target Group manages their respective capital to ensure that the respective entities and businesses will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance.

The capital structure of the Target Group consists of debt, which includes bank borrowings as disclosed in note 22, cash and cash equivalents, amounts due to ultimate holding company and intermediate holding company as disclosed in note 20 and equity attributable to the equity owners of the Target Group as disclosed in the statement of changes in equity.

The management reviews the capital structure periodically. As a part of this review, the management considers the cost of capital and the risks associated with each class of capital. The management will balance the overall capital structure through the payment of dividends, increase in registered capital as well as increase in bank borrowings. The overall strategy of the management remains unchanged throughout the Relevant Periods.

(b) Financial risk management

The Target Group’s major financial instruments include bank borrowings, trade and notes receivables, trade and notes payables, bank balances and cash and amounts due from/to related companies, fellow subsidiaries, intermediate holding company and ultimate holding company. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

(i) Credit risk management

Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Target Group. The Target Group has adopted procedures in monitoring its credit risk.

— II-21 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

The Target Group mitigates its exposure to risk relating to accounts receivable by dealing with diversified customers with sound financial standing. Certain new customers are required to place cash deposits with the Target Group to reduce the maximum exposure to credit risk. The Target Group seeks to maintain strict control over its outstanding receivables and has a credit control policy to minimise credit risk. In addition, all receivable balances are monitored on an ongoing basis and overdue balances are followed up by senior management. The Target Group’s maximum exposure to credit risk in the event that the counterparties fail to perform their obligations as at end of the financial year in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the combined balance sheets. In this regard, the management of Qingdao Hisense are satisfied that this risk is minimal and adequate allowance for doubtful debts, if any, has been made in the Financial Information after assessing the collectability individual debts. The credit risk on liquid funds is limited because the counterparties are reputable banks in the PRC.

The Target Group has no significant concentration of credit risk in respect of the trade and other receivables, with exposure spread over a number of counterparties and customers.

(ii) Liquidity risk management

In managing liquidity risk, the management of Qingdao Hisense monitors and maintains a level of cash and cash equivalents deemed adequate by management to finance the Target Group’s operations and mitigate the effects of short-term fluctuations in cash flows. The Target Group’s treasury function is responsible for maintaining a balance between continuity and flexibility of funding through the use of bank facilities in order to meet the Target Group’s liquidity requirements both in the short and long term. Most of debts of the Target Group would mature in less than one year as at the respective balance sheet dates.

The following table details the Target Group’s remaining contractual maturity for its non-derivative financial liabilities as at 31 December 2004, 2005 and 2006 and 30 June 2007. Except for the bank borrowings shown below, other liabilities are non-interest bearing and repayable on demand. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Target Group can required to pay. The table includes both interest and principal cash flows.

— II-22 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Within 1 year RMB’000 At 31 December 2004 Non-interest bearing borrowings 47,000 At 31 December 2005 Fixed interest rate borrowings 41,824 Non-interest bearing borrowings 130,569 172,393 At 31 December 2006 Variable interest rate borrowings 4,121 Fixed interest rate borrowings 42,114 Non-interest bearing borrowings 16,506 62,741 At 30 June 2007 Variable interest rate borrowings 6,218 Fixed interest rate borrowings 51,293 Non-interest bearing borrowings 20,500 78,011	1-2 years RMB’000 — — — — 10,931 — — 10,931 10,958 — — 10,958	2-5 years RMB’000 — — — — 25,837 — — 25,837 20,847 — — 20,847	Total RMB’000 47,000
			41,824 130,569
			172,393
			40,889 42,114 16,506
			99,509
			38,203 51,293 20,500
			109,816

(iii) Interest rate risk

The Target Group is exposed to cash flow interest rate risk due to fluctuation of the prevailing market interest rate on bank deposits, bank borrowings and the loan from ultimate holding company which are at variable rates. The Target Group has not used any derivative contracts to hedge its exposure to interest rate risk.

At the respective balance sheet dates, if interest rates had been increased/decreased by 10% and all other variables were held constant, the Target Group’s net profit would decrease/increase by approximately 1% for the years ended 31 December 2004, 2005 and 2006 and for the six months ended 30 June 2007.

(iv) Foreign currency sensitivity

As all of the Target Group’s monetary assets and liabilities are denominated in RMB and the Target Group conducts its business transactions principally in RMB, the exchange rate risk of the Target Group is insignificant and the Target Group does not employ any financial instruments for hedging purposes.

(v) Fair value of financial instruments

The fair value of financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis or using prices from observable current market transactions.

The management of Qingdao Hisense considers that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the Financial Information approximate their fair values.

— II-23 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

5. Revenue

The principal activities of the Target Group are the manufacture and sale of air-conditioners and refrigerators in the PRC. The Target Group is also engaged in trading of other white-coloured household electrical appliances. Revenue represents the amounts received and receivable for goods sold during the year/period. An analysis of the Target Group’s revenue for the year/period is as follows:

Sale of air-conditioners Sale of refrigerators Sale of other white-coloured household electrical appliances	Year ended 31 December Six months ended 30 June 2004 2005 2006 2006 2007 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 2,188,637 2,878,792 2,651,347 1,399,724 1,949,200 580,034 1,159,039 1,696,112 925,186 910,136 17,080 102,502 105,092 57,217 32,633 2,785,751 4,140,333 4,452,551 2,382,127 2,891,969	Year ended 31 December Six months ended 30 June 2004 2005 2006 2006 2007 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 2,188,637 2,878,792 2,651,347 1,399,724 1,949,200 580,034 1,159,039 1,696,112 925,186 910,136 17,080 102,502 105,092 57,217 32,633 2,785,751 4,140,333 4,452,551 2,382,127 2,891,969
		2,891,969

6. Business and geographical segments

Business segments

The Target Group is organised into three main operating divisions — air-conditioners, refrigerators and other white-coloured household electrical appliances. These divisions are the basis on which the Target Group reports its primary segment information.

— II-24 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Segment information about these businesses is presented below:

Year ended 31 December 2004

• (a) Combined income statement

Revenue External sales Other income Total revenue Result Segment result Unallocated corporate income Profit from operations Finance costs Profit before income tax Income tax expense Profit for the year (b) Combined balance sheet Segment assets Segment assets Unallocated Combined total assets Segment liabilities Segment liabilities Unallocated Combined total liabilities	Air- conditioners RMB’000 2,188,637 43,225 2,231,862 62,143 Air- conditioners RMB’000 958,617 767,608	Refrigerators RMB’000 580,034 5,259 585,293 28,532 Refrigerators RMB’000 243,694 107,405	Other white- coloured household electrical appliances RMB’000 17,080 — 17,080 (8,651) Other white- coloured household electrical appliances RMB’000 6,961 839	Combined RMB’000 2,785,751 48,484 2,834,235 82,024 7,910 89,934 (11,673) 78,261 (921) 77,340 Combined RMB’000 1,209,272 313,676 1,522,948 875,852 492,983 1,368,835

— II-25 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(c) Other information

			Other white-
			coloured
			household
	Air-		electrical
	conditioners	Refrigerators	appliances	Combined
	RMB’000	RMB’000	RMB’000	RMB’000
Additions of property,
plant and equipment	29,080	17,671	7,356	54,107
Depreciation of property,
plant and equipment	20,341	7,912	2,514	30,767
Amortisation of payments
for leasehold land held
for own use under
operating leases	599	—	—	599
Amortisation of
intangible assets	231	1,762	—	1,993
Loss on disposal of
property, plant
and equipment	2,424	92	47	2,563
Loss on written off
of intangible assets	1,133	—	—	1,133
(Reversal of impairment
loss)/impairment loss
on trade and other
receivables	(4,909)	72	2,627	(2,210)
Write down of inventories
to net realisable value	4,386	—	—	4,386
Reversal of write down
of inventories to net
realisable value	7,479	—	1,846	9,325

— II-26 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Year ended 31 December 2005

• (a) Combined income statement

Revenue External sales Other income Total revenue Result Segment result Unallocated corporate income Profit from operations Finance costs Profit before income tax Income tax expense Profit for the year (b) Combined balance sheet	Air- conditioners RMB’000 2,878,792 29,074 2,907,866 37,276	Refrigerators RMB’000 1,159,039 9,115 1,168,154 102,600	Other white- coloured household electrical appliances RMB’000 102,502 — 102,502 10,682	Combined RMB’000 4,140,333 38,189
				4,178,522
				150,558 9,957
				160,515 (15,653)
				144,862 (35,362)
				109,500

Other white- coloured household Air- electrical conditioners Refrigerators appliances RMB’000 RMB’000 RMB’000 Segment assets Segment assets 1,316,037 380,348 16,233 Unallocated Combined total assets Segment liabilities Segment liabilities 727,013 226,102 3,520 Unallocated Combined total liabilities	Combined RMB’000 1,712,618 601,845
	2,314,463
	956,635 870,465
	1,827,100

— II-27 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(c) Other information

			Other white-
			coloured
			household
	Air-		electrical
	conditioners	Refrigerators	appliances	Combined
	RMB’000	RMB’000	RMB’000	RMB’000
Additions of property,
plant and equipment	88,955	71,784	4,141	164,880
Additions of payments
for leasehold land
held for own use
under operating leases	41,700	34,269	—	75,969
Additions of intangible
assets	22,512	200	—	22,712
Depreciation of property,
plant and equipment	34,984	16,273	2,598	53,855
Amortisation of payments
for leasehold land held
for own use under
operating leases	573	1,314	—	1,887
Amortisation of intangible
assets	1,595	1,778	—	3,373
Loss on disposal of
property, plant and
equipment	299	65	261	625
Impairment loss/(reversal of
impairment loss) on trade
and other receivables	608	(112)	6,224	6,720
Write down of inventories
to net realisable value	5,490	—	—	5,490
Reversal of write down
of inventories to net
realisable value	4,386	—	—	4,386

— II-28 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Year ended 31 December 2006

• (a) Combined income statement

Revenue External sales Other income Total revenue Result Segment result Unallocated corporate income Profit from operations Finance costs Profit before income tax Income tax expense Profit for the year (b) Combined balance sheet Segment assets Segment assets Unallocated Combined total assets Segment liabilities Segment liabilities Unallocated Combined total liabilities	Air- conditioners RMB’000 2,651,347 38,888 2,690,235 (28,601) Air- conditioners RMB’000 945,498 625,218	Refrigerators RMB’000 1,696,112 12,025 1,708,137 111,177 Refrigerators RMB’000 416,852 236,819	Other white- coloured household electrical appliances RMB’000 105,092 — 105,092 3,448 Other white- coloured household electrical appliances RMB’000 6,169 5,167	Combined RMB’000 4,452,551 50,913 4,503,464 86,024 26,218 112,242 (16,029) 96,213 (36,778) 59,435 Combined RMB’000 1,368,519 787,799 2,156,318 867,204 723,072 1,590,276

— II-29 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(c) Other information

			Other white-
			coloured
			household
	Air-		electrical
	conditioners	Refrigerators	appliances	Combined
	RMB’000	RMB’000	RMB’000	RMB’000
Additions of property,
plant and equipment	73,233	104,628	4,489	182,350
Additions of intangible
assets	2,060	26	—	2,086
Depreciation of property,
plant and equipment	43,041	19,053	2,886	64,980
Amortisation of payments
for leasehold land held
for own use under
operating leases	860	1,344	—	2,204
Amortisation of intangible
assets	2,598	1,759	—	4,357
Loss on disposal of
property, plant and
equipment	1,661	23	77	1,761
Impairment loss/(reversal
of impairment loss)
on trade and other
receivables	901	(114)	5,598	6,385
Write down of inventories
to net realisable value	6,094	—	—	6,094
Reversal of write down
of inventories to net
realisable value	5,490	—	—	5,490

— II-30 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Six months ended 30 June 2006

• (a) Combined income statement

Revenue External sales Other income Total revenue Result Segment result Unallocated corporate income Profit from operations Finance costs Profit before income tax Income tax expense Profit for the period (b) Combined balance sheet	Air- conditioners RMB’000 (unaudited) 1,399,724 13,630 1,413,354 (13,842)	Refrigerators RMB’000 (unaudited) 925,186 4,366 929,552 76,310	Other white- coloured household electrical appliances RMB’000 (unaudited) 57,217 — 57,217 (133)	Combined RMB’000 (unaudited) 2,382,127 17,996
				2,400,123
				62,335 16,272
				78,607 (11,501)
				67,106 (32,579)
				34,527

Other white- coloured household Air- electrical conditioners Refrigerators appliances RMB’000 RMB’000 RMB’000 (unaudited) (unaudited) (unaudited) Segment assets Segment assets 2,117,683 625,728 13,921 Unallocated Combined total assets Segment liabilities Segment liabilities 2,068,320 469,138 4,030 Unallocated Combined total liabilities	Combined RMB’000 (unaudited) 2,757,332 879,021
	3,636,353
	2,541,488 572,975
	3,114,463

— II-31 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(c) Other information

			Other white-
			coloured
			household
	Air-		electrical
	conditioners	Refrigerators	appliances	Combined
	RMB’000	RMB’000	RMB’000	RMB’000
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Additions of property,
plant and equipment	49,134	74,588	3,400	127,122
Additions of intangible
assets	2,003	26	—	2,029
Depreciation of property,
plant and equipment	28,016	10,390	1,460	39,866
Amortisation of payments
for leasehold land held
for own use under
operating leases	430	672	—	1,102
Amortisation of intangible
assets	631	878	—	1,509
Loss/(gain) on disposal
of property, plant
and equipment	1,306	(10)	(73)	1,223
(Reversal of impairment
loss)/impairment loss
on trade and other
receivables	(2,238)	(114)	5,598	3,246
Reversal of write down
of inventories to net
realisable value	5,490	—	—	5,490

— II-32 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Six months ended 30 June 2007

• (a) Combined income statement

Revenue External sales Other income Total revenue Result Segment result Unallocated corporate income Profit from operations Finance costs Profit before income tax Income tax expense Profit for the period (b) Combined balance sheet Segment assets Segment assets Unallocated Combined total assets Segment liabilities Segment liabilities Unallocated Combined total liabilities	Air- conditioners RMB’000 1,949,200 21,420 1,970,620 54,017 Air- conditioners RMB’000 1,725,274 1,541,122	Refrigerators RMB’000 910,136 6,745 916,881 59,166 Refrigerators RMB’000 700,135 273,116	Other white- coloured household electrical appliances RMB’000 32,633 — 32,633 (72) Other white- coloured household electrical appliances RMB’000 15,284 2,483	Combined RMB’000 2,891,969 28,165 2,920,134 113,111 13,097 126,208 (18,417) 107,791 (40,764) 67,027 Combined RMB’000 2,440,693 1,029,499 3,470,192 1,816,721 1,022,632 2,839,353

— II-33 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(c) Other information

			Other white-
			coloured
			household
	Air-		electrical
	conditioners	Refrigerators	appliances	Combined
	RMB’000	RMB’000	RMB’000	RMB’000
Additions of property,
plant and equipment	6,898	31,300	895	39,093
Addition of payments
for leasehold land held
for own use under
operating leases	—	6,932	—	6,932
Additions of intangible
assets	553	—	—	553
Depreciation of property,
plant and equipment	23,386	13,253	1,264	37,903
Amortisation of payments
for leasehold land held
for own use under
operating leases	757	672	—	1,429
Amortisation of intangible
assets	1,397	881	—	2,278
Loss/(gain) on disposal
of property, plant
and equipment	62	(1,321)	21	(1,238)
(Reversal of impairment
loss)/impairment loss
on trade and other
receivables	(1,153)	—	8,097	6,944
Write down of inventories
to net realisable value	7,784	—	—	7,784
Reversal of write down
of inventories to net
realisable value	6,094	—	—	6,094

— II-34 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Geographical segments

The Target Group’s operations, customers and production facilities are all located in the PRC. Therefore, presentation of geographical segment is not shown.

7. Other income and gains

An analysis of the Target Group’s other income and gains is as follows:

Government subsidy income Gain on disposal of raw materials Gain on disposal of property, plant and equipment Interest income Material handling income Penalty income Others	Year 2004 RMB’000 23,610 13,385 — 3,138 5,794 896 9,571 56,394	ended 31 December 2005 2006 RMB’000 RMB’000 25,389 30,581 9,567 26,099 — — 5,558 3,255 4,883 9,680 623 2,789 2,126 4,727 48,146 77,131	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) 12,712 14,415 9,211 14,767 — 1,238 1,975 1,832 7,084 4,611 1,234 1,060 2,052 3,339 34,268 41,262	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) 12,712 14,415 9,211 14,767 — 1,238 1,975 1,832 7,084 4,611 1,234 1,060 2,052 3,339 34,268 41,262
				41,262

8. Finance costs

Interest on: — bank borrowings wholly repayable within five years — discounted notes receivables Others	Year 2004 RMB’000 7,141 3,212 10,353 1,320 11,673	ended 31 December 2005 2006 RMB’000 RMB’000 8,436 5,174 6,197 9,629 14,633 14,803 1,020 1,226 15,653 16,029	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) 2,919 7,611 7,846 10,387 10,765 17,998 736 419 11,501 18,417	Six months ended 30 June 2006 2007 RMB’000 RMB’000 (unaudited) 2,919 7,611 7,846 10,387 10,765 17,998 736 419 11,501 18,417
				17,998 419
				18,417

— II-35 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

9. Profit before income tax

Profit before income tax is stated after charging/ (crediting): Staff costs (including directors’ and supervisors’ remuneration) — Basic salaries, housing and other allowances and benefits — Defined contribution pension costs Auditor’s remuneration Depreciation of property, plant and equipment Amortisation of payments for leasehold land held for own use under operating leases (included in administrative expenses) Amortisation of intangible assets (included in administrative expenses) Loss/(gain) on disposal of property, plant and equipment Loss on written off of intangible assets Research and development costs (Reversal of impairment loss)/Impairment loss on trade and other receivables Operating lease on land and buildings Write down of inventories to net realisable value Reversal of write down of inventories to net realisable value (as a result of subsequent disposal)

Year ended 31 December Six months ended 30 June 2004 2005 2006 2006 2007 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 130,481 160,861 238,419 119,057 62,202 9,138 11,598 13,264 4,909 4,874 139,619 172,459 251,683 123,966 67,076 280 3,045 2,961 689 3,477 30,767 53,855 64,980 39,866 37,903 599 1,887 2,204 1,102 1,429 1,993 3,373 4,357 1,509 2,278 2,563 625 1,761 1,223 (1,238) 1,133 — — — — 5,314 8,347 5,731 2,458 2,937 (2,210) 6,720 6,385 3,246 6,944 8,433 7,499 8,261 7,196 5,090 4,386 5,490 6,094 — 7,784 (9,325) (4,386) (5,490) (5,490) (6,094)

— II-36 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

10. Directors’ emoluments

The emoluments paid or payable by the Target Group to the directors of the entities and businesses comprising the Target Group during the Relevant Periods are as follows:

Name of directors Year ended 31 December 2004: 楊雲鐸 解思平 代會嬌 Year ended 31 December 2005: 楊雲鐸 劉文忠 解思平 石永昌 孫榮賜 袁清林 代會嬌 Year ended 31 December 2006: 李硯泉 張立軍 劉文忠 解思平 楊雲鐸 袁清林 代會嬌 Six months ended 30 June 2006: (Unaudited) 劉文忠 張立軍 解思平 李硯泉 楊雲鐸 袁清林 孫榮賜	Fees RMB’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — —	Basic salary, housing and other allowances and benefits RMB’000 281 180 90 551 381 249 189 187 138 98 62 1,304 464 427 339 176 142 96 54 1,698 219 187 165 157 142 78 30 978	Defined contribution pension costs RMB’000 9 8 9 26 8 10 10 6 9 5 3 51 11 13 11 11 5 8 4 63 5 4 5 11 5 5 5 40	Total RMB’000 290 188 99
				577
				389 259 199 193 147 103 65
				1,355
				475 440 350 187 147 104 58
				1,761
				224 191 170 168 147 83 35
				1,018

— II-37 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Name of directors Six months ended 30 June 2007: 李硯泉 劉文忠 代會嬌 張立軍 袁清林	Fees RMB’000 — — — — — —	Basic salary, housing and other allowances and benefits RMB’000 181 160 127 92 64 624	Defined contribution pension costs RMB’000 6 6 6 10 6 34	Total RMB’000 187 166 133 102 70
				658

No directors waived or agreed to waive any emoluments during the Relevant Periods. No emoluments were paid to all other directors during the Relevant Periods. No incentive payment for joining the Target Group or compensation for loss of office was paid or payable to any directors during the Relevant Periods.

11. Individuals with highest emoluments

The five individuals whose emoluments were the highest in the Target Group during the years ended 31 December 2004, 2005 and 2006 and for the six months ended 30 June 2006 and 2007 included two, four, three, five and three directors, respectively whose details have been reflected in the analysis presented in Note 10. The emoluments payable to the remaining three, one, two, nil and two individuals respectively during the years and 31 December 2004, 2005 and 2006 and for the six months ended 30 June 2006 and 2007 are as follows:

	Year	ended 31 December	ended 31 December	Six months	ended 30 June
	2004	2005	2006	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Basic salaries, housing
and other allowances
and benefits in kind	993	1,281	1,793	870	753

The remaining individuals were within remuneration band of less than HK$1,000,000.

— II-38 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

12. Income tax expense

Income tax expense
				Six months
	Year	ended 31 December		ended 30 June
	2004	2005	2006	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Income taxes consist of:
Current tax
— PRC enterprise
income tax (“EIT”)	921	35,362	36,778	32,579	40,764

Details of the EIT rate, after considering exemption and relief granted applicable to the entities and businesses comprising the Target Group, during the Relevant Periods is as follows:

Name of entities/business				Six months	Six months
	Year	ended 31 December		ended 30 June
	2004	2005	2006	2006	2007
	EIT rate	EIT rate	EIT rate	EIT rate	EIT rate
Qingdao Hisense
Air-conditioning
Business	12%	12%/33%	33%	33%	33%
Hisense Zhejiang	N/A*	33%	33%	33%	33%
Hisense Beijing	0%	0%	16.5%	16.5%	33%
Hisense Nanjing	N/A*	33%	33%	33%	33%
Hisense Marketing
Business	33%	33%	33%	33%	33%

• Not yet incorporated in 2004.

The entities and businesses comprising the Target Group are operating in the PRC and are subject to EIT at statutory rate of 33%, with the following exceptions:

Qingdao Hisense was established as a Sino-foreign equity joint venture and regarded as 外商投資 先進技術企業 . It is therefore entitled to a tax concession period in which it is fully exempted from EIT for two years starting from its first profit marking year, followed by a 50% reduction in the EIT rate for the next three years. In late 2005, subsequent to the capital injection by its PRC controlling equity owner, the percentage of foreign equity owner fell below 25% of the total registered capital. The tax concession was therefore withdrawn according to the relevant EIT laws and the Qingdao Hisense Air-conditioning Business was subject to the standard EIT rate of 33% since then.

Hisense Beijing was qualified as 新辦勞動就業服務企業 in 2004 and such entitled Hisense Beijing to a tax concession period in which it is fully exempted from EIT for two years starting from its first profit marking year, followed by a 50% reduction in EIT rate for the next three years.

Pursuant to the PRC enterprise income tax law passed by the Tenth National People’s Congress on 16 March 2007, the new enterprise income tax rates for domestic and foreign enterprises are unified at 25% and will be effective from 1 January 2008. The impact of this change in EIT rates on the Financial Information will depend on detailed implementation pronouncements that are to be issued subsequently. The management of Qingdao Hisense is not in a position to assess the impact, if any, to the carrying value of tax liabilities as at the respective balance sheet dates. The management of Qingdao Hisense will continue to evaluate the impact as more detailed regulations are announced.

— II-39 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

A reconciliation between income tax expense and accounting profit at applicable tax rate is as follows:

Year 2004 RMB’000 Profit before tax 78,261 Tax at the PRC statutory rate of 33% 25,826 Effect of exemption granted and preferential tax treatment (4,584) Tax effect of utilisation of tax losses attributable to Hisense Marketing (note (i)) (25,506) Tax effect of expenses not deductible for tax purposes 880 Tax effect of revenue not taxable for tax purposes (764) Tax effect of tax losses and deductible temporary differences not recognised 14,684 Utilisation of tax losses and deductible temporary differences previously not recognised (9,615) Income tax expense 921	Six months ended 31 December ended 30 June 2005 2006 2006 2007 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 144,862 96,213 67,106 107,791 47,804 31,750 22,145 35,571 (17,743) (4,348) (1,807) — (8,612) (8,596) (13,951) (911) 12,350 13,646 36,816 28,868 (4,024) (2,130) (14,058) (28,667) 8,533 9,304 6,695 11,081 (2,946) (2,848) (3,261) (5,178) 35,362 36,778 32,579 40,764	Six months ended 31 December ended 30 June 2005 2006 2006 2007 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 144,862 96,213 67,106 107,791 47,804 31,750 22,145 35,571 (17,743) (4,348) (1,807) — (8,612) (8,596) (13,951) (911) 12,350 13,646 36,816 28,868 (4,024) (2,130) (14,058) (28,667) 8,533 9,304 6,695 11,081 (2,946) (2,848) (3,261) (5,178) 35,362 36,778 32,579 40,764
		35,571 — (911) 28,868 (28,667) 11,081 (5,178)
		40,764

Note:

(i) During the Relevant Periods, the taxable profits generated by the Hisense Marketing Business were offset by the tax losses incurred from other business in Hisense Marketing.

At the respective balance sheet dates, no deferred tax assets has not been recognised as it is not probable that future taxable profit will be available against which the unused tax losses can be utilised.

The unused tax losses carried forward not recognised in the combined financial statements due to unpredictability of future profit streams are as follows:

		At 31 December		At 30 June
	2004	2005	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000
Unused tax losses	12,666	19,752	38,714	38,714

The PRC tax losses can only be carried forward for a maximum period of five years.

— II-40 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

13. Dividends

Dividend represents the dividends paid to the equity owners of the entities comprising the Target Group during the Relevant Periods.

The rates of dividends and the number of shares ranking for dividends are not presented as such information is not considered meaningful having regard to the purpose of this report.

14. Earnings per share

No earnings per share information is presented as its inclusion is not considered meaningful for the purpose of this report.

15. Property, plant and equipment

Cost At 1 January 2004 Additions Transfer Disposals At 31 December 2004 and 1 January 2005 Additions Transfer Disposals At 31 December 2005 and 1 January 2006 Additions Transfer Disposals At 31 December 2006 and 1 January 2007 Additions Transfer Disposals At 30 June 2007	Buildings RMB’000 195,992 10 396 — 196,398 10,220 832 — 207,450 4,465 91,099 — 303,014 — 9,576 — 312,590 -------------	Plant, machinery and equipment RMB’000 309,240 12,568 17,057 (12,491) 326,374 14,803 20,746 (2,491) 359,432 11,573 76,803 (9,410) 438,398 1,765 23,354 (1,893) 461,624 -------------	Moulds RMB’000 127,833 5,401 13,601 (11,792) 135,043 43,200 1,283 — 179,526 36,816 2,532 — 218,874 8,968 — — 227,842 -------------	Motor Construction vehicles in progress RMB’000 RMB’000 10,813 18,780 1,331 34,797 — (31,054) (2,055) (2,267) 10,089 20,256 3,567 93,090 — (22,861) (2,474) (11,991) 11,182 78,494 2,104 127,392 — (170,434) (1,523) (9,090) 11,763 26,362 1,246 27,114 — (32,930) (79) — 12,930 20,546 ------------- -------------	Total RMB’000 662,658 54,107 — (28,605)
					688,160 164,880 — (16,956)
					836,084 182,350 — (20,023)
					998,411 39,093 — (1,972)
					1,035,532 -------------

— II-41 —

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Accumulated depreciation At 1 January 2004 Provided for the year Eliminated on disposals At 31 December 2004 and 1 January 2005 Provided for the year Eliminated on disposals At 31 December 2005 and 1 January 2006 Provided for the year Eliminated on disposals At 31 December 2006 and 1 January 2007 Provided for the period Eliminated on disposals At 30 June 2007 Net book values At 31 December 2004 At 31 December 2005 At 31 December 2006 At 30 June 2007	Buildings RMB’000 13,434 4,502 — 17,936 4,887 — 22,823 7,286 — 30,109 4,748 — 34,857 ------------- 178,462 184,627 272,905 277,733	Plant, machinery and equipment RMB’000 61,463 18,040 (1,894) 77,609 20,594 (781) 97,422 25,039 (2,936) 119,525 15,864 (595) 134,794 ------------- 248,765 262,010 318,873 326,830	Moulds RMB’000 108,598 6,481 (1,002) 114,077 26,800 — 140,877 30,981 — 171,858 16,408 — 188,266 ------------- 20,966 38,649 47,016 39,576	Motor Construction vehicles in progress RMB’000 RMB’000 2,060 — 1,744 — (653) — 3,151 — 1,574 — (1,038) — 3,687 — 1,674 — (642) — 4,719 — 883 — (20) — 5,582 — ------------- ------------- 6,938 20,256 7,495 78,494 7,044 26,362 7,348 20,546	Total RMB’000 185,555 30,767 (3,549)
					212,773 53,855 (1,819)
					264,809 64,980 (3,578)
					326,211 37,903 (615)
					363,499 ------------- 475,387
					571,275
					672,200
					672,033

Certain property, plant and equipment were pledged as security for the bank borrowings granted to the Target Group as indicated in note 22.

16. Payments for leasehold land held for own use under operating leases

The Target Group’s payments for leasehold land held for own use under operating leases comprise:

		At 31 December		At 30 June
	2004	2005	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000
Leasehold land in PRC:
— Medium-term lease	28,481	102,563	100,359	105,862

— II-42 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Carrying amount at 1 January Additions Amortisation charge Carrying amount at 31 December	2004 RMB’000 29,080 — (599) 28,481	At 31 December 2005 RMB’000 28,481 75,969 (1,887) 102,563	2006 RMB’000 102,563 — (2,204) 100,359	At 30 June 2007 RMB’000 100,359 6,932 (1,429) 105,862

Certain payments for leasehold land held for own use under operating leases were pledged as security for the Target Group’s bank borrowings as indicated in note 22.

