THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in HISENSE HOME APPLIANCES GROUP CO., LTD. , you should at once hand this circular to the purchaser(s) or transferee(s) or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

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

海信家電

HISENSE HOME APPLIANCES GROUP CO., LTD. 海信家電集團股份有限公司

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

(Stock Code: 00921)

(1) MAJOR TRANSACTION;

(2) CONTINUING CONNECTED TRANSACTIONS – BUSINESS CO-OPERATION REVISED ANNUAL CAPS AND BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT; AND

(3) MAJOR TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS – FINANCIAL SERVICES REVISED ANNUAL CAPS AND FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT

Independent Financial Adviser to the Independent Board Committee and the Shareholders

==> picture [23 x 22] intentionally omitted <==

A letter from the Board is set out on pages 7 to 57 of this circular. A letter from the Independent Board Committee is set out on page 58 to 59 of this circular. A letter from the Independent Financial Adviser containing its advice to the Independent Board Committee and the Shareholders is set out on pages 60 to 102 of this circular.

A notice of the EGM to be held on 29 August 2019 at 3 p.m. at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC, a proxy form for use at the EGM and a reply slip have been despatched by the Company on 21 June 2019 and are also published on the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (http://www.kelon.com). If you are not able to attend the meeting in person, you are requested to complete and return the proxy form in accordance with the instructions printed thereon and to lodge the same with the Company’s branch share registrar in Hong Kong, Hong Kong Registrars Limited, at Shops 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 (as the case may be). Completion and delivery of the proxy form will not preclude you from attending and voting in person at the EGM or any adjournment thereof (as the case may be) if you so wish.

14 August 2019

		Page
DEFINITIONS	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		7
LETTER FROM THE INDEPENDENT BOARD COMMITTEE. . . . . . . . . . . . . . .		58
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER. . . . . . . . . . . . . . .		60
APPENDIX I	– FINANCIAL INFORMATION OF THE GROUP. . . . . . . . . . . . .	I-1
APPENDIX II	– ACCOUNTANTS’ REPORT OF HISENSE HITACHI . . . . . . . .	II-1
APPENDIX III	– UNAUDITED PRO FORMA FINANCIAL INFORMATION
	OF THE ENLARGED GROUP. . . . . . . . . . . . . . . . . . . . . . . . .	III-1
APPENDIX IV	– GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-1

– i –

DEFINITIONS

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

“A Shares”
domestic ordinary shares of the Company with a nominal value of RMB1.00 each and are listed on the Shenzhen Stock Exchange;
“associates”
has the meaning ascribed to it under the Listing Rules;
“Board” or “Director(s)”
the board of directors of the Company;
“Business Co-operation Framework Agreement”
the agreement（業務合作框架協議）entered into between the Company, Hisense Group, Hisense Electric and Hisense Commercial Trading dated 26 November 2018;
“Business Co-operation Revised Annual Caps”
the revised annual caps for the Relevant Business Cooperation Transactions pursuant to the Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement) for the year ending 31 December 2019;
“Business Co-operation Framework Supplemental Agreement”
the supplemental agreement （業務合作框架協議之補充協議） to the Business Co-operation Framework Supplemental Agreement entered into between the Company, Hisense Group and Hisense Electric dated 21 June 2019, which amends and supplements the Business Co-operation Framework Agreement;
“CBRC”
中國銀行業監管管理委員會 (China Banking Regulatory Commission);
“close associates”
has the meaning ascribed to it under the Listing Rules;
“Company”
Hisense Home Appliances Group Co., Ltd., a company incorporated in the PRC with limited liability, whose shares are listed on the main board of the Stock Exchange and the main board of the Shenzhen Stock Exchange;
“connected person”
has the meaning ascribed to it in the Listing Rules;

– 1 –

DEFINITIONS

“EGM”

the 2019 second extraordinary general meeting of the Company to be held at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC on 29 August 2019 at 3 p.m. for, among other things:– (i) to consider and approve the resolution on Transfer of Target Equity Interests and amendments to articles of association of Hisense Hitachi; (ii) to consider and approve the Business Co-operation Framework Supplemental Agreement, the continuing connected transactions contemplated thereunder and the relevant revised annual caps; (iii) to consider and approve the Financial Services Supplemental Agreement, the major transaction and the continuing connected transactions contemplated thereunder and the relevant revised annual caps; and (iv) to consider and approve the resolution on entrusted wealth management of idle self-owned funds of the Company;

“Enlarged Group” the Company and its subsidiaries after including Hisense Hitachi in the scope of the consolidated statements;
“Equity Interests”
the equity interests of Hisense Hitachi;
“Financial Services Agreement”
the agreement（金融服務協議）entered into between the Company and Hisense Finance dated 26 November 2018;
“Financial Services Revised Annual Caps”
the revised annual caps for the Relevant Financial Services Transactions pursuant to the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) for the year ending 31 December 2019;
“Financial Services Supplemental Agreement”
the supplemental agreement （金融服務協議之補充協議） to the Financial Services Agreement entered into between the Company and Hisense Finance dated 21 June 2019, which amends and supplements the Financial Services Agreement;
“Group”
the Company and its subsidiaries (for the purpose of this circular, excluding Hisense Hitachi);
“H Shares”
overseas listed foreign shares of the Company with a nominal value of RMB1.00 each and are listed on the Stock Exchange;

– 2 –

DEFINITIONS

“Hisense Air-conditioning”
Qingdao Hisense Air-conditioning Company Limited*（青島海信空調有限公司）, a company incorporated in the PRC with limited liability and a subsidiary of Hisense Group;
“Hisense Electric” Hisense Electric Co., Ltd. （青島海信電器股份有限公司）, a company incorporated in the PRC with limited liability, whose shares are listed on the Shanghai Stock Exchange;
“Hisense Commercial Trading” Qingdao Hisense Commercial Trading Development Co., Ltd.* （青島海信商貿發展有限公司）, a company incorporated in the PRC with limited liability;
“Hisense Finance”
Hisense Finance Co., Ltd.* （海信集團財務有限公司）, a company incorporated in the PRC with limited liability and a subsidiary of Hisense Group;
“Hisense Group” Hisense Company Limited （海信集團有限公司）, a company incorporated in the PRC with limited liability;
“Hisense HK” Hisense (Hong Kong) Company Limited, a company incorporated in Hong Kong with limited liability and a subsidiary of Hisense Group;
“Hisense HK”
“Hisense International”
Hisense International Co., Ltd.（青島海信國際營銷股份有限公司）, a company incorporated in the PRC with limited liability and a subsidiary of Hisense Group;
“Hisense Hitachi”
Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd. （青島海信日立空調系統有限公司）, a company incorporated in the PRC with limited liability;
“Hisense Hitachi Shareholder(s)”

the holders of Equity Interests;

“Hong Kong”
the Hong Kong Special Administrative Region of the People’s Republic of China;
“Independent Board Committee”
an independent board committee of the Company comprising all the independent non-executive Directors (namely Mr. Ma Jin Quan, Mr. Zhong Geng Shen and Mr. Cheung Sai Kit);

– 3 –

DEFINITIONS

“Independent Financial Adviser”
“Independent Shareholders”
“Independent Third Parties”
“Listing Rules”
“Latest Practicable Date”
“PRC”
“Revised Annual Caps”
Yuanta Securities (Hong Kong) Co., Ltd., a corporation licensed to carry Type 1 (Dealing in securities), Type 2 (Dealing in future contracts), Type 4 (Advising on securities), Type 5 (Advising on future contracts), Type 6 (Advising on corporate finance) and Type 9 (Asset management) regulated activities under the SFO, being the independent financial adviser appointed by the Independent Board Committee to advise the Independent Board Committee and the Shareholders in respect of (a) the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps) and (b) the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps);
(i) in respect of the Business Co-operation Framework Supplemental Agreement, Shareholders other than Hisense Group, Hisense Electric and their respective associates and other Shareholders which are required to abstain from voting in relation to the Business Co-operation Framework Supplemental Agreement under the Shenzhen Listing Rules; and (ii) in respect of the Financial Services Supplemental Agreement, Shareholders other than Hisense Finance and its associates and other Shareholders which are required to abstain from voting in relation to the Financial Services Supplemental Agreement under the Shenzhen Listing Rules;
a person, or in the case of a company, the company or its ultimate beneficial owner(s), who is independent of and not connected with the Company and its subsidiaries and its connected persons and its ultimate beneficial owner(s) or their respective associate;
the Rules Governing the Listing of Securities on the Stock Exchange;
9 August 2019, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular;
the People’s Republic of China;
collectively, Business Co-operation Revised Annual Caps and Financial Services Revised Annual Caps;

– 4 –

DEFINITIONS

“Relevant Business Co-operation Transactions”
certain continuing connected transactions of the Enlarged Group contemplated under the Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement) as set out in the section headed “CONTINUING CONNECTED TRANSACTIONS – BUSINESS CO-OPERATION REVISED ANNUAL CAPS AND THE BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT” in this circular;
“Relevant Financial Services certain continuing connected transactions of the Transactions” Enlarged Group contemplated under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) as set out in the section headed “MAJOR AND CONTINUING CONNECTED TRANSACTIONS – FINANCIAL SERVICES REVISED ANNUAL CAPS AND THE FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT” in this circular;
“Sale and Purchase Agreement” the sale and purchase agreement entered into between the Company and the Transferor dated 5 March 2019 in relation to the Transfer of Target Equity Interests;
“SFO” Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong);

“Share(s)” share(s) of RMB1.00 each in the capital of the Company, comprising the A Shares and the H Shares;

“Shareholder(s)” holder(s) of the Shares;
“Shenzhen Stock Exchange” The Shenzhen Stock Exchange;
“Stock Exchange” The Stock Exchange of Hong Kong Limited;
“Target Equity Interests” 0.2% Equity Interests of Hisense Hitachi;

“The Major Transaction” collectively (i) the Transfer of Target Equity Interests; (ii) amendments of the articles of association of Hisense Hitachi; and (iii) matters in relation to the appointment of additional directors of Hisense Hitachi; “Transfer of Target Equity the transfer of Target Equity Interests by the Transferor Interests” to the Company;

“Transferor” Unitecs Corporation（株式會社聯合貿易）;

– 5 –

	DEFINITIONS
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong;
“RMB”	Renminbi, the lawful currency of the PRC;
“USD”	United States dollars, the lawful currency of the United
	States of America;
“Yen”	Japanese Yen, the lawful currency of Japan;
“%”	per cent; and
“*”	for identification purpose only.

