Medlive Technology Co., Ltd. - Proxy Solicitation & Information Statement 2008

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt about this circular, you should obtain independent professional advice.

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

HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED 海信科龍電器股份有限公司 (A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 00921)

MAJOR TRANSACTION

ESTABLISHMENT OF JOINT VENTURE

A letter from the Board is set out from pages 4 to 16 of this circular.

A notice convening the EGM of the Company to be held on 26 August 2008 at 9:30 a.m. at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC is set out on pages N-1 to N-2 of this circular.

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

30 June 2008

	Page
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
APPENDIX I: FINANCIAL INFORMATION OF THE KELON GROUP. . . . . . .	I-1
APPENDIX II: MANAGEMENT DISCUSSION AND ANALYSIS. . . . . . . . . . . . .	II-1
APPENDIX III: UNAUDITED PRO FORMA FINANCIAL INFORMATION. . . .	III-1
APPENDIX IV: GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-1
NOTICE OF EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	N-1

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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
“Approval Authorities” The Ministry of Commerce of the PRC and such other authorities as appointed by the Ministry of Commerce to approve the JV Agreement and the articles of association of the JV Company
“Board” the board of Directors “Company” Hisense Kelon Electrical Holdings Company Limited, a joint stock limited company incorporated in the PRC with limited liability and the H Shares and A Shares of which are listed on the main board of the Stock Exchange and Shenzhen Stock Exchange, respectively
“Director(s)” the current director(s) of the Company “EGM” The extraordinary general meeting of the Company to be held on 26 August 2008 to consider and approve, among other things, the JV Agreement and the transaction contemplated thereunder
“Group” or “Kelon Group” the Company and subsidiaries of the Company “H Shares” overseas listed foreign shares of the Company with a nominal value of RMB1.00 each and are listed on the Stock Exchange
“Hisense Assets Transfer the assets transfer agreement dated 27 April 2008 entered Agreement” into by the Company and the JV Company in relation to the transfer of machinery, equipment and moulds pursuant to the JV Agreement
“Hisense Group” Hisense Group Company, a limited company incorporated in the PRC and is a State-owned enterprise
“Hong Kong” the Hong Kong Special Administrative Region of the PRC

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DEFINITIONS

“HK$” Hong Kong dollar(s), the lawful currency of Hong Kong “JV Agreement” the agreement dated 27 April 2008 entered into between the Company and Whirlpool (Hong Kong) to establish the JV Company
“JV Company” 海信‧惠而浦（浙江）電器有限公司 (Hisense — Whirlpool (Zhejiang) Electric Appliances Co., Ltd), a joint venture company to be established under the laws of the PRC
“Land” A piece of land with an area of 166 mu and is located at the Changxing economic development zone of Zhejiang Province, the PRC
“Latest Practicable Date” 27 June 2008, 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
“OEM” original equipment manufacturing, a type of manufacturing under which products are manufactured, in whole or in part, in accordance with specifications of the customer and are marketed and sold under the brand name of customer
“PRC” the People’s Republic of China “RMB” Renminbi yuan, the lawful currency of the PRC “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 “Site” the Land and the factory to be constructed by the Company thereon
“Stock Exchange” The Stock Exchange of Hong Kong Limited

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DEFINITIONS

“Hisense Air-conditioning” Qingdao Hisense Air-conditioning Company Limited “Whirlpool Corp.” Whirlpool Corporation, a limited company incorporated in the United States “Whirlpool (Hong Kong)” Whirlpool (Hong Kong) Limited, a limited company incorporated in Hong Kong “White Goods” the general term by which white-coloured household electrical appliances are commonly known which include, but not limited to, air-conditioners and refrigerators “%” per cent

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LETTER FROM THE BOARD

Directors:

Mr. Tang Ye Guo Mr. Wang Shi Lei Ms. Yu Shu Min Mr. Lin Lan Ms. Liu Chun Xin Mr. Zhang Ming

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

Independent non-executive Directors :

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

Principal place of business in Hong Kong: Room 3104-06 Singga Commercial Centre No. 148 Connaught Road West Hong Kong

30 June 2008

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION

ESTABLISHMENT OF JOINT VENTURE

INTRODUCTION

The Board announces that on 27 April 2008, the Company entered into the JV Agreement with Whirlpool (Hong Kong) to establish the JV Company for the purposes of developing, manufacturing and selling washing machines, refrigerators and other electrical appliances and provision of after-sale and consultation services in relation thereto.

The purpose of this circular is:

(a) to provide you with further information on the JV Agreement and the establishment of the JV Company; and

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LETTER FROM THE BOARD

(b) to provide you with the notice of the EGM which is to be convened for the purposes of considering and, if thought fit, approving the JV Agreement and the establishment of the JV Company.

JV AGREEMENT

Date

27 April 2008

Parties to the JV Agreement

(1) The Company; and
(2) Whirlpool (Hong Kong).

To the best of the knowledge, information and belief of the Directors having made all reasonable enquiry, Whirlpool (Hong Kong) and its ultimate beneficial owner are third parties independent of the Company and its connected persons.

Scope of Business of the JV Company

The JV Company will be incorporated under the laws of the PRC with limited liability and located in Zhejiang Province, the PRC.

The scope of business of the JV Company includes developing, manufacturing, selling washing machines and refrigerators and its components parts and other electrical appliances; and provision of after-sale and consultation services in relation thereto.

Effective Date

The JV Agreement will become effective on the date of which (i) the JV Agreement and the articles and memorandum of association of the JV Company were approved by the Approval Authorities; and (ii) the relevant approval procedures in relation to the establishment of the JV Company in accordance with the relevant laws and regulations were completed and the relevant approvals were obtained.

Term of the JV Company

The term of the JV Company is 50 years from the date of the incorporation of the JV Company and such term can be revised with the agreement between the parties and the approval from the Approval Authorities of the PRC.

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LETTER FROM THE BOARD

Total Investment and Capital Contribution

(1) The total investment amount for the JV Company will be RMB900,000,000 and the total registered share capital of the JV Company will be RMB450,000,000. Pursuant to the JV Agreement, each of the Company and Whirlpool (Hong Kong) agreed to invest RMB225,000,000 as capital contribution to JV Company. The JV Company will be owned as to 50% by the Company and 50% by Whirlpool (Hong Kong).

The above-mentioned total investment amount for the JV Company was determined after arm’s length negotiations between the parties taking into account the estimated investment required for carrying out the anticipated production and sales of the JV Company. The Company and Whirlpool (Hong Kong)’s contributions are in proportion to their respective shareholding interest in the JV Company.

Pursuant to the JV Agreement, the total committed amount of the Company for the formation of JV Company is RMB225 million (including the Company’s total capital commitment and any possible guarantee or indemnity that maybe provided in connection with the formation of the JV Company).

(2) The Company agreed to make capital contribution to the registered share capital of the JV Company in the following manners:
(i) RMB33,750,000 by way of cash generated from internal funding of the Company;
(ii) RMB120,000,000 by way of transfer of the land use rights of a piece of Land (the value of the Land is estimated at RMB26,560,000, i.e. area of the Land being 166 mu at the price of RMB160,000 per mu) and the ownership of a factory to be constructed by the Company thereon (Note), which will be funded internally;
- Note: The above-mentioned value of RMB120,000,000 is only an estimated figure which is arrived at after arm’s length negotiations between the parties taking into account (i) the estimated investment to be made to the JV Company considering the anticipated scale of production of the JV Company; (ii) the estimated construction costs of the factory considering the anticipated scale of production of the JV Company; and (iii) the guideline issued by the local government for the compensated use of industrial land in the economic development zone that the price of the Land should not be less than RMB150,000 per mu. The value of the Site is still subject to valuation to be carried out by independent valuer.

In the event that the assessed value of the Site after valuation is lower than its current estimated value, the Company shall make further contribution to the JV Company by way of cash from the Company’s internal resources which amount is equivalent to such differences in values. In the event that the assessed value of the Site after valuation is higher than its current estimated value, the JV Company shall make cash refund to the Company which amount is equivalent to such differences in values.

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LETTER FROM THE BOARD

The transfer of the Site constitutes a transaction under Chapter 14 of the Listing Rules. As at the Latest Practicable Date, the exact location of the Land has not been identified and the terms for the transfer of the Site has not been finalized, the Company will comply with the relevant requirements of the Listing Rules, including the disclosure, announcement and shareholders’ approval requirements (as the case may be), taking into account the classification of the transaction pursuant to Chapter 14 of the Listing Rules when the terms for the transfer of the Site are finalized and the exact location of the Land is identified.

(iii) RMB37,500,000 by way of injection of machinery and equipment in accordance with the Hisense Assets Transfer Agreement; and
(iv) RMB33,750,000 by way of injection of moulds in accordance with the Hisense Assets Transfer Agreement.
- Note: The injection of the machinery and equipment, moulds and the transfer of the Site from the Company to the JV Company as set out above is considered to be disposal of assets of the Company to one particular party and therefore should be aggregated as a series of transaction pursuant to Rule 14.22 of the Listing Rules. The Company will comply with the relevant requirements of the Listing Rules, including the disclosure, announcement and shareholders’ approval requirements (as the case may be), in due course taking into account the classification of the transaction pursuant to Chapter 14 of the Listing Rules.
(3) Whirlpool (Hong Kong) agreed to make its capital contribution, i.e. the sum of RMB225,000,000, to the JV Company by way of cash.
(4) Subject to the fulfillment of the conditions set out below, each of the parties shall make contribution equivalent to 15% of the registered share capital of the JV Company (i.e., each of the parties shall contribute the respective sum of RMB33,750,000) by way of cash within 3 months from the date of the issue of the business certificate of the JV Company. The parties agreed to make remaining capital contribution to the JV Company according to the timetable approved by the board of directors of the JV Company, however in any event, such remaining capital contribution shall be made within 2 years from the date of the issue of the business certificate of the JV Company.
(i) The anti-trust report (if required by the PRC laws and regulations) submitted by both parties in relation to the transaction under the JV Agreement has been accepted and approved by Ministry of Commerce and the State Administration for Industry and Commerce without any dissent;
(ii) The JV Agreement, the articles of association of the JV Company and the ancillary agreements thereto (if required by the PRC laws and regulations) have been approved by the Approval Authorities, and the competent authority for industrial and commercial registration has issued the business licence to the JV Company;

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LETTER FROM THE BOARD

(iii) Hisense Group and Whirlpool Corp. have entered into the relevant agreements in relation to non-competition, preferential purchase and OEM arrangement in agreed forms and contents to acknowledge that they have undertaken to and are obliged to procure all of their subsidiaries and associate entities to observe the relevant terms of the JV Agreement;
(iv) Hisense Group has issued a letter of undertaking, pursuant to which Hisense Group undertakes that it shall procure the Company to perform its obligations under the JV Agreement and the ancillary agreements in relation thereto;
(v) Whirlpool Corp. has issued a letter of undertaking, pursuant to which Whirlpool Corp. undertakes that it shall procure Whirlpool (Hong Kong) to perform its obligations under the JV Agreement and the ancillary agreements in relation thereto;
(vi) The specified technology licensing agreement under the JV Agreement has been registered with the relevant PRC government authorities;
(vii) All ancillary agreements to the JV Agreement in the form and content as agreed by both parties prior to the execution of the JV Agreement have been signed by the parties to the relevant contract and approved by the board of directors of the JV Company (if require);
(viii) The Company has obtained the written acknowledgement from the relevant third party that the JV Company is to be regarded as “Hisense Kelon Plant（海信科龍工廠）”. The JV Company shall be entitled to use the technologies of the refrigerators with certain production model numbers as specified in the JV Agreement and their derived products;
(ix) The first annual budget plan and business proposal in the form and content as agreed by both parties prior to the execution of the JV Agreement have been approved by the board of directors of the JV Company; and
(x) The Company has received the site assessment report of the Site. The value of the land use right of the Land set out in the site assessment report shall be in consistency with or shall not exceed more than 110% the estimated value of the land use right of the Land as set out in the JV Agreement.

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LETTER FROM THE BOARD

(5) If any conditions set out in clause (4) above fails to be satisfied within 120 days after the signing of the JV Agreement and both parties do not waive any of such conditions nor postpone the deadline for the performance of such conditions within 30 days upon expiration of such 120 days, either party shall have the right to terminate the JV Agreement.

Under such circumstances, neither party shall have the right to (i) request the other party to pay for any capital contribution to the registered share capital; or (ii) request the other party to indemnify against the losses it suffered.

In addition, if during the course of examination and review of the relevant joint venture documents, the Approval Authorities or the relevant registration authorities in the PRC have requested to make any amendments to any terms and conditions of the JV Agreement, the articles of association or any other documents which are agreed and submitted to the Approval Authorities by both parties, the party who receives the relevant notice of suggested amendments shall notify the other party on a timely basis. Within fifteen (15) days upon such notification, each party shall confirm whether such amendments are acceptable after discussion and negotiation. If either party considers that such amendments are not acceptable, it shall notify the other party promptly in writing. Thereafter, neither party shall have the obligation on the incorporation of the JV Company (in case the business licence has been issued, neither party shall be obliged to pay for its capital contribution thereafter) and both parties shall have the right to terminate the JV Agreement in accordance with the provisions therein.

(6) The parties agree that the JV Company shall be responsible for funding the differences between the total investment amount and the registered share capital with the assistance of both parties. The parties shall have no obligation in providing any additional capital nor loans to the JV Company unless in accordance with the JV Agreement or other agreements between the parties.

It is anticipated that the JV Company will be set up upon (i) obtaining the approval by the relevant government authorities and by the shareholders of the Company at the general meeting; and (ii) the respective parties have made their respective capital contributions equivalent to 15% of the registered share capital of the JV Company (i.e., each of the parties shall contribute the respective sum of RMB33,750,000) by way of cash within 3 months from the date of the issue of the business certificate of the JV Company.

Profit Distribution

The profits of the JV Company will be shared among the Company and Whirlpool (Hong Kong) in accordance with their respective holdings of registered share capital in the JV Company.

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LETTER FROM THE BOARD

Board of Directors and Management

The board of directors of the JV Company shall be composed of 6 directors. Each of the Company and Whirlpool (Hong Kong) is entitled to appoint 3 directors to the board of directors. The term of such directors shall be 3 years from the date of their appointment and is subject to re-election.

Whirlpool (Hong Kong) is entitled to appoint one director as the chairman and the Company is entitled to appoint one director as the vice-chairman.

There will be one general manager in the JV Company whom will be responsible for the dayto-day operational management of the JV Company and is to be nominated by the Company.

The above-mentioned arrangement is arrived at after arm’s length negotiations between the parties with the aim of making the best of the competitive edge and management experience of the parties.

Roles and Obligations

(1) Save for the obligation of making capital contribution, the Company shall, at the request of the JV Company, perform the following obligations, in particular during the course of initial operation of the JV Company:
(i) to assist the JV Company in obtaining the all necessary approvals, permits and licences in relation to the incorporation and operation of the JV Company and the establishment of factories on the designated sites for the JV Company;
(ii) to assist the JV Company in organizing and installing the facilities required for its business and putting such facilities into operation;
(iii) to assist the JV Company in purchasing the China-made equipment and ensuring that the quantity and quality of such equipment meet the requirements of the business operation of the JV Company;
(iv) to assist the JV Company in purchasing the foreign-made equipment and ensuring that the quantity and quality of such equipment meet the requirements of the business operation of the JV Company;
(v) to assist the JV Company in applying for and enjoying the most preferential taxation treatments and other investment benefits available under the relevant PRC laws and regulations;

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LETTER FROM THE BOARD

(vi) to assist the JV Company in liaising with the relevant authorities and departments so as to obtain the water supply, fuel supply, power supply, transportation service, communication service and other services required for the operation of production facilities of the JV Company;
(vii) to assist the JV Company in arranging for the transportation of imported equipment and materials between the PRC ports and the place where the JV Company is situated;
(viii) to assist the JV Company in completing all application procedures for, and obtaining, all permits required for importing specific volume of machinery and equipment, materials and resources;
(ix) to assist the foreign employees of the JV Company, the foreign employees of the party who enters into a contract with the JV Company and the foreign members of the board of directors in obtaining all necessary visas and working permits;
(x) to assist the JV Company in opening up the Reminbi and foreign currency bank accounts;
(xi) to assist the JV Company in handling all necessary importing and customs declaration procedures in relation to the machinery and equipment, materials and resources imported by the JV Company;
(xii) to assist the JV Company in purchasing raw materials, parts and components and other resources in the PRC;
(xiii) to assist the JV Company in obtaining the recognition as an advanced technology enterprise and the relevant certificates;
(xiv) to assist the JV Company, Whirlpool (Hong Kong) and/or its affiliated companies in handling the profit appropriation under the JV Agreement or settling the issues on the PRC taxation and foreign currency in relation to any amounts paid or to be paid to Whirlpool (Hong Kong) and/or its affiliated companies in accordance with any contracts entered into between the JV Company and Whirlpool (Hong Kong) or its affiliated companies;
(xv) to assist the JV Company in recruiting the personnel who meets with the requirements of the JV Company; and
(xvi) to complete other matters as maybe agreed by both parties.

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LETTER FROM THE BOARD

(2) Save for the obligation of making capital contribution, Whirlpool (Hong Kong) shall, at the request of the JV Company, perform the following obligations:
(i) to assist the JV Company in purchasing materials in the PRC;
(ii) to assist the JV Company in recruiting the personnel who meets with the requirements of the JV Company;
(iii) to assist the JV Company in applying for and enjoying the most preferential taxation treatments and other investment benefits available under the relevant PRC laws and regulations;
(iv) to assist the JV Company in completing all application procedures for, and obtaining, all permits required for importing specific volume of machinery and equipment, materials and resources;
(v) to assist the JV Company in purchasing the China-made equipment and ensuring that the quantity and quality of such equipment meeting the requirements of the business operation of the JV Company;
(vi) to assist the JV Company in purchasing the foreign-made equipment and ensuring that the quantity and quality of such equipment meeting the requirements of the business operation of the JV Company; and
(vii) to complete other matters as maybe agreed by both parties.

FUTURE PLAN OF THE JV COMPANY

The JV Company will fully make use of the advanced technology and management experience of Whirlpool (Hong Kong) to develop and manufacture washing machines and refrigerators.

REASONS FOR AND BENEFITS FOR ENTERING INTO THE JV AGREEMENT

The Company is principally engaged in the manufacturing and sale of air-conditioners and refrigerators. Whirlpool (Hong Kong) is principally engaged in the production of washing machines and other electrical appliances.

The Company considers that the establishment of the JV Company will diversify the products of the Company, improve its products’ structure and enhance its anti-risk ability and profitability. Through cooperation with Whirlpool (Hong Kong), both parties can complement each other. The introduction of advanced technologies and management method can also further strengthen the presence of the Company in the domestic electric appliance industry.

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LETTER FROM THE BOARD

In light of the above, the Directors (including the independent non-executive Directors) consider that the terms of the JV Agreement are fair and reasonable and in the interest of the Company and the shareholders as a whole.

ACCOUNTING TREATMENT OF THE JV COMPANY

In accordance with PRC accounting standards, the accounts of the JV Company will not be consolidated to the accounts of the Company and the JV Company will not be regarded as a subsidiary of the Company.

In accordance with International Financial Reporting Standards, the JV Company and its revenues (if applicable) will be classified as an interest in an associate in the balance sheet and share of results of an associate in the financial statements of the Company, respectively.

EFFECT OF THE TRANSACTION ON THE EARNINGS AND ASSETS AND LIABILITY OF THE COMPANY

After the incorporation of the JV Company, the Company will own 50% of its equity interest and the JV Company will become an associated company of the Company. The transaction will not cause any impact on the assets and liability of the Company. The Company will share the profit or loss of the JV Company in accordance with its shareholding therein.

INFORMATION RELATING TO THE COMPANY

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

INFORMATION RELATING TO WHIRLPOOL (HONG KONG)

Whirlpool (Hong Kong) is principally engaged in the production of washing machines and other electrical appliances.

LISTING RULES IMPLICATIONS

As the consideration ratio (as defined in Rule 14.07 of the Listing Rules) of the transaction under the JV Agreement is more than 25% but less than 100% and each of the other relevant percentage ratios (as defined in Rule 14.07 of the Listing Rules) is less than 25%, the transaction under the JV Agreement constitutes a major transaction under Chapter 14 of the Listing Rules and is subject to the reporting, announcement and shareholders’ approval requirements under Chapter 14 of the Listing Rules. To the best knowledge of the Company, no shareholder of the Company has any material interest in the transaction under the JV Agreement and required to abstain from voting in approving such transaction in the EGM.

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LETTER FROM THE BOARD

FINANCIAL AND TRADING PROSPECTS OF THE GROUP

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

The PRC economy has undergone a sustained economic growth over the past decades. As a result of the continuous growth of the purchasing power of the PRC residents, the demand for electrical appliances has sustained a steady growth and has brought about an invaluable opportunity for the development of the white goods industry of the PRC.

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

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

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

(i) changes in existing government policies or political, legal (including changes in legislations, regulations or rules), regulatory, fiscal, economic, market conditions, or the macro-economy measures in the PRC may lead to a decrease in demand of white goods products, or changes in interest rates, and may have an adverse impact on the financial position of the Group;
(ii) the material costs as well as the salary of labour may increase which will increase the cost in the white goods manufacturing process, this may have a negative impact on the Group’s results and financial position; and
(iii) the product recalls and repurchases as a result of the change in the existing consumer laws and regulations or the adoption of the new laws and regulations in the future that have onerous compliance obligation, this may adversely affect the Group’s operations and financial position.

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LETTER FROM THE BOARD

EGM

A notice of the EGM to be held on 26 August 2008 at 9:30 a.m. at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC, at which relevant resolution will be proposed to approve, among other things, the JV Agreement and the transaction contemplated thereunder.

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

In accordance with article 8.28 of the articles of association of the Company, a poll may be demanded in any general meeting of the Company by:

(A) the chairman of the meeting; or
(B) at least two Shareholders with voting rights or their representative; or
(C) individual or a group of Shareholders (including their representatives) holding 10% or more of the voting rights present in that general meeting.

RECOMMENDATION

The Directors (including the independent non-executive Directors) consider that the terms of the JV Agreement are fair and reasonable and is in the best interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM.

ADDITIONAL INFORMATION

Your attention is drawn to the general information of the Group as well as other information contained in the appendices to this circular before considering whether to vote for or against the resolution to be proposed at the EGM for approving the JV Agreement as set out in the notice of the EGM.

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LETTER FROM THE BOARD

SUSPENSION OF TRADING IN THE H SHARES OF THE COMPANY

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

The Company has reviewed the relevant documents in relation to the suspension of trading of the H Shares, the events leading to such suspension and the actions taken by the Company and has submitted a resumption proposal to the Stock Exchange for review. The Company received a letter from the Stock Exchange dated 5 June 2008 agreeing that trading in the H shares of the Company be allowed to resume subject to the fulfilment of the conditions as set out in its letter to the satisfaction of the Stock Exchange prior to the resumption of trading in the H shares of the Company. Please refer to the announcement of the Company dated 6 June 2008 for details of such conditions.