17. Intangible assets

Non-patent technologies RMB’000 Cost At 1 January 2004 17,141 Written off — At 31 December 2004 and 1 January 2005 17,141 Additions 22,000 At 31 December 2005 and 1 January 2006 39,141 Additions — At 31 December 2006 and 1 January 2007 39,141 Additions — At 30 June 2007 39,141 ------------- Amortisation At 1 January 2004 2,428 Charge for the year 1,714 Eliminated on written off — At 31 December 2004 and 1 January 2005 4,142 Charge for the year 3,181 At 31 December 2005 and 1 January 2006 7,323 Charge for the year 3,914 At 31 December 2006 and 1 January 2007 11,237 Charge for the period 1,957 At 30 June 2007 13,194 ------------- Net book values At 31 December 2004 12,999 At 31 December 2005 31,818 At 31 December 2006 27,904 At 30 June 2007 25,947	Software systems RMB’000 2,167 (1,921) 246 712 958 2,086 3,044 553 3,597 ------------- 638 279 (788) 129 192 321 443 764 321 1,085 ------------- 117 637 2,280 2,512	Total RMB’000 19,308 (1,921) 17,387 22,712 40,099 2,086 42,185 553 42,738 ------------- 3,066 1,993 (788) 4,271 3,373 7,644 4,357 12,001 2,278 14,279 ------------- 13,116 32,455 30,184 28,459

— II-43 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

18. Inventories

2004 RMB’000 Raw materials 100,072 Work in progress 15,839 Finished goods 338,962 454,873 Trade and other receivables 2004 RMB’000 Trade receivables_(i) 31,650 Notes receivable(ii) 100,276 Other receivables 125,413 Amount due from ultimate holding company(iii) 25,847 Amounts due from intermediate holding companies(iv) 59,577 Amount due from fellow subsidiaries(iv) 108,397 Amounts due from the Kelon Group(iv) — Amounts due from minority owners(iv) 821 451,981 2004 _RMB’000 Trade receivables 35,073 Less: Provision for impairment of trade receivables_(v)_ (3,423) Trade receivables, net 31,650	At 31 December 2005 RMB’000 99,066 10,683 487,463 597,212 At 31 December 2005 RMB’000 62,830 227,222 73,523 86,091 297,630 174,230 — 3,460 924,986 At 31 December 2005 RMB’000 72,973 (10,143) 62,830	2006 RMB’000 41,966 4,407 367,236 413,609 2006 RMB’000 17,130 82,034 24,659 44,765 317,676 113,874 310,412 1,866 912,416 2006 RMB’000 33,658 (16,528) 17,130	At 30 June 2007 RMB’000 67,163 4,844 765,928
			837,935
			At 30 June 2007 RMB’000 115,403 217,219 86,944 389,821 306,654 216,637 447,989 1,866
			1,782,533
			At 30 June 2007 RMB’000 138,875 (23,472)
			115,403

19. Trade and other receivables

— II-44 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

• (i) The aging analysis of trade receivables is as follows:

At 31 December 2004 2005 RMB’000 RMB’000 Within 3 months (not yet due) 23,405 48,209 Three to six months 4,100 2,118 Six months to one year 1,472 3,976 One to two years 2,054 8,527 Two to three years 619 — 31,650 62,830	At 30 June 2006 2007 RMB’000 RMB’000 4,777 65,883 8,470 42,713 3,883 6,807 — — — — 17,130 115,403	At 30 June 2006 2007 RMB’000 RMB’000 4,777 65,883 8,470 42,713 3,883 6,807 — — — — 17,130 115,403
		115,403

Normal credit terms of within 3 months is granted to customers. Sales are usually settled by cash on delivery for small and new customers. Trade receivables are non-interest bearing.

• (ii) Included in notes receivable was an amount of RMB47,000,000, RMB130,569,000, RMB16,506,000 and RMB20,500,000 of notes discounted to banks with recourse as at 31 December 2004, 2005, 2006 and 30 June 2007 respectively. The transaction has been accounted for as short-term bank borrowings.

• (iii) The amounts included interest receivable and cash deposits placed with the clearing centre organised and managed by the ultimate holding company. The amount are unsecured, repayable on demand and interest free, except for the amount of RMB15,095,000 and RMB158,520,000 at 31 December 2004 and 2007 respectively, which bear interest rate at approximately 1% per annum.

• (iv) The amounts are unsecured, interest free and repayable on demand.

• (v) The table below represents the movement of provision for impairment of trade receivables during the Relevant Periods:

Balance at the beginning of the year/period Addition during the year/period Reversal during the year/period Balance at the end of the year/period	At 31 December 2004 2005 RMB’000 RMB’000 5,633 3,423 — 6,720 (2,210) — 3,423 10,143	At 30 June 2006 2007 RMB’000 RMB’000 10,143 16,528 6,385 6,944 — — 16,528 23,472	At 30 June 2006 2007 RMB’000 RMB’000 10,143 16,528 6,385 6,944 — — 16,528 23,472
			23,472

— II-45 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

20. Trade and other payables

Trade payables_(i) Notes payable Other payables Accruals Amount due to ultimate holding company(ii) Amount due to intermediate holding company(ii) Amount due to fellow subsidiaries(ii) Amounts due to the Kelon Group(ii) Amounts due to minority owners(ii)_	At 31 December 2004 2005 RMB’000 RMB’000 363,246 468,422 555,393 423,400 23,599 35,592 100,581 131,473 51,180 355,285 — 3,255 24,842 38,515 — 49 10 10 1,118,851 1,456,001	At 30 June 2006 2007 RMB’000 RMB’000 430,194 1,410,595 188,445 363,696 57,332 88,727 230,819 354,207 268,399 312 — 150,708 21,415 25,764 643 12,181 — 47 1,197,247 2,406,237	At 30 June 2006 2007 RMB’000 RMB’000 430,194 1,410,595 188,445 363,696 57,332 88,727 230,819 354,207 268,399 312 — 150,708 21,415 25,764 643 12,181 — 47 1,197,247 2,406,237
			2,406,237

(i) The aging analysis of trade payables is as follows: At 31 December 2004 2005 RMB’000 RMB’000 Within one year 360,481 466,766 One to two years 2,742 941 Two to three years 6 266 Over three years 17 449 363,246 468,422	At 30 June 2006 2007 RMB’000 RMB’000 425,858 1,097,997 3,743 309,901 97 2,104 496 593 430,194 1,410,595	At 30 June 2006 2007 RMB’000 RMB’000 425,858 1,097,997 3,743 309,901 97 2,104 496 593 430,194 1,410,595
		1,410,595

Normal credit terms ranging from 30 to 120 days was granted to the Target Group. Trade payables within normal credit period are non-interest bearing.

(ii) The amounts due are unsecured, interest free and repayable on demand.

— II-46 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

21. Provisions

At 1 January 2004 Additional provision in the year Utilisation of provision At 31 December 2004 Additional provision in the year Utilisation of provision At 31 December 2005 Additional provision in the year Utilisation of provision At 31 December 2006 Additional provision in the period Utilisation of provision At 30 June 2007	Warranty provision RMB’000 86,414 48,835 (58,539)
	76,710 44,910 (47,141)
	74,479 35,052 (48,601)
	60,930 22,121 (17,429)
	65,622

22. Bank borrowings

Secured_(note (i), (ii)) Unsecured(note (iii))_	At 31 December 2004 2005 RMB’000 RMB’000 — 40,000 47,000 130,569 47,000 170,569	At 30 June 2006 2007 RMB’000 RMB’000 76,000 84,000 16,506 20,500 92,506 104,500

Total current and non-current bank borrowings were payable as follows:

At 31 December 2004 2005 RMB’000 RMB’000 On demand or within one year 47,000 170,569 More than one year but not exceeding two years — — More than two years but not exceeding five years — — 47,000 170,569 Amount due within one year included in current liabilities (47,000) (170,569) — —	At 30 June 2006 2007 RMB’000 RMB’000 60,506 76,500 10,000 10,000 22,000 18,000 92,506 104,500 (60,506) (76,500) 32,000 28,000

— II-47 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

• (i) During the Relevant Periods, except for the bank borrowings on the discounted notes receivables, (see (iii) below) the effective interest rates of the other bank borrowings per annum are as follows:

		At 31 December	At 31 December		At 30 June
	2004	2005		2006	2007
	RMB’000	RMB’000		RMB’000	RMB’000
Bank loans	Nil	5.9%	5.9% to 6.3%		6.10% to 6.5%

• (ii) At the respective balance sheet dates, the Target Group pledged the following assets to banks for bank loans granted to the Target Group:

Property, plant and equipment Payments for leasehold land held for own use under operating leases	At 31 December 2004 2005 RMB’000 RMB’000 — — — 33,554 — 33,554	At 30 June 2006 2007 RMB’000 RMB’000 75,292 82,575 73,075 72,272 148,367 154,847	At 30 June 2006 2007 RMB’000 RMB’000 75,292 82,575 73,075 72,272 148,367 154,847
			154,847

• (iii) Included in bank borrowings was an amounts of approximately RMB47,000,000, RMB130,569,000, RMB16,506,000 and RMB20,500,000 as at 31 December 2004, 2005, 2006 and 30 June 2007 respectively of notes discounted to banks with recourse.

23. Combined capital

Qingdao Hisense Air-conditioning Business Hisense Zhejiang Hisense Beijing Hisense Marketing Business	At 31 December 2004 2005 RMB’000 RMB’000 149,134 232,950 — 56,100 47,140 47,140 30,000 30,000 226,274 366,190	At 30 June 2006 2007 RMB’000 RMB’000 232,950 232,950 56,100 56,100 47,140 47,140 30,000 30,000 366,190 366,190	At 30 June 2006 2007 RMB’000 RMB’000 232,950 232,950 56,100 56,100 47,140 47,140 30,000 30,000 366,190 366,190
			366,190

Combined capital represents the issued and fully paid-up capital of the entities comprising the Target Group and the capital contributed to the Qingdao Hisense Air-conditioning Business and the Hisense Marketing Business. Since at the beginning of the Relevant Periods, substantially all of the issued and fully paid-up registered capital of Qingdao Hisense and Hisense Marketing were utilised for the operations of the Qingdao Hisense Air-conditioning Business and the Hisense Marketing Business respectively, the initial capital contributed to each of the businesses at 1 January 2004 (the beginning of the Relevant Periods) represents the issued and fully paid-up registered capital of their corresponding entities as at 1 January 2004.

— II-48 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The subsequent capital contribution of Qingdao Hisense in 2005, which was also utilitised for the operations of the Qingdao Hisense Business, was accounted for as part of the combined capital of the Target Group.

24. Leases

The Target Group leases certain of its leasehold land and buildings under operating lease arrangements with lease terms ranging from one to five years.

The total future minimum lease payments under non-cancellable operating leases are as follows:

Not later than one year Later than one year and not later than five years	At 31 December 2004 2005 RMB’000 RMB’000 387 356 602 392 989 748	At 30 June 2006 2007 RMB’000 RMB’000 356 1,497 37 — 393 1,497	At 30 June 2006 2007 RMB’000 RMB’000 356 1,497 37 — 393 1,497
			1,497

25. Related party transactions

Hisense Group Co. itself is a state-owned enterprise and is controlled by the PRC Government. As the Target Group is ultimately controlled by Hisense Group Co., it is then considered to be controlled by the PRC Government, which controls a substantial number of entities in the PRC. In accordance with IAS 24 “Related Party Disclosures”, state-owned enterprises and their subsidiaries, other than the companies comprising Hisense Group Co., directly or indirectly controlled by the PRC Government are also deemed as related parties of the Target Group. For the purpose or related party transactions disclosure, the Target Group has in place procedures to assist the identification of the immediate ownership structure of its customers and suppliers as to whether they are state-owned enterprises. Many state-owned enterprises have multi-layered corporate structure and the ownership structures change over time as a result of transfers and privatisation programs. Nevertheless, management believes that meaningful information relative to related-party transactions has been adequately disclosed.

(I) Relationship with related parties

During the Relevant Periods, for the purpose of this report, the management is of the view that the following companies are related parties of the Target Group:

Name of related parties

Relationship

Hisense Group Co. Ultimate holding company Qingdao Hisense Intermediate holding company Hisense Marketing Intermediate holding company Hisense Electric Fellow subsidiary Hisense Electronic Fellow subsidiary 青島海信進出口有限公司 Fellow subsidiary 青島海信物業有限公司 Fellow subsidiary 青島海信通訊有限公司 Fellow subsidiary 青島海信電子技術服務有限公司 Fellow subsidiary 山東賽維電子技術服務有限公司 Fellow subsidiary 青島海信網路科技股份有限公司 Fellow subsidiary

— II-49 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Name of related parties

Relationship

淄博海信電子有限公司 Fellow subsidiary 海信（香港）有限公司 Fellow subsidiary 海信集團上海營銷中心 Fellow subsidiary 海信集團北京營銷中心 Fellow subsidiary 海信集團廣州營銷中心 Fellow subsidiary 青島海信日立空調系統有限公司 Fellow subsidiary 青島海信光學有限公司 Fellow subsidiary 青島海信房地產股份有限公司 Fellow subsidiary 青島海信塑料製品有限公司 Fellow subsidiary 青島海信模具有限公司 Fellow subsidiary 青島海信軟件開發有限公司 Fellow subsidiary 青島海信實業股份有限公司 Fellow subsidiary 青島賽維家電服務產業有限公司 Fellow subsidiary 臨沂海信電子有限公司 Fellow subsidiary 佛山市順德區容聲塑膠製品廠有限公司 A subsidiary of the Company 廣東科龍空調電器有限公司 A subsidiary of the Company 成都科龍冰箱有限公司 A subsidiary of the Company 廣東科龍配件有限公司 A subsidiary of the Company 廣東科龍模具有限公司 A subsidiary of the Company 西安科龍製冷有限公司 A subsidiary of the Company 海信容聲（揚州）冰箱有限公司 A subsidiary of the Company 海信容聲（廣東）冰箱有限公司 A subsidiary of the Company 海信容聲（揚州）冰箱有限公司 A subsidiary of the Company 海信容聲（營口）冰箱有限公司 A subsidiary of the Company 蕪湖盈嘉電機有限公司 A subsidiary of the Company 江西科龍實業發展有限公司 A subsidiary of the Company 北京雪花電器集團公司 Minority owner of the Target Group (Beijing Xuehua Group Company Limited) (“Xuehua Group”) 浙江先科電器製造有限公司 Minority owner of the Target Group (Zhejiang Xianke Electrical Appliance Manufacturing Co., Ltd) (“Zhejiang Xianke”) 雪花（北京）科技有限公司 A company controlled by a minority owner of the Target Group

(II) Transactions with related parties

(a) Transactions with ultimate holding company

The Target Group had the following significant transactions with the ultimate holding company:

company:
				Six months
		Year ended 31	December	ended 30 June
	2004	2005	2006	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Purchases of
raw materials	—	10,995	—	—	—

— II-50 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(b) Transactions with the fellow subsidiaries of the Target Group

The Target Group had the following significant transactions with the fellow subsidiaries of the Target Group:

				Six months	Six months
	Year	ended 31 December		ended 30 June
	2004	2005	2006	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Sale of goods/raw materials to (i)
青島海信進出口有限公司	224,997	838,730	431,338	257,983	212,840
海信集團北京營銷中心	85,898	178,850	196,351	124,013	133,682
海信集團上海營銷中心	104,962	99,931	64,323	45,086	47,517
青島賽維家電服務產業有限公司	2,793	12,213	2,504	1,247	1,244
青島海信電子產業控股股份有限公司	—	—	1,355	—	939
青島海信日立空調系統有限公司	—	1,328	442	255	132
臨沂海信電子有限公司	—	—	1	—	53
青島海信實業股份有限公司	34,907	39,464	22,717	21,704	—
青島海信塑料製品有限公司	6,541	10,211	3,334	3,139	—
青島海信光學有限公司	15,238	6,951	6,236	2,684	—
青島海信房地產股份有限公司	2,099	5,277	319	254	—
Hisense Electric	—	—	339	—	—
海信集團廣州營銷中心	48,996	13,034	5	—	—
Sale of plant and equipment to (i)
青島海信進出口有限公司	—	—	22,787	4,992	8,927
青島海信軟件開發有限公司	2,435	—	—	—	—
Purchase of goods/raw
materials from (i)
海信(香港)有限公司	92,776	118,179	74,578	61,579	69,348
臨沂海信電子有限公司	27,044	81,848	79,100	40,292	30,208
青島海信光學有限公司	37,730	26,732	15,109	8,208	21,999
青島海信進出口有限公司	42,837	37,798	8,962	8,846	18,387
青島海信塑料製品有限公司	19,992	29,221	7,461	5,927	11,463
青島賽維家電服務產業有限公司	3,460	4,628	1,244	947	540
海信集團北京營銷中心	1,981	5,239	256	162	473
海信集團上海營銷中心	6,009	507	111	111	337
青島海信日立空調系統有限公司	388	496	311	232	34
青島海信實業股份有限公司	314	865	1,173	790	—
Hisense Electric	—	607	—	—	—
海信集團廣州營銷中心	4,884	44	—	—	—
Purchase of plant and
equipment from (i)
青島海信進出口有限公司	—	1,705	—	—	14
青島海信光學有限公司	2,839	—	—	—	—
Purchase of software from (i)
青島海信軟件開發有限公司	1,773	7,279	11,000	4,318	4,190
Purchase of moulds from (i)
青島海信模具有限公司	—	1,362	12,922	6,349	2,068
Brand usage fee (ii)
Hisense Electronic	4,600	6,800	7,740	5,512	4,946

— II-51 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

• (i) The above transactions were entered into by the Target Group at terms mutually agreed by both parties.

• (ii) The above transactions were entered into by the Target Group in accordance with the relevant agreements.

(c) Transactions with the Kelon Group

The Target Group had the following significant transactions with the related parties of the Target Group:

				Six months	Six months
	Year	ended 31 December		ended 30 June
	2004	2005	2006	2006	2007
RMB’000		RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Sale of goods/raw materials to
廣東科龍空調電器有限公司	—	3,008	69,872	—	338,547
海信容聲（廣東）冰箱有限公司	—	—	13	—	29,576
蕪湖盈嘉電機有限公司	—	—	—	—	3,945
海信容聲（營口）冰箱有限公司	—	—	5,520	5,520	—
成都科龍冰箱有限公司	—	—	1,817	—	—
Purchase of goods/raw materials from
廣東科龍空調電器有限公司	—	—	5,956	—	65,639
海信容聲（廣東）冰箱有限公司	—	—	—	—	34,563
佛山市順德區容聲塑膠製品廠有限公司	—	—	789	—	28
廣東科龍配件有限公司	—	—	509	—	—
Purchase of plant and equipment
from
江西科龍實業發展有限公司	—	—	300	—	—
Purchase of moulds from
廣東科龍模具有限公司	—	—	—	—	3,079

The above transactions were entered into by the Target Group at terms mutually agreed by both parties.

— II-52 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(d) Transactions with the minority owners of the Target Group and a company controlled by a minority owner

The Target Group had the following significant transactions with the minority owners of the Target Group and a company controlled by a minority owner:

				Six months	Six months
	Year	ended 31 December		ended 30 June
	2004	2005	2006	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Sale of goods to
雪花（北京）科技有限公司	—	5,445	514	—	—
Zhejiang Xianke	—	3,253	103	—	—
Xuehua Group	14,759	1,916	—	—	—
Purchase of raw materials from
Zhejiang Xianke	—	270	2	—	—
Purchase of moulds from
Xuehua Group	5,000	—	—	—	—
Rental expenses of production
plant paid to
Xuehua Group	6,465	6,465	6,465	3,232	3,232
Rental expenses of motor
vehicles paid to
Xuehua Group	7,148	8,867	8,485	5,409	4,382

(III) Balances with related parties

(a) Balances with the ultimate holding company

Included in trade and other receivables Included in trade and other payables	At 31 December 2004 2005 RMB’000 RMB’000 25,847 86,091 51,180 355,285	At 30 June 2006 2007 RMB’000 RMB’000 44,765 389,821 268,399 312	At 30 June 2006 2007 RMB’000 RMB’000 44,765 389,821 268,399 312
			312

— II-53 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(b) Balances with the intermediate holding companies

Included in trade and other receivables Hisense Marketing Qingdao Hisense Included in trade and other payables Qingdao Hisense	At 31 December 2004 2005 RMB’000 RMB’000 45,221 297,630 14,356 — 59,577 297,630 — 3,255	At 30 June 2006 2007 RMB’000 RMB’000 317,676 306,654 — — 317,676 306,654 — 150,708	At 30 June 2006 2007 RMB’000 RMB’000 317,676 306,654 — — 317,676 306,654 — 150,708
			306,654
			150,708

(c) Balances with the fellow subsidiaries of the Target Group

Included in trade and other receivables 青島海信進出口有限公司 海信集團上海營銷中心 海信集團北京營銷中心 海信集團廣州營銷中心 臨沂海信電子有限公司 青島賽維家電服務產業有限公司 Hisense Electric 青島海信電子技術服務有限公司 青島海信模具有限公司 青島海信物業有限公司 青島海信房地產股份有限公司 青島海信軟件開發有限公司 青島海信通訊有限公司 海信（香港）有限公司 青島海信日立空調系統有限公司 青島海信塑料製品有限公司	2004 RMB’000 38,160 24,671 14,024 21,026 3,320 1,431 170 — — — 1,252 166 3,286 777 85 29 108,397	At 31 December 2005 2006 RMB’000 RMB’000 31,952 39,567 68,923 41,128 15,407 14,789 17,034 17,111 17,764 — 2,800 961 20,187 59 32 130 105 129 12 — 11 — 3 — — — — — — — — — 174,230 113,874	At 30 June 2007 RMB’000 114,817 52,317 29,828 15,444 2,630 1,073 206 193 129 — — — — — — —
			216,637

— II-54 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Included in trade and other payables 海信（香港）有限公司 青島海信軟件開發有限公司 青島海信光學有限公司 青島海信進出口有限公司 青島海信塑膠製品有限公司 Hisense Electronic Hisense Electric 青島海信模具有限公司 青島海信電子技術服務有限公司 青島海信房地產股份有限公司 淄博海信電子有限公司 青島賽維家電服務產業有限公司 山東賽維電子技術服務有限公司 海信集團北京營銷中心 青島海信網路科技股份有限公司 海信集團廣州營銷中心 臨沂海信電子有限公司 青島海信日立空調系統有限公司 青島海信實業股份有限公司 (d) Balances with the Kelon Group Included in trade and other receivables The Company 廣東科龍空調電器有限公司 海信容聲（廣東）冰箱有限公司 西安科龍製冷有限公司 廣東科龍模具有限公司 海信容聲（揚州）冰箱有限公司 Included in trade and other payables 海信容聲（揚州）冰箱有限公司 廣東科龍模具有限公司 蕪湖盈嘉電機有限公司 海信容聲（廣東）冰箱有限公司 佛山市順德區容聲塑膠製品廠有限公司 The Company	2004 RMB’000 — 936 2,361 10 — 7,600 109 — — 476 78 800 — — — — 5 — 12,467 24,842 2004 RMB’000 — — — — — — — — — — — — — —	At 31 December 2005 2006 RMB’000 RMB’000 1,886 821 — 3,223 65 42 12,268 2,353 — — 6,802 7,700 63 130 114 5,259 49 28 500 1,164 — 10 121 99 — — 462 35 — 22 413 11 5 422 11 96 15,756 — 38,515 21,415 At 31 December 2005 2006 RMB’000 RMB’000 — 300,749 — 8,790 — — — — — 491 — 382 — 310,412 — — — — — 227 49 50 — 363 — 3 49 643	At 30 June 2007 RMB’000 5,426 4,013 3,631 2,643 2,577 1,844 1,671 1,406 1,336 664 295 144 45 35 23 11 — — —
			25,764
			At 30 June 2007 RMB’000 237,053 197,470 13,461 5 — —
			447,989
			8,116 2,535 1,288 177 63 2
			12,181

— II-55 —

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

• (e) Balances with the minority owners of the Target Group and a company controlled by a minority owner

Included in trade and other receivables Zhejiang Xianke 雪花（北京）科技有限公司 Xuehua Group Included in trade and other payables 雪花（北京）科技有限公司 Xuehua Group	2004 RMB’000 — — 821 821 — 10 10	At 31 December 2005 2006 RMB’000 RMB’000 1,868 1,866 1,592 — — — 3,460 1,866 — — 10 — 10 —	At 30 June 2007 RMB’000 1,866 — —
			1,866
			47 —
			47

(IV) Others

• (a) During the Relevant Periods, Hisense Group Co. granted a piece of land with total land area of approximately 203,000 square metres to Qingdao Hisense for the manufacture of air-conditioners at nil consideration. On 27 February 2007, the land was transferred to Qingdao Hisense at a consideration of RMB1,898,000.

• (b) On 31 December 2006, the directors of Hisense Marketing assigned the receivables due from the Company in the amount RMB300,749,000 to the Target Group in order to settle part of its debt due to the Target Group.

• (c) Remuneration of key management personnel of the Target Group is as follows:

Short-term employee benefits Post-employment benefits	Six months Year ended 31 December ended 30 June 2004 2005 2006 2006 2007 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 1,881 3,277 4,267 2,173 2,196 87 172 208 108 131 1,968 3,449 4,475 2,281 2,327	Six months Year ended 31 December ended 30 June 2004 2005 2006 2006 2007 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 1,881 3,277 4,267 2,173 2,196 87 172 208 108 131 1,968 3,449 4,475 2,281 2,327
		2,327

— II-56 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

26. Capital commitments

		At 31 December		At 30 June
	2004	2005	2006	2007
	RMB’000	RMB’000	RMB’000	RMB’000
Capital expenditure for
acquisition of property,
plant and equipment
contracted for but not
provided in the Financial
Information	6,755	46,751	36,541	29,967
Acquisition of land use right	—	6,125	3,063	1,497

27. Critical accounting judgments and key sources of uncertainty

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Target Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Impairment

In considering the impairment losses that may be required for certain of the Target Group’s assets which include property, plant and equipment, construction in progress, payments for leasehold land held for own use under operating leases and intangible assets, recoverable amounts of those assets need to be determined. The recoverable amount is the greater of the fair value less costs to sell and the value in use. It is difficult to precisely estimate fair value less costs to sell because quoted market prices for these assets may not be readily available. In determining the value in use, expected cash flows generated by the assets are discounted to their present value, which require significant judgment relating to items such as level of sales, selling price and amount of operating costs. The Target Group uses all readily available information in determining amounts that are reasonable approximations of recoverable amounts, including estimates based on reasonable and supportable assumptions and projections of items such as sales volume, selling price and amount of operating costs.

In considering the impairment losses that may be required for current receivables, future cash flows need to be determined. One of the key assumptions that has to be applied is the ability of the debtors to settle the receivables. Although the Target Group has used all available information to make this estimation, inherent uncertainty exists and actual may be different from the amount estimated.

Depreciation and amortisation

Property, plant and equipment and intangible assets are depreciated/amortised on a straight-line basis over the estimated useful lives of the assets, after taking into account of their estimated residual values. The Target Group reviews the estimated useful lives of the assets regularly. The useful lives are based on the Target Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation and amortisation expense for future periods is adjusted if there are significant changes from previous estimates.

— II-57 —

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Provisions

As explained in note 3(r), the Target Group makes provisions under the warranties it gives on sale of its electrical products taking into account the Target Group’s recent claim experience. As the Target Group is continuously upgrading its product designs and launching new models, it is possible that recent claim experience is not indicative of the future claims that it will receive in respect of past sales. Any increase or decrease in the provision would affect profit or loss in future years.

Income taxes

Determining income tax provisions involves judgement on the future tax treatment of certain transactions. The management of Qingdao Hisense carefully evaluates the tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislation. Deferred tax assets are recognised for unused tax losses and deductible temporary differences. As those deferred tax assets were recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses and credits can be utilised, management’s judgement is required to assess the probability of future taxable profits. Management’s assessment is constantly reviewed and additional deferred tax assets will recognise if it becomes probable that future taxable profits will allow the deferred tax assets to be recovered. No deferred tax assets have been recognised for tax losses and deductible temporary differences generated from the businesses comprising the Target Group for the reason that those tax losses or temporary differences are not recoverable for income tax purpose upon the completion of the Proposed Acquisition.

28. Subsequent events

Other than those disclosed in note 1 of section B, the Target Group had no other significant events taken place subsequent to 30 June 2007 until the date of this report.

C. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of the Target Group, the entities and businesses comprising the Target Group have been prepared in respect of any period subsequent to 30 June 2007.

BDO McCabe Lo Limited

Certified Public Accountants Alfred Lee Practising Certificate Number P04960

Hong Kong, 31 December 2007

— II-58 —

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

MANAGEMENT DISCUSSION AND ANALYSIS

Investors should read the following discussion and analysis in conjunction with the audited financial statements of the Target Group, including notes thereto, as set forth in Appendix II “Financial Information of the Target Group” to this circular. The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”).

Overview

The Target Group is one of the leading manufacturers of air-conditioners and refrigerators in the PRC. The operation of the Target Group is divided into three segments: 1) air-conditioner manufacturing; 2) refrigerator manufacturing; and 3) white goods sales and marketing. As at the Latest Practicable Date, the Target Group is currently operating 4 production plants with an annual production capacity in 2006 of approximately 3 million air-conditioners and approximately 2 million refrigerators.

Air-conditioner manufacturing by the Target Group is primarily undertaken by Hisense Shandong and Hisense Zhejiang. Both Hisense Shandong and Hisense Zhejiang are engaged in the production and sale of air-conditioners.

Refrigerator manufacturing by the Target Group is carried out through Hisense Beijing and Hisense Nanjing. Both Hisense Beijing and Hisense Nanjing are principally engaged in the business of the manufacture and sales of refrigerators whereas Hisense Beijing has a wider business scope, including provision of raw materials and components, equipment, measuring meters, and the export of products and import of technology.

Hisense Marketing is mainly responsible for the sales and marketing of white goods produced by Hisense Shandong, Hisense Zhejiang, Hisense Beijing and Hisense Nanjing.

The Target Group has recently introduced Multi-DC Inverter air-conditioners and Vector Inverter refrigerators — in 2006 and the first half of 2007, respectively. The Directors expect that both Multi-DC Inverter air-conditioners and Vector Inverter refrigerators will become major revenue source of the Target Group.

— III-1 —

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Performance analysis for year ended 31 December 2006 compared to year ended 31 December 2005 and year ended 31 December 2005 compared to year ended 31 December 2004

The Target Group’s 2006 audited turnover amounted to approximately RMB4,452.55 million, representing an increase of approximately 7.54% over the prior year. 2005’s audited turnover amounted to approximately RMB4,140.33 million, representing an increase of approximately 48.63% over 2004’s audited turnover of approximately RMB2,785.75 million. The airconditioner manufacturing business accounted for approximately 78.57%, approximately 69.53% and approximately 59.55% of the total revenue of the Target Group in 2004, 2005 and 2006, respectively. Audited turnover from the air-conditioner business increased from approximately RMB2,188.64 million in 2004 to approximately RMB2,878.79 million in 2005 but decreased to approximately RMB2,651.35 million in 2006, representing an increase of approximately 31.53% in 2005 and a decrease of approximately 7.90% in 2006. The refrigerator business contributed to approximately 20.82%, approximately 28.00% and approximately 38.09% of the total revenue of the Target Group in 2004, 2005 and 2006, respectively. Audited turnover from the sale of refrigerator increased from approximately RMB580.03 million in 2004 to approximately RMB1,159.04 million in 2005 and further increased to RMB1,696.11 million in 2006, representing an increase of approximately 99.82% in 2005 and approximately 46.34% in 2006. The sale of other white goods products just took up approximately 0.61%, approximately 2.47% and approximately 2.36% of the total revenue of the Target Group in 2004, 2005 and 2006, respectively. Audited turnover from the sales of other white goods products has increased from approximately RMB17.08 million in 2004 to approximately RMB102.50 million in 2005 and further increased to approximately RMB105.09 million in 2006, representing an increase of approximately 500.11% in 2005 and an increase of approximately 2.53% in 2006. The turnover in 2005 has substantially increased compared to that of 2004 mainly due to the introduction of the Vector Inverter refrigerator and expanded PRC distribution channel coverage. The turnover growth remained stable in 2006 as a result of the Target Group’s policy to adjust its sales mix to high-end white goods products, which in turn slowed down the turnover growth. The refrigerator business has taken up an increasingly larger portion of the turnover of the Target Group, mainly due to the popularity of the newly introduced Vector Inverter refrigerator in the PRC.