– 6 –

LETTER FROM THE BOARD

海信家電

HISENSE HOME APPLIANCES GROUP CO., LTD. 海信家電集團股份有限公司

(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 00921)

Executive Directors: Mr. Tang Ye Guo Mr. Jia Shao Qian Mr. Lin Lan Mr. Dai Hui Zhong Mr. Fei Li Cheng Mr. Wang Yun Li

Registered Office: No. 8 Ronggang Road Ronggui Shunde Foshan Guangdong Province The PRC

Independent non-executive Directors:

Mr. Ma Jin Quan Mr. Zhong Geng Shen Mr. Cheung Sai Kit

Principal place of business in Hong Kong: Room 3101-05 Singga Commercial Centre, No. 148 Connaught Road West, Hong Kong 14 August 2019

To the Shareholders

Dear Sir or Madam,

(1) MAJOR TRANSACTION;

(2) CONTINUING CONNECTED TRANSACTIONS – BUSINESS CO-OPERATION REVISED ANNUAL CAPS AND BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT; AND (3) MAJOR TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS – FINANCIAL SERVICES REVISED ANNUAL CAPS AND FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT

(1) MAJOR TRANSACTION

TRANSFER OF TARGET EQUITY INTERESTS

On 5 March 2019, the Company (as the transferee) and the Transferor entered into the Sale and Purchase Agreement, pursuant to which the Transferor has agreed to transfer and the Company has agreed to be transferred from the Transferor the Target Equity Interests.

– 7 –

LETTER FROM THE BOARD

The principal terms and conditions of the Sale and Purchase Agreement are set out below:–

Date: 5 March 2019 Parties: The Company, as the transferee; and Unitecs Corporation（株式會社聯合貿易）, as the transferor.

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, the Transferor and its ultimate beneficial owner are Independent Third Parties.

ASSETS TO BE TRANSFERRED

Pursuant to the Sale and Purchase Agreement, the Transferor has agreed to transfer and the Company has agreed to be transferred from the Transferor the Target Equity Interests.

The following table sets out the registered capital of Hisense Hitachi (and registered capital held by the Hisense Hitachi Shareholders) and the change of shareholding of the Hisense Hitachi Shareholders immediately before and after completion of the Transfer of Target Equity Interests:–

Hisense Hitachi Shareholders Company Transferor Other shareholders Total	Immediately before completion of the Transfer of Target Equity Interests Registered Capital Held Percentage of Shareholding USD22,540,000 49% USD920,000 2.0% USD22,540,000 49% USD46,000,000 100%	Immediately after completion of the Transfer of Target Equity Interests Registered Capital Held Percentage of Shareholding USD22,632,000 49.2% USD828,000 1.8% USD22,540,000 49% USD46,000,000 100%	Immediately after completion of the Transfer of Target Equity Interests Registered Capital Held Percentage of Shareholding USD22,632,000 49.2% USD828,000 1.8% USD22,540,000 49% USD46,000,000 100%
			100%

CONSIDERATION

The consideration for the Transfer of Target Equity Interests shall be RMB 25,000,000 (the “ Consideration ”). The Company shall pay the Consideration in the following manner:–

(i) within 20 business days of obtaining approval from the board of directors of Hisense Hitachi in respect of the Sale and Purchase Agreement by way of written resolutions, the Company shall pay 50% of the Consideration to the Transferor in cash as deposit; and

– 8 –

LETTER FROM THE BOARD

(ii) within 20 business days from the date on which the business registration procedure in respect of the Transfer of Target Equity Interests have been completed, the Company shall pay the remaining 50% of Consideration to the Transferor in cash.

The Consideration was determined after arm’s length negotiations between the Company and the Transferor on normal commercial terms. The Company shall use its own funds to settle the Consideration. The Consideration was determined with reference to the following factors: (a) the profitability of Hisense Hitachi; and (b) the price-to-earnings ratios of the four major listed enterprises of home electrical appliances in the PRC, namely Gree Electric Appliances, Inc. of Zhuhai, Midea Group Co., Ltd., Haier Smart Home Co., Ltd. and the Company which had price-to-earnings ratios of between 10 and 15 times in 2017 which are set out in the table below.

	A Share	Price-to-earnings
Name of the comparable companies	Stock Code	ratio for 20171
Gree Electric Appliances, Inc. of Zhuhai	000651	10
Midea Group Co., Ltd.	000333	15
Haier Smart Home Co., Ltd.	600690	13
Company	000921	10
	Average	12
	Median	11.5

Note 1: Price-to-earnings ratios are calculated by: the average closing prices of the comparable companies in the year 2017 divided by earnings per share as shown in the audited annual reports 2017 of the comparable companies (which were the latest audited annual reports available as at the date of the Sale and Purchase Agreement).

The Consideration represents a price-to-earnings ratio of Hisense Hitachi in 2017 of 8.34 times (i.e. Consideration of RMB25 million divided by 0.2% then divided by Hisense Hitachi’s net profits attributable to the parent company of approximately RMB1,499,281,300) which was lower than the price-to-earnings ratios of the four major listed enterprises of home electrical appliances. Given that Hisense Hitachi is not a listed company, the Directors consider that a lower price-to-earnings ratio of Hisense Hitachi is reasonable.

The Directors consider that the terms and conditions in the Sale and Purchase Agreement (including Consideration) are made on normal commercial terms, are fair and reasonable and in the interest of the Company and the Shareholders as a whole.

The aggregate of the remuneration payable to and benefits in kind receivable by the directors of Hisense Hitachi will not be varied in consequence of the Transfer of Target Equity Interests.

EFFECTIVE DATE OF THE SALE AND PURCHASE AGREEMENT

The Sale and Purchase Agreement shall be effective on the date on which the Company having obtained the approval from the Shareholders in the EGM.

– 9 –

LETTER FROM THE BOARD

COMPLETION OF TRANSFER OF TARGET EQUITY INTERESTS

The completion of the Transfer of Target Equity Interests shall take place on the date on which the business registration procedure in respect of the Transfer of Target Equity Interests having been completed.

AMENDMENTS OF THE ARTICLES OF ASSOCIATION OF HISENSE HITACHI AND BOARD COMPOSITION OF HISENSE HITACHI

On 5 March 2019, the Board reviewed and approved the “Resolution on transfer of the equity interest of Hisense Hitachi and amendments to the articles of association of Hisense Hitachi” and the same has been approved unanimously by all directors of Hisense Hitachi.

The revised articles of association of Hisense Hitachi stipulate that: Matters in respect of ordinary operations which require approval from at least 1/2 of the directors attending the board meeting are elaborated as follows:–

Consent required in passing
board resolutions	Major issues
Board resolutions which require	1.	Annual budgets		and		final	accounts		of
approval from at least 1/2 of the		Hisense Hitachi;
directors attending the board	2.	Formulation	and		change		of	annual
meeting		production and		sales		plans	of	Hisense
		Hitachi; and
	3.	Appointment	and		removal		of	senior
		management.

After the completion of The Major Transaction, the Company will obtain more than half of voting rights of the board of directors of Hisense Hitachi. As a result, the Company will be able to decide the daily production and operations of Hisense Hitachi and thereby obtain the controlling power of Hisense Hitachi. As such, Hisense Hitachi will be included in the Company’s consolidated financial statements.

INFORMATION RELATING TO THE COMPANY

The Company is principally engaged in research and development, manufacturing and marketing of electrical products such as refrigerators, household air-conditioners, central air-conditioners, freezers, washing machines, kitchen appliances, etc.

– 10 –

LETTER FROM THE BOARD

INFORMATION RELATING TO THE TRANSFEROR

The Transferor is established in accordance with the laws of Japan and is registered in the Ministry of Justice of Japan. Registered office: 日本東京都港區虎之門2 丁目3番22號 (2-3-22, Toranomon, Minato-ku, Tokyo, Japan). Legal representative and ultimate beneficial owner: 角町和滿 (Tsunomachi Kazuma). The registered capital of the Transferor is 20 million Yen. The Transferor is principally engaged in investment consultancy services in relation to projects in relation to home appliances, communications, air conditioning and the import and export of other related parts and components. The Transferor is an existing Hisense Hitachi Shareholder and currently holds 2% shareholding in the registered capital of Hisense Hitachi.

INFORMATION RELATING TO HISENSE HITACHI

The shareholding structure of Hisense Hitachi is as follows: 49% directly held by the Company; 29% directly held by 江森自控日立空調貿易（香港）有限公司 (Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited); 20% directly held by 台灣日立江森自控股份有限公司 (Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd.) and 2% directly held by the Transferor; among which 江森自控日立空調貿易（香港）有限公司 (Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited)and 台灣日立江森自控股份有限公司 (Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd.) are associated companies under common control. Hisense Hitachi was established in 2003; nature of the enterprise: company with limited liability; registered address: 218 Qian Wan Gang Road, Qingdao Economic and Technological Development Zone; legal representative: FRANZ WOLFGANG CERWINKA; registered capital: USD46 million. The scope of business include: research and development, manufacturing and sales of air-conditioners, heat pumps, refrigeration equipment, heating equipment, ventilation equipment, air purification equipment, intelligent electrical equipment and supporting facilities, electric water heaters and related parts; and the provision of installation, after-sales, technical testing services; import and export of the above goods and technologies.

– 11 –

LETTER FROM THE BOARD

The consolidated financial statements of Hisense Hitachi for the year ended 31 December 2016, the year ended 31 December 2017, the year ended 31 December 2018 and the three months ended 31 March 2019 were audited by its auditors in accordance with the accounting standards in the PRC. The following is the consolidated financial information of Hisense Hitachi:–

	For the year	For the year	For the year	For the three
	ended	ended	ended	months ended
	31 December	31 December	31 December	31 March
	2016/As at	2017/As at	2018/As at	2019/As at
	31 December	31 December	31 December	31 March
Items	2016	2017	2018	2019
	RMB’0000	RMB’0000	RMB’0000	RMB’0000
	(Approximately)	(Approximately)	(Approximately)	(Approximately)
	(audited)	(audited)	(audited)	(audited)
Total income	651,847	940,177	1,098,667	270,152
Operating profits	136,658	190,481	194,733	46,250
Net profit before tax	147,304	190,765	194,969	46,441
Net profit after tax	122,335	156,718	160,322	37,993
Total asset	686,412	963,532	1,191,738	1,256,502
Total liabilities	345,360	514,489	584,816	761,487
Net asset	341,052	449,042	606,921	495,015
Net cash flow from
operating activities	222,791	228,275	181,457	36,684

Further financial information of Hisense Hitachi is set out in Appendix II – Accountant’s Report of Hisense Hitachi of this circular.

