Medlive Technology Co., Ltd. - Proxy Solicitation & Information Statement 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, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED , you should at once hand this circular to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

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

CONTINUING CONNECTED TRANSACTIONS

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

A letter from the Board of the Company is set out on pages 5 to 34 of this circular. A letter from the Independent Board Committee is set out on page 35 of this circular. A letter from AMS Corporate Finance Limited containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 37 to 65 of this circular.

A supplemental notice convening the EGM of the Company to be held at 9:30 a.m. on Monday, 19 March 2007 at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC is set out on pages 73 to 74 of this Circular. 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 supplemental form of proxy, together with a duly notarised power of attorney or other document of authority, if any, under which the supplemental 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. Completion and return of the supplemental form of proxy will not preclude you from attending and voting at the EGM or any adjournment thereof should you so wish.

5 March 2007

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . .	35
Letter from AMS Corporate Finance Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . .	37
Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	66
Supplemental Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	73

– i –

DEFINITIONS

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

“A Shares”	domestic ordinary shares of the Company with a nominal
	value of RMB1.00 each and are listed on the Shenzhen
	Stock Exchange
“AMS Corporate Finance”	AMS Corporate Finance Limited, a corporation licensed
	under the SFO to carry on type 4 (advising on securities),
	type 6 (advising on corporate finance) and type 9 (asset
	management) regulated activities under the SFO and the
	independent financial adviser to the Independent Board
	Committee and the Independent Shareholders in respect
	of the Compressors Purchase and Supply Framework
	Agreement and the Business Co-operation Framework
	Agreement
“Associate”	has the meaning ascribed to it in the Listing Rules
“Board”	the board of Directors
“Business Co-operation	the agreement ( ) dated 5 February
Framework Agreement”	2007 entered into between certain Subsidiaries of the
	Company and certain Subsidiaries of Hisense Group in
	connection with the sale and purchase of refrigerators,
	air-conditioners, raw materials, sale of moulds and
	provision of after-sale maintenance services to the
	customers of the Company
“Company”	Guangdong Kelon Electrical Holdings Company Limited,
	a company incorporated in the PRC with limited liability
	and listed on the main board of the Stock Exchange and
	Shenzhen Stock Exchange
“Compressors Purchase and	the agreement ( ) entered into
Supply Framework Agreement”	between certain Subsidiaries of the Company and Huayi
	Compressor, Jiaxi Beila or Huayi Jiangzhou dated 5
	February 2007 in connection with the purchase and
	supply of compressors
“Director(s)”	the current director(s) of the Company
“EGM”	the 2007 second 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 on 19 March 2007 at 9:30
	a.m.

– 1 –

DEFINITIONS

“Equity Transfer Agreement” the agreement entered into by Guangdong Greencool and Hisense Air-conditioning on 9 September 2005 in relation to the transfer of the 262,212,194 domestic legal person shares of the Company which was supplemented by a supplemental agreement entered into on 28 September 2005 and a second supplemental agreement entered into on 15 April 2006, the equity transfer was completed on 13 December 2006(for further details please refer to the announcement of the Company dated 14 September 2005, 30 September 2005, the circular dated 29 November 2005 and the announcements dated 21 April 2006 and 14 December 2006)

“Group” the Company and the Subsidiaries of the Company “Guangdong Greencool” Guangdong Greencool Enterprise Development Company Limited

==> picture [426 x 402] intentionally omitted <==

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

||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|“H|Shares”|overseas|listed|foreign|shares|of|the|Company|with|a|
|nominal|value|of|RMB1.00|each|and|are|listed|on|the|
|Stock|Exchange|
|“HC|Subsidiaries”|Guangdong|Kelon|Refrigerator|Co.,|Ltd.|
|(|),|Guangdong|Kelon|Air-|
|Conditioner|Co.,|Ltd|(|),|
|Guangdong|Kelon|Refrigerator|Ltd.|(|
|),Yingkou|Kelon|Refrigerator|Co.,|Ltd.|
|(|),|Hangzhou|Kelon|Electrical|
|Co.,|Ltd|(|),|Chengdu|Kelon|
|Refrigerator|Co.,|Ltd.|(|),|
|Yangzhou|Kelon|Electrical|Company|Limited|
|(|),|all|of|which|are|Subsidiaries|
|of|the|Company|
|“Hisense|Air-conditioning”|Qingdao|Hisense|Air-Conditioning|Co.,|Ltd|
|(|),|a|subsidiary|of|Hisense|Group|
|“Hisense|Group”|Hisense|Group|Company,|a|limited|company|
|incorporated|in|the|PRC|
|“Hong|Kong”|the|Hong|Kong|Special|Administrative|Region|of|the|
|PRC|
|“Huayi|Compressor”|Huayi|Compressor|Company|Limited|
|(|),|a|limited|company|
|incorporated|in|the|PRC|

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

– 2 –

DEFINITIONS

==> picture [426 x 589] intentionally omitted <==

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

|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|“Huayi|Jingzhou”|Huayi|Compressor|(Jingzhou)|Co.,|Ltd|
|(|),|a|Subsidiary|of|Huayi|
|Compressor|
|“HK$”|Hong|Kong|dollar(s),|the|lawful|currency|of|Hong|Kong|
|“HS|Companies”|or|“HS|Guangdong|Kelon|Refrigerator|Ltd.|
|Company”|(|),|Guangdong|Kelon|Air-|
|Conditioner|Co.,|Ltd|(|),|
|Guangdong|Kelon|Mould|Co.,|Ltd.|(|
|),|all|of|which|are|Subsidiaries|of|the|Company,|
|and|the|Company,|or|any|one|of|them|
|“Independent|Board|Committee”|an|independent|board|committee|of|the|Company|
|comprising|all|the|independent|non-executive|Directors,|
|namely|Mr.|Zhang|Sheng|Ping,|Mr.|Lu|Qing|and|Mr.|
|Cheung|Yui|Kai,|Warren|
|“Independent|Third|Parties”|Third|parties|independent|of|and|not|connected|with|the|
|Company|and|connected|persons,|as|defined|in|the|
|Listing|Rules,|of|the|Company|
|“Jiaxi|Beila”|Jiaxi|Beila|Compressor|Company|Limited|
|(|),|a|Subsidiary|of|Huayi|
|Compressor|
|“Kelon|Mould”|Guangdong|Kelon|Mould|Co.,|Ltd|(|
|),|a|company|incorporated|in|the|PRC|on|20|
|July|1994,|an|indirect|non-wholly|owned|Subsidiary|of|
|the|Company|
|“Latest|Practicable|Date”|27|February|2007,|being|the|latest|practicable|date|prior|
|to|the|printing|of|this|circular|for|ascertaining|certain|
|information|in|this|circular|
|“Listing|Rules”|Rules|Governing|the|Listing|of|Securities|on|the|Stock|
|Exchange|
|“PRC”|the|People’s|Republic|of|China|
|“RMB”|Renminbi|yuan,|the|lawful|currency|of|the|PRC|

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

– 3 –

DEFINITIONS

“Ronshen Plastic”	Shunde Ronshen Plastic Products Co,. Ltd ( ), a company
	incorporated in the PRC on 18 October 1991 and which
	is an indirect non wholly-owned Subsidiary of the
	Company
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the
	Laws of Hong Kong) as amended from time to time
“Share(s)”	share(s) of RMB1.00 each in the capital of the Company,
	comprising the A Shares and the H Shares
“Shareholder(s)”	holders of the Shares
“Shunde”	the main production base of the Company, consisting of
	a number of production plants of the Company, located in
	Shunde District, Foshan, Guangdong Province, the PRC
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subsidiary” or “Subsidiaries”	has the meaning defined in sections 2 and 2B of the
	Companies Ordinance (Cap. 32 of the Laws of Hong
	Kong)
“%”	per cent.

– 4 –

LETTER FROM THE BOARD

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

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

Executive Directors: Mr. Tang Ye Guo Ms. Yu Shu Min Mr. Yang Yun Duo Mr. Wang Shi Lei Mr. Lin Lan Mr. Xiao Jian Lin

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

Independent non-executive Directors:

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

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

5 March 2007

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

(A) COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT

The Board announces that on 5 February 2007 certain HC Subsidiaries entered into the Compressors Purchase and Supply Framework Agreement with Huayi Compressor, Jiaxi Beila or Huayi Jingzhou for a term of one year ending on 31 December 2007 in connection with the purchase of compressors for the purpose of manufacturing household electrical appliances, including but not limited to refrigerators and air-conditioners, by the Group.

(B) BUSINESS CO-OPERATION FRAMEWORK AGREEMENT

The Board announces that on 5 February 2007 HS Companies entered into the Business Co-operation Framework Agreement with certain Subsidiaries of Hisense Group for a term of one year ending on 31 December 2007 in connection with the sale and purchase of refrigerators, air-conditioners, raw materials, sale of moulds and provision of after-sale maintenance and repair services to the customers of the Group.

– 5 –

LETTER FROM THE BOARD

CONTINUING CONNECTED TRANSACTIONS

Compressors Purchase and Supply Framework Agreement

As at the date of this circular, each of Huayi Compressor, Jiaxi Beila and Huayi Jingzhou (both of which are non wholly-owned Subsidiaries of Huayi Compressor, Huayi Compressor holds approximately 53.78% and 51% of the issued share capital of Jiaxi Beila and Huayi Jingzhou respectively.) are connected persons of the Company by virtue of the holding of 30% equity interest by Huayi Compressor in each of Kelon Mould and Ronshen Plastic, both of which are non wholly-owned Subsidiaries of the Company. Accordingly, the transactions contemplated under the Compressors Purchase and Supply Framework Agreement constitute continuing connected transactions for the Company under the Listing Rules. As each of the applicable percentage ratios (other than the profit ratio) is more than 2.5%, the continuing connected transactions under the Compressors Purchase and Supply Framework Agreement are subject to reporting, announcement and independent shareholders’ approval requirements under Rule 14A.35 of the Listing Rules.

So far as the Company is aware, Huayi Compressor, Huayi Jingzhou and Jiaxi Beila are independent from, not related to and not otherwise connected with (as defined in the Listing Rules) Hisense Group or its Subsidiaries.

Business Co-operation Framework Agreement

As such, the transactions contemplated under the Business Co-operation Framework Agreement will be deemed to be continuing connected transactions of the Company under the Listing Rules and should be aggregated for the purpose of Rules 14A.25 to 14A.27 of the Listing Rules. Given that each of the applicable percentage ratios (other than the profit ratio) for the aggregated amount of the transactions contemplated under the Business Co-operation Framework Agreement is more than 2.5%, the continuing connected transactions 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.

The purpose of this circular is to provide you with details of the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement, to set out the recommendation of the Independent Board Committee and to set out the letter of advice from AMS Corporate Finance to the Independent Board Committee and the Independent Shareholders in respect of the terms of the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement.

– 6 –

LETTER FROM THE BOARD

(A) COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT

Date and Parties

Date

5 February 2007

Parties

(i) HC Subsidiaries (as purchaser); and
(ii) Huayi Compressor, Jiaxi Beila or Huayi Jinzhou (as supplier).

Term

The Compressors Purchase and Supply Framework Agreement is valid for a term of one year commencing from 1 January 2007 to 31 December 2007, which can be terminated before its expiration by mutual agreement of the parties.

The parties are entitled to terminate the Compressors Purchase and Supply Framework Agreement before its expiration upon mutual agreement or in the event of occurrence of any breaches of the Compressors Purchase and Supply 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, warranties and undertaking and non-fulfilment of its obligations by any party under the Compressors Purchase and Supply Framework Agreement, the other party(ies) is entitled to claim damages and compensation from such party.

The notice period (if any) to be given by either party to the other for such termination will be set out in the compressors purchase and supply orders to be entered between the relevant HC Subsidiaries and Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be).

Purchase of Compressors

Pursuant to the terms of the Compressors Purchase and Supply Framework Agreement, HC Subsidiaries agreed to purchase on a non-exclusive basis such quantities of compressors as they may require from time to time from each of Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) for the purpose of manufacturing household electrical appliances, including but not limited to refrigerators and air-conditioners, by the Group.

HC Subsidiaries will enter into individual compressors purchase and supply orders with Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) 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 Compressors Purchase and Supply Framework Agreement, including the pricing, operation and trading policies set out therein.

– 7 –

LETTER FROM THE BOARD

HC Subsidiaries have the right to purchase compressors from suppliers other than Huayi Compressor, Huayi Jingzhou and Jiaxi Beila from time to time according to their own needs. The Compressors Purchase and Supply Framework Agreement does not restrict the rights of Huayi Compressor, Huayi Jingzhou or Jiaxi Beila (as the case may be) to sell its compressors to any other third parties.

Pricing

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

Maximum Aggregate Annual Caps

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

For the year ending 31 December 2007 RMB336,000,000

The above annual cap was determined with reference to (a) similar transactions between the Subsidiaries of the Company with each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila in the past; (b) the prevailing market conditions that the demand for electrical appliances in the PRC increases rapidly as a result of its booming economy; and (c) the projected rising level of production of household electrical appliances of the Subsidiaries of the Company including but not limited to refrigerators and air-conditioners for the financial year ending 31 December 2007 as a result of the booming economy of the PRC and the rising demand for electrical appliances, especially in the rural areas of the PRC and the business development plan of the Company to significantly increase the production and sales level of refrigerators and air-conditioners in 2007.

It is currently estimated that the value of the transactions contemplated under the Compressors Purchase and Supply Framework Agreement will amount to approximately 18% of the total value of the same type of transactions, i.e. the purchase of compressors, to be conducted by the Group for the year ending 31 December 2007. The aggregate unaudited value of the same transactions conducted by the Group for the year ended 31 December 2006 was approximately RMB1,143,356,400.

The relevant HC Subsidiaries have conducted the same transactions, i.e. purchase of compressors, with Huayi Compressor, Huayi Jingzhou and Jiaxi Beila for the years ended 31 December 2005 and 31 December 2006 respectively. The total amount for such transactions for the years ended 31 December 2005 and 31 December 2006 were in the respective approximate sums of RMB104,853,130.68 and RMB129,174,805.03 (unaudited).

– 8 –

LETTER FROM THE BOARD

The cap amount for the purchase of compressors for the year ended 31 December 2007 is substantially higher than that for the year ended 31 December 2006. As a result of the increase in production capacity of compressors of Huayi Compressor, Huayi Compressor is able to supply more compatible compressors to the relevant HC Subsidiaries in 2007. In view of the development plan of the Company and in order to reduce costs of production, the relevant HC Subsidiaries plans to increase the purchase of compressors from Huayi Compressor in 2007. Jiaxi Beila will increase its production capacity of compressors in 2007 and will be able to supply more compatible compressors to the relevant HC Subsidiaries. In view of the stable good quality of the compressors produced by Jiaxi Beila, the relevant HC Subsidiaries plans to increase the purchase of compressors from Jiaxi Beila in 2007. Further, the Company was very satisfied with the quality and prices of the compressors produced by Huayi Jianzhou, and thus the relevant HC Subsidiaries plans to increase the purchase of compressors from Huayi Compressor in 2007.