Audited profit for the year were approximately RMB77.34 million, approximately RMB109.50 million and approximately RMB59.44 million, respectively, for the years ended 31 December 2004, 2005 and 2006 — representing an increase of approximately 41.58% in 2005 and a decrease of approximately 45.72% in 2006. Audited net profit margin fell from approximately 2.78% in 2004 to approximately 2.64% in 2005 and further decreased to approximately 1.33% in 2006. The increase in the audited profit in 2005 was mainly due to the increasing contribution of the Target Group’s turnover from high-end white goods products such as the Vector Inverter refrigerator and side-by-side door refrigerator. The net profit margin remained stable in 2005. The substantial decrease in the audited profit as well as the net profit margin in 2006 was

— III-2 —

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

primarily attributable to the substantial increase in the selling and distribution expenses to support the Target Group’s policy to adjust its product mix to high-end products. The Target Group has resourced extra advertising and marketing expenses for upgrading its product image.

Performance analysis for the six months ended 30 June 2007 compared to six months ended 30 June 2006

For the six months ended 30 June 2007, the Target Group has achieved an audited turnover of approximately RMB2,891.97 million, representing an increase of approximately 21.40% over the unaudited turnover in the corresponding period in 2006 which amounted to RMB2,382.13 million. The sale of air-conditioners represented approximately 58.76% and approximately 67.40% of the total revenue of the Target Group for the 6 months ended 30 June 2006 and 2007, respectively. The turnover from the air-conditioner business increased from approximately RMB1,399.72 million in 2006 (unaudited) to approximately RMB1,949.20 million in 2007 (audited), representing an increase of approximately 39.26%. The refrigerators business accounted for approximately 38.84% and approximately 31.47% of the total revenue of the Target Group for the 6 months ended 30 June 2006 and 2007, respectively. The turnover from the sale of refrigerators has decreased from approximately RMB925.19 million in 2006 (unaudited) to approximately RMB910.14 million in 2007 (audited), representing a decrease of approximately 1.63%. The sale of other white good products represented approximately 2.40% and 1.13% of the Target Group’s turnover for the 6 months ended 2006 and 2007, respectively. The turnover from the sale of other white good business fell from approximately RMB57.22 million in 2006 (unaudited) to approximately RMB32.63 million in 2007 (audited), representing a decrease of approximately 42.97%. The increase in the turnover of the Target Group for the six months ended 30 June 2007 was mainly as a result of a greater variety of products being offered by the Target Group to its customers and a wider coverage of its distribution channels in the PRC compared to the corresponding period in 2006. Regarding the air-conditioner business, it has experienced a higher turnover growth compared to the refrigerator business for the six months ended 30 June 2007 mainly attributable to the introduction of the Multi-DC Inverter air-conditioner in the first half of 2007.

The profit for the period was approximately RMB34.53 million and approximately RMB67.03 million, respectively, for the six months ended 30 June 2006 (unaudited) and 2007 (audited), representing an increase of approximately 94.12%. The net profit margin for the six months ended 30 June 2006 and 2007 were approximately 1.45% and 2.32%, respectively. The increase in the profit for the period and the increase in the net profit margin were primarily as a result of the improvement in operational efficiency and a tighter cost control over sales and distribution expenses adopted by the Target Group during 2007.

— III-3 —

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Liquidity and capital resources

The Target Group’s financial position is summarized below:

	As at	As at	As at	As at
	31 December	31 December	31 December	30 June
	2004	2005	2006	2007
	(audited)	(audited)	(audited)	(audited)
		(Unit: RMB’million, except ratios)
Current assets	1,006	1,608	1,354	2,664
Current liabilities	1,369	1,827	1,558	2,811
Current ratio	0.73	0.88	0.87	0.95
Bank borrowing	47	171	93	105

Net current assets

As at 30 June 2007, the Target Group had net current liabilities of approximately RMB147 million. The Target Group’s current assets were mainly comprised of trade and other receivables of approximately RMB1,783 million, inventories of approximately RMB838 million and cash and cash equivalents of approximately RMB43 million. The Target Group’s current liabilities were mainly comprised of trade and other payables of approximately RMB2,406 million. Current ratio has improved from approximately 0.73 in 2004 to approximately 0.88 in 2005 as a result of the business expansion in 2005 and tighter control being implemented by the Target Group over the inventory turnover and the account receivable turnover. Current ratio remained consistent in 2006 and further increased to approximately 0.95 as at 30 June 2007 as a result of the decrease in capital expenditure incurred by the Target Group for the period ended 30 June 2007.

Although the Target Group was in a net current liabilities position as at 30 June 2007, it would be able to satisfy its working capital needs and other capital requirements from cash flow from operations and cash on hand and it has the ability to finance these activities through the issuance of equity securities, long-term borrowings and the issuance of convertible and other debt securities.

Borrowing and banking facilities

The increase in the bank borrowing in 2005 was mainly for the construction of plants for Hisense Nanjing and Hisense Zhejiang during the year. The decrease in the bank borrowing in 2006 was mainly attributable to the loan repayment during the year. The slight increase in the bank borrowing for the six months ended 30 June 2007 was mainly for the daily operation of the Target Group.

— III-4 —

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

As at 30 June 2007, the Target Group has pledged property, plant and equipment of approximately RMB83 million and leasehold land of approximately RMB72 million to banks for bank loans granted to the Target Group.

Cash Flows

	Year	ended 31 December	ended 31 December	Year ended	30 June
	2004	2005	2006	2006	2007
	(audited)	(audited)	(audited)	(unaudited)	(audited)
Selected Cash Flow
Statement data		(Unit: RMB’million)
Net cash (used in)/from
operating activities	79	(104)	568	726	520
Net cash used in
investing activities	(84)	(564)	(457)	(267)	(378)
Net cash from/(used in)
financing activities	67	653	(165)	(458)	(126)
Net increase/(decrease)
in cash and
cash equivalents	62	(15)	(54)	1	16

Net cash (used in)/from operating activities

The Target Group has changed from net cash generated from operating activities of approximately RMB79 million for the year ended 31 December 2004 to net cash used in operating activities of approximately RMB104 million for the year ended 31 December 2005. The change was principally due to the substantial increase in trade and other receivables as a result of the business expansion of the Target Group. The net cash from operating activities has been improved to the amount of approximately RMB568 million for the year ended 31 December 2006. The change in 2006 was mainly as a result of a tighter control over the account receivable collection and the inventory turnover implemented by the Target Group as mentioned above.

The net cash from the operating activities were RMB726 million and RMB520 million for the six months ended 30 June 2006 and 2007 respectively. The decrease in the cash flow from the operating activities was as a result of maintaining a higher inventory level for meeting the strong expected sales demand in 2007.

Net cash from (used in) investing activities

The net cash used in investing activities of the Target Group were approximately RMB84 million, approximately RMB564 million and approximately RMB457 million for the year ended 31 December 2004, 2005 and 2006, respectively. The purchase of property, plant and

— III-5 —

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

equipment of approximately RMB165 million and the purchase of leasehold land of approximately RMB76 million for the construction of plant for Hisense Zhejiang and Hisense Nanjing which has partly resulted in the net cash used in investing activities of approximately RMB241 million for the year ended 31 December 2005. The Target Group has also advanced RMB252.4 million to Hisense Marketing, the intermediate holding company of the Target Group, in 2005. The net cash used in investing activities of the Target Group decreased slightly for the year ended 31 December 2006 was mainly due to relatively less capital investment in 2006. The capital investment of the Target Group was mainly utilized in purchasing the plant and machinery for Hisense Zhejiang and Hisense Nanjing.

The net cash used in investing activities of the Target Group was approximately RMB267 million and RMB378 million, respectively, for the six months ended 2006 and 2007. The increase in the net cash used in investing activities of the Target Group was mainly due to the advance of approximately RMB345 million to Hisense Group Co., the ultimate holding company of the Target Group.

Net cash used in financing activities

Net cash from financing activities of the Target Group has increased from approximately RMB67 million for the year ended 31 December 2004 to approximately RMB653 million for the year ended 31 December 2005. The increase in net cash from financing activities was mainly attributable to 1) the bank borrowing of approximately RMB171 million; 2) the loan of approximately RMB304 million from Hisense Group Co., the ultimate holding company; and 3) the injection of capital of approximately RMB140 million for the set up of Hisense Zhejiang and Hisense Nanjing. The Target Group changed to net cash used in financing activities of approximately RMB165 million for the year ended 31 December 2006. The change in 2006 was primarily attributable to the repayment of bank borrowing of approximately RMB171 million and the repayment of loan from Hisense Group Co. of approximately RMB87 million.

The net cash used in financing activities of the Target Group was approximately RMB458 million and approximately RMB126 million, respectively, as a result of further loan repayment to Hisense Group Co. by the Target Group of approximately RMB333 million and approximately RMB268 million for the six months ended 30 June 2006 and 2007.

— III-6 —

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Indebtedness

As at 30 June 2007, the capital commitments of the Target Group amounted to RMB27 million, which were contracted for the acquisition of property, plant and equipment. The Target Group did not have any significant contingent liabilities as at 30 June 2007. The summary of the bank borrowing of the Target Group is as follows:

Secured: Bank loans Unsecured: Bank loans on discounted note receivables Carrying amount repayable On demand or within one year More than one year but not exceeding two years More than two years but not exceeding five years _Less:_Amount due within one year shown under current liabilities Amount due after one year	As at 31 December As at 30 June 2004 2005 2006 2007 RMB’million RMB’million RMB’million RMB’million (audited) (audited) (audited) (audited) — 40 76 84 47 131 17 21 47 171 93 105 47 171 61 77 — — 10 10 — — 22 18 47 171 93 105 (47) (171) (61) (77) — — 32 28

As at 31 October 2007, the Target Group had outstanding bank loans of approximately RMB97,000,000, comprising secured bank loans of approximately RMB82,000,000 and bills discounted with recourse of approximately RMB15,000,000.

— III-7 —

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

As at 31 December 2005, 2006 and 30 June 2007, the bank loans of RMB40 million, RMB40 million and RMB50 million are fixed-rate borrowings which carried interest at 5.86%, 6.30% and 6.30% per annum, respectively.

As at 31 December 2004, 2005, 2006 and 30 June 2007, the bank loan on discounted note receivables was at zero interest rate.

GEARING

The gearing ratios of the Target Group, which were calculated based on the amount of total debt divided by the amount of total net assets attributable to shareholders, were approximately 43%, 49%, 23% and 23% as at 31 December 2004, 2005 and 2006 and as at 30 June 2007, respectively.

Market risks

Currency risk

As a majority of the transactions of the Target Group are in RMB, no significant currency risk is expected.

Interest rate risk

The Target Group’s exposure to interest rate risk relates to its interest-bearing bank loans.

EMPLOYEES AND REMUNERATION POLICIES

The total number of employees of Target Group as at 31 December 2004, 2005 and 2006 and as at 30 June 2007 was 5,326, 7,338, 6,477 and 6,794, respectively. The total amount of salaries and other allowances for the employees of Target Group during the three years ended 31 December 2004, 2005 and 2006 and the six months ended 30 June 2006 and 2007, was approximately RMB140 million, RMB172 million, RMB252 million, RMB124 million and RMB67 million, respectively.

For the three years ended 31 December 2004, 2005 and 2006 and the six months ended 30 June 2006 and 2007, the Target Group adopted a remuneration system whereby the salaries paid to the employees of Target Group were linked to employee position and performance and one-off bonuses were paid to certain employees if they achieved their respective performance targets. The Target Group conducted training courses for its employees during the three years ended 31 December 2004, 2005 and 2006 and the six months ended 30 June 2006 and 2007, which focused on such matters as technical skills and the use of new products and new technology.

— III-8 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AS AT 30 JUNE 2007

1. Introduction

The following is the unaudited pro forma statement of assets and liabilities of the Enlarged Group prepared in accordance with the Listing Rules for the purpose of illustrating the effect of the proposed acquisition of the Target Group (the “Acquisition”) by the Company and its subsidiaries (the “Kelon Group”) on the financial position of the Enlarged Group (the Target Group together with the Kelon Group referred to as the “Enlarged Group”) as if the Acquisition had been completed on 30 June 2007. As it is prepared for illustrative purposes only, and because of its nature, it may not give a true picture of the financial position of the Enlarged Group following the completion of the Acquisition.

The unaudited pro forma statement of assets and liabilities of the Enlarged Group is prepared based on the unaudited consolidated balance sheet of the Kelon Group as at 30 June 2007 extracted from the published interim report of the Kelon Group as of 30 June 2007 as set out on pages 3 to 4 in Appendix I “Financial Information of the Kelon Group” to the circular of the Company dated 31 December 2007 (the “Circular”) and the audited combined balance sheet of the Target Group as at 30 June 2007 extracted from accountants’ report of the Target Group as set out on pages 6 to 7 in Appendix II “Accountants’ Report of the Target Group” to the Circular, as if the Acquisition has been completed on 30 June 2007.

— IV-1 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

2. Unaudited Pro Forma Statement of Assets and Liabilities of the Enlarged Group

ASSETS Non-current assets Property, plant and equipment Investment properties Other intangible assets Payments for leasehold land held for own use under operating leases Interests in associates Deferred tax assets Current assets Inventories Trade and other receivables Taxation recoverable Pledged bank deposits Cash and cash equivalents Non-current assets held for sale Total assets	The Kelon Group as at 30 June 2007 RMB’000 (Unaudited) 1,415,813 37,200 123,478 343,437 77,972 25,007 2,022,907 1,131,798 1,695,099 103 30,797 230,647 3,088,444 49,767 5,161,118	The Target Group as at 30 June 2007 (Note 1) RMB’000 (Audited) 672,033 — 28,459 105,862 — — 806,354 837,935 1,782,533 — — 43,370 2,663,838 — 3,470,192	Pro forma adjustment (Notes 2 and 3) RMB’000 (Unaudited) — — — — — — — — (460,170) — — — (460,170) — (460,170)	Pro Forma Enlarged Group as at 30 June 2007 RMB’000 (Unaudited) 2,087,846 37,200 151,937 449,299 77,972 25,007
				2,829,261 1,969,733 3,017,462 103 30,797 274,017
				5,292,112
				49,767
				8,171,140

— IV-2 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

LIABILITIES Current liabilities Trade and other payables Trade deposits received Provisions Taxation payable Other liabilities Bank borrowings Non-current liabilities Bank borrowings Total liabilities Net current liabilities Total assets less current liabilities Total net assets/(liabilities) Capital and reserves attributable to equity holders of the parent Share capital Reserves Minority interests TOTAL EQUITY	The Kelon Group as at 30 June 2007 RMB’000 (Unaudited) 3,960,295 461,812 178,176 28,980 56,884 1,194,090 5,880,237 — 5,880,237 (2,791,793) (719,119) (719,119) 992,007 (1,920,275) (928,268) 209,149 (719,119)	The Target Group as at 30 June 2007 (Note 1) RMB’000 (Audited) 2,406,237 203,796 65,622 59,198 — 76,500 2,811,353 28,000 2,839,353 (147,515) 658,839 630,839 366,190 87,789 453,979 176,860 630,839	Pro forma adjustment (Notes 2 and 3) RMB’000 (Unaudited) (460,170) — — — — — (460,170) — (460,170) — — — (2,093) (2,093) — — —	Pro Forma Enlarged Group as at 30 June 2007 RMB’000 (Unaudited) 5,906,362 665,608 243,798 88,178 56,884 1,270,590 8,231,420 28,000 8,259,420 (2,939,308) (60,280) (88,280) 1,356,104 (1,830,393) (474,289) 386,009 (88,280)

— IV-3 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Notes to the Unaudited Pro Forma Statement of Assets and Liabilities

Notes:

1. This represents the combined assets and liabilities of the Target Group at 30 June 2007 which are to be acquired by the Company.

2. The Acquisition is considered as a business combination involving entities under common control because the Company and the Target Group are ultimately controlled by Hisense Group Co. both before and after the Acquisition, and that control is not transitory. Such business combination under common control is outside the scope of IFRS 3 “Business Combinations” issued by the IASB. In the absence of a standard under IFRSs in relation to the accounting for business combinations under common control, Accounting Guideline 5 “Merger Accounting for Common Control Combinations” issued by Hong Kong Institute of Certified Public Accountants, being pronouncements of standard-setting bodies other than the IASB that use a similar conceptual framework, is referred to in accounting for the Acquisition. Accordingly, the shareholders’ equity of the Target Group is aggregated with that of the Company rather than eliminated against the assets or liabilities of the Kelon Group. Pursuant to the Acquisition Agreement (as defined in this circular), the Company has conditionally agreed to acquire the Target Group at a total consideration of RMB2,541,400,000. The consideration will be satisfied in full by the allotment and issue of 364,097,421 shares of the Company at nominal value of RMB1 each, increasing the issued share capital of the Company by approximately RMB364,097,000 and decreasing the combined capital of the Target Group by RMB366,190,000 and increasing the reserves of the Enlarged Group by RMB2,093,000.

Hisense Group Co. exercises its control over the Kelon Group through Qingdao Hisense, the single largest shareholder of the Company who currently holds approximately 24.08% equity interest in the Company, and upon completion of the anticipated Acquisition will hold approximately 44.46% equity interest in the Company, is considered the ultimate holding company of the Kelon Group. Hisense Group Co. has control over the Kelon Group by virtue of Qingdao Hisense’s power to govern the financial and operating policies of the Kelon Group so as to obtain benefits from the activities of the Kelon Group through its power to cast majority votes at the meetings of the board of directors of the Company and its de facto control over the majority of the voting rights of the Company’s shareholders’ meetings.

1. The adjustment represents the elimination of the amounts due by the Kelon Group to the Target Group of approximately RMB447,989,000 and the amounts due by the Target Group to the Kelon Group of approximately RMB12,181,000 as at 30 June 2007.

— IV-4 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

B. COMFORT LETTER ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

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The Board of Directors

Hisense Kelon Electrical Holdings Company Limited

31 December 2007

Dear Sirs,

We report on the unaudited pro forma statement of assets and liabilities (the “Unaudited Pro Forma Financial Information”) of Hisense Kelon Electrical Holdings Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Kelon Group”), which has been prepared by the Directors of the Company for illustrative purposes only, to provide information about how the proposed acquisition of the Target Group (together with the Kelon Group referred to as the “Enlarged Group”) might have affected the assets and liabilities, as set out on pages 1 to 4 in Appendix IV “Unaudited Pro Forma Financial Information of the Enlarge Group” to the circular of the Company dated 31 December 2007 (the “Circular”). The basis of preparation of the pro forma statement of assets and liabilities is set out on pages 1 to 4 in Appendix IV “Unaudited Pro Forma Financial Information of the Enlarged Group” to the Circular.

Respective Responsibilities of the Directors of the Company and the Reporting Accountants

It is the responsibility solely of the Directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

— IV-5 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagement 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the Kelon Group’s unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the Directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly complied by the Directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Kelon Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgments and assumptions of the Directors of the Company, and because of its hypothetical nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Enlarged Group as at 30 June 2007 or any future dates.

Opinion

In our opinion:

• (a) the Unaudited Pro Forma Financial Information has been properly compiled by the Directors of the Company on the basis stated;

• (b) such basis is consistent with the accounting policies of the Kelon Group; and

• (c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully,

BDO McCabe Lo Limited

Certified Public Accountants

Chow Tak Sing, Peter

Practising Certificate Number P04659

Hong Kong, 31 December 2007

— IV-6 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

C. INDEBTEDNESS

At the close of business on 31 October 2007, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of the Circular, the Kelon Group had outstanding bank loans of approximately RMB1,053,910,000, comprising secured bank loans of approximately RMB575,787,000, bills discounted with recourse of approximately RMB128,950,000 and unsecured bank loans of approximately RMB349,173,000. The Target Group had outstanding bank and other loans of approximately RMB249,249,000, comprising secured bank loans of approximately RMB82,000,000, bills discounted with recourse of approximately RMB15,000,000, unsecured advance from the ultimate holding company of approximately RMB2,122,000 and unsecured advance from the intermediate holding company of approximately RMB150,127,000.

As at 31 October 2007, bank loans of the Kelon Group amounting to approximately RMB575,787,000 are secured by certain plant and machinery, land use right and bank deposits of the Kelon Group. Unsecured bank loans of the Kelon Group amounting to approximately RMB328,000,000 are guaranteed by Hisense Group Co. Bank loans of the Target Group amounting to approximately RMB82,000,000 are secured by certain plant and machinery and land use right of the Target Group.

Save as aforesaid, the Enlarged Group did not have, at the close of business on 31 October 2007, outstanding liabilities or any mortgages, charges, debentures, loan capital, bank overdrafts, loans, liabilities under acceptance or other similar indebtedness, hire purchase or finance lease obligations or any guarantees or other material contingent liabilities.

D. WORKING CAPITAL

The Directors are satisfied after due and careful enquiry that after taking into account the existing banking facilities available, financial support from the Company’s ultimate holding company and the existing cash and bank balances, the Enlarged Group has sufficient working capital for its present requirements, that is for at least the next 12 months from the date of publication of this circular, in the absence of unforeseeable circumstances.

— IV-7 —

IFRS 2007 PROFIT FORECASTS

APPENDIX V

In compliance with PRC laws and regulations and pursuant to the requirements of CSRC in respect of substantial acquisitions by PRC listed companies, the Company has published the PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts in the PRC. As required under the Listing Rules, the Company disclosed the IFRS 2007 Profit Forecasts in the Announcement. The Directors consider that the IFRS 2007 Profit Forecasts disclosed in the Announcement remain valid as at the Latest Practicable Date.

Set out below are the forecast figures, bases and assumptions, together with the letters from BDO McCabe Lo Limited.

The IFRS 2007 Profit Forecasts include the profit forecasts of the Kelon Group and the Target Group as well as the pro forma profit forecast of the Enlarged Group for the year ending 31 December 2007, prepared in accordance with IFRS.

A. PROFIT FORECASTS OF THE KELON GROUP AND THE TARGET GROUP

Forecast Figures

The Directors forecast that on the bases and assumptions set out below and in the absence of unforeseen circumstances, the profit attributable to equity holders of the Company for the year ending 31 December 2007 will be not less than RMB304.50 million (equivalent to approximately HK$319.02 million) and the profit attributable to equity holders of the Target Group for the year ending 31 December 2007 will be not less than RMB79.49 million (equivalent to approximately HK$83.28 million).

Bases and Assumptions

Pursuant to the Acquisition Agreement, the Company has conditionally agreed to acquire from Qingdao Hisense the Target Group which operates the White Good Business at a total consideration of RMB2,541,400,000 (equivalent to approximately HK$2,662,573,730). The consideration will be satisfied in full by the allotment and issue of 364,097,421 Consideration Shares by the Company at the issue price of RMB6.98 (equivalent to approximately HK$7.31). The Target Group includes the following:

• 55% of the equity interests in Hisense Beijing, which in turn holds 60% of the equity interests in Hisense Nanjing;

• 100% of equity interests in Hisense Shandong;

• 51% of the equity interests in Hisense Zhejiang; and

• Hisense Marketing Business.

— V-1 —

IFRS 2007 PROFIT FORECASTS

APPENDIX V

• (1) Profit forecast of the Kelon Group for the year ending 31 December 2007 has been prepared by the Directors based on the results shown in unaudited management accounts of the Kelon Group for the ten months ended 31 October 2007 and a forecast of the results for the remaining two months ending 31 December 2007.

• (2) Profit forecast of the Target Group for the year ending 31 December 2007 has been prepared by the Directors based on the results shown in the audited accounts of the Target Group for the six months ended 30 June 2007, the unaudited management accounts of the Company for the four months ended 31 October 2007 and a forecast of the results for the remaining two months ending 31 December 2007.

The profit forecasts of the Company and the Target Group are prepared for illustrative purposes only and because of their nature, they may not give a true picture of the results of the Company and the Target Group for any financial period.

The profit forecasts of the Company and the Target Group have been prepared on a basis consistent in all material respects with the accounting policies currently adopted by the Kelon Group, on the following principal assumptions:

• (1) the Acquisition had been completed on 1 January 2007;

• (2) there will be no material changes in existing government policies or political, legal (including changes in legislation, regulations or rules), regulatory environment or fiscal, economic or market conditions, or macro-economic measures in the PRC or any of the countries in which the Enlarged Group, carries on business;

• (3) there will not be any material changes in product pricing as well as cost and expense structure within the industry under which the Enlarged Group operates;

• (4) there will be no material changes in the bases or rates of taxation or duties in the PRC or any of the territories in which the Enlarged Group operates except as otherwise disclosed in the circular;

• (5) there will be no material changes in inflation rates, interest rates or foreign currency exchange rates from those currently prevailing; and

• (6) the operations and business of the Enlarged Group will not be severely interrupted by any unforeseeable factors or any unforeseeable reasons that are beyond the control of the Enlarged Group including but not limited to, the occurrence of natural disasters or catastrophes, epidemics or serious accidents.

— V-2 —

IFRS 2007 PROFIT FORECASTS

APPENDIX V

B. PRO FORMA PROFIT FORECAST OF THE ENLARGED GROUP

The Directors have prepared the pro forma profit forecast of the Enlarged Group in accordance with IFRS and in compliance with Rules 4.29 and 14.62 of the Listing Rules.

Pursuant to the Acquisition Agreement, the Company has conditionally agreed to acquire from Qingdao Hisense the Target Group which operates the White Good Business at a total consideration of RMB2,541,400,000 (equivalent to approximately HK$2,662,573,730). The consideration will be satisfied in full by the allotment and issue of 364,097,421 Consideration Shares by the Company at the issue price of RMB6.98 (equivalent to approximately HK$7.31).

The following is the pro forma profit forecast of the Enlarged Group assuming the Company will acquire:

• 55% of the equity interests in Hisense Beijing, which in turn holds 60% of the equity interests in Hisense Nanjing;

• 100% of equity interests in Hisense Shandong;

• 51% of the equity interests in Hisense Zhejiang; and

• Hisense Marketing Business.

The pro forma profit forecast of the Enlarged Group for the year ending 31 December 2007 is prepared assuming that the Acquisition had been completed on 1 January 2007 and based on the forecast profit attributable to equity holders of each of the Kelon Group and the Target Group for the year ending 31 December 2007 as set out under the section “Profit forecasts of the Kelon Group and the Target Group” to this appendix, with adjustments to reflect the effect of the Acquisition.

The pro forma profit forecast of the Enlarged Group for the year ending 31 December 2007 is prepared for illustrative purposes only based on the judgments and assumptions of the Directors, and because of its nature, it does not provide any assurance or indication that any event will take place in the future and may not give a true picture of the results of the Kelon Group, the Target Group or the Enlarged Group for any financial period.

— V-3 —

IFRS 2007 PROFIT FORECASTS

APPENDIX V

	The	The	Pro forma	Pro forma
	Kelon Group	Target Group	adjustments	profit forecast
	RMB’000	RMB’000	RMB’000	RMB’000
	(Note 1)	(Note 1 and 2)	(Note 2)
Forecast profit attributable
to equity holders for the
year ending 31 December 2007	304,497	79,486	—	383,983

Notes:

1. The forecast profit of the Enlarged Group for the year ending 31 December 2007 is based on the profit forecasts of the Kelon Group and the Target Group for the year ending 31 December 2007, details of which have been set out under the section “Profit forecasts of the Kelon Group and the Target Group” to this appendix.

2. The respective percentages of Hisense Beijing and Hisense Zhejiang is still 55% and 51% respectively and the minority interests have already been excluded in the forecast profit attributable to equity holders of the Target Group for the year ending 31 December 2007. As such, exclusion of the minority interests would not be reflected as pro forma adjustments.

3. The directors of the Company are not aware of any significant effect of the transaction on the Target Group or the Enlarged Group that would occur as if the Acquisition was completed on 1 January 2007 and as if such transaction had been undertaken at the commencement of the period being reported on.

— V-4 —

IFRS 2007 PROFIT FORECASTS

APPENDIX V

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31 December 2007

The Board of Directors

Hisense Kelon Electrical Holdings Company Limited

Dear Sirs,

We have reviewed the accounting policies and calculations made in arriving at the forecast profits attributable to the equity holders of each of Hisense Kelon Electrical Holdings Company Limited (the “Company”) and its subsidiaries (collectively referred as the “Kelon Group”), and the Target Group (defined as below) for the year ending 31 December 2007 (the “2007 Forecasts”), for which the Directors of the Company (the “Directors”) are solely responsible, set out on pages 1 to 2 in Appendix V of the circular dated 31 December 2007 issued by the Company in connection with the proposed acquisition of the Target Group (the “Circular”).

The Target Group comprises the following:

• (a) 100% of the air-conditioning business and related net assets of 青島海信空調有限公 司 (Qingdao Hisense Air-conditioning Company Limited) (“Qingdao Hisense”). This business is referred to as the “Qingdao Hisense Air-conditioning Business” and was subsequently transferred to a newly established wholly owned subsidiary of Qingdao Hisense 海信（山東）空調有限公司 (Hisense (Shandong) Air-conditioning Company Limited) (“Hisense Shandong”) on 27 November 2007;

• (b) 51% of the equity interests of 海信浙江空調有限公司 (Hisense Zhejiang Airconditioning Company Limited) (“Hisense Zhejiang”);

• (c) 55% of the equity interests of 海信（北京）電器有限公司 (Hisense (Beijing) Electric Company Limited) (“Hisense Fridge”), which in turn holds 60% of the equity interests of 海信（南京）電器有限公司 (Hisense (Nanjing) Electric Company Limited) (“Hisense Nanjing”);

• (d) 100% of the business and the related net assets of 青島海信營銷有限公司 (Qingdao Hisense Marketing Company Limited) (“Hisense Marketing”) that are related to the sale and marketing of air-conditioners and refrigerators mainly produced by Qingdao Hisense Air-conditioning Business, Hisense Zhejiang, Hisense Beijing and Hisense Nanjing (the “Hisense Marketing Business”); and

• (e) 100% of the equity interests of Hisense Shandong.

— V-5 —

IFRS 2007 PROFIT FORECASTS

APPENDIX V

The 2007 Forecasts have been prepared by the Directors in accordance with the accounting policies consistent in all material respects with those adopted in the preparation of the financial statements of the Company for the year ended 31 December 2006 and in accordance with the International Financial Reporting Standards (“IFRSs”), issued by the International Accounting Standards Board.

We conducted our work in accordance with the Auditing Guideline 3.341 on “Accountants’ Report On Profit Forecasts” issued by the Hong Kong Institute of Certified Public Accountants.

We have not conducted an audit of the results for the year ending on 31 December 2007.

The forecast of the Kelon Group for the year ending 31 December 2007 has been prepared by the Directors based on the results shown in unaudited management accounts of the Kelon Group for the ten months ended 31 October 2007 and a forecast of the results of the Kelon Group for the remaining two months ending 31 December 2007.

The forecast for the Target Group for the year ending 31 December 2007 has been prepared by the Directors based on the audited financial statements of the Target Group for the six months ended 30 June 2007, unaudited management accounts of the Target Group for the four months ended 31 October 2007 and a forecast of the results of the Target Group for the remaining two months ending 31 December 2007.

In our opinion, so far as the accounting policies and calculations are concerned, the 2007 Forecasts have been properly compiled in accordance with the assumptions made by the Directors as set out in Appendix V of the Circular and are presented on a basis consistent in all material respects with the accounting policies adopted by the Kelon Group and the Target Group in their respective annual audited financial statements for the year ended 31 December 2006 in accordance with IFRSs.