BUSINESS DISCUSSION AND ANALYSIS OF HISENSE HITACHI

1. Characteristics analysis of the industry where Hisense Hitachi situated

Industry overview analysis

According to statistics from www.aircon.com.cn, in 2018 the overall capacity of domestic central air-conditioner market was about 100 billion. Growth of central air-conditioners market in 2018 was less than 10% as compared to an approximate increase of 20% in 2017. From the perspective of different channels, there is nearly no increase in the home furnishing retail market’s overall capacity as compared to 2017 due to the impact of real estate regulation policies, and its proportion in the overall central air-conditioner market decreased. The slow overall market increase of 2018 was mainly caused by the weak home furnishing retail market. Benefiting from the promotion of property fitting-out policies and other factors, growth in engineering project market was higher than expected. There was a balanced development and continued growth in mega, small and middle-sized projects and auxiliary facilities for property projects. From the perspective of the types of products, the growth rate of multi-connected products,

– 12 –

LETTER FROM THE BOARD

being the largest and most popular category in the central air-conditioner market, was approximately 10% in 2018. They accounted for 48.5% of the overall central air-conditioner market, and their market share is steadily increasing.

According to the Central Air-conditioning Market National Report 2018 issued on www.aircon.com.cn (the “ Report ”), the range of statistics involves the pre-tax shipping amount of central air-conditioning enterprises in the PRC in the year of 2018. The market of Mainland China was used as statistical area for the Report, covering the entire market of the PRC (excluding Macau Special Administrative Region and Hong Kong Special Administrative Region and Taiwan) which involves 7 major regions and 31 provinces or municipalities. Objects for the research are mainly mainstream products in the central air-conditioning market (including: centrifugal units, water-cooled screw units, multi-connected units and individual units etc.). The Report is the main third party report used by the central air-conditioning enterprises in the PRC to understand the development trend of the industry and trend in the market shares of each enterprise in the industry.

Analysis of competitions in the industry

Among the various categories of product in the central air-conditioner industry, multi-connected products have occupied nearly 50% of market share due to its remarkable features such as energy-saving comfortability, flexibility in its usage and convenient installation; and are far ahead of other product categories such as large-size water machines and air-cooling modules. In the market of multi-connected products, Hisense Hitachi’s market share has steadily increased year by year, constantly narrowing its distance with the leader in the market share. According to statistics from www.aircon.com.cn, the market share of Hisense Hitachi in multi-connected central air-conditioners in 2018 was only 0.2 percentage points lower than the first place.

Favorable and unfavorable factors affecting the development of the industry

Favorable factors: With the escalation in consumption, the demand for household central air-conditioning products is increasing with positive development prospects. With the direction of the policy of “increasing the strength of shortcomings remedy in the infrastructure sector and stabilizing effective investment”, it is expected that infrastructure investment will increase steadily thereby driving market growth for central air-conditioning projects. Individual market segments such as rail transportation, medical institutions, educational institutions and data centers continue to maintain their growth trend. Overall, the central air-conditioning market is still at the stage of upward development.

Unfavorable factors: The central air-conditioning home furnishing retail market is in connection with the real estate market. If the real estate market is regulated, it will affect the growth in scale of the central air-conditioning home furnishing retail market.

– 13 –

LETTER FROM THE BOARD

2. Hisense Hitachi’s core competitiveness and status in the industry

Hisense Hitachi is currently the largest production base for inverter multi-connected air conditioners of Johnson Controls-Hitachi Air Conditioning Holding (UK) Ltd. outside Japan, and it demonstrates the practical application of Hitachi Air-Conditioning’s latest achievements in The People’s Republic of China. The central air-conditioning products of Hisense Hitachi lead in the industry with their superior performance and quality.

The production base of Hisense Hitachi is equipped with world-class manufacturing facilities and laboratories. Hisense Hitachi has established a production system with inverter multi-connected air conditioners as the leading focus to meet various demands of commercial and household usage, and they are widely used in office buildings, hotels, apartments, villas and other locations. Benefiting from Hisense Hitachi’s advantages in various aspects such as brand, product and technology, quality, marketing and service systems, Hisense Hitachi’s operating revenue has been increasing steadily year by year since the commencement of its production. Its market share has steadily increased and it is the leading enterprise of multi-connected central air-conditioners in the People’s Republic of China.

Brand advantage: Hisense Hitachi products use the brands of HITACHI, HISENSE and YORK simultaneously, which in turn enables Hisense Hitachi to extensively adapt to and meet the demands of different categories of consumer group and provides customers with a variety of solutions.

Product and technical advantages: Hisense Hitachi has advantages in leading the industry in the areas of compressor and frequency conversion control technology, efficient heat exchange, intelligent defrosting, silent design, healthy air treatment, etc., and it has carried out technical cooperation with well-known colleges locally and internationally to continuously enhance the technical research and input in forefront areas.

Quality and manufacturing advantages: The production base of Hisense Hitachi is equipped with advanced processing equipment and production lines, with comprehensive quality control procedures for the entire machines, components, production processes, design and manufacture; with laboratories of international standard and the application of strict testing standards, it provides guarantee for the excellence of Hisense Hitachi in its product quality and high reputation.

Marketing and service advantages: Hisense Hitachi has professional marketing teams and a complete service system for before, during and after sale of products, from engineering design, installation guidance, operation debugging to equipment maintenance and user operation training. A complete package of professional services is therefore realized.

– 14 –

LETTER FROM THE BOARD

3. Analysis of financial position and profitability of Hisense Hitachi

Analysis of financial position

According to the audited financial statements of Hisense Hitachi, the financial position and operating results of Hisense Hitachi in the past three years and the three months ended 31 March 2019 were as follows:–

Unit: RMB’0000

	As at 31	As at 31	As at 31	As at 31
	March	December	December	December
Balance sheet	2019	2018	2017	2016
Total assets	1,256,501.98	1,191,737.95	963,531.58	686,411.63
Total liabilities	761,487.19	584,816.48	514,489.36	345,359.96
Total net assets	495,014.79	606,921.48	449,042.22	341,051.67
	2019 1st
Income statement	Quarter	2018	2017	2016
Operating revenue	270,152.36	1,098,666.68	940,177.24	651,846.73
Operating profits	46,250.34	194,732.85	190,480.84	136,657.84
Total profits	46,440.53	194,969.23	190,764.84	147,304.48
Net profits	37,993.32	160,321.77	156,717.76	122,335.38
	2019 1st
Cash flow statement	Quarter	2018	2017	2016
Net cash flows from
operating activities	36,683.62	181,456.66	228,274.96	222,791.36
Net cash flows from
investing activities	-161,186.18	-82,323.05	-102,926.64	-207,086.80
Net cash flows from
financing activities	-3,297.80	-2,442.51	-48,727.22	-33,953.26
Net increase in cash and
cash equivalents	-127,800.36	96,691.10	76,621.10	-18,248.70

Analysis of assets and liabilities structure

As at 31 December 2018, 31 December 2017 and 31 December 2016, the amount of monetary funds accounted for 47.33%, 24.16% and 27.80% of total assets respectively. As at 31 March 2019, the amount of monetary funds accounted for 50.47% of the total assets. The quality of the assets was satisfactory. The total liabilities mainly comprised current liabilities.

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LETTER FROM THE BOARD

Charges on Hisense Hitachi’s assets

As at 31 March 2019, 31 December 2018, 31 December 2017 and 31 December 2016, Hisense Hitachi did not have any property, plant and equipment (including leasehold land held for own use), investment properties and trade receivables which were pledged as security for Hisense Hitachi’s borrowings.

Liquidity and financial resources

As at 31 December 2018, 31 December 2017 and 31 December 2016, Hisense Hitachi had bank deposits and cash amounting to approximately RMB5,640,344,200, RMB2,328,176,000, RMB1,908,148,900 respectively and had no bank loan respectively. As at 31 March 2019, Hisense Hitachi had bank deposits and cash amounting to approximately RMB6,341,112,900 and had no bank loan.

As at 31 December 2018, 31 December 2017 and 31 December 2016, Hisense Hitachi’s cash and cash equivalents amounted to approximately RMB1,868,786,200 (of which more than RMB1,835,902,600 were denominated in RMB), RMB901,875,200 (of which more than RMB796,014,400 were denominated in RMB) and RMB135,664,200 (of which more than RMB129,075,000 were denominated in RMB) respectively. As at 31 March 2019, Hisense Hitachi’s cash and cash equivalents amounted to approximately RMB590,782,500 (of which more than RMB567,790,200 are were denominated in RMB).

As at 31 December 2018, 31 December 2017 and 31 December 2016, Hisense Hitachi’s current liabilities amounted to approximately RMB5,693,597,000, RMB5,041,316,600 and RMB3,373,347,000; non-current liabilities amounted to approximately RMB154,567,800, RMB103,577,100 and RMB80,252,600; and net assets amounted to approximately RMB6,069,214,800, RMB4,490,422,200 and RMB3,410,516,700 respectively. As at 31 March 2019, Hisense Hitachi’s current liabilities amounted to approximately RMB7,459,021,300, non-current liabilities amounted to approximately RMB155,850,600 and net assets amounted to approximately RMB4,950,147,900.

As at 31 December 2018, 31 December 2017 and 31 December 2016, total capital expenditures of Hisense Hitachi amounted to approximately RMB856,127,600, RMB901,631,900 and RMB57,008,200 respectively. Total capital expenditures for the three months ended 31 March 2019 amounted to approximately RMB36,256,700. Hisense Hitachi expects that the total capital expenditures for 2019 will be approximately RMB418,288,400. Hisense Hitachi has sufficient funds to meet the funding requirement for purposes such as capital expenditure plans and daily operations.

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LETTER FROM THE BOARD

Trust deposits

As at 31 March 2019, 31 December 2018, 31 December 2017 and 31 December 2016, Hisense Hitachi did not have any trust deposits with any financial institutions in the PRC. All of Hisense Hitachi’s deposits have been deposited in commercial banks and other financial institutions in the PRC and Hong Kong.

Solvency analysis

	As at 31	As at 31	As at 31	As at 31
	March	December	December	December
Items (Unit)	2019	2018	2017	2016
Gearing Ratio (%)	60.60	49.07	53.40	50.31
Current Ratio (Times)	1.34	1.59	1.05	1.20
Quick Ratio (Times)	0.92	1.46	0.85	0.94

The gearing ratios (calculated according to the formula: total liabilities/total assets) of Hisense Hitachi are considered relatively low compared to home electrical appliances enterprises. Hisense Hitachi’s current ratio and quick ratio is moderate, Hisense Hitachi’s short-term solvency is guaranteed.

Capital structure

Details of the Hisense Hitachi’s capital structure are set out in Appendix II – Accountants’ Report of Hisense Hitachi.

Future plans for material investments or capital assets

Hisense Hitachi has no future plan for material investments or capital assets.

Contingent liabilities

Hisense Hitachi has no contingent liabilities as at 31 March 2019, 31 December 2018, 31 December 2017 and 31 December 2016.