Yours faithfully,

By Order of the Board of

Hisense Kelon Electrical Holdings Company Limited Tang Ye Guo

Chairman

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

A. SUMMARY OF FINANCIAL STATEMENTS

The following is a summary of the audited consolidated results, assets and liabilities of the Kelon Group prepared under IFRS for the three years ended 31 December 2007 which are extracted from the respective annual reports of the Kelon Group. All such financial information should be read in conjunction with the audited consolidated financial statements and accompanying notes, which are included in the Kelon Group’s annual reports. There were qualifications to each of the auditors’ reports in respect of the Kelon Group’s financial statements for the three years ended 31 December 2007. The qualified audit opinions for each of the Kelon Group’s financial statements for the three years ended 31 December 2007 are set out in Part C of this Appendix. The audited financial statements and accompanying notes of the Kelon Group for the year ended 31 December 2007, as extracted from the Group’s 2007 annual report, are set out in Part B of this Appendix.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Consolidated Income Statements

Turnover Cost of sales Gross profit Other income and gains Distribution costs Administrative expenses Other operating expenses Profit from operations Dilution loss on share reform of an associate Finance costs Share of results of associates Profit before income tax Income tax (expense)/credit Profit for the year Attributable to: Equity holders of the Company Minority interests Dividends Earnings per share attributable to equity holders of the Company Basic and diluted	Year 2005 RMB’000 (Audited & restated) 6,978,372 (6,817,774) 160,598 73,328 (1,517,946) (1,495,569) (815,931) (3,595,520) — (162,524) (31,571) (3,789,615) (1,021) (3,790,636) (3,726,095) (64,541) (3,790,636) — RMB(3.76)	ended 31 December 2006 2007 RMB’000 RMB’000 (Audited (Audited) & restated) 6,564,257 8,319,960 (5,474,785) (6,942,789) 1,089,472 1,377,171 409,305 570,905 (869,207) (1,126,269) (390,978) (397,500) (56,815) (133,500) 181,777 290,807 (16,317) — (140,672) (78,530) 3,590 2,247 28,378 214,524 20,871 (10,867) 49,249 203,657 69,989 238,712 (20,740) (35,055) 49,249 203,657 — — RMB0.07 RMB0.24

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

— I-2 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

ASSETS Non-current assets Property, plant and equipment Investment properties Intangible assets Payments for leasehold land held for own use under operating leases Interests in associates Goodwill Available-for-sale financial assets Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Taxation recoverable Other financial assets Pledged bank deposits Cash and cash equivalents Total current assets Non-current assets held for sale Total assets LIABILITIES Current liabilities Trade and other payables Trade deposits received Other financial liabilities Provisions Taxation payable Other liabilities Bank borrowings Total current liabilities	As at 31 December 2005 2006 RMB’000 RMB’000 (Audited (Audited & restated) & restated) 1,828,689 1,612,767 27,723 26,144 128,782 125,831 470,080 372,533 92,186 78,981 — — — — — 21,387 2,547,460 2,237,643 1,232,979 919,837 1,414,388 1,119,733 1,474 827 — — 102,814 248,257 184,284 142,247 2,935,939 2,430,901 — — 5,483,399 4,668,544 3,534,418 3,093,956 277,845 488,587 — — 209,916 169,995 26,846 26,663 43,106 46,978 2,160,523 1,556,702 6,252,654 5,382,881	2007 RMB’000 (Audited) 1,383,062 38,192 168,112 305,392 82,839 — 1,220 11,300 1,990,117 940,284 1,307,209 585 9,479 70,133 76,395 2,404,085 20,369 4,414,571 3,093,181 406,379 6,158 144,006 27,856 55,793 1,310,972 5,044,345

— I-3 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Non-current liabilities Other liabilities Total non-current liabilities Total liabilities Net current liabilities Total assets less current liabilities Total Net Liabilities Capital and reserves attributable to equity holders of the Company Share Capital Share premium Statutory reserves Capital reserve Foreign exchange reserve Accumulated losses Minority interests Total Equity	As at 31 December 2005 2006 RMB’000 RMB’000 (Audited (Audited & restated) & restated) 30,818 13,594 30,818 13,594 6,283,472 5,396,475 (3,316,715) (2,951,980) (769,255) (714,337) (800,073) (727,931) 992,007 992,007 1,195,597 1,195,597 114,581 114,581 403,143 309,733 4,954 14,956 (3,794,745) (3,621,452) (1,084,463) (994,578) 284,390 266,647 (800,073) (727,931)	2007 RMB’000 (Audited) — — 5,044,345 (2,640,260) (629,774) (629,774) 992,007 1,195,597 114,581 266,672 29,111 (3,382,740) (784,772) 154,998 (629,774)

— I-4 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

B. FINANCIAL STATEMENTS OF THE KELON GROUP FOR THE YEAR ENDED 31 DECEMBER 2007

Consolidated Income Statement

For the year ended 31 December 2007

Notes Turnover 5 Cost of sales Gross profit Other income and gains 7 Distribution costs Administrative expenses Other operating expenses 8 Profit from operations Dilution loss on share reform of an associate Share of results of associates Finance costs 10 Profit before income tax 11 Income tax (expense)/credit 14 Profit for the year Attributable to: — Equity holders of the Company — Minority interests Dividends Earnings per share attributable to equity holders of the Company 15 — Basic and diluted	2007 RMB’000 8,319,960 (6,942,789) 1,377,171 570,905 (1,126,269) (397,500) (133,500) 290,807 — 2,247 (78,530) 214,524 (10,867) 203,657 238,712 (35,055) 203,657 — RMB0.24	2006 RMB’000 (Restated) 6,564,257 (5,474,785) 1,089,472 409,305 (869,207) (390,978) (56,815) 181,777 (16,317) 3,590 (140,672) 28,378 20,871 49,249 69,989 (20,740) 49,249 — RMB0.07

— I-5 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Consolidated Balance Sheet

As at 31 December 2007

Notes ASSETS Non-current assets Property, plant and equipment 16 Investment properties 17 Payments for leasehold land held for own use under operating leases 18 Interests in associates 20 Available-for-sale financial assets 21 Intangible assets 22 Goodwill 23 Deferred tax assets 24 Total non-current assets Current assets Inventories 25 Trade and other receivables 26 Taxation recoverable Other financial assets 27 Pledged bank deposits Cash and cash equivalents Total current assets Non-current assets held for sale 28 Total assets	2007 RMB’000 1,383,062 38,192 305,392 82,839 1,220 168,112 — 11,300 1,990,117 940,284 1,307,209 585 9,479 70,133 76,395 2,404,085 20,369 4,414,571	2006 RMB’000 (Restated) 1,612,767 26,144 372,533 78,981 — 125,831 — 21,387
		2,237,643
		919,837 1,119,733 827 — 248,257 142,247
		2,430,901
		—
		4,668,544

— I-6 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Notes LIABILITIES Current liabilities Trade and other payables 29 Trade deposits received Other financial liabilities 27 Provisions 30 Taxation payable Other liabilities 31 Bank borrowings 32 Total current liabilities Non-current liabilities Other liabilities 31 Total non-current liabilities Total liabilities Net current liabilities Total assets less current liabilities TOTAL NET LIABILITIES Capital and reserves attributable to equity holders of the Company Share capital 33 Share premium Statutory reserves 41(a) Capital reserve Foreign exchange reserve Accumulated losses Minority interests TOTAL EQUITY	2007 RMB’000 3,093,181 406,379 6,158 144,006 27,856 55,793 1,310,972 5,044,345 — — 5,044,345 (2,640,260) (629,774) (629,774) 992,007 1,195,597 114,581 266,672 29,111 (3,382,740) (784,772) 154,998 (629,774)	2006 RMB’000 (Restated) 3,093,956 488,587 — 169,995 26,663 46,978 1,556,702 5,382,881 13,594 13,594 5,396,475 (2,951,980) (714,337) (727,931) 992,007 1,195,597 114,581 309,733 14,956 (3,621,452) (994,578) 266,647 (727,931)

— I-7 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

For the year ended 31 December 2007

As at 1 January 2006, as previously stated Effect of change in accounting policies (Note 4(a)) As at 1 January 2006, as restated Share of reserves of associates Exchange differences on translation Profit for the year As at 31 December 2006 As at 31 December 2006, as previously stated Effect of changes in accounting policies (Note 4(a)) As at 1 January 2007, as restated Share of reserves of associates Acquisition of additional interests in a subsidiary (Note 37) Disposal of a subsidiary (Note 38) Exchange differences on translation Profit for the year As at 31 December 2007	Share capital RMB’000 992,007 — 992,007 — — — 992,007 992,007 — 992,007 — — — — — 992,007	Share premium RMB’000 1,195,597 — 1,195,597 — — — 1,195,597 1,195,597 — 1,195,597 — — — — — 1,195,597	Statutory reserves (Note 41(a)) RMB’000 114,581 — 114,581 — — — 114,581 114,581 — 114,581 — — — — — 114,581	Capital reserve Revaluat- ion reserve RMB’000 RMB’000 29,573 373,570 280,637 (373,570) 310,210 — (477) — — — — — 309,733 — 29,096 373,570 280,637 (373,570) 309,733 — 1,611 — (44,672) — — — — — — — 266,672 —	Foreign exchange reserve RMB’000 4,954 — 4,954 — 10,002 — 14,956 14,956 — 14,956 — — — 14,155 — 29,111	Accumu- lated losses Equity attributable to equity holders of Company RMB’000 RMB’000 (3,794,745) (1,084,463) 103,304 10,371 (3,691,441) (1,074,092) — (477) — 10,002 69,989 69,989 (3,621,452) (994,578) (3,725,527) (1,005,720) 104,075 11,142 (3,621,452) (994,578) — 1,611 — (44,672) — — — 14,155 238,712 238,712 (3,382,740) (784,772)	Minority interests Total equity RMB’000 RMB’000 284,390 (800,073) — 10,371 284,390 (789,702) — (477) 2,997 12,999 (20,740) 49,249 266,647 (727,931) 266,647 (739,073) — 11,142 266,647 (727,931) — 1,611 (36,716) (81,388) (36,880) (36,880) (2,998) 11,157 (35,055) 203,657 154,998 (629,774)	Minority interests Total equity RMB’000 RMB’000 284,390 (800,073) — 10,371 284,390 (789,702) — (477) 2,997 12,999 (20,740) 49,249 266,647 (727,931) 266,647 (739,073) — 11,142 266,647 (727,931) — 1,611 (36,716) (81,388) (36,880) (36,880) (2,998) 11,157 (35,055) 203,657 154,998 (629,774)
								(789,702) (477) 12,999 49,249
								(727,931)

								(739,073) 11,142
								(727,931) 1,611 (81,388) (36,880) 11,157 203,657
								(629,774)

— I-8 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 31 December 2007

Operating activities Profit before income tax Adjustments for: Share of results of associates Dilution loss on share reform of an associate Interest income Interest expense Depreciation of property, plant and equipment Depreciation of investment properties Amortisation of intangible assets Amortisation of payments for leasehold land held for own use under operating leases Impairment loss on property, plant and equipment Impairment loss on intangible assets Impairment loss on payments for leasehold land held for own use under operating leases Loss/(gain) on disposal of property, plant and equipment, net Impairment loss on trade and other receivables Partial recovery of an impaired receivable Reversal of impairment loss on trade and other receivables Write down of inventories to net realisable value, net Gain on disposal of investment properties Reversal of provision for sales rebates Gain on disposal of a subsidiary Gain on disposal of payments for leasehold land held for own use under operating leases Gain on fair value change of other financial assets and other financial liabilities, net Operating profit before working capital changes (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables (Decrease)/increase in trade deposits received Decrease in provisions Decrease in other liabilities Cash (used in)/generated from operations Tax refund/(paid), net Net cash flows (used in)/generated from operating activities	2007 RMB’000 214,524 (2,247) — (3,753) 67,905 236,181 3,687 3,919 15,555 26,658 1,282 17,189 50,556 13,546 (57,072) (12,564) 11,954 (60,258) — (4,509) (284,351) (3,104) 235,098 (33,310) (133,790) 32,274 (80,577) (25,989) (4,779) (11,073) 655 (10,418)	2006 RMB’000 (Restated) 28,378 (3,590) 16,317 (5,238) 121,321 247,512 641 4,126 14,449 25,159 — — (5,180) — — (61,012) 42,700 — (37,593) — (38,597) — 349,393 270,443 396,716 (289,972) 210,741 (39,921) (13,352) 884,048 (52) 883,996

— I-9 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Investing activities Purchase of property, plant and equipment Purchase of intangible assets Proceeds from disposal of property, plant and equipment Decrease/(increase) in pledged bank deposits Purchase of investment properties Proceeds from disposal of investment properties Purchase of payments for leasehold land held for own use under operating leases Investment in available-for-sale financial assets Disposal of a subsidiary, net of cash disposed Interest received Proceeds from disposal of payments for leasehold land held for own use under operating leases Net cash flows generated from/(used in) investing activities Financing activities Bank borrowings raised Interest paid Proceeds on transfer of trade and other receivables Repayment of bank borrowings Repayment to a shareholder Net cash flows used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of foreign exchange rate changes Cash and cash equivalents at end of year representing bank balances and cash	2007 RMB’000 (236,149) (47,482) 197,544 178,124 (1,035) 100,289 (16,605) (1,220) (23) 3,753 131,485 308,681 1,780,780 (67,905) 142,000 (2,026,510) (191,004) (362,639) (64,376) 142,247 (1,476) 76,395	2006 RMB’000 (Restated) (141,477) (1,175) 88,372 (145,443) — — — — — 5,238 90,646 (103,839) 1,520,864 (121,321) — (2,124,009) (110,000) (834,466) (54,309) 184,284 12,272 142,247

— I-10 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Notes to the Financial Statements

31 December 2007

1. General information

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

The Company was formerly named Guangdong Kelon Electrical Holdings Company Limited（廣東科龍電器股份有限公司）and has changed its name to Hisense Kelon Electrical Holdings Company Limited（海信科龍電器股份有限公司）since 21 June 2007.

As at 31 December 2006, Qingdao Hisense Air-Conditioning Company Limited (“Hisense Air-Conditioner”) held 262,212,194 shares of domestic legal person shares of the Company, representing 26.43% of total share capital of the Company.

On 29 March 2007, the share reform proposed on 19 December 2006 was completed. Upon its completion, the 262,212,194 domestic shares which were non-freely transferable A shares held by Hisense Air-Conditioner were converted into 238,872,074 transferable shares, representing 24.08% of the Company’s total capital. Hisense Air-Conditioner was the substantial shareholder of the Company as at 31 December 2007.

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

The Group, comprising the Company and its subsidiaries, is principally engaged in the manufacture and sale of refrigerators and air-conditioners.

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

2. Basis of preparation

(a) Statement of compliance

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

— I-11 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(b) Basis of preparation

As at 31 December 2007, the Group’s current liabilities exceeded its current assets by approximately RMB2,640 million (2006: RMB2,952 million) in which the Group has outstanding short-term loans in the aggregate of approximately RMB1,311 million (2006: RMB1,557 million) of which approximately RMB18 million (2006: RMB255 million) were overdue as at 31 December 2007. The Company’s management confirmed that most of the Group’s bankers have expressed their intention to renew/grant credit facilities to the Group upon maturity. However, in the absence of written confirmation from the bankers, there is no assurance that there will be an extension of all such facilities as the debts fall due. Based on the operating budget prepared, the directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis.

The consolidated financial statements for the year ended 31 December 2007 comprise the Company and its subsidiaries and the Group’s interests in associates. The measurement basis used in the preparation of the financial statements is historical cost except for certain financial instruments which are measured at fair value as explained in accounting policies.

The accounting policies and bases adopted in the preparation of these financial statements differ in some respects from those used in the statutory accounts of the group entities which are prepared in accordance with generally accepted accounting principles and relevant financial regulations in the PRC.

The Ministry of Finance of the PRC issued a series of new and revised Accounting Standards for Business Enterprises (the “New Chinese Accounting Standards, CAS”) on 15 February 2006. The New CAS has become effective from 1 January 2007 for listed companies in the PRC. The Company and all its subsidiaries located in the PRC started to prepare their PRC statutory financial statements in accordance with the New CAS for accounting periods beginning on or after 1 January 2007. The differences arising from the restatement of the result of operations for compliance with IFRSs, if any, are adjusted in these financial statements but will not be taken up in the accounting books of the Group.

(c)

Use of estimates and judgments

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

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

Judgments made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next financial year are disclosed in Note 44.

(d) Functional and presentation currency

The consolidated financial statements are presented in Renminbi (“RMB”), which is the functional currency of the group entities.

— I-12 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

3. Adoption of new or revised international financial reporting standards

(a) Application of International Financial Reporting Standards

In the current year, the Group has applied all the new and revised standards, amendments and interpretations (“new IFRSs”) issued by the IASB, that are relevant to its operation and effective for accounting periods beginning on or after 1 January 2007. The adoption of the new IFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented except for the following items.

The adoption of “IFRS 7, Financial Instruments: Disclosure” and “Amendment to IAS 1, Presentation of Financial Statements: Capital Disclosures” resulted in more disclosures in respect of financial instruments and an additional disclosure on capital management policy, respectively. Comparative information has been restated for a consistent presentation or included to reflect the new requirements.

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

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

IAS 1 (Revised)	Presentation of Financial Statements	Presentation of Financial Statements	1
IAS 23 (Revised)	Borrowing Costs 1
IAS 27 (Revised)	Consolidated and Separate Financial		Statements			5
IAS 32 and IAS 1	Puttable Financial Instruments and Obligations Arising on
Amendments	Liquidation 1
IFRS 2 Amendment	Share-based Payments – Vesting Conditions and
	Cancellations 1
IFRS 3 (Revised)	Business Combinations 5
IFRS 8	Operating Segments 1
IFRIC — Interpretation 11	Group and Treasury Share Transactions			4
IFRIC — Interpretation 12	Service Concession Arrangements	3
IFRIC — Interpretation 13	Customer Loyalty Programmes 2
IFRIC — Interpretation 14	IAS 19 — The Limit on a Defined	Benefit Asset, Minimum
	Funding Requirements and their	Interaction			3

1 Effective for annual periods beginning on or after 1 January 2009 2 Effective for annual periods beginning on or after 1 July 2008 3 Effective for annual periods beginning on or after 1 January 2008 4 Effective for annual periods beginning on or after 1 March 2007 5 Effective for annual periods beginning on or after 1 July 2009

— I-13 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

4. Principal accounting policies

(a) Summary of the effects of the changes in accounting policies

The financial statements for the year ended 31 December 2007 include a restatement of the 2006 financial statements as a result of the change in accounting policy of the measurement basis of the property, plant and equipment, details and effects of the change are explained below:

Income statement:
Decrease in administrative expenses_(i)
Increase in profit for the year
Increase in basic earnings per share
Balance sheet:
Increase in cost of property, plant and equipment(ii)
Increase in accumulated depreciation and impairment losses on
property, plant and equipment(ii)
Increase in total assets
Increase in retained earnings as at 1 January
Increase in profit for the year
Decrease in revaluation reserve as at 1 January(iii)
Increase in capital reserve as at 1 January(iii)_
Increase in total equity

2006
RMB’000
771
771
RMB
0.001
2006
RMB’000
Dr/(Cr)
99,229
(88,087)
11,142
(103,304)
(771)
373,570
(280,637)
(11,142)

(i) In prior years, certain property, plant and equipment held for use in production or supply of goods or services, or for administrative purpose are stated in the balance sheet at their revalued amounts, being the fair value on basis of their existing use at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment loss (revaluation model) in accordance with the provisions of IAS 16. During the year, the Company restated these property, plant and equipment at cost less any subsequent accumulated depreciation and subsequent accumulated impairment loss (cost model) in accordance with the provisions of IAS 16, to be in alignment with the accounting policy for property, plant and equipment adopted in its PRC statutory financial statements.

— I-14 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(ii) The changes resulted in an increase in the cost by approximately RMB99,229,000, and an increase in accumulated depreciation and impairment losses on property, plant and equipment by approximately RMB88,087,000.
(iii) Included in the revaluation reserve brought forward of RMB373,570,000 as at 1 January 2006 was an amount of RMB280,637,000 arose from the restructuring of the Company. This amount was reclassified to capital reserve in order to conform with current year’s presentation of financial statements.

(b) Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries (“the Group”) as at 31 December each year. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. Intercompany transactions and balances between group companies are therefore eliminated in full in preparing the consolidated financial statements.

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

Minority interests represent the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are presented in the consolidated balance sheet within equity, separately from equity attributable to the equity holders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year attributable to minority interests and the equity shareholders of the Company.

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

The Group applies a policy of treating transactions with minority interests as transactions with equity owners of the Group. For purchases from minority interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from equity. For disposals to minority interests, differences between any proceeds received and the relevant share of minority interests are also recorded in equity.

(c) Subsidiaries

A subsidiary is an entity over which the Company is able to exercise control. Control is achieved where the Company, directly or indirectly, has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

— I-15 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(d) Associates

Where the Group has the power to participate in (but not control) the financial and operating policy decisions of another entity, that other entity is classified as an associate. Associates are accounted for using equity method whereby they are initially recognised in the consolidated balance sheet at cost and thereafter, their carrying values are adjusted for Group’s share of the post-acquisition change in the associate’s net assets — except that losses in excess of the Group’s investment in the associate are not recognised unless there is an obligation to make good those losses.

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

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

(e) Goodwill

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

Goodwill arising from acquisition of a subsidiary is capitalised as a separate asset with any impairment in carrying value being charged to the consolidated income statement.

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

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

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

— I-16 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(f) Property, plant and equipment

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

As at 1 January 2007, the Company resolved to change the measurement basis for property, plant and equipment from revaluation model to cost model. The details and the effect of the changes are presented in note 4(a) to the financial statements.

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

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

An asset is written down immediately to its recoverable amount if its carrying amount is higher than the asset’s estimated recoverable amount.

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

The gain or loss on disposal of an item of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the income statement.

(g) Investment properties

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

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

— I-17 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

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

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

When the lease payments cannot be allocated reliably between land and building elements, the entire lease payments are included in the cost of the leasehold land and buildings as a finance lease in property, plant and equipment.

(i) Leasing

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

The Group as lessor

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

The Group as lessee

Assets held under finance leases are recognised as assets of the Group at the fair value of the leased asset or, if lower, the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the income statement over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Rentals payable under the lease are charged to the income statement on a straight-line basis over the lease term.