Yours faithfully,

BDO McCabe Lo Limited

Certified Public Accountants Chow Tak Sing, Peter Practising Certificate Number P04659

Hong Kong, 31 December 2007

— V-6 —

IFRS 2007 PROFIT FORECASTS

APPENDIX V

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31 December 2007

The Board of Directors

Hisense Kelon Electrical Holdings Company Limited

Dear Sirs,

We report on the unaudited pro forma profit forecast of the Enlarged Group (as defined below) set out in Appendix V (the “IFRS 2007 Pro Forma Profit Forecast”) to the circular of the Company dated 31 December 2007 (the “Circular”) in connection with the proposed acquisition (the “Acquisition”) of the Target Group (as defined below). The basis of preparation of the IFRS 2007 Pro Forma Profit Forecast is set out on pages 3 to 4 in Appendix V under the section “Pro forma profit forecast of the Enlarged Group” to the Circular.

Hisense Kelon Electrical Holdings Company Limited (the “Company”) and its subsidiaries are hereinafter collectively referred to as the “Kelon Group”. The Target Group together with the Kelon Group are referred to as the “Enlarged Group”.

The Target Group comprises of the following:

• (a) 100% of the air-conditioning business and related net assets of 青島海信空調有限公 司 (Qingdao Hisense Air-conditioning Company Limited) (“Qingdao Hisense”). This business is referred to as the “Qingdao Hisense Air-conditioning Business” and was subsequently transferred to a newly established wholly owned subsidiary of Qingdao Hisense 海信（山東）空調有限公司 (Hisense (Shandong) Air-conditioning Company Limited) (“Hisense Shandong”) on 27 November 2007;

• (b) 51% of the equity interests of 海信浙江空調有限公司 (Hisense Zhejiang Airconditioning Company Limited) (“Hisense Zhejiang”);

• (c) 55% of the equity interests of 海信（北京）電器有限公司 (Hisense (Beijing) Electric Company Limited) (“Hisense Beijing”), which in turn holds 60% of the equity interests of 海信（南京）電器有限公司 (Hisense (Nanjing) Electric Company Limited) (“Hisense Nanjing”);

— V-7 —

IFRS 2007 PROFIT FORECASTS

APPENDIX V

• (d) 100% of the business and the related net assets of 青島海信營銷有限公司 (Qingdao Hisense Marketing Company Limited) (“Hisense Marketing”) that are related to the sale and marketing of air-conditioners and refrigerators mainly produced by Qingdao Hisense Air-conditioning Business, Hisense Zhejiang, Hisense Beijing and Hisense Nanjing (the “Hisense Marketing Business”); and

• (e) 100% of the equity interests of Hisense Shandong.

The IFRS 2007 Pro Forma Profit Forecast has been prepared by the directors of the Company (the “Directors”) for illustrative purposes only, to provide information about how the Acquisition might have affected the profit forecast presented, for inclusion in Appendix V to the Circular.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS OF THE COMPANY AND REPORTING ACCOUNTANTS

It is the responsibility solely of the Directors to prepare the IFRS 2007 Pro Forma Profit Forecast in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the IFRS 2007 Pro Forma Profit Forecast and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the IFRS 2007 Pro Forma Profit Forecast beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

BASIS OF OPINION

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the IFRS 2007 Pro Forma Profit Forecast with source documents, considering the evidence supporting the adjustments and discussing the IFRS 2007 Pro Forma Profit Forecast with the Directors. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that IFRS 2007 Pro Forma Profit Forecast has been properly compiled by the Directors on the basis stated, that such basis is consistent with the accounting policies of the Kelon Group and that the adjustments are appropriate for the purposes of the IFRS 2007 Pro Forma Profit Forecast as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

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IFRS 2007 PROFIT FORECASTS

APPENDIX V

The IFRS 2007 Pro Forma Profit Forecast is for illustrative purposes only based on the judgments and assumptions of the Directors, and because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the results of the Enlarged Group for the year ending 31 December 2007 or any future period.

OPINION

In our opinion:

• (a) the IFRS 2007 Pro Forma Profit Forecast has been properly compiled by the Directors on the basis stated;

• (b) such basis is consistent with the accounting policies of the Kelon Group; and

• (c) the adjustments are appropriate for the purposes of the IFRS 2007 Pro Forma Profit Forecast as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Yours faithfully,

BDO McCabe Lo Limited

Certified Public Accountants

Chow Tak Sing, Peter

Practising Certificate Number P04659

Hong Kong 31 December 2007

— V-9 —

IFRS 2008 PROFIT FORECASTS

APPENDIX VI

In compliance with PRC laws and regulations and pursuant to the requirements of CSRC in respect of substantial acquisitions by PRC listed companies, the Company has published the PRC Target Group Profit Forecasts and the PRC Enlarged Group Profit Forecasts in the PRC. As required under the Listing Rules, the Company disclosed the IFRS 2008 Profit Forecasts in the Announcement. The Directors consider that the IFRS 2008 Profit Forecasts disclosed in the Announcement remain valid as at the Latest Practicable Date.

Set out below are the forecast figures, bases and assumptions, together with the letter from BDO McCabe Lo Limited.

Forecast Figures

The Directors forecast that on the bases and assumptions set out below and in the absence of unforeseen circumstances, the profit attributable to equity holders of the Target Group for the year ending 31 December 2008 will be not less than RMB106.44 million (equivalent to approximately HK$111.52 million) and the profit attributable to equity holders of the Enlarged Group for the year ending 31 December 2008 will be not less than RMB236.50 million (equivalent to approximately HK$247.78 million).

BASES AND ASSUMPTIONS

Pursuant to the Acquisition Agreement, the Company has conditionally agreed to acquire from Qingdao Hisense the Target Group which operates the White Good Business at a total consideration of RMB2,541,400,000 (equivalent to approximately HK$2,662,573,730). The consideration will be satisfied in full by the allotment and issue of 364,097,421 Consideration Shares by the Company at the issue price of RMB6.98 (equivalent to approximately HK$7.31). The Target Group includes the following:

• 55% of the equity interests in Hisense Beijing, which in turn holds 60% of the equity interests in Hisense Nanjing;

• 100% of equity interests in Hisense Shandong;

• 51% of the equity interests in Hisense Zhejiang; and

• Hisense Marketing Business.

The IFRS 2008 Profit Forecasts include the following:

• (1) Profit forecast of the Target Group for the year ending 31 December 2008, which has been prepared by the Directors based on a forecast of the results for the year ending 31 December 2008; and

— VI-1 —

IFRS 2008 PROFIT FORECASTS

APPENDIX VI

• (2) Profit forecast of the Enlarged Group for the year ending 31 December 2008, which has been prepared by the Directors based on a forecast of the results for the year ending 31 December 2008.

The IFRS 2008 Profit Forecasts are prepared for illustrative purposes only based on the judgments and assumptions of the Directors, and because of its nature, does not provide any assurance or indication that any event will take place in the future and may not give a true picture of the results of the Target Group and the Enlarged Group for the year ending 31 December 2008.

The IFRS 2008 Profit Forecasts have been prepared on a basis consistent in all material respects with the accounting policies currently adopted by the Kelon Group, on the following principal assumptions:

• (1) the Acquisition had been completed on 1 January 2008;

• (2) there will be no material changes in existing government policies or political, legal (including changes in legislation, regulations or rules), regulatory environment or fiscal, economic or market conditions, or macro-economic measures in the PRC or any of the countries in which the Target Group carries on business;

• (3) there will not be any material changes in product pricing as well as cost and expense structure within the industry under which the Enlarged Group operates;

• (4) there will be no material changes in the bases or rates of taxation or duties in the PRC or any of the territories in which the Enlarged Group operates except as otherwise disclosed in the circular;

• (5) there will be no material changes in inflation rates, interest rates or foreign currency exchange rates from those currently prevailing;

• (6) the operations and business of the Enlarged Group will not be severely interrupted by any unforeseeable factors or any unforeseeable reasons that are beyond the control of the Enlarged Group, including but not limited to, the occurrence of natural disasters or catastrophes, epidemics or serious accidents.

— VI-2 —

IFRS 2008 PROFIT FORECASTS

APPENDIX VI

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==> picture [140 x 60] intentionally omitted <==

31 December 2007

The Board of Directors

Hisense Kelon Electrical Holdings Company Limited

Dear Sirs,

We have reviewed the accounting policies adopted and calculations made in arriving at the forecast profits attributable to each of the equity holders of the Target Group (defined as below) and the Enlarged Group (defined as below) for the year ending 31 December 2008 (the “IFRS 2008 Forecasts”), for which the Directors of the Company (the “Directors”) are solely responsible, set out pages 1 to 2 in Appendix VI of the circular dated 31 December 2007 issued by the Company in connection with the proposed acquisition of the Target Group (the “Circular”).

Hisense Kelon Electrical Holdings Company Limited (the “Company”) and its subsidiaries are hereinafter collectively referred to as the “Kelon Group”. The Target Group together with the Kelon Group are referred to as the “Enlarged Group”.

The Target Group comprises the following:

• (a) 100% of the air-conditioning business and related net assets of 青島海信空調有限公 司 (Qingdao Hisense Air-conditioning Company Limited) (“Qingdao Hisense”). This business is referred to as the “Qingdao Hisense Air-conditioning Business” and was subsequently transferred to a newly established wholly owned subsidiary of Qingdao Hisense 海信（山東）空調有限公司 (Hisense (Shandong) Air-conditioning Company Limited) (“Hisense Shandong”) on 27 November 2007;

• (b) 51% of the equity interests of 海信浙江空調有限公司 (Hisense Zhejiang Airconditioning Company Limited) (“Hisense Zhejiang”);

• (c) 55% of the equity interests of 海信（北京）電器有限公司 (Hisense (Beijing) Electric Company Limited) (“Hisense Beijing”), which in turn holds 60% of the equity interests of 海信（南京）電器有限公司 (Hisense (Nanjing) Electric Company Limited) (“Hisense Nanjing”);

— VI-3 —

IFRS 2008 PROFIT FORECASTS

APPENDIX VI

• (d) 100% of the business and the related net assets of 青島海信營銷有限公司 (Qingdao Hisense Marketing Company Limited) (“Hisense Marketing”) that are related to the sale and marketing of air-conditioners and refrigerators mainly produced by Qingdao Hisense Air-conditioning Business, Hisense Zhejiang, Hisense Beijing and Hisense Nanjing (the “Hisense Marketing Business”); and

• (e) 100% of the equity interests of Hisense Shandong.

The IFRS 2008 Forecasts have been prepared by the Directors in accordance with the accounting policies consistent in all material respects with those adopted in the preparation of the financial statements of the Company for the year ended 31 December 2006 and in accordance with the International Financial Reporting Standards (“IFRSs”), issued by the International Accounting Standards Board.

We conducted our work in accordance with the Auditing Guideline 3.341 on “Accountants’ Report on Profit Forecasts” issued by the Hong Kong Institute of Certified Public Accountants.

We have not conducted an audit of the results for the year ending on 31 December 2008.

The forecast for the Target Group for the year ending 31 December 2008 has been prepared by the Directors based on the forecast results of the Target Group for the year ending 31 December 2008.

The forecast for the Enlarged Group for the year ending 31 December 2008 has been prepared by the Directors based on the forecast results of the Kelon Group and the Target Group for the year ending 31 December 2008.

In our opinion, so far as the accounting policies and calculations are concerned, the IFRS 2008 Forecasts have been properly compiled in accordance with the assumptions made by the Directors as set out in Appendix VI of the Circular and are presented on a basis consistent in all material respects with the accounting policies adopted by the Kelon Group and the Target Group in their respective annual audited financial statements for the year ended 31 December 2006 in accordance with IFRSs.

Yours faithfully,

BDO McCabe Lo Limited

Certified Public Accountants

Chow Tak Sing, Peter

Practising Certificate Number P04659

Hong Kong, 31 December 2007

— VI-4 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

The following is the text of a letter, summary of value and valuation certificates, prepared for the purpose of incorporation in this circular received from Sallmanns (Far East) Limited, an independent valuer, in connection with its valuation as at 31 October 2007 of the property interests of the Enlarged Group.

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/

==> picture [38 x 53] intentionally omitted <==

31 December 2007

The Board of Directors Hisense Kelon Electrical Holdings Co., Ltd. No. 8 Ronggang Road Ronggui Street Shunde District Foshan City Guangdong Province The People’s Republic of China

Dear Sirs,

In accordance with your instructions to value the properties in which Hisense Kelon Electrical Holdings Co., Ltd. (the “Company”) and its subsidiaries (hereinafter together referred to as the “Group”) have interests and the property interests to be acquired by the Company held by Hisense (Shandong) Air-conditioning Company Limited, Hisense Zhejiang Air-conditioning Company Limited, Hisense (Beijing) Electric Company Limited and its subsidiary Hisense (Nanjing) Electric Company Limited (these 4 companies are together defined as the “Target Group”) and the property interest rented by Qingdao Hisense Marketing Co., Ltd. in the People’s Republic of China (the “PRC”), we confirm that we have carried out inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the capital value of the property interests as at 31 October 2007 (the “date of valuation”). The Group and the Target Group are together defined as the “Enlarged Group”.

Our valuations of the property interests represent the market value which we would define as intended to mean “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”.

Our valuations have been made on the assumption that the seller sells the properties on the open market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement, which could serve to affect the value of the properties.

— VII-1 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

No allowance has been made in our report for any charges, mortgages or amounts owing on any of the properties valued nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions and outgoings of an onerous nature, which could affect their values.

We have valued the property interests of property Nos. 12 to 19, 21 and 26 in Group I, property Nos. 31 and 35 in Group II, property Nos. 36 to 37 in Group III and property No. 38 in Group IV by the direct comparison approach assuming sale of the property interests in their existing state with the benefit of immediate vacant possession and by making reference to comparable sale transactions as available in the relevant market.

Where, due to the nature of the buildings and structures of the property Nos. 1 to 11, 20 and 22 to 29 in Group I and Group II (except for property Nos. 31 and 35) in the PRC, there are no market sales comparables readily available, the property interests have been valued on the basis of their depreciated replacement cost.

Depreciated replacement cost is defined as “the current cost of replacement (reproduction) of a property less deduction for physical deterioration and all relevant forms of obsolescence and optimization”. It is based on an estimate of the market value for the existing use of the land, plus the current cost of replacement (reproduction) of the improvements less deduction for physical deterioration and all relevant forms of obsolescence and optimization. The depreciated replacement costs of the property interests are subject to adequate potential profitability of the concerned business.

In valuing the property interest in Group V, which is currently under development, we have assumed that it will be developed and completed in accordance with the Group’s latest development proposals provided to us. In arriving at our opinion of value, we have taken into account the construction costs and professional fees relevant to the stage of construction as at the date of valuation and the remainder of the costs and fees to be expended to complete the developments.

We have attributed no commercial value to the property interests in Groups VI and VII, which are leased by the Target Group and the Group in the PRC, due either to the short-term nature of the leases or the prohibition against assignment or sub-letting or otherwise due to the lack of substantial profit rents.

In valuing the property interests, we have complied with all the requirements contained in Chapter 5 and Practice Note 12 of the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited; the RICS Appraisal and Valuation Standards (5th Edition May 2003) published by the Royal Institution of Chartered Surveyors and the HKIS Valuation Standard on Properties (1st Edition January 2005) published by the Hong Kong Institute of Surveyors.

We have relied to a very considerable extent on the information given by the Enlarged Group and have accepted advice given to us on such matters as tenures, planning approvals, statutory notices, easements, particulars of occupancy, lettings, and all other relevant matters.

— VII-2 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

We have been shown copies of various title documents including State-owned Land Use Rights Certificates, Real Estate Title Certificates, Building Ownership Certificates and official plans relating to the properties and have made relevant enquiries. Where possible, we have examined the original documents to verify the existing titles to the property interests in the PRC and any material encumbrance that might be attached to the property interests or any lease amendment. We have relied considerably on the advice given by the Company’s PRC legal advisers — Zhongyin Law Offices as at the date of 28 December 2007, concerning the validity of titles to the property interests.

We have not carried out detailed site measurements to verify the correctness of the site areas in respect of the properties but have assumed that the site areas shown on the documents and official site plans handed to us are correct. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations. No on-site measurement has been taken.

We have inspected the exterior and, where possible, the interior of the properties unless we have been otherwise instructed. However, we have not carried out investigations on site to determine the suitability of the ground conditions and the services etc. for any development thereon. Our valuations have been prepared on the assumption that these aspects are satisfactory. Moreover, no structural survey has been made, but in the course of our inspection, we did not note any serious defects. We are not, however, able to report whether the properties are free of rot, infestation or any other structural defects. No tests were carried out on any of the services.

We have had no reason to doubt the truth and accuracy of the information provided to us by the Group and the Target Group. We have also sought confirmation from the Group and the Target Group that no material factors have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view, and we have no reason to suspect that any material information has been withheld.

Unless otherwise stated, all monetary sums stated in this report are in Renminbi (RMB).

Our valuations are summarized below and the valuation certificates are attached.

Yours faithfully,

for and on behalf of Sallmanns (Far East) Limited Paul L. Brown B.Sc. FRICS FHKIS

Director

Note: Paul L. Brown is a Chartered Surveyor who has 24 years’ experience in the valuation of properties in the PRC and 27 years of property valuation experience in Hong Kong, the United Kingdom and the AsiaPacific region.

— VII-3 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

SUMMARY OF VALUES

Group I — Property interests held and occupied by the Group in the PRC

				Capital value
			Interest	attributable
		Capital value	attributable	to the Enlarged
		in existing state	to the	Group
		as at 31	Enlarged	as at 31
No.	Property	October 2007	Group	October 2007
		RMB		RMB
1.	A parcel of land, various buildings	65,268,000	60%	39,161,000
	and structures
	No. 1 Rongqi Dadaodong Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
2.	2 parcels of land, various buildings	38,470,000	100%	38,470,000
	and structures
	Nos. 6 and 27 Rongqi Dadaodong Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
3.	3 parcels of land, various buildings	169,830,000	100%	169,830,000
	and structures
	Nos. 8, 11 and 13 Ronggang Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
4.	2 parcels of land, various buildings	29,189,000	100%	29,189,000
	and structures
	Nos. 120 and 129 Ronggui Dadaobei Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC

— VII-4 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

				Capital value
			Interest	attributable
		Capital value	attributable	to the Enlarged
		in existing state	to the	Group
		as at 31	Enlarged	as at 31
No.	Property	October 2007	Group	October 2007
		RMB		RMB
5.	2 parcels of land, 3 buildings and	12,035,000	100%	12,035,000
	various structures
	Nos. 1, 2 and 6 of Huanxin Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
6.	5 parcels of land, various buildings	127,070,000	60%	76,242,000
	and structures located at
	the northern side of Rongqi Bridge
	Guangzhu Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
7.	2 parcels of land, various buildings	39,651,000	100%	39,651,000
	and structures located at
	the northern side of Rongqi Bridge
	Guangzhu Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
8.	3 parcels of land and various buildings	184,778,000	100%	184,778,000
	Nos. 29 and 46
	Wenfeng Bei Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC

— VII-5 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

				Capital value
			Interest	attributable
		Capital value	attributable	to the Enlarged
		in existing state	to the	Group
		as at 31	Enlarged	as at 31
No.	Property	October 2007	Group	October 2007
		RMB		RMB
9.	A parcel of land, various buildings	23,683,000	100%	23,683,000
	and structures
	No. 71 Zhenhua Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
10.	A parcel of land, various buildings	25,309,000	100%	25,309,000
	and structures
	Nos. 22 and 24 Rongxin Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
11.	A parcel of land, various buildings	31,560,000	100%	31,560,000
	and structures
	No. 2 Fengye Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
12.	A parcel of land and a building	9,734,000	100%	9,734,000
	located at Xihuan Street
	Ronggui Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
13.	82 residential units and 6 retail	10,128,000	100%	10,128,000
	shops of Meijing Mansion
	Rongqi Zhong Road
	Ronggui Town
	Shunde City
	Guangdong Province
	The PRC

— VII-6 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

				Capital value
			Interest	attributable
		Capital value	attributable	to the Enlarged
		in existing state	to the	Group
		as at 31	Enlarged	as at 31
No.	Property	October 2007	Group	October 2007
		RMB		RMB
14.	6 car ports of Kangfu Garden	2,804,000	100%	2,804,000
	Xinghua Road
	Ronggui Town
	Shunde City
	Guangdong Province
	The PRC
15.	Levels 1 and 2 of a 7-storey building	3,652,000	100%	3,652,000
	No. 32-1 Jinwu Road
	Jinshui District
	Zhengzhou City
	Henan Province
	The PRC
16.	Unit Nos. 1101 and 1201 of	4,100,000	100%	4,100,000
	Kaiyuan Mansion
	Huoju Road
	Beilin Technical Industry Garden
	Xi’an City
	Shaanxi Province
	The PRC
17.	An office unit of a 7-storey building	No commercial	100%	No commercial
	No. 34-1 Yaowang Miao Road	value		value
	Shenhe District
	Shenyang City
	Liaoning Province
	The PRC
18.	Unit Nos. 605 and 606 of the	No commercial	100%	No commercial
	northern part of Yuetan Mansion	value		value
	Xicheng District
	Beijing
	The PRC

— VII-7 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

				Capital value
			Interest	attributable
		Capital value	attributable	to the Enlarged
		in existing state	to the	Group
		as at 31	Enlarged	as at 31
No.	Property	October 2007	Group	October 2007
		RMB		RMB
19.	Unit No. 201 of the North	2,129,000	100%	2,129,000
	Building of Binnan Garden
	Huaizhong Zhong Road
	Shijia Zhuang City
	Hebei Province
	The PRC
20.	A parcel of land, various buildings	76,383,000	78.79%	60,182,000
	and structures
	No. 9 Fushengli
	Zhanqian District
	Yingkou City
	Liaoning Province
	The PRC
21.	A residential unit	No commercial	100%	No commercial
	located at Xinhong Nan Road	value		value
	Chengdu City
	Sichuan Province
	The PRC
22.	A parcel of land, various buildings	No commercial	70%	No commercial
	and structures located at the southern	value		value
	side of Songcheng Road
	Development Zone
	Kaifeng City
	Henan Province
	The PRC
23.	A parcel of land, various buildings	No commercial	100%	No commercial
	and structures located at	value		value
	Sifangyuan
	Suiyang District
	Shangqiu City
	Henan Province
	The PRC

— VII-8 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

				Capital value
			Interest	attributable
		Capital value	attributable	to the Enlarged
		in existing state	to the	Group
		as at 31	Enlarged	as at 31
No.	Property	October 2007	Group	October 2007
		RMB		RMB
24.	A parcel of land, various buildings and	No commercial	100%	No commercial
	structures located at the southern side of	value		value
	Nanjing Road and the western side
	of Kaixuan Road
	Shangqiu City
	Henan Province
	The PRC
25.	A parcel of land, various buildings and	20,981,000	80%	16,785,000
	structures located at Yananbei Road
	Development Zone
	Wuhu City
	Anhui Province
	The PRC
26.	2 residential units of No. 20 Building	724,000	80%	579,000
	of Yuanding Garden
	Xinwu District
	Wuhu City
	Anhui Province
	The PRC
27.	A parcel of land, various buildings	43,687,000	60%	26,212,000
	and structures
	No. 67 Keji 2nd Road
	Hi-Tech Development Zone
	Xi’an City
	Shaanxi Province
	The PRC
28.	A parcel of land, various buildings and	460,450,000	100%	460,450,000
	strutures
	Nos. 9 and 19 Hongyang Road
	Yangzhou City
	Jiangsu Province
	The PRC
29.	A parcel of land, various buildings	No commercial	100%	No commercial
	and structures	value		value
	No. 46 Shijinggou Road
	Zhuqueshan Economy
	Development Zone
	Fengman District
	Jilin City
	Jilin Province
	The PRC
	Sub-total: 1,381,615,000			1,266,663,000

— VII-9 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

Group II — Property interests held and occupied by the Target Group in the PRC

					Capital value
				Interest	attributable
			Capital value	attributable	to the Enlarged
			in existing state	to the	Group
			as at 31	Enlarged	as at 31
No.	Property		October 2007	Group	October 2007
			RMB		RMB
30.	A parcel of land, various buildings		226,553,000	100%	226,553,000
	and structures located at Nancun Town
	Pingdu City
	Shandong Province
	The PRC
31.	5 residential units		3,580,000	55%	1,969,000
	Nos. 38-41 Xinghuananli
	Daxing District
	Beijing
	The PRC
32.	A parcel of land, various buildings		110,880,000	33%	36,590,000
	and structures
	No. 19 Hengfei Road
	Xingang Development Zone
	Nanjing City
	Jiangsu Province
	The PRC
33.	A parcel of land and various buildings		64,467,000	51%	32,878,000
	located at the northern side of
	Zhongyang Dadao Road
	Economic Development Zone
	Changxing County
	Zhejiang Province
	The PRC
34.	A parcel of land and various buildings		26,889,000	51%	13,713,000
	located at Baixi Village
	Zhicheng Town
	Changxing County
	Zhejiang Province
	The PRC
35.	A parcel of land and 9 leased buildings		32,782,000	55%	18,030,000
	No. 36 Qingyuan Road
	Daxing District
	Beijing
	The PRC
		Sub-total:	465,151,000		329,733,000

— VII-10 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

Group III — Property interests held by the Group for future development in the PRC

				Capital value
			Interest	attributable
		Capital value	attributable to the Enlarged
	in	existing state	to the	Group
		as at 31	Enlarged	as at 31
No.	Property	October 2007	Group	October 2007
		RMB		RMB
36.	A parcel of land located at the eastern	8,427,000	100%	8,427,000
	side of Waihuan Road
	Shunde District
	Foshan City
	Guangdong Province
	The PRC
37.	A parcel of land located at	47,984,000	100%	47,984,000
	Shuangqiao Road
	Chenghua District
	Chengdu City
	Sichuan Province
	The PRC
	Sub-total:	56,411,000		56,411,000

Group IV — Property interest held by the Target Group for future development in the PRC

				Capital value
			Interest	attributable
		Capital value	attributable to the Enlarged
		in existing state	to the	Group
		as at 31	Enlarged	as at 31
No.	Property	October 2007	Group	October 2007
		RMB		RMB
38.	2 parcels of land located at	21,558,000	51%	10,995,000
	Baixi Village
	Zhicheng Town
	Changxing County
	Zhejiang Province
	The PRC

Sub-total: 21,558,000

10,995,000

— VII-11 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

Group V — Property interest held by the Group under development in the PRC

					Capital value
				Interest	attributable
			Capital value	attributable	to the Enlarged
			in existing state	to the	Group
			as at 31	Enlarged	as at 31
No.	Property		October 2007	Group	October 2007
			RMB		RMB
39.	A parcel of land and		No commercial	100%	No commercial
	3 industrial buildings		value		value
	No. 18 Xingguang Zhong Road
	Longquan District
	Chengdu	City
	Sichuan Province
	The PRC
		Sub-total:	Nil		Nil
Group VI — Property interest rented and occupied by the				Group in the PRC
					Capital value
				Interest	attributable
			Capital value	attributable	to the Enlarged
			in existing state	to the	Group
			as at 31	Enlarged	as at 31
No.	Property		October 2007	Group	October 2007
			RMB		RMB
40.	24 office	units in various cities	No commercial	100%	No commercial
	in the PRC		value		value
		Sub-total:	Nil		Nil
**Group VII — **		Property interest rented and	occupied by Qingdao Hisense		Marketing Co.,
		Ltd. and to be acquired by the Group in the		PRC
					Capital value
				Interest	attributable
			Capital value	attributable	to the Enlarged
			in existing state	to the	Group
			as at 31	Enlarged	as at 31
No.	Property		October 2007	Group	October 2007
			RMB		RMB
41.	22 units	of sales offices	No commercial	100%	No commercial
	in the PRC		value		value
		Sub-total:	Nil		Nil
		**Total: **	1,924,735,000		1,663,802,000

Note: Pursuant to Rule 11.3 of the Takeovers Code, the potential tax liability which would arise if the property interests held and occupied by the Group specified in Groups I, III and V in the PRC of this report and by the Target Group in Groups II and IV, in the PRC of this report were to be sold at the amount of the valuation is estimated to be approximately RMB137.6 million. As advised by the Company, the taxes mainly include income tax, stamp tax, urban construction tax, business tax, education fee addition and land appreciation tax at 25%, 0.05%, 0.5%, 5%, 0.5% and 1% respectively. The Directors consider that except properties numbered 4,13,14,15,16,17,18,19 and 37 in this report which are currently made available for sale and the aggregate potential tax liability for such sale is estimated to be approximately RMB35.6 million, it is unlikely any other tax liability will crystallize as the Company has no present intention to sell other properties which are currently being used for the Enlarged Group’s operations.

— VII-12 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group I — Property interests held and occupied by the Group in the PRC

• Capital value

• in existing state

• Particulars as at

• Property Description and tenure of occupancy 31 October 2007 RMB

• 1. A parcel of land, The property comprises a parcel of The property is 65,268,000 various buildings land with a site area of approximately occupied by and structures 43,586.1 sq.m. and 16 buildings and Guangdong Kelon (60% interest No. 1 Rongqi various structures constructed thereon Air-conditioner Co., attributable Dadaodong Road which were completed in 1993. Ltd. for production to the Enlarged Shunde District purpose. Group: Foshan city The buildings have a total gross floor RMB39,161,000) Guangdong area of approximately 68,347.4 sq.m. Province The PRC The buildings mainly include industrial buildings, office buildings and storehouses.

The structures mainly include roads, boundary walls, bridges and landscape features.

The land use rights of the property were granted for a term of 50 years expiring on 31 May 2044.

Notes:

1. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C1485787, 16 buildings with a total gross floor area of approximately 68,347.4 sq.m. are owned by Guangdong Kelon Air-conditioner Co., Ltd. The relevant land use rights of a parcel of land with a site area of approximately 43,586.1 sq.m. were granted to Guangdong Kelon Air-conditioner Co., Ltd. for a term of 50 years expiring on 31 May 2044 for industrial use. Guangdong Kelon Air-conditioner Co., Ltd. is a 60% owned subsidiary of the Company.

2. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The real estate ownership rights of the property are legally vested in the Group; and

4. (b) The property is subject to a mortgage in favour of Foshan Branch of Bank of China.

— VII-13 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

				Capital value
				in existing state
			Particulars	as at
Property		Description and tenure	of occupancy	31 October 2007
				RMB
2.	2 parcels of land,	The property comprises 2 parcels of	The property is	38,470,000
	various buildings	land with a total site area of	occupied by
	and structures	approximately 26,449.7 sq.m. and 12	Rongsheng Plastic	(100% interest
	Nos. 6 and 27	buildings and various structures	Factory Co., Ltd., a	attributable
	Rongqi Dadaodong	constructed thereon which were	70% owned subsidiary	to the Enlarged
	Road	completed in various stages between	of the Company, for	Group:
	Shunde District	1992 and 2003.	production purpose.	RMB38,470,000)
	Foshan City
	Guangdong	The buildings have a total gross floor
	Province	area of approximately 33,260.8 sq.m.
	The PRC
		The buildings mainly include
		industrial buildings, office buildings
		and storehouses.
		The structures mainly include roads
		and boundary wall.
		The land use rights of the property
		were granted for terms of 50 years
		with the latest expiry date on 31 May
		2044.