REASONS FOR AND BENEFITS OF THE COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT

Each of HC Subsidiaries is engaged in the manufacture of household electrical appliances, including but not limited to refrigerators and air-conditioners, which requires compressors as a component for its products. After considering a range of factors including the quality, the price and the compatibility of the compressors manufactured by Huayi Compressor, Huayi Jingzhou and Jiaxi Beila with the current facilities used by and the refrigerators and air-conditioners manufactured by HC Subsidiaries, as well as the level of services provided by Huayi Compressor, Huayi Jingzhou and Jiaxi Beila, the Group considers each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila is in a good position to supply compressors to HC Subsidiaries.

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

(B) BUSINESS CO-OPERATION FRAMEWORK AGREEMENT

Date

5 February 2006

Parties

(i) HS Companies; and
(ii) certain Subsidiaries of Hisense Group.

Term

The Business Co-operation Framework Agreement is valid for a term of one year commencing from 1 January 2007 to 31 December 2007, which can be terminated before its expiration by mutual agreement of the parties.

– 9 –

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 breaches 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, warranties and undertaking and non-fulfilment of its obligations by any party under the Business Co-operation Framework Agreement, the other party(ies) is entitled to claim damages and compensation from such party.

The notice period (if any) to be given by either party to the other for such termination will be set out in the mould purchase orders, air-conditioners production and supply orders, refrigerators production and supply orders, raw materials production and supply orders, air-conditioners production and purchase orders, refrigerator production and purchase orders, raw materials purchase and supply orders and service provision orders to be entered between the relevant HS Companies and the relevant Subsidiaries of Hisense Group.

The Business Co-operation Framework Agreement is in connection with the following aspects of business co-operation between the HS Companies and the Subsidiaries of Hisense Group:

(1) Sale and Supply of Moulds

Pursuant to the Business Co-operation Framework Agreement, the relevant HS Company has agreed to manufacture and supply on a non-exclusive basis such quantities of moulds as the relevant Subsidiaries of Hisense Group may require from time to time for the purpose of the manufacture of household electrical appliances, including but not limited to air-conditioners. 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 of Hisense Group has the right to purchase moulds from suppliers other than the relevant HS Company from time to time according to its own needs. The Business Co-operation Framework Agreement does not restrict the rights of the relevant HS Company to sell its moulds to any other third parties.

Pricing

In response to the invitations to tender from the relevant Subsidiaries of Hisense Group (which are also extended to various Independent Third Parties) from time to time, the relevant HS Company may submit such tenders or bids to manufacture the moulds for such products requested by the relevant Subsidiaries of Hisense Group in their invitations to tender. Pricing for the manufacture of moulds is determined predominantly by the open bidding process. However, the prices offered by the relevant HS Company to the relevant Subsidiaries of Hisense Group for the sale and supply of moulds shall be on terms no more favourable than other third parties.

– 10 –

LETTER FROM THE BOARD

Reasons for and Benefits of the Sale and Supply of Moulds

The relevant HS Company is principally engaged in the design and manufacture of large and medium size moulds for household electrical appliances. The relevant Subsidiaries of Hisense Group is principally engaged in the manufacture of household appliances. The manufacture and provision of moulds by the relevant HS Company to the relevant Subsidiaries of Hisense Group therefore formed an integral part of the business of the relevant HS Company. The sale of moulds under the Business Co-operation Framework Agreement will facilitate the Company to maintain an important existing relationship with the relevant Subsidiaries of Hisense Group so that they may become stable customers of the Company thereby further expanding the sales of the Company. In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms of the sale and supply 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.

Maximum Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement regarding the sale and supply of moulds are subject to the annual cap set out below:

For the year ending 31 December 2007

RMB18,000,000

The above annual cap was determined with reference to (a) similar transactions between the relevant HS Company with the relevant Subsidiaries of Hisense Group in the past; (b) the prevailing market conditions that the demand for electrical appliances in the PRC increases rapidly as a result of its booming economy; and (c) the projected rising level of production of household electrical appliances of the relevant Subsidiaries of Hisense Group for the year ended 31 December 2007 based on its forecast of the market demand.

The relevant HS Company has conducted similar transactions with the relevant subsidiaries of Hisense Group for the year ended 31 December 2006 and the total unaudited amount for such transactions for the year ended 31 December 2006 was approximately RMB3,747,500.

The cap amount for the sale and supply of moulds for the year ended 31 December 2007 is higher than that for the year ended 31 December 2006.Apart from the moulds of televisions, the relevant HS Company also possesses strong experiences and good reputation for the production of moulds of “white electrical appliances”, i.e. air-conditioners and refrigerators. In view of the satisfactory cooperation relationship between the parties in 2006, the relevant Subsidiaries of Hisense Group have established confidence and trust in the quality of moulds produced by the relevant HS Company and the services it provides. The relevant HS

– 11 –

LETTER FROM THE BOARD

Company is also confident that it will be able to provide moulds of televisions, air-conditioners and refrigerators of good quality to the relevant Subsidiaries of Hisense Group. According to the understanding of the Company, the relevant Subsidiaries of Hisense Group also plan to increase its production of electrical appliances in 2007. As such, the Company estimates that the demand for moulds from the relevant Subsidiaries of Hisense Group will increase in 2007.

(2) Sale and Supply of Air-Conditioners

Pursuant to the Business Co-operation Framework Agreement, the relevant HS Company has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners (which models are different from the models of air-conditioners to be purchased by the relevant HS Company from the relevant Subsidiary of Hisense Group under the Business Co-operation Framework Agreement, the particulars of such models will be set out in the air-conditioners production and supply orders to be entered into between the relevant parties) as the relevant Subsidiary of Hisense Group may require from time to time for its sale to its customers.

The relevant parties agreed to enter into individual air-conditioners production 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 of Hisense Group has the right to purchase air-conditioners from suppliers other than the relevant HS Company from time to time according to its own needs. The Business Co-operation Framework Agreement does not restrict the rights of the relevant HS Company to sell air-conditioners to any other third parties.

Pricing

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

The prices offered by the relevant HS Company to the relevant Subsidiary of Hisense Group for the sale and supply of air-conditioners shall be on terms no more favourable than other third parties.

The price of individual air-conditioner to be sold by the relevant HS Company to the relevant Subsidiary of Hisense Group is determined according to the following standard:

– 12 –

LETTER FROM THE BOARD

The selling price of individual air-conditioner to be sold by the relevant HS Company to the relevant Subsidiary of Hisense Group should not be less than the aggregate of (1) production cost for individual air-conditioner, (2) management fee, and (3) after-sale service fee.

After considering the above pricing standard and the relevant percentage level of the management fee and after-sale service fee of the relevant HS Company and making reference with the market prices of air-conditioners, the price of individual air-conditioner agreed by both parties, is:

The price of air-conditioner (specific model) to be sold by the relevant HS Company to the relevant Subsidiary of Hisense Group = production cost of the air-conditioner (specific model) of the relevant HS Company/0.95

The relevant Subsidiary of Hisense Group is responsible for the collection of the air-conditioners from the relevant HS Company.

Reasons for and Benefits of the Sale and Supply of Air-Conditioners

The relevant HS Company is principally engaged in the design and manufacture of air-conditioners. The relevant Subsidiary of Hisense Group is principally engaged in the production, and sales of air-conditioners. Pursuant to the Business Co-operation Framework Agreement, the relevant HS Company shall manufacture and supply air-conditioners to the relevant Subsidiary of Hisense Group for its sale to its customers. The manufacture and provision of airconditioners by the relevant HS Company to the relevant Subsidiary of Hisense Group will increase the sales and revenues of the Group.

The competition in the air-conditioners’ market in the PRC is very keen at present with substantial increase in raw materials prices, the production and supply of air-conditioners by the relevant HS Company to the relevant Subsidiary of Hisense Group can help to lower the fixed costs per unit of product incurred by the relevant HS Company for the production of air-conditioners. Since the relevant HS Company possesses excess production capacity for air-conditioners and fixed costs (e.g. depreciation of machinery and rent) will be incurred by the relevant HS Company for the production of air-conditioners in any event, the production of air-conditioners for the relevant Subsidiary of Hisense Group can help to make the best use of the idling machinery and lower the fixed costs per unit of product incurred by the relevant HS Company as a result of the increase in production level and thus reducing the per-unit costs of production of air-conditioners by the relevant HS Company. Therefore, the competitiveness of the products of the Company will increase.

Further, since the Company has no means to access the sales channel of Hisense Group and in view of the above-mentioned benefits of selling and supplying air-conditioners to the relevant Subsidiaries of Hisense Group, the Company intends to entered into the Business Co-operation Framework Agreement.

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LETTER FROM THE BOARD

In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms of the sale and supply of air-conditioners under the Business Co-operation Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Maximum Aggregate Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement regarding the sale and supply of air-conditioners are subject to the annual cap set out below:

For the year ending 31 December 2007 RMB580,000,000

The above annual cap was determined with reference to (a) similar transactions between the relevant HS Company with the relevant Subsidiaries of Hisense Group in the past; (b) the prevailing market conditions that the demand for electrical appliances, including air-conditioners, in the PRC increases rapidly as a result of its booming economy; and (c) the projected rising level of production and sale of air-conditioners of the relevant Subsidiaries of Hisense Group for the year ended 31 December 2007 based on its forecast of the market demand.

The cap amount for the sale and supply of air-conditioners for the year ended 31 December 2007 is higher than that for the year ended 31 December 2006 due to the following reasons:

(a) The Company estimates that there will be an increase of demand for air-conditioners from the relevant Subsidiaries of Hisense Group due to the increasing demand in the air-conditioners’ market of the PRC as a result of its booming economy; and
(b) Since Hisense Air-conditioning has become a substantial shareholder of the Company, the co-operation relationship between the Company and Hisense Group will be strengthened and thus the transactions relating to the sale and supply of air-conditioners under the Business Co-operation Framework Agreement will also increase.

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(3) Sale and Supply of Refrigerators

Pursuant to the Business Co-operation Framework Agreement, the relevant HS Company has agreed to manufacture and supply on a non-exclusive basis such quantities of refrigerators (which models are different from the models of refrigerators to be purchased by the relevant HS Company from the relevant Subsidiary of Hisense Group under the Business Co-operation Framework Agreement, the particulars of such models will be set out in the refrigerators production and supply orders to be entered into between the relevant parties) as the relevant Subsidiary of Hisense Group may require from time to time for its sale to its customers. The relevant parties agreed to enter into individual refrigerators production 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 of Hisense Group has the right to purchase refrigerators from suppliers other than the relevant HS Company from time to time according to its own needs. The relevant HS Company also has the right to supply and sell refrigerators to other companies other than the relevant Subsidiary of Hisense Group.

Pricing

The pricing for the supply of refrigerators is determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between the relevant parties with reference to the market price of the refrigerators from time to time and the price fixing policy of OEM products within the industry. 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.

The prices offered by the relevant HS Company to the relevant Subsidiary of Hisense Group for the sale and supply of refrigerators shall be on terms no more favourable than other third parties.

The price of individual refrigerator to be sold by the relevant HS Company to the relevant Subsidiary of Hisense Group is determined according to the following standard:

The selling price of individual refrigerator to be sold by the relevant HS Company to the relevant Subsidiary of Hisense Group should not be less than the aggregate of (1) production cost for individual refrigerator, (2) management fee, and (3) after-sale service fee.

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LETTER FROM THE BOARD

After considering the above pricing standard and the relevant percentage level of the management fee and after-sale service fee of the relevant HS Company and making reference with the market prices of refrigerators, the price of individual refrigerator agreed by both parties, is:

The price of refrigerator (specific model) to be sold by the relevant HS Company to the relevant Subsidiary of Hisense Group = production cost of the refrigerator (specific model) of the relevant HS Company/0.93

The relevant Subsidiary of Hisense Group is responsible for the collection of the refrigerators from the relevant HS Company.

Reasons for and Benefits of the Sale and Supply of Refrigerators

The relevant HS Company is principally engaged in the design and manufacture of refrigerators. The relevant Subsidiary of Hisense Group is principally engaged in the production, research and sales of household appliances and electronic products and the provision of related services. Pursuant to the Business Co-operation Framework Agreement, the relevant HS Company shall manufacture and supply refrigerators to the relevant Subsidiary of Hisense Group for its sale to its customers. The manufacture and provision of refrigerators by the relevant HS Company to the relevant Subsidiary of Hisense Group will increase the sales and revenues of the Group.

The competition in the refrigerators’ market in the PRC is very keen at present with substantial increase in raw materials prices, the production and supply of refrigerators by the relevant HS Company to the relevant Subsidiary of Hisense Group can help to lower the fixed costs per unit of product incurred by the relevant HS Company for the production of refrigerators. The relevant HS Company possesses excess production capacity for refrigerators and fixed costs (e.g. depreciation of machinery and rent) will be incurred by the relevant HS Company for the production of refrigerators in any event, the production of refrigerators for the relevant Subsidiaries of Hisense Group can help to make the best use of the idling machinery and lower the fixed costs per unit of product incurred by the relevant HS Company as a result of the increase in production level and thus reducing the per-unit costs of production of refrigerators by the relevant HS Company. Therefore, the competitiveness of the products of the Company will increase.

Further, since the Company has no means to access the sales channel of Hisense Group and in view of the above-mentioned benefits of selling and supplying refrigerators to the relevant Subsidiaries of Hisense Group, the Company intends to entered into the Business Co-operation Framework Agreement.

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the sale and supply of refrigerators under the Business Co-operation Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Maximum Aggregate Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement regarding the sale and supply of refrigerators are subject to the annual cap set out below:

For the year ending 31 December 2007 RMB212,500,000

The above annual cap was determined with reference to (a) the prevailing market conditions that the demand for electrical appliances, including refrigerators, in the PRC increases rapidly as a result of its booming economy; and (b) the projected level of production and sale of refrigerators of the relevant Subsidiaries of Hisense Group for the year ended 31 December 2007 based on its forecast of market demand.

The relevant HS Company did not conduct any similar transactions with the relevant subsidiaries of Hisense Group for the year ended 31 December 2006 or in the past.

(4) Sale and Supply of Raw Materials

Pursuant to the Business Co-operation Framework Agreement, the relevant HS Companies have agreed to manufacture and supply on a non-exclusive basis such quantities of raw materials (including “white board materials”, “black board materials” and compressors) and components of refrigerators and air-conditioners (which models and nature are different from the models and nature of raw materials of components of refrigerators and air-conditioners to be purchased by the relevant HS Company from the relevant Subsidiary of Hisense Group under the Business Co-operation Framework Agreement, the particulars of such models will be set out in the raw-materials production and supply orders to be entered into between the relevant parties) as the relevant Subsidiaries of Hisense Group may require from time to time for the purpose of the manufacture of refrigerators and air-conditioners, for sale to the Company pursuant to the Business Co-operation Framework Agreement (which will be elaborated in subsequent section of this circular). The relevant parties agreed to enter into individual raw materials production 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 Subsidiaries of Hisense Group has the right to purchase raw materials and components of refrigerators and air-conditioners from suppliers other than the relevant HS Companies from time to time according to its own needs. The Business Co-operation Framework Agreement does not restrict the rights of the relevant HS Companies to sell raw materials and components of refrigerators and air-conditioners to any other third parties.