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

(j) Intangible assets (other than goodwill)

(i) Externally acquired intangible assets

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

— I-18 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

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

The significant intangibles recognised by the Group, their useful economic lives are as follows:

Intangible Useful economic life Trademarks Indefinite Software 4 years Non-patented technologies 4 to 5 years

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

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

It is technically feasible to develop the product for it to be sold;
Adequate resources are available to complete the development;
There is an intention to complete and sell the product;
The Group is able to sell the product;
Sale of the product will generate future economic benefits; and
Expenditure on the project can be measured reliably.

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

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

(iii) Impairment

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually by comparing their carrying amounts with their recoverable amounts, irrespective of whether there is any indication that they may be impaired. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years.

Intangible assets with finite lives are tested for impairment when there is an indication that an asset may be impaired.

— I-19 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(k) Financial instruments

(i) Financial assets

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

Financial assets at fair value through profit or loss: include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments or financial guarantee contracts. Gains or losses on investments held for trading are recognised in the income statement.

Where a contract contains one or more embedded derivatives, the entire hybrid contract may be designated as a financial asset at fair value through profit or loss, except where the embedded derivative does not significantly modify the cash flows or it is clear that the separation of the embedded derivative is prohibited.

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

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

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

Available-for-sale financial assets: Non-derivative financial assets not included in the above categories are classified as available-for-sale and comprise the Group’s strategic investments in entities not qualifying as subsidiaries, associates or jointly controlled entities. They are carried at fair value with changes in fair value recognised directly in equity.

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

— I-20 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(ii) Impairment loss on financial assets

Objective evidence that the asset is impaired includes observable data that comes to the attention of the Group including the following loss events:

significant financial difficulty of the debtor;
a breach of contract, such as a default or delinquency in interest or principal payments;
granting concession to a debtor because of debtors’ financial difficulty; or
it becoming probable that the debtor will enter bankruptcy or other financial reorganisation.

For loan and receivables

An allowance for impairment loss is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. The amount of provision is the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount is recognised in the income statement. When the asset is uncollectible, it is written off against the allowance account. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

For available-for-sale financial assets

Where a decline in the fair value constitutes objective evidence of impairment, the amount of the loss is removed from equity and recognised in the income statement.

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

For available-for-sale equity investment, any increase in fair value subsequent to an impairment loss is recognized directly in equity.

For available-for-sale equity investment that is carried at cost, the amount of impairment loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss shall not be reversed.

— I-21 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(iii) Financial liabilities

The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liabilities were incurred. Other than financial liabilities in a qualifying hedging relationship (see below), the Group’s accounting policy for each category is as follows:

Financial liabilities at fair value through profit or loss: Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the income statement.

Where a contract contains one or more embedded derivatives, the entire hybrid contract may be designated as a financial liability at fair value through profit or loss, except where the embedded derivative does not significantly modify the cash flows or it is clear that separation of the embedded derivative is prohibited.

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

Other financial liabilities include the following items:

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

— I-22 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(iv) Financial guarantee contracts

A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. A financial guarantee contract issued by the Group and not designated as at fair value through profit or loss is recognised initially at its fair value less transaction costs that are directly attributable to the issue of the financial guarantee contract. Subsequent to initial recognition, the Group measures the financial guarantee contract at the higher of: (i) the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and (ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue.

(v) Derecognition

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

The Group derecognises a financial liability when the obligation under the liability is discharged or cancelled or expired.

(l) Inventories

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

(m) Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale when their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is met only when the sale is highly probable and the assets or disposal group is available for immediate sale in its present condition:

Non-current assets classified as held for sale are measured at the lower of:

their carrying amount immediately prior to being classified as held for sale in accordance with the Group’s accounting policy; and
fair value less costs to sell.

(n) Revenue recognition

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

— I-23 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

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

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

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

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

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

(o) Income taxes

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

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

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

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

(p) Foreign currency

Transactions entered into by group entities in currencies other than the currency of the primary economic environment in which it operates (the “functional currency”) are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in the income statement in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the income statement for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which case, the exchange differences are also recognised directly in equity.

— I-24 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

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

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

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

(q) Employee benefits

Pursuant to the PRC laws and regulations, the Group established in the PRC makes monthly contributions to the basic old age pension for the local staff to a government agency. The contributions are made at a specific percentage on the standard salary set by the provincial government, of which 10% is borne by the Group and the remainder is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff on their retirement.

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

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

(r) Borrowing costs

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

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

— I-25 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(s) Impairment of other assets

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

property, plant and equipment and investment properties;
payments for leasehold land held for own use under operating lease; and
investments in associates.

If the recoverable amount (i.e. the greater of the fair value less costs to sell and value in use) of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

(t)

Government grants

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

(u) Provisions and contingent liabilities

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

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

(v) Warranty obligation

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

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

— I-26 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

5. Turnover

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

Sales of refrigerators Sales of air-conditioners Sales of freezers Sales of product components	2007 RMB’000 4,324,808 3,214,875 324,821 455,456 8,319,960	2006 RMB’000 3,327,896 2,533,360 231,972 471,029
		6,564,257

6. Business and geographical segments

Business segments

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

— I-27 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Segment information about these businesses is presented below:

Year ended 31 December 2007

(i) Consolidated income statement

			Air-			Product
Refrigerators		conditioners		Freezers	components		Elimination	Consolidated
	RMB’000		RMB’000	RMB’000		RMB’000	RMB’000	RMB’000
Turnover
External sales	4,324,808		3,214,875	324,821		455,456	—	8,319,960
Inter-segment
sales	—		—	—		603,559	(603,559)	—
Total revenue	4,324,808		3,214,875	324,821		1,059,015	(603,559)	8,319,960

Inter-segment sales are charged at prevailing market					rates.
Result
Segment result	305,559		9,872	17,464		(24,940)	—	307,955
Unallocated
corporate
expenses								(17,148)
Profit from
operations								290,807
Share of results of
associates	1,168		868	88		123	—	2,247
Finance costs								(78,530)
Profit before
income tax
expense								214,524
Income tax
expense								(10,867)
Profit for the year								203,657

— I-28 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(ii) Consolidated balance sheet

		Air-		Product
	Refrigerators	conditioners	Freezers	components	Consolidated
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Assets
Segment assets	2,290,306	1,212,432	166,650	471,722	4,141,110
Interests in associates	49,680	32,247	842	70	82,839
Unallocated corporate assets					190,622
Consolidated total assets					4,414,571
Liabilities
Segment liabilities	1,871,830	1,375,441	108,200	237,725	3,593,196
Unallocated corporate
liabilities					1,451,149
Consolidated total liabilities					5,044,345

(iii) Other information

		Air-		Product
	Refrigerators	conditioners	Freezers	components	Consolidated
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Additions of property, plant
and equipment	232,366	44,458	11,464	20,733	309,021
Additions of investment
properties	619	405	11	—	1,035
Additions of payments for
leasehold land held for own
use under operating leases	16,605	—	—	—	16,605
Additions of intangible assets	26,327	20,395	464	296	47,482
Depreciation of property,
plant and equipment	115,296	72,579	10,284	38,022	236,181
Depreciation of investment
properties	2,462	1,120	29	76	3,687
Amortisation of intangible
assets	1,212	1,032	123	1,552	3,919
Amortisation of payments for
leasehold land held for own
use under operating leases	9,310	4,092	723	1,430	15,555
Impairment loss on property,
plant and equipment	1,564	—	—	25,094	26,658
Impairment loss on intangible
assets	—	—	—	1,282	1,282
Impairment loss on payments
for leasehold land held for
own use under operating
leases	17,189	—	—	—	17,189
Loss on disposal of property,
plant and equipment, net	40,788	7,595	(342)	2,515	50,556
Write down of inventories to
net realisable value, net	2,013	846	431	8,664	11,954

— I-29 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Year ended 31 December 2006 (Restated)

(i) Consolidated income statement

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

Inter-segment sales are charged at prevailing market rates.
Result
Segment result	151,035		22,693	10,027	(11,779)		—		171,976
Unallocated corporate
income									9,801
Profit from operations									181,777
Dilution loss on share
reform of an associate									(16,317)
Share of results of
associates	1,819		1,385	127	259		—		3,590
Finance costs									(140,672)
Profit before income tax
credit									28,378
Income tax credit									20,871
Profit for the year									49,249

— I-30 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(ii) Consolidated balance sheet

			Air-		Product
		Refrigerators	conditioners	Freezers	components	Consolidated
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
	Assets
	Segment assets	1,909,175	1,509,343	416,819	666,897	4,502,234
	Interests in associates	40,041	30,481	2,791	5,668	78,981
	Unallocated corporate assets					87,329
	Consolidated total assets					4,668,544
	Liabilities
	Segment liabilities	1,752,636	1,621,186	184,471	275,021	3,833,314
	Unallocated corporate
	liabilities					1,563,161
	Consolidated total liabilities					5,396,475
*(iii)*	*Other information*

		Air-		Product
	Refrigerators	conditioners	Freezers	components	Consolidated
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Additions of property, plant
and equipment	79,256	47,244	8,261	6,716	141,477
Additions of intangible
assets	486	443	141	105	1,175
Depreciation of property,
plant and equipment	153,127	66,961	15,575	11,849	247,512
Depreciation of investment
properties	—	—	—	641	641
Amortisation of intangible
assets	3,232	713	125	56	4,126
Amortisation of payments
for leasehold land held
for own use under
operating leases	8,099	4,522	879	949	14,449
Impairment loss on
property, plant and
equipment	12,999	12,149	6	5	25,159
Write down of inventories to
net realisable value, net	35,867	6,434	—	399	42,700

— I-31 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Geographical segments

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

The PRC Mainland China Hong Kong Europe America Others	2007 RMB’000 4,821,614 257,188 5,078,802 883,350 926,332 1,431,476 8,319,960	2006 RMB’000 4,300,110 259,792
		4,559,902 525,854 613,349 865,152
		6,564,257

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

7. Other income and gains

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

Gain on disposal of raw materials Gain on disposal of property, plant and equipment Gain on disposal of payments for leasehold land held for own use under operating leases Gain on disposal of investment properties Gain on debts settlement with suppliers Gain on fair value change of other financial assets Gain on disposal of a subsidiary_(Note 38) Interest income Penalty income Rental income Partial recovery of an impaired receivable(Note 26) Reversal of impairment loss on trade and other receivables (Note 26)_ Reversal of provision for sales rebates Subsidy income Others	2007 RMB’000 53,884 16,040 284,351 60,258 4,422 9,479 4,509 3,753 12,166 20,721 57,072 12,564 — 6,236 25,450 570,905	2006 RMB’000 114,139 24,588 38,597 — 10,231 — — 5,238 7,843 7,723 — 61,012 37,593 70,511 31,830
		409,305

— I-32 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

8. Other operating expenses

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

Loss on fair value change of other financial liabilities Loss on disposal of property, plant and equipment Impairment loss on intangible assets Impairment loss on payments for leasehold land held for own use under operation leases Impairment loss on property, plant and equipment Loss on disposal of raw materials Loss on non-deductible input value added tax Penalty Others	2007 RMB’000 6,375 66,596 1,282 17,189 26,658 — 4,894 2,544 7,962 133,500	2006 RMB’000 — 19,408 — — 25,159 10,047 — 1,145 1,056
		56,815

9. Amorisation of long term assets

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

Amount included in administrative expenses 10. Finance lost Interest on: — bank borrowings wholly repayable within five years — discounted note receivables Others	2007 RMB’000 19,474 2007 RMB’000 63,597 4,308 67,905 10,625 78,530	2006 RMB’000 18,575

		2006 RMB’000 100,196 21,125
		121,321 19,351
		140,672

— I-33 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

11. Profit before income tax

Profit before income tax is stated after charging/(crediting): Inventories recognised as an expense — upon sales of goods — upon sales of raw materials Staff costs (including directors’ and supervisors’ remuneration) — Basic salaries, housing and other allowances and benefits in kind — Defined contribution pension cost Auditors’ remuneration Research and development costs Impairment loss on trade and other receivables_(Note 26)_ Write down of inventories to net realisable value, net Foreign exchange loss, net Share of income tax of associates	2007 RMB’000 6,944,208 425,839 589,735 41,135 630,870 4,800 58,857 13,546 11,954 40,970 6,277	2006 RMB’000 (Restated) 5,515,189 507,582 506,843 31,223 538,066 5,551 11,925 — 42,700 28,619 6,091

— I-34 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

12. Directors’ and supervisors’ emoluments

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

Year ended 31 December 2007 Executive directors Tang Ye Guo Yang Yun Duo_(i) Yu Shu Min Lin Lan Xiao Jian Lin(ii) Wang Shi Lei(iii) Liu Chun Xin(iv)_ Independent non-executive directors Zhang Sheng Ping Lu Qing Cheung Yui Kai, Warren Supervisors Guo Qing Cun Zhou Zhao Li Liu Zhan Cheng	Fees Basic salaries, housing and other allowances and benefits in kind Defined contribution pension cost Discretionary bonuses RMB’000 RMB’000 RMB’000 RMB’000 — 600 15 200 — 400 15 160 — — — — — — — — — — — — — 460 13 180 — 117 2 50 60 — — — 60 — — — 233 — — — — — — — — — — — — 100 4 100 353 1,677 49 690	Total RMB’000 815 575 — — — 653 169 60 60 233 — — 204
		2,769

(i) Mr. Yang Yun Duo was appointed on 4 January 2007 and resigned on 26 February 2008.

(ii) Mr. Xiao Jian Lin resigned on 21 June 2007.

(iii) Mr. Wang Shi Lei was appointed on 4 January 2007.

(iv) Ms. Liu Chun Xin was appointed on 8 August 2007.

— I-35 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

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

Year ended 31 December 2006 Executive directors Tang Ye Guo Yu Shu Min Lin Lan Xiao Jian Lin Liu Cong Meng_(i) Li Zhen Hua(i) Fang Zhi Guo(i) Gu Chu Jun(i) Yan You Song(i) Zhang Hong(i) Zhang Ming(ii) Su Yu Tao(iii) Independent non-executive directors Zhang Sheng Ping Lu Qing Cheung Yui Kai, Warren Xu Xiao Lu(i) Li Kung Man(i) Chan Pei Cheong(iv) Supervisors Guo Qing Cun Zhou Zhao Li Liu Zhan Cheng He Si(v) Bai Yun Feng(vi)_	Fees Basic salaries, housing and other allowances and benefits in kind Defined contribution pension cost Discretionary bonuses RMB’000 RMB’000 RMB’000 RMB’000 — 493 4 — — — — — — 248 — — — 322 3 — — — — — — — — — — — — — — — — — — — — — — — — — — 85 3 — — 302 3 — 30 — — — 30 — — — 120 — — — — — — — — — — — — — — — — — — — — — — — — 60 1 133 — 48 1 — — 50 — — 180 1,608 15 133	Total RMB’000 497 — 248 325 — — — — — — 88 305 30 30 120 — — — — — 194 49 50
		1,936

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

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

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

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

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

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

— I-36 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

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

There was no arrangement under which a director or a supervisor waived or agreed to waive any remuneration for the years ended 31 December 2006 and 2007.

None of the directors and supervisors received compensation for the loss of office as a director or a supervisor of the Group in connection with the management of the affairs of the Group for the years ended 31 December 2006 and 2007.

13. Individuals with highest emoluments

Of the five highest paid individuals of the Group, three (2006: four) are directors of the Group. The remaining two individuals (2006: one) are not directors or supervisors of the Group.

The following table sets out the emoluments of the Group’s five (2006: five) highest paid individuals for the year ended 31 December 2007 of which two (2006: four) of these individuals were appointed as directors of the Company during the year and their emoluments paid for the period from the dates of being appointed as directors during the year to the end of the year are included in Note 12 above.

Basic salaries, housing and other allowances and benefits in kind Discretionary bonuses	2007 RMB’000 2,219 660 2,879	2006 RMB’000 4,695 —
		4,695

The emoluments set out above of these individuals are within the following bands:

	2007	2006
	Number of staff	Number of staff
Nil — RMB969,000 (2006: Nil — RMB1,022,000)
(equivalent to Nil — HKD1,000,000)	5	4
RMB969,001 — RMB1,454,000 (2006: RMB1,022,001 —
RMB1,533,000) (equivalent to HKD1,000,001 — HKD
1,500,000)	—	1
	5	5

— I-37 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

14. Income tax expense/(credit)

Income taxes consist of: Current tax — PRC enterprise income tax (“EIT”) — Hong Kong Profits Tax Deferred tax	2007 RMB’000 266 514 10,087 10,867	2006 RMB’000 516 — (21,387) (20,871)

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

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

The Company and its subsidiaries which are established and operating in the PRC are subject to EIT at a statutory rate of 33% for 2007.

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

The Company’s subsidiaries, Guangdong Kelon Air-Conditioner Co., Ltd., Hisense Ronshen (Guangdong) Freezer Co., Ltd, Guangdong Kelon Mould Co., Ltd, Shunde Rongsheng Plastic Products Co., Ltd., Hisense Ronshen Yingkou Refrigerator Co. Ltd., and Hisense Ronshen Yangzhou Refrigerator Co., Ltd established in coastal open economic zones, are subject to national EIT at a rate of 24%. Together with the local EIT at a rate of 3%, the aggregate EIT are at a rate of 27%. Hisense Ronshen (Guangdong) Refrigerator Co., Ltd, as a company established in coastal open economic zones, is also classified as a high new technology enterprise in year 2007 and entitled to national EIT at a rate of 15%, together with the local EIT at a rate of 3%, the aggregate EIT is at a rate 18%.

Guangdong Kelon Fittings Co., Ltd (“Kelon Fittings”) established in coastal open economic zones and was classified as advanced technology enterprise. In year 2007, Kelon Fittings is entitled to EIT at a preferential rate of 12%, which is half deduction of national EIT with fully exemption from local EIT.

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

Other subsidiaries of the Group which are established and operating in the PRC are subject to EIT at a statutory rate of 33% for the year 2007.

— I-38 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Except for Kelon Electric Appliance Co., Ltd., no provision for Hong Kong Profits Tax has been made as the subsidiaries in Hong Kong did not generate assessable profits during the year. Hong Kong Profits Tax has been provided at the rate of 17.5% on the estimated assessable profit for the year 2007.

On 16 March 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC (“new tax law”) which will take effect on 1 January 2008. As a result of the new tax law, the statutory income tax rate will change from 33% to 25% with effect from 1 January 2008. The preferential tax rate currently enjoyed by the Company will be gradually transitioned to the new standard rate of 25% over a five-year transitional period. The Group estimates that the preferential income tax rate currently enjoyed by the Group will expire at the earlier of the end of the existing preferential tax period or the five-year transitional period. The change in the carrying amount of the deferred tax assets and liabilities, as a result of the change in tax rate, is reflected in the consolidated financial statements for the year ended 31 December 2007.

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

Profit before income tax _Less:_Share of results of associates Tax at the PRC statutory rate of 33% Effect of different tax rates of subsidiaries operating in other jurisdictions Effect of exemption granted and preferential tax treatment Tax effect of expenses not deductible for tax purposes Tax effect of revenue not taxable for tax purposes Tax effect of tax losses and other deductible temporary differences not recognised Utilisation of tax losses previously not recognised Income tax expense/(credit)	2007 RMB’000 214,524 2,247 212,277 70,051 (3,087) (60,314) 25,622 (9,503) 24,387 (36,289) 10,867	2006 RMB’000 (Restated) 28,378 3,590 24,788 8,180 1,560 (18,718) 1,826 (290) 165,844 (179,273) (20,871)

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

15. Earnings per share

The calculation of basic and diluted earnings per share attributable to equity holders of the Company for the year is based on the net profit attributable to equity holders of the Company for the year of RMB238,712,000 (2006 (restated): RMB69,989,000) and 992,006,563 shares (2006: 992,006,563 shares) outstanding during the year. There were no dilutive potential ordinary shares in issue in both years.

— I-39 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

16. Property, plant and equipment

Year ended 31 December 2007

Cost At 1 January 2007, as previously stated Effect of change in accounting policies_(Note 4(a)) At 1 January 2007, as restated Exchange differences Additions at cost Disposals Disposal of a subsidiary(Note 38) Reclassified to investment properties (Note 17) Reclassified to non-current assets held for sale(Note 28) Reclassification At 31 December 2007 Accumulated depreciation and impairment At 1 January 2007, as previously stated Effect of change in accounting policies(Note 4(a)) At 1 January 2007, as restated Exchange differences Depreciation for the year Impairment provided for the year Elimination on disposals Disposal of a subsidiary(Note 38) Reclassified to investment properties(Note 17) Reclassified to non-current assets held for sale(Note 28)_ Reclassification At 31 December 2007 Net book value At 31 December 2007	Leasehold land and buildings RMB’000 1,239,926 19,134 1,259,060 (1,302) 14,004 (177,197) (24,137) (81,461) (56,555) 157,744 1,090,156 470,086 22,751 492,837 (749) 72,473 — (62,669) (4,201) (25,785) (44,338) (1,284) 426,284 663,872	Plant, machinery and equipment RMB’000 2,055,752 4,491 2,060,243 (243) 39,995 (302,263) (13,524) — — 106,370 1,890,578 1,554,697 (6,858) 1,547,839 (213) 105,386 16,050 (258,648) (3,245) — — 1,105 1,408,274 482,304	Moulds RMB’000 204,835 22,182 227,017 — 63,906 (59,876) (12,674) — — 9,423 227,796 116,530 22,182 138,712 — 56,587 62 (48,130) (12,674) — — 200 134,757 93,039	Motor vehicles Construction in progress RMB’000 RMB’000 43,596 236,920 (164) 53,586 43,432 290,506 (111) — 206 190,910 (8,164) (28,673) (354) (15) — — — — (5) (273,532) 35,004 179,196 38,091 — (3,574) 53,586 34,517 53,586 (109) — 1,735 — — 10,546 (7,585) (22,042) (274) — — — — — (21) — 28,263 42,090 6,741 137,106	Total RMB’000 3,781,029 99,229
					3,880,258 (1,656) 309,021 (576,173) (50,704) (81,461) (56,555) —
					3,422,730
					2,179,404 88,087
					2,267,491 (1,071) 236,181 26,658 (399,074) (20,394) (25,785) (44,338) —
					2,039,668
					1,383,062

— I-40 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Year ended 31 December 2006

Cost At 1 January 2006, as previously stated Effect of change in accounting policies_(Note 4(a)) At 1 January 2006, as restated Exchange differences Additions at cost Disposals Reclassification At 31 December 2006, as restated Accumulated depreciation and impairment At 1 January 2006, as previously stated Effect of change in accounting policies(Note 4(a))_ At 1 January 2006, as restated Exchange differences Depreciation for the year Impairment provided for the year Elimination on disposals Reclassification At 31 December 2006, as restated Net book value At 31 December 2006, as restated	Leasehold land and buildings RMB’000 1,548,947 15,917 1,564,864 (2,267) 1,290 (64,152) (240,675) 1,259,060 419,045 19,534 438,579 (713) 76,970 3,217 (27,380) 2,164 492,837 766,223	Plant, machinery and equipment RMB’000 1,892,728 (8,951) 1,883,777 (74) 22,015 (115,959) 270,484 2,060,243 1,537,641 (19,529) 1,518,112 363 111,635 13,442 (102,445) 6,732 1,547,839 512,404	Moulds RMB’000 168,054 15,491 183,545 — 80,707 (37,500) 265 227,017 95,867 15,491 111,358 — 54,174 6,691 (33,411) (100) 138,712 88,305	Motor vehicles Construction in progress RMB’000 RMB’000 69,811 267,260 (477) 52,090 69,334 319,350 (95) — 1,211 36,254 (28,020) (34,022) 1,002 (31,076) 43,432 290,506 65,558 — (3,887) 52,090 61,671 52,090 (80) — 4,733 — 313 1,496 (23,324) — (8,796) — 34,517 53,586 8,915 236,920	Total RMB’000 3,946,800 74,070
					4,020,870 (2,436) 141,477 (279,653) —
					3,880,258
					2,118,111 63,699
					2,181,810 (430) 247,512 25,159 (186,560) —
					2,267,491
					1,612,767

— I-41 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

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

PRC, other than in Hong Kong Hong Kong Japan	2007 RMB’000 640,219 — 23,653 663,872	2006 RMB’000 (Restated) 700,580 41,990 23,653 766,223

“Leasehold land and buildings” and “Plant, machinery and equipment” with net book values of approximately RMB444,444,000 (2006 (restated): RMB437,764,000) and RMB21,033,000 (2006: RMB134,584,000) respectively, have been pledged as security for the Group’s bank borrowings.