Notes:

1. Pursuant to a Stated-owned Land Use Rights Certificate — Shun Fu Guo Yong (96) Zi No. 009481100094, the land use rights of a parcel of land with a site area of approximately 11,739 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for a term of 50 years expiring on 31 May 2044 for industrial use. Guangdong Kelon Electrical Holdings Co., Ltd. is the former name of the Company.

2. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C0488538, 11 buildings with a total gross floor area of approximately 30,744.8 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. The relevant land use rights of a parcel land with a site area of approximately 14,710.7 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for a term of 50 years expiring on 30 May 2044 for industrial use.

3. In the course of our valuation, we have not attributed any commercial value to a building with a gross floor area of approximately 2,516 sq.m., as we are informed that the relevant title ownership documents of the building have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the building (excluding the land) as at the date of valuation would be RMB1,635,000 assuming all relevant title ownership certificates have been obtained and the building could be freely transferred.

4. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The real estate ownership rights of the 2 parcels of land and 11 buildings mentioned in notes 1 and 2 are legally vested in the Group;

6. (b) The Company is in application of relevant title ownership certificates of the building mentioned in note 3 and the relevant applications have been submitted in October 2006. According to the Group, there is no legal impediment for the Company to use and occupy the building in the application period; and

7. (c) The Group should apply for a new title ownership certificates under its own name.

— VII-14 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

• Property Description and tenure 3. 3 parcels of land, The property comprises 3 parcels of various buildings land with a total site area of and structures approximately 121,386.9 sq.m. and 33 Nos. 8, 11 and 13 buildings and various structures Ronggang Road constructed thereon which were Shunde District completed in various stages between Foshan City 1989 and 2005. Guangdong Province The buildings have a total gross floor The PRC area of approximately 134,627.6 sq.m. The buildings mainly include industrial buildings, office buildings and storehouses.

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	169,830,000
currently occupied by
the Company,	(100% interest
Hisense Rongsheng	attributable
(Guangdong)	to the Enlarged
Refrigerator	Group:
Co., Ltd. and	RMB169,830,000)
Guangdong Kelon
Mould
Co., Ltd. for
production purpose.

The structures mainly include roads, boundary walls and bridges.

The land use rights of the property were granted for terms of 50 years with the latest expiry date on 30 May 2044.

Notes:

1. Pursuant to 3 Real Estate Title Certificates — Yue Fang Di Zheng Zi Nos. C5740745, C5740746 and C2558121, 33 buildings with a total gross floor area of approximately 134,627.6 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. The relevant land use rights of 3 parcels of land with a total site area of approximately 121,386.9 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for terms of 50 years with the latest expiry date on 30 May 2044 for industrial and other uses. Guangdong Kelon Electrical Holdings Co., Ltd. is the former name of the Company.

2. A parcel of land with a site area of approximately 14,029.4 sq.m., 10 buildings with a total gross floor area of approximately 10,493.05 sq.m. were occupied by Guangdong Kelon Mould Co., Ltd. (廣東科龍 模具有限公司 ), a 70% owned subsidiary of the Company and a building with a gross floor area of approximately 5,087.25 sq.m. was occupied by Hisense Rongsheng (Guangdong) Refrigerator Co., Ltd., a wholly-owned subsidiary of the Company.

3. A parcel of land with a site area of approximately 93,180.4 sq.m. and 18 buildings with a total gross floor area of approximately 111,659.75 sq.m. were occupied by Hisense Rongsheng (Guangdong) Refrigerator Co., Ltd.

4. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The real estate ownership rights of the property are legally vested in the Group;

6. (b) The parcel of land and the buildings constructed thereon mentioned in note 3 are subject to a mortgage in favour of Foshan Branch of Bank of China; and

7. (c) As informed by the Group, the relevant ownership title of 2 parcels of land (Yue Fang Di Zheng Zi Nos. C5740745 and C5740746) has been under the name of Hisense Kelon Electrical Holdings Co., Ltd. as at the date of valuation.

— VII-15 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

				Capital value
				in existing state
			Particulars	as at
Property		Description and tenure	of occupancy	31 October 2007
				RMB
4.	2 parcels of land,	The property comprises 2 parcels of	The property is	29,189,000
	various buildings	land with a total site area of	currently occupied by
	and structures	approximately 16,994.6 sq.m. and 18	Hisense Rongsheng	(100% interest
	Nos. 120 and 129	buildings and various structures	(Guangdong)	attributable
	Ronggui Dadaobei	constructed thereon which were	Refrigeratory	to the Enlarged
	Road	completed in various stages between	Co., Ltd. for	Group:
	Shunde District	1987 and 1997.	production purpose.	RMB29,189,000)
	Foshan City
	Guangdong	The buildings have a total gross floor
	Province	area of approximately 40,201.2 sq.m.
	The PRC
		The buildings mainly include
		industrial buildings and office
		buildings.
		The structures mainly include roads,
		boundary walls and bridges.

The land use rights of the property were granted for terms of 50 years with the latest expiry date on 30 May 2044.

Notes:

1. Pursuant to 2 Real Estate Title Certificates — Yue Fang Di Zheng Zi Nos. 1485751 and 1159414, 18 buildings with a total gross floor area of approximately 40,201.2 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. The relevant land use rights of 2 parcels of land with a total site area of approximately 16,994.6 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for terms of 50 years with the latest expiry date on 30 May 2044 for industrial use. Guangdong Kelon Electrical Holdings Co., Ltd. is the former name of the Company.

2. The property is occupied by Hisense Rongsheng (Guangdong) Refrigeratory Co., Ltd., a wholly-owned subsidiary of the Company.

3. The Company has signed the relevant land use right agreements on 13 May 2007 with respect to the two parcels of land referred to on page VII-16 of the Circular, the announcement and circular of which have been made and despatched by the Company on 23 May 2007 and 13 June 2007.

4. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The real estate ownership rights of the property are legally vested in the Group;

6. (b) The property is subject to a mortgage in favour of Foshan Branch of Bank of China; and

7. (c) The Group planned to sell the property as at the date of valuation and will not be in possession of a proper legal title to the property if it is legally transferred to the third parties.

— VII-16 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Description and tenure

Property

1. 2 parcels of land, The property comprises 2 parcels of 3 buildings and land with a total site area of various structures approximately 7,734.8 sq.m. and 3 Nos. 1, 2 and 6 of buildings and various structures Huanxin Road constructed thereon which were Shunde District completed in various stages between Foshan City 1989 and 1990. Guangdong Province The buildings have a total gross floor The PRC area of approximately 17,815.4 sq.m.

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	12,035,000
currently occupied
by Hisense	(100% interest
Rongsheng	attributable
(Guangdong)	to the Enlarged
Refrigeratory Co.,	Group:
Ltd. and the	RMB12,035,000)
Company for
production
purpose.

The buildings include a industrial building, an office building and a storehouse.

The land use rights of the property were granted for terms of 50 years with the latest expiry date on 30 May 2044.

Notes:

1. Pursuant to 2 Real Estate Title Certificates — Yue Fang Di Zheng Zi Nos. C1485750 and C1113583, 3 buildings with a total gross floor area of approximately 17,815.4 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. The relevant land use rights of 2 parcels of land with a total site area of approximately 7,734.8 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for terms of 50 years with the latest expiry date on 30 May 2044 for industrial use. Guangdong Kelon Electrical Holdings Co., Ltd. is the former name of the Company.

2. A parcel of land with a site area of approximately 5,021.1 sq.m. and a building with a gross floor area of approximately 11,007.8 sq.m. are occupied by Hisense Rongsheng (Guangdong) Refrigeratory Co., Ltd., a wholly-owned subsidiary of the Company.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The real estate ownership rights of the property are legally vested in the Group; and

5. (b) The property is subject to a mortgage in favour of Foshan Ronggui Branch of Rural Credit.

— VII-17 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Description and tenure

Property

1. 5 parcels of land, The property comprises 5 parcels of various buildings land with a total site area of and structures approximately 68,462.9 sq.m. and 12 located at buildings and various structures the nortern side of constructed thereon which were Rongqi Bridge completed in various stages between Guangzhu Road 1989 and 1996. Shunde District Foshan City The buildings have a total gross floor Guangdong area of approximately 148,293 sq.m. Province The PRC The buildings mainly include industrial buildings, office buildings and warehouses.

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	127,070,000
currently occupied
by the Company	(60% interest
and Guangdong	attributable
Kelon Air	to the Enlarged
Conditioner Ltd.	Group:
for production and	RMB76,242,000)
office purposes.

The structures mainly include road and boundary wall.

The land use rights of the property were granted for terms of 50 years with the latest expiry date on 9 November 2050.

Notes:

1. Pursuant to 5 Real Estate Title Certificates — Yue Fang Di Zheng Zi Nos. C0005419, C0005473, C0005451, C0005076 and C5265567, 12 buildings with a total gross floor area of approximately 148,293 sq.m. are owned by Guangdong Kelon Air Conditioner Ltd., a 60% owned subsidiary of the Company. The relevant land use rights of 5 parcels of land with a total site area of approximately 68,462.9 sq.m. were granted to Guangdong Kelon Air Conditioner Ltd. for terms of 50 years with the latest expiry date on 9 November 2050 for industrial use.

2. A portion of an office building with a gross floor area of approximately 7,990 sq.m. is occupied by Guangdong Kelon Electrical Holdings Co., Ltd. and the remaining portion is occupied by Guangdong Kelon Air Conditioner Ltd. for production purpose.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The real estate ownership rights of the property are legally vested in the Group; and

5. (b) The property is subject to a mortgage in favour of Foshan Branch of Bank of China.

— VII-18 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

				Capital value
				in existing state
			Particulars	as at
Property		Description and tenure	of occupancy	31 October 2007
				RMB
7.	2 parcels of land,	The property comprises 2 parcels of	The property is	39,651,000
	various buildings	land with a total site area of	currently occupied
	and structures	approximately 24,988.9 sq.m. and 25	by the Company	(100% interest
	located at	buildings and various structures	for production	attributable
	the northern side	constructed thereon which were	purpose.	to the Enlarged
	of Rongqi Bridge	completed in various stages between		Group:
	Guangzhu Road	1989 and 1994.		RMB39,651,000)
	Shunde District
	Foshan City	The buildings have a total gross floor
	Guangdong	area of approximately 47,960.51
	Province	sq.m.
	The PRC
		The buildings mainly include
		industrial buildings and office
		buildings.

The structures mainly include roads and boundary wall.

The land use rights of the property were granted for terms of 50 years with the latest expiry date on 9 November 2050.

Notes:

1. Pursuant to 2 Real Estate Title Certificates — Yue Fang Di Zheng Zi Nos. C1119233 and C1119234, 19 buildings with a total gross floor area of approximately 42,585.52 sq.m. are owned by Guangdong Kelon Peijian Co., Ltd. (廣東科龍配件有限公司 ), a wholly-owned subsidiary of the Company. The relevant land use rights of 2 parcels of land with a total site area of approximately 24,988.9 sq.m. were granted to Guangdong Kelon Peijian Co., Ltd. for terms of 50 years with the latest expiry date on 9 November 2050 for industrial use.

2. In the course of our valuation, we have not attributed any commercial value to 6 buildings with a total gross floor area of approximately 5,374.99 sq.m., as we are informed that the relevant title ownership documents of the buildings have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the buildings (excluding the land) as at the date of valuation would be RMB2,420,000 assuming all relevant title ownership certificates have been obtained and the buildings could be freely transferred.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The real estate ownership rights of the 2 parcels of land and 19 buildings mentioned in note 1 are legally vested in the Group;

5. (b) Guangdong Kelon Peijian Co., Ltd. is in application of relevant title ownership certificates of the 6 buildings mentioned in note 2 and the relevant applications have been submitted in October 2007. According to the Group, there is no legal impediment for the Company to use and occupy the buildings in the application period; and

6. (c) The property is subject to a mortgage in favour of Foshan Branch of Bank of China.

— VII-19 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

• Property Description and tenure 8. 3 parcels of land The property comprises 3 parcels of and various land with a total site area of buildings approximately 223,443.3 sq.m. and 16 Nos. 29 and 46 buildings constructed thereon which Wenfeng Bei Road were completed in various stages Shunde District between 1997 and 2005. Foshan City Guangdong The buildings have a total gross floor Province area of approximately 127,808.61 The PRC sq.m. The buildings mainly include industrial buildings and storehouses.

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	184,778,000
currently occupied
by the Company	(100% interest
and Hisense	attributable
Rongsheng	to the Enlarged
(Guangdong)	Group:
Lenggui Co., Ltd.	RMB184,778,000)
for production
purpose.

The land use rights of the property were granted for terms expiring on 30 December 2045.

Notes:

1. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C5740748, the land use rights of a parcel of land with a site area of approximately 173,788.7 sq.m. were granted to the Company for a term expiring on 30 December 2045 for industrial use and 2 buildings with a total gross floor area of approximately 47,751.31 sq.m. are owned by the Company.

2. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C5740747, the land use rights of a parcel of land with a site area of approximately 10,258.1 sq.m. were granted to the Company for a term expiring on 30 December 2045 for industrial use and a building with a gross floor area of approximately 3,476 sq.m. are owned by the Company.

3. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C2440455, the land use rights of a parcel of land with a site area of approximately 39,396.5 sq.m. were granted to Hisense Rongsheng (Guangdong) Lenggui Co., Ltd. for a term expiring on 30 December 2045 for industrial use and 11 buildings with a total gross floor area of approximately 29,474.8 sq.m. are owned by Hisense Rongsheng (Guangdong) Lenggui Co., Ltd. (海信容聲（廣東）冷櫃有限公司 ), a wholly-owned subsidiary of the Company.

4. In the course of our valuation, we have not attributed any commercial value to the remaining 2 buildings, constructed on the parcel of land described in note 1 with a total gross floor area of approximately 47,106.50 sq.m., as we are informed that the relevant title ownership documents of the buildings have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the buildings (excluding the land) as at the date of valuation would be RMB17,890,000 assuming all relevant title ownership certificates have been obtained and the buildings could be freely transferred.

— VII-20 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

1. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

2. (a) The real estate ownership rights of the property except for 2 buildings mentioned in note 4 are legally vested in the Group;

3. (b) For the 2 buildings mentioned in note 4 and occupied as storehouse facilities, the Company has not obtained any proper title ownership certificates. The Company is planning to demolish these 2 buildings in the near future. According to the directors of the Group, there is no material adverse impact on the Group’s operation for the Group to use and occupy the buildings in the absence of such title certificates before they are demolished;

4. (c) The parcel of land and 2 buildings constructed thereon as mentioned in note 1 are subject to a mortgage in favour of Foshan Branch of Bank of China; and

5. (d) The parcel of land and 11 buildings constructed thereon as mentioned in note 3 are subject to a mortgage in favour of Foshan Ronggui Branch of Rural Credit Union.

— VII-21 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

• Property Description and tenure 9. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 25,760 sq.m. and 4 buildings and No. 71 Zhenhua various structures constructed thereon Road which were completed in about 1993. Shunde District Foshan City The buildings have a total gross floor Guangdong area of approximately 13,198.60 Province sq.m. The PRC The buildings mainly include industrial buildings and office buildings.

Property

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	23,683,000
currently occupied by
Guangdong Kelon	(100% interest
Peijian Co., Ltd. for	attributable
production purpose.	to the Enlarged
	Group:
	RMB23,683,000)

The structures mainly include roads, boundary wall and bridges.

The land use rights of the property were granted for a term of 50 years expiring on 31 May 2044.

Notes:

1. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C1150996, the land use rights of a parcel of land with a site area of approximately 25,760 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for a term of 50 years expiring on 31 May 2044 for industrial use and 4 buildings with a total gross floor area of approximately 13,198.6 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. (the former name of the Company).

2. The property is occupied by Guangdong Kelon Peijian Co., Ltd. （廣東科龍配件有限公司）, a whollyowned subsidiary of the Company.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The real estate ownership rights of the property are legally vested in the Group; and

5. (b) The property is subject to a mortgage in favour of Foshan Branch of Bank of China.

— VII-22 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Description and tenure

Property

1. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 19,234.1 sq.m. and 14 buildings and Nos. 22 and 24 various structures constructed thereon Rongxin Road which were completed in various Shunde District stages between 1986 and 2002. Foshan City Guangdong The buildings have a total gross floor Province area of approximately 22,477.5 sq.m. The PRC

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	25,309,000
currently occupied
by Guangdong	(100% interest
Kelon Peijian Co.,	attributable
Ltd. and the	to the Enlarged
Company for	Group:
production	RMB25,309,000)
purpose.

The buildings mainly include industrial buildings and office buildings.

The structures mainly include boundary wall.

The land use rights of the property were granted for a term of 50 years expiring on 30 May 2044.

Notes:

1. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C1570584, the land use rights of a parcel of land with a site area of approximately 19,234.1 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for a term of 50 years expiring on 30 May 2044 for industrial use and 14 buildings with a total gross floor area of approximately 22,477.5 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. (the former name of the Company).

2. 12 buildings with a total gross floor area of approximately 12,943.7 sq.m. are occupied by Guangdong Kelon Peijian Co., Ltd. （廣東科龍配件有限公司）, a wholly-owned subsidiary of the Company.

3. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The real estate ownership rights of the property are legally vested in the Group; and

5. (b) The property is subject to a mortgage in favour of Foshan Branch of Bank of China.

— VII-23 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Description and tenure

Property

1. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 12,581.4 sq.m. and 2 buildings and No. 2 Fengye various structures constructed thereon Road which were completed in about 1998. Shunde District Foshan City The buildings have a total gross floor Guangdong area of approximately 35,349.6 sq.m. Province The PRC The buildings mainly include industrial buildings, marketing center buildings, and storehouses.

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	31,560,000
currently occupied
by the Company	(100% interest
and Guangdong	attributable
Kelon Air	to the Enlarged
Conditioner Ltd.	Group:
for production	RMB31,560,000)
purpose.

The structures mainly include roads, boundary walls and bridges.

The land use rights of the property were granted for a term of 50 years expiring on 22 September 2047.

Notes:

1. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C5757769, the land use rights of a parcel of land with a site area of approximately 12,581.4 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for a term of 50 years expiring on 22 September 2047 for industrial use and 2 buildings with a total gross floor area of approximately 35,349.60 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. (the former name of the Company).

2. The property is occupied by the Company and Guangdong Kelon Air Conditioner Ltd., a 60% owned subsidiary of the Company.

3. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The real estate ownership rights of the property are legally vested in the Group; and

5. (b) The property is subject to a mortgage in favour of Foshan Ronggui Branch of Rural Credit Union.

— VII-24 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
12. A parcel of land	The property comprises a parcel of	The property is	9,734,000
and a building	land with a site area of approximately	currently occupied
located at	2,389.9 sq.m. and a residential	by the Company	(100% interest
Xihuan Street	building constructed thereon which	for residential	attributable
Ronggui Road	was completed in 1990s.	purpose.	to the Enlarged
Shunde District			Group:
Foshan City	The building has a gross floor area of		RMB9,734,000)
Guangdong	approximately 8,111.8 sq.m.
Province
The PRC	The land use rights of the property
	were granted for a term of 50 years
	expiring on 1 May 2044.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Shun Fu Guo Yong (95) Zi No. 004081100036, the land use rights of a parcel of land with a site area of approximately 2,389.90 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for a term of 50 years expiring on 1 May 2044 for industrial use. Guangdong Kelon Electrical Holdings Co., Ltd. is the former name of the Company.

2. Pursuant to a Real Estate Title Certificate — Yue Fang Di Zheng Zi No. C1771479, a residential building with a gross floor area of approximately 8,111.8 sq.m. is owned by Guangdong Kelon Electrical Holdings Co., Ltd.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The real estate ownership rights of the property are legally vested in the Group.

— VII-25 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
13. 82 residential units	The property comprises 82	The property is	10,128,000
and 6 retail shops	residential units and 6 retail shops	currently occupied
of Meijing	of a 29-storey composite building	by the Company	(100% interest
Mansion	with a total gross floor area of	for residential and	attributable
Rongqi Zhong	approximately 17,015.16 sq.m.	retail purposes.	to the Enlarged
Road	completed in 2002.		Group:
Ronggui Town			RMB10,128,000)
Shunde City
Guangdong
Province
The PRC

Note:

1. Pursuant to 81 Real Estate Title Certificates — Yue Fang Di Zheng Zi Di Nos. C0754094 to C0754130, C0754132 to C0754134, C0754143 to C0754145, C0754156 to C0754168, C0754170 to C0754172 and C0761739 to C0761760 issued by the People’s Government of Guangdong Province, 81 residential units with a total gross floor area of approximately 6,584.8 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. (the former name of the Company).

2. In the course of our valuation, we have not attributed any commercial value to the remaining 1 residential unit with a total gross floor area of approximately 84.4 sq.m. and 6 retail shops with a total gross floor area of approximately 10,345.96 sq.m., as we are informed that the relevant title ownership documents have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the residential unit and 6 retail shops as at the date of valuation would be RMB19,741,000 assuming all relevant title ownership certificates have been obtained and they could be freely transferred.

3. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The real estate ownership rights of the 81 residential units mentioned in note 1 are legally vested in the Group;

5. (b) The Company is in application of relevant ownership title certificates of the residential unit and 6 retail shops mentioned in note 2 and the relevant applications have been submitted in October 2006. According to the Group, there is no legal impediment for the Company to use and occupy them in the application period; and

6. (c) The Group planned to sell the property as at the date of valuation and will not be in possession of a proper legal title to the property if it is legally transferred to the third parties.

— VII-26 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
14. 6 car ports of	The property comprises 6 car	The property is	2,804,000
Kangfu Garden	ports with a total gross floor area	currently occupied
Xinghua Road	of approximately 967.3 sq.m.	by the Company	(100% interest
Ronggui Town	completed in 1990s.	for car parking	attributable
Shunde City		purpose.	to the Enlarged
Guangdong			Group:
Province			RMB2,804,000)
The PRC

Note:

1. Pursuant to 6 Real Estate Title Certificates — Yue Fang Di Zheng Zi Nos. C0450285 to C0450286, C0443783 to C0443785 and C0443788 issued by the People’s Government of Guangdong Province dated 6 September 2001, the property with a total gross floor area of approximately 967.3 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. (the former name of the Company).

2. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The real estate ownership rights of the property are legally vested in the Group; and

4. (b) The Group planned to sell the property as at the date of valuation and will not be in possession of a proper legal title to the property if it is legally transferred to the third parties.

— VII-27 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
15. Levels 1 and 2	The property comprises levels 1	The property is	3,652,000
of a 7-storey	and 2 of a 7-storey building with	currently occupied
building	a total gross floor area of	by the Company	(100% interest
No. 32-1	approximately 730.43 sq.m.	for residential	attributable
Jinwu Road	completed in 1990s.	purpose.	to the Enlarged
Jinshui District			Group:
Zhengzhou			RMB3,652,000)
City
Henan Province
The PRC

Note:

1. Pursuant to a Building Ownership Certificate — Zheng Fang Quan Zheng Zi No. 0001027393 issued by the Housing Management Bureau of Zhengzhou City dated 15 June 2000, the property with a total gross floor area of approximately 730.43 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. (the former name of the Company).

2. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The building ownership rights and land use rights of the property are legally vested in the Group; and

4. (b) The Group planned to sell the property as at the date of valuation and will not be in possession of a proper legal title to the property if it is legally transferred to the third parties.

— VII-28 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
16. Unit Nos. 1101	The property comprises 2 office	The property is	4,100,000
and 1201 of	units of a 7-storey building with a	currently occupied
Kaiyuan Mansion	total gross floor area of	by the Company	(100% interest
Huoju Road	approximately 854.59 sq.m.	for office purpose.	attributable
Beilin Technical	completed in 1990s.		to the Enlarged
Industry Garden			Group:
Xi’an City			RMB4,100,000)
Shaanxi Province
The PRC

Note:

1. Pursuant to a Building Ownership Certificate — Xi’an Shi Fang Quan Zheng Gao Xin Qu Zi No. 1150106020-1-1-1101 issued by the Real Estate Management Bureau of Xi’an City, 2 office units with a total gross floor area of approximately 854.59 sq.m. are owned by Guangdong Kelon Electrical Holdings Co., Ltd. (the former name of the Company).

2. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The building ownership rights and land use rights of the property are legally vested in the Group; and

4. (b) The Group planned to sell the property as at the date of valuation and will not be in possession of a proper legal title to the property if it is legally transferred to the third parties.

— VII-29 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Capital value in existing state Particulars as at Property Description and tenure of occupancy 31 October 2007 RMB 17. An office unit The property comprises an office The property is No commercial of a 7-storey unit of a 7-storey building with a currently occupied value building gross floor area of approximately by the Company No. 34-1 220 sq.m. completed in 1990s. for office purpose. Yaowang Miao Road Shenhe District Shenyang City Liaoning Province The PRC

Note:

1. In the course of our valuation, we have not attributed any commercial value to the property with a gross floor area of approximately 220 sq.m., as we are informed that the relevant title ownership documents of the property have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the property as at the date of valuation would be RMB638,000 assuming all relevant title ownership certificates have been obtained and the property could be freely transferred.

2. The Board has approved the disposal of the office units, in accordance with its Articles of Association and the applicable laws and regulations on 30 November 2006.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The Group is not in possession of a proper legal title to the property;

5. (b) The Company is planning to apply for relevant title ownership certificates of the property as at the date of valuation. According to the Group, there is no legal impediment for the Company to use and occupy the property; and

6. (c) The Group planned to sell the property and will not occupy the property if it is legally transferred to the third parties.

— VII-30 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Capital value in existing state Particulars as at Property Description and tenure of occupancy 31 October 2007 RMB 18. Nos. 605 and The property comprises 2 office The property is No commercial 606 of the units of a commercial building currently occupied value North part of with a total gross floor area of by the Company Yuetan Mansion approximately 348.29 sq.m. for office purpose. Xicheng District completed in 1990s. Beijing The PRC

Note:

1. In the course of our valuation, we have not attributed any commercial value to the property with a total gross floor area of approximately 348.29 sq.m., as we are informed that the relevant title ownership documents of the property have been not obtained. As advised by the Company, the construction quality of the subject building does not comply with the building completion standard and as such the title ownership documents have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the property as at the date of valuation would be RMB6,095,000 assuming all relevant title ownership certificates have been obtained and the property could be freely transferred.

2. The Board has approved the disposal of the office units, in accordance with its Articles of Association and the applicable laws and regulations on 25 September 2006.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The Group is not in possession of a proper legal title to the property;

5. (b) According to the Group, there is no legal impediment for the Company to use and occupy the property in the application period; and

6. (c) The Group planned to sell the property and will not occupy the property if it is legally transferred to the third parties.

— VII-31 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
19. Unit No. 201	The property comprises an office	The property is	2,129,000
of the North	unit of a commercial building	currently occupied
Building of	with a gross floor area of	by the Company	(100% interest
Binnan Garden	approximately 560.34 sq.m.	for office purpose.	attributable
Huaizhong	completed in 1990s.		to the Enlarged
Zhong Road			Group:
Shijia Zhuang			RMB2,129,000)
City
Hebei Province
The PRC

Note:

1. Pursuant to a Building Ownership Certificate - Shi Fang Quan Zheng Zhang Zi No. 170000004 issued by the Real Estate Management Bureau of Shijia Zhuang City, an office unit with a gross floor area of approximately 560.34 sq.m. are owned by Guangdong Kelon Electrical Holdings Co. Ltd. (the former name of the Company).

2. The Board has approved the disposal of the office units, in accordance with its Articles of Association and the applicable laws and regulations on 30 November 2006.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The building ownership rights and land use rights of the property are legally vested in the Group; and

5. (b) The Group planned to sell the property as at the date of valuation and will not be in possession of a proper legal title to the property if it is legally transferred to the third parties.

— VII-32 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

• Property Description and tenure 20. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 67,188.31 sq.m. and 29 buildings and No. 9 Fushengli various structures constructed thereon Zhanqian District which were completed in various Yingkou City stages between 1975 and 2002. Liaoning Province The PRC The buildings have a total gross floor area of approximately 56,175.54 sq.m.

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	76,383,000
occupied by Yingkou
Kelon Refrigeratory	(78.79% interest
Co., Ltd. for	attributable
production purpose.	to the Enlarged
	Group:
	RMB60,182,000)

The buildings mainly include industrial buildings, office buildings and storehouses.

The structures mainly include boundary wall, roads and carport.

The land use rights of the property were granted for a term of 50 years expiring on 12 June 2047.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Ying Kou Guo Yong (2005) Zi No. 210146, the land use rights of a parcel of land with a site area of approximately 67,188.31 sq.m. were granted to Yingkou Kelon Refrigeratory Co., Ltd., a 78.79% owned subsidiary of the Company, for a term of 50 years expiring on 12 June 2047 for industrial use.

2. Pursuant to 15 Building Ownership Certificates — Ying Fang Quan Zhen Zi Nos. 100023450, 100023451, 100023454, 100023455, 100023435, 100023436, 100023438 to 100023442, 100025938, 100023444, 100023445 and 100023447, 19 buildings with a total gross floor area of approximately 52,193.54 sq.m. are owned by Yingkou Kelon Refrigeratory Co., Ltd.

3. In the course of our valuation, we have not attributed any commercial value to the remaining 10 buildings with a total gross floor area of approximately 3,982 sq.m., as we are informed that the relevant title ownership documents of the buildings have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the buildings (excluding the land) as at the date of valuation would be RMB2,566,000.00 assuming all relevant title ownership certificates have been obtained and the buildings could be freely transferred.

4. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The building ownership rights and land use rights of the parcel of land and 19 buildings mentioned in notes 1 and 2 are legally vested in the Group; and

6. (b) Yingkou Kelon Refrigeratory Co., Ltd. is planning to apply for the relevant title ownership certificates of the 10 buildings mentioned in note 3 and relevant applications will be submitted in January 2008. According to the Group, there is no legal impediment for Yingkou Kelon Refrigeratory Co., Ltd. to use and occupy the buildings in the application period.

— VII-33 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
21. A residential unit	The property comprises a residential	The property is	No commercial
located at	unit of a composite building with a	occupied by Chengdu	value
Xinhong Nan Road	gross floor area of approximately	Kelon Refrigeratory
Chengdu City	152.4 sq.m.	Co., Ltd. for
Sichuan Province		residential purpose.
The PRC

Notes:

1. In the course of our valuation, we have not attributed any commercial value to the property as we are informed that the relevant title ownership certificates of the property have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the property as at the date of valuation would be RMB274,000 assuming all relevant title ownership certificates have been obtained and the property could be freely transferred.

2. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The Group is not in possession of a proper legal title to the property; and

4. (b) The property is a residential unit in a building that has not been able to obtain title certificates for the units of the building by the property developer. The title certificates for such residential units can only be obtained after the property developer, which is an independent third party, obtains proper approval for the application for title documents for all the units of the building. Given the size and the nature of the property, the directors of the Group are of the view that the absence of such title certificates should not have any material adverse impact on the operation of the Group.

— VII-34 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Property Description and tenure 22. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 31,941.18 sq.m. and 6 buildings and located various structures constructed thereon at the southern which were completed in 2003. side of Songcheng Road The buildings have a total gross floor Development Zone area of approximately 20,388.75 Kaifeng City sq.m. Henan Province The PRC The buildings mainly include industrial buildings, office buildings and warehouses. The structures mainly include boundary walls.