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Pricing

Pricing for the sale and supply of raw materials is determined principally by arm’s length commercial negotiation between the relevant HS Companies and the relevant Subsidiaries of Hisense Group according to the principle of fairness and reasonableness with reference to the market price of raw materials and components of refrigerators and air-conditioners 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.

The prices offered by the relevant HS Company to the relevant Subsidiaries of Hisense Group for the sale and supply of raw-materials shall be on terms no more favourable than other third parties.

Reasons for and Benefits of the Sale and Supply of Raw Materials

The relevant HS Companies are principally engaged in the design and manufacture of refrigerators and air-conditioners. The relevant Subsidiaries of Hisense Group is principally engaged in the production and sales of household appliances and electronic products. Pursuant to the Business Co-operation Framework Agreement, the relevant Subsidiaries of Hisense Group shall manufacture and supply refrigerators and air-conditioners to the Company (which will be elaborated out in subsequent section of the circular). In the circumstances, the relevant Subsidiaries of Hisense Group shall purchase compatible refrigerators’ and air-conditioners’ components for the production of refrigerators and airconditioners for its sale to the Company. The provision of refrigerators’ and air-conditioners components by the relevant HS Companies to the relevant Subsidiaries of Hisense Group facilitates the Company to distribute and sell its products Further, the HS Company considers that the relevant subsidiary of Hisense Group is a reliable business co-operation partner and is beneficial to the business of the HS Company. The purchase of refrigerators between the parties under the Business Co-operation Framework Agreement is in compliance with the relevant laws and regulations of the PRC. They will not jeopardise the interest of the Group and the Shareholders and will not affect the independence of the Group.

Further, the Company anticipates that there will be a shortage of compressors in 2007, especially the models used by the Company and the relevant Subsidiaries of Hisense Group for the production of refrigerators. Meanwhile, monopoly exists in the upstream supply of steel boards, a component for the production of refrigerators. The sale and supply of raw materials under the Business Co-operation Framework Agreement can help to reduce the adverse effects of these influences on the Group and thus lowering the costs for the Company to purchase refrigerators from the relevant Subsidiaries of Hisense Group.

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LETTER FROM THE BOARD

In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms of the sale and supply of raw materials and components of refrigerators and air-conditioners under the Business Co-operation Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Maximum Aggregate Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement regarding the sale and supply of raw materials are subject to the annual cap set out below:

For the year ending 31 December 2007 RMB35,000,000

The above annual cap was determined with reference to (a) similar transactions between the relevant HS Company with the relevant Subsidiaries of Hisense Group in the past; (b) the prevailing market conditions that the demand for electrical appliances, including air-conditioners and refrigerators, in the PRC increases rapidly in view of its booming economy; and (c) the projected rising level of purchase of air-conditioners and refrigerators by the relevant HS Companies from the relevant Subsidiaries of Hisense Group for the year ended 31 December 2007.

The cap amount for the sale and supply of raw materials and components of refrigerators and air-conditioners for the year ended 31 December 2007 is higher than that for the year ended 31 December 2006 due to the following reasons:

(a) The Company estimates that there will be an increase of demand for air-conditioners and refrigerators produced by the relevant Subsidiaries of Hisense Group from the relevant HS Companies due to the booming economy in the PRC. Thus, there will be a corresponding increase of demand for raw materials and components of refrigerators and airconditioners from the relevant Subsidiaries of Hisense Group to facilitate its production; and
(b) Under the Business Co-operation Agreement, the relevant HS Company will purchase refrigerators from the relevant Subsidiary of Hisense Group. Since such type of transaction was not conducted in 2006 and the relevant Subsidiary of Hisense Group needs to purchase compatible raw materials and refrigerators’ components from the relevant HS Company to produce refrigerators to the relevant HS Company (which details for the transaction will be set out in subsequent section of this circular), the demand for raw materials and refrigerators’ components from the relevant Subsidiary of Hisense Group will increase. As such, the cap for sale and supply of raw materials, air-conditioners and refrigerators’ components will also increase.

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LETTER FROM THE BOARD

(5) Purchase of Air-Conditioners

Pursuant to the Business Co-operation Framework Agreement, the relevant Subsidiaries of Hisense Group has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners (which models are different from the models of air-conditioners to be sold by the relevant HS Company to the relevant Subsidiary of Hisense Group under the Business Co-operation Framework Agreement, the particulars of such models will be set out in the air-conditioners production and purchase orders to be entered into between the relevant parties) as the HS Company may require from time to time to facilitate its sale. The parties agreed to enter into individual air-conditioners production and 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 HS Company has the right to purchase air-conditioners from suppliers other than the relevant Subsidiaries of Hisense Group from time to time according to its own needs. The Business Co-operation Framework Agreement does not restrict the rights of the relevant Subsidiaries of Hisense Group to sell air-conditioners to any other third parties.

Pricing

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

The price of individual air-conditioner to be sold by the relevant Subsidiaries of Hisense Group to the HS Company is determined according to the following standard:

The purchase price of individual air-conditioner to be purchased by the HS Company from the relevant Subsidiaries of Hisense Group should be less than or equal to the aggregate of (1) production cost for individual air-conditioner produced by the HS Company, (2) management fee, and (3) transportation costs for individual air-conditioner (from Shunde to the locations of the relevant Subsidiaries of Hisense Group)

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LETTER FROM THE BOARD

After considering the above pricing standard and the relevant percentage level of the production costs and management fee of the HS Company and making reference to the market prices of air-conditioners, the price of individual airconditioner agreed by both parties is:

The price of air-conditioner (specific model) to be sold by the relevant Subsidiaries of Hisense Group to the HS Company = production cost of the air-conditioner (specific model) of the HS Company/0.95 the HS Company is responsible for the collection of the air-conditioners from the relevant Subsidiaries of Hisense Group.

Reasons for and Benefits of the Purchase of Air-Conditioners

The HS Company is principally engaged in the manufacture and sales of refrigerators and air-conditioners. The relevant Subsidiaries of Hisense Group is principally engaged in the production of air-conditioners and the production and sales of other household electrical appliances.

Taking into account a range of factors including the reduction in transportation costs, the improvement in competitiveness, the quality and the price of the air-conditioners manufactured by the relevant Subsidiaries of Hisense Group, as well as the level of services provided by the relevant Subsidiaries of Hisense Group, the HS Company considers that the purchase of air-conditioners under the Business Co-operation Framework Agreement will improve the competitiveness and responsiveness of the air-conditioners of the HS Company and thus facilitating the Group’s air-conditioner sales so as to assist the HS Company to further develop its business.

The pricing for the purchase of air-conditioners by the HS Company from the relevant Subsidiaries of Hisense Group will be substantially the same as the aggregate costs of production of air-conditioners by the HS Company in Shunde, and costs of transportation of the same for sale to the relevant locations of the relevant Subsidiaries of Hisense Group. The purchase of air-conditioners from the relevant Subsidiaries of Hisense Group will reduce the time of transportation between Shunde, to the location of the relevant Subsidiaries of Hisense Group, improving the responsiveness of the HS Company to changes in the market conditions as well as changes in climate and thus preventing loss of market share to its competitors.

A reduction in the transportation distance of air-conditioners will also reduce probable damages to the cooling products during transportation.

In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms for the purchase of air-conditioners under the Business Co-operation Framework Agreement are fair and reasonable and in the interests of the HS Company and the Shareholders as a whole.

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Maximum Aggregate Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement regarding the purchase of air-conditioners are subject to the annual cap set out below:

For the year ending 31 December 2007 RMB607,500,000

The above annual cap was determined with reference to (a) the similar transactions between the relevant HS Company with the relevant Subsidiaries of Hisense Group in the past; (b) the prevailing market conditions that the demand for electrical appliances, including air-conditioners, in the PRC increases rapidly as a result of its booming economy; and (c) the projected rising level of sale of air-conditioners by the relevant HS Company for the year ended 31 December 2007 based on its business development plan and forecast of the market demand.

The cap amount for the purchase of air-conditioners for the year ended 31 December 2007 is higher than that for the year ended 31 December 2006 due to the following reasons:

(a) It is estimated by the Company that there will be an increase of demand for air-conditioners as a result of the booming economy of the PRC. In order to meet such rise in demand, the relevant HS Company will increase its purchase of air-conditioners from the relevant Subsidiaries of Hisense Group; and
(b) Since Hisense Air-conditioning has become a substantial shareholder of the Company, the co-operation relationship between the Company and Hisense Group will be strengthened and it is anticipated that the transactions relating to the purchase of air-conditioners under the Business Co-operation Framework Agreement will also increase.

(6) Purchase of Refrigerators

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facilitate its sale, which is a strong sales region for refrigerators of the Group. The parties agreed to enter into individual refrigerator production and 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 HS Company has the right to purchase refrigerators from suppliers other than the relevant Subsidiaries of Hisense Group from time to time according to its own needs. The Business Co-operation Framework Agreement also does not restrict the rights of the relevant Subsidiaries of Hisense Group to sell refrigerators to any other third parties.

Pricing

The pricing for the purchase of refrigerators is determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between the HS Company and the relevant Subsidiaries of Hisense Group with reference to market price of the refrigerators from time to time and the Group’s knowledge of pricing policy of OEM products within the industry. 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. The price of individual refrigerator to be sold by the relevant Subsidiaries of Hisense Group to the HS Company is determined according to the following standard:

The purchase price of individual refrigerator to be purchased by the HS Company from the relevant Subsidiaries of Hisense Group should be less than or equal to the aggregate of (1) production cost for individual refrigerator produced by the HS Company, (2) management fee, and (3) transportation costs for individual refrigerator (from Shunde to the locations of the relevant Subsidiaries of Hisense Group).

After considering the above pricing standard and the relevant percentage level of the production costs and management fee of the HS Company and making reference to the market prices of refrigerators, the price of individual refrigerator agreed by both parties is:

The price of refrigerator (specific model) to be sold by the relevant Subsidiaries of Hisense Group to the HS Company = production cost of the refrigerator (specific model) of the HS Company/0.93 the HS Company is responsible for the collection of the refrigerators from the relevant Subsidiaries of Hisense Group.

Reasons for and Benefits of the Purchase of Refrigerators

The HS Company is principally engaged in the manufacture and sales of refrigerators and air-conditioners. The relevant Subsidiaries of Hisense Group is

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principally engaged in the production of refrigerators and the production and sales of other household electrical appliances.

Taking into account a range of factors including the reduction in transportation costs, the improvement in competitiveness, the quality and the price of the refrigerators manufactured by the relevant Subsidiaries of Hisense Group, as well as the level of services provided by the relevant Subsidiaries of Hisense Group, the HS Company considers that the purchase of refrigerators under the Business Co-operation Framework Agreement will improve the competitiveness and responsiveness of the refrigerators of the HS Company for its sales and thus facilitating the Group’s refrigerators sales so as to assist the HS Company to further develop its business.

The pricing for the purchase of refrigerators by the HS Company from the relevant Subsidiaries of Hisense Group will be substantially the same as the aggregate costs of production of refrigerators by the HS Company in Shunde, and costs of transportation of the same for sale to the relevant locations of the relevant Subsidiaries of Hisense Group.

The purchase of refrigerators from the relevant Subsidiaries of Hisense Group will reduce the time of transportation between Shunde, and the location of the relevant Subsidiaries of Hisense Group, improving the responsiveness of the HS Company to changes in the market and preventing loss of market share to its competitors.

A reduction in the transportation distance of refrigerators will also reduce wear and tear to the cooling products during transportation. In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms for the purchase of refrigerators under the Business co-operation Framework Agreement are fair and reasonable and in the interests of the HS Company and the Shareholders as a whole.

Maximum Aggregate Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement regarding the purchase of refrigerators are subject to the annual cap set out below:

For the year ending 31 December 2007

RMB270,000,000

The above annual cap was determined with reference to (a) the prevailing market conditions that the demand for electrical appliances, including refrigerators, in the PRC increases rapidly in view of its booming economy; and (b) the projected increasing level of and sale of refrigerators by the relevant HS Company for the year ended 31 December 2007 based on its business development plan and forecast of the market demand.

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The relevant HS Company did not conduct any similar transactions with the relevant subsidiaries of Hisense Group for the year ended 31 December 2006 or in the past.

(7) Purchase of Raw Materials

Pursuant to the Business Co-operation Framework Agreement, the relevant HS Companies has agreed to purchase on a non-exclusive basis such quantities of raw materials (including “white board materials”, “black board materials” and compressors) and refrigerators’ and air-conditioners’ components (which models and nature are different from the models and nature of raw materials of refrigerators’ and airconditioners’ components to be purchased by the relevant Subsidiary of Hisense Group from the relevant HS Company under the Business Co-operation Framework Agreement, the particulars of such models will be set out in the raw-materials production and purchase orders to be entered into between the relevant parties) as it may require from time to time for the purpose of the manufacture of air-conditioners and refrigerators, for sale to the relevant Subsidiaries of Hisense Group pursuant to the Business Co-operation Framework Agreement (which are set out in previous sections of this circular). The parties agreed to enter into individual raw materials production and 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 HS Companies has the right to purchase raw materials and refrigerators’ and air-conditioners’ components from suppliers other than the relevant Subsidiaries of Hisense Group from time to time according to its own needs. The Business Co-operation Framework Agreement does not restrict the rights of the relevant Subsidiaries of Hisense Group to sell its raw materials and refrigerators’ and airconditioners’ components to any other third parties.

Pricing

Pricing for the purchase of raw materials is determined principally by arm’s length commercial negotiation between the relevant HS Companies and the relevant Subsidiaries of Hisense Group according to the principle of fairness and reasonableness with reference to the market price of raw materials and components of refrigerators and air-conditioners 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.

Reasons for and Benefits of the Purchase of Raw Materials

The relevant HS Companies are principally engaged in the design and manufacture of air-conditioners and refrigerators. The relevant Subsidiaries of Hisense Group are principally engaged in the manufacture of electrical appliances,

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including air-conditioners. Pursuant to the Business Co-operation Framework Agreement, the HS Company shall manufacture and supply refrigerators and air-conditioners to the Subsidiaries of Hisense Group (which were set out in previous parts of the circular). In the circumstances, HS Company shall purchase compatible raw materials and refrigerators’ and air-conditioners’ components for the production of refrigerators and air-conditioners for its sale to the relevant Subsidiary of Hisense Group.