17. Investment properties

Cost At 1 January Exchange differences Additions at cost Disposals Reclassified from property, plant and equipment_(Note 16) At 31 December Accumulated depreciation and impairment At 1 January Exchange differences Depreciation for the year Elimination on disposals Reclassified from property, plant and equipment(Note 16)_ At 31 December Carrying amount at 31 December Directors’ valuation at fair value	2007 RMB’000 28,201 (990) 1,035 (52,351) 81,461 57,356 2,057 (44) 3,687 (12,321) 25,785 19,164 38,192 54,698	2006 RMB’000 29,201 (1,000) — — — 28,201 1,478 (62) 641 — — 2,057 26,144 40,030

The Group’s investment properties are situated in the PRC (2006: in Hong Kong) under medium term leases. The valuation for the investment properties at 31 December 2007 were determined by the directors by reference to the market price of similar properties.

Investment properties with net book values of approximately RMB2,568,000 (2006: Nil) has been pledged as security for the Group’s bank borrowings.

— I-42 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

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

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

Leasehold land in PRC: — Medium-term leases Carrying amount at 1 January Reclassified to non-current assets held for sale_(Note 28) Additions at cost Charge for the year Impairment provided for the year(i) Disposal of a subsidiary(Note 38)_ Disposals Carrying amount at 31 December	2007 RMB’000 305,392 372,533 (8,152) 16,605 (15,555) (17,189) (13,084) (29,766) 305,392	2006 RMB’000 372,533 470,080 — — (14,449) — — (83,098) 372,533

(i) In July 2004, Shangqiu Kelon Electrical Company Limited (“Shangqiu Kelon”), Shangqiu Bing Xiong Freezing Facilities Company Limited (“Shangqiu Bing Xiong”), and the Administration Committee of Shangqiu Economic and Technological Development Zone（商丘經濟技術開發區管委會）(“Shangqiu Administrative Committee”) entered into a three-party land transfer agreement under which all parties agreed that Shangqiu Kelon acquires a piece of land use right with 187 acres from Shangqiu Bing Xiong at a consideration of approximately RMB36 million. Under the land transfer agreement, it was agreed that Shangqiu Kelon develops the land and meets minimum production and sales requirements after the development is completed. However, the land has not been developed nor has Shangqiu Kelon met the minimum production and sales requirements thereafter. In August 2005, Shangqiu Kelon received a notice from Shangqiu Administrative Committee claiming that it has breached the three-party land transfer agreement for not fulfilling the minimum production and sales requirements and requesting that Shangqiu Kelon surrenders the land use right. The local court froze the land accordingly. The Company has made an impairment loss of approximately RMB18 million against the carrying amount of the land use right for the possible loss that may arise as a result of the event for the year ended 2005. In mid 2007, through a local source, the Company further realised that the land use right has been confiscated by Henan Shangqiu Bureau of Land and Resources (“SQBLR”) in November 2006 for the reason of delayed development. The Company is reviewing the appropriateness of judicial procedure made by SQBLR. At the date of this report, the case is being handled by the Group’s lawyer and has not been resolved. The Company has further made an impairment loss of approximately RMB17 million against the carrying amount of the land use right for the maximum loss that may arise as a result of the event. As at 31 December 2007, the Company has provided an impairment loss of approximately RMB35 million against the carrying amount of the land use right.
(ii) At 31 December 2007, the carrying amount of payments for leasehold land held for own use under operating leases pledged as security for the Group’s bank borrowings amounted to approximately RMB226,035,000 (2006: RMB245,559,000).

— I-43 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

19. Interests in subsidiaries

Details of the Company’s principal subsidiaries as at 31 December 2007 are listed under a table as follows:

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

— I-44 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

	Place and date		Percentage of	Percentage of
	of incorporation/	Registered	ownership/profit share
Name	establishment	capital	Directly	Indirectly	Principal activities
Shunde Jiake Electronic Company	PRC_(ii)_	RMB60,000,000	70%	30%	IT and communication
Limited	12 October 2001				technology and
					micro-electronics
					technology
					development
Xi’an Kelon Cooling Co., Ltd.	PRC_(ii)_	RMB202,000,000	60%	—	Manufacture and sale
(“Xi’an Kelon”)	20 March 2002				of spare parts for
					refrigerators
Jiangxi Kelon Industrial	PRC_(i)_	US$29,800,000	60%	40%	Manufacture and sale
Development Co., Ltd.	24 June 2003				of refrigerators, air-
					conditioners and
					other household
					appliances
Hangzhou Kelon Electrical	PRC_(i)_	RMB24,000,000	100%	—	Manufacture and sale of
Co., Ltd. (“Hangzhou Kelon”)	22 August 2003				refrigerators
Shangqiu Kelon Electrical	PRC_(ii)_	RMB150,000,000	—	100%	Manufacture and sale of
Co., Ltd.	23 September 2003				refrigerators
Zhuhai Kelon Industrial	PRC_(i)_	US$29,980,000	75%	25%	Manufacture and sale of
Development Co., Ltd.	3 December 2003				refrigerators
Hisense (Chengdu) Refrigerator	PRC_(i)_	RMB5,000,000	75%	25%	Manufacture and sale of
Co., Ltd.	28 March 2007				refrigerators
Entities operating in Hong Kong:
Pearl River Electric Refrigerator	Hong Kong	HK$400,000	—	100%	Trading in materials and
Company Limited	26 July 1985				parts for refrigerators
					and import and
					export business
Kelon Electric Appliances	Hong Kong	HK$10,000	—	100%	Property investment
Co., Ltd.	29 August 1991
Kelon Development Company	Hong Kong	HK$5,000,000	100%	—	Investment holding
Limited	17 August 1993
Kelon International Inc.	British Virgin Islands	US$50,000	—	100%	Investment holding and
	13 January 1999				sale of refrigerators
					and air-conditioners

— I-45 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(i) Established as a sino-foreign equity joint venture in the PRC.
(ii) Established as a limited liability company in the PRC.
(iii) The financial statements of Jiangxi Combine Electrical Appliance Co., Ltd. (“Jiangxi Combine”) and Kelon Europe Industrial Design Limited (“Kelon Europe”) were excluded from the consolidated financial statements. Jiangxi Combine has not commenced active business since its establishment and Kelon Europe has only very limited activities. The management considers that the impact of not consolidating Jiangxi Combine and Kelon Europe is insignificant to the Group.

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

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

20. Interests in associates

Share of net assets Goodwill Listed investment Unlisted investment Fair value of listed investment Details of the goodwill are as follows: Cost At 1 January Release on dilution in share reform At 31 December Impairment At 1 January Release on dilution in share reform At 31 December Carrying amount at 31 December	2007 RMB’000 82,839 — 82,839 78,179 4,660 82,839 164,070 2007 RMB’000 131,207 — 131,207 131,207 — 131,207 —	2006 RMB’000 78,981 — 78,981 74,478 4,503 78,981 43,241 2006 RMB’000 137,346 (6,139) 131,207 137,346 (6,139) 131,207 —

— I-46 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Details of the Group’s principal associates as at 31 December 2007 are listed under a table as follows:

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

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

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

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

Total assets Total liabilities Net assets Revenue Profit for the year	2007 RMB’000 2,471,410 (1,831,894) 639,516 2,766,448 8,654	2006 RMB’000 2,158,965 (1,572,054) 586,911 1,842,149 16,017

The financial statements of Huayi and Attend Logistics have been audited by Guangdong Hengxin Delu Certified Public Accountants Co., Ltd. and Shinewing Certified Public Accountants respectively.

— I-47 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

21. Available-for-sale financial assets

Unquoted long-term equity investments in the PRC, at cost Impairment loss 22. Intangible assets Trademarks (i) Non-patented technologies (ii) RMB’000 RMB’000 Year ended 31 December 2007 Cost At 1 January 2007 521,858 537 Additions at cost — 43,711 Disposal of a subsidiary (Note 38) — — Write off — — At 31 December 2007 521,858 44,248 Accumulated amortisation and impairment At 1 January 2007 403,480 377 Charge for the year — 137 Impairment provided for the year — — Disposal of a subsidiary (Note 38) — — Elimination on write off — — At 31 December 2007 403,480 514 Carrying amount At 31 December 2007 118,378 43,734 Year ended 31 December 2006 Cost At 1 January 2006 521,858 537 Additions at cost — — Write off — — At 31 December 2006 521,858 537 Accumulated amortisation and impairment At 1 January 2006 403,480 241 Charge for the year — 136 Elimination on write off — — At 31 December 2006 403,480 377 Carrying amount At 31 December 2006 118,378 160		2007 RMB’000 8,469 (7,249) 1,220 Software systems (ii) RMB’000 33,751 3,771 (8) (190) 37,324 26,458 3,782 1,282 (8) (190) 31,324 6,000 32,580 1,175 (4) 33,751 22,472 3,990 (4) 26,458 7,293		2006 RMB’000 7,249 (7,249) — Total RMB’000 556,146 47,482 (8) (190) 603,430 430,315 3,919 1,282 (8) (190) 435,318 168,112 554,975 1,175 (4) 556,146 426,193 4,126 (4) 430,315 125,831

— I-48 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(i) Impairment tests for trademarks

Trademarks represent the rights of using「科龍」,「容聲」and「容升」brands in producing refrigerators and air-conditioners recognised in October 2003.

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

Due to the significant loss incurred in 2005 and the business interruption in May 2005, the management conducted an impairment assessment on the trademarks. The recoverable amount of trademarks was determined based on value-in-use calculations with the support of valuation performed by independent third party valuer. As a result of such assessment, trademarks had been assessed to be impaired by approximately RMB338,247,000 as at 31 December 2005.

As at 31 December 2007, the management performed self-assessment and concluded that there was no further impairment identified.

Details of trademarks allocated to cash generating units for which the amount of trademarks so allocated is significant in comparison to total trademarks are as follows:

Air-conditioners Refrigerators	2007 RMB’000 38,473 79,905 118,378	2006 RMB’000 38,473 79,905
		118,378

The recoverable amounts of Segment Air-conditioners and Segment Refrigerators have been determined from value in use calculations based on cash flow projections from formally approved budgets covering a five-year period to 31 December 2012 with a discount rate of 15%. The cash flows beyond the five-year period are extrapolated using a steady 2% growth rate. The resulting value of the trademarks as at 31 December 2007 was higher than their carrying amount. Management believes that any possible change in any of these assumptions would not cause the aggregate carrying amount to exceed the aggregate recoverable amount.

(ii) Non-patented technologies and software systems are amortised over their estimated useful lives of 4 to 5 years.

— I-49 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

23. Goodwill

Year ended 31 December 2007 Cost At 1 January 2007 and 31 December 2007 Impairment At 1 January 2007 and 31 December 2007 Carrying amount At 31 December 2007 Year ended 31 December 2006 Cost At 1 January 2006 and 31 December 2006 Impairment At 1 January 2006 and 31 December 2006 Carrying amount At 31 December 2006	*RMB’000* 47,033 47,033
	—

	47,033 47,033
	—

24. Deferred tax assets

Deferred tax assets of the Group were arising from deductible temporary differences and tax losses. Net movement for the year is as follows:

At 1 January Recognition for the year Utilisation of tax losses for the year Effect of change in tax rate At 31 December	2007 RMB’000 21,387 7,183 (9,317) (7,953) 11,300	2006 RMB’000 — 21,387 — —
		21,387

— I-50 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

The following are the major deferred tax assets/(liabilities) and movements thereon for the year:

Assets/(liabilities) At 1 January 2006 Credit to income statement for the year At 31 December 2006 Credit/(charge) to income statement for the year Effect of change in tax rate At 31 December 2007	Depreciation allowance and provisions RMB’000 — — — 7,183 — 7,183	Tax losses RMB’000 — 21,387 21,387 (9,317) (7,953) 4,117	Total RMB’000 — 21,387
			21,387 (2,134) (7,953)
			11,300

For the purpose of balance sheet presentation, certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes:

	2007	2006
	RMB’000	RMB’000
Deferred tax assets	11,300	21,387

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

Unused tax losses Deductible temporary differences	2007 RMB’000 2,170,960 911,032 3,081,992	2006 RMB’000 1,846,123 691,429
		2,537,552

— I-51 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

The PRC tax losses can only be carried forward for a maximum period of five years and the Hong Kong tax losses can be carried forward indefinitely. The expiry of unused tax losses for which no deferred tax assets have been recognised is as follows:

Tax losses will expire in 2007 Tax losses will expire in 2008 Tax losses will expire in 2009 Tax losses will expire in 2010 Tax losses will expire in 2011 Tax losses will expire in 2012 Tax losses can be carried forward indefinitely	2007 RMB’000 — 7,068 44,748 1,097,025 649,153 145,268 227,698 2,170,960	2006 RMB’000 15,179 25,601 55,489 1,235,871 276,859 — 237,124
		1,846,123

25. Inventories

Raw materials Work in progress Finished goods	2007 RMB’000 195,695 42,333 702,256 940,284	2006 RMB’000 184,013 33,745 702,079
		919,837

As at 31 December 2007, the carrying amount of inventories pledged for bank borrowings amounted to approximately RMB40,000,000 (2006: RMB140,236,000).

26. Trade and other receivables

Trade receivables_(i) Notes receivable Other receivables Amounts due from Greencool Enterprise and its affiliates (Note 35 III a) Amounts due from companies suspected to be connected with Mr. Gu(Note 35 III b) Amounts due from Hisense Group(Note 35 III c) Amounts due from associates(Note 35 III d) Amounts due from other related companies(Note 35 III e)_	2007 RMB’000 442,835 2,740 540,497 72,061 214,217 28,821 322 5,716 1,307,209	2006 RMB’000 290,166 77,317 376,838 72,061 214,217 2,187 40 86,907
		1,119,733

— I-52 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(i) As at 31 December 2007, included in trade and notes receivable was an amount of RMB73,072,000 (2006: RMB28,200,000) being pledged for bank borrowings.

The aging analysis of trade receivables is as follows:

Within three months Three to six months Six months to one year Over one year _Less:_Provision for impairment of trade receivables At 31 December	2007 RMB’000 396,038 34,126 13,695 186,423 (187,447) 442,835	2006 RMB’000 252,966 30,938 9,691 194,211 (197,640)
		290,166

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

The aging analysis of trade receivables using allowed credit term is as follows:

Current_(Note a) Less than three months past due More than three months but less than twelve months past due More than twelve months past due Amount past due at balance sheet date but not impaired(Note b)_ At 31 December	2007 RMB’000 408,821 20,311 13,531 172 34,014 442,835	2006 RMB’000 274,119 11,071 3,335 1,641
		16,047
		290,166

(a) The balance that was neither past due nor impaired related to a wide range of customers for whom there was no recent history of default.

(b) The balance that was past due but not impaired related to a number of customers that had a good track record with the Group. Based on the past experience, the management estimated that the carrying amounts could be fully recovered.
(ii) Other receivables principally comprised of receivable from disposal of payments for leasehold land held for own use under operating leases, investment properties and value-added tax recoverable of RMB251,065,000, RMB5,233,000 and RMB147,308,000 respectively. The management has assessed the recoverability of the balance of other receivables and considered no further provision for impairment is needed.

— I-53 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(iii) The below table reconciled the allowance of impairment loss on trade and other receivables for the year:

At 1 January Impairment loss recognised Bad debt written off Reversal of impairment loss previously recognised At 31 December	2007 RMB’000 676,758 13,546 (41,508) (69,636) (579,160)	2006 RMB’000 762,882 — (25,112) (61,012)
		676,758

The Group recognised impairment loss on trade and other receivables by individual assessment based on the accounting policy stated in Note 4(k)(ii).

(iv) As at 31 December 2007, the Group has trade and other receivables denominated in USD of approximately RMB245,000,000 (2006: RMB179,000,000).
(v) As at 31 December 2007 and 2006, accumulated impairment loss of approximately RMB344,968,000 and RMB18,985,000 were recorded in respect of amounts due from companies suspected to be connected with Mr. Gu and amounts due from Greencool Enterprise and its affiliates.

27. Other financial assets and liabilities

During the year, the Group entered into foreign exchange forward contracts to manage its exchange rate exposures arising from ordinary course of business. The instruments purchased are primarily denominated in the currencies of the Group’s principal markets. At the balance sheet date, the total notional amount of outstanding foreign exchange forward contracts to which the Group has committed are as follows:

	2007	2006
	RMB’000	RMB’000
Foreign exchange forward contracts:
— contracted to buy foreign currency	413,831	—
— contracted to sell foreign currency	411,511	—

The fair value gain/(loss) of the forward exchange contracts for the year ended 31 December 2007 is estimated to be approximately RMB3,104,000 (2006: Nil) and it was recognised in the consolidated income statements. The gain/(loss) is calculated based on market values of equivalent instruments at the balance sheet date.

28. Non-current assets held for sale

In May 2007, the directors resolved to dispose certain factories, warehouses and offices of the Group. The sale transactions will be completed in early next year. As at 31 December 2007, the properties with carrying amount of approximately RMB20,369,000 have been classified as noncurrent assets held for sale.

— I-54 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

29. Trade and other payables

Trade payables Notes payable Other payables Accruals Amounts due to Greencool Enterprise and its affiliates (Note 35 III a) Amounts due to companies suspected to be connected with Mr. Gu_(Note 35 III b) Amounts due to Hisense Group(Note 35 III c) Amounts due to associates(Note 35 III d) Amounts due to other related companies(Note 35 III e)_ The aging analysis of trade payables is as follows: Within one year One to two years Two to three years Over three years	2007 RMB’000 1,152,853 770,960 616,756 165,679 13,050 118,461 205,184 40,200 10,038 3,093,181 2007 RMB’000 995,092 70,838 64,796 22,127 1,152,853	2006 RMB’000 1,415,803 507,918 486,073 140,678 13,050 119,316 319,526 51,680 39,912
		3,093,956

		2006 RMB’000 1,177,093 196,857 30,937 10,916
		1,415,803

As at 31 December 2007, the Group has trade and other payables denominated in USD of approximately RMB45,000,000 (2006: RMB31,000,000).

30. Provisions

At 1 January 2007 Additional provision in the year Utilisation of provision At 31 December 2007 At 1 January 2006 Additional provision in the year Utilisation of provision At 31 December 2006	Warranty(i) RMB’000 165,783 66,643 (99,006) 133,420 204,179 90,427 (128,823) 165,783	Legal(ii) RMB’000 4,212 10,471 (4,097) 10,586 5,737 5,444 (6,969) 4,212	Total RMB’000 169,995 77,114 (103,103)
			144,006

			209,916 95,871 (135,792)
			169,995

— I-55 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(i) The Group provides free repairing services on its products and free replacement of the major components of its products for one to three years after date of sale. The warranty provision is estimated by management based on past experience. The assumptions used to estimate the warranty provision are reviewed periodically in light of actual results.
(ii) The Group is currently involved in a number of legal disputes. The amount provided represents the directors’ best estimate of the Group’s liability having taken legal advice. Uncertainties exist as to whether claims will be settled out of court or if not whether the Group is successful in defending any action.

31. Other liabilities

Employee benefits_(i) Government grants(ii) Amounts due within one year: — Employee benefits(i) — Government grants(ii)_ Amounts due after one year	2007 RMB’000 30,820 24,973 55,793 30,820 24,973 55,793 —	2006 RMB’000 32,620 27,952
		60,572

		19,026 27,952
		46,978
		13,594

(i) The amounts represent accrued contributions to a defined contribution pension scheme for its employees during the period from 1993 to 2001. Settlement of employee benefits payable was mutually agreed by the Company and the committee of the Company’s staff union.
(ii) The amounts represent government grants received for the Group’s research and development activities. Government grants recognised as income for the year amounted to approximately RMB6,236,000 (2006: RMB70,511,000).

32. Bank borrowings

Short-term bank loans due within one year Analysed as: Secured Unsecured	2007 RMB’000 1,310,972 773,812 537,160 1,310,972	2006 RMB’000 1,556,702
		1,233,294 323,408
		1,556,702

— I-56 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

As at 31 December 2007, the Group has outstanding short-term loans in the aggregate of approximately RMB1,311,972,000 (2006: RMB1,556,702,000) of which approximately RMB18,000,000 (2006: RMB385,000,000) were overdue. The Group negotiated with bankers to refinance the short-term bank loans which are due in 2007. Based on discussion with the Group’s bankers to date, the directors expect that these borrowings will be renewed in due course.

The bank borrowings carry interest at fixed rates ranging from 5.47% to 8.35% (2006: 4.65% to 7.84%) per annum. Bank borrowings of approximately RMB773,812,000 (2006: RMB1,233,294,000) were secured by pledge of property, plant and equipment (Note 16), investment properties (Note 17), payments for leasehold land held for own use under operating leases (Note 18), inventories (Note 25) and trade and notes receivable (Note 26).

At 31 December 2007, included in bank borrowings were amount of approximately RMB9,000,000 (2006: Nil) in respect of financial guarantees provided to banks in favor of certain distributors of the Group on bank acceptance notes. Under the guarantee arrangements, the Group assumed the repayment responsibilities of the bank acceptance notes after it utilised the credit facilities granted to the distributors by such banks. The management assessed that the guarantee arrangements would not result in the Group picking up additional credit risks or financial contingencies in favor of the distributors. These financing arrangements would however result in a reclassification of trade deposits received to bank borrowings.