Capital value in existing state Particulars as at of occupancy 31 October 2007 RMB The property is No commercial occupied by value Kaifeng Kelon Air-conditioning Co., Ltd., a 70% owned subsidiary of the Company, for production purpose.

The land use rights of the property were granted for a term of 50 years expiring on 26 April 2052 for industrial use.

Notes:

1. Pursuant to a Real Estate Title Certificate — Bian Fang Di Quan Zheng Zi No. (240143), the land use rights of a parcel of land with a site area of approximately 31,941.18 sq.m. were granted to Kaifeng Economy Technology Development Group Incorporation for a term of 50 years expiring on 26 April 2052 for industrial use and 6 buildings with a total gross floor area of approximately 20,388.75 sq.m. are owned by Kaifeng Economy Technology Development Group Incorporation, an independent third party of the Group.

2. In the course of our valuation, we have not attributed any commercial value to the property as relevant title ownership documents have not been under the name of the Group. However, for reference purposes, we are of the opinion that the capital value of the property as at the date of valuation would be RMB35,215,000 assuming all relevant title ownership certificates have been obtained and the property could be freely transferred.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The Group is not in possession of a proper legal title to the property; and

5. (b) The property is part of the investment of Kaifeng Economy Technology Development Group Incorporation (“Kaifeng ETDGI”), the 30% shareholder of Kaifeng Kelon Air-conditioning Co., Ltd. (“Kaifeng Kelon”), a 70% owned subsidiary of the Company. The transfer of the title from Kaifeng ETDGI to Kaifeng Kelon is in process and it is a matter of timing for the transfer to be completed. According to the Group, there is no legal impediment for Kaifeng Kelon Airconditioning Co., Ltd. to use and occupy the property in the application period.

— VII-35 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Property

Description and tenure

Capital value in existing state Particulars as at of occupancy 31 October 2007 RMB

1. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 19,449.57 sq.m. and 9 buildings and located at various structures constructed thereon Sifangyuan which were completed in various Suiyang District stages between 1990 and 2001. Shangqiu City Henan Province The buildings have a total gross floor The PRC area of approximately 7,272.93 sq.m.

2. The property is No commercial occupied by value Shangqiu Kelon Electrical Co., Ltd. for production purpose.

3. The buildings mainly include industrial buildings, office buildings and storehouses.

The structures mainly include boundary walls and roads.

The land use rights of the property were granted for a term of 50 years expiring on 31 May 2054.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Shang Guo Yong (2004) Zi No. 2364, the land use rights of a parcel of land with a site area of approximately 19,449.57 sq.m. were granted to Shangqiu Kelon Electrical Co., Ltd., a wholly-owned subsidiary of the Company, for industrial use for a term of 50 years expiring on 31 May 2054.

2. Pursuant to a Building Ownership Certificate — Shang Shi Fang Quan Zheng Zi No. C009389-009394, 6 buildings with a total gross floor area of approximately 7,042.93 sq.m. are owned by Shangqiu Kelon Electrical Co., Ltd.

3. For the remaining 3 buildings with a total gross floor area of approximately 230 sq.m., we have not been provided with any proper title ownership documents.

4. In the course of our valuation, we have not attributed any commercial value to the property as we are informed that the property is subject to a sequestration judged by the People’s Intermediate Court of Jinlin City dated 17 July 2007.

5. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

6. (a) The building ownership rights and land use rights of the parcel of land and 6 buildings mentioned in notes 1 and 2 are legally vested in the Group;

7. (b) For the 3 buildings mentioned in note 3, Shangqiu Kelon Electrical Co., Ltd. has not obtained any relevant title ownership certificates. According to the Group, there is no legal impediment for Shangqiu Kelon Electrical Co., Ltd. to use and occupy the buildings in the application period; and

8. (c) The occupation of Shangqiu Kelon Electrical Co., Ltd. to the property is strictly restrained and the property can not be freely transferred, leased and mortgaged by Shangqiu Kelon Electrical Co., Ltd.

— VII-36 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

• Property Description and tenure 24. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 20,473.65 sq.m. and 7 buildings and located various structures constructed thereon at the southern which were completed in various side of Nanjing stages between 1990 and 1993. Road and the western side of The buildings have a total gross floor Kaixuan Road area of approximately 9,976.72 sq.m. Shangqiu City Henan Province The buildings mainly include The PRC industrial buildings, office buildings and storehouses.

Property

	Capital value	Capital value
	in existing state
Particulars		as at
of occupancy	31 October 2007
		RMB
The property is	No commercial
occupied by		value
Shangqiu Kelon
Electrical Co., Ltd.
for production
purpose.

The structures mainly include boundary walls and roads. The land use rights of the property were granted for a term of 50 years expiring on 31 May 2054.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Shang Guo Yong (2004) Zi No. 2365, the land use rights of a parcel of land with a site area of approximately 20,473.65 sq.m. were granted to Shangqiu Kelon Electrical Co., Ltd., a wholly-owned subsidiary of the Company, for industrial use for a term of 50 years expiring on 31 May 2054.

2. Pursuant to 6 Building Ownership Certificates — Shang Shi Fang Quan Zheng Zi Nos. C009383 to C009388, 6 buildings with a total gross floor area of approximately 9,966.72 sq.m. are owned by Shangqiu Kelon Electrical Co., Ltd.

3. For the remaining 1 building with a gross floor area of approximately 10 sq.m., we have not been provided with any proper title ownership documents.

4. In the course of our valuation, we have not attributed any commercial value to the property as we are informed that the property is subject to a sequestration judged by the People’s Intermediate Court of Jinlin City dated 17 July 2007.

5. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

6. (a) The building ownership rights and land use rights of the property except for the building mentioned in note 3 are legally vested in the Group;

7. (b) For the building mentioned in note 3 and occupied as an ancillary washroom, Shangqiu Kelon Electrical Co., Ltd. has not obtained any relevant title ownership certificates. According to the Group, there is no legal impediment for Shangqiu Kelon Electrical Co., Ltd. to use and occupy the building in the application period; and

8. (c) The occupation of Shangqiu Kelon Electrical Co., Ltd. to the property is strictly restrained and the property can not be freely transferred, leased and mortgaged by Shangqiu Kelon Electrical Co., Ltd.

— VII-37 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
25. A parcel of land,	The property comprises a parcel of	The property is	20,981,000
various buildings	land with a site area of approximately	occupied by
and structures	31,900 sq.m. and 10 buildings and	Wuhu Yingjia	(80% interest
located at	various structures constructed thereon	Electrical Co., Ltd.	attributable
Yananbei Road	which were completed in various	for production	to the Enlarged
Development Zone	stages between 2000 and 2004.	purpose.	Group:
Wuhu City			RMB16,785,000)
Anhui Province	The buildings have a total gross floor
The PRC	area of approximately 12,404.7 sq.m.

The buildings mainly include industrial buildings, office buildings and warehouses.

The structures mainly include boundary walls, roads, landscape and awnings.

The land use rights of the property were granted for a term of 50 years expiring on 1 March 2050.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Wu Kai Guo Yong (2000) Zi No. 010, the land use rights of a parcel of land with a site area of approximately 31,900 sq.m. were granted to Wuhu Liya Electrical Co., Ltd., an 80% owned subsidiary of the Company, for a term of 50 years expiring on 1 March 2050 for industrial use.

2. Pursuant to 2 Building Ownership Certificates — Wu Jiu Jiang Qu Zi Nos. 2007007575 and 2007007577, 9 buildings with a total gross floor area of approximately 12,354.7 sq.m. are owned by Wuhu Liya Electrical Co., Ltd.

3. Wuhu Liya Electrical Co., Ltd. is the predecessor of Wuhu Yingjia Electrical Co., Ltd.

4. In the course of our valuation, we have not attributed any commercial value to the remaining building with a gross floor area of approximately 50 sq.m., as we are informed that the relevant title ownership documents have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the building (excluding the land) as at the date of valuation would be RMB33,000 assuming all relevant title ownership certificates have been obtained and the building could be freely transferred.

5. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

6. (a) The building ownership rights and land use rights of the property except for the building mentioned in note 4 are legally vested in the Group; and

7. (b) For the building mentioned in note 4 and occupied for temporary storage use, Wuhu Yingjia Electrical Co., Ltd. has not obtained any relevant title ownership certificates. The Company planned to demolish it in the near future. Given the small size of such building, there is no material adverse impact on the Group’s operation for the Group to use and occupy the property in the absence of such title certificates before it is demolished.

— VII-38 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
26. 2 residential units	The property comprises 2 residential	The property is	724,000
of No. 20	units of a residential building with a	currently occupied by
Building of	total gross floor area of	Wuhu Yingjia	(80% interest
Yuanding Garden	approximately 226.43 sq.m.	Electrical Co., Ltd.	attributable
Xinwu District		for production	to the Enlarged
Wuhu City	The land use rights of the property	purpose.	Group:
Anhui Province	were granted for a term of 50 years		RMB579,000)
The PRC	expiring on 1 March 2050.

Notes:

1. Pursuant to 2 Building Ownership Certificates — Wu Jing Hu Qu Zi Nos. 2006071104 and 2006071102, issued by the Real Estate Management Bureau of Wuhu City dated on 1 July 2001, 2 residential units with a total gross floor area of approximately 226.43 sq.m. are owned by Wuhu Yingjia Electrical Co., Ltd., an 80% owned subsidiary of the Company.

2. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The building ownership rights and land use rights of the property are legally vested in the Group.

— VII-39 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
27. A parcel of land,	The property comprises a parcel of	The property is	43,687,000
various buildings	land with a site area of approximately	currently occupied by
and structures	23,756.1 sq.m. and 10 buildings and	Xi’an Kelon	(60% interest
No. 67	various structures constructed thereon	Refrigeratory Co.,	attributable
Keji 2nd Road	which were completed in 2001.	Ltd. for production	to the Enlarged
Hi-Tech		purpose.	Group:
Development Zone	The buildings have a total gross floor		RMB26,212,000)
Xi’an City	area of approximately 25,203.8 sq.m.
Shaanxi Province
The PRC	The buildings mainly include
	industrial buildings, office buildings
	and warehouses.

The structures mainly include roads.

The land use rights of the property were granted for a term of 50 years expiring on 7 October 2048.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Xi Gao Ke Ji Guo Yong (2004) No. 35508, the land use rights of a parcel of land with a site area of approximately 23,756.1 sq.m. were granted to Xi’an Kelon Refrigeration Co., Ltd., a 60% owned subsidiary of the Company, for industrial use for a term of 50 years expiring on 07 October 2048.

2. Pursuant to 2 Building Ownership Certificates — Xi’an City Fang Quan Zheng Gao Xin Qu Zi Nos. 1050104013-21-4 and 1050104013-21-6, 4 buildings with a total gross floor area of approximately 18,391.8 sq.m. are owned by Xi’an Kelon Refrigeration Co., Ltd.

3. In the course of our valuation, we have not attributed any commercial value to the remaining 6 buildings with a total gross floor area of approximately 6,812 sq.m., as we are informed that the relevant title ownership documents have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the buildings (excluding the land) as at the date of valuation would be RMB7,669,000 assuming all relevant title ownership certificates have been obtained and the buildings could be freely transferred.

4. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The building ownership rights and land use rights of the parcel of land and 4 buildings mentioned in notes 1 and 2 are legally vested in the Group; and

6. (b) The Company is in application of relevant title ownership certificates of the 6 buildings mentioned in note 3 and relevant applications will be submitted in January 2008. According to the Group, there is no legal impediment for the Company to use and occupy the buildings in the application period.

— VII-40 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

• Property Description and tenure 28. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 729,099.2 sq.m. and 15 buildings and Nos. 9 and 19 various structures constructed thereon Hongyang Road which were completed in 2006. Yangzhou City Jiangsu Province The buildings have a total gross floor The PRC area of approximately 271,053.16 sq.m.

Property

	Capital value
	in existing state
Particulars	as at
of occupancy	31 October 2007
	RMB
The property is	460,450,000
occupied by
Hisense Rongsheng	(100% interest
(Yangzhou)	attributable
Refrigerator	to the Enlarged
Co., Ltd. for	Group:
production purpose.	RMB460,450,000)

The buildings mainly include industrial buildings, office buildings and storehouses.

The structures mainly include roads, boundary walls.

The land use rights of the property were granted for a term of 50 years expiring on 4 August 2053.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Yang Guo Yong (2005) No. 0951, the land use rights of a parcel of land with a site area of approximately 729,099.2 sq.m. were granted to Yangzhou Kelon Electrical Co., Ltd., a wholly-owned subsidiary of the Company, for a term of 50 years expiring on 04 August 2053 for industrial use.

2. Pursuant to 3 Building Ownership Certificates — Yang Fang Quan Zheng Guang Zi Nos. 292791 to 292793, 15 buildings with a total gross floor area of approximately 271,053.16 sq.m. are owned by Yangzhou Kelon Electrical Co., Ltd.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The building ownership rights and land use rights of the property are legally vested in the Group; and

5. (b) The property is subject to a mortgage in favour of Foshan Branch of Bank of China.

— VII-41 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Description and tenure

Property

1. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 94,914.27 sq.m. and 18 buildings and No. 46 Shijinggou various structures constructed thereon Road which were completed in various Zhuqueshan stages between 1987 and 1992. Economy Development Zone The buildings have a total gross floor Fengman District area of approximately 42,169.25 Jilin City sq.m. Jilin Province The PRC The buildings mainly include industrial buildings, office buildings and storehouses.

	Capital value	Capital value
	in existing state
Particulars		as at
of occupancy	31 October 2007
		RMB
The property is	No commercial
occupied by		value
Jilin Kelon Electronic
Co., Ltd.
(“Jilin Kelon”) for
production purpose.

The land use rights of the property were granted for a term of 50 years expiring on 14 September 2052 for industrial use.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Ji Shi Guo Yong (2005) No.220204000644, the land use right of a parcel of land with a site area of approximately 94,914.27 sq.m. were granted to Jilin Kelon Electronic Co., Ltd., a wholly-owned subsidiary of the Company, for a term of 50 years expiring on 14 September 2052 for industrial use.

2. Pursuant to 18 Building Ownership Certificates — Jilin Shi Fang Quan Zheng Feng Zi No.YX40000337 to YX40000349, YX40000350, YX40000351, YX40000363 to YX40000365, 18 buildings with a total gross floor area of approximately 42,169.25 sq.m. are owned by Jilin Kelon.

3. The property is subject to a mortgage in favour of Jiangbei Branch of Jinlin Commercial Bank. In the course of our valuation, we have not attributed any commercial value to the property as Jiangbei Branch of Jinlin Commercial Bank was authorized to execute its mortgage rights on the property by the People’s Intermediate Court of Jinlin City dated on 15 May 2007.

4. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The building ownership rights and land use rights of the property are legally vested in the Group; and

6. (b) The property is subject to a mortgage in favour of Jiangbei Branch of Jinlin Commercial Bank and an executive legality risk.

— VII-42 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group II — Property interests held and occupied by the Target Group in the PRC

• Property Description and tenure 30. A parcel of land, The property comprises a parcel of various buildings land with a site area of approximately and structures 203,466.60 sq.m. and 24 buildings located at and various structures constructed Nancun Town thereon which were completed in Pingdu City various stages between 1997 and Shandong Province 2006. The PRC The buildings have a total gross floor area of approximately 181,729.31 sq.m.

Capital value in existing state Particulars as at of occupancy 31 October 2007 RMB The property is 226,553,000 currently occupied by various third parties of (100% interest the Target Group for attributable production purpose. to the Enlarged Group: RMB226,553,000)

The buildings mainly include industrial buildings, office buildings and storehouses.

The structures mainly include roads, boundary walls and rain pavilion.

The land use rights of the property were granted for a term of 50 years expiring on 8 September 2048.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate - Ping Guo Yong (2007) No. 00240, the land use rights of a parcel of land with a site area of approximately 203,466.60 sq.m. were granted to Hisense (Shandong) Air-conditioning Company Limited (“Hisense Shandong”) for a term of 50 years expiring on 8 September 2048 for industrial use. Hisense Shandong will be a wholly-owned subsidiary of the Enlarged Group after completion of the acquisition.

2. Pursuant to a Real Estate Title Certificate - Qing Fang Di Quan Ping Zi No. 16000 issued by the People’s Government of Guangdong Province dated 6 September 2001, 24 buildings with a total gross floor area of approximately 181,729.31 sq.m. are owned by Hisense (Shandong) Air-conditioning Company Limited.

3. Pursuant to various tenancy agreements, 5 buildings out of the 24 buildings with a total gross floor area of approximately 16,260 sq.m. were leased to various third parties commencing from 30 March 2007 at an aggregate annual rental of RMB1,277,757 exclusive of management fees, water and electricity charges.

4. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The real estate ownership rights of the property are legally vested in the Target Group.

— VII-43 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
31. 5 residential units	The property comprises 5 units on	The property is	3,580,000
Nos. 38-41	Level 6 of a 6-storey building	currently occupied by
Xinghuananli	completed in 2003.	Hisense (Beijing)	(55% interest
Daxing District		Electrical Co., Ltd. for	attributable
Beijing	The units have a total gross floor area	residential purpose.	to the Enlarged
The PRC	of approximately 604.74 sq.m.		Group:
			RMB1,969,000)

Notes:

1. Pursuant to 5 Building Ownership Certificates — Jing Fang Quan Xin Gu Zi Di No. 0003007 to 0003010 and 0003607, the property with a total gross floor area of approximately 604.74 sq.m. are owned by Hisense (Beijing) Electrical Co., Ltd. (“Hisense Beijing”). Hisense Beijing will be a 55% owned subsidiary of the Enlarged Group after completion of the acquisition.

2. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The real estate ownership rights of the property are legally vested in the Target Group.

— VII-44 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
32. A parcel of land,	The property comprises a parcel of	The property is	110,880,000
various buildings	land with a site area of approximately	occupied by
and structures	134,163.3 sq.m. and 4 buildings and	Hisense (Nanjing)	(33% interest
No. 19 Hengfei	various structures constructed thereon	Electric Co., Ltd. for	attributable
Road	which were completed in various	manufacturing	to the Enlarged
Xingang	stages between 2006 and 2007.	purpose.	Group:
Development Zone			RMB36,590,000)
Nanjing City	The buildings have a total gross floor
Jiangsu Province	area of approximately 58,444.56
The PRC	sq.m.
	The buildings mainly include
	industrial buildings, office buildings
	and workshops.

The structures mainly include roads boundary walls and landscape features.

The land use rights of the property were granted for a term of 50 years expiring on 15 February 2050.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Ning Xi Guo Yong (2005) No. 05996, the land use rights of a parcel of land with a site area of approximately 134,163.3 sq.m. were granted to Hisense (Nanjing) Electrical Co., Ltd. (“Hisense Nanjing”) for industrial use for a term of 50 years expiring on 15 February 2050. Hisense Nanjing will be a 33% owned subsidiary of the Enlarged Group after completion of the acquisition.

2. Pursuant to a Building Ownership Certificate — Ning Fang Quan Zheng Xi Chu Zi Di No. 247072, 2 buildings with a total gross floor area of approximately 51,410.96 sq.m. are owned by Hisense (Nanjing) Electrical Co., Ltd.

3. In the course of our valuation, we have not attributed any commercial value to the remaining 2 buildings with a total gross floor area of approximately 7,033.60 sq.m., as we are informed that the relevant title ownership documents of the buildings have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the buildings (excluding the land) as at the date of valuation would be RMB5,996,000 assuming all relevant title ownership certificates have been obtained and the buildings could be freely transferred.

4. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The building ownership rights and land use rights of the property except for the 2 buildings mentioned in note 3 are legally vested in the Target Group;

6. (b) Hisense Nanjing is in application of relevant title ownership certificates of the 2 buildings mentioned in note 3 and relevant applications will be submitted in January 2008. According to the Target Group, there is no legal impediment for Hisense Nanjing to use and occupy the buildings in the application period; and

7. (c) The property is subject to a mortgage in favour of the Construction Bank of China.

— VII-45 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
33. A parcel of land	The property comprises a parcel of	The property is	64,467,000
and various	land with a site area of approximately	currently occupied by
buildings	108,885.96 sq.m. and 7 buildings	Hisense Zhejiang Air-	(51% interest
located at	constructed thereon which were	conditioning Co., Ltd.	attributable
the northern side	completed in various stages between	for manufacturing	to the Enlarged
of Zhongyang	2004 and 2005.	purpose.	Group:
Dadao Road			RMB32,878,000)
Economic	The buildings have a total gross floor
Development Zone	area of approximately 46,830.45
Changxing County	sq.m.
Zhejiang Province
The PRC	The buildings mainly include
	industrial buildings, office buildings,
	workshops and dormitory buildings.

The land use rights of the property were granted for a term of 50 years expiring on 15 October 2053.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Chang Tu Guo Yong (2005) No. (1-4120), the land use rights of a parcel of land with a site area of approximately 108,885.96 sq.m. were granted to Hisense (Zhejiang)Air-Conditioning Co., Ltd. (“Hisense Zhejiang”) for industrial use for a term of 50 years expiring on 15 October 2053. Hisense Zhejiang will be a 51% owned subsidiary of the Enlarged Group after completion of the acquisition.

2. Pursuant to 3 Building Ownership Certificates — Fang Quan Zheng Fang Zi Nos. 0042246 to 0042248, 3 buildings with a total gross floor area of approximately 43,621.95 sq.m. are owned by Hisense (Zhejiang) Air-Conditioning Co., Ltd.

3. In the course of our valuation, we have not attributed any commercial value to the remaining 4 buildings with a total gross floor area of approximately 3,208.50 sq.m. as we are informed that the relevant title ownership documents of the buildings have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the buildings (excluding the land) as at the date of valuation would be RMB2,236,000 assuming all relevant title ownership certificates have been obtained and the buildings could be freely transferred.

4. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The building ownership rights and land use rights of the property except for the 4 buildings mentioned in note 3 are legally vested in the Target Group;

6. (b) Hisense Zhejiang is in application of relevant title ownership certificates of the 4 buildings mentioned in note 3 and will obtain the relevant title certificates in March 2008. According to the Target Group, there is no legal impediment for Hisense Zhejiang to use and occupy the buildings in the application period; and

7. (c) The property is subject to a mortgage in favour of Construction Bank of China.

— VII-46 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
34. A parcel of land	The property comprises a parcel of	The property is	26,889,000
and various	land with a site area of approximately	currently occupied
buildings	42,831 sq.m. and 2 buildings	Hisense (Zhejiang)	(51% interest
located at	completed in various stages between	Air-conditioning Co.,	attributable
Baixi Village	2004 and 2005.	Ltd. for manufacturing	to the Enlarged
Zhicheng Town		purpose.	Group:
Changxing County	The buildings have a total gross floor		RMB13,713,000)
Zhejiang Province	area of approximately 19,772.86
The PRC	sq.m.
	The buildings mainly include
	industrial buildings and sewage
	foundation.
	The land use rights of the property
	were granted for a term of 50 years
	expiring on 9 December 2056 for
	industrial use.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Chang Tu Guo Yong (2007) No. 1-423, the land use rights of a parcel of land with a site area of approximately 42,831 sq.m. were granted to Hisense (Zhejiang) Air-Conditioning Co., Ltd. (“Hisense Zhejiang”) for a term of 50 years expiring on 9 December 2056 for industrial use. Hisense Zhejiang will be a 51% owned subsidiary of the Enlarged Group after completion of the acquisition.

2. Pursuant to a Building Ownership Certificate — Fang Quan Zheng Chang Zi No. 00062636, a building with a gross floor area of approximately 19,246.91 sq.m. are owned by Hisense (Zhejiang) AirConditioning Co., Ltd.

3. In the course of our valuation, we have not attributed any commercial value to the remaining building with a gross floor area of approximately 525.95 sq.m., as we are informed that the relevant title ownership documents of the building have not been obtained. However, for reference purposes, we are of the opinion that the capital value of the building (excluding the land) as at the date of valuation would be RMB260,000.00 assuming all relevant title ownership certificates have been obtained and the building could be freely transferred.

4. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The building ownership rights and land use rights of the parcel of land and the building mentioned in notes 1 and 2 are legally vested in the Target Group; and

6. (b) Hisense Zhejiang is in application of relevant title ownership certificates of the building mentioned in note 3 and will obtain the relevant title certificates in March 2008. According to the Target Group, there is no legal impediment for Hisense Zhejiang to use and occupy the building in the application period.

— VII-47 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
35. A parcel of land	The property comprises a parcel of	The property is	32,782,000
and 9 leased	land with a site area of approximately	currently occupied by
buildings	72,115.53 sq.m. and 9 leased	Hisense (Beijing)	(55% interest
No. 36 Qingyuan	buildings constructed thereon which	Electric Company	attributable
Road	were completed in 1994	Limited	to the Enlarged
Daxing District		for office use.	Group:
Beijing	The buildings have a total gross floor		RMB18,030,000)
The PRC	area of approximately 59,085.05
	sq.m.
	The buildings mainly include
	industrial buildings, office buildings
	and storehouses.

The land use rights of the property were granted for a term of 50 years expiring on 15 October 2053.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Jing Xing Guo Yong (2003 Chu) Zi No. 473, the land use rights of a parcel of land with a site area of approximately 72,115.53 sq.m. were granted to Hisense (Beijing) Electric Company Limited (“Hisense Beijing”), for a term of 50 years expiring on 15 October 2053 for industrial use. Hisense Beijing will be a 55% owned subsidiary of the Enlarged Group after completion of the acquisition.

2. Pursuant to 5 Building Ownership Certificates — Xing Quan Zi No. 1479, 1494, 1495, 1496 and 1491, 5 buildings with a total gross floor area of approximately 58,692 sq.m. are owned by Beijing Xuehua Electrical Group, an independent third party of the Target Group. We have not been provided with any title certificates for the other 4 buildings with a total gross area of approximately 393.05 sq.m.

3. Pursuant to a Tenancy Agreement entered into between the Target Group and Beijing Xuehua Electrical Group, 9 buildings with a total leased area of approximately 59,085.05 sq.m. are leased to the Target Group for a term of 3 years commencing from 1 July 2002 at an annual rent of RMB6,464,907.38 exclusive of management fees, water and electricity charges.

4. In the course of our valuation, we have not attributed any commercial value to the 9 leased buildings with a total gross floor area of approximately 59,085.05 sq.m. as the buildings do not belong to Hisense Beijing.

5. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

6. (a) The land use rights of the parcel of land mentioned in note 1 are legally vested in the Target Group.

— VII-48 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group III — Property interests held by the Group for future development in the PRC

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
36. A parcel of land	The property comprises a parcel of	The property is	8,427,000
located at	land with a site area of approximately	currently vacant.
eastern side of	12,038.32 sq.m.		(100% interest
Waihuan Road			attributable
Shunde District	The land use rights of the property		to the Enlarged
Foshan City	were granted for a term of 70 years		Group:
Guangdong Province	expiring on 22 December 2072.		RMB8,427,000)
The PRC

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Shun Fu Guo Yong (2005) Zi No. 1002282, the land use rights of a parcel of land with a site area of approximately 12,038.32 sq.m. were granted to Guangdong Kelon Electrical Holdings Co., Ltd. for residential use for a term of 70 years expiring on 22 December 2072. Guangdong Kelon Electrical Holdings Co., Ltd. is the former name of the Company.

2. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The land use rights of the property are legally vested in the Group.

— VII-49 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
37. A parcel of land	The property comprises a parcel of	The property is	47,984,000
located at	land with a site area of approximately	currently vacant.
Shuangqiao Road	67,298.18 sq.m.		(100% interest
Chenghua District			attributable
Chengdu City	The land use rights of the property		to the Enlarged
Sichuan Province	were granted for a term of 50 years		Group:
The PRC	expiring on 31 March 2047.		RMB47,984,000)

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Cheng Guo Yong (1997) Zi No. 107, the land use rights of a parcel of land with a site area of approximately 67,298.18 sq.m. were granted to Chengdu Kelon Refrigerator Co., Ltd., a wholly-owned subsidiary of the Company, for a term of 50 years expiring on 31 March 2047 for industrial use.

2. The Company has entered into a “confirmation letter” with the transferee with respect to the parcel of land, following an auction held on 20 December 2007, the announcement of which has been made by the Company on 21 December 2007.

3. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The land use rights of the property are legally vested in the Group;

5. (b) The property is subject to a mortgage in favour of Guangzhou Branch of Minsheng Bank of China and the loan has been fully paid off as at the date of valuation; and

6. (c) Chengdu Kelon Refrigerator Co., Ltd. is planning to sell the property and will not be in possession of a proper legal title to the property if it is legally transferred to the third parties.

— VII-50 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

• Group IV — Property interest held by the Target Group for future development in the PRC

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
38. 2 parcels of land	The property comprises 2 parcels of	The property is	21,558,000
located at	land with a total site area of	currently vacant.
Baixi Village	approximately 177,014 sq.m.		(51% interest
Zhicheng Town			attributable
Changxing County	The land use rights of the parcel of		to the Enlarged
Zhejiang Province	land with a site area of approximately		Group:
The PRC	126,812 sq.m. were granted for a term		RMB10,995,000)
	of 50 years expiring on 21 June 2057.
	For the remaining parcel of land with
	a site area of approximately 50,202
	sq.m., we have not been provided
	with any proper title documents.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate — Chang Tu Guo Yong (2007) No. 1-1794, the land use rights of a parcel of land with a site area of approximately 126,812 sq.m., were granted to Hisense (Zhejiang) Air-conditioning Co., Ltd. (“Hisense Zhejiang”) for a term of 50 years expiring on 21 June 2057 for industrial use. Hisense Zhejiang will be a 51% owned subsidiary of the Enlarged Group after completion of the acquisition.

2. Pursuant to a State-owned Land Use Rights Grant Contract — Chang Guo Rang (He) Zi (2007) No. 370 dated 12 November 2007, the land use rights of the property with a site area of approximately 50,202 sq.m. were contracted to be granted to Hisense (Zhejiang) Air-conditioning Co., Ltd. for a term of 50 years for industrial use. The land premium is RMB7,890,000 and as advised by Hisense (Zhejiang) Airconditioning Co., Ltd., the land premium has been fully paid.

3. In the course of our valuation, we have not attributed any commercial value to the parcel of land with a site area of approximately 50,202 sq.m., as we are informed that the relevant title ownership documents of the land have not been obtained by Hisense (Zhejiang) Air-conditioning Co., Ltd. However, for reference purposes, we are of the opinion that the capital value of the parcel of land as at the date of valuation would be RMB8,534,000 assuming all relevant title ownership certificates have been obtained and the parcel of land could be freely transferred.

4. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

5. (a) The land use rights of the parcel of land mentioned in note 1 are legally vested in the Target Group; and

6. (b) For the parcel of land mentioned in note 3, Hisense Zhejiang has entered into a State-owned Land Use Rights Grant Contract with the relevant government authority, the proper use rights certificates will be obtained in March 2008. According to the Target Group, Hisense Zhejiang is in application of relevant use rights certificates and there is no legal impediment for Hisense Zhejiang to use and occupy the land in the application period.