The purchase of raw materials by the relevant HS Companies from the relevant Subsidiaries of Hisense Group will improve the control of reserve fund by the relevant HS Companies and reduce purchase costs, and at the same time, can reduce the limitation of the bottleneck in the production of upstream raw materials during peak season, achieving full utilisation of resources.

Further, the Company anticipates that there will be a shortage of compressors in 2007, especially the models used by the Company and the relevant Subsidiaries of Hisense Group for the production of refrigerators. Meanwhile, monopoly exists in the upstream supply of steel boards, a component for the production of refrigerators. The sale and supply of raw materials and refrigerators’ and airconditioners’ components under the Business Co-operation Framework Agreement can help to reduce the adverse effects of these influences on the Company and thus lowering the production costs for the Company to manufacture refrigerators and air-conditioners to the relevant Subsidiary of Hisense Group.

In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the terms of the purchase of raw materials and components of refrigerators and air-conditioners under the Business Co-operation Framework Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Maximum Aggregate Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement regarding the purchase of raw-materials are subject to the annual cap set out below:

For the year ending 31 December 2007

RMB55,000,000

The above annual cap was determined with reference to (a) the similar transactions between the relevant HS Company with the relevant Subsidiaries of Hisense Group in the past; (b) the prevailing market conditions that the demand for electrical appliances, including air-conditioners and refrigerators, in the PRC increases rapidly as a result of its booming economy; and (c) the projected rising level of sale and production of air-conditioners and refrigerators by the relevant HS Companies to the relevant Subsidiaries of Hisense Group for the year ended 31 December 2007.

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The cap amount for the purchase of raw materials for the year ended 31 December 2007 is higher than that for the year ended 31 December 2006 due to the following reasons:

(1) The Company estimates that there will be an increase of demand for air-conditioners and refrigerators produced by the relevant HS Companies from the relevant Subsidiaries of Hisense Group due to the booming economy in the PRC. Thus, there will be a corresponding increase of demand for raw materials and components of refrigerators and air-conditioners from the relevant HS Companies to facilitate its production; and
(2) Under the Business Co-operation Agreement, the relevant HS Company will supply refrigerators to the relevant Subsidiary of Hisense Group. Since such type of transaction was not conducted in 2006 and the relevant HS Company needs to purchase compatible raw materials and refrigerators’ components from the relevant Subsidiary of Hisense Group to produce refrigerators to the relevant Subsidiary of Hisense Group (which details for the transaction has been set out in preceding section of this circular), the demand for raw materials and refrigerators’ components from the relevant HS Company will increase. As such, the cap for the purchase of raw materials, air-conditioners and refrigerators’ components will also increase.

(8) Provision of Services

Pursuant to the Business Co-operation Framework Agreement, the HS Company has agreed to engage the relevant Subsidiary of Hisense Group for the provision of after-sale maintenance and repair services to the customers of the Group in 27 cities including Beijing, Tianjin and Shijiazhuang and Shangdong Province (the “Regions”) who have purchased refrigerators from the Group. The parties agreed to enter into individual service provision orders setting out specific terms for the provision of the maintenance and repair 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 HS Company has the right to engage from time to time according to its own needs other service providers to provide after-sale maintenance and repair services to the customers of the Group other than the relevant Subsidiary of Hisense Group. The Business Co-operation Framework Agreement also does not restrict the rights of the relevant Subsidiary of Hisense Group to provide after-sale maintenance and repair services to any other third parties.

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Pricing

The fees payable by the HS Company to the relevant Subsidiary of Hisense Group for the provision of after-sale maintenance and repair services to the customers of the Group in the Regions is determined principally by arm’s length commercial negotiations according to the principle of fairness and reasonableness between the HS Company and the relevant Subsidiary of Hisense Group with reference to the market price for the provision of after sale maintenance and repair service 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.

Reasons for and Benefits of the Engagement for the Service Provision

The HS Company is principally engaged in the manufacture and sales of refrigerators and air-conditioners. The relevant Subsidiary of Hisense Group is principally engaged in the provision of repair and maintenance services for electrical appliances At present, the HS Company does not have its own repair and maintenance services team to provide after-sale maintenance and repair services to its customers and as such, it has to engage third party service provider for the provision of the after-sale maintenance and repair services to its customers, including customers in the Regions. Even though the HS Company will continue to engage other third parties service providers for the provision of the after-sale maintenance and repair services to its customers, the engagement of the relevant Subsidiary of Hisense Group for the provision of after-sale maintenance and repair services can help the HS Company to reduce reliance on a single service provider, foster its control on its services network, enhance its supervision on the maintenance and repair service teams and enable the HS Company to make long term planning on maintenance services provision.

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

Maximum Aggregate Annual Cap

The transactions contemplated by the Business Co-operation Framework Agreement regarding the provision of services are subject to the annual cap set out below:

For the year ending 31 December 2007

RMB10,000,000

The above annual cap was determined with reference to the services fees incurred in similar transactions between the relevant HS Company with Independent Third Parties in the past.

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LETTER FROM THE BOARD

The relevant HS Company did not conduct any similar transactions with the relevant subsidiaries of Hisense Group for the year ended 31 December 2006 or in the past.

INFORMATION RELATING TO THE COMPANY

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

INFORMATION RELATING TO HUAYI COMPRESSOR

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

As at 31 December 2005, the Company held approximately 22.73% of the issued share capital of Huayi Compressors and was its second largest shareholder. As at the Latest Practicable Date, the Company’s shareholding interest in Huayi Compressors has been reduced to approximately 18.26%.

INFORMATION ON JIAXI BEILA

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

INFORMATION ON HUAYI JINGZHOU

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

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LETTER FROM THE BOARD

INFORMATION ON HISENSE GROUP

Hisense Group Limited was incorporated in the PRC in 1979 with limited liability. It has a registered capital of RMB806,172,200. Its authorised representative is Zhou Hou Jian. Its registered address is 17 Donghai W Rd., Qingdao City. It is principally engaged in trust operation of state-owned assets; and the manufacturing and sale of TV set, DVD/VCD player, hi-fi set, broadcasting and television equipment, air-conditioner, electronic computer, telephone set, communications product, network product and electronic products; the development of software; sale and after-sale services, technological development and consultancy, self-managed import & export trade with the items verified by the Ministry of Foreign Trade and Economic Cooperation (“MOFTEC”), Sino-foreign economic and technical co-operation with the items verified by MOFTEC.

CONTINUING CONNECTED TRANSACTIONS

THE COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT

As at the date of this circular, Huayi Compressor owns 30% of the equity interest in each of Kelon Mould and Ronshen Plastic, both of which are non wholly-owned Subsidiaries of the Company and Huayi Jingzhou and Jiaxi Beila are non wholly-owned Subsidiaries of Huayi Compressor. Huayi Compressor holds approximately 53.78% and 51% of the issued share capital of Jiaxi Beila and Huayi Jingzhou respectively. As such, each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila is a connected person of the Company. Accordingly, the Compressors Purchase and Supply Framework Agreement constitute continuing connected transactions for the Company under the Listing Rules. As each of the applicable percentage ratios (other than the profit ratio) is more than 2.5 %, the continuing connected transactions under the Compressors Purchase and Supply Framework Agreement are subject to reporting, announcement and independent shareholders’ approval requirements under Rule 14A.35 of the Listing Rules.

BUSINESS CO-OPERATION FRAMEWORK AGREEMENT

As a result of the completion of the equity transfer under the Equity Transfer Agreement (pursuant to which, Guangdong Greencool, the Company’s former substantial shareholder, transferred 262,212,194 domestic shares of the Company, being approximately 26.43% of the issued shares of the Company, held by it to Hisense Air-conditioning), Hisense Airconditioning has become a substantial shareholder of the Company. Each of Hisense Group and its Subsidiaries are Associates of Hisense Air-conditioning, and therefore connected persons of the Company. Since the relevant Subsidiaries of Hisense Group are connected or otherwise associated with each other, the transactions contemplated under the Business Co-operation Framework Agreement are aggregated for the purpose of Rules 14A.25 to 14A.27 of the Listing Rules and are subject to independent shareholders’ approval.

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LETTER FROM THE BOARD

Given that each of the applicable percentage ratios (other than the profit ratio) for the aggregated amount of the transactions contemplated under the Business Co-operation Framework Agreement is more than 2.5%, the continuing connected transactions 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.

Reference is made to the announcement made by the Company dated 19 December 2006 regarding the share reform of the Company. Under the said announcement, it is stated that Hisense Air-conditioning, the controlling shareholder of the Company, undertakes that upon the completion of the consideration payment under the share reform of the Company, it will commence the asset restructuring of the Company by injecting the related assets of the white goods business (“White Goods”) of Hisense Group into the Company, including the manufacturing business, marketing business and sales channels of air-conditioners and refrigerators. Upon the completion of the said assets restructuring, it is estimated by the Company that the continuing connected transactions regarding the sale and purchase of air-conditioners and refrigerators between the Company and Hisense Group will not exist.

To the best knowledge of the Company, the position of Hisense Air-conditioning regarding the above undertaking remains unchanged as at the Latest Practicable Date.

As the sale of the White Goods was affected by weather and the peak sales seasons of such products are very short, White Goods producers will use their best endeavour to increase their sales within a short period of time and as such a long transportation time for delivery of White Goods products is very unfavourable to the market responsiveness of such products. The plants of Company and Hisense Group can supplement each other in term of their locations since most of their plants are located at different regions of the PRC and therefore, it is beneficial to the Company to adopt the sales and purchase mode under the Business Co-operation Framework Agreement. However, since the afore-mentioned assets restructuring of the Company has not been completed and in view of the benefits as a result of conducting the transactions under the Business Co-operation Framework Agreement (as mentioned in previous sections of the circular), the Company can only achieve the aforementioned benefits through conducting the continuing connected transactions mentioned in the Business Cooperation Framework Agreement.

In summary, the sales of refrigerators and air-conditioners by the Company to the relevant subsidiaries of Hisnese Group under the Business Co-operation Framework Agreement can achieve the following benefits to the Company:

(1) Making best use of the idling production capacity of the Company and increase the sales and revenues of the Company;
(2) Lowering the fixed costs per unit of product incurred by the Company for the production of air-conditioners and refrigerators. Since the Company possesses excess production capacity for air-conditioners and refrigerators and fixed costs (e.g. depreciation of machinery and rent) will be incurred by the Company for the production of air-conditioners and refrigerators in any event, the production of air-conditioners and refrigerators for the relevant Subsidiary of Hisense Group can

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LETTER FROM THE BOARD

help to make the best use of the idling machinery and lower the fixed costs per unit of product incurred by the Company as a result of the increase in production level and thus reducing the per-unit costs of production of air-conditioners and refrigerators by the Company.

In summary, the purchase of refrigerators and air-conditioners by the Company from the relevant subsidiaries of Hisnese Group under the Business Co-operation Framework Agreement can achieve the following benefits:

(1) The purchase of refrigerators and air-conditioners from the relevant Subsidiaries of Hisense Group will reduce the time of transportation between Shunde, and the location of the relevant Subsidiaries of Hisense Group, improving the responsiveness of the Company to changes in the market and preventing loss of market share to its competitors;
(2) A reduction in the transportation distance of refrigerators and air-conditioners will also reduce wear and tear to such products during transportation and thus reducing the costs to the Company.

In light of the above, the Directors (excluding the independent non-executive Directors, whose views are set out in the letter from the Independent Board Committee in the subsequent part of this circular) are of the view that the transactions under the Business Co-operation Framework Agreement are in the interests of the Company and the Shareholders as a whole.

It is currently estimated that the value of the transactions contemplated under the Business Co-operation Framework Agreement regarding the sale of moulds, refrigerators, air-conditioners and raw materials will amount to approximately 12% of the total value of the same type of transactions to be conducted by the Group for the year ending 31 December 2007.

It is currently estimated that the value of the transactions contemplated under the Business Co-operation Framework Agreement regarding the purchase of refrigerators, airconditioners and raw materials will amount to approximately 18% of the total value of the same type of transactions to be conducted by the Group for the year ending 31 December 2007.

It is currently estimated that the value of the transactions contemplated under the Business Co-operation Framework Agreement regarding the provision of services by the relevant Subsidiary of Hisense Group will amount to approximately 3% of the total value of the same type of transactions to be conducted by the Group for the year ending 31 December 2007.

In view of the above-mentioned percentages, the Company is of the view that it will not develop any dependence on Hisense Group or its Subsidiaries.

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LETTER FROM THE BOARD

SUSPENSION OF TRADING IN THE H SHARES

At the request of the Company, trading in the H Shares was suspended with effect from 10:00 a.m. on 16 June 2005 until further notice.

EGM

The Company will convene the EGM, among other things, to

(i) consider and approve the Compressors Purchase and Supply Framework Agreement and the continuing connected transactions contemplated thereunder; and
(ii) consider and approve the Business Co-operation Framework Agreement and the continuing connected transactions contemplated thereunder.

A notice convening the EGM is set out on pages 73 to 74 of this circular.

Pursuant to Rule 13.39(4) of the Listing Rules, the votes of independent shareholders taken at the EGM must be taken on poll.

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

Since Hisense Air-conditioning is a Shareholder of the Company holding 26.43% of the issued share capital of the Company, it and its associates have to be abstained from voting in relation to the continuing connected transactions entered between the HS Companies and the Subsidiaries of Hisense Group under the Business Co-operation Framework Agreement.

POLL PROCEDURE

The voting in the EGM by the independent shareholders for the approval of (i) the Compressors Purchase and Supply Framework Agreement and the continuing connected transactions contemplated thereunder; and (ii) the Business Co-operation Framework Agreement and the continuing connected transactions contemplated thereunder will be taken by poll.

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

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LETTER FROM THE BOARD

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

RECOMMENDATION

Your attention is drawn to the advice of the Independent Board Committee set out in its letter on pages 35 to 36 of this circular which contains its recommendation to the independent shareholders on the terms of the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement.

Your attention is also drawn to the letter of advice from AMS Corporate Finance, which are set out on pages 37 to 65 in this circular, to the Independent Board Committee and the independent shareholders in respect of the terms of and the annual caps for the continuing connected transactions contemplated under the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement.

ADDITIONAL INFORMATION

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

Yours faithfully,

By Order of the Board of

Guangdong Kelon Electrical Holdings Company Limited Tang Ye Guo Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

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

5 March 2007

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular issued by the Company to Shareholders dated 5 March 2007 (the “Circular”) of which this letter forms part. Terms defined in this Circular shall have the same meanings in this letter unless the context otherwise requires.

Under the Listing Rules, the entering into of the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement constitute continuing connected transactions for the Company and is thus subject to the approval of the independent shareholders at the EGM.

We have been appointed by the Board to consider the terms of the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement and to advise the independent shareholders in connection with the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement as to whether, in our opinion, their terms and their respective annual caps are fair and reasonable so far as the independent shareholders are concerned. AMS Corporate Finance has been appointed as the independent financial adviser to advise us in this respect.