At 31 December 2007, included in bank borrowings was an amount of approximately RMB89,946,000 (2006: RMB218,000,000) in respect of notes and trade receivables factored to banks with recourse.

33. Share capital

Share of RMB1 each: 314,587,227 (2006:337,986,755) transferable shares that are subject to selling restrictions 459,589,808 (2006: 459,589,808) H shares 217,829,528 (2006: 194,430,000) A shares	2007 RMB’000 314,587 459,590 217,830 992,007	2006 RMB’000 337,987 459,590 194,430
		992,007

(i) During the year ended 31 December 2007, the Company announced a proposed share reform including conversion of all the non-freely transferable shares into transferable shares of the Company and allocation of 1.2 newly issued shares to each holders of transferable A shares for every 10 transferable shares held by such holders of A shares and such share reform was completed in March 2007.

As a result of the share reform, the 262,212,194 Domestic shares which are non-freely transferable shares held by Hisense Air-Conditioner was converted into 238,872,074 transferable shares that are subject to certain selling restrictions of the Company, representing 24.08% of the Company’s total capital.

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

— I-57 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(ii) The Group’s objectives when managing capital are:
to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and
• to provide an adequate return to shareholders by pricing products and services commensurate with the level of risk.

The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the debtto-adjusted capital ratio. This ratio is calculated as net debt divided by adjusted capital. Net debt is calculated as total debt (as shown in the balance sheet) less cash and cash equivalents. Adjusted capital comprises all components of equity.

During 2007, the Group’s strategy, which was unchanged from 2006 was to substantially finance through debt as the Group has deficiency in equity of RMB629,774,000 (2006 (restated): RMB727,931,000). At 31 December 2007, the bank borrowings were approximately RMB1,310,972,000 (2006: RMB1,556,702,000) (Note 32) .

34. Leases

Operating leases – lessee

The Group leases certain leasehold land and buildings and plant and machinery under operating lease arrangements with lease terms ranging from one to five years. The operating lease charges for the year ended 31 December 2007 was as follows:

	2007	2006
	RMB’000	RMB’000
Operating lease charges
— leasehold land and buildings	40,434	63,855
— plant and machinery	250	6,500

The total future minimum lease payments under non-cancellable operating leases are due as follows:

Not later than one year Later than one year and not later than five years	2007 RMB’000 2,196 457 2,653	2006 RMB’000 2,590 1,116
		3,706

— I-58 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Operating leases – lessor

The Group’s investment properties are also leased to a number of tenants for varying terms. The sub-lease rental income for the year ended 31 December 2007 was RMB20,721,000 (2006: RMB7,723,000).

The minimum rent receivables under non-cancellable operating leases are as follows:

Not later than one year Later than one year and not later than five years	2007 RMB’000 3,523 8,397 11,920	2006 RMB’000 60 —
		60

35. Related party transactions

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

As at 31 December 2007, Hisense Air-Conditioner held 238,872,074 shares of the Company, representing 24.08% of total share capital of the Company.

During the period from 2001 to 2005, the Group had significant transactions and relationships with Greencool Enterprise and its affiliates. The Group also had entered into a series of activities/ transactions with companies suspected to be connected with Mr. Gu. Upon the completion of share transfer, Mr. Gu, Greencool Enterprise and its affiliates were no longer connected with the Group. Accordingly, no related party disclosure was made in respect of Mr. Gu, Greencool Enterprise and its affiliates for the year.

During the year, the Group entered into a Business Co-operation Framework Agreement with Hisense Group Company and certain of its subsidiaries (hereinafter collectively referred to as the “Hisense Group”). The Business Co-operation Framework Agreement is valid for a term of one year commencing from 1 January 2007. Pursuant to the Business Co-operation Framework Agreement, the Group agrees to sell and supply moulds, air-conditioners, refrigerators and raw materials to Hisense Group, purchase air-conditioners, refrigerators and raw materials from Hisense Group and Hisense Group agrees to render repair and maintenance services for electrical appliances to the Group. The details of the transactions with Hisense Group are disclosed in note 35 II(b).

— I-59 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

I. Relationship with related parties

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

Name of related parties

Relationship

Hisense Air-Conditioner The substantial shareholder of the Company Hisense Group Company The holding company of Hisense AirConditioner Qingdao Hisense Marketing Co., Ltd. A fellow subsidiary of Hisense Air(“Hisense Agent”) Conditioner Hisense Electric Co., Ltd. A fellow subsidiary of Hisense Air(“Hisense Electric”) Conditioner Hisense (Zhejiang) Air-Conditioner A subsidiary of Hisense Air-Conditioner Co., Ltd. (“Hisense Zhejiang”) Hisense (Shandong) Air-Conditioner A fellow subsidiary of Hisense AirCo., Ltd. (“Hisense Shandong”) Conditioner Hisense (Nanjing) Electric Co., Ltd. A fellow subsidiary of Hisense Air(“Hisense Nanjing”) Conditioner Hisense (Beijing) Electric Co., Ltd. A fellow subsidiary of Hisense Air(“Hisense Beijing”) Conditioner Hisense (Qingdao) Import & Export A fellow subsidiary of Hisense AirCo., Ltd. (“Hisense Import & Export”) Conditioner Hisense Hitachi Air Conditioning A fellow subsidiary of Hisense AirCo., Ltd. (“Hisense Hitachi”) Conditioner

Savor Household Electrical Appliance Service Industry Co., Ltd. (“Savor Service”)

A fellow Subsidiary of Hisense AirConditioner

Chongqing Kelon Rongsheng Refrigerator Sales Co., Ltd. (“Chongqing Rongsheng”)

An associate of the Group

Attend Logistics

An associate of the Group

Huayi

An associate of the Group

Jiaxibeila Compressor Company Limited (“Jiaxibeila”)

A subsidiary of an associate of the Group

Kelon Europe

An unconsolidated subsidiary of the Company

— I-60 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Name of related parties Relationship Jiangxi Combine An unconsolidated subsidiary of the Company Chengdu Engine (Group) Company A minority investor of Chengdu Kelon before Limited (“Chengdu Engine”) 24 April 2007 Chengdu Xinxing Electrical Appliance An associate of Chengdu Engine Holdings Company Limited (“Chengdu Xinxing”) Hangzhou Xileng Group Company A minority investor of Hangzhou Kelon Limited (“Hangzhou Xileng”) before 5 December 2007 Xi’an Gaoke (Group) Limited A minority investor of Xi’an Kelon (“Xi’an Gaoke”) Shunde Yunlong Consultancy A minority investor of Huaao Electronics (“Shunde Yunlong”)

For the purpose of this report, the directors are of the views that the following companies controlled by or suspected to be connected with Mr. Gu are no longer related to the Group starting from 13 December 2006 due to the completion of the share transfer transaction between Greencool Enterprise and Hisense Air-Conditioner. As a result, transactions with Mr. Gu, Greencool Enterprise and its affiliates and companies suspected to be connected with Mr. Gu for the year ended 31 December 2007 are not classified as related party transactions.

Name of related parties Relationship Greencool Enterprise The former single largest shareholder of the Company Mr. Gu The beneficial owner of Greencool Enterprise and also the former executive director of the Company Greencool Technology Development A company controlled by Mr. Gu (Shenzhen) Company Limited (“Shenzhen Greencool Technology”) Greencool Environmental Protection A company controlled by Mr. Gu Engineering (Shenzhen) Company Limited (“Shenzhen Greencool Environmental”) Greencool Refrigerant (China) Company A company controlled by Mr. Gu Limited (“Greencool China”)

— I-61 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Name of related parties

Relationship

Hainan Greencool Environmental Protection Engineering Company Limited (“Hainan Greencool”)

A company controlled by Mr. Gu

Greencool Procurement (Shenzhen) Co., Ltd. (“Greencool Procurement”)

A company controlled by Mr. Gu

Hefei Meiling Holdings Limited (“Hefei Meiling”)

A company controlled by Mr. Gu

Jiangxi Greencool Electrical Appliance Company Limited (“Jiangxi Greencool”)

A company controlled by Mr. Gu

Yangzhou Yaxing Motor Coach Company Limited (“Yangzhou Yaxing”)

A company controlled by Mr. Gu

Chengdu Refrigerating Components Factory (“Chengdu Refrigerating”)

A company suspected to be connected with Mr. Gu

Hefei Weixi Electrical Appliance Company Limited (“Hefei Weixi”) Jiangxi Keda Plastic Technology Company Limited (“Jiangxi Keda”)

A company suspected to be connected with Mr. Gu
A company suspected to be connected with Mr. Gu

Jiangxi Kesheng Trading Company Limited (“Jiangxi Kesheng”)

A company suspected to be connected with Mr. Gu

Jinan San’ai’fu Chemical Company Limited (“Jinan San’ai’fu”)

A company suspected to be connected with Mr. Gu

Tianjin Lixin Trading Development Company Limited (“Tianjin Lixin”)

A company suspected to be connected with Mr. Gu

Tianjin Taijin Yunye Company Limited (“Tianjin Taijin Yunye”)

A company suspected to be connected with Mr. Gu

Tianjin Xiangrun Trading Development Company Limited (“Tianjin Xiangrun”)

A company suspected to be connected with Mr. Gu

Wuhan Changrong Electrical Appliance Company Limited (“Wuhan Changrong”)

A company suspected to be connected with Mr. Gu

Zhongshan Dongyue Electrical Company Limited (“Zhongshan Dongyue”)

A company suspected to be connected with Mr. Gu
Zhejiang Guoda Trading Company Limited A company suspected to be connected with (“Zhejiang Guoda”) Mr. Gu

— I-62 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Name of related parties Relationship Zhejiang Yuhuan Compressor Factory A company suspected to be connected with (“Zhejiang Yuhuan”) Mr. Gu Beijing De Heng Solicitors A company suspected to be connected with (“Beijing De Heng”) Mr. Gu Zhuhai Defa Air-conditioner Fittings A company suspected to be connected with Company Limited (“Zhuhai Defa”) Mr. Gu Zhuhai Longjia Refrigerating Plant A company suspected to be connected with Company Limited (“Zhuhai Longjia”) Mr. Gu

II. Transactions with related parties

(a) Transactions with Greencool Enterprise and its affiliates

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

	2006
	RMB’000
Loan guarantee provided by Greencool Enterprise
— maximum amount during the year	327,971
— amount as at 31 December	85,709

— I-63 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(b) Transactions with Hisense Group

The Group had the following significant transactions with Hisense Group:

		2007	2006
	Notes	RMB’000	RMB’000
Sales of goods/raw materials to
— Hisense Shandong	(i)	132,725	—
— Hisense Agent	(i)	192	1,572,695
— Hisense Zhejiang	(i)	9,693	7,253
— Hisense Import & Export	(i)	6	266
— Hisense Beijing	(i)	110,303	—
— Hisense Nanjing	(i)	429	—
— Hisense Hitachi	(i)	—	286
Sales of property, plant and equipment to
— Hisense Zhejiang		—	300
— Hisense Shandong		8	—
Sales of moulds to
— Hisense Electric	(i)	—	2,554
— Hisense Agent	(i)	—	649
Agency fee paid/payable to
— Hisense Agent	(ii)	—	13,178
Loan interest payable to
— Hisense Agent		8,684	16,390
Purchases of goods/raw materials from
— Hisense Air-Conditioner	(i)	—	18
— Hisense Shandong	(i)	120,923	—
— Hisense Agent	(i)	—	209,729
— Hisense Zhejiang	(i)	334,424	69,854
— Hisense Nanjing	(i)	105,329	1,830
— Hisense Beijing	(i)	15	5,520
— Hisense Electric	(i)	32	—
Purchases of property, plant and
equipment from
— Hisense Shandong		32	—
— Hisense Beijing		19	—

— I-64 —

FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

	2007	2006
	RMB’000	RMB’000
Repair and maintenance services provided by
Savor Service	1,944	—
Loan and note payables guarantee provided by
Hisense Group Company
— amount as at 31 December	1,141,500	—

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

(ii) Agency fee was based on 1% of the total amount of sales proceeds of products under the sales agency agreement. On 10 May 2006, the sales agency agreement expired.

(c) Transactions with associates

The Group had the following significant transactions with associates:

		2007	2006
	Notes	RMB’000	RMB’000
Sales of goods/raw materials to
— Chongqing Rongsheng	(i)	64,756	39,601
— Huayi and Jiaxibeila	(i)	18	356
Purchases of goods/raw materials from
— Huayi and Jiaxibeila	(ii)	221,801	127,978
Service fee charged to
— Attend Logistics		103	103
— Hisense Zhejiang		75	—
Logistics management fee/warehouse
rental paid to
— Attend Logistics	(iii)	29,657	51,538

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

(ii) Huayi and Jiaxibeila mainly provide compressors to the Group for production of air-conditioners and refrigerators.

(iii) The Group and Attend Logistics entered into a logistics service agreement, pursuant to which Attend Logistics provides transportation and warehousing service to the Group. The service fee is based on the actual volume of goods, the distance delivered, the occupancy space of warehouse and charged at a pre-determined rate agreed by both parties.

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APPENDIX I

(d) Transactions with other related parties

The Group had the following significant transactions with other related parties:

		2007	2006
	Notes	RMB’000	RMB’000
Sales of goods/raw materials to
— Chengdu Xinxing		—	3,337
Purchases of goods/raw materials from
— Chengdu Xinxing		—	25,236
Water and electricity expenses paid to
— Chengdu Engine	(i)	7,057	6,468
Lease payment in respect of plant and
equipment to
— Hangzhou Xileng	(ii)	—	6,000

(i) Water and electricity expenses are charged at cost.

(ii) Lease payment in respect of plant and equipment to Hangzhou Xileng is determined by reference to an equipment lease agreement entered into between Hangzhou Kelon and Hangzhou Xileng. The lease was terminated by a mutual agreement signed on 14 October 2007 and the lease payment accrued for the year was waived accordingly.

III. Balances with related parties

(a) Balances with Greencool Enterprise and its affiliates

Balances with Greencool Enterprise and its affiliates
Included in trade and other receivables, net — Greencool Enterprise — Hainan Greencool — Shenzhen Greencool Technology — Shenzhen Greencool Environmental Included in trade and other payables — Hefei Meiling — Jiangxi Greencool	2006 RMB’000 6,085 976 32,000 33,000
	72,061

	50 13,000
	13,050

Amounts due from/to Greencool Enterprise and its affiliates are unsecured, interest-free and repayable on demand.

As at 31 December 2006, accumulated impairment loss of approximately RMB18,985,000 was recorded in respect of amounts due from Greencool Enterprise and its affiliates.

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APPENDIX I

FINANCIAL INFORMATION OF THE KELON GROUP

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

Included in trade and other receivables, net — Beijing De Heng — Hefei Weixi — Jiangxi Keda — Jiangxi Kesheng — Jinan San’ai’fu — Tianjin Lixin — Tianjin Xiangrun — Wuhan Changrong — Zhuhai Defa — Zhuhai Longjia Included in trade and other payables — Tianjin Taijin Yunye — Zhongshan Dongyue — Zhuhai Longjia — Zhuhai Defa — Zhejiang Yuhuan	2006 RMB’000 1,000 10,424 6,500 6,072 56,683 44,800 48,199 15,539 10,700 14,300
	214,217

	65,000 4,377 28,316 21,400 223
	119,316

Amounts due from/to companies suspected to be connected with Mr. Gu are unsecured, interest-free and repayable on demand.

As at 31 December 2006, accumulated impairment loss of approximately RMB344,968,000 was recorded in respect of amounts due from companies suspected to be connected with Mr. Gu.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

(c) Balances with Hisense Group

Included in trade and other receivables, net — Hisense Agent — Hisense Air-Conditioner — Hisense Zhejiang — Hisense Nanjing — Hisense Beijing — Savor Service Included in trade and other payables — Hisense Air-Conditioner — Hisense Shandong — Hisense Agent — Hisense Beijing — Hisense Nanjing — Hisense Zhejiang — Savor Service	2007 RMB’000 47 675 — — 28,066 33 28,821 58 54,487 38,785 — 545 109,236 2,073 205,184	2006 RMB’000 540 335 582 730 — —
		2,187

		9,281 — 309,965 1 279 — —
		319,526

Amounts due from Hisense Group are unsecured, interest-free and are repayable in accordance with normal commercial terms.

Amounts due to Hisense Group are unsecured, interest-free and repayable on demand.

(d) Balances with associates

Included in trade and other receivables, net — Chongqing Rongsheng — Attend Logistics Included in trade and other payables — Attend Logistics — Chongqing Rongsheng — Huayi and Jiaxibeila	2007 RMB’000 317 5 322 7,998 207 31,995 40,200	2006 RMB’000 — 40
		40

		20,652 4,083 26,945
		51,680

Amounts due from/to associates are unsecured, interest-free and are repayable in accordance with normal commercial terms.

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APPENDIX I

(e) Balances with other related companies

Included in trade and other receivables, net — Chengdu Engine — Chengdu Xinxing — Kelon Europe Included in trade and other payables — Chengdu Engine — Chengdu Xinxing — Hangzhou Xileng — Jiangxi Combine — Xi’an Gaoke	2007 RMB’000 — — 5,716 5,716 109 — 2,471 5,100 2,358 10,038	2006 RMB’000 47,191 34,000 5,716
		86,907

		5,309 11,946 15,772 5,100 1,785
		39,912

Amounts due from/to other related companies are unsecured, interest-free and are repayable on demand.

As at 31 December 2007, impairment losses of approximately RMB4,455,000 (2006: RMB4,526,000) were recorded in respect of amounts due from other related companies.

IV. Key management personnel emoluments

Basic salaries, allowances and benefits-in-kind Defined contribution pension cost	2007 RMB’000 4,692 90 4,782	2006 RMB’000 7,422 34
		7,456

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, including directors and other senior management, totaling 18 individuals (2006: 33 individuals).

36. Financial risk management objectives and policies

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

Interest rate risk
Foreign currency risk
Liquidity risk
Credit risk

The Group does not hold or issue any financial derivatives for trading purpose.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Interest rate risk

The Group is exposed to interest rate risks due to changes in interest rates of interest-bearing financial assets and liabilities. Interest-bearing financial assets are mainly deposits with banks which are mostly short-term in nature whereas interest-bearing financial liabilities are primarily short-term bank borrowings. As at 31 December 2007, the Group’s short-term bank borrowings were carried at fixed interest rates, and therefore not significantly exposed to both fair value and cash flow interest rate risks.

The following table indicates the approximate change in the profit after tax in response to reasonably possible changes in an interest rate to which the Group has exposure at the balance sheet date. In determining the effect on profit after tax on the next accounting period until next balance sheet date, the management assumes that the change in interest rate had occurred at the balance sheet date and all other variables remain constant. There is no change in the methods and assumptions used in 2006 and 2007.

	2007	2006
	Effect on	Effect on
	profit	profit
	after tax	after tax
	RMB’000	RMB’000
Increase by 100 basis points	(3,000)	(1,000)
Decrease by 100 basis points	3,000	1,000

Foreign currency risk

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

Certain companies in the Group use foreign exchange forward contracts when major fluctuation in the relevant foreign currency is anticipated to manage their foreign exchange risk arising from future commercial transactions, recognised assets and liabilities and net investments in foreign operations.

The carrying amounts of the Group’s monetary assets and monetary liabilities denominated in foreign currency at the reporting date are as follows:

	Liabilities		Assets
	2007	2006	2007	2006
	RMB’000	RMB’000	RMB’000	RMB’000
USD	1,273,645	527,313	450,298	423,771
GBP	521,614	—	46,042	—
Euro	48,764	563	28,425	3,063

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

The sensitivity analysis on foreign exchange risk includes monetary financial assets and liabilities that are denominated in a foreign currency, i.e. in a currency other than the functional currency in which they are measured. The following table indicates the approximate effect on the profit after tax in the next accounting period and the effect on other component of equity at one year after balance sheet date in response to reasonably possible changes in exchange rates to which the company has significant exposure at the balance sheet date.

	2007		2006
	Effect on		Effect
	profit	on profit
	after tax	after tax
	RMB’000	RMB’000
USD to RMB
Appreciates by 1%	(6,010)		(756)
Depreciates by 1%	6,010		756
GBP to RMB
Appreciates by 6%	(20,830)		N/A
Depreciates by 6%	20,830		N/A
Euro to RMB
Appreciates by 9%	(1,336)		(164)
Depreciates by 9%	1,336		164

Liquidity risk

In the management of liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by management to finance the Group’s operations and mitigate the effects of short-term fluctuations in cash flows. The Group’s treasury department is responsible for maintaining a balance between continuity and flexibility of funding through the use of bank facilities in order to meet the Group’s liquidity requirements. All of the debts of the Group would mature in less than one year as at 31 December 2007.

The contractual maturities of financial liabilities are shown as below:

Current Within six months Within one year	2007 RMB’000 868,417 2,823,675 1,246,105 4,938,197	2006 RMB’000 1,128,137 2,989,792 539,000
		4,656,929

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Credit risk

It is the risk that a counterparty is unable to pay amount in full when due. It arises primarily from the Group’s trade receivables and amounts due from related parties. The Group limits its exposure to credit risk by vigorously selecting counterparties. There is no concentration of credit risk. The Group mitigates its exposure to risk relating to accounts receivable by dealing with diversified customers with sound financial standing. Certain new customers are required to place cash deposits with the Group to reduce the maximum exposure to credit risk. The Group seeks to maintain strict control over its outstanding receivables and has a credit control policy to minimise credit risk. In addition, all receivable balances are monitored on an ongoing basis and overdue balances are followed up by senior management.

The maximum exposure to credit risk at reporting date is the carrying amount of each class of financial assets is shown on the balance sheet.

37. Acquisition of further equity interests in a subsidiary

On 24 April 2007, the Company acquired an additional 30% shareholding in a subsidiary, Chengdu Kelon, from Chengdu Engine. After the acquisition, Chengdu Kelon became a wholly-owned subsidiary of the Company.

Details of the identifiable assets and liabilities acquired, and the purchase consideration are as follows:

Property, plant and equipment Payments for leasehold land held for own use under operating leases Trade and other receivables Inventories Cash and cash equivalents Trade and other payables Taxation payable Bank borrowings Net assets Net assets acquired Consideration: Satisfied by payment in advance and a note payable Net assets acquired Debited to capital reserve	RMB’000 84,365 19,450 183,516 7,361 7,525 (150,950) (3,981) (24,900) 122,386 36,716 81,388 (36,716) 44,672

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

38. Disposal of a subsidiary

On 27 August 2007, the Company disposed 70% shareholding in a subsidiary, Kaifeng Kelon AirConditioner Co., Ltd (“Kaifeng Kelon”) to the minority equity holder, Henan Province, Kaifeng Economic Technology Development (Group) Company for a consideration of approximately RMB6,123,000 satisfied by waiver of debt settlement by Kaifeng Kelon. Kaifeng Kelon ceased to be a subsidiary of the Company following the disposal and the Company had no more shareholding interest in Kaifeng Kelon.