— VII-51 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group V — Property interest held by the Group under development in the PRC

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
39. A parcel of land	The property comprises a parcel of	The property is	No commercial
and 3 industrial	land with a site area of approximately	currently under	value
buildings	127,131.16 sq.m. and 3 industrial	construction.
No. 18 Xingguang	buildings which were being
Zhong Road	constructed thereon as at the date of
Longquan District	valuation.
Chengdu City
Sichuan Province	The total planned gross floor area of
The PRC	the buildings is approximately
	36,549.4 sq.m. and the property is
	scheduled to be completed by the end
	of 2007.
	The total investment is estimated to
	be approximately RMB48,000,000 of
	which the construction cost incurred
	up to the date of valuation is
	estimated to be approximately
	RMB15,505,126.
	The land use rights of the property
	were granted for a term of 50 years
	expiring on 29 June 2057 for
	industrial use.

Notes:

1. As informed by the Group, Hisense Chengdu Refrigerator Co., Ltd. is in application of relevant title certificates of the parcel of land with a site area of approximately 127,131.16 sq.m. and a land premium of RMB16,018,548 has been paid.

2. Pursuant to a Construction Land Planning Permit — Cheng Jing Gui No.2007-06 dated 13 June 2007, permission towards the planning of the subject land with a site area of approximately 190.697 Mu (i.e. 127,131.40 sq.m.) has been granted to Hisense Chengdu Refrigerator Co., Ltd., a wholly-owned subsidiary of the Company.

3. Pursuant to a Construction Work Planning Permit — Cheng Jing Gui No. 2007-17 dated 6 June 2007 in favour of Chengdu Hisense refrigerator Co., Ltd., the buildings with a total gross floor area of approximately 36,549.4 sq.m. have been approved for construction.

— VII-52 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

1. In the course of our valuation, we have not attributed any commercial value to the property as we have not been provided with any proper title ownership documents of the property by Hisense Chengdu Refrigerator Co., Ltd. However, for reference purposes, we are of the opinion that the capital value of the property as at the date of valuation would be RMB38,796,000 assuming all relevant title ownership certificates/permits have been obtained and the property could be freely transferred.

2. We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) Hisense Chengdu Refrigerator Co., Ltd. planned to apply for the relevant title ownership certificates of the property; and

4. (b) According to the Group, there is no legal impediment for Hisense Chengdu Refrigerator Co., Ltd. to use and occupy the property.

— VII-53 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group VI — Property interest rented and occupied by the Group in the PRC

			Capital value
			in existing state
		Particulars	as at
Property	Description and tenure	of occupancy	31 October 2007
			RMB
40. 24 office units	The property comprises 24 office	The property is	No commercial
in various cities	units with a total gross floor area of	currently occupied by	value
in the PRC	approximately 5,187.32 sq.m.	the Group for sales
	completed in 1990s.	office purpose.
	The property is rented by the Group
	from various independent third parties
	at an aggregated annual rental of
	RMB4,121,614.58 with the latest
	expiring date on 21 December 2010.

Notes:

1. Pursuant to various Tenancy Agreements entered into between the Group and various independent third parties, 24 office units with a total gross floor area of approximately 5,187.32 sq.m. were leased to the Group at an aggregated annual rent of RMB4,121,614.58 exclusive of management fees, water and electricity charges.

2. We have been provided with a legal opinion on the legality of the tenancy agreements to the property issued by the Company’s PRC legal advisers, which contains, inter alia, the following:

3. (a) The tenancy agreements with respect to the property are legally binding and enforceable. There is no legal impediment for the Group to use and occupy the property.

— VII-54 —

VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group VII — Property interest rented and occupied by Qingdao Hisense Marketing Co., Ltd. and to be acquired by the Group in the PRC

• Property Description and tenure 41. 22 units of sales The property comprises 22 units with offices in the PRC a total gross floor area of approximately 7,454.37 sq.m. mainly completed in 1990s.

• Capital value

• in existing state

• Particulars as at of occupancy 31 October 2007 RMB

• The property is No commercial currently occupied by value Qingdao Hisense Marketing Co., Ltd. for office purpose.

The property is rented to Qingdao Hisense Marketing Co., Ltd. from various independent third parties at an aggregated annual rental of RMB2,826,683.5 with the latest expiry date on 15 October 2017.

Notes:

1. Pursuant to 22 Tenancy Agreements entered into between Qingdao Hisense Marketing Co., Ltd. and various independent third parties, 22 units with a total gross floor area of approximately 7,454.37 sq.m. were leased to Qingdao Hisense Marketing Co., Ltd. at an aggregated annual rent of RMB 2,826,683.5 exclusive of management fees, water and electricity charges.

2. The property and business operation of Qingdao Hisense Marketing Co., Ltd. (“Hisense Marketing Business”) are to be acquired by the Company as part of the Target Group.

3. We have been provided with a legal opinion on the legality of the tenancy agreements to the property issued by the Company’s PRC legal advisers, which contains, inter alia, the following:

4. (a) The tenancy agreements with respect to the property are legally binding and enforceable. There is no legal impediment for Qingdao Hisense Marketing Co., Ltd. to use and occupy the property.

— VII-55 —

GENERAL INFORMATION

APPENDIX VIII

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules and the Takeovers Code for the purpose of giving information with regard to the Kelon Group. The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this circular (other than information relating to Qingdao Hisense) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular (other than information relating to Qingdao Hisense) have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement (other than information relating to Qingdao Hisense) in this circular misleading.

The directors of Qingdao Hisense jointly and severally accept full responsibility for the accuracy of the information (other than that relating to the Kelon Group) contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular (other than that relating to the Kelon Group) have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement (other than that relating to the Kelon Group) in this circular misleading.

2. MARKET PRICES

• (a) The table below shows the closing prices of the H Shares on the Stock Exchange (i) at the end of each of the six calendar months immediately preceding the suspension of trading of the H Shares on 16 June 2005; (ii) on 15 June 2005 (being the last trading day preceding the suspension of trading of the H Shares on 16 June 2005):

		Closing price
		HK$
31	December 2004	1.63
31	January 2005	1.61
28	February 2005	2.20
31	March 2005	1.70
29	April 2005	1.18
31	May 2005	0.92
15	June 2005	0.89

The lowest and highest closing market prices of the H Shares recorded on the Stock Exchange during the period between the beginning of the six months preceding 16 June 2005 was HK$2.325 on 24 February 2005 and 25 February 2005 and HK$0.85 on 1 June 2005 and 2 June 2005 respectively.

— VIII-1 —

GENERAL INFORMATION

APPENDIX VIII

• (b) The table below shows the closing prices of the A Shares on the Shenzhen Stock Exchange (i) at the end of each of the six calendar months immediately preceding the trading day of the Announcement; (ii) on 28 December 2007 (being the last trading day preceding the date of the Announcement); and (iii) on the Latest Practicable Date:

	Closing price
	RMB
29 June 2007 (trading of A Shares was suspended)	6.77
31 July 2007	7.18
31 August 2007	7.50
28 September 2007 (trading of A Shares was suspended)	7.88
31 October 2007 (trading of A Shares was suspended)	7.88
30 November 2007	7.01
28 December 2007	8.49
Latest Practicable Date	8.49

The lowest and highest closing market prices of the A Shares recorded on the Shenzhen Stock Exchange during the period between the beginning of the six months preceding the date of the Announcement and the Latest Practicable Date were RMB6.09 on 27 June 2007 and RMB8.49 on 28 December 2007 respectively.

3. SHARE CAPITAL

As at the Latest Practicable Date, the share capital of the Company was as follows:

Authorised capital: 459,589,808 H Shares of RMB1.00 each 532,416,755 A Shares of RMB1.00 each Issued and fully paid or credited as fully paid: 459,589,808 H Shares of RMB1.00 each 532,416,755 A Shares of RMB1.00 each	RMB 459,589,808
	532,416,755
	459,589,808
	532,416,755

— VIII-2 —

GENERAL INFORMATION

APPENDIX VIII

The H Shares and A Shares in issue are ordinary shares in the share capital of the Company. Except for the currency in which dividends are paid and the restrictions as to whether the shareholders can be PRC investors or foreign investors, all existing H Shares and A Shares rank pari passu in all respects with each other, including capital, dividends and voting rights. The H Shares and A Shares in issue are listed on the Stock Exchange and the Shenzhen Stock Exchange, respectively.

Nature of Shareholders Shares capital Qingdao Hisense A Shares SEC A Shares Dongheng A Shares Public A Share Shareholders A Shares Public H Share Shareholders H Shares Total	Number of Approximate issued share percentage of % 238,872,074 24.08 68,666,667 6.92 7,036,894 0.71 217,841,120 21.96 459,589,808 46.33 992,006,563 100.00	Number of Approximate issued share percentage of % 238,872,074 24.08 68,666,667 6.92 7,036,894 0.71 217,841,120 21.96 459,589,808 46.33 992,006,563 100.00
		100.00

No Share has been issued since 31 December 2006 (the date to which the latest audited consolidated financial statements of the Company) up to the Latest Practicable Date.

The holders of the Consideration Shares will be entitled to receive all future dividends and distributions which are declared, made or paid after the date of allotment and issue of the Consideration Shares. The Consideration Shares to be issued will, when issued and fully paid, rank pari passu in all respects with the existing A Shares.

In addition, A and H Shares are regarded as different classes of shares under the Company’s Articles of Association. The differences between the two classes of shares, including provisions on class rights, the despatch of notices and financial reports to shareholders, dispute resolution, registration of shares on different branches of the register of shareholders, the method of share transfer and appointment of dividend receiving agents are set out in the Company’s Articles of Association.

The Company does not have any outstanding options, warrants, derivatives or securities convertible into Shares as at the Latest Practicable Date.

— VIII-3 —

GENERAL INFORMATION

APPENDIX VIII

4. DIRECTORS’ AND SUPERVISORS’ INTERESTS

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 2006, being the date to which the latest published audited financial statements of the Kelon Group were made up, acquired or disposed of by or leased to any member of the Kelon Group or are proposed to be acquired or disposed of by or leased to any member of the Kelon 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 Kelon Group since 31 December 2006, 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 Kelon Group.

As at the Latest Practicable Date, there was no agreement, arrangement or understanding (including any compensation agreement) existing between Qingdao Hisense or any person acting in concert with it and any Director, recent Director, Shareholder or recent Shareholder of the Company having any connection with or dependence upon the Acquisition Agreement, the allotment and issue of the Consideration Shares or the Whitewash Waiver.

As at the Latest Practicable Date, there was no benefit given or agreed to be given to any Director as compensation for loss of office or otherwise in connection with the Acquisition or the Whitewash Waiver.

As at the Latest Practicable Date, none of the Directors had a material personal interest in any material contract entered into by Qingdao Hisense.

— VIII-4 —

GENERAL INFORMATION

APPENDIX VIII

As at the Latest Practicable Date, there was no agreement, arrangement or understanding between any Director and any other person which is conditional on/or dependent upon the outcome of the Acquisition Agreement, the allotment and issue of the Consideration Shares or the Whitewash Waiver or otherwise connected with the Acquisition Agreement, the allotment and issue of the Consideration Shares or the Whitewash Waiver.

As at the Latest Practicable Date, none of the Directors or Supervisors was materially interested in any contract or arrangement to which any member of the Kelon Group was a party and which was significant to the business of the Kelon Group.

Qingdao Hisense, its associates and parties acting in concert with it will abstain from voting on the relevant resolutions in relation to (i) the Acquisition and the allotment and issue of Consideration Shares; (ii) the Whitewash Waiver, (iii) the CSRC Waiver (iv) the Non-exempt Continuing Connected Transactions, and (v) the authorisation to the Board to deal with all matters relating to the allotment and issue of Consideration Shares at the EGM in accordance with the Listing Rules, the Takeovers Code and the Shenzhen Listing Rules.

As at the Latest Practicable Date, none of the Shareholders had, prior to the Latest Practicable Date, irrevocably committed itself to vote in favour of or against the relevant resolutions in relation to Acquisition and the allotment and issue of Consideration Shares, the Whitewash Waiver, the CSRC Waiver, the Non-exempt Continuing Connected Transactions, the authorisation to the Board to deal with all matters relating to the allotment and issue of Consideration Shares and the proposed amendments to the Articles of Association at the EGM.

— VIII-5 —

GENERAL INFORMATION

APPENDIX VIII

5. 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 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	Proportion
				relevant class	to the
			Number of	of issued	total issued
			ordinary	share capital of	share capital
Name	Class of	Shares	shares held	the Company	of the Company
Qingdao Hisense	A Shares		244,100,981	45.85%	24.61%
		(long	position)(Note 1)
			9,275,050	1.83%	0.98%
		(short	position)(Note 2)
SEC	A Shares		68,666,667	12.90%	6.92%
			(long position)

Notes:

1. Pursuant to the Share Reform Proposal, Qingdao Hisense agreed to pay in advance, on behalf of SEC and Dongheng, 4,742,863 and 486,044 Shares to eligible A Shareholders for their participation in the share reform. Pursuant to the Share Reform Proposal, SEC and Dongheng must repay such Borrowed Shares to Qingdao Hisense or otherwise obtain its consent before the shares held by SEC and Dongheng can be listed and transferred.

2. Pursuant to the Share Reform Proposal, Qingdao Hisense has undertaken to make a Donation of 9,725,050 A Shares under certain circumstances, including the circumstance where the Acquisition cannot be completed by 28 March 2008.

Interests in other members of the Kelon 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

— VIII-6 —

GENERAL INFORMATION

APPENDIX VIII

carrying rights to vote in all circumstances at general meetings of any other members of the Kelon Group:

			Percentage
			shareholding
	Shareholders holding 10% or		of shareholders
Other members of	more in other members of		in other members
the Kelon Group	the Kelon Group	of the Kelon Group
Guangdong Kelon	Weishi Investments Company Limited		40%
Air-Conditioner Co., Ltd
Guangdong Kelon Mould	Hua Yi Compressor Company Limited		30%
Co., Ltd
Foshan Shunde Rongsheng	Hua Yi Compressor Company Limited		30%
Plastic Co., Ltd
Guangdong Huaao Electrical	Foshan City Shunde District Yun Long		30%
Electronics Co., Ltd.	Enquiry Service Company Limited
Hisense Ronshen (Yingkou)	Yingkou Yingleng (Group) Bankruptcy		14.74%
Refrigerator Co., Ltd.	Liquidation Team
Hangzhou Kelon Electrical	Hangzhou Xiling Group Company Limited		30%
Company Limited
Xi’an Kelon Cooling Co., Ltd.	Xi’an Gaoke (Group) Company Limited		29.05%
Jiangxi Kelon Combine	Jiangxi Fadasi Domestic Electrical		45%
Electrical Appliances	Appliances Company Limited
Co., Ltd.
Kaifeng Kelon Air-Conditioner	Kaifeng Economic Technique Development		30%
Co., Ltd.	(Group) Company
Hua Yi Compressor Company	Huayi Electrical Appliances		32.69%
Limited	Company Limited
	A-share public shareholders		49.05%
Chongqing Kelon Rongsheng	Chongqing Shang She Group		24%
Refrigerator Sales Co., Ltd.
	Chongqing Huaqing Commerce Company		24%
	Chongqing Department Building		24%

— VIII-7 —

GENERAL INFORMATION

APPENDIX VIII

			Percentage
			shareholding
	Shareholders holding 10% or		of shareholders
Other members of	more in other members of		in other members
the Kelon Group	the Kelon Group	of the Kelon Group
Guangzhou Antaida Logistic Co., Ltd.	Guangzhou Zhongyuan International		30%
	Freight Forwarding Company Limited
	China Far Ocean Network Company Limited		25%
	Wuxi Small Swan Holdings Company Limited		20%
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 Yun Long		11%
Technology Company	Enquiry Service Company Limited
Guangdong Kelon Weili Electrical	Zhongshan City Fusha Town Shunchang		20%
Appliances Company Limited	Industry Limited Company

Save as disclosed above, as at the Latest Practicable Date and so far as is known to the Directors or chief executive of the Company, there was no other person (other than a Director, supervisor or chief executive of the Company or a member of the Kelon 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 Kelon Group.

— VIII-8 —

GENERAL INFORMATION

APPENDIX VIII

6. SHAREHOLDING OF AND DEALING IN THE SECURITIES OF THE COMPANY AND QINGDAO HISENSE

• (a) Save as disclosed under the paragraph headed “Implications of the Takeovers Code and Whitewash Waiver” in the letter from the Board of this circular and in Section 4 in this appendix, none of Qingdao Hisense and parties acting in concert with it; and the Directors and their respective associates, owned or controlled any shares, convertible securities, warrants, options or derivatives in respect of the Shares as at the Latest Practicable Date, none of them has dealt for value in any such securities of the Company during the period between 27 June 2007, being six months prior to the date of the Announcement and up to the Latest Practicable Date.

• (b) No arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code existed (i) between any person and the Company or any person who is an associate of the Company by virtue of classes (1), (2), (3) and (4) of the definition of an associate under the Takeovers Code or (ii) between any person and Qingdao Hisense or any person who is acting in concert with it during the period between 27 June 2007, being six months prior to the date of the Announcement and up to the Latest Practicable Date.

• (c) None of the subsidiaries of the Company and none of the pension funds of the Company and/or its subsidiaries, nor any fund managed on a discretionary basis by any fund manager connected with the Company owned or controlled any Shares or any convertible securities, warrants, options or derivatives in respect of the Shares as at the Latest Practicable Date or had dealt in any securities of the Company during the period between 27 June 2007, being six months prior to the date of the Announcement and up to the Latest Practicable Date.

• (d) None of the advisers of the Company as specified in class (2) of the definition of “associates” under the Takeovers Code, owned or controlled any securities, shares, options, warrants, derivatives or convertible securities of the Company as at the Latest Practicable Date.

• (e) None of the Directors and the Company owned or controlled any shares, convertible securities, warrants, options or derivatives of Qingdao Hisense as at the Latest Practicable Date, and none of them has dealt for value in any such securities of Qingdao Hisense during the period between 27 June 2007, being six months prior to the date of the Announcement and up to the Latest Practicable Date.

• (f) None of the Directors owned or controlled any shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date, and therefore, none of the Directors intends, in respect of his own beneficial shareholdings, to vote for or against the resolutions with respect to the Acquisition and the Whitewash Waiver, and none of them has dealt for value in any such

— VIII-9 —

GENERAL INFORMATION

APPENDIX VIII

securities of the Company during the period between 27 June 2007, being six months prior to the date of the Announcement and up to the Latest Practicable Date.

• (g) None of the directors of Qingdao Hisense owned or controlled any shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date, and none of them has dealt for value in any such securities of the Company during the period between 27 June 2007, being six months prior to the date of the Announcement and up to the Latest Practicable Date.

7. SERVICE AGREEMENTS

As at the Latest Practicable Date, none of the Directors has entered or proposed to enter into any service contract with any member of the Kelon Group and any associated companies of the Company which is not determinable by the employer within one year without payment of compensation (other than statutory compensation) or which is a continuous contract with a notice period of 12 months or more.

As at the Latest Practicable Date, none of the Directors or Supervisors had any existing nor proposed service contract (including both continuous and fixed term contract) with the Company or its subsidiaries or associated companies which have more than 12 months to run after the Latest Practicable Date, irrespective of the notice period.

As at the Latest Practicable Date, there was no service contract (including both continuous and fixed term contract) entered into, commenced, or amended within six months before the date of the Announcement and up to the Latest Practicable Date.

8. INTEREST IN CONTRACTS OR ARRANGEMENT

• (a) As at the Latest Practicable Date, none of the Directors or their associates had any direct or indirect interest in any asset which has been, since 31 December 2006 (being the date to which the latest published audited consolidated financial statements of the Kelon Group were made up), acquired or disposed of by or leased to or proposed to be acquired or disposed of by or leased to any member of the Kelon Group.

• (b) As at the Latest Practicable Date, none of the Directors or their associates was materially interested in any contract or arrangement entered into by any member of the Kelon Group and subsisting at the date of this circular which was significant in relation to the business of the Kelon Group.

— VIII-10 —

GENERAL INFORMATION

APPENDIX VIII

9. COMPETING BUSINESS

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 Kelon Group other than those businesses where the Directors were appointed as directors to represent the interests of the Company and/or the Kelon Group pursuant to the Listing Rules:

• Name of entity Description of which business is business of the entity considered to which is considered to compete or likely to compete or likely to compete with the compete with the Nature of interest of business of the business of the the Director

• Name of Director Kelon Group Kelon Group in the entity

• Mr. Tang Ye Guo Hisense Group Co. or Production of Director its Subsidiaries air-conditioning/ electrical products

• Ms. Yu Shu Min Hisense Group Co. or Production of Director and/or its Subsidiaries air-conditioning/ senior management electrical products

• Mr. Yang Yung Duo Hisense Group Co. or Production of Director and/or its Subsidiaries air-conditioning/ senior management electrical products

• Mr. Wang Shi Lei Hisense Group Co. or Production of Director and/or its Subsidiaries air-conditioning/ senior management electrical products

• Mr. Lin Lan Hisense Group Co. or Production of Director and/or its Subsidiaries air-conditioning/ senior management electrical products

• Ms. Liu Chun Xin The subsidiaries of Sales and marketing Director Hisense Group Co. operations of home appliances

As at the Latest Practicable Date, save as disclosed above, none of the Directors 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 Kelon Group.

— VIII-11 —

GENERAL INFORMATION

APPENDIX VIII

10. LITIGATION

As at the Latest Practicable Date, so far as the Directors are aware, the following litigation or claims of material importance are pending or threatened against the Enlarged Group:

No.	Name of case	Plaintiff	Claim Amount	Particulars	Status
1.	Claims against	China	RMB140,000,000	China Construction Bank	The plaintiff is in
	Jiangxi Kelon and	Construction		Corporation Nanchang	the process of
	the Company	Bank		Changbei Branch applied	withdrawing the
	initiated by China	Corporation		with the court for pre-trial	claim
	Construction	Nanchang		security order on the basis
	Bank Corporation	Changbei		of dispute over the loan
	Nanchang	Branch		contract and guarantee
	Changbei Branch			contract. The claim amount
	in relation to the			involved in this case was
	loan contract and			140,000,000. On 5 August
	guarantee contract			2005, the High Court of
				Jiangxi Province ordered to
				freeze Jiangxi Kelon’s 80%
				shareholdings in Shangqiu
				Kelon. After negotiations
				between both parties,
				Jiangxi Kelon has so far
				repaid all outstanding
				amounts to the plaintiff.
2.	Claims against the	Hangxiao	RMB19,853,000	The plaintiff alleged that it	Foshan
	Company initiated			had undertaken the	Intermediate
	by Hangxiao			construction works of the	People’s Court
	Ganggou			Company’s plain warehouse	first heard the case
	Holdings			factories No. 1 and No. 2	in March 2007.
	Company Limited			pursuant to a construction	The second
	(“Hangxiao”) in			contract with the Company	hearing was
	relation to a			and the Company defaulted in	scheduled in June
	construction			payment of RMB1,193,000 in	2007 and this case
	contract			construction fees. The	would be tried
				plaintiff sued the Company	together with the
				for payment of RMB1,193,000	case initiated by
				in construction fees and	the Company
				RMB17,660,000 in default	against Zhejiang
				penalties and the cost of legal	Hangxiao for
				proceedings. The proceedings	breach of contract.
				was resumed in March 2007 in	On 3 December
				the intermediate court of	2007, the
				Foshan, the construction fees	Company received
				were revised as	the verdict ((2005)
				RBM1,170,000 by Hangxiao.	Fo Zhong Fa Min
					Wu Zhu Zi No. 21)
					from Foshan
					Intermediate
					People’s Court,
					under which the
					claim against the
					Company initiated
					by Hangxiao was
					turned down and
					Hangxiao should
					be liable for the
					case acceptance
					fee.

— VIII-12 —

GENERAL INFORMATION

APPENDIX VIII

No. Name of case

Plaintiff

Claim Amount

1. Claims against Henan Province RMB27,160,000 Jiangxi Kelon and Kaifeng Kaifeng Kelon Economic Air-Conditioner Technology Co., Ltd. Development (“Kaifeng Kelon”) (Group) by Henan Company Province Kaifeng Economic Technology Development (Group) Company in relation to joint venture contract

2. Claims initiated Can International US$13,750,719.19 by CNA/MC Inc./MC Appliance Appliance Corporation Corporation against the Company and Kelon International Incorporation

Particulars

The plaintiff applied for a pre-trial security order. The court ordered to seize properties worth of RMB18,000,000 of Jiangxi Kelon and Kaifeng Kelon. The plaintiff applied for the property security order during the proceeding. The court ordered to seize the assets of Jiangxi Kelon and Kaifeng Kelon in the sum of RMB9,160,000.

The plaintiff alleged that it had entered into a contract with the defendant on 29 December 2003 to purchase 108,108 units of MCBR1000W refrigerators, that the defendant failed to perform its obligations as set out in the contract on a timely basis and that the goods delivered were defective.

Status

In June 2007, the Company presented jurisdictional dissent to the Intermediate People’s Court of Kaifeng City based on the arbitration clause under the contract entered by the parties and the court accepted the case. Meanwhile, the parties were negotiating to settle the case. In August 2007, Jiangxi Kelon and Henan Province Kaifeng Economic Technology Development (Group) Company entered into the relevant documents including Share Transfer Agreement and Debt Arrangement Agreement.

The case is being processed.

— VIII-13 —

GENERAL INFORMATION

APPENDIX VIII

No.	Name of case	Plaintiff	Claim Amount	Particulars	Status
5.	Claim initiated	Ronshen	RMB99,984,100	The Company initiated a	Ronshen
	against Xi’an	Refrigerator		claim against the defendant	Refrigerator
	Kelon by Ronshen			for the repayment of the	received Civil
	Refrigerator			loan of RMB89.18 million	Judgment (Fo
				and the related interest	Zhong Fa Li Bao
				amounting to RMB10.8	Zi No. 241 (2007))
				million, together with the	and the summon
				litigation costs of this case.	from the Foshan
					Intermediate Court
					in June 2007. As
					applied by
					Ronshen
					Refrigerator, the
					Foshan
					Intermediate Court
					made an order of
					freezing the bank
					deposit of Xi’an
					Kelon amounting
					to RMB89,000,000
					or sealing up and
					distraining its
					assets of such
					equivalent amount.
					The trial of this
					case has been
					postponed.

— VIII-14 —

GENERAL INFORMATION

APPENDIX VIII

No. Name of case Plaintiff Claim Amount Particulars Status 6. Litigation The Company RMB25,660,900 The Company initiated a In July 2007, the initiated by the claim against the defendant Company received Company against for the repayment of the the summon from Shangqiu Kelon loan of RMB21,590,900, and Foshan its interest amounting to Intermediate RMB4,070,000, together People’s Court. with the litigation costs of Regarding the the case. application by the Company, Foshan Intermediate People’s Court brought in a verdict ((2007) Fo Zhong Li Bao Zi No. 262), under which an amount of RMB25,660,867.88 deposited with a bank by Shangqiu Kelon should be freezed, or to seize and distrain the property with equivalent amount. On 20 December 2007, the Company received the judgment from Foshan Intermediate People’s Court, under which an amount of RMB21,590,867.88 and its interest should be repaid by Shangqiu Kelon to the Company within 10 days from the effective date of the judgment. The case acceptance fee and property insurance premium totaling RMB175,104 should be borne by the plaintiff, Shangqiu Kelon, for RMB 157,594, and the Company for RMB 17,510, respectively.

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GENERAL INFORMATION

APPENDIX VIII

11. MATERIAL CONTRACTS

The following contracts, not being contracts entered into in the ordinary course of business, had been entered into by members of the Enlarged Group after the date two years before the date of the Announcement and up to the Latest Practicable Date which may be material:

• (a) Acquisition Agreement;

• (b) a land use right transfer agreement dated 18 November 2006 entered between the Company and Foshan City Shunde District Zhao Chuang Real Estate Limited (“Zhao Chuang”) pursuant to which the Company agreed to transfer the land use rights of a piece of land located at East of Waihuan Road, Ronggui Gaoli Community Residents’ Committee, Shunde District, Foshan District, the People’s Republic of China with an area of 133,334.05 m[2] to Zhao Chuang at a consideration of RMB127,207,347.72;

• (c) an equity transfer memorandum of understanding dated 31 October 2006 entered into between the Company and Chengdu Engine (Group) Co., Ltd (“Chengdu Engine Group”), Chengdu Xinxing Electrical Appliance Co., Ltd and Chengdu Kelon Refrigerator Co., Ltd (“Chengdu Kelon”), a subsidiary of the Company, in respect of an acquisition of 30% equity interest in Chengdu Kelon by the Company from Chengdu Engine Group at a consideration of RMB81,000,000 (subject to adjustment).

• (d) a settlement agreement dated 18 April 2007 entered into between the Company and Ronggui Rural Credit Cooperative of Shunde (“Ronggui Rural”) and Foshan Shunde Jiegao Investments Company Limited (“Jiegao”) pursuant to which the Company, Ronggui Rural and Jiegao acknowledged that Jiegao owed Ronggui Rural and the Company the principal amounts of RMB200 million and RMB168 million, respectively and Jiegao agreed to dispose of the land use right of a piece of land, which is held by Jiegao, located at the east of Wai Huan Lu, Rong Gui, Shunde District, Foshan City with a site area of 254,629.69 sq.m. and to repay the debt from the proceeds of the disposal of such land.

• (e) a sale and purchase agreement dated 15 March 2007 entered into between Kelon Electric Appliances Co., Ltd (“Kelon Electric”), a wholly owned subsidiary of the Company, and Getway Limited (“Getway”) pursuant to which Kelon Electric agreed to sell and Getway agreed to acquire the whole of 25/F., Harbour Centre, 25 Harbour Road, Hong Kong at a consideration of HK$123,295,400.

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GENERAL INFORMATION

APPENDIX VIII

• (f) a land use rights transfer agreement dated 13 May 2007 entered into between the Company and Hongke Investments Co., Ltd. (“Hongke”) pursuant to which the Company agreed to sell and Hongke agreed to acquire the land use rights of the of No. 27 Rongqi Avenue, Desheng Residents’ Committee, Ronggui Street Office, Shunde District, the PRC and the factories erected thereon at a consideration of RMB29,000,000.00.

• (g) a land use rights transfer agreement dated 14 May 2007 entered into between Guangdong Kelon Air-conditioning Company Limited (“Kelon Air-conditioning”), a subsidiary of the Company, and two natural persons (Zhou Dichang and Lv Zhihua) or the registered company owned by them pursuant to which Kelon Airconditioning agreed to sell and the two natural persons agreed to acquire the land use rights of Nanchong Industrial Park, Nanjiang Village’s Committee, Daliang Street Office, Shunde District, the PRC at a consideration of RMB17,338,300.

• (h) a land use rights transfer agreement dated 14 May 2007 entered into between the Company and Haogang Business & Trade Co., Ltd. (“Haogang”) pursuant to which the Company agreed to sell and Haogang agreed to acquire the land use rights of the of No. 2 Fengye Road, Desheng Residents’ Committee, Ronggui Street Office, Shunde District, the PRC and the buildings erected thereon at a consideration of RMB5,438,000.

• (i) a land use rights transfer agreement and a supplemental land use rights transfer agreement both dated 13 May 2007 entered into between the Company and Foshan Shunde Xinzhenhua Property Investment Company (“Foshan Shunde Xinzhenhua”) pursuant to which the Company agreed to sell and Foshan Shunde Xinzhenhua agreed to acquire the land use rights of six parcels of land located in Shunde District, Foshan City, the PRC and the factories erected thereon at a consideration of RMB91,200,000. Foshan Shunde Xinzhenhua agreed to pay a moving fees of RMB50,000,000 to the Company.