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LETTER FROM THE BOARD

Analysis of business performance

(i) Analysis of principal operating revenue

Units: RMB’0000

	2019 1st	Quarter	2018	2018		2017	2017		2016	2016
		Proportion		Proportion			Proportion			Proportion
		in principal		in	principal		in	principal		in	principal
	Amount of	operating	Amount of		operating	Amount of		operating	Amount of		operating
Products	revenue	revenue	revenue		revenue	revenue		revenue	revenue		revenue
Central Air-conditioner	246,929.14	100.00%	997,284.65		100.00%	863,056.45		100.00%	607,717.17		100.00%
Total	246,929.14	100.00%	997,284.65		100.00%	863,056.45		100.00%	607,717.17		100.00%

The only source of principal operating revenue of Hisense Hitachi is sales of central air-conditioners.

(ii) Analysis of composition of profits

Units: RMB’0000

	2019 1st
Item	Quarter	2018	2017	2016
Operating revenue	270,152.36	1,098,666.68	940,177.24	651,846.73
Operating costs	153,649.81	667,872.80	540,848.37	357,641.53
Total profits	46,440.53	194,969.23	190,764.84	147,304.48
Net profits	37,993.32	160,321.77	156,717.76	122,335.38
Net profits attributable the
holding company	36,612.86	153,874.33	149,928.13	117,129.88
Net profits after deducting
non-recurring gains or
losses	36,454.30	153,423.05	149,572.10	117,008.72

Profitability of Hisense Hitachi is stable and maintains continuous growth.

(iii) Analysis of Profitability

	2019 1st
Item (Unit)	Quarter	2018	2017	2016
Gross profit margin (%)	43.12	39.21	42.47	45.13
Basic earnings per share
(RMB)	1.14	4.80	4.68	3.65

With the steady growth in scale and profitability of Hisense Hitachi, Hisense Hitachi’s basic earnings per share have increased year by year.

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LETTER FROM THE BOARD

Human resources and employees’ remuneration polices and training schemes

As at 31 December 2018, 31 December 2017 and 31 December 2016, Hisense Hitachi had approximately 4,414 employees, 3,839 employees, 2,851 employees respectively. As at 31 March 2019, Hisense Hitachi had approximately 4,582 employees.

For the year ended 31 December 2018, 31 December 2017 and 31 December 2016, Hisense Hitachi’s staff payroll amounted to approximately RMB773,805,900, RMB571,904,600 and RMB409,282,500 respectively. For the three months ended 31 March 2019, Hisense Hitachi’s staff payroll amounted to approximately RMB298,057,800.

Employees and talented personnel are the basis for corporate development. Through the platform provided by Hisense College, Hisense Hitachi has established a three-tier training system, a well-rounded curriculum system and a training regulatory system. Hisense Hitachi has also actively promoted the establishment of teaching resources internally and externally in order to effectively support the development of its management and technical team and enhance its human resources. Every year, Hisense Hitachi will formulate education and training programmes for employees based on the annual operational strategies and human resources development needs.

The training programmes mainly include areas such as corporate management, quality craftsmanship, corporate culture, production and manufacturing as well as technological research and development and they are provided for employees at different levels, ranging from base level staff who are responsible for tasks such as front-line production and marketing to senior management.

Hisense Hitachi adopts a position-based remuneration policy for its staff. Staff remuneration is determined by reference to the relative importance of and responsibility assumed by the position and other performance factors.

REASONS AND BENEFITS OF THE MAJOR TRANSACTION AND ITS FINANCIAL IMPACT ON THE COMPANY

After the completion of Transfer of Target Equity Interests, the Company will hold 49.2% of Equity Interests of Hisense Hitachi; and the articles of association of Hisense Hitachi shall be amended such that the number of members of Hisense Hitachi’s board of directors will increase from currently seven to nine, among which board members to be appointed by the Company will increase from the existing three members to five.

Upon conclusion of all of the abovementioned actions, the Company will include Hisense Hitachi in the scope of the consolidated statements of the Company and the assets, income and scale of cash flow of the Company will be greatly enhanced, and the overall gross profit margin of the Company will also be improved. This transaction

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LETTER FROM THE BOARD

is conducive to enhancing the scale and quality of the Company, and enhancing the Company’s value and overall capability. The Board is of the view that the terms of this transaction are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

IMPLICATIONS UNDER THE LISTING RULES

As more than one of the applicable percentage ratios (as defined under the Listing Rules) for the Transfer of Target Equity Interests exceed(s) 25% but less than 100%, the acquisition constitutes a major transaction of the Company under Chapter 14 of the Listing Rules and is subject to the reporting, announcement and shareholders’ approval requirements thereunder.

GENERAL

As at the Latest Practicable Date, the Directors, having made all reasonable enquiries, confirm that to the best of their knowledge, information and belief, no Shareholder had a material interest in The Major Transaction who will be required to abstain from voting at the EGM.

Shareholders with a material interest in The Major Transaction and their close associates shall not vote on the resolution to be proposed at the EGM.

(2) CONTINUING CONNECTED TRANSACTIONS – BUSINESS CO-OPERATION REVISED ANNUAL CAPS AND BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT; AND (3) MAJOR AND CONTINUING CONNECTED TRANSACTIONS – FINANCIAL SERVICES REVISED ANNUAL CAPS AND FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT

BACKGROUND

Reference is made to the announcements of the Company dated 26 November 2018 and 7 December 2018, and the circular of the Company dated 7 January 2019 in respect of, amongst others, the Business Co-operation Framework Agreement and the Financial Services Agreement. The Business Co-operation Framework Agreement and the Financial Services Agreement and the transactions contemplated thereunder (subject to the related caps) were approved by the Independent Shareholders at the extraordinary general meetings of the Company held on 23 January 2019.

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LETTER FROM THE BOARD

Business Co-operation Framework Agreement and the Financial Services Agreement will increase following completion of The Major Transaction, the Company has entered into the Business Co-operation Framework Supplemental Agreement and the Financial Services Supplemental Agreement to revise the annual caps for the year ending 31 December 2019 for some of the transactions contemplated under the Business Co-operation Framework Agreement and the Financial Services Agreement.

The purpose of this circular is to:–

(a) provide you with further information on Revised Annual Caps, the Business Co-operation Framework Supplemental Agreement and the Financial Services Supplemental Agreement;
(b) set out the letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Shareholders in relation to the Revised Annual Caps, the Business Co-operation Framework Supplemental Agreement and the Financial Services Supplemental Agreement; and
(c) set out the recommendation from the Independent Board Committee in relation to the Revised Annual Caps, the Business Co-operation Framework Supplemental Agreement and the Financial Services Supplemental Agreement.

CONTINUING CONNECTED TRANSACTIONS – BUSINESS CO-OPERATION REVISED ANNUAL CAPS AND THE BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT

Date: 21 June 2019 Parties: The Company; Hisense Group; and Hisense Electric.

Hisense Hitachi is principally engaged in the manufacture of sale of central air-conditioners. For its operational needs, Hisense Hitachi requires commissioned processing for raw materials, parts and components for manufacturing use which tailored to the project-based contracts with clients. To satisfy such demand, Hisense Hitachi has been engaging Hisense Group, and/or its subsidiaries for commissioned processing services and such involved mutual sale and purchase of raw materials, parts and components in the process.

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LETTER FROM THE BOARD

Revision of annual caps:

(1) Purchase of electrical appliances[(note)]

Pursuant to the terms of the Business Co-operation Framework Supplemental Agreement, the Company and/or its subsidiaries will purchase from Hisense Group and/ or its subsidiaries on a non-exclusive basis electrical appliances as they may require from time to time.

Note: In the Business Co-operation Framework Agreement, this head of transaction was categorised as purchase of “home electrical appliances”. After the completion of The Major Transaction, the sale and purchase of central air-conditioners (which may be for household or commercial use and conducted by Hisense Hitachi) will become one of the major business of the Enlarged Group and, therefore, the Company adopted the terms “electrical appliances” in this circular instead.

Determination of the proposed Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

				Proposed
				Business
				Co-operation
				Revised
		Actual	Expected	Annual
		transaction	transaction	Caps for
		amount of	amount of	the
		Hisense	Hisense	Enlarged
	Original	Hitachi for	Hitachi for	Group the
	cap for the	the period	the period	financial
	financial	from 1	from 1	year
	year	August	August	ending 31
	ending 31	2018 to 31	2019 to 31	December
Entities providing electrical	December	December	December	2019
appliances	2019 (1)	2018	2019	(1)+(2)
Hisense Group and/or its
subsidiaries	230,000	70,000	880,000	1,110,000
Hisense Electric and/or its
subsidiaries	410,000	–	–	410,000
Hisense International and/or its
subsidiaries	277,650,000	–	–	277,650,000

The above proposed Business Co-operation Revised Annual Caps were determined with reference to: (i) the expected demand of Hisense Hitachi in relation to purchase of electrical appliances by Hisense Hitachi from Hisense Group and/or its subsidiaries for the financial year ending 31st December 2019 and; (ii) projections on purchase based on the progress of the current on-going

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LETTER FROM THE BOARD

projects between Hisense Hitachi and Hisense Group and the value of such purchase was projected from the total value of the contracts of such current on-going projects.

The abovementioned on-going project is a procurement project for special air conditioners in subways which purchase air conditioners for special purposes is necessary. The estimated transaction amount for the entire project is approximately RMB2,250,000. According to the progress of this project, it is estimated that approximately 40% of the project will be completed in 2019, therefore, the estimated transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 will be RMB880,000.

Pricing

Pricing for the purchase of electrical appliances is determined by commercial negotiation between the parties according to the principles of fairness and reasonableness mainly with reference to the market price of similar electrical appliances offered by at least three independent third parties selected randomly from time to time.

The operation department of the relevant business sector of the Enlarged Group will compare the terms of the proposed purchase (including pricing and other contractual terms taking into account factors such as the product quality and the stability in supply of the product) to those of the similar existing transactions with independent third parties or quotations offered by independent third parties (as the case may be) prior to the execution of the relevant orders or contracts. The operation department of the relevant business sector will report to the finance department which will check, compare and confirm the price of the product is not less favourable than the price offered by independent third parties (with the pricing information supplied by the operation department) and the head of the finance department will approve the terms of the relevant orders or contracts.

Reasons and benefits

By purchasing electrical appliances from Hisense Group and/or its subsidiaries, which is beneficial for achieving synergic effect, Hisense Hitachi meets its operational needs. As pricing in respect of purchasing electrical appliances from Hisense Group and/or its subsidiaries will be determined based on market prices of similar electrical appliances, the Enlarged Group will enjoy the advantage in terms of time and production costs.

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LETTER FROM THE BOARD

(2) Purchase of raw materials, parts and components

Pursuant to the terms of the Business Co-operation Framework Supplemental Agreement, the Company and/or its subsidiaries will purchase from Hisense Group, Hisense Electric and/or their respective subsidiaries on a non-exclusive basis such quantities of raw materials, parts and components as they may require from time to time.