Details of the identifiable assets and liabilities disposed and the sales consideration are as follows:

Sale proceeds satisfied by waiver of debt settlement Net book value of net assets disposed Gain on disposal of Kaifeng Kelon The assets and liabilities disposed of at the date of disposal were as follows: Property, plant and equipment Payments for leasehold land held for own use under operating leases Cash and cash equivalents Trade and other receivables Inventories Trade and other payables Minority interests Net book value of net assets disposed	RMB’000 6,123 (1,614)
	4,509

	30,310 13,084 23 837 782 (6,542) (36,880)
	1,614

39. Capital commitments

	2007	2006
	RMB’000	RMB’000
Capital expenditure for acquisition of property,
plant and equipment contracted for but not provided
in the financial statements	90,831	14,004

40. Retirement benefits schemes

The Group contributes mainly to a defined contribution pension scheme, which is administered by the provincial government, in respect of employees of the Group. According to such scheme, the Group shall pay an amount, calculated at a percentage of the total salaries and wages of the employees, to a retirement reserve.

The total cost charged to the consolidated income statement of approximately RMB41,135,000 (2006: RMB31,223,000) represents contributions payable to the scheme by the Group at rates specified in the rules of the scheme.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

41. Reserves

(a) Statutory reserves

According to the Articles of Association of the Company, when distributing net profit of each year, the Company shall set aside 10% of its after tax profits for the statutory common reserve fund (except where the fund has reached 50% of the Company’s registered capital) and 5% to 10% of after tax profits for the statutory common welfare fund. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends.

(b) Distributable reserves of the Company

In accordance with the Articles of Association of the Company, the accumulated profits of the Company for the purpose of profit distribution will be deemed to be the lesser of (i) the amount determined in accordance with PRC accounting standards and regulations (“PRC GAAP”) and (ii) the amount determined in accordance with IFRS.

As at 31 December 2007, the Company did not have reserve available for distribution to its shareholders (2006: Nil).

42. Contingencies

The Group is a defendant in certain lawsuits as well as the plaintiff in other proceedings arising in the ordinary course of business. The amount involved in the litigations against the Group relate mainly to bank loans, purchases and expenditures incurred by the Group and most of them were recorded as liabilities of the Group as at the balance sheet date. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have material adverse effect on the financial position or operating results of the Group.

43. Subsequent events

The following significant events took place subsequent to 31 December 2007:

(a) In January 2008, the Group signed share transfer agreement to dispose of its 100% equity interests in a subsidiary-Jilin Kelon. The total share transfer consideration was agreed to be RMB30,000,000 in which RMB29,500,000 was used for the settlement of liabilities of Jilin Kelon. The remaining balance of RMB500,000 has to be settled in cash. The Group had suffered a loss on disposal of the subsidiary of approximately RMB11,000,000 and the transaction for disposal of subsidiary was completed in March 2008.
(b) In January 2008, the Group entered into a Business Cooperation Framework Agreement with certain subsidiaries of Hisense Group for a term of one year ending on 31 December 2008, which can be terminated before its expiration by mutual agreement of the parties, in connection with the (i) Sale and supply of moulds, (ii) Sale and supply of Air-conditioners, (iii) Sale and supply of Refrigerators, (iv) Sale and supply of raw material and components and (v) Provision of property management service to the subsidiaries of Hisense Group, subject to a maximum cap of RMB47,500,000, RMB120,000,000, RMB100,000,000, RMB92,100,000 and RMB500,000 respectively.

Under the same business cooperation Framework Agreement, the subsidiaries of Hisense Group agreed to (i) Sales and supply of Air-Conditioners, (ii) Sales and supply of

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

refrigerators, (iii) Sales and supply of raw materials, components and moulds and (iv) Provision of property management service to the Group, subject to a maximum cap of RMB620,000,000, RMB210,000,000, RMB46,100,000 and RMB42,000,000.

The Group also entered into a Business Cooperation Framework Agreement with Huayi Compressor Holdings Company Limited and its associates for a term of one year ending on 31 December 2008, which can be terminated before its expiration by mutual agreement of the parties, in connection with the purchase of compressor by the subsidiaries of the Group, subject to a maximum cap of RMB581,710,000.

(c) The Company has approved in the general meeting of the Company held on 15 February 2008 to provide guarantees in favour of the Group’s distributors at an aggregate amount of RMB442,000,000 (2006: RMB267,000,000). The Group and the respective distributors, however, have not reached any mutual commitment and entered into contractual arrangement for the proposed guarantee.
(d) In December 2007, the Company proposed to purchase the White Goods assets of Hisense Air-Conditioner, the substantial shareholder of the Company, including the production companies of refrigerators and air-conditioners and the sale company of White Goods Business (the “Target Assets”) by way of private issuance of A shares of the Company to the Hisense Air-conditioning (the Acquisition). The price of the Target Assets of the Acquisition was proposed to be approximately RMB2,541,000,000. For the purpose of determining the consideration, the Company proposed to issue a total of up to and including 365,000,000 domestic ordinary shares (A-shares) with a nominal value of RMB1 each.

On 15 February 2008, the Company held an extraordinary general meeting and passed the Acquisition proposal. On 20 March 2008, the Company announced that the Acquisition has been rejected by the Merger and Reorganisation Review Committee of CSRC (“中國證券監督管理委員會併購重組審核委員會”).

(e) In April 2008, the Company announced a notice to confirm that the Acquisition failed to complete by 28 March 2008. Pursuant to the Share Reform Proposal completed on 29 March 2007, Hisense Air-conditioner has undertaken to make a compensation of 9,725,059 shares calculated based on 0.5 share for every 10 transferable A Shares held by such holders as registered on 10 April 2008 under the circumstances that the Acquisition cannot be completed by 29 March 2008.

44. Critical accounting judgments and key sources of uncertainty

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Impairment

In considering the impairment losses that may be required for certain of the Group’s assets which include property, plant and equipment, construction in progress, investment properties, payments for leasehold land held for own use under operating leases, intangible assets, goodwill and interests in associates, recoverable amounts of the assets need to be determined. The recoverable amount is the greater of the fair value less costs to sell and the value in use. It is difficult to precisely estimate fair value less costs to sell because quoted market prices for these assets may not be readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which require significant judgment relating to items such as level of sales, selling price and amount of operating costs. The Group uses all readily available information in determining amounts that are reasonable approximations of recoverable amounts, including estimates based on reasonable and supportable assumptions and projections of items such as sales volume, selling price and amount of operating costs.

In considering the impairment losses that may be required for current receivables, future cash flows need to be determined. One of the key assumptions that has to be applied is the ability of the debtors to settle the receivables. Although the Group has used all available information to make this estimation, inherent uncertainty exists and actual may be different from the amount estimated.

Depreciation and amortisation

Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account their estimated residual values. The Group reviews the estimated useful lives of the assets regularly. The useful lives are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Warranty provision

As explained in noted 30(i), the Group makes provisions under the warranties it gives on sales of its electrical products taking into account the Group’s recent claim experience. As the Group is continuously upgrading its product designs and launching new models, it is possible that recent claim experience is not indicative of the future claims that it will receive in respect of past sales. Any increase or decrease in the provision would affect profit or loss in future years.

Taxation

Determining income tax provisions involves judgement on the future tax treatment of certain transactions. The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislations. Where the final tax outcome of these transactions is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions in the year in which such determination is made.

45. Approval of financial statements

The financial statements were approved and authorised for issue by the Board of Directors on 24 April 2008.

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

C. AUDITOR’S REPORTS AND QUALIFIED AUDIT OPINIONS EXTRACTED FROM PUBLISHED ANNUAL REPORTS
(i) Qualified audit opinion on the Kelon Group’s financial statements for the year ended 31 December 2005 as extracted from the Kelon Group’s 2005 annual report

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TO THE SHAREHOLDERS OF

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED 廣東科龍電器股份有限公司

(A joint stock limited company established in the People’s Republic of China with limited liability)

We have audited the financial statements which have been prepared in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board.

Respective responsibilities of directors and auditors

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Basis of opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants except that the scope of our work was limited as explained below.

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and its subsidiaries (collectively “the Group”), consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited as follows:

a. The consolidated financial statements include the financial statements of Jiangxi Kelon Industrial Development Co., Ltd. (“Jiangxi Kelon”), the business of which was interrupted after the freezure of its assets by the Higher People’s Court of Jiangxi Province in August 2005. The scope of our audit on Jiangxi Kelon was limited as personnel responsible for the operations of Jiangxi Kelon had left during the year and the management of the Group were unable to ascertain the accuracy and completeness of the books and records of Jiangxi Kelon. Due to this limitation, we were unable to obtain sufficient reliable evidence to assess whether the carrying amounts of the following significant financial statement areas (after elimination of intra-group balances and transactions), relating to Jiangxi Kelon, were free from material misstatements:
Property, plant and equipment of approximately RMB60 million;
Inventories of approximately RMB44 million;
Other receivables of approximately RMB49 million;
Amounts due from companies suspected to be connected with Mr. Gu (as defined in point (f) below) of approximately RMB85 million;
Cash and bank balances of approximately RMB1.5 million;
Trade payables of approximately RMB172 million;
Other payables of approximately RMB18 million;
Amounts due to companies suspected to be connected with Greencool Enter prise (as def ined in point (f ) below) of approximately RMB13 million;

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FINANCIAL INFORMATION OF THE KELON GROUP

APPENDIX I

Taxation payable of approximately RMB23 million;
Short-term bank borrowings of approximately RMB151 million; and
Net loss attributable to the Group of approximately RMB244 million.
b. Included in leasehold land and buildings at 31 December 2005 were asset appreciation adjustments made in prior years of an aggregate gross amount and net book value of approximately RMB133 million and RMB96 million respectively. Those asset appreciation adjustments were initially recorded in lump sums without sufficient details as to the individual asset items they relate to. As no further information was available to us with respect to the lump sums, we were unable to determine with reasonable certainty whether the carrying amounts of the property, plant and equipment and revaluation reserve at 31 December 2005 were free from material misstatements and the possible impact on the Group’s income statements in the current year and prior periods should adjustments be found necessary.
c. The Company and certain of its subsidiaries did not maintain a proper costing system in respect of finished goods of sufficient reliability for financial reporting purpose. There were numerous negative quantities and negative unit costs in the inventory ledgers for certain of the Company’s subsidiaries throughout the year. The carrying amounts of inventories at the balance sheet date were re-calculated based on the physical quantities at the balance sheet date and the weighted average cost of production in the year. Since both the carrying amounts of finished goods at 1 January 2005 and 31 December 2005 have direct impact on the cost of sales figure for the current year, and we could not place reliance on the Group’s inventory system nor was it practical for us to perform other audit procedures to verify the carrying value of the Group’s inventories at 1 January 2005, we were therefore unable to obtain sufficient information to assess whether the cost of sales for the current year was free from material misstatement. We have, however, performed alternative audit procedures to ascertain the existence, completeness and valuation of the closing inventories as at 31 December 2005 and our opinion is not qualified in this respect.
d. At 31 December 2005, included in trade and other receivables under current assets were intra-group receivables of approximately RMB80 million and included in trade and other payables under current liabilities were intra-group payables of approximately RMB52 million. This resulted from an inability to eliminate balances among companies within the Group on consolidation. We were unable to obtain sufficient information and

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APPENDIX I

explanation concerning the timing and nature underlying the unreconciled receivables and payables. We were therefore unable to assess the validity and recoverability of the unreconciled receivables amount of approximately RMB80 million and the validity and completeness of the unreconciled payables amount of approximately RMB52 million and the possible impact on the Group’s income statements in the current year and prior periods should adjustments be found necessary.

e. Included in trade and other receivables at 31 December 2005 was a receivable arising from the sale of an interest in leasehold land under operating lease in Shunde, the People’s Republic of China (the “PRC”), of gross amount and carrying amount of approximately RMB169 million and RMB85 million respectively. Although the land use right was registered in the name of the purchaser in June 2005, no settlement of the receivable has been recorded in the Company’s books up to the date of this report. The carrying amount was stated net of an impairment loss, made in the current year, of approximately RMB84 million. During the course of our audit, we sought but were unable to obtain direct confirmation from the purchaser concerning the existence of the receivable. There were no other satisfactory audit procedures that we could adopt to satisfy ourselves concerning the continued existence of the receivable nor for us to assess its recoverability. Accordingly, we were unable to assess with reasonable certainty whether the carrying amount of such receivable at 31 December 2005 as well as the impairment loss made in the current year were free from material misstatement.
f. It was reported by the Company that the controlling shareholder, Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”), had entered into a series of activities/ transactions during the period from 2001 to 2005 which had been harmful to the Group, including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, unreasonable prepayments and purchases of raw materials and property, plant and equipment at unreasonable quantities and prices. These transactions were conducted through Greencool Enterprise, its affiliates and/or companies suspected to be connected with the Company’s former chairman, Mr. Gu Chu Jun (“Mr. Gu”). As at 31 December 2005, the aggregate amount of receivables and aggregate amount of payables due from/to these companies were approximately RMB680 million and RMB131 million respectively which are reflected in the consolidated balance sheet at 31 December 2005 as “Amounts due from Greencool Enterprise and its affiliates” and “Amounts due from companies suspected to be connected with Mr. Gu” within current assets and “Amounts due to Greencool Enterprise and its

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APPENDIX I

affiliates” and “Amounts due to companies suspected to be connected with Mr. Gu” within current liabilities. The management have made an impairment loss of approximately RMB374 million on the receivables. Due to the irregularity of the transactions mentioned above and limitation of information available to us, we were unable to satisfy ourselves concerning the validity of these transactions, the appropriateness of the impairment amount and the recoverability of the net carrying amounts.

g. As a result of the alleged breaches of PRC securities laws and regulations and consequent upon the alleged economic crimes committed by the former chairman of the Company, the Company had appointed an independent professional firm to carry out an investigation on the material cash flows of the Group during the period from 1 October 2001 to 31 July 2005 (the “Investigation Period”). The results of the investigation, announced by the Company on 20 January 2006, revealed that there were significant cash flows which were inconsistent with or were irrelevant to the business of the Group: (1) between the Group and Greencool Enterprise and its affiliates (“Greencool Companies”); (2) between the Group and companies suspected to be connected with Greencool Companies; (3) between the Group and other companies; and (4) within the Group, during the Investigation Period.

The management considered that the results of the investigation indicated that (1) there could have been omissions of recording and disclosure of material related party transactions during the year ended 31 December 2005 and prior periods and (2) there could have been material misstatements under the cash flow statements in distinguishing operating, investing and financing cash flows during the year ended 31 December 2005 and prior periods.

In consequence, we were unable to obtain sufficient reliable information and explanations to assess (1) whether all material related party transactions have been properly disclosed in the financial statements during the year ended 31 December 2005; and (2) whether all material cash flows have been properly reflected in operating, investing and financing activities under the cash flow statement for the year ended 31 December 2005.

h. Following a formal investigation into the Company for alleged breaches of securities laws and regulations in the PRC by the China Securities and Regulatory Commission, the management noted certain errors that had significant impact on the Group’s prior years’ financial statements. The financial statements for the year ended 31 December 2005 included a restatement of the 2004 financial statements to correct the errors noted by

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the management. The above restatements have, in aggregate, reduced the net assets of the Group as at 31 December 2004 by approximately RMB209 million, profit for the year ended 31 December 2004 by approximately RMB181 million and opening retained earnings as at 1 January 2004 by approximately RMB27 million. Details of the income statement and balance sheet line items being affected are disclosed in note 2 to the financial statements. Due to the irregularity of the transactions entered into by the Company as mentioned in the foregoing and in points (f) and (g) above, we were unable to obtain sufficient reliable evidence to satisfy ourselves concerning the appropriateness, completeness and accuracy of the prior year restatements. Further this will have a material impact on the financial statements for the year ended 31 December 2005. In addition, we were also unable to ascertain with reasonable accuracy as to whether the impairment losses on inventories of approximately RMB293 million and receivables of approximately RMB479 million as included in administrative expenses were under conditions that did not exist prior to 1 January 2005 and thus would not have led to prior year restatements.

Any adjustments found to be necessary to the matters set out in points (a) to (h) above would affect the net liabilities of the Group as at 31 December 2005 and/or the loss and cash flows of the Group for the year then ended.

Fundamental uncertainty relating to the going concern basis

In forming our opinion, we have considered the adequacy of the disclosures made in note 3(b) to the financial statements concerning the adoption of the going concern basis, being the basis on which the financial statements have been prepared. As explained in note 3(b) to the financial statements, the Group incurred losses of approximately RMB3,767 million and RMB237 million (restated) for the year ended 31 December 2005 and year ended 31 December 2004 respectively. As at 31 December 2005, the Group’s current liabilities exceeded its current assets by approximately RMB3,307 million. In addition, the Group had outstanding short-term loans in the aggregate of approximately RMB2,161 million of which approximately RMB1,233 million were overdue as at 31 December 2005. The Group is in the process of negotiating with certain banks to restructure the amounts due to them and the Company’s management confirmed that most of the Group’s bankers have expressed their intention to reschedule overdue bank borrowings and/or renew/grant credit facilities to the Group. In addition, the successor single largest shareholder of the Company, Hisense Air-Conditioner Company Limited has expressed its intention to provide necessary financial support to the Group so as to enable it to continue as a going concern. Based on the above assessments, the directors are of the opinion that the Group will have sufficient working capital to finance its normal operations

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and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis. We consider that appropriate estimates and disclosures have been made herein and our opinion is not qualified in this respect.

In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Qualified opinion arising from limitation of audit scope and disclaimer on view given by consolidated income statement and consolidated cash flow statement

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence concerning the matters set out in the basis of opinion section of this report, in our opinion the financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2005 and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Because of the significance of the possible effects of the limitation in scope in respect of reliable evidence outside the control of the directors on matters set out in points (f) to (h) above, we are unable to form an opinion as to whether the financial statements give a true and fair view of the Group’s loss and cash flows for the year ended 31 December 2005.

In respect alone of the limitations on our work described in the basis of opinion section of this report:

we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and
we were unable to determine whether proper books of account had been kept.

BDO McCabe Lo Limited

Certified Public Accountants Chow Tak Sing, Peter Practising Certificate Number P04659

Hong Kong, 11 August 2006

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(ii) Qualified audit opinion on the Kelon Group’s financial statements for the year ended 31 December 2006 as extracted from the Kelon Group’s 2006 annual report

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THE SHAREHOLDERS OF

GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED （廣東科龍電器股有限公司）

(A joint stock limited company established in the People’s Republic of China with limited liability)

We have audited the financial statements of Guangdong Kelon Electrical Holdings Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated balance sheet as at 31 December 2006, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements

The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the disclosure requirements of the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the content of this report.

Except as described in the basis for qualified opinion paragraph, we conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

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An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Basis for qualified opinion

It was reported by the Company that the previous controlling shareholder, Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”), had entered into a series of activities/transactions during the period from 2001 to 2005 which had been harmful to the Group, including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, unreasonable prepayments and purchases of raw materials and property, plant and equipment at unreasonable quantities and prices. These transactions were conducted through Greencool Enterprise, its affiliates and/or companies suspected to be connected with the Company’s former chairman, Mr. Gu Chu Jun (“Mr. Gu”). As at 31 December 2006, the aggregate amount of receivables and aggregate amount of payables due from/to these companies were approximately RMB286 million (net of an accumulated impairment loss of RMB364 million) and RMB132 million respectively which were reflected in the consolidated balance sheet at 31 December 2006 as “Amounts due from Greencool Enterprise and its affiliates” and “Amounts due from companies suspected to be connected with Mr. Gu” within current assets and “Amounts due to Greencool Enterprise and its affiliates” and “Amounts due to companies suspected to be connected with Mr. Gu” within current liabilities. Due to the irregularity of the transactions mentioned above and limitation of information available to us, we were unable to satisfy ourselves concerning the validity of these transactions, the appropriateness of the accumulated impairment and the recoverability of the carrying amounts. Any adjustments found to be necessary would affect the net liabilities as at 31 December 2006 and the profit for the year then ended.

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Qualified opinion arising from limitation of audit scope

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to the matters set out in the basis for qualified opinion section of this report, the financial statements give a true and fair view of the state of the Group’s affairs as at 31 December 2006 and of its profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Without qualifying our opinion, we draw attention to note 3(b) to the financial statements which indicates that the Group’s current liabilities exceeded its current assets by approximately RMB2,952 million as at 31 December 2006. These conditions, along with other matters as set forth in note 3(b) to the financial statements, include the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern. The directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis.

BDO McCabe Lo Limited Certified Public Accountants Chow Tak Sing, Peter Practising Certificate Number P04659

Hong Kong, 26 April 2007

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APPENDIX I FINANCIAL INFORMATION OF THE KELON GROUP

(iii) Qualified audit opinion on the Kelon Group’s financial statements for the year ended 31 December 2007 as extracted from the Kelon Group’s 2007 annual report.

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TO THE SHAREHOLDERS OF HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED

(海信科龍電器股份有限公司)

(A joint stock limited company established in the People’s Republic of China with limited liability)

We have audited the financial statements of Hisense Kelon Electrical Holdings Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 58 to 128, which comprise the consolidated balance sheet as at 31 December 2007, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements

Auditor’s responsibility

Except as described in the basis for qualified opinion paragraph, we conducted our audit in accordance with Hong Kong Standards on Auditing issued by the

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Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Basis for qualified opinion

It was reported by the Company that the previous controlling shareholder, Guangdong Greencool Enterprise Development Company Limited (“Greencool Enterprise”), had entered into a series of activities/ transactions during the period from 2001 to 2005 which had been harmful to the Group, including but not limited to unauthorised use of the Group’s funds, fictitious sales of goods and scrap materials, unreasonable prepayments and purchases of raw materials and property, plant and equipment at unreasonable quantities and prices. These transactions were conducted through Greencool Enterprise, its affiliates and/or companies suspected to be connected with the Company’s former chairman, Mr. Gu Chu Jun (“Mr. Gu”). As at 31 December 2007, the aggregate amount of receivables and aggregate amount of payables due from/to these companies were approximately RMB286 million (net of an accumulated impairment loss of RMB364 million) and RMB132 million respectively which were reflected in the consolidated balance sheet at 31 December 2007 as “Amounts due from Greencool Enterprise and its affiliates” and “Amounts due from companies suspected to be connected with Mr. Gu” within current assets and “Amounts due to Greencool Enterprise and its affiliates” and “Amounts due to companies suspected to be connected with Mr. Gu” within current liabilities. Due to the irregularity of the transactions mentioned above and limitation of information available to us, we were unable to satisfy ourselves concerning the validity of

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these transactions, the appropriateness of the accumulated impairment and the recoverability of the carrying amounts. Any adjustments found to be necessary would affect the opening accumulated losses as at 1 January 2007, the net liabilities as at 31 December 2007 and the profit for the year then ended.