We wish to draw your attention to the letter from the Board and the letter from AMS Corporate Finance as set out in this circular. Having considered the principal factors and reasons considered by, and the advice of AMS Corporate Finance as set out in its letter of advice, we consider that the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement are on normal commercial terms and in the interest of the Company and the Shareholders as a whole.

We also consider that the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement and their respective annual caps are fair and reasonable so far as the independent shareholders are concerned.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Accordingly, we recommend the independent shareholders to vote in favour of the ordinary resolution to approve the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement and the continuing connected transactions contemplated thereunder at the EGM.

Yours faithfully,

For and on behalf of the Independent Board Committee of Guangdong Kelon Electrical Holdings Company Limited Zhang Sheng Ping Lu Qing Cheung Yui Kai, Warren Independent non-executive Directors

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LETTER FROM AMS CORPORATE FINANCE LIMITED

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

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

20th Floor

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

5 March 2007

To the Independent Board Committee and

the Independent Shareholders of

Guangdong Kelon Electrical Holdings Company Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Compressors Purchase and Supply Framework Agreement and the Business Co-operation Framework Agreement (collectively the “Framework Agreements”), details of which are set out in the circular to the Shareholders dated 5 March 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 Framework Agreements. Unless otherwise stated, terms defined in the Circular have the same meanings in this letter.

On 9 February 2007, the Board announced that certain subsidiaries of the Company entered into the Framework Agreements respectively with Huayi Compressor, its subsidiaries and the subsidiaries of Hisense Group on 5 February 2007 (details of the Framework Agreements are stated in the section headed “Terms of the Framework Agreements” below).

As at the date of the Framework Agreements and the Latest Practicable Date, Huayi Compressor held 30% equity interest in Kelon Mould and Rongsheng Plastic (both of which are non-wholly owned subsidiaries of the Company). Jiaxi Beila and Huayi Jingzhou are non-wholly owned subsidiaries of Huayi Compressor. Accordingly, each of Huayi Compressor, Jiaxi Beila and Huayi Jingzhou is a connected person of the Company and the transactions contemplated under the Compressors Purchase and Supply Framework Agreement constitute

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LETTER FROM AMS CORPORATE FINANCE LIMITED

continuing connected transactions of the Company under Chapter 14A of the Listing Rules. Since the relevant percentage ratios as represented by the estimated amount of purchases of compressors for the year ending 31 December 2007 under the Compressors Purchase and Supply Framework Agreement exceed the thresholds set out in Rule 14A.34 of the Listing Rules, the continuing connected transactions under the Compressors Purchase and Supply Framework Agreement are subject to, among other things, the approval of the Independent Shareholders at a general meeting of the Company.

As a result of the completion of the Equity Transfer Agreement on 13 December 2006 under which Guangdong Greencool, a former substantial shareholder of the Company, transferred 262,212,194 domestic legal person shares of the Company (representing approximately 26.43% of the Company’s total issued share capital as at the Latest Practicable Date) to Hisense Air-conditioning, Hisense Air-conditioning has become a substantial shareholder of the Company. Since Hisense Air-conditioning is a non-wholly owned subsidiary of Hisense Group, Hisense Group and its subsidiaries are associates (as defined in the Listing Rules) of Hisense Air-conditioning 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 subject to, among other things, the approval of the Independent Shareholders at the EGM.

The Independent Board Committee, comprising all the independent non-executive Directors, has been formed to advise the Independent Shareholders as to whether the transactions contemplated under the Framework Agreements are in the interests of the Company and the Shareholders as a whole, and the terms of the Framework Agreements including the proposed annual caps are fair and reasonable. As the independent financial adviser to the Independent Board Committee and the Independent Shareholders, our role is to give an independent opinion to the Independent Board Committee and the Independent Shareholders as to (i) whether or not the transactions contemplated under each of the Framework Agreements are in the interests of the Company and the Shareholders as a whole; (ii) whether or not the respective terms of the Framework Agreements, including the maximum value of the transactions contemplated thereunder, are fair and reasonable; and (iii) how the Independent Shareholders should vote in respect of the resolutions to approve each of the Framework Agreements and the transactions contemplated thereunder 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.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

BASIS OF OUR OPINION

In formulating our opinion, we have relied on the statements, information, opinions and representations contained in the Circular and the information and representations provided to us by the Company and the Directors. We have assumed that all information, representations and opinions contained or referred to in the Circular, which have been provided by the Company and the Directors and for which they are solely and wholly responsible, were true and accurate at the time they were made and continue to be so at the date hereof. We have no reason to believe that any information and representations relied on by us in forming our opinion is untrue, inaccurate or misleading, nor are we aware of any material facts the omission of which would render the information provided and the representations made to us untrue, inaccurate or misleading. The Directors have confirmed, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no other facts or representations the omission of which would make any statement in the Circular, including this letter, misleading. We consider that we have reviewed sufficient information which enables us to form a reasonable basis for our opinion. We also consider that we have performed all reasonable steps as required under Rule 13.80 of the Listing Rules to ascertain the reliability of the information provided to us and to form our opinion. We have not, however, conducted any independent verification of the information provided, nor have we carried out any in-depth investigation into the business and affairs of the Group or Hisense Group or any parties to the Framework Agreements and the markets in which they respectively operate.

PRINCIPAL FACTORS CONSIDERED

In formulating our opinion regarding the Framework Agreements, we have taken into consideration the following principal factors:

I. Background information and reasons for the Framework Agreements

1. Information on the Group

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

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LETTER FROM AMS CORPORATE FINANCE LIMITED

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

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

As explained in the Annual Report, the financial results of the Group for the year ended 31 December 2004 had been restated to correct the errors noted by the Company following its in-depth investigation (the “Investigation”) for the purpose of identifying the financial impacts of the alleged economic crimes committed by its former senior management, including the Company’s former chairman, a former executive Director and a former vice president and other former senior management officers responsible for the finance of the Group (the “Relevant Persons”). In particular, the Investigation was

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LETTER FROM AMS CORPORATE FINANCE LIMITED

conducted by the Company at the request of the China Securities and Regulatory Commission (the “CSRC”), which has formally investigated the Company for alleged breaches of the securities laws and regulations in the PRC since 5 April 2005 as a result of the formal investigation by the PRC’s Public Security Bureau in connection with criminal offences on the Relevant Persons who are suspected of having committed economic crimes.

As set out in the Annual Report, the result of the Investigation revealed that the Relevant Persons had caused the Company to enter into a series of fraudulent activities/transactions in 2005 and prior periods including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, misstatement in distribution costs, administrative expenses, other operating expenses and income tax expenses and non-disclosure of related party transactions. As summarised in the Annual Report, the effects of the restatement on the Group’s financial statements for the year ended 31 December 2004 to correct the errors noted by the Company are that the net loss of the Group for the year increased by approximately RMB181.6 million to approximately RMB236.8 million and its total net assets decreased by approximately RMB209.2 million to approximately RMB2,913.4 million.

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

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

For the year ended 31 December 2005, the Group recorded an audited turnover of approximately RMB6,978.4 million (representing a decrease of approximately 12% from the restated turnover of approximately RMB7,923.0 million for the preceding year) and

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LETTER FROM AMS CORPORATE FINANCE LIMITED

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

For the six months ended 30 June 2006, the Group recorded an unaudited turnover and gross profit of approximately RMB3,586.2 million and RMB703.8 million, respectively. For the same period, while the Group recorded an unaudited profit from operations of approximately RMB48.7 million, its net loss amounted to approximately RMB37.6 million. As noted in the Interim Report, the continuous rise in prices of raw materials, especially metals, and the impact of RMB appreciation had significantly eroded the profit margin of the Group’s principal products. In addition, the rumor in March 2006 that the relevant domestic legal person shares of the Company under the Equity Transfer Agreement might be put on auction had adversely affected the confidence of the financial institutions, suppliers and distributors. Accordingly, the production and operation of the Group suffered a setback during the period despite the execution of the sales agency agreement and its supplemental agreements between the Company and Hisense Marketing (details of which are stated in the Company’s circulars of 27 April 2006 and 29 November 2005) had facilitated the revival of the principal operations of the Group. Nevertheless, the Group recorded a gross profit margin of approximately 19.6% for the six months ended 30 June 2006, representing significant improvement from approximately 2.3% for 2005 and approaching the level of approximately 20.9% for 2004. The loss for the period had also narrowed to approximately RMB37.6 million.

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

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LETTER FROM AMS CORPORATE FINANCE LIMITED

2. Information on Huayi Compressors

Huayi Compressors has been listed on the Shenzhen Stock Exchange of the PRC since 1996 and is located in Jingdezhen City, Jiangxi Province, the PRC. Based on the information available from the website of Huayi Compressors, Huayi Compressors is one of the major fluorine-free compressor producers in the PRC. As disclosed in the annual report of Huayi Compressors for the year ended 31 December 2005, its largest shareholder was Huayi Electrical Appliance General Company (“ ”), a PRC national enterprise holding approximately 40.67% of the issued share capital of Huayi Compressors as at 31 December 2005. We also note that the Company held approximately 22.73% of the issued share capital of Huayi Compressors as at 31 December 2005 and was the second largest shareholder. As advised by the Company, its shareholding interest in Huayi Compressor has been reduced to approximately 18.26% as at the Latest Practicable Date. Set out below is the consolidated financial information of Huayi Compressor for each of the three years ended 31 December 2005 which is extracted from its 2004 and 2005 annual reports.

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

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

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LETTER FROM AMS CORPORATE FINANCE LIMITED

3. Information on Hisense Group

Based on the information available from the website of Hisense Group, Hisense Group is one of the major electronic companies in the PRC. Hisense Group is headquartered in Qingdao, the PRC and has operational presence in every major continent and sells its products to more than 100 countries worldwide. Its major product lines include televisions, set-top boxes, mobile phones, air-conditioning systems and refrigerators. In addition, we note that Hisense Electric Co., Ltd. (“Hisense Electric”), of which Hisense Group was beneficially interested in approximately 48.40% of the issued share capital as at the Latest Practicable Date, has been listed on the Shanghai Stock Exchange of the PRC since 1997. The following financial results of Hisense Electric for each of the three years ended 31 December 2005 are extracted from its 2004 and 2005 annual reports.

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

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

4. Reasons for the Framework Agreements

a. Compressors Purchase and Supply Framework Agreement

Under the Compressors Purchase and Supply Framework Agreement, the relevant subsidiaries of the Company has agreed to purchase compressors from Huayi Compressor, Jiaxi Beila or Huayi Jingzhou (as the case may be) on a non-exclusive basis for the purpose of the manufacture of household electrical appliances, including but not limited to refrigerators and air-conditioners, by the Group for a term of one year commencing from 1 January 2007 to 31 December 2007.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

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

We understand from the Company that the Group has been purchasing compressors from the Huayi Group since 2001 and it was very satisfied with the quality and prices of the compressors produced by the Huayi Group. Having considered its current development plan and the possible reduction in the production costs, the Group plans to increase the purchase of compressors from Huayi Compressor in 2007. In view of the fact that the manufacture and sale of refrigerators and air-conditioners is one of the principal businesses of the Group and compressors are essential components of refrigerators and air-conditioners, it is reasonable for the Group to purchase compressors as part of the components for the manufacture of its products from time to time in its ordinary course of business. As mentioned above, Huayi Compressors is one of the major producers of compressors in the PRC and was the largest producer of refrigerator compressors in the PRC for 2005 in terms of sales volume. Furthermore, the Huayi Group has been one of the major suppliers of compressors of the Group. On this basis, we consider that the Huayi Group has the relevant experience and expertise in the manufacture of compressors. Accordingly, we are of the view that the entering into of the Compressors Purchase and Supply Framework Agreement for the purpose of sourcing compressors from the Huayi Group is in the interests of the Company and the Shareholders as a whole.

b. The Business Co-operation Framework Agreement

Under the Business Co-operation Framework Agreement, the relevant subsidiaries of the Company has agreed to enter into certain transactions with the relevant subsidiaries of Hisense Group in respect of sale and supply of moulds, air-conditioners, refrigerators and raw materials, purchase of air-conditioners, refrigerators and raw materials, and provision of after-sales maintenance and repair services (particulars and terms of each category of the aforesaid transactions are discussed in the section headed “Terms of the Framework Agreements” below).

As set out in the Letter from the Board, it was disclosed in the Company’s announcement dated 19 December 2006 that Hisense Air-conditioning, the controlling shareholder of the Company, undertakes that upon the completion of the

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LETTER FROM AMS CORPORATE FINANCE LIMITED

consideration payment under the share reform of the Company, it will commence the asset restructuring of the Company by injecting the related assets of the white goods business of Hisense Group into the Company, including the manufacturing business, marketing business and sales channels of air-conditioners and refrigerators. Upon the completion of the aforesaid assets restructuring, the Company expects that the continuing connected transactions regarding the sale and purchase of airconditioners and refrigerators between the Company and Hisense Group will not exist.

In addition, as noted in the Letter from the Board, the sale of white goods such as air-conditioners and refrigerators is often affected by weather and the peak sales seasons of such products are very short. As such, transportation time is always an important consideration for the white goods producers such as the Company and Hisense Group. The Board believes that the production plants of the Group and Hisense Group can supplement each other in terms of their locations since most of their plants are located at different regions of the PRC. In particular, the sale of refrigerators and air-conditioners by the Group to the relevant subsidiaries of Hisnese Group under the Business Co-operation Framework Agreement can achieve the following benefits to the Company:

(i) making best use of the idling production capacity of the Group as well as increasing the sales and revenues of the Company; and
(ii) lowering the fixed costs per unit of products incurred by the Group for the production of air-conditioners and refrigerators as a result of the increase in production level.

On the other hand, the purchase of refrigerators and air-conditioners by the Group from the relevant subsidiaries of Hisense Group under the Business Co-operation Framework Agreement can achieve the following benefits to the Company:

(i) reducing the time of transportation between Shunde and the location of the relevant Subsidiaries of Hisense Group, which can improve the responsiveness of the Group to changes in the market and prevent loss of market share to its competitors; and
(ii) reducing wear and tear to the relevant products during transportation as a result of the reduction in the transportation time, which may reduce the costs to the Group.

Given the aforesaid benefits, the Board is of the view that the transactions contemplated under the Business Co-operation Framework Agreement are in the interests of the Company and the Shareholders as a whole.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

Given the similar principal activities between the Group and Hisense Group which include the design and manufacture of household electrical appliances including air-conditioners and refrigerators and the provision of related services and the substantial interest of Hisense Group in the Company following completion of the Equity Transfer Agreement, we consider that the business arrangements under the Business Co-operation Framework Agreement serve essentially to assist the Group in resuming its operations for the manufacture and sales of air-conditioners and refrigerators.