Determination of the proposed Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

				Proposed
				Business
				Co-operation
				Revised
				Annual
		Actual	Expected	Caps for
		transaction	transaction	the
		amount of	amount of	Enlarged
		Hisense	Hisense	Group for
	Original	Hitachi for	Hitachi for	the
	cap for the	the period	the period	financial
	financial	from 1	from 1	year
	year	August	August	ending 31
	ending 31	2018 to 31	2019 to 31	December
Entities providing raw materials,	December	December	December	2019
parts and components	2019 (1)	2018	2019 (2)	(1)+(2)
Hisense Group and/or its
subsidiaries	237,660,000	29,050,000	67,150,000	304,810,000
Hisense Electric and/or its
subsidiaries	29,540,000	9,280,000	20,000,000	49,540,000
Hisense International and/or its
subsidiaries	700,000	–	–	700,000

The proposed Business Co-operation Revised Annual Caps were determined with reference to: (i) similar historical transactions between Hisense Hitachi and Hisense Group, Hisense Electric and/or their respective subsidiaries; (ii) the increase in proportion of the purchase of raw materials, parts and components by Hisense Hitachi from Hisense Group and/or its subsidiaries in the total amount of Hisense Hitachi’s purchase of raw materials, parts and components in 2019; and (iii) the increase in the variety of raw materials, parts and components purchased by Hisense Hitachi from Hisense Group and/or its subsidiaries in 2019.

The expected increase in purchase of raw materials, parts and components by Hisense Hitachi from Hisense Group and/or its subsidiaries for the period from 1 August to 31 December 2019 when compared to the same period in 2018 was

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LETTER FROM THE BOARD

determined with the following basis:– (a) the transaction amount of commissioned processing of raw materials, parts and components purchased by Hisense Hitachi from Hisense Group and/or its subsidiaries will increase to around 40% of the total transaction amount of purchase of raw materials, parts and components by Hisense Hitachi in 2019 compared to that of around 20% in 2018 and such increase will amount to approximately RMB29,020,000; (b) Hisense Hitachi will engage Hisense Group and/or its subsidiaries for commissioned processing of 5 new types of raw materials, parts and components and the transaction amount will be approximately RMB8,930,000.

As the factories of Hisense Hitachi in relation to the purchase of raw materials, parts and components are in the same industrial zone with those of Hisense Electric and as usual practice, the water and electricity bills are unified to be issued to Hisense Electric and Hisense Electric will pay such bills of Hisense Hitachi’s behalf and Hisense Hitachi will pay to Hisense Electric the actual fees incurred. The expected increase in the transaction amount with Hisense Electice was determined with following basis:– (a) the expected increase in electrical usage in the new laboratories of such relevant factories of Hisense Hitachi; (b) the expected increase in electricity usage for commencement of operation of new factory plant of Hisense Hitachi.

Pricing

Pricing for the purchase of raw materials, parts and components is determined by commercial negotiation between the parties according to the principles of fairness and reasonableness mainly with reference to the market price of similar raw materials, parts and components offered to the Enlarged Group by at least three independent third parties selected randomly from time to time.

The operation department of the relevant business sector of the Enlarged Group will compare the terms of the proposed purchase (including pricing and other contractual terms taking into account factors such as the product quality and the stability in supply of the product) to those of the similar existing transactions with independent third parties or quotations offered by independent third parties (as the case may be) prior to the execution of the relevant orders or contracts. The operation department of the relevant business sector will report to the finance department which will check, compare and confirm the price of the product is not less favourable than the price offered to the Enlarged Group by independent third parties (with the pricing information supplied by the operation department) and the head of the finance department will approve the terms of the relevant orders or contracts.

Reasons and benefits

With the gradual increase in intelligent electrical appliances, the usage of raw materials, parts and components of intelligent product also increases; Hisense Group and/or its subsidiaries have better ability in manufacturing those products

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LETTER FROM THE BOARD

with better quality which is beneficial to ensure the quality and performance of products. Hisense Hitachi is satisfied with the quality of raw materials, parts and components provided by Hisense Group and/or its subsidiaries from their previous course of dealings. By purchasing certain raw materials from Hisense Group and/ or its subsidiaries, quality of Hisense Hitachi’s products will be ensured and the competitiveness of Hisense Hitachi’s products and brand will be enhanced, which will in turn increase the sales revenue of its products.

Through purchasing raw materials, parts and components from Hisense Electric and/or its subsidiaries, a synergic effect can be achieved, which will in turn satisfy the ordinary production demand of Hisense Hitachi.

(3) Provision of services

Pursuant to the terms of the Business Co-operation Framework Supplemental Agreement, the Company and/or its subsidiaries will engage (i) Hisense Group and/or its subsidiaries on a non-exclusive basis for the provision of material processing, installation and maintenance, distribution, property, medical, leasing, design, inspection, agency services, property construction, management consultancy, technical support and information system maintenance services; and (ii) Hisense Electric and/or its subsidiaries on non-exclusive basis for the provision of property, technical support and advertisement services.

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LETTER FROM THE BOARD

Proposed Cap	Business	Co-operation	Revised Annual	Caps for the	Reasons and Basis for determining Enlarged Group	the proposed Business Co-operation for the financial	Revised Annual Caps for the year ending 31	financial year ending 31 December December 2019	2019 (1)+(2)	142,990,000 Not Applicable.		281,640,000 Not Applicable.		34,380,000 (a) similar transactions between	Hisense Hitachi and Hisense	Group and/or its subsidiaries
Additional Cap	Expected	transaction	amount of	Hisense Hitachi	for the period	from 1 August	2019 to 31	December 2019	(2)	–		–		4,190,000
Historical figures		Actual	transaction	amount of	Original cap for Hisense Hitachi	the financial for the period	year ending 31 from 1 August	December 2019 2018 to 31	(1) December 2018	142,990,000 –		281,640,000 –		30,190,000 2,350,000
									Types of services provided	material processing services		installation and maintenance	services	property services (including	property management and	property leasing)
							Entities	providing	services	Hisense Group	and/or its	subsidiaries

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LETTER FROM THE BOARD

						Reasons and Basis for determining	the proposed Business Co-operation	Revised Annual Caps for the	financial year ending 31 December	2019	(a) similar transactions between	Hisense Hitachi and Hisense	Not Applicable.	(a) similar transactions between	Hisense Hitachi and Hisense	Group and/or its subsidiaries	in the past;	(b) the projected increase in the
Proposed Cap	Proposed	Business	Co-operation	Revised Annual	Caps for the	Enlarged Group	for the financial	year ending 31	December 2019	(1)+(2)	68,710,000		17,620,000	105,140,000					650,480,000
Additional Cap		Expected	transaction	amount of	Hisense Hitachi	for the period	from 1 August	2019 to 31	December 2019	(2)	13,410,000		–	5,300,000					22,900,000
Historical figures			Actual	transaction	amount of	Original cap for Hisense Hitachi	the financial for the period	year ending 31 from 1 August	December 2019 2018 to 31	(1) December 2018	55,300,000 7,180,000		17,620,000 –	99,840,000 2,470,000					627,580,000 12,000,000
										Types of services provided	information system	maintenance services	equipment inspection services	distribution, medical, leasing,	design, agency services,	property construction,	management consultancy and	technical support services	Total
								Entities	providing	services

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LETTER FROM THE BOARD

						Reasons and Basis for determining	the proposed Business Co-operation	Revised Annual Caps for the	financial year ending 31 December	2019	(a) similar transactions between	Hisense Hitachi and Hisense	Group and/or its subsidiaries	in the past;	Not Applicable.
Proposed Cap	Proposed	Business	Co-operation	Revised Annual	Caps for the	Enlarged Group	for the financial	year ending 31	December 2019	(1)+(2)	16,690,000				4,920,000		21,610,000
Additional Cap		Expected	transaction	amount of	Hisense Hitachi	for the period	from 1 August	2019 to 31	December 2019	(2)	7,200,000				0		7,200,000
Historical figures			Actual	transaction	amount of	Original cap for Hisense Hitachi	the financial for the period	year ending 31 from 1 August	December 2019 2018 to 31	(1) December 2018	9,490,000 5,670,000				4,920,000 0		14,410,000 5,670,000
										Types of services provided	property services (including	property management and	property leasing)		technical support and	advertisement services	Total
								Entities	providing	services	Hisense	Electric	and/or its	subsidiaries

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LETTER FROM THE BOARD

The expected increase in the transaction amount for property services (including property management and property leasing) to be provided by Hisense Group and/or its subsidiaries was determined based on: (i) a year-on-year increase of RMB320,000 of rental and property services fees for staff quarters due to increased number of employees of Hisense Hitachi; (ii) a year-on-year increase of RMB980,000 of rental and property services fee due to additional office area as a result of additional staff hired by Hisense Hitachi; and (iii) a year-on-year increase of RMB540,000 of rental and property services fee due to additional office space located at Hisense Southern Building, Shenzhen.

The expected increase in the transaction amount for property services (including property management and property leasing) to be provided by Hisense Electric and/or its subsidiaries was determined based on the increase of approximately RMB1,530,000 in the property management fees and rental due to the growth of business scale and hiring of new employees.

The expected increase in the transaction amount for information system maintenance services to be provided by Hisense Group and/or its subsidiaries was determined based on:–

(a) The increase of approximately RMB3,640,000 (equivalent to around 83%) in the service fees for the information system services for 2019 when compared to those incurred in 2018. With the growth in the scale of Hisense Hitachi, the number of employees increased, resulting in an increase in the number of users of information systems. Furthermore, following Hisense Hitachi’s higher demand for confidentiality, the number of users of encryption software increased; the use of financial systems was also newly added for the purpose of improving work efficiency.

With the growth in scale of operation of Hisense Hitachi, in order to improve work efficiency, the extent of usage of information system will further increase. It is expected that five additional information systems will be used by Hisense Hitachi in year 2019. Further, the number of employees of Hisense Hitachi is expected to increase at a rate in line with that of its operating revenue in 2019, which will amount to approximately 20%. With such increase in usage of information systems and number of employees of Hisense Hitachi, it is estimated that the number of users of information systems in year 2019 will increase by approximately 2,000 and the service fees for information systems will increase by approximately RMB2,010,000 correspondingly.

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LETTER FROM THE BOARD

For information system maintenance service fees during the period from 1 August 2019 to 31 December 2019, the existing signed contracts will amount to approximately RMB6,400,000 (as compared to the actual transaction amount of approximately RMB4,390,000 for the period from 1 August to 31 December 2018). With reference to the encryption and financial system projects which are currently under negotiation and the project progresses in 2019, it is expected that the transaction amounts of information system service fees will be approximately RMB1,000,000 and RMB630,000 during the period from 1 August 2019 to 31 December 2019 respectively (as compared to the actual transaction amounts of approximately RMB0 and RMB0 for the period from 1 August to 31 December 2018 respectively).

As such, it is expected that the total transaction amount for information system maintenance during the period from 1 August 2019 to 31 December 2019 would amount to approximately RMB8,030,000.