Qualified Opinion arising from limitation of audit scope

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to the matters set out in the basis for qualified opinion section of this report, the financial statements give a true and fair view of the state of the Group’s affairs as at 31 December 2007 and of its profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Without further qualifying our opinion, we draw attention to note 2(b) to the financial statements which indicates that the Group’s current liabilities exceeded its current assets by approximately RMB2,640 million as at 31 December 2007. These conditions, along with other matters as set forth in note 2(b) to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern. The directors are of the opinion that the Group will have sufficient working capital to finance its normal operations and to meet its financial obligations as they fall due for the foreseeable future and have prepared the consolidated financial statements on a going concern basis.

BDO McCabe Lo Limited

Certified Public Accountants Chow Tak Sing, Peter Practising Certificate Number P04659

Hong Kong, 24 April 2008

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX II

MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 DECEMBER 2007 (THE “REPORTING PERIOD”)

Performance Review

Year 2007 was a challenging year. During the past year, while the prices of global energy and raw materials surged; the consumer price index and production price index climbed up incessantly; the financing environment became worsen under domestic monetary stringency and increasing financing costs; the export sector was aggravated by the expanding trade surplus under continued appreciation of Renminbi. Against this background, enterprises were exposed to mounting pressure on operation and difficulties in the internationalization process, and the influence is expected to continue in 2008.

In response to such critical situation, the Company adhered to its operating strategy of “creating product advantages, accelerating cash flow, enhancing management efficiency, reinforcing people training, achieving synergy”. During the Reporting Period, the Company recorded a turnover from its principal operations of RMB8,319,960,000, representing an increase of 26.75% as compared to the corresponding period in 2006. Net profit was RMB203,657,000, representing an increase of 154,408,000 as compared to the corresponding period of 2006, and the profit attributable to equity holders was RMB238,712,000.

Operation Structure

During the Reporting Period, the sales revenues of refrigerator business, air-conditioner business and freezer and other businesses accounted for 51.98%, 38.64%, 3.90% and 5.47% of the total turnover of the principal operations of the Company, respectively, representing an increase of 29.96%, 26.90%, 40.03% and -3.31% as compared to the same period last year.

On the other hand, domestic and export sales accounted for 57.95% and 42.05% of the total turnover of the principal operations of the Company, respectively, representing an increase of 12.13% and 54.51% as compared to the same period last year.

Refrigerator Business

During the Reporting Period, with aggressive exploration of different markets, the Company successfully achieved substantial increases in sales and relatively significant enhancement of its products’ overall profitability. For the domestic market, apart from adopting a number of measures such as reinforced product promotion, increased investments in research and development, and improved production efficiency, the Company also intensified advertising efforts to exert and amplify the advantages of the “Ronshen” brand, and effectively enhanced the operating results of the refrigerator business and obtained significant increases in sales and effective enhancement of profitability. The refrigerator business reached its annual sales target in domestic market in 2007. In respect of the export market, the Company fostered

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APPENDIX II

strong strategic cooperation with most of its international customers and achieved noticeable increases in its scale. However, because of a number of other factors such as the increases in the prices of major raw materials for the manufacture of refrigerators in 2007, appreciation of Renminbi, the profit margin of exported refrigerators narrowed and led to a decrease in the overall profit margin of refrigerator products as compared to the previous reporting period. In the next reporting period, the Company will focus on improving the sales structure of export products through expanding the overseas market for large-volume refrigerator, especially the export business of hi-tech products under its own brand with higher gross profit margin, with the objective to further enhance the overall profitability of refrigerator products.

During the Reporting Period, the refrigerator business of the Company achieved a sales revenues of approximately RMB4,325 million, representing a year-on-year growth of 29.96%, maintaining a leading position in the industry in the PRC.

Air-conditioner Business

During the Reporting Period, the Company aggressively developed the domestic and overseas markets, achieving considerable increase in the sales of air-conditioners. For the domestic market, the Company further developed its core technologies and launched a number of energy-saving, high efficiency products to expand its scale of sales. However, as the airconditioner product market in the PRC concentrated and homogeneous competition of airconditioner products intensified, the scale of domestic sales of air-conditioners still lagged behind that of its major competitors. For the export market, the Company successfully regained its lost major accounts upon resumption of operation, and achieved an increase in sales of air-conditioners which significantly outperformed the industry average, coupled with an increasing market share. The Company strengthened its efforts in increasing the technological content of its products and enhancing its product structures in response to the pressure from intense market competition and rising costs of raw materials.

During the Reporting Period, the air-conditioner business of the Company realized a sales income of approximately RMB3,215 million, representing a year-on-year growth of 26.90%.

Freezer Business

During the Reporting Period, the Company aggressively explored the domestic and international markets, especially the direct sales market, and achieved remarkable results. The direct sales business was set to target. At the medium-to-high-end customers with the provision of custom-made services to develop unique and customized products. Currently, the Company has established strong strategic cooperation with a number of customers of well-known brands with the aim to refresh the market image of its freezers and to ensure sustainable and stable growth of the freezer business.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX II

Technology, Research and Development

During the Reporting Period, the Company upheld the operation objective of “creating product advantages and talent training” and strengthen the development of research and development capabilities, especially the research and development of medium-to-high-end products to the technological quality, healthy and energy-saving capabilities of the products. In 2007, the Company obtained 103 patents in total, of which 39 patents were related to refrigerators and 56 were related to air-conditioners;

In 2007, the Company was accredited as “outstanding” in the examination of the First Enterprises with Intellectual Property Right Advantages in the Guangdong Province. Also, its key research and development programs including “mobile air-conditioners with indoor/ outdoor ventilation”, “high efficiency air duct parameter design and test of air duct with high efficiency and value enhancement research” were awarded Top Patent Award of the Guangdong Province and Science and Technology Award of Guangdong Province in 2007, respectively.

At the 2007 Innovation Design Ceremony & China Wuxi International Industrial Design Expo, Ronshen BCD-288WYM refrigerator was awarded the only “Best Outlook Award” in the refrigerators section; whereas the “Fengshang” series dual high-efficiency air-conditioner launched by Kelon air-conditioners in 2007 was awarded the “iF Industrial Design Award” for its innovative and unique outlook.

In respect of the research and development for freezer products, the Company enjoys a leading position within the industry in the PRC for its core technologies such as energysaving and preservation, as well as its testing and management capabilities. On the other hand, “Ronshen” freezers has completed the introduction and assimilation of Japan’s Toshiba freezer products during the Reporting Period, which further consolidated and confirmed the leading position of the Company’s freezers in the PRC in terms of technology.

Analysis on the Influence Factors of the Results

The management of the Company was of the view that, the growth in the turnover from its principal operations and net profits was mainly attributable to the overall growth of the PRC economy and the industry, increase in idle assets disposal and revitalized revenues, as well as to the operation quality enhancement measures adopted by the Company during the Reporting Period. However, as the Company was generally in a stage of recovery, the results for the Reporting Period still fell below the planned objectives as a result of the multiple operation difficulties brought by historical problems and the pre-investment made by the Company for the purpose of long-term development.

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Analysis of the main reasons for the growth in results:

(1) The amount of cash recovered from the disposal of idle assets during the Reporting Period played an important role in meeting the demand for production capital by the Company during the peak season and in protecting the reputation of the Company, and enhanced its assets structure and quality to a certain extent. It also made significant contribution to the profits for the Reporting Period.
(2) Expanded scale of sales generated increasing turnover from domestic and export sales. In respect of domestic sales, the Company focused on the important regions and reinforced the support for the sales network of the third and fourth markets, which gradually regained the confidence of the distributors. For export sales, the Company leveraged on its technology and product advantages to forcefully explore the overseas markets, strengthening the cooperation with its major international customers and regaining the market shares lost in the prior periods, realizing an increase in sales that outperformed the industry average.
(3) During the Reporting Period, the Company continued to strengthen its research and development efforts to enhance the embedded technological content of the products in respect of health and energy-saving and successively launched French door refrigerators featuring innovative designs and air-conditioner products with high energy-saving efficiency, which were highly appraised by the market. In particular, the Company stepped up the technological cooperation at the international level in respect of highend technologies, and completed the introduction of Japan’s Toshiba freezer multidoor refrigerator during the Reporting Period. This has established a new height in the manufacture of refrigerators and brought along new development opportunities for the refrigerator industry.
(4) Proactively enhancement of product sales structure, and deepening of brand position efforts to various segments including product research and development, production and manufacture and marketing, expansion into the high-end product market and improvement of the product profit margin. The concept provided a strong guidance for the corresponding operating activities of the Company and as a result successfully enhanced the profit margin of the Company’s principal products. Of which, the profit margin of refrigerator products for domestic sales showed a notable increase as compared to the corresponding period of last year and enhanced the overall operating results of the Group.
(5) During the Reporting Period, fundamental management standard represented by reinforced capital control was enhanced. The Company stepped up its fundamental management with a particular focus on the fundamental management of capital control. The reserve and production cash flow for all business segments of the Company was unanimously accelerated as compared to the corresponding periods. In particular, the

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APPENDIX II

reserve cash flow of the production bases has basically reached the advanced level in the industry. At the same time, the internal procedures of the Company were further streamlined, whereas various systems were implemented scientifically and specifically. These measures have invigorated the environment of management and promoted the management efficiency.

(6) Implementation of a number of informatization projects, such as the SAP project and PLM project of the air-conditioner business, and the CRM project of the marketing section. The implementation of these projects have significantly promoted the operation efficiency of the Company and facilitated the management standardization of the Company.

Through the above offers, the operation quality of the Company showed considerable improvement as compared to the previous periods, but on the other hand, the results of the Company was adversely affected by the following factors.

(1) With the consolidation of the air-conditioner industry and increasing brand concentration, although the Company recorded significant growth in revenues from the air-conditioner business of the Company during the Reporting Period, the growth was still below the planned objectives and economies of scale were not achieved. The overall scale of the Company’s air-conditioner business still needed to be improved.
(2) Increase in sales expense of the Company exceeded the increase in revenues. It was one of the important factors that affected the results of the Company during the Reporting Period. Aimed at enhancing its brand image and reputation�the Company significantly increased its advertising input and brand promotion during the Reporting Period and reinforced the establishment of channels and sales network to regain market confidence for the long-term development of the Company.
(3) Some production bases of the Company were still out of production and in a state of sustained loss due to historical reasons. This has to a certain extent impaired the scale of operation of the Company and its recovery and growth.

Outlook of 2008

Look forward 2008, the Company is open to exceptional business opportunities: continuous growth of the PRC economy; the significant business opportunities brought to China by the 2008 Olympic Games; the forceful implementation of the State’s policy on agriculture, rural areas and farmers, as well as the Project for “Taking Household Appliances to Rural Areas” recently promulgated by the Ministry of Commerce. All these will strongly stimulate the expenditure on the home appliances market, creating an immense headroom of growth for the market. At the same time, the consumer, suppliers and distributors resumed their confidence in the Company as its branding and sales network gradually recuperated; the

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APPENDIX II

Company’s products possess advantages in energy-saving, high-efficiency and environmental friendliness, which are fully compatible with the State’s energy-saving and environmental protection policies, and empower the Company with remarkable technological and product advantages. These opportunities will enable the Company to maintain positive growth for the forthcoming year. However, at the same time, it is foreseeable that the competition on the global household appliances market would intensify in 2008, taking into account significant increase in the prices of energy and raw materials around the world; worsening of financing environment under stringent domestic credit and increased financing costs; continued rapid appreciation of Renminbi; increased costs of sea freight and non-tariff barriers. All these have exposed home appliances enterprises to additional risks.

In 2008, the Company will uphold the operating strategy of “creating product advantages, enhancing product quality, maximizing production capacity, accelerating cash flow, reinforcing talent training”, with the objective to improve the operating results of the Company:

(1) Originally, the direction of our research and development work was further confirmed to be: fortify research of foundation technologies and track our competitors and internationally advanced technologies, complemented by other measures such as self-development, introduction and assimilation and external cooperation, with the objective of mastering the most advanced technologies on the international and domestic levels. On the one hand, we will devote to closely tracking the demand and construct a reliable, enhanced and consistent technological platform to rapidly implement the transition to technology-oriented products, in order to enable the launch of new products with competitive edge timely. In view of the specific products, for refrigerators, we will continue to increase our investment in energy-saving technologies to further consolidate and reinforce our leading position in the industry, while at the same time we will pinpoint our efforts to enhance the preservation technologies, design of product structure and industrial outlook design. For the air-conditioner products, we will also continue to increase our investment in energy-saving technologies to further consolidate and reinforce our leadership in the industry, while at the same time we will look into the details such as adoption of new models of heat exchanger to improve comfort, reliability and compatibility. On the other hand, we will implement a series of measures including reinforcing talent training and introduction, strengthening the introduction of external technologies and external cooperation, as well as adjusting the internal research and development system, with the objective to systematically rationalize the management of the research and development section and thereby increase the research and development efficiency and enhance the quality of work. In 2008, the research and development efforts of the Company will be put more on the transformation of high technology contents, with an effective enhancement of the technological content of our products. With this actual inifination for enhancement of the current and future competitiveness of our products, we look forward to enhancing our brand image and stimulating sales with our products.

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(2) In 2008, the Company will continue to leverage on its quality advantages to maintain the establishment of the quality system, and adopt the approach of preventive management. Product quality control is further reinforced through multi-point quality control such as stringent quality inspection for external components, control of design responsibility, standardization of production site.
(3) In order to ensure the supply of materials to satisfy the demand from the expansion of the after market, the Company will concentrate on enhancing the production capacity for its products and breaking through the production bottlenecks. On one hand, the Company will actively promote the renovation work in respect of various technologies, including the commencement of production line for large volume refrigerator sand renovation of production facilities involved in the key bottlenecks to increase the production efficiency. On the other hand, the Company will renovate the staff quarters and canteens for junior grade staff to improve the living conditions of the employees, so as to retain and attract talents and resolve the lack of labor supply.
(4) In respect of the domestic market, the Company will continue to strengthen its marketing capabilities with the forceful construction and enhancement of the channels. Coupled with the existing network of each different product, channel exploration and innovation of marketing models will be conducted in response to the specific situation with reinforced planning.
(5) In respect of overseas business, the Company will further enhance the structure of export products, expand the export channels, increase the proportion of high-end products, continue to consolidate the advantages of cooperation with international major brand and customers, create long-term strategic partnerships, continue to increase the scale of export, improve the profitability of export sales and facilitate the process of internationalization.
(6) Parallel to the training of talents, the Company will make an effort to recruit external talents and project teams upon appropriate organization and planning, with a special focus on the recruitment of high-end talents from overseas to resolve the major conflicts such as business, lack of technical supervisors, structural shortage of talents from the fundamentals, in order to accommodate to the needs of enterprise upgrade and internationalization.
(7) The Company will aggressively proceed with the assets reorganization with the Hisense Group to increase the operating scale of the Company’s principal products, enhance the Company’s assets quality and further promote its financial structure, with the objective of upgrading the Company’s competitiveness.

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APPENDIX II

Looking ahead, the Company faces both opportunities and challenges. The management will ride on the trend of the industry and leverage on its own advantages, striving for improvements and enhancement. The management of the Company is of the view that the Company has successfully go through the most difficult situation and is on the track of sustained healthy development. Backed by the enthusiastic expectation and sincere trust of its shareholders and the relentless efforts of all our staff, the Company will do its best to accomplish the operating objectives for 2008.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma financial information of Hisense Kelon Electrical Holdings Company Limited ( the “Company”) and its subsidiaries ( the “Group” ) (“Unaudited Pro Forma Financial Information”) is prepared on the basis of the notes set out below for the purpose of illustrating the effect of the major transaction in connection with its proposed establishment of Hisense-Whirlpool (Zhejiang) Electric Appliances Co., Limited, a joint venture in Zhejiang Province with Whirlpool (Hong Kong) Limited, (the “Establishment”), as if it had taken place on 31 December 2007.

The Unaudited Pro Forma Financial Information of the Group is prepared based on the audited consolidated balance sheet of the Group as at 31 December 2007 extracted from the published annual report of the Group for the year ended 31 December 2007.

The Unaudited Pro Forma Financial Information is prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Group had the Establishment been completed as at 31 December 2007 or at any future dates.

— III-1 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Group
as at 31
December
2007
Pro Forma
Adjustments
Notes
RMB’000
RMB’000
Audited
Unaudited
ASSETS
Non-current assets
Property, plant and equipment
1,383,062
(71,250)
1
Investment properties
38,192
—
Payments for leasehold land held for
own use under operating leases
305,392
—
Interests in associates
82,839
—
Interest in a jointly controlled entity
—
225,000
2
Available-for-sale financial assets
1,220
—
Intangible assets
168,112
—
Deferred tax assets
11,300
—
Total non-current assets
1,990,117
153,750
Current assets
Inventories
940,284
—
Trade and other receivables
1,307,209
—
Taxation recoverable
585
—
Other financial assets
9,479
—
Pledged bank deposits
70,133
—
Cash and cash equivalents
76,395
(153,750)
3
Total current assets
2,404,085
(153,750)
Non-current assets held for sale
20,369
—
Total assets
4,414,571
—
LIABILITIES
Current liabilities
Trade and other payables
3,093,181
—
Trade deposits received
406,379
—
Other financial liabilities
6,158
—
Provisions
144,006
—
Taxation payable
27,856
—
Other liabilities
55,793
—
Bank borrowings
1,310,972
—
Total and current liabilities
5,044,345
—

Adjusted
Balance
RMB’000
Unaudited
1,311,812
38,192
305,392
82,839
225,000
1,220
168,112
11,300
2,143,867
940,284
1,307,209
585
9,479
70,133
(77,355)
2,250,335
20,369
4,414,571
3,093,181
406,379
6,158
144,006
27,856
55,793
1,310,9722
5,044,345

— III-2 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

The Group
as at 31
December
2007
Pro Forma
Adjustments
Notes
RMB’000
RMB’000
Audited
Unaudited
Net current liabilities
(2,640,260)
(153,750)
Total assets less current liabilities
(629,774)
—
TOTAL NET LIABILITIES
(629,774)
—
Capital and reserves attributable to
equity holders of the Company
Share capital
992,007
—
Share premium
1,195,597
—
Statutory reserves
114,581
—
Capital reserve
266,672
—
Foreign exchange reserve
29,111
—
Accumulated losses
(3,382,740)
—
(784,772)
—
Minority interests
154,998
—
TOTAL EQUITY
(629,774)
—

Adjusted
Balance
RMB’000
Unaudited
(2,794,010)
(629,774)
(629,774)
992,007
1,195,597
114,581
266,672
29,111
(3,382,740)
(784,772)
154,998
(629,774)

Notes to unaudited financial information:

The decreases in property, plant and equipment represents internal resources of the Group utilised as the Group’s partial capital contribution to Hisense-Whirlpool (Zhejiang) Electric Appliances Co., Ltd. (the “Joint Venture”).
The increase in interest in a jointly controlled entity represents the Group’s total capital contribution to the Joint Venture.
Pursuant to the joint venture agreement, the Company is required to contribute, among others, the land use rights of a piece of land and a factory to be constructed by the Company in the amount of RMB120,000,000 and cash of RMB33,750,000. A cash and cash equivalents deficit of RMB77,355,000 under the unaudited pro forma adjusted balance is resulted as the pro forma financial information is prepared as if the Company’s capital contributions to the Joint Venture had been fully settled as at 31 December 2007.

— III-3 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

ACCOUNTANTS’ REPORT ON PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF HISENSE KELON ELECTRICAL HOLDINGS COMPANY LIMITED

We report on the unaudited pro forma statement of assets and liabilities (the “Unaudited Pro Forma Financial Information”) of Hisense Kelon Electrical Holdings Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), which has been prepared by the Directors of the Company for illustrative purpose only, to provide information about how the establishment of Hisense-Whirlpool (Zhejiang) Electric Appliances Co., Limited, a joint venture in Zhejiang Province with Whirlpool (Hong Kong) Limited, might have affected the assets and liabilities, as set out on pages 1 to 3 in Appendix III to the circular of the Company dated 30 June 2008 (the “Circular”). The basis of preparation of the Unaudited Pro Forma Financial Information is set out on page 1 in Appendix III to the Circular.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS OF THE COMPANY AND THE REPORTING ACCOUNTANTS

It is the responsibility solely of the Directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

BASIS OF OPINION

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the Directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

— III-4 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the Directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgments and assumptions of the Directors of the Company, and because of its hypothetical nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at 31 December 2007 or any future dates.

OPINION

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled by the Directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

BDO McCabe Lo Limited

Certified Public Accountants

Chow Tak Sing, Peter

Practising Certificate Number P04659

Hong Kong, 30 June 2008

— III-5 —

GENERAL INFORMATION

APPENDIX IV

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. All the Directors jointly and severally accept full responsibility for the accuracy of information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

2. INDEBTEDNESS

As the close of business on 30 April 2008, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding bank and other loans of approximately RMB1,075,438,012.34, comprising secured bank loans of approximately RMB497,393,371.82 and unsecured bank and other loans of approximately RMB578,044,640.52.

As at 30 April 2008, bank loans amounting to RMB497,393,371.82 are secured by certain plant and machinery, land use right and other assets of the subsidiaries of the Group. Other bank and other loans amounting to approximately RMB488,000,000 is guaranteed by Hisense Group respectively.

Save as aforesaid, the Group did not have, at the close of business on 30 April 2008, outstanding liabilities or any mortgages, charges, debentures, loan capital, bank overdrafts, loans, liabilities under acceptance or other similar indebtedness, hire purchase of finance lease obligations or any guarantees or other material contingent liabilities.

3. WORKING CAPITAL

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

— IV-1 —

GENERAL INFORMATION

APPENDIX IV

4. 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 2007, 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 2007, 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.