As noted from the Company’s announcements and its latest annual report for 2005, the CSRC’s investigation on the Company for alleged breaches of the securities laws and regulations in the PRC as announced in May 2005 had adversely affected the confidence of the financial institutions, suppliers and customers on the Company. In particular, the Company had been unable to settle the amounts due to certain suppliers and about 40% of the suppliers reduced or stopped supplying raw materials for the production of air-conditioners to the Company since May 2005. As a result, about 70% of the Group’s production lines of air-conditioners were gradually suspended during the period from May to September 2005. Similarly, about 20% of the suppliers reduced or stopped supplying raw materials for the production of refrigerators and freezers to the Company and accordingly, about 50% of the production lines of freezers and refrigerators were suspended during the relevant period. The Group had also experienced difficulties in renewal and origination of banking facilities and the lack of working capital significantly disturbed the Group’s relationship with its suppliers and sales agents. As a result, the Group missed the peak season for production and sales of refrigerators and air-conditioners in the financial year.

Following completion of the Share Transfer Announcement in December 2006, Hisense Air-conditioner has become the single largest shareholder of the Company holding 262,212,194 domestic legal person shares in the Company (representing approximately 26.43% of the Company’s total issued share capital as at the Latest Practicable Date). In view of the substantial interest of Hisense Group in the Company, we consider it commercially reasonable and sensible for Hisense Group to assist the Group in rebuilding its market position which has been adversely affected by the suspension of certain production lines of the Group as a result of the aforesaid CSRC’s investigation. Given that Hisense Group, together with its subsidiaries, is currently one of the major electronic companies in the PRC and has demonstrated a good track record in the sales of electrical appliances in the PRC, we are of the view that it is in the commercial interest of the Company to enter into the Business Co-operation Framework Agreement as Hisense Group and its subsidiaries have the relevant expertise in the domestic electrical appliances market in the PRC as well as strong financial resources and are therefore able to assist the Group in rebuilding its market position.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

In addition, certain transactions contemplated under the Business Co-operation Framework Agreement such as sale and supply of moulds, air-conditioners, refrigerators and raw materials by the Group to the subsidiaries of Hisense Group will be able to increase the Group’s sales and revenue. As stated in the Letter from the Board, the sale and supply of moulds under the Business Co-operation Framework Agreement will facilitate the Company to maintain an important relationship with the relevant subsidiaries of Hisense Group so that they may become stable customers of the Company thereby further expanding the sales of the Company. As regards the sale and supply of air-conditioners and refrigerators under the Business Co-operation Framework Agreement, since the relevant subsidiaries currently possess excess production capacity for air-conditioners and refrigerators and they will incur fixed costs such as depreciation of machinery and rent regardless of the production level, the sale and supply of air-conditioners and refrigerators to the subsidiaries of Hisense Group can help to utilise their otherwise idling capacity as well as reduce the products’ per-unit fixed costs as a result of the increase in the production level. The competitiveness of the Group’s products in terms of costing may therefore increase.

As regards those transactions contemplated under the Business Co-operation Framework Agreement in relation to the purchase of air-conditioners, refrigerators and raw materials and procurement of after-sales services by the Group from the subsidiaries of Hisense Group, they are expected to reduce the Group’s transportation costs or purchase costs and hence improve the competitiveness and responsiveness of the Group’s products in the market. In particular, it has been agreed between the relevant parties that the pricing for the purchase of air-conditioners or refrigerators (as the case may be) by the Group from the subsidiaries of Hisense Group will be substantially the same as the aggregate of the production costs of air-conditioners or refrigerators (as the case may be) by the Group in Shunde and the transportation costs to the relevant locations of the subsidiaries of Hisense Group. The purchase of air-conditioners and refrigerators from the subsidiaries of Hisense Group will therefore reduce the transportation time between Shunde and other locations of the production plants of Hisense Group as the products purchased will be delivered directly from the relevant production plants of Hisense Group, instead of the Group’s production base in Shunde, to the relevant market, which may therefore improve the Group’s responsiveness to market changes and prevent loss of market share to its competitors. Furthermore, the reduction in the transportation distance will also reduce wear and tear to the cooling products during transportation.

Based on the benefits expected to be brought by the transactions contemplated under the Business Co-operation Framework Agreement as discussed above, we concur with the view of the Board that the entering into of the Business Co-operation Framework Agreement is in the interests of the Company and the Shareholders as a whole.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

II. Terms of the Framework Agreements

1. The Compressors Purchase and Supply Framework Agreement

Pursuant to the Compressors Purchase and Supply Framework Agreement, the relevant subsidiaries of the Company, namely Guangdong Kelon Refrigerator Co., Ltd., Guangdong Kelon Air-Conditioner Co., Ltd., Guangdong Kelon Refrigerator Ltd., Yingkou Kelon Refrigerator Co., Ltd., Hangzhou Kelon Electrical Co., Ltd. Chengdu Kelon Refrigerator Co., Ltd. and Yangzhou Kelon Electrical Company Limited, have agreed to purchase on a non-exclusive basis such quantities of compressors as they may require from time to time from each of Huayi Compressor, Jiaxi Beila or Huayi Jingzhou (as the case may be) for the purpose of the manufacture of household electrical appliances, including but not limited to refrigerators and air-conditioners, by the Group for a term of one year commencing from 1 January 2007 to 31 December 2007 (which can be terminated before its expiration by mutual agreement of the parties or in the event of any breaches of the agreement). Individual compressors purchase and supply orders setting out specific terms including the price, payment terms, technological services and terms of delivery will be entered into between the relevant contracting parties and such terms must be consistent with the principles and the terms of the Compressors Purchase and Supply Framework Agreement, including the pricing, operation and trading policies set out therein.

The purchase price 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 compressors from time to time. The purchase of compressors will be conducted in the ordinary and usual course of business of the Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties.

The Compressors Purchase and Supply Framework Agreement will not restrict the relevant subsidiaries of the Company from purchasing compressors from suppliers other than the Huayi Group, nor will it restrict the Huayi Group from supplying their compressors to any other third parties.

On the basis that the terms (including the price, payment terms, technological services and terms of delivery) of the compressors purchase and supply orders entered into between the relevant subsidiaries of the Company and each of Huayi Compressor, Jiaxi Beila or Huayi Jingzhou (as the case may be) will be consistent with those of the Compressors Purchase and Supply Framework Agreement and will be determined in accordance with the principle of fairness and reasonableness with reference to the market and on terms not less favourable to the Group than those available from independent third party suppliers, we are of the view that the terms of the Compressors Purchase and Supply Framework Agreement are fair and reasonable.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

2. The Business Co-operation Framework Agreement

The Business Co-operation Framework Agreement is valid for a term of one year commencing from 1 January 2007 to 31 December 2007 (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 respective subsidiaries of the Company and Hisense Group:

a. Sale and supply of moulds

Under the Business Co-operation Framework Agreement, Kelon Mould has agreed to manufacture and supply on a non-exclusive basis such quantities of moulds as Hisense Air-conditioning and Hisense Electric may require from time to time 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, 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. Kelon Mould is a subsidiary of the Company principally engaged in the design and manufacture of large and medium size moulds for household electrical appliances, while Hisense Air-conditioning and Hisense Electric are subsidiaries of Hisense Group principally engaged in the manufacture of household appliances. 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 of Hisense Group. As advised by the Company, Kelon Mould may from time to time submit tenders or bids to manufacture the moulds for such products as requested by the relevant subsidiaries of Hisense Group in their invitations to tender (which are also extended to various independent third parties).

The Business Co-operation Framework Agreement will not restrict the relevant subsidiaries of Hisense Group from purchasing moulds from suppliers other than Kelon Mould, nor will it restrict Kelon Mould from supplying its moulds to any other third parties.

In view of the pricing for the manufacture of moulds that will be determined by open tendering process, which is a transparent pricing mechanism, we are of the view that the terms of the Business Co-operation Framework Agreement with respect to the sale and supply of moulds by Kelon Mould to the subsidiaries of Hisense Group are fair and reasonable.

b. Sale and supply of air-conditioners

Under the Business Co-operation Framework Agreement, Guangdong Kelon Air-Conditioner Co., Ltd. (“Kelon Air-Conditioner”) has agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners as Hisense Air-conditioning may require from time to time for its sale to its customers. Kelon

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Air-conditioner and Hisense Air-conditioning have also agreed to enter into individual air-conditioners production and supply orders setting out specific terms including particulars of the models, the price, payment terms, technological services and terms of delivery, 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.

Kelon Air-Conditioner is a subsidiary of the Company principally engaged in the manufacture of air-conditioners, while Hisense Air-conditioning is a subsidiary of Hisense Group principally engaged in the manufacture of air-conditioners. The purchase price of the air-conditioners supplied by Kelon Air-Conditioner to Hisense Air-conditioning 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 of the air-conditioners from time to time and the pricing policy of OEM products within the industry. The sale of air-conditioners by Kelon Air-Conditioner will be conducted in the ordinary and usual course of business of the Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties. Hisense Air-conditioning is responsible for the collection of the air-conditioners from Kelon Air-Conditioner.

In addition, both parties to the Business Co-operation Framework Agreement have agreed that the price of air-conditioner of a specific model sold by Kelon Air-Conditioner to Hisense Air-conditioning will equal the production cost of such specific model of Kelon Air-Conditioner divided by 0.95. As stated in the Business Co-operation Framework Agreement, such formula is determined by the relevant parties on the principle that the unit sale price of the air-conditioner to be sold by Kelon Air-Conditioner to Hisense Air-conditioning shall not be lower than the aggregate of the production cost, management fee and after-sales service fee for each such air-conditioner. In arriving at the formula, the relevant parties have taken into account the relevant percentage level of the management fee and after-sales service fee of Kelon Air-Conditioner and have made reference to the market prices of air-conditioners.

As stated in the Letter from the Board, the air-conditioners to be sold by Kelon Air-Conditioner to Hisense Air-conditioning under the Business Co-operation Framework Agreement are of different models from the air-conditioners manufactured and supplied by the subsidiaries of Hisense Group to Kelon Air-Conditioner (particulars of the purchases of air-conditioners by Kelon Airconditioner from subsidiaries of Hisense Group are discussed below). The Business Co-operation Framework Agreement will not restrict Hisense Air-conditioning from purchasing air-conditioners from suppliers other than Kelon Air-Conditioner, nor will it restrict Kelon Air-Conditioner from selling its air-conditioners to any other third parties.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

On the basis that (i) the sale and supply of air-conditioners by Kelon Air-Conditioner to Hisense Air-conditioning will increase the revenue of the Group as well as utilise its resources so as to facilitate the Group to resume normal business operations; (ii) such sales will be conducted on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties; and (iii) the unit sale price of the air-conditioner will not be lower than the aggregate of the production cost, management fee and after-sales service fee for each such air-conditioner as incurred by Kelon Air-conditioner, we are of the view that the terms of the Business Co-operation Framework Agreement with respect to the sale and supply of air-conditioners by Kelon Air-conditioner to Hisense Air-conditioning are fair and reasonable.

c. Sale and supply of refrigerators

Under the Business Co-operation Framework Agreement, Guangdong Kelon Refrigerator Ltd. (“Kelon Refrigerator”) has agreed to manufacture and supply on a non-exclusive basis such quantities of refrigerators as Hisense (Beijing) Electrical Appliances Co., Ltd. (“Hisense Beijing”) may require from time to time for its sale to its customers. Kelon Refrigerator is a subsidiary of the Company engaged in the design and manufacture of refrigerators, while Hisense Beijing is a subsidiary of Hisense Group principally engaged in the production, research and sales of household appliances and electronic products and the provision of related services. Kelon Refrigerator and Hisense Beijing have also agreed to enter into individual refrigerators production and supply orders setting out specific terms including particulars of the models, the price, payment terms, technological services and terms of delivery, 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 refrigerators supplied by Kelon Refrigerator to Hisense Beijing 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 of the refrigerators from time to time and the price fixing policy of OEM products within the industry. The sale of refrigerators by Kelon Refrigerator will be conducted in the ordinary and usual course of business of the Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties. Hisense Beijing is responsible for the collection of the refrigerators from Kelon Refrigerator.

In addition, the relevant parties have agreed that the price of refrigerator of a specific model sold by Kelon Refrigerator to Hisense Beijing will equal the production cost of such specific model of Kelon Refrigerator divided by 0.93. As stated in the Business Co-operation Framework Agreement, such formula is determined by the relevant parties on the principle that the unit sale price of the refrigerator to be sold by Kelon Refrigerator to Hisense Beijing shall not be lower than the aggregate of the production cost, management fee and after-sales service fee for each such refrigerator. In arriving at the formula, the relevant parties have taken into account the relevant percentage level of the management fee and after-sales service fee of Kelon Refrigerator and have made reference to the market prices of refrigerators.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

As stated in the Letter from the Board, the refrigerators to be sold by Kelon Refrigerator to Hisense Beijing under the Business Co-operation Framework Agreement are of different models from the refrigerators manufactured and supplied by the subsidiaries of Hisense Group to Kelon Refrigerator (particulars of the purchase of refrigerators by Kelon Refrigerator from subsidiaries of Hisense Group are discussed below). The Business Co-operation Framework Agreement will not restrict Hisense Beijing from purchasing refrigerators from suppliers other than Kelon Refrigerator, nor will it restrict Kelon Refrigerator from selling its refrigerators to any other third parties.

On the basis that (i) the sale and supply of refrigerators by Kelon Refrigerator to Hisense Beijing will increase the revenue of the Group as well as utilise its resources so as to facilitate the Group to resume normal business operations; (ii) such sales will be conducted on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties; and (iii) the unit sale price of the refrigerator to be sold by Kelon Refrigerator to Hisense Beijing will not be lower than the aggregate of the production cost, management fee and after-sales service fee for each such refrigerator as produced by Kelon Refrigerator, we are of the view that the terms of the Business Co-operation Framework Agreement with respect to the sale and supply of refrigerators by Kelon Refrigerator to Hisense Beijing are fair and reasonable.

d. Sale and supply of raw materials

Under the Business Co-operation Framework Agreement, Kelon AirConditioner and Kelon Refrigerator have agreed to manufacture and supply on a non-exclusive basis such quantities of raw materials and components of airconditioners and refrigerators as each of Hisense Beijing, Hisense (Nanjing) Electrical Appliances Co., Ltd. (“Hisense Nanjing”), Hisense Air-conditioning, Hisense (Zhejiang) Air-Conditioner Co., Ltd. (“Hisense Zhejiang”) (as the case may be) may require from time to time for the purpose of the manufacture of air-conditioners and refrigerators for sale to Kelon Air-conditioner and Kelon Refrigerator (particulars of the purchases of air-conditioners and refrigerators by subsidiaries of the Company from subsidiaries of Hisense Group under the Business Co-operation Framework Agreement are discussed below).

Individual raw materials production and supply orders setting out specific terms including particulars of the merchandise required, 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 supplied by Kelon Air-Conditioner and Kelon Refrigerator to the relevant subsidiaries of Hisense Group 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 of the raw materials and components of air-conditioners and

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refrigerators from time to time. Such transactions will be conducted in the ordinary and usual course of business of the Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties.