(b) The increase of approximately RMB2,590,000 (equivalent to around 93%) in the service fees for software development and maintenance services for 2019 when compared to those incurred in 2018. The increase in service fees for software development and maintenance services in 2019 is due to development and upgrade of newly-added warehousing and logistics, marketing management, cost management and after-sales services software systems.

The expected increase in the transaction amount for distribution, medical, leasing, design, agency services, property construction, management consultancy and technical support services to be provided by Hisense Group and/or its subsidiaries was determined based on: (a) a year-on-year increase of approximately RMB1,440,000 in the technical development fees due to the development fees to be incurred for development of new product cloud service for the period from 1 August to 31 December 2019; (b) the expected fees to be incurred for the new R&D project in the sum of approximately RMB1,050,000.

The original annual cap of RMB29,000,000 allocated to the provision of agency services by Hisense International and/or its subsidiaries and original annual cap of RMB167,250,000 allocated to the provision of agency services by Hisense Commercial Trading and/or its subsidiaries will remain unchanged.

Pricing

The fees payable by the Enlarged Group for the provision of the aforesaid services are determined by commercial negotiations according to the principles of fairness and reasonableness between the parties with reference to the market price for the provision of similar services offered to the Enlarged Group by at least three independent third parties selected randomly from time to time.

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The operation department of the relevant business sector of the Enlarged Group will compare the terms of the proposed services (including pricing and other contractual terms taking into account factors such as the service quality and the stability in provision of the service) to those of the similar existing transactions with independent third parties or quotations offered by independent third parties (as the case may be) prior to the execution of the relevant orders or contracts. The operation department of the relevant business sector will report to the finance department which will check, compare and confirm the service fees are not less favourable than the fees offered to the Enlarged Group by independent third parties (with the pricing information supplied by the operation department) and the head of the finance department will approve the terms of the relevant orders or contracts.

Reasons and benefits

Hisense Hitachi is satisfied with the quality of the services provided by Hisense Group, Hisense Electric and/or their respective subsidiaries from their previous course of dealings and considers that Hisense Group, Hisense Electric and/or their respective subsidiaries possess the expertise and experience for the provision of relevant services which can enable Hisense Hitachi to carry out its ordinary operation smoothly.

(4) Supply of electrical appliances

Pursuant to the terms of the Business Co-operation Framework Supplemental Agreement, the Company and/or its subsidiaries will supply on a non-exclusive basis electrical appliances to Hisense Group, Hisense Electric and/or their respective subsidiaries as they may require from time to time.

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Determination of the proposed Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

				Proposed
		Actual	Expected	Business
		transaction	transaction	Co-operation
		amount of	amount of	Revised
		Hisense	Hisense	Annual Caps
		Hitachi for	Hitachi for	for the
	Original cap	the period	the period	Enlarged
	for the	from 1	from 1	Group for
	financial	August 2018	August 2019	the financial
	year ending	to 31	to 31	year ending
Entities receiving	31 December	December	December	31 December
electrical appliances	2019 (1)	2018	2019 (2)	2019 (1)+(2)
Hisense Group and/or its
subsidiaries	364,280,000	6,730,000	14,040,000	378,320,000
Hisense Electric and/or its
subsidiaries	1,160,000	–	2,000,000	3,160,000
Hisense International
and/or its subsidiaries	14,049,620,000	–	–	14,049,620,000
Hisense Commercial
Trading and/or its
subsidiaries	670,640,000	–	–	670,640,000

The proposed Business Co-operation Revised Annual Caps were determined with reference to: (i) similar historical transactions between Hisense Hitachi and Hisense Group and/or its subsidiaries; (ii) the current market situation and market demand in respect of the relevant electrical appliances; (iii) Hisense Hitachi’s projected level of production and sale of electrical appliances for the financial year ending 31 December 2019; and (iv) projections of supply based on the progress of the current on-going projects of Hisense Hitachi with Hisense Group and Hisense Electric and the value of such supply was projected from the total value of the contracts of such current on-going projects.

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The expected increase in the transaction amount for the supply of electrical appliances to Hisense Group and/or its subsidiaries was determined on the following basis:– (a) Hisense Hitachi and Hisense Group and/or its subsidiaries has entered into contracts for sale of central air-conditioners with the aggregate transaction amount of approximately RMB9,000,000 and it is expected that Hisense Hitachi and another subsidiary of Hisense Group will enter into a new contract for such sale in the aggregate transaction amount of approximately RMB2,500,000; (b) RMB2,540,000 buffer for entering into new transactions.

The proposed Business Co-operation Revised Annual Cap for the Enlarged Group in supplying electrical appliances to Hisense Group and/or its subsidiaries was determined with reference to the expected transaction amounts of approximately RMB1,160,000 for the supply of household electrical appliances (such as refrigerators, washing machines and household air-conditioners etc.) and approximately RMB2,000,000 for the supply of central air-conditioners. The expected increase in the transaction amount for the supply of electrical appliances to Hisense Electric and/or its subsidiaries was determined on the following basis:– (a) Hisense Hitachi and Hisense Electric and/or its subsidiaries has entered into contracts for sale of central air-conditioners with the aggregate transaction amount of approximately RMB1,520,000; (b) RMB480,000 buffer for entering into new transactions.

Pricing

Pricing for the supply of electrical appliances is determined by commercial negotiation between the parties according to the principles of fairness and reasonableness with reference to the market price of similar electrical appliances offered by at least three independent third parties selected randomly from time to time.

The operation department of the relevant business sector of the Enlarged Group will compare the terms of the proposed supply of electrical appliances (including pricing and other contractual terms taking into account factors including the customers’ credit rating and the qualification of the customers such as their asset scale) to those of the similar existing transactions with independent third parties or the terms offered to independent third parties (as the case may be) prior to the execution of the relevant orders or contracts. The operation department of the relevant business sector will report to the finance department which will check, compare and confirm the price of the product is not less favourable than the price offered by independent third parties (with the pricing information supplied by the operation department) and the head of the finance department will approve the terms of the relevant orders or contracts.

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Reasons and benefits

The supply of electrical appliances by Hisense Hitachi to Hisense Group, Hisense Electric and/or their respective subsidiaries can help to create synergetic effect, increase sales scale of Hisense Hitachi and boost market share and income of Hisense Hitachi.

(5) Supply of raw materials, parts and components

Pursuant to the terms of the Business Co-operation Framework Supplemental Agreement, the Company and/or its subsidiaries will supply to Hisense Group, and/or its subsidiaries on a non-exclusive basis such quantities of raw materials, parts and components to Hisense Group and/or its subsidiaries as they may require from time to time.

Determination of the proposed Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

				Proposed
				Business
				Co-operation
				Revised
				Annual
		Actual	Expected	Caps for
		transaction	transaction	the
		amount of	amount of	Enlarged
		Hisense	Hisense	Group for
	Original	Hitachi for	Hitachi for	the
	cap for the	the period	the period	financial
	financial	from 1	from 1	year
	year	August	August	ending 31
Entities to which the Enlarged	ending 31	2018 to 31	2019 to 31	December
Group will supply raw materials,	December	December	December	2019
parts and components	2019 (1)	2018	2019 (2)	(1)+(2)
Hisense Group and/or its
subsidiaries	25,150,000	27,420,000	62,330,000	87,480,000
Hisense Electric and/or its
subsidiaries	49,370,000	–	-	49,370,000
Hisense International and/or its
subsidiaries	86,900,000	–	–	86,900,000

The proposed Business Co-operation Revised Annual Caps were determined with reference to (i) similar historical transactions between Hisense Hitachi and Hisense Group and/or its subsidiaries; (ii) the increase in proportion of sale of raw materials, parts and components by Hisense Hitachi to Hisense Group and/or its subsidiaries in the total amount of Hisense Hitachi’s sale of raw materials,

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parts and components in 2019; and (iii) the increase in the variety of raw materials, parts and components sold by Hisense Hitachi to Hisense Group in 2019.

The expected increase in supply of raw materials, parts and components by Hisense Hitachi to Hisense Group and/or its subsidiaries for the period from 1 August to 31 December 2019 when compare to the same period in 2018 was determined with the following basis:–

(a) the transaction amount of commissioned processing of raw materials, parts and components supplied by Hisense Hitachi to Hisense Group and/or its subsidiaries will increase to around 40% of the total transaction amount of raw materials, parts and components supplied by Hisense Hitachi in 2019 compared to that of around 20% in 2018 and such increase of supply relating to such arrangement will amount to approximately RMB27,420,000. One of Hisense Group’s subsidiaries is a professional company specializing in component adhesion and base plate processing. The subsidiary has dozens of component adhesion product lines with relatively high automation, ensuring high quality and high efficiency. Meanwhile, since the subsidiary and Hisense Hitachi are in the same industrial park, the transactions between the two parties can effectively save costs and responses to material guarantees can be conducted in a prompt manner. In view of this, the percentage of procurement of base plates by Hisense Hitachi from Hisense Group’s subsidiary will increase from 20% to 40%. Meanwhile, following the increase in Hisense Hitachi’s scale, the number of models procured by Hisense Hitachi from Hisense Group’s subsidiary will increase and the procurement amount will have a relatively significant year-on-year increase.
(b) Hisense Hitachi will engage Hisense Group and/or its subsidiaries for commissioned processing of 5 new types of raw materials, parts and components and the transaction amount for supply relating to such engagement will be approximately RMB7,240,000.

Pricing

Pricing for the supply of raw materials, parts and components is determined by commercial negotiation between the parties according to the principles of fairness and reasonableness mainly with reference to the market price of similar raw materials, parts and components supplied by the Enlarged Group to at least three independent third parties selected randomly from time to time.

The operation department of the relevant business sector of the Enlarged Group will compare the terms of the proposed supply of raw materials, parts and components (including pricing and other contractual terms taking into account factors including the customers’ credit rating and the qualification of the customers such as their asset scale) to those of the similar existing transactions

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with independent third parties or the terms offered to independent third parties (as the case may be) prior to the execution of the relevant orders or contracts. The operation department of the relevant business sector will report to the finance department which will check, compare and confirm the price of the product is not less favourable than the price of similar raw materials, parts and components supplied by the Group to independent third parties (with the pricing information supplied by the operation department) and the head of the finance department will approve the terms of the relevant orders or contracts.

Reasons and benefits

Through supplying raw materials, parts and components to Hisense Group and/or its subsidiaries, a synergic effect can be achieved, which will in turn satisfy the ordinary production demand of Hisense Hitachi.

(6) Provision of services by the Enlarged Group

Pursuant to the terms of the Business Co-operation Framework Supplemental Agreement, (i) the Company and/or its subsidiaries will provide design, processing services, property services and installation services to Hisense Group and/or its subsidiaries and (ii) the Company and/or its subsidiaries will provide processing services, property services and installation services to Hisense Electric and/or its subsidiaries on a non-exclusive basis from time to time.