— IV-2 —

GENERAL INFORMATION

APPENDIX IV

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
		Number of	class of	to the total
		issued	issued share	issued share
		ordinary	capital of the	capital of the
Name	Class of Shares	shares held	Company	Company
Hisense Air-conditioning	A Shares subject to	234,375,922	78.57%	23.63%
	selling restrictions
Foshan City Shunde	A shares subject to	63,923,804	21.43%	6.44%
District Economic	selling restrictions
Consultancy Company

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 in
	Shareholders holding 10% or	other members
Other members of Group	more in other members of the Group	of the Group
Guangdong Kelon Air-Conditioner	Weishi Investments Company Limited	40%
Co., Ltd
Guangdong Kelon Mould Co., Ltd	Hua Yi Compressor Company Limited	29.89%
Foshan City Shunde District	Hua Yi Compressor Company Limited	29.95%
Rongsheng Plastic Co., Ltd

— IV-3 —

GENERAL INFORMATION

APPENDIX IV

		Percentage
		shareholding of
		shareholders in
	Shareholders holding 10% or	other members
Other members of Group	more in other members of the Group	of the Group
Guangdong Huaao Electrical	Foshan City Shunde District Yun	30%
Electronics Co., Ltd.	Long Enquiry Service Company Limited
Hisense Ronshen	Yingkou Yingleng (Group)	14.74%
(Yingkou) Refrigerator Co., Ltd.	Bankruptcy Liquidation Team
Xi’an Kelon Cooling Co., Ltd.	Xi’an Gaoke (Group) Company Limited	29.05%
Jiangxi Kelon Combine	Jiangxi Fadasi Domestic Electrical	45%
Electrical Appliances Co., Ltd.	Appliances Company Limited
	（江西發達思家電有限公司）
Hua Yi Compressor Company Limited	Sichuan Changhong Electric	29.92%
	Holdings Co., Ltd
	A-share public shareholders	49.05%
Chongqing Kelon Rongsheng	Chongqing Shang She Group	24%
Refrigerator Sales Co., Ltd.
	Chongqing Huaqing Commerce Company	24%
	Chongqing Department Building	24%
Guangzhou Antaida Logistic Co., Ltd.	Guangzhou Zhongyuan International	30%
	Freight Forwarding Company Limited
	China Far Ocean Network Company Limited	25%
	Wuxi Small Swan Holdings	20%
	Company Limited
Wuhu Yingjia Electrical	Heavenly King Incorporated	20%
Machinery Co., Ltd.
Sichuan Rongsheng Kelon	Xu Wei Ru	24%
Refrigerator Sales Co., Ltd.

— IV-4 —

GENERAL INFORMATION

APPENDIX IV

		Percentage
		shareholding of
		shareholders in
	Shareholders holding 10% or	other members
Other members of Group	more in other members of the Group	of the Group
Beijing Hengsheng Xin Chuang	Foshan City Shunde District Yun Long	11%
Technology Company	Enquiry Service Company Limited
Guangdong Kelon Weili Electrical	Zhongshan City Fusha Town Shunchang	20%
Appliances Company Limited	Industry Limited Company
	（中山市阜沙鎮順暢工業有限公司）

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

5. 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).

6. INTEREST IN CONTRACTS OR ARRANGEMENT

(a) As at the Latest Practicable Date, none of the Directors or their associates had any direct or indirect interest in any assets which have been, since 31 December 2007 (being the date to which the latest published audited consolidated financial statements of the Kelon Group were made up), acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.
(b) As at the Latest Practicable Date, none of the Directors or their associates was materially interested in any contract or arrangement entered into by any member of the Kelon Group and subsisting at the date of this circular which was significant in relation to the business of the Group.

— IV-5 —

GENERAL INFORMATION

APPENDIX IV

7. COMPETING BUSINESS

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

Description of business

Name of Director

Name of entity which of the entity which business is considered is considered to compete to compete or likely or likely to compete compete with the business with the business Nature of interest of the of the Kelon Group of the Kelon Group Director in the entity
Mr. Tang Ye Guo Hisense Group or its Production of airDirector Subsidiaries conditioning/electrical products
Ms. Yu Shu Min Hisense Group or its Production of airDirector and/or senior Subsidiaries conditioning/electrical management products
Mr. Wang Shi Lei Hisense Group or its Production of airDirector and/or senior Subsidiaries conditioning/electrical management products
Mr. Lin Lan Hisense Group or its Production of airDirector and/or senior Subsidiaries conditioning/electrical management products
Ms. Liu Chun Xin The Subsidiaries of Sales and marketing of Director Hisense Group electrical products
Mr. Zhang Ming The Subsidiaries of Production of airDirector Hisense Group 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.

— IV-6 —

GENERAL INFORMATION

APPENDIX IV

8. LITIGATION

As at the Latest Practicable Date, so far as the Directors are aware, the following litigation or claims of material importance are pending or threatened against the Group:

1 Litigation Can International. USD13,750,719.19 The plaintiff The Company has initiated CAN/ Inc./MC Appliance alleged that it lodged the counterMC Appliance Corporation entered into a claim. The case is Corporation contract with now being heard against the the defendant Company on 29 December and Kelon 2003 regarding International the purchase of Incorporation 108,108 units of MCBR1000W refrigerators, but the defendant failed to perform its obligations under the contract on timely basis and that the goods delivered were defective. CNA has not brought any claim over the breach of the obligation of repair and maintenance to the court. The Company is entitled to lodge an counter-claim on the payment of more than USD980,000 for goods.

— IV-7 —

GENERAL INFORMATION

APPENDIX IV

2 Litigation Hangxiao Ganggou RMB19,853,000 against the Company initiated by Zhejiang Hangzhou Hangxiao Ganggou Holdings Company Limited (“Hangxiao Ganggou”)

The plaintiff filed The hearing proceeding against commenced in the Company for the Intermediate the payment of People’s Court RMB1,193,000 of Foshan City in construction in March 2007. fees and The second RMB17,660,000 court session in penalty interest was scheduled in and the litigation June 2007 and costs. The plaintiff the case would alleged that it had be tried together undertaken the with the litigation construction works against Hangxiao of the Company’s Ganggou by the plain warehouse Company. The factories No. 1 petition against and No. 2 pursuant the Company by to a construction Hangxiao ganggou contract with the was dismissed, and Company, and the Hangxiao Ganggou Company defaulted shall be liable for in payment of the case acceptance RMB1,193,000 of fees. Hangxiao construction fees. Ganggou lodged The proceeding an appeal, and was resumed in the High Court of the Intermediate Guangdong heard People’s court the case together of Foshan City with the case in March 2007. against Hangxiao Hangxiao Ganggou Ganggou by the has amended Company on 30 the claim for January 2008/ construction fees to The case is now RMB1,170,000. pending judgement.

— IV-8 —

GENERAL INFORMATION

APPENDIX IV

Litigation	The plaintiff filed	The Company has
against Kelon	a claim against	completed a simple
USA initiated	Kelon USA for	answering session
by Home Depot	the settlement of	in the litigation
in relation	default principal	and the case is
to the Sale	amount of	in the process of
and Purchase	USD1,143,171.38	investigation and
Contract	and its interest	gathering evidence.
	USD351,219.23
	(USD1,494,391.21
	in aggregate)
	payable by Kelon
	USA, and the
	interest calculated
	from the date of
	litigation based on
	an annual interest
	rate of 18%, the
	litigation fees and
	other compensation
	as the court
	deemed fair and
	reasonable.

9. MATERIAL CONTRACTS

The following contracts, not being contracts entered into in the ordinary course of business, had been entered into by members of the Group after the date two years before the date of the Announcement and up to the Latest Practicable Date which may be material:

(a) the JV Agreement;
(b) Framework Agreement for Purchase and Supply of Compressors entered into between the relevant subsidiaries of the Company and Huayi Compressor Holdings Company Limited and its subsidiaries on 7 January 2008 for a term of 1 year commencing from 1 January 2008 to 31 December 2008, under which the annual cap for the transactions contemplated therein amounted to RMB581,710,000;

— IV-9 —

GENERAL INFORMATION

APPENDIX IV

(c) Business Cooperation Framework Agreement entered into between the relevant subsidiaries of the Company and Hisense Group and its subsidiaries on 7 January 2008 for a term of 1 year commencing from 1 January 2008 to 31 December 2008, under which the annual cap for the transactions contemplated therein amounted to RMB47,500,000;
(d) The state-owned land use transfer agreement dated 27 December 2007 entered into between Chengdu Kelon Refrigerator Co., Ltd, the wholly-owned subsidiary of the Company, with Chengdu Gandao Construction Comprehensive Development Corporation (Pai Zhuan (2007) ZiDi No. 010), pursuant to which Chengdu Kelon shall transfer the land use right of a piece of land with a gross area of 51,673.51 sqm located at No. 51, Shuangqing Road, Chenghua Area to Chengdu Gandao Construction Comprehensive Development Corporation at the consideration of RMB372,049,440.00.
(e) Contract on the Introduction of Refrigerator Technology entered into between the Company and Toshiba Consumer Marketing Corporation（東芝電器行銷株式会社）(“Toshiba”)（東芝）on 10 December 2007, pursuant to which the Company shall pay Toshiba a fee totalling of RMB58,000,000, together with a commission based on a contractual percentage of the sales income from the sales of contractual products (i.e. the household refrigerators equipped with the double-chilling temperature technology as provided by Toshiba) to the markets other than Japan;
(f) A debt settlement Agreement entered into between the Company and its subsidiary Jiangxi Kelon and Henan Development（河南開發）on 27 August 2007, pursuant to which the Company and its subsidiary agreed to waive the amount of RMB37,363,000 owed by Kaifeng Kelon to them, and Kaifeng Kelong agreed to waive the amount of RMB43,639,200 owed by the Company and its subsidiary to it;
(g) Equity Transfer Agreement entered into between Jiangxi Kelon Industrial Development Co., Ltd. (“Jiangxi Kelon”, a wholly owned subsidiary of the Company) and Henan Province Kaifeng Economic Technology Development (Group) Company (“Henan Development”) on 27 August 2007, pursuant to which Jiangxi Kelon agreed to sell, and Henan Development agreed to acquire, a 70% equity interest in Kaifeng Kelon Air-conditioner Co., Ltd. (“Kaifeng Kelon”) at nil-monetary consideration;

— IV-10 —

GENERAL INFORMATION

APPENDIX IV

(h) Joint Venture Agreement entered into among the Company, Qingdao Hisense Import & Export Co., Ltd. (“Hisense Import & Export”), Qingdao Hisense Electric Co., Ltd. (“Hisense Electric”) and the natural persons on 27 July 2007 regarding the establishment of Qingdao Hisense International Marketing Co., Ltd. (“Joint Venture Company”), pursuant to which the Company, Hisense Import & Export, Hisense Electric and the natural persons agreed to contribute RMB3,800,000, RMB10,400,000, RMB3,800,000 and RMB2,000,000 respectively in cash as the capital of the Joint Venture Company;
(i) Land Use Right Transfer Contract entered into between Guangdong Kelon Airconditioner Co., Ltd. (“Kelon Air-conditioner”, a subsidiary of the Company) and two natural persons (namely, Zhou Dichang（周迪昌）and Lu Zhihua（呂志華）) or their registered companies on 14 May 2007, pursuant to which Kelon Air-conditioner agreed to sell, and the two natural persons agreed to acquire, the land use right for the land parcel at Nanchong Industrial Zone, South of Nanjiang Village Committee, at the consideration of RMB17,338,300;
(j) Land Use Right Transfer Contract entered into between the Company and Haogang Commerce Co., Ltd. (“Haogang Commerce”) on 14 May 2007, pursuant to which the Company agreed to sell, and Haogang Commerce agreed to acquire, the land use right for the land parcel at No. 2 Fengye Road, Bandesheng Residential Committee, Ronggui Street, Shunde District, China and the factory building erected thereon at the consideration of RMB5,438,000;
(k) Land Use Right Transfer Contract and Supplemental Agreement for the Transfer of Land Use Right entered into between the Company and Foshan Shunde Xin Zhen Hua Real Estate Co., Ltd. (“XZH Real Estate”) on 13 May 2007, pursuant to which the Company agreed to sell, and XZH Real Estate agreed to acquire, the land use rights for the six parcels of land at Shunde District, Foshan, China and the factory buildings erected thereon at the consideration of RMB91,200,000. XZH Real Estate agreed to pay the transportation fee of RMB50,000,000 to the Company;
(l) Land Use Right Transfer Contract entered into between the Company and Hongke Trade Co., Ltd. (“Hongke”) on 13 May 2007, pursuant to which the Company agreed to sell, and Hongke agreed to acquire the land use right for the land parcel at No. 27 Rongqi Avenue East, Bandesheng Residential Committee, Ronggui Street, Shunde District, China and the factory building erected thereon at the consideration of RMB29,000,000,000;
(m) Settlement Agreement entered into among the Company and the Ronggui Rurul Credit Cooporative of Shunde District Shunde (“Ronggui Rural”) and Foshan Shunde Jiegao Investments Co., Ltd. (“Jiegao”) on 18 April 2007, pursuant to

— IV-11 —

GENERAL INFORMATION

APPENDIX IV

which the Company, Ronggui Rural and Jiegao confirmed that Jiegao owed the principal amounts of RMB200,000,000 and RMB168,000,000 to Ronggui Rural and the Company respectively, and Jiegao agreed to dispose of its land use right for a land parcel at the east of Ronggui Waihuan Road, Shunde District, Foshan City with a site area of 254,629.69 square meter. The proceed from such disposal would be used to settle the liabilities;

(n) Sale and Purchase Agreement entered into between Kelon Electric Appliance Co., Ltd. (“Kelon Electric”, a wholly owned subsidiary of the Company) and Jiawei Co, Ltd.（佳偉有限公司）(“Jiawei”) on 15 March 2007, pursuant to which Kelon Electric agreed to sell and Jiawei agreed to acquire the entire 25th Floor of Harbour Center located at 25 Harbour Road, Hong Kong at the consideration of HK$123,295,400;
(o) Land Use Right Transfer Contract entered into between the Company and Foshan Shunde Zhaochuang Real Estate Co., Ltd.（佛山市順德區兆創房產有限公司）(“Zhaochuang”) on 18 November 2006, pursuant to which the Company agreed to transfer the land use right for a land parcel located at the east of Waihuan Road, Ronggui Gaoli Community Residential Committee, Shunde District, Foshan, the PRC with an area of 133,334.05 square meter at the consideration of RMB127,207,347.72;
(p) Letter of Intent on Equity Transfer signed by the Company, Chengdu Engine (Group) Co., Ltd. (“Chengdu Engine”), Chengdu Xinxing Electrical Appliance Co., Ltd. and Chengdu Kelong Refrigerator Co., Ltd. (“Chengdu Kelon”, a subsidiary of the Company) on 31 October 2006 in relation to the acquisition of 30% equity interest in Chengdu Kelon by the Company from Chengdu Engine at the consideration of RMB81,000,000 (subject to adjustment);
(q) Project Construction Agreement entered into between the Company and Chengdu Economic and Technological Development Zone Management Committee (“Management Committee”) and Quanyi District People’s Government, Chengdu (“People’s Government”), pursuant to which the Management Committee and the People’s Government sold a cleared land parcel with an area of approximately 259 mu at price of RMB84,000 per mu;
(r) Framework Agreement for Purchase and Supply of Compressors entered into between the relevant subsidiaries of the Company and Huayi Compressor Holdings Company Limited and its subsidiaries on 15 September 2006 for a term of 1 year commencing from 1 January 2006 to 31 December 2006, under which the cap for the transactions contemplated amounted to RMB209,457,400; and

— IV-12 —

GENERAL INFORMATION

APPENDIX IV

(s) Framework Agreement for Ordering of Moulds, Framework Agreement for Purchase of Raw Materials, Framework Agreement for Production and Purchase of Air-conditioner Products and Framework Agreement for Production and Supply of Air-conditioner Products entered into between the relevant subsidiaries of the Company and Hisense Group and its subsidiaries on 15 September 2006 for a term of 1 year commencing from 1 January 2006 to 31 December 2008, under which the caps for transactions contemplated amounted to RMB8,000,000, RMB12,000,000, RMB120,000,000 and RMB120,000,000 respectively. The aggregate amount is RMB260,000,000.

10. NO MATERIAL ADVERSE CHANGE

At the Latest Practicable Date, none of the Directors was aware of any material adverse change in the financial or trading position of the Group since 31 December 2007 (being the date to which the latest published audited financial statements of the Group were made up).

11. MISCELLANEOUS

(a) The registered office of the Company is at No. 8 Ronggang Road, Ronggui Street, Shunde District, Foshan City, Guangdong Province, PRC
(b) The head office and principal place of business in Room 3104-06, Singga Commercial Centre, No. 148 Connaught Road West, Hong Kong.
(c) Mr. Chen Zhen Wen was appointed as its company secretary and qualified accountant in compliance with the Listing Rules. Mr. Chen is a PRC certified public accountant and a certified public accountant registered with the Hong Kong Institute of Certified Public Accountant. Mr. Chen was also admitted as a member of the ACCA. Mr. Chen graduated in 1999 with a Bachelor’s degree in economics. Mr. Chen has been working in the areas relating to finance and auditing for 9 years and possesses ample accounting experience.
(d) This circular has been prepared in both English and Chinese. In the case of any discrepancies, the English text shall prevail over the Chinese text.

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GENERAL INFORMATION

APPENDIX IV

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business in Hong Kong of the Company at Room 3104-06, Singga Commercial Centre, No. 148 Connaught Road West, Hong Kong during normal business hours from the date of this circular up and including 15 July 2008:

(a) the memorandum and articles of association of the Company; and
(b) the material contracts referred to in the section headed “Material Contracts” in this Appendix.

— IV-14 —

NOTICE OF EGM

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the third 2008 extraordinary general meeting (the “EGM”) of Hisense Kelon Electrical Holdings Company Limited (the “Company”) will be held at the conference room on the Company’s head office, Shunde District, Foshan City, Guangdong Province, the Peoples’ Republic of China (the “PRC”) on Tuesday, 26 August 2008 at 9:30 a.m. to review and, if thought fit, pass the following as a ordinary resolution:

ORDINARY RESOLUTION

(1) To consider and approve the JV Agreement dated 27 April 2008 entered into by the Company and Whirlpool (Hong Kong) Limited and the transaction contemplated thereunder.

TRADING IN THE H SHARES OF THE COMPANY

— N-1 —

NOTICE OF EGM

received a letter from the Stock Exchange dated 5 June 2008 agreeing that trading in the H shares of the Company be allowed to resume subject to the fulfilment of the conditions as set out in its letter to the satisfaction of the Stock Exchange prior to the resumption of trading in the H shares of the Company. Please refer to the announcement of the Company dated 6 June 2008 for details of such conditions.

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

Foshan City, Guangdong, the PRC, 30 June 2008

As at the date of this announcement, the Company’s directors are Mr. Tang Ye Guo, Mr. Wang Shi Lei, Ms. Yu Shu Min, Mr. Lin Lan, Ms. Liu Chun Xin and Mr. Zhang Ming; and the Company’s independent non-executive directors are Mr. Zhang Sheng Ping, Mr. Lu Qing and Mr. Cheung Yui Kai, Warren.

Notes:

(1) H shares shareholders intending to attend the EGM shall give written reply slip, as attached, to the Company, which shall be lodged at the registered office of the Company on or before 5 August 2008. To qualify for attendance at the EGM, all H shares shareholders transfers accompanied by the relevant share certificates must be lodged with the Company’s Branch Share Registrar in Hong Kong, Hong Kong Registrars Limited of Rooms 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, no later than 4:00 p.m. on 25 July 2008 for registration.
(2) Shareholders entitled to attend and vote at the EGM are entitled to appoint one or more persons (whether or not a shareholder of the Company) as their proxy to attend and vote on behalf of themselves.
(3) Notice of the holders of domestic shares and H shares of the Company whose names appear on the register of members of the Company as at or before the close of business of Friday, 25 July 2008 (including holders of H Shares of the Company who have submitted verification transfer forms on or before 25 July 2008) will be entitled to attend the EGM. The register of members of the Company will be closed from 28 July 2008 (Monday) to 26 August 2008 (Tuesday ) (both days inclusive).
(4) In order to be valid, the form of proxy, together with a duly notarised power of attorney or other document of authority, if any, under which the form is signed must be deposited at the registered office of the Company not later than 24 hours before the time for holding the EGM.
(5) The registered address of the Company is: No. 8 Ronggang Road, Ronggui Street, Shunde District, Foshan City, Guangdong Province.

Postal code: 528303 Tel: (86) 757 2836 2570 Fax: (85) 757 2836 1055 Contact person: Ms. Li Lin, Mr. Mei Shi Liang

— N-2 —

AI assistant

Medlive Technology Co., Ltd. — Proxy Solicitation & Information Statement 2008

50436_rns_2008-06-30_c22cca3f-0c2a-4d3d-80c9-f50868496af6.pdf

MAJOR TRANSACTION

ESTABLISHMENT OF JOINT VENTURE

CONTENTS

DEFINITIONS

DEFINITIONS

MAJOR TRANSACTION

ESTABLISHMENT OF JOINT VENTURE

INTRODUCTION

JV AGREEMENT

Date

Parties to the JV Agreement

Scope of Business of the JV Company

Effective Date

Term of the JV Company

Total Investment and Capital Contribution

Profit Distribution

Board of Directors and Management

Roles and Obligations

FUTURE PLAN OF THE JV COMPANY

REASONS FOR AND BENEFITS FOR ENTERING INTO THE JV AGREEMENT

ACCOUNTING TREATMENT OF THE JV COMPANY

EFFECT OF THE TRANSACTION ON THE EARNINGS AND ASSETS AND LIABILITY OF THE COMPANY

INFORMATION RELATING TO THE COMPANY

INFORMATION RELATING TO WHIRLPOOL (HONG KONG)

LISTING RULES IMPLICATIONS

FINANCIAL AND TRADING PROSPECTS OF THE GROUP

EGM

RECOMMENDATION

ADDITIONAL INFORMATION

SUSPENSION OF TRADING IN THE H SHARES OF THE COMPANY

Yours faithfully,

A. SUMMARY OF FINANCIAL STATEMENTS

Consolidated Income Statements

B. FINANCIAL STATEMENTS OF THE KELON GROUP FOR THE YEAR ENDED 31 DECEMBER 2007

Consolidated Income Statement

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

Notes to the Financial Statements

1. General information

2. Basis of preparation

(a) Statement of compliance

(b) Basis of preparation

(c)

Use of estimates and judgments

(d) Functional and presentation currency

3. Adoption of new or revised international financial reporting standards

(a) Application of International Financial Reporting Standards

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

4. Principal accounting policies

(a) Summary of the effects of the changes in accounting policies

(b) Basis of consolidation

(c) Subsidiaries

(d) Associates

(e) Goodwill

(f) Property, plant and equipment

(g) Investment properties

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

(i) Leasing

The Group as lessor

The Group as lessee

(j) Intangible assets (other than goodwill)

(iii) Impairment

(k) Financial instruments

For loan and receivables

(iii) Financial liabilities

(iv) Financial guarantee contracts

(v) Derecognition

(l) Inventories

(m) Non-current assets held for sale

(n) Revenue recognition

(o) Income taxes

(p) Foreign currency

(q) Employee benefits

(r) Borrowing costs

(s) Impairment of other assets

(t)

Medlive Technology Co., Ltd. Proxy Solicitation & Information Statement 2008