• (j) an agreement dated 27 July 2007 entered into between the Company, Hisense Imp. & Exp. Co., Ltd (“Hisense Export”), Hisense Electric Co., Ltd (“Hisense Electrical”) and natural person(s) to establish Qingdao Hisense International Marketing Co., Ltd. (the “JV Company”), a joint venture company, pursuant to which each of the Company, Hisense Export, Hisense Electrical and natural person(s) agreed to invest the sums of RMB3,800,000, RMB10,400,000, RMB3,800,000, and RMB2,000,000, respectively, in cash as capital contribution to the JV Company.

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GENERAL INFORMATION

APPENDIX VIII

• (k) a project construction agreement entered between the Company and the Administration Committee of Chengdu Economic & Technological Development Zone (“Administration Committee”) and the People’s Government of Longquanyi District, Chengdu City (“People’s Government”) pursuant to which the Administration Committee and the People’s Government agreed to provide the Company with land in net area of approximately 259 mu at a price of RMB84,000 per mu.

• (l) An equity transfer agreement dated 27 August 2007 entered between Jiangxi Kelon Industrial Development Co., Ltd (“Jiangxi Kelon”), a wholly-owned subsidiary of the Company, and Henan Province Kaifeng Economic Technology Development (Group) Company (“Henan Development”) pursuant to which Jiangxi Kelon agreed to sell and Henan Development agreed to acquire 70% of the equity interest in Kaifeng Kelon Air-Conditioner Co., Ltd (“Kaifeng Kelon”) for nil monetary consideration.

• (m) a debt settlement agreement dated 27 August 2007 entered between the Company and its subsidiaries, Jiangxi Kelon, and Henan Development pursuant to which the Company and its subsidiaries agreed to forgo their rights to debts of RMB37,363,000 owed by Kaifeng Kelon to the Company and its subsidiaries and Kaifeng Kelon agreed to forgo its rights to debts of RMB43,639,200 owed to it by the Company and its subsidiaries.

• (n) a capital injection agreement of Hisense (Nanjing) for phase 2 dated 20 August 2006 entered into between Hisense Beijing and Nanjing Aipulaisi High and New Technology Industrial Park Company Limited (“Nanjing Aipulaisi”) pursuant to which (i) Hisense Beijing contributed RMB21,650,200 in cash and RMB7,216,700 in intangible assets and (ii) Nanjing Aipulaisi contributed the equipment amounting to RMB 19,244,600 to Hisense (Nanjing) as the capital injection.

• (o) a construction work agreement dated 16 June 2005 entered into between Hisense (Nanjing) and Nanjing No.1 Construction Co., Ltd.（南京第一建築工程有限公 司）(“Nanjing No. 1”) pursuant to which Hisense Nanjing engaged Nanjing No.1 to contract the piling, land construction and installation of water and electricity supply works for a consideration of RMB43,850,586.

• (p) a land use right transfer agreement dated 23 August 2006 entered into between Hisense Zhejiang and Changxing County Bureau（長興縣國土資源局）pursuant to which Changxing County Bureau agreed to transfer the land use rights of a piece of land located at Baixi Village, Zhicheng Town, Changxing County, the PRC to Hisense Zhejiang at a consideration of RMB8,566,200;

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GENERAL INFORMATION

APPENDIX VIII

• (q) a land use right transfer agreement dated 12 November 2007 entered into between Hisense Zhejiang and Changxing County Bureau pursuant to which Changxing County Bureau agreed to transfer the land use rights of a piece of land located at Baixi Village, Zhicheng Town, Changxing County, the PRC to Hisense Zhejiang at a consideration of RMB7,890,000; and

• (r) a land use right transfer agreement dated 12 November 2007 entered into between Hisense Zhejiang and Changxing County Bureau pursuant to which Changxing County Bureau agreed to transfer the land use rights of a piece of land located at Baixi Village, Zhicheng Town, Changxing County, the PRC to Hisense Zhejiang at a consideration of RMB22,065,337.

12. NO MATERIAL CHANGE

The Directors confirm that save as disclosed in the sections headed “The Acquisition Agreement”, “Shareholding structure of the Company before and after Completion”, “Information of the Company”, “Information of the Target Group”, “Financial effects of the Acquisition on the Target Group”, “Reasons for and benefits of the Acquisition”, “Indebtedness”, “Working Capital” and “Financial and trading prospects of the Enlarged Group” in the “Letter from the Board” set out in this circular, the financial information as included in the “Interim Report 2007” of the Company published in Hong Kong on 23 August 2007, the financial information as included in the “2007 Third Quarterly Report” of the Company published in Hong Kong on 24 October 2007, the “Announcement of estimated profit increase” published in Hong Kong on 24 October 2007 and the “Announcement on the progress of assets disposal” published in Hong Kong on 21 December 2007, they are not aware of any material change in the financial or trading position or outlook of the Kelon Group (whether adverse or otherwise) since 31 December 2006, being the date to which the latest published audited consolidated accounts of the Company were made up, and up to the Latest Practicable Date.

13. EXPERTS

• (a) The following sets out the qualifications of the Experts who have given their opinions or advice as contained in this circular:

Name Qualifications BDO McCabe Lo Limited Certified Public Accountants Access Capital Limited A corporation licensed to carry on type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO

Sallmanns (Far East) Limited Chartered surveyors

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GENERAL INFORMATION

APPENDIX VIII

Tang Law Group

PRC Legal counsels to the Company

北京中威華德誠 Qualified PRC Valuer 資產評估有限公司 (Beijing Zhongwei Huadecheng Asset Appraisal Company Limited)

• (b) None of the Experts has any shareholding in the Company or any other member of the Kelon Group or the right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in the Company or any other member of the Kelon Group as at the Latest Practicable Date.

• (c) As at the Latest Practicable Date, none of the Experts has any direct or indirect interests in any assets which had been acquired or disposed of by or leased to any member of the Kelon Group since 31 December 2006 (the date to which the latest published audited consolidated financial statements of the Kelon Group were made up) or proposed to be so acquired, disposed of or leased.

• (d) The Experts have given and have not withdrawn their respective written consents to the issue of this circular with the inclusion of their respective advice, letters, reports and/or summary of their opinions (as the case may be) and references to their names and logos in the form and context in which they respectively appear.

MISCELLANEOUS

• (a) The registered office of the Company is at No. 8 Ronggang Road, Ronggui Street, Shunde District, Foshan City, Guangdong Province, PRC

• (b) The principal place of business of the Company in Hong Kong is at Room 3104-06, Singga Commercial Centre, No. 148 Connaught Road West, Hong Kong.

• (c) The Company is in the process of identifying a suitable candidate with the appropriate qualifications as its company secretary and qualified accountant in compliance with the Listing Rules .

• (d) Qingdao Hisense and Hisense Group Co. have undertaken to the Company that they will comply with the relevant PRC rules and regulations, “The notice to standardize on the cash flow between a listed Company and its associates and the guarantee to an outside party by a listed company” (Zheng Jian Fa (2003) 56) and “The notice to standardize the guarantee to an outside party by a listed company” (Zheng Jian Fa (2005) 120), in relation to any transaction between Qingdao Hisense and Hisense Group Co. and the Company as well as to any guarantee provided by the Company to Qingdao Hisense and Hisense Group Co..

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GENERAL INFORMATION

APPENDIX VIII

• (e) The registered address of Qingdao Hisense is at Changsha Road, Qingdao Hi-Tech Industrial Park, Chengdu City, Shandong Province, PRC. The board of directors of Qingdao Hisense comprises of Mr. Tang Ye Guo, Mr. Yang Yun Duo, Mr. Wang Shi Lei, Mr. Su Yu Tao, Mr. Zhang Ming, Mr. Liu Wen Zhong and Mr. Yuan Qing Lin. The ultimate holding Company of Qingdao Hisense is Hisense Group Co. and the board of directors of Hisense Group Co. comprises of Mr. Zhou Hou Jian, Ms. Yu Shu Min, Mr. Liu Guo Dong and Mr. Su Hui Zheng. Principal member of the Qingdao Hisense’s concert group includes Hisense Property Company Limited, Hisense Electric and Hisense Communications Limited. The registered address of Hisense Property Company Limited is at Haier Road South, Laoshan, Chengdu City, Shandong Province, PRC. The registered address of Hisense Electric is at No.218, Harbour Road Front, Economic Technology Region, Chengdu City, Shandong Province, PRC and the registered address of Hisense Communications Limited is at No.218, Harbour Road Front, Economic Technology Region, Chengdu City, Shandong Province, PRC.

• (f) The financial adviser to Qingdao Hisense is Daiwa Securities SMBC Hong Kong Limited and its registered address is at Level 26, One Pacific Place, 88 Queensway, Hong Kong.

• (g) The independent financial advisers of the Company is Access Capital Limited and its office is situated at suite 606, 6/F, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong.

• (h) This circular has been prepared in both English and Chinese. In the case of any discrepancies, the English text shall prevail over the Chinese text.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business in Hong Kong of the Company at Room 3104-06, Singga Commercial Centre, No. 148 Connaught Road West, Hong Kong during 9 a.m. to 5 p.m. (Monday to Friday) from the date of this circular up to and including 20 January 2008:

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

• (b) Business Co-operation Framework Agreement;

• (c) the annual reports of the Company for the two years ended 31 December 2006 and the interim report for the six months ended 30 June 2007;

• (d) the accountants’ reports on the Target Group dated 31 December 2007 prepared by BDO McCabe Lo Limited, the text of which is set out in Appendix II to this circular;

• (e) the report from BDO McCabe Lo Limited dated 31 December 2007 on the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix IV to this circular;

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GENERAL INFORMATION

APPENDIX VIII

• (f) letter relating to the profit forecasts of the Company and the Target Group for the year ended 31 December 2007 dated 31 December 2007 prepared by BDO McCabe Lo Limited, the text of which is set out in Appendix V to this circular;

• (g) letter relating to pro forma profit forecasts of the Enlarged Group for the year ending 31 December 2007 dated 31 December 2007 prepared by BDO McCabe Lo Limited, the text of which is set out in Appendix V to this circular;

• (h) letter relating to IFRS 2008 Profit Forecasts dated 31 December 2007 prepared by BDO McCabe Lo Limited, the text of which is set out in Appendix VI to this circular;

• (i) the valuation reports of the Enlarged Group dated 31 December 2007 and the property valuation certificates prepared Sallmanns (Far East) Limited, the text of which is set out in Appendix VII to this circular;

• (j) the letter from the Board, the text of which is set out on pages 10 to 50 of this circular;

• (k) the letter from the Independent Board Committee, the text of which is set out on page 51 of this circular;

• (l) the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 52 to 87 of this circular;

• (m) the letters of consent from the experts referred to in the section headed “Experts” in this Appendix;

• (n) the material contracts referred to in the section headed “Material Contracts” in this Appendix;

• (o) a discloseable transaction circular in relation to land disposals dated 13 June 2007;

• (p) a discloseable transaction circular in relation to debt transfer dated 29 June 2007; and

• (q) a connected transaction circular in relation to establishment of a joint venture company dated 14 August 2007.

The above documents will be available at the website of the Securities and Futures Commission at www.sfc.hk and the Company’s website at www.kelon.com from the date of this circular up to (and including) the date of the EGM in accordance with Note 1 to Rule 8 of the Takeovers Code.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED 海信科龍電器股份有限公司

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

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting (“EGM”) of Hisense Kelon Electrical Holdings Company (the “Company”) will be held at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC at 2:00 p.m. on 15 February 2008 for the purpose of considering and, if thought fit, approving with or without modification, the following resolutions. Unless otherwise defined, capitalised terms used in this notice and the following resolutions shall have the same meanings as those defined in the circular of the Company dated 31 December 2007:

Resolutions in relation to the Acquisition

SPECIAL RESOLUTIONS

1. “ THAT each of the following items in relation to the Acquisition be and is hereby approved”

2. (a) “ THAT the proposal for the Acquisition be and is hereby approved.”

3. (b) “Method of issue: THAT the non-public issue of A Shares be and is hereby approved.”

4. (c) “Type of shares to be issued: THAT the issue of A Shares denominated in Renminbi in the ordinary share capital of the Company be and is hereby approved.”

5. (d) “Nominal value of shares: THAT the issue of A Shares with a par value of RMB1.00 each be and is hereby approved.”

6. (e) “Size of the issue: THAT the issue of 364,097,421 A Shares be and is hereby approved.”

7. (f) “Target subscribers: THAT the issue of A Shares to Qingdao Hisense be and is hereby approved.”

8. (g) “Issue price: THAT the issue price of RMB6.98 per A Share be and is hereby approved.”

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NOTICE OF EXTRAORDINARY GENERAL MEETING

• (h) “Lock up arrangement: THAT the A Shares issued to Qingdao Hisense will not be traded or transferred for a period of 36 months from the date of issue be and is hereby approved.”

• (i) “Validity of the resolutions: THAT the resolutions in relation to the Acquisition remain valid for a period of twelve months following the approval by the Shareholders at the EGM be and is hereby approved.”

• (j) “Profit distribution arrangement: THAT all Shareholders (including those holders of A Shares to be issued hereof) be entitled to share all undistributed profits of the Company immediately before the issue of A Shares be and is hereby approved.”

Resolution in relation to the amendments to the Articles of Association

SPECIAL RESOLUTION

1. “ THAT the Articles of Association be and are hereby amended as follows:

Article 2.2 of the Articles of Association shall be amended from “The scopes of operation of the Company: development and manufacture of domestic appliances such as refrigerators, domestic and overseas sales of products and provision of after-sale services, transportation of self-operated products. The scopes of operation of the Company are in accordance with the scopes of operation approved by the industry, commerce and administrative authorities. The Company may adjust the scopes and the ways of operation and establish branch institutions in response to changes in market conditions and its own needs of operation under approval from the review and approval authorities from time to time.” to “The scopes of operation of the Company: development and manufacture of domestic appliances such as refrigerators, air-conditioners, freezers and washing machines, domestic and overseas sales of products and provision of after-sale services, transportation of self-operated products. The scopes of operation of the Company are in accordance with the scopes of operation approved by the industry, commerce and administrative authorities. The Company may adjust the scopes and the ways of operation and establish branch institutions in response to changes in market conditions and its own needs of operation under approval from the review and approval authorities from time to time.”

Article 3.5 of the Articles of Association shall be amended from “The total number of ordinary shares issued by the Company was approximately 992,006,563 shares, of which overseas listed foreign shares accounted for 459,589,808 shares, representing 46.33% of the total share capital while domestically-listed domestic shares accounted for 532,416,755 shares, representing 53.67% of the total share capital.” to “The total number of ordinary shares issued by the Company was approximately 1,356,103,984 shares, of which overseas listed foreign shares accounted for 459,589,808 shares, representing 33.89% of the total share capital while domestically-listed domestic shares accounted for 896,514,176 shares, representing 66.11% of the total share capital.”

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Article 3.8 of the Articles of Association shall be deleted.

Article 3.8 of the Articles of Association currently reads as “After the issuance of A- shares, the total number of paid-up capital was 992,006,563 shares, and the registered capital of the Company was RMB992,006,563. The entire capital of the Company was divided into shares of equal amount with a nominal value of RMB1 per share.”

Articles 3.9, 3.10, 3.11, 3.12 and 3.13 of the Articles of Association shall be renumbered as Articles 3.8, 3.9, 3.10, 3.11 and 3.12.

A new Article 7.8 shall be inserted to the Articles of Association to read as “The directors, supervisors and senior managements of the Company have the obligation to protect the capital of the Company from being embezzled by the controlling shareholder or the beneficial controller. In the case of directors and senior managements of the Company assisting or conniving the controlling shareholder or its subsidiaries in misappropriating the assets of the Company, the board of directors of the Company shall inflict punishment on the directly responsible persons and remove the directors with significant responsibilities. In the case of the controlling shareholder or beneficial controller of the Company misappropriating the assets of the Company, including but not limited to, the capital of a listing company, the board of directors of the Company shall immediately apply to the People’s Court in the name of the Company to legally freeze the assets of the Company embezzled and the shares of the Company held by the controlling shareholder or beneficial controller. For any misappropriated assets of the Company that cannot be restored to the original form or repaid in cash by the controlling shareholder or beneficial controller, the board of directors of the Company shall restitute the misappropriated assets of the Company by realizing the shares of the Company held by the controlling shareholder or beneficial controller in accordance with the provisions and procedures of the relevant laws, rules and regulations.”

The original Article 7.8 of the Articles of Association shall be renumbered as Article 7.9 and shall be amended to read as “The controlling shareholder set out in Articles 7.6, 7.7 and 7.8 of the Articles of Associations refer to persons meeting one of the following criteria: (1) shareholders whose shareholding account for more than fifty percent of the entire share capital of the Company; (2) shareholders whose shareholding account for less than fifty percent but the voting rights entitled by the shares held are sufficient to cause significant influence to the resolutions of shareholders’ meetings and general meetings.”

The original Article 7.9 of the Articles of Association shall be renumbered as Article 7.10

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Article 10.3 of the Articles of Association shall be amended from “Both the board of directors and the supervisory committee of the Company are entitled to propose resolutions at general meetings to nominate candidates for directorship or to change directors of the Company. In addition, shareholders holding or aggregately holding more than five percent of the total number of issued shares with voting rights are entitled to propose resolutions at general meetings to change directors of the Company. However, when nominating the directorship candidates, the maximum number of nominees shall be determined in accordance with the ratio of one directorship candidate for every five percent of the total number of shares with voting rights (the remaining balance not making up to five percent will be ignored and not taken into account). The written notice of the intention to propose directorship candidates and the statement of acceptance of nomination by the nominees shall not be delivered to the board of directors of the Company before the day following the despatch of the notice of general meeting for the directors election, and shall not be later than seven days before the holding of the general meeting. The resolutions related to the nomination of directorship candidates and change of directors shall be subject to the provisions of these Articles of Association.” to “Both the board of directors and the supervisory committee of the Company are entitled to propose resolutions at general meetings to nominate candidates for directorship or to change directors of the Company. In addition, shareholders holding or aggregately holding more than three percent of the total number of issued shares with voting rights are entitled to propose resolutions at general meetings to change directors of the Company. However, when nominating the directorship candidates, the maximum number of nominees shall be determined in accordance with the ratio of one directorship candidate for every three percent of the total number of shares with voting rights (the remaining balance not making up to three percent will be ignored and not taken into account). The written notice of the intention to propose directorship candidates and the statement of acceptance of nomination by the nominees shall not be delivered to the board of directors of the Company before the day following the despatch of the notice of general meeting for the directors election, and shall not be later than seven days before the holding of the general meeting. The resolutions related to the nomination of directorship candidates and change of directors shall be subject to the provisions of these Articles of Association.”

— N-4 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

Resolutions in relation to the waiver pursuant to the Takeover Procedures in respect of the obligation on Qingdao Hisense to acquire further Shares by way of an offer and resolutions in relation to the waiver pursuant to the Takeovers Code in respect of the obligation on Qingdao Hisense and its concert parties to make a mandatory general offer

ORDINARY RESOLUTION

1. (a) “ THAT the waiver in respect of the obligation on Qingdao Hisense to acquire further Shares by way of an offer (other than those already owned by Qingdao Hisense) be and is hereby approved and an application be made by Qingdao Hisense to CSRC for such waiver in accordance with clause 62(3) of the Takeover Procedures.”

2. (b) “ THAT , subject to the Executive granting to Qingdao Hisense and parties acting in concert with it the Whitewash Waiver and the satisfaction of any conditions attached to the Whitewash Waiver imposed by the Executive, the waiver pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code in respect of the obligation on Qingdao Hisense and parties acting in concert with it to make a mandatory general offer to the Shareholders to acquire Shares (other than those already owned or agreed to be acquired by Qingdao Hisense and parties acting in concert with it) pursuant to the Acquisition which would otherwise arise under Rule 26.1 of the Takeovers Code as a result of the allotment and issue of Consideration Shares be and is hereby approved.”

Resolution in relation to the Non-exempt Continuing Connected Transactions contemplated under the Business Co-operation Framework Agreement

ORDINARY RESOLUTION

1. “ THAT the Non-exempt Continuing Connected Transactions contemplated under the Business Co-operation Framework Agreement dated 28 December 2007, and the annual caps proposed to be adopted therefor be and are hereby approved.”

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Resolutions in relation to the authorisation of the Board to deal with, in its absolute discretion, all matters relating to the non-public allotment and issue of Consideration Shares

ORDINARY RESOLUTIONS

1. “ THAT , the Board be and is hereby authorised to deal with, in its absolute discretion and to the extent permitted by the relevant laws and regulations, all matters relating to the non-public allotment and issue of Consideration Shares, as they may consider necessary or expedient, including without limitation:

2. (a) to formulate and implement the proposal for the allotment and issue of Consideration Shares in accordance with the proposal approved by the Shareholders at the EGM, including but not limited to fixing the timetable for the allotment and issue of Consideration Shares;

3. (b) to revise the proposal for the allotment and issue of Consideration Shares for the purposes of complying with the relevant laws and regulations and the requirements of the relevant securities regulatory authorities in Hong Kong and the PRC;

4. (c) to handle all matters in relation to the listing of the Consideration Shares on the Shenzhen Stock Exchange;

5. (d) to handle all matters in connection with the Acquisition; and

6. (e) such authorisation will be valid for 12 months following the approval by the Shareholders at the EGM.”

Suspension of trading in the H Shares

At the request of the Company, trading in the H shares of the Company was suspended from 28 April 2005 to 10 May 2005, and has remained suspended since 10:00 a.m. on 16 June 2005, initially following various press releases regarding the investigation by the CSRC on Greencool Technology Holdings Limited in connection with the possible misappropriation of funds of the Company. Greencool Technology Holdings Limited was then an indirect shareholder of the Company controlled by Mr. Gu Chu Jun, who was the then executive director and chairman of the Company and the controlling shareholder of Guangdong Greencool Enterprise Development Company Limited, the then single largest shareholder of the Company.

The Company is currently reviewing the relevant documents in relation to the suspension of H Shares, the events leading to such suspension and the actions taken by the Company and will submit a resumption proposal to the Stock Exchange as soon as practicable.

By Order of the Board of

Hisense Kelon Electrical Holdings Company Limited Tang Ye Guo

Chairman

People’s Republic of China, 31 December 2007

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

• (1) H Shareholders intending to attend the EGM shall give written reply slip, as attached, to the Company (which may be delivered in person, by post or by fax) which shall be lodged at the registered office of the Company on or before 25 January 2008. To qualify for attendance at the EGM, all H Shares transfers accompanied by the relevant share certificates must be lodged with the Company’s Branch Share Registrar in Hong Kong, Hong Kong Registrars Limited of Rooms 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, no later than 4:00 p.m. on 15 January 2008 for registration.

• (2) Shareholders entitled to attend and vote at the EGM are entitled to appoint one or more persons (whether or not a Shareholder of the Company) as their proxy to attend and vote on behalf of themselves. In order to be valid, the form of proxy, together with a duly notarised power of attorney or other document of authority, if any, under which the form is signed must be deposited at the registered office of the Company not later than 24 hours before the time for holding the EGM.

• (3) Holders of domestic Shares and H Shares whose names appear on the register of members of the Company as at or before the close of business of 15 January 2008 (including holders of H Shares who have submitted verification transfer forms on or before 15 January 2008) will be entitled to attend the EGM. The register of members of the Company will be closed from 16 January 2008 to 15 February 2008 (both days inclusive).

• (4) The place for registration is: Securities Department, Hisense Kelon Electrical Holdings Company Limited, No. 8 Ronggang Road, Ronggui Street, Shunde District, Foshan City, Guangdong Province. Postal code: 528303 Tel: (86) 757 2836 2570 Fax (86) 757 2836 1055 Contact person: Li Lin, Lv Yan Song, Mei Shi Liang.

• (5) Appointment of proxies

• (i) Each shareholder who has the right to attend and vote at the EGM is entitled to appoint one or more proxies, whether they are Shareholders or not, to attend and vote on his behalf at the EGM. A proxy of a Shareholder who has appointed more than one proxy may only vote on a poll.

• (ii) Proxies of the Shareholders must be appointed in writing and the appointment must be signed by the Shareholders or their agents who have been duly authorised in writing. If the instrument of appointment of the proxy is signed by an agent of the Shareholder, the power of attorney or other authority of the agent must be notarially certified. In order to be valid, the notarially certified copy of such power of attorney or other authority, together with the instrument of appointment of the proxy, shall be deposited at the Company’s branch share registrar, Hong Kong Registrars Limited at the address given in Note (1) above, not less than 24 hours before the time appointed for holding of the EGM.

• (6) Shareholders attending the EGM are responsible for their own transportation and accommodation expenses.

• (7) Voting on the resolutions to approve the Acquisition, the Non-exempt Continuing Connected Transactions and the Whitewash Waiver will be conducted by way of poll as required under the Listing Rules and the Takeovers Codes, respectively.

• (8) Qingdao Hisense, its associates and parties acting in concert with it will abstain from voting in respect of resolutions no. 1(a) to 1(j), 3, 4 and 5 proposed to be considered and approved at the EGM.

• (9) Resolutions no. 3(a) and (b) shall be voted as a single resolution only.

• (10) Resolutions no. 5(a), 5(b), 5(c), 5(d) and 5(e) shall be voted as a single resolution only.

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NOTICE OF CLASS MEETING OF H SHAREHOLDERS

HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED 海信科龍電器股份有限公司

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

NOTICE OF CLASS MEETING OF H SHAREHOLDERS

NOTICE IS HEREBY GIVEN that the class meeting of the H Shareholders (“Class Meeting of H Shareholders”) of Hisense Kelon Electrical Holdings Company (the “Company”) will be held at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the People’s Republic of China (the “PRC”) at 3:00 p.m. on 15 February 2008 (or immediately after the conclusion or adjournment of the class meeting of the Shareholders of the A Shares for the purpose of considering and, if thought fit, approving with or without modification, the following resolutions. Unless otherwise defined, capitalised terms used in this notice and the following resolutions shall have the same meanings as those defined in the circular of the Company dated 31 December 2007:

Resolutions in relation to the Acquisition

SPECIAL RESOLUTIONS

1. “ THAT each of the following items in relation to the Acquisition be and is hereby approved”

2. (a) “ THAT the proposal for the Acquisition be and is hereby approved.”

3. (b) “Method of issue: THAT the non-public issue of A Shares be and is hereby approved.”

4. (c) “Type of shares to be issued: THAT the issue of A Shares denominated in Renminbi in the ordinary share capital of the Company be and is hereby approved.”

5. (d) “Nominal value of shares: THAT the issue of A Shares with a par value of RMB1.00 each be and is hereby approved.”

6. (e) “Size of the issue: THAT the issue of 364,097,421 A Shares be and is hereby approved.”

7. (f) “Target subscribers: THAT the issue of A Shares to Qingdao Hisense be and is hereby approved.”

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NOTICE OF CLASS MEETING OF H SHAREHOLDERS

• (g) “Issue price: THAT the issue price of RMB6.98 per A Share be and is hereby approved.”

• (h) “Lock up arrangement: THAT the A Shares issued to Qingdao Hisense will not be traded or transferred for a period of 36 months from the date of issue be and is hereby approved.”

• (i) “Validity of the resolutions: THAT the resolutions in relation to the Acquisition remain valid for a period of twelve months following the approval by the Shareholders at the EGM be and is hereby approved.”

• (j) “Profit distribution arrangement: THAT all Shareholders (including those holders of A Shares to be issued hereof) be entitled to share all undistributed profits of the Company immediately before the issue of A Shares be and is hereby approved.”

Suspension of trading in the H Shares

At the request of the Company, trading in the H shares of the Company was suspended from 28 April 2005 to 10 May 2005, and has remained suspended since 10:00 a.m. on 16 June 2005, initially following various press releases regarding the investigation by the CSRC on Greencool Technology Holdings Limited in connection with the possible misappropriation of funds of the Company. Greencool Technology Holdings Limited was then an indirect shareholder of the Company controlled by Mr. Gu Chu Jun, who was the then executive director and chairman of the Company and the controlling shareholder of Guangdong Greencool Enterprise Development Company Limited, the then single largest shareholder of the Company.

The Company is currently reviewing the relevant documents in relation to the suspension of H Shares, the events leading to such suspension and the actions taken by the Company and will submit a resumption proposal to the Stock Exchange as soon as practicable.

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

Foshan City, Guangdong, the PRC, 31 December 2007

Notes:

(1) H Shares Shareholders intending to attend the Class Meeting of H Shareholders shall give written reply slip, as attached, to the Company (which may be delivered in person, by post or by fax) which shall be lodged at the registered office of the Company on or before 25 January 2008. To qualify for attendance at the Class Meeting of H Shareholders, all H Shares transfers accompanied by the relevant share certificates must be lodged with the Company’s Branch Share Registrar in Hong Kong, Hong Kong Registrars Limited of Rooms 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, no later than 4:00 p.m. on 15 January 2008 for registration.

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NOTICE OF CLASS MEETING OF H SHAREHOLDERS

• (2) Shareholders entitled to attend and vote at the Class Meeting of H Shareholders are entitled to appoint one or more persons (whether or not a Shareholder of the Company) as their proxy to attend and vote on behalf of themselves. In order to be valid, the form of proxy, together with a duly notarised power of attorney or other document of authority, if any, under which the form is signed must be deposited at the registered office of the Company not later than 24 hours before the time for holding the Class Meeting of H Shareholders.

• (3) Holders of H Shares of the Company whose names appear on the register of members of the Company as at or before the close of business of 15 January 2008 (including holders of H Shares of the Company who have submitted verification transfer forms on or before 15 January 2008) will be entitled to attend the Class Meeting of H Shareholders. The register of members of the Company will be closed from 16 January 2008 to 15 February 2008 (both days inclusive).

• (4) The place for registration is: Securities Department, Hisense Kelon Electrical Holdings Company Limited, No. 8 Ronggang Road, Ronggui Street, Shunde District, Foshan City, Guangdong Province. Postal code: 528303 Tel: (86) 757 2836 2570 Fax (86) 757 2836 1055 Contact person: Li Lin, Lv Yan Song, Mei Shi Liang.

• (5) Appointment of proxies

• (i) Each shareholder who has the right to attend and vote at the Class Meeting of H Shareholders is entitled to appoint one or more proxies, whether they are Shareholders or not, to attend and vote on his behalf at the Class Meeting of H Shareholders. A proxy of a Shareholder who has appointed more than one proxy may only vote on a poll.

• (ii) Proxies of the Shareholders must be appointed in writing and the appointment must be signed by the Shareholders or their agents who have been duly authorised in writing. If the instrument of appointment of the proxy is signed by an agent of the Shareholder, the power of attorney or other authority of the agent must be notarially certified. In order to be valid, the notarially certified copy of such power of attorney or other authority, together with the instrument of appointment of the proxy, shall be deposited at the Company’s branch share registrar, Hong Kong Registrars Limited at the address given in Note (1) above, not less than 24 hours before the time appointed for holding of the Class Meeting of H Shareholders.

• (6) Shareholders attending the Class Meeting of H Shareholders are responsible for their own transportation and accommodation expenses.

• (7) Voting on the resolutions to approve the Acquisition will be conducted by way of poll as required under the Listing Rules.

• (8) Qingdao Hisense, its associates and parties acting in concert with it will abstain from voting in respect of resolutions no. 1(a) to 1(j) proposed to be considered and approved at the Class Meeting of H Shareholders.

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