Under the Business Co-operation Framework Agreement, the raw materials and components of air-conditioners and refrigerators to be sold by Kelon AirConditioner and Kelon Refrigerator to the relevant subsidiaries of Hisense Group include those compatible components utilised for the manufacture of the airconditioners and refrigerators which are to be sold to Kelon Air-conditioner and Kelon Refrigerator. As stated in the Letter from the Board, the models and nature of such raw materials and components of air-conditioners and refrigerators to be sold to the subsidiaries of Hisense Group are different from those raw materials and components proposed to be purchased from the subsidiaries of Hisense Group (particulars of the purchase of raw materials and components of air-conditioners and refrigerators by the Group from subsidiaries of Hisense Group under the Business Co-operation Framework Agreement are discussed below). The Business Cooperation Framework Agreement will not restrict the relevant subsidiaries of Hisense Group from purchasing raw materials or components of air-conditioners and refrigerators from suppliers other than the Group, nor will it restrict the Group from selling its raw materials or components of air-conditioners and refrigerators to any other third parties.

On the basis that the terms (including the price, payment terms, technological services and terms of delivery) of the raw materials production 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 Group than those available to or from (as appropriate) independent third parties, we are of the view that the terms of the Business Co-operation Framework Agreement with respect to the sale and supply of raw materials by the Group to subsidiaries of Hisense Group are fair and reasonable.

e. Purchase of air-conditioners

Under the Business Co-operation Framework Agreement, Hisense Airconditioning and Hisense Zhejiang have agreed to manufacture and supply on a non-exclusive basis such quantities of air-conditioners as Kelon Air-Conditioner may require from time to time for its sale to its customers. The contracting parties have also agreed to enter into individual air-conditioners production and purchase orders setting out specific terms including particulars of the models, the price, payment terms, technological services and terms of delivery, 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.

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The purchase price of the air-conditioners supplied by Hisense Airconditioning and Hisense Zhejiang to Kelon Air-Conditioner 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 of air-conditioners from time to time and the pricing policy of OEM products within the industry. In particular, as set out in the Business Co-operation Framework Agreement, the purchase price of air-conditioners by Kelon Air-Conditioner from Hisense Air-conditioning or Hisense Zhejiang shall not be higher than the total sum of production costs, management expenses and transportation costs of air-conditioners as produced by Kelon Air-Conditioner in Shunde or its other production base. In this connection, the relevant parties have agreed that the price of air-conditioner of a specific model sold by Hisense Air-conditioning or Hisense Zhejiang to Kelon Air-Conditioner will equal the production cost of such specific model of Kelon Air-Conditioner divided by 0.95. In arriving at the formula, the relevant parties have taken into account the relevant percentage level of the production costs and management expenses of Kelon Air-Conditioner and have made reference to the market prices of air-conditioners.

The purchase of air-conditioners by Kelon Air-Conditioner will be conducted in the ordinary and usual course of business of the Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties. Kelon Air-Conditioner is responsible for the collection of the air-conditioners from the relevant subsidiaries of Hisense Group. The Business Co-operation Framework Agreement will not restrict Kelon Air-Conditioner from purchasing air-conditioners from suppliers other than Hisense Air-conditioning or Hisense Zhejiang, nor will it restrict each of Hisense Airconditioning or Hisense Zhejiang from selling its air-conditioners to any other third parties.

On the basis that (i) the terms (including the price, payment terms, technological services and terms of delivery) of the air-conditioners production and purchase 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 with reference to the market price; (ii) the purchase price of air-conditioners by Kelon Air-Conditioner from Hisense Air-conditioning or Hisense Zhejiang will not be higher than the total sum of production costs, management expenses and transportation costs of air-conditioners that will otherwise be incurred by Kelon Air-Conditioner if such air-conditioners are produced by Kelon Air-Conditioner; and (iii) the non-exclusive arrangement under the Business Co-operation Framework Agreement provides the Group with the flexibility without any commitment on the purchase quantity from the relevant subsidiaries of Hisense Group, we are of the view that the terms of the Business Co-operation Framework Agreement with respect to the purchase of air-conditioners by the Group are fair and reasonable.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

f. Purchase of refrigerators

Under the Business Co-operation Framework Agreement, Hisense Beijing and Hisense Nanjiang have agreed to manufacture and supply on a non-exclusive basis such quantities of refrigerators as Kelon Refrigerator may require from time to time for its sale to its customers. The contracting parties have also agreed to enter into individual refrigerator production and purchase orders setting out specific terms including particulars of the models, the price, payment terms, technological services and terms of delivery, 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 refrigerators supplied by Hisense Beijing and Hisense Nanjiang to Kelon Refrigerator 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 of refrigerators from time to time and the pricing policy of OEM products within the industry. In particular, as set out in the Business Co-operation Framework Agreement, the purchase price of refrigerators by Kelon Refrigerator from Hisense Beijing or Hisense Nanjing shall not be higher than the total sum of production costs, management expenses and transportation costs of refrigerators as produced by Kelon Refrigerator in Shunde or its other production base. In this connection, the relevant parties have agreed that the price of refrigerator of a specific model sold by Hisense Beijing or Hisense Nanjing to Kelon Refrigerator will equal the production cost of such specific model of Kelon Refrigerator divided by 0.93. In arriving at the formula, the relevant parties have taken into account the relevant percentage level of the production costs and management expenses of Kelon Refrigerator and have made reference to the market prices of air-conditioners.

The purchase of refrigerators by Kelon Refrigerator will be conducted in the ordinary and usual course of business of the Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties. Kelon Refrigerator is responsible for the collection of the refrigerators from the relevant subsidiaries of Hisense Group. The Business Co-operation Framework Agreement will not restrict Kelon Refrigerator from purchasing refrigerators from other suppliers apart from Hisense Beijing and Hisense Nanjing, nor will it restrict each of Hisense Beijing or Hisense Nanjing from selling its refrigerators to any other third parties.

On the basis that (i) the terms (including the price, payment terms, technological services and terms of delivery) of the refrigerators production and purchase 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 with reference to the market price; (ii) the purchase price of refrigerators by Kelon Refrigerator from Hisense Beijing or Hisense Nanjing will not be higher than the total sum of production costs, management expenses and transportation costs of

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LETTER FROM AMS CORPORATE FINANCE LIMITED

refrigerators that will otherwise be incurred by Kelon Refrigerator if the relevant refrigerators are produced by Kelon Refrigerator; and (iii) the non-exclusive arrangement under the Business Co-operation Framework Agreement provides the Group with the flexibility without any commitment on the purchase quantity from the relevant subsidiaries of Hisense Group, we are of the view that the terms of the Business Co-operation Framework Agreement with respect to the purchase of refrigerators by the Group are fair and reasonable.

g. Purchase of raw materials

Under the Business Co-operation Framework Agreement, Hisense Beijing, Hisense Nanjiang and Hisense Air-conditioning have agreed to supply on a non-exclusive basis such quantities of raw materials and components as Kelon Air-Conditioner and Kelon Refrigerator (as the case may be) may require from time to time for their respective manufacture of air-conditioners and refrigerators. The contracting parties have also agreed to enter into individual raw materials production and purchase orders setting out specific terms including particulars of the merchandise, the price, payment terms, technological services and terms of delivery, 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 supplied by the relevant subsidiaries of Hisense Group to Kelon Air-Conditioner or Kelon Refrigerator 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 of raw materials from time to time. The purchase of raw materials by Kelon Air-Conditioner and Kelon Refrigerator will be conducted in the ordinary and usual course of business of the Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties. The Business Co-operation Framework Agreement will not restrict Kelon Air-Conditioner or Kelon Refrigerator from purchasing raw materials from suppliers other than Hisense Beijing, Hisense Nanjing and Hisense Air-conditioning, nor will it restrict each of Hisense Beijing, Hisense Nanjing or Hisense Air-conditioning from selling its raw materials to any other third parties.

On the basis that (i) the terms (including the price, payment terms, technological services and terms of delivery) of the raw materials production and purchase 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 with reference to the market price and (ii) the non-exclusive arrangement under the Business Co-operation Framework Agreement provides the Group with the flexibility without any commitment on the purchase quantity from the relevant subsidiaries of Hisense Group, we are of the view that the terms of the Business Co-operation Framework Agreement with respect to the purchase of raw materials by the Group are fair and reasonable.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

h. Provision of services

Under the Business Co-operation Framework Agreement, the Company has agreed to engage Savor Household Electrical Appliance Service Industry Co., Ltd. (“Savor Service”), in which Hisense Group was interested in approximately 48.67% as at the Latest Practicable Date, for the provision of repair and maintenance services for the Group’s electrical appliances. The contracting parties have also agreed to enter into individual service provision orders setting out specific terms for the provision of the maintenance and repair services including fees, payment terms and scope of the services, and such terms must be consistent with the principles and the terms of the Business Co-operation Framework Agreement.

As stated in the Letter from the Board, the services to be provided by Savour Service will include primarily the after-sales maintenance and repair services to the customers of the Group in 27 cities, including Beijing, Tianjin, Shijiazhuang and Shangdong Province, (the “Regions”) who have purchased refrigerators from the Group. The fees payable by the Company to Savor Service for the provision of after-sales maintenance and repair services to the customers of the Group 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 Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties. The Business Co-operation Framework Agreement will not restrict the Company from engaging services providers other than Savor Service, nor will it restrict Savor Service from providing its services to any other third parties.

As further stated in the Letter from the Board, the Group presently does not have its own repair and maintenance services team to provide after-sales services to its customers. Therefore, the Group has to engage outside service providers for the provision of after-sales services to its customers, including those in the Regions. We concur with the Group’s view that the engagement of Savor Service to handle the after-sales services for the Group in the Regions will help reduce the Group’s reliance on any single service provider.

On the basis that (i) the terms (including the fees, payment terms, and scope of the after-sales repair and maintenance services) 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 and (ii) the non-exclusive arrangement under the Business Co-operation Framework Agreement provides the Group with the flexibility without any commitment on the amount of services provided by Savor Service, we are of the view that the terms of the Business Co-operation Framework Agreement with respect to the provision of services are fair and reasonable.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

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

Pursuant to Rule 14A.35(2) of the Listing Rules, the transactions contemplated under each of the Framework Agreements during the year commencing from 1 January 2007 to 31 December 2007 will be subject to an annual cap for the financial year ending 31 December 2007 of the Company. The proposed maximum aggregate values, or “caps”, of the transactions contemplated under the Framework Agreements for the year ending 31 December 2007 and the unaudited value of similar transactions between the relevant parties in 2006 are summarised below:

								Increase	of the
				Unaudited				proposed caps
			value of similar					as compared to
	Proposed	caps		transactions				the value of
	for the	year		between the				similar
	ending		relevant parties					transactions
	31 December	2007			in 2006			in 2006
	(RMB’ million)		(RMB’ million)						(%)
The Compressors Purchase
and Supply Framework
Agreement
Maximum aggregate value
of purchases of
compressors:	336.0					129.2			160.1
The Business Co-operation
Framework Agreement
Maximum aggregate value
of sale and supply of
moulds:		18.0					3.7		386.5
Maximum aggregate value
of sale and supply of
air-conditioners:	580.0						73.0		694.5
Maximum aggregate value
of sale and supply of
refrigerators:	212.5						Nil		N/A
Maximum aggregate value
of sale and supply of
raw materials:		35.0					7.0		400.0
Maximum aggregate value
of purchase of air-
conditioners:	607.5						69.9		769.1

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LETTER FROM AMS CORPORATE FINANCE LIMITED

				Increase of the
			Unaudited	proposed caps
		value of similar		as compared to
	Proposed caps		transactions	the value of
	for the year		between the	similar
	ending	relevant parties		transactions
	31 December 2007		in 2006	in 2006
	(RMB’ million)	(RMB’ million)		(%)
Maximum aggregate value
of purchase of
refrigerators:	270.0		Nil	N/A
Maximum aggregate value
of purchase of raw
materials:	55.0		8.4	554.8
Maximum aggregate value
of provision of services:	10.0		Nil	N/A

As set out in the Letter from the Board, the proposed maximum value of purchase of compressors in the aggregate amount of RMB336.0 million for the year ending 31 December 2007 under the Compressors Purchase and Supply Framework Agreement was determined with reference to (i) similar transactions between the relevant subsidiaries of the Company with each of Huayi Compressor, Huayi Jingzhou and Jiaxi Beila in the past; (ii) the prevailing market conditions that the demand for electrical appliances in the PRC increases rapidly as a result of its booming economy; and (iii) the projected rising level of production of household electrical appliances of the subsidiaries of the Company, including but not limited to air-conditioners and refrigerators, for the financial year ending 31 December 2007 as a result of the booming economy of the PRC and the rising demand for electrical appliances, especially in the rural areas of the PRC and the business development plan of the Company to significantly increase the production and sales level of air-conditioners and refrigerators in 2007.

The basis for the proposed maximum value for each category of transactions contemplated under the Business Co-operation Framework Agreement is set out in the letter from the Board. The table below summarises the basis for each category of the transactions:

Category Basis for the proposed annual cap

Sale and supply of moulds

(i) similar transactions between the relevant subsidiaries of the Company with the relevant subsidiaries of Hisense Group in the past; (ii) the prevailing market conditions that the demand for electrical appliances in the PRC increases rapidly as a result of its booming economy; and (iii) the projected rising level of production of household electrical appliances of the relevant subsidiaries of Hisense Group based on its forecast of the market demand for the financial year ending 2007

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LETTER FROM AMS CORPORATE FINANCE LIMITED

Sale and supply of airconditioners

(i) similar transactions between the relevant subsidiaries of the Company with the relevant subsidiaries of Hisense Group in the past; (ii) the prevailing market conditions that the demand for electrical appliances, including air-conditioners, in the PRC increases rapidly as a result of its booming economy; and (iii) the projected rising level of production and sale of air-conditioners of the relevant subsidiaries of Hisense Group based on its forecast of the market demand for the financial year ending 2007

Sale and supply of refrigerators

(i) the prevailing market conditions that the demand for electrical appliances, including refrigerators, in the PRC increases rapidly as a result of its booming economy and (ii) the projected level of production and sale of refrigerators of the relevant subsidiaries of Hisense Group based on its forecast of the market demand for the financial year ending 2007

Sale and supply of raw materials (i) similar transactions between the relevant subsidiaries of the Company with the relevant subsidiaries of Hisense Group in the past; (ii) the prevailing market conditions that the demand for electrical appliances, including air-conditioners and refrigerators, in the PRC increases rapidly as a result of its booming economy; and (iii) the projected rising level of purchase of airconditioners and refrigerators by the relevant subsidiaries of Hisense Group for the financial year ending 2007

Purchase of air-conditioners (i) similar transactions between the relevant subsidiaries of the Company with the relevant subsidiaries of Hisense Group in the past; (ii) the prevailing market conditions that the demand for electrical appliances, including air-conditioners, in the PRC increases rapidly as a result of its booming economy; and (iii) the projected rising level of sale of air-conditioners of the relevant subsidiaries of the Company based on its business development plan and forecast of the market demand for the financial year ending 2007

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LETTER FROM AMS CORPORATE FINANCE LIMITED

Purchase of refrigerators

(i) the prevailing market conditions that the demand for electrical appliances, including refrigerators, in the PRC increases rapidly as a result of its booming economy and (ii) the projected rising level of sale of refrigerators of the relevant subsidiaries of the Company based on its business development plan and forecast of the market demand for the financial year ending 2007

Purchase of raw materials

(i) similar transactions between the relevant subsidiaries of the Company with the relevant subsidiaries of Hisense Group in the past; (ii) the prevailing market conditions that the demand for electrical appliances, including air-conditioners and refrigerators, in the PRC increases rapidly as a result of its booming economy; and (iii) the projected rising level of sale and production of air-conditioners and refrigerators of the relevant subsidiaries of the Company to the relevant subsidiaries of Hisense Group for the financial year ending 2007

Provision of services the services incurred in similar transactions between the relevant subsidiaries of the Company with independent third parties in the past

As indicated from above, in those cases where there were similar transactions conducted between the relevant parties in 2006, the proposed annual caps all represent a significant increase over the actual value of such transactions. For instance, the proposed annual cap of RMB336.0 million for the purchase of compressors for the year ending 31 December 2007 represents an increase of approximately 160.1% from the historical unaudited value of such transactions for 2006. In view of the significant increase in the proposed annual caps for the year ending 2007 and the fact that such annual caps have been largely arrived at based on the expectation of both the Group and the Hisense Group that the demand for electrical appliances in the PRC, including air-conditioners and refrigerators, will increase rapidly in the future as a result of the booming economy, we have therefore sought to consider the statistics relating to the PRC economy which are relevant to the household appliances business in general.