As part of the ordinary operation of Hisense Hitachi, it is expected that installation services of central air-conditioners will be provided by Hisense Hitachi to Hisense Group, Hisense Electric and/or their respective subsidiaries from time to time.

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Determination of the proposed Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

				Proposed
				Business
				Co-operation
				Revised
				Annual
		Actual	Expected	Caps for
		transaction	transaction	the
		amount of	amount of	Enlarged
		Hisense	Hisense	Group for
	Original	Hitachi for	Hitachi for	the
	cap for the	the period	the period	financial
	financial	from 1	from 1	year
	year	August	August	ending 31
	ending 31	2018 to 31	2019 to 31	December
	December	December	December	2019
Entities receiving services	2019 (1)	2018	2019 (2)	(1)+(2)
Hisense Group and/or its
subsidiaries	17,690,000	1,810,000	11,520,000	29,210,000
Hisense Electric and/or its
subsidiaries	2,000,000	150,000	2,000,000	4,000,000
Hisense International and/or its
subsidiaries	14,700,000	–	–	14,700,000

The proposed Business Co-operation Revised Annual Caps were determined with reference to: (i) similar historical transactions between Hisense Hitachi, Hisense Group, Hisense Electric and/or their respective subsidiaries; and (ii) projected increase in sale of central air-conditioners by Hisense Hitachi, which leads to higher demand for provision of installation services of the Hisense Hitachi; and (iii) projection of services fees payable to Hisense Hitachi based on the progress of the current on-going projects of Hisense Hitachi with Hisense Group and Hisense Electric.

The proposed Business Co-operation Revised Annual Cap for the provision of services by the Enlarged Group to Hisense Group and/or its subsidiaries was determined with reference to the expected transaction amounts of approximately RMB17,690,000 for the provision of design, processing services and property services and approximately RMB11,520,000 for the supply of central air-conditioners.

The proposed Business Co-operation Revised Annual Cap for the provision of services by the Enlarged Group in supplying electrical appliances to Hisense Group and/or its subsidiaries was determined with reference to the expected

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transaction amounts of approximately RMB2,000,000 for the provision of processing services and property services and approximately RMB2,000,000 for the supply of central air-conditioners.

As the sale of central air-conditioners is normally accompanied by the provision of installation services, the increase in sale of central air-conditioners by Hisense Hitachi will result in a corresponding increase in the installation fees for central air-conditioners incurred.

Hisense Hitachi, Hisense Group, Hisense Electric and/or their respective subsidiaries are negotiating contracts for installation services. Based on the previous practices, it is expected that the installation fees will be determined based on the product prices in respect of volume of installment work involved multiplied by certain ratio negotiated based on the relevant products’ value. In view of the transaction amount of the contacts entered or expected to be entered into by Hisense Hitachi with Hisense Group, Hisense Electric and/or their respective subsidiaries as disclosed on page 29 of this circular, it is estimated that during the period from 1 August to 31 December 2019, installation fees payable to Hisense Hitachi by Hisense Group and/or its subsidiaries will correspondingly increase to approximately RMB11,520,000 and installation fees payable to Hisense Hitachi by Hisense Electric and/or its subsidiaries will increase to approximately RMB2,000,000.

While most of the central air-conditioners sold in the period from 1 August 2018 to 31 December 2018 did not require installation services provided by Hisense Hitachi, it is expected that all of the central air-conditioners sold (and to be sold) in the period from 1 August 2019 to 31 December 2019 would require installation services provided by Hisense Hitachi. Thus, the increment in the expected transaction amount of Hisense Hitachi in respect of installation fees is greater than the increment in the expected transaction amount in respect of supply of central air-conditioners by Hisense Hitachi for the period from 1 August 2019 to 31 December 2019.

Pricing

The fees payable for the aforesaid services are determined by commercial negotiations according to the principles of fairness and reasonableness between the parties with reference to the market price for the provision of similar services offered by the Enlarged Group to at least three independent third parties selected randomly from time to time.

The operation department of the relevant business sector of the Enlarged Group will compare the terms of the proposed services (including pricing and other contractual terms taking into account factors including the customers’ credit rating and the qualification of the customers such as their asset scale) to those of the similar existing transactions with independent third parties or the terms offered to independent third parties (as the case may be) prior to the execution of the relevant orders or contracts. The operation department of the relevant business

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sector will report to the finance department which will check, compare and confirm the service fees are not less favourable than the fees of similar services offered by the Enlarged Group to independent third parties (with the pricing information supplied by the operation department) and the head of the finance department will approve the terms of the relevant orders or contracts.

Reasons and benefits

The provision of services to Hisense Group, Hisense Electric and/or their respective subsidiaries can enhance the utilisation rate of Hisense Hitachi’s resources and increase Hisense Hitachi’s revenue.

As at the Latest Practicable Date, the original annual caps for the Relevant Business Co-operation Transactions have not been exceeded.

The Business Co-operation Framework Supplemental Agreement is conditional upon the approval of the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps) by the Independent Shareholders.

In view of the above, the Directors (including the independent non-executive Directors) are of the view that the transactions contemplated under the Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement) will be conducted in the ordinary and usual course of business of the Company, on normal commercial terms and on terms no less favourable to the Company than terms available to or from (as appropriate) independent third parties. As such, the Directors (including the independent non-executive Directors) consider that the terms of the Business Co-operation Framework Agreement (as amended by the Business Co-operation Framework Supplemental Agreement) and the Business Co-operation Revised Annual Caps thereunder are fair and reasonable and in the interest of the Company and the Shareholders as a whole.

MAJOR AND CONTINUING CONNECTED TRANSACTIONS – FINANCIAL SERVICES REVISED ANNUAL CAPS AND THE FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT

Date: 21 June 2019 Parties: The Company; Hisense Finance

Pursuant to the Financial Services Supplemental Agreement, the Company has agreed that the Enlarged Group shall engage Hisense Finance to provide deposit services, loan and electronic Bank acceptance bill services as may be required by the Enlarged Group from time to time upon the terms and conditions of the Financial Services Supplemental Agreement.

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Determination of the proposed Annual Caps

Unit: RMB (Unaudited, inclusive of interests)

			Expected
		Maximum	maximum
		daily closing	daily closing	Proposed
		balance of	balance of	maximum
		Hisense	Hisense	daily closing
	Maximum	Hitachi for	Hitachi for	balance for
	daily closing	the period	the period	the Enlarged
	balance for	from	from	Group for
	the financial	1 August	1 August	the financial
	year ending	2018 to	2019 to	year ending
	31 December	31 December	31 December	31 December
Services provided by Hisense Finance	2019 (1)	2018	2019 (2)	2019 (1)+(2)
Deposit Services	8,000,000,000	5,300,000,000	8,000,000,000	16,000,000,000
Loan and electronic bank acceptance bill
services	9,000,000,000	1,700,000,000	2,500,000,000	11,500,000,000

(1) Deposit services

The revised annual cap for deposit services for the year ending 31 December 2019 was determined with reference to: (i) the historical cashflow figures of Hisense Hitachi; (ii) balance of monetary funds (inclusive of time deposits) of Hisense Hitachi as of 31 December 2018; and (iii) the expected growth plan in scale of Hisense Hitachi in 2019.

As of 31 December 2018, balance of monetary funds (inclusive of time deposits) of Hisense Hitachi was RMB6,440,000,000, it is expected that the scale of revenue of Hisense Hitachi will increase by approximately 20% in 2019 and the highest daily cash balance held by Hisense Hitachi will correspondingly increase by approximately 20% to approximately RMB7,800,000,000 in 2019.

In 2018, the inventory turnover of Hisense Hitachi was shortened by 3 days year-on-year. In 2019, Hisense Hitachi will further enhance its management on inventory to expedite the capital turnover and reduce unused inventory, and it is estimated that the stock of monetary funds will further increase. It is expected that the inventory turnover will be further shortened by 3 days in 2019 (which corresponds with the improvement rate of inventory turnover in 2018). As such, the stock of monetary funds will further increase by approximately RMB200,000,000.

Therefore, in order to satisfy the business needs, it is expected that the daily closing balance of deposits placed by Hisense Hitachi with Hisense Finance will not exceed RMB8,000,000,000 in 2019.

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The Company does not intend to deposit all its cash with Hisense Finance. However, a buffer in the maximum daily closing balance of deposit of the Enlarged Group with Hisense Finance is required in view of the deposit services required during the transitional period between expiry of wealth management products subscribed by the Enlarged Group and subscription of new wealth management products by the Enlarged Group; and the expectation that the amount used for wealth management products will be approximately RMB9 billion in 2019.

(2) Loan and electronic bank acceptance bill services

The revised annual cap for the loan and electronic bank acceptance bill services for the year ending 31 December 2019 was determined with reference to: (i) the expected growth plan in scale of Hisense Hitachi in 2019; (ii) the expected percentage of payment by Hisense Hitachi by means of electronic bank acceptance bills; (iii) the terms for the provision of the loan and electronic bank acceptance bill services by Hisense Finance to Hisense Hitachi shall be no less favourable than those of other normal commercial banks and financial institutions and Hisense Finance has better knowledge about the background and financial status of Hisense Hitachi which will facilitate the loan application and issuing process of electronic bank acceptance bill services by Hisense Hitachi.

In 2019, Hisense Hitachi will further adjust payment terms, increase payment via electronic bank acceptance bills, reduce payments via cash and endorsement of bills receivable. On one hand, the Enlarged Group can consolidate capital to obtain operational income and increase cashflows. On the other hand, the Enlarged Group can reduce costs derived from endorsement of bills receivable. As such, it is expected that the Enlarged Group will continue to use electronic bank acceptance bills services in the future. In 2018, the maximum daily closing balance of electronic bank acceptance bills issued by Hisense Hitachi at Hisense Finance amounted to RMB1,700,000,000. In 2019, it is expected that the percentage of payment by Hisense Hitachi by means of electronic acceptance bills will increase from currently 47% to 57%; coupled with the estimated increase in the amount of purchase payment of 20% (which corresponds with the percentage increase of expected income in 2019), the daily balance of electronic bank acceptance bills are expected to be not exceeding RMB11,500,000,000 (inclusive of interests and service fees) to meet business needs of the Enlarged Group.

As at the Latest Practicable Date, the original annual caps and daily balances for the Relevant Financial Services Transactions have not been exceeded.

Pricing

(1) Deposit services

The interest rate payable for the Enlarged Group’s deposits with Hisense Finance shall not be lower than the rate payable by normal commercial banks in the PRC for comparable deposits. The designated finance staff of the Enlarged Group will review and compare the interest rates offered by Hisense Finance with the major commercial banks based on the nature and tenure of such deposits (e.g. the time deposits will be

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reviewed quarterly and the demand deposits will be reviewed monthly). For the purpose of ensuring the sufficiency of independent bank transactions that are subject to review, the finance staff will review the interest rates on deposits offered by the five major commercial banks in the PRC, namely, China Construction Bank, Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Agricultural Bank of China. The Company would randomly select three banks out of the aforementioned five major banks to obtain their quotations of interest rates on deposits via conducting online and telephone enquiries.