According to the China Statistical Yearbook 2006 ( 2006) compiled by the National Bureau of Statistics of China ( ), 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 21 July 2006, the ADB forecasted that the GDP of China would achieve an annual growth of 9.5% and 8.8% for 2006 and 2007, respectively.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

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.

Higher 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 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%.

As mentioned above, the Company is of the view that there will be rising demand for electrical appliances in the PRC, especially in the rural areas. In this connection, we note that the year 2007 is the second year of the 11th Five-Year Program for Economic and Social Development (2006-2010) 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.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

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.

With a population of 1.31 billion and expected continuous and steady economic growth 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 in China market is promising. While the proposed annual caps under the Framework Agreements for the year ending 2007 in certain cases 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 Framework Agreements will continue to be conducted on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties; (ii) it is generally in the interest of the Company to maximise the value of the sales transactions contemplated under the Framework Agreements so as to increase the Group’s revenue; and (iii) the non-exclusive arrangement under the Framework Agreements provides the Group with the flexibility without any commitment on the actual transaction values. Accordingly, we are of the view that the entering into of the Framework Agreements is in the interests of the Company and the Shareholders as a whole and the proposed annual caps under the Framework Agreements have been arrived at on a fair and reasonable basis.

RECOMMENDATION

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

(i) The financial and trading positions of the Group have been hampered following the severe disruption to its operations as a result of the CSRC’s investigation, details of which are set out in the section headed “Background information and reasons for the Framework Agreements”.
(ii) The manufacture and sale of air-conditioners and refrigerators is one of the principal businesses of the Group and compressors are essential components of airconditioners and refrigerators. Huayi Compressor is one of the major producers of compressors in the PRC and has the relevant experience and expertise in the manufacture of compressors. It is therefore in the commercial interest of the Group to enter into the Compressors Purchase and Supply Framework Agreement with the Huayi Group.

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LETTER FROM AMS CORPORATE FINANCE LIMITED

(iii) Hisense Group, together with its subsidiaries, is currently one of the major electronic companies in the PRC and has the relevant expertise in the domestic electrical appliances market in the PRC as well as strong financial resources. Accordingly, Hisense Group is in a good position to assist the Group in rebuilding its market position.
(iv) The transactions contemplated under the Framework Agreements will increase the sales of the Group, so it is in the interest of the Group to enter into such agreements.
(v) The terms (including the price, payment terms, technological services and terms of delivery) of the formal orders entered into by the Group pursuant to the Framework Agreements will be determined in accordance with the principle of fairness and reasonableness with reference to the market price, and the proposed transactions contemplated under the Framework Agreements will be conducted in the ordinary and usual course of business of the Group, on normal commercial terms and on terms not less favourable to the Group than terms available to or from (as appropriate) independent third parties. In addition, all the transactions contemplated under the Framework Agreements are to be conducted on a non-exclusive basis, so the Framework Agreements will not restrict the Group from engaging in similar transactions with other parties.
(vi) The value of, and the basis for determining, the annual caps under the Framework Agreements are fair and reasonable, details of which are set out in the section headed “Rationale for determining the maximum value of the transactions contemplated under the Framework Agreements”.

Based on the above, we are of the opinion that each of the Framework Agreements is in the interests of the Company and the Shareholders as a whole, the transactions to be contemplated under the Framework Agreements are in the ordinary and usual course of the business of the Group and the terms of which including the proposed annual caps are fair and reasonable. Accordingly, we would advise the Independent Board Committee and the Independent Shareholders that the Independent Shareholders should vote in favour of the ordinary resolution to approve each of the Framework Agreements at the EGM.

Yours faithfully,

For and on behalf of

AMS Corporate Finance Limited Jinny Mok Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement in this circular misleading.

2. DISCLOSURE OF INTERESTS

Directors, supervisors and chief executive of the Company

As at the Latest Practicable Date, none of the Directors, supervisors and chief executive of the Company had interests and short positions in the Shares, underlying Shares and/or debentures (as the case may be) of the Company or any its associated corporations (within the meaning of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which any such Director or chief executive is taken or deemed to have under such provisions of the SFO) or which were required to be entered into the register required to be kept by the Company under section 352 of the SFO or which were otherwise required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules.

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

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

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GENERAL INFORMATION

APPENDIX

Interests of Substantial Shareholders

Interests in the Company

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

			Proportion to
			the relevant	Proportion to
		Number of	class of issued	the total
		issued	share capital	issued share
		ordinary	of the	capital of the
Name	Class of Shares	shares held	Company	Company
Qingdao Hisense	Domestic legal	262,212,194	77.60%	26.43%
Air-Conditioning	person shares
Co., Ltd
Shunde Economic	Domestic legal	68,666,667	20.32%	6.92%
Consultancy	person shares
Company
Shenyin Wanguo	H Shares	54,851,000	11.93%	5.53%
Securities (H.K.)
Limited
The Hong Kong &	H Shares	51,343,925	11.17%	5.18%
Shanghai Banking
Corporation Limited
Bank of China (Hong	H Shares	49,102,000	10.68%	4.95%
Kong) Limited
Guotai Junan	H Shares	40,920,000	8.90%	4.12%
Securities (Hong
Kong) Limited
HSBC Nominees	H Shares	40,106,904	8.73%	4.04%
(Hong Kong)
Limited
First Shanghai	H Shares	25,868,000	5.63%	2.61%
Securities Limited

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GENERAL INFORMATION

APPENDIX

Interests in other members of the Group

As at Latest Practicable Date, so far as the Directors are aware, the following persons, not being a Director, supervisor or chief executive of the Company, was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other members of the Group:

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

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GENERAL INFORMATION

APPENDIX

		Percentage
		shareholding of
	Shareholders holding 10%	shareholders in
Other members	or more in other members	other members of
of the Group	of the Group	the Group
Hua Yi Compressor	Huayi Electrical Appliances	32.69%
Company Limited	Company Limited
	A-share public shareholders	49.04%
Chongqing Kelon Ronshen	Chongqing Shang She	24%
Refrigerator Sales Co.,	Group
Ltd.
	Chongqing Huaqing	24%
	Commerce Company
	Chongqing Department	24%
	Building
Guangzhou Antaida	Guangzhou Zhongyuan	30%
Logistic Co., Ltd.	International Freight
	Forwarding Company
	Limited
	China Far Ocean Network	25%
	Company Limited
	Wuxi Small Swan Holdings	20%
	Company Limited
Wuhu Yingjia Electrical	Heavenly King	20%
Machinery Co., Ltd	Incorporated
Sichuan Ronshen Kelon	Xu Wei Ru	24%
Refrigerator Sales
Co., Ltd.
Beijing Hengsheng Xin	Foshan City Shunde	11%
Chuang Technology	District Yun Long Enquiry
Company	Service Company Limited
Guangdong Kelon Weili	(Zhongshan City Buisha	20%
Electrical Appliances	Province Shunzhun Limited
Company Limited	Company)

– 69 –

GENERAL INFORMATION

APPENDIX

Save as disclosed above, as at the Latest Practicable Date, there was no other person (other than a Director, supervisor or chief executive of the Company or a member of the Group), who had an interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group.

3. SERVICE AGREEMENTS

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

4. MATERIAL CHANGES

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

5. COMPETING INTEREST

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

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

– 70 –

GENERAL INFORMATION

APPENDIX

		Description of
	Name of entity	business of the
	which business is	entity which is
	considered to	considered to
	compete or likely	compete or likely
	compete with the	to compete with	Nature of interest
	business of the	the business of the	of the Director
Name of Director	Group	Group	in the entity
Mr. Yang Yun Duo	Hisense Group	Production of	Senior Management
		air-conditioning/
		electrical products
Mr. Wang Shi Lei	Hisense Group	Production of	Senior Management
		air-conditioning/
		electrical products
Mr. Lin Lan	Hisense Group	Production of	Senior Management
		air-conditioning/
		electrical products
Mr. Xiao Jian Lin	Hisense Group or	Production of	Director
	its Subsidiaries	air-conditioning/
		electrical products

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

6. EXPERT

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

Name

Qualifications

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

(b) AMS Corporate Finance does not have any shareholding, direct or indirect, in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.
(c) AMS Corporate Finance does not have any interest, direct or indirect, in any assets which have been acquired or disposed of by or leased to any member of the Group,

– 71 –

GENERAL INFORMATION

APPENDIX

or which are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2005, the date to which the latest published audited financial statements of the Company were made up.

(d) AMS Corporate Finance has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which they are included.
(e) The letter and recommendation given by AMS Corporate Finance are given as of the date of this circular for incorporation herein.

7. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business in Hong Kong of the Company at Room 2502-2505, Harbour Centre, 25 Harbour Road, Wanchai, Hong Kong during normal business hours from the date of this circular up to and including 20 March 2007:

(a) Compressors Purchase and Supply Framework Agreement; and
(b) Business Co-operation Framework Agreement.

– 72 –

SUPPLEMENTAL NOTICE OF EGM

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

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

SUPPLEMENTAL NOTICE OF 2007 SECOND EXTRAORDINARY GENERAL MEETING

Guangdong Kelon Electrical Holdings Company Limited (the “Company”) received a written request from Qingdao Hisense Air-conditioning Co., Ltd, which holds 262,212,194 domestic shares of the Company, being approximately 26.43% of the total issued shares capital of the Company, on 2 March 2007 requesting that additional resolutions (specified as ordinary resolutions 2 and 3 below) to be tabled before the forthcoming 2007 second extraordinary general meeting (the “EGM”) of the Company for shareholders’ consideration and approval.

SUPPLEMENTAL NOTICE IS HEREBY GIVEN that the EGM of the Company will be held as originally scheduled at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the People’s Republic of China (the “PRC”) on 19 March 2007 at 9:30 a.m. to review and, if thought fit, pass the following resolutions in addition to the resolutions set out in the previous notice of the EGM dated 1 February 2007:

ORDINARY RESOLUTIONS

(2) To consider and approve the Business Co-operation Framework Agreement entered into between the Company, the relevant subsidiaries of the Company and the relevant subsidiaries of Hisense Group Company and the continuing connected transactions contemplated thereunder; and
(3) To consider and approve the Compressors Purchase and Supply Framework Agreement entered into between the Company, the relevant subsidiaries of the Company, Huayi Compressor Company Limited ( ) and its relevant subsidiaries and the continuing connected transactions contemplated thereunder.

– 73 –

SUPPLEMENTAL NOTICE OF EGM

SUSPENSION OF TRADING IN THE H SHARES

At the request of the Company, trading in the H Shares was suspended with effect from 10:00 a.m. on 16 June 2005 until further notice.

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

Foshan City, Guangdong, the PRC, 2 March 2007

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

Note:

(1) Apart from adding the above two resolutions, all other matters relating to the EGM shall remain unchanged. Please refer to the notice of EGM published by the Company on 1 February 2007 in “China Securities Journal”, “Securities Times”, “Hong Kong Commercial Daily” and “China Daily” for details.

– 74 –

AI assistant

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

50436_rns_2007-03-05_cda5210a-8aae-492a-b514-0d01ae38e04b.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

CONTINUING CONNECTED TRANSACTIONS

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

(A) COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT

(B) BUSINESS CO-OPERATION FRAMEWORK AGREEMENT

CONTINUING CONNECTED TRANSACTIONS

Compressors Purchase and Supply Framework Agreement

Business Co-operation Framework Agreement

(A) COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT

Date and Parties

Date

Parties

Term

Purchase of Compressors

LETTER FROM THE BOARD

Pricing

Maximum Aggregate Annual Caps

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE COMPRESSORS PURCHASE AND SUPPLY FRAMEWORK AGREEMENT

(B) BUSINESS CO-OPERATION FRAMEWORK AGREEMENT

Date

Parties

Term

LETTER FROM THE BOARD

(1) Sale and Supply of Moulds

Pricing

Reasons for and Benefits of the Sale and Supply of Moulds

Maximum Annual Cap

LETTER FROM THE BOARD

(2) Sale and Supply of Air-Conditioners

Pricing

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Maximum Aggregate Annual Cap

(3) Sale and Supply of Refrigerators

Pricing

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Maximum Aggregate Annual Cap

(4) Sale and Supply of Raw Materials

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Maximum Aggregate Annual Cap

(5) Purchase of Air-Conditioners

LETTER FROM THE BOARD

LETTER FROM THE BOARD

(6) Purchase of Refrigerators

LETTER FROM THE BOARD

Pricing

LETTER FROM THE BOARD

Maximum Aggregate Annual Cap

LETTER FROM THE BOARD

(7) Purchase of Raw Materials

Pricing

Reasons for and Benefits of the Purchase of Raw Materials

LETTER FROM THE BOARD

Maximum Aggregate Annual Cap

LETTER FROM THE BOARD

(8) Provision of Services

LETTER FROM THE BOARD

Pricing

Reasons for and Benefits of the Engagement for the Service Provision

Maximum Aggregate Annual Cap

INFORMATION RELATING TO THE COMPANY

INFORMATION RELATING TO HUAYI COMPRESSOR

INFORMATION ON JIAXI BEILA

INFORMATION ON HUAYI JINGZHOU

INFORMATION ON HISENSE GROUP

CONTINUING CONNECTED TRANSACTIONS

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