(2) Loan and electronic bank acceptance bill services

The interest rate charged for the loans provided to the Enlarged Group by Hisense Finance shall not be higher than the rate charged by normal commercial banks in the PRC for comparable loans. The designated finance staff of the Enlarged Group will review and compare the interest rates for loan offered by Hisense Finance with the major commercial banks regularly. For the purpose of ensuring the sufficiency of independent bank transactions that are subject to review, the finance staff will review the interest rates for loan offered by the five major commercial banks in the PRC, namely, China Construction Bank, Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Agricultural Bank of China. The Company would randomly select three banks out of the aforementioned five major banks to obtain their quotations of interest rate charged for loans via conducting online and telephone enquiries.

The service fees charged for the provision of electronic bank acceptance bill services by Hisense Finance for the Enlarged Group shall not be higher than the standard service fees charged by normal commercial banks in the PRC for comparable services. The treasure department of the Enlarged Group will conduct a monthly review on the service fees charged by external commercial banks, namely the five major commercial banks in the PRC, namely, China Construction Bank, Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Agricultural Bank of China. The Company would randomly select three banks out of the aforementioned five major banks to obtain their quotations of service fees for issuing electronic bank acceptance bills via conducting online and telephone enquiries. The monthly review is conducted to ensure that the service fees charged by Hisense Finance are not higher than those charged by commercial banks.

Hisense Finance may require the Enlarged Group to provide guarantee or security or pledge in respect of the loan services and the electronic bank acceptance bill services rendered, depending on the then circumstances and business needs.

The Financial Services Supplemental Agreement is conditional upon the approval of the same (which stipulates the Financial Services Revised Annual Caps for the Relevant Financial Services Transactions as set out above) by the Independent Shareholders.

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PLEDGING AND OTHER SECURITY

Certain subsidiaries of the Enlarged Group have provided charges in favour of Hisense Finance in respect of the provision of electronic bank acceptance bills provided by Hisense Finance to such subsidiaries of the Enlarged Group. Pursuant to these charges, part of the bank acceptance bills held by the Enlarged Group will be charged to Hisense Finance to form a portfolio of bank acceptance bills. The Enlarged Group has opened a special account with Hisense Finance for depositing due and charged bank acceptance bills. The pledged amount is the value of the valid bank acceptance bills which have been deposited to form the pledge portfolio multiplied by the pledge rate determined by Hisense Finance pursuant to the relevant regulations set out by the relevant banking supervision department (which is currently 100%). The maximum balance of the bank acceptance bills which Hisense Finance may provide for the Enlarged Group will then be not lower than such pledged amount from time to time. It is contemplated that if the Enlarged Group is required to provide security or pledge to Hisense Finance in respect of the provision of electronic bank acceptance bill services, such security or pledge will be on similar terms with the pledge mentioned above.

As at the Latest Practicable Date, the Enlarged Group did not obtain any loan from Hisense Finance and therefore no guarantee or security or pledge in respect of loan services was provided by the Enlarged Group to Hisense Finance. In the future, if the Enlarged Group is required to obtain loan from Hisense Finance exceeding the credit limit, Hisense Finance may require the Enlarged Group to provide guarantee or security or pledge in relation to the provision of loan services. In such circumstance, the Enlarged Group will use bank acceptance bills as security and such security or pledge will be on similar terms with the pledge in respect of the electronic bank acceptance bill services mentioned above.

If the Enlarged Group is required to provide security or pledge to Hisense Finance in respect of the provision of electronic bank acceptance bill services or loan services which will involve pledging or charging of any assets other than electronic bank acceptance bills or if the maximum balance of the electronic bank acceptance bills services or loans which Hisense Finance may provide for the Enlarged Group up to is less than 100% of the pledge value for the bank acceptance bills which are deposited by the Enlarged Group as security for such services or loans, the Company will re-comply with the applicable requirements under Chapter 14A of the Listing Rules.

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REASONS FOR AND BENEFITS OF THE FINANCIAL SERVICES AGREEMENT (AS AMENDED AND SUPPLEMENTED BY THE FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT)

The main reasons for the election by the Company to use Hisense Finance for the provision of the relevant financial services are as follows:–

(i) the interest rates on deposits and loans and the service fee for electronic bank acceptance bills offered by Hisense Finance to the Enlarged Group will be equal to or more favourable than those offered by commercial banks in the PRC;
(ii) the Enlarged Group is expected to benefit from Hisense Finance’s better understanding of the operations of the Enlarged Group which should allow more expedient and efficient service provision than those offered by PRC commercial banks; and
(iii) Hisense Finance is regulated by the CBRC and engages into the provision of financial services in compliance with the regulations and operation requirements issued by the relevant regulatory authorities. Its primary customers are companies within the Hisense Group. In general, as the risks exposed to Hisense Finance are lesser than those exposed to the financial institutions with a broad and unrestricted customer base, Hisense Finance is able to safeguard customers’ funds more effectively.

Despite the Company considers that the risk associated with placing deposits with Hisense Finance is minimal, the Enlarged Group is still facing a risk that the Enlarged Group may not be able to withdraw all of its deposits from Hisense Finance due to operational problems of Hisense Finance. However, the Company is of the view that such risk can be managed and monitored. On one hand, Hisense Finance will strictly adhere to the risk management guidelines to financial institutions issued by the CBRC and the asset-liability ratio, liquidity ratio and other regulatory indicators of Hisense Finance are in compliance with the relevant requirements of the “Measures for the Administration of Finance Companies of Enterprise Group” issued by the CBRC. On the other hand, the Company has devised a risk management plan to prevent, timely control and resolve the risk involved in the Enlarged Group’s deposit arrangement with Hisense Finance and ensure safety of its capital. To enhance risk assessment and management, during the period when cash is deposited with Hisense Finance, the Company will review the latest available financial reports of Hisense Finance, obtains and reviews the indicator data submitted by Hisense Finance to the CBRC on a quarterly basis, assess the operational and financial risks of Hisense Finance, regularly issue risk assessment reports to the Directors for their consideration and adoption of necessary measures to prevent the risks identified and ensure the safety and liquidity of the Company’s capital and to publish announcement timely. As the Company has been reviewing financial reports of Hisense Finance, arranging simulation stress test every year and formulates liquidity stress test report, assessing the operational and financial risks of Hisense Finance and regularly issuing risk assessment reports to the Directors during the period when cash is deposited with Hisense Finance pursuant to the

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Financial Services Agreement and taking into consideration the information from the aforesaid review and comparing with the risk portfolio of other independent financial service providers, the Board considers that the risk profile of Hisense Finance, as a financial services provider to the Enlarged Group, is not greater than that of the independent commercial banks in the PRC.

Further, while it is the intention of the Company to continue to use a significant part of its cash in the subscription of entrusted wealth management products, deposit services will still be needed for that part of the Company’s cash in the interim period between the expiry of an entrusted wealth management product and the subscription of a new entrusted wealth management product.

Given that (i) the interest rates on deposits offered by Hisense Finance to the Enlarged Group will be equal to or more favourable than those offered by commercial banks in the PRC; and (ii) Hisense Finance is expected to provide more suitable and efficient service to the Enlarged Group based on their better understanding of the operations of the Enlarged Group, the Company prefers to conduct the deposit service under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) with size exceeding the original annual caps with Hisense Finance in order to maximize the benefits of the Shareholders, instead of conducting the deposit service under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) with commercial banks in the PRC to diversify risk. The transactions contemplated under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) are conducive to the reduction of financing expenses and the maintaining of a relatively stable scope of external financing by the Company. It would in turn strengthen the Company’s ability to avoid the risk arising from the change of national monetary policies and ensure that the Company will maintain a stable level of assets for daily operation. It would also further improve capital efficiency of the Company.

It was also set out in the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) that the transactions contemplated thereunder will be conducted in the ordinary and usual course of business of the Company, on normal commercial terms and on terms not less favourable to the Company than terms available to or from (as appropriate) independent third parties.

The Board has considered the risks which may be involved in fully utilising the Financial Services Revised Annual Caps and assessed the possibility of default for Hisense Finance by:

(a) reviewing the audited reports of Hisense Finance of the previous two financial years to ascertain the amount of its total assets and has found that its total assets has year-on-year increase and such reports are not qualified nor disclaimed by the auditors;

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(b) preparing 「關於在海信集團財務有限公司開展存款金融業務的風險評估報告」 (the “Risk Assessment Reports”) which has been published by the Company on the website of Shenzhen Stock Exchange dated 29 March 2016, 29 March 2017, 29 March 2018, 29 August 2018 and 29 March 2019 respectively and in which it was noted that Hisense Finance had complied with certain key regulatory requirements pursuant to the Measures for the Administration of Finance Companies of Enterprise Group as at 31 December 2015, 31 December 2016, 31 December 2017, 30 September 2018 and 31 December 2018 and the Board has noted that Hisense Finance has been maintaining a relatively higher standard for the weighted average capital adequacy ratio and current ratio; and
(c) reviewing the internal regulatory report submitted by Hisense Finance to the Company and the confirmation from Hisense Finance that there was no non-compliance events or deficiencies which resulted in suspension of business or administrative punishment.

Having considered the above findings and the fact that Hisense Finance is only allowed to provide financial services to the group companies of Hisense Group which Hisense Finance shall have better understanding on their financial positions and such focus of client base enables Hisense Finance subject to lower default risk as compared to those commercial banks which with voluminous clients, the Directors are of the view that even with the full utilisation of the Financial Services Revised Annual Caps, the Company will not be subject to undue default risk by Hisense Finance in light of its relatively sound financial positions and historical compliance with relevant regulatory requirements.

Having reviewed the historical sample deposit rates offered by Hisense Finance and other major commercial banks (for example, China Construction Bank, Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Agricultural Bank of China), the Board has noted that the interest rates offered by Hisense Finance are not less favourable than those offered by major commercial banks for the deposit with the same type and tenure. Moreover, Hisense Finance may offer to the Enlarged Group tailor-made beneficial deposit mix that can specially cater for the Enlarged Group’s funding needs which may not be readily available from other commercial banks.

As quite a substantial amount of the Enlarged Group’s cash and borrowings will be handled by Hisense Finance under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement), the Company has adopted risk control measures to mitigate the risks involved by:

(a) periodically checking the deposit balance placed with Hisense Finance and reviewing the same by the designated finance staff of the Enlarged Group;
(b) requesting Hisense Finance to provide monthly deposit transaction record statements to the Enlarged Group so that the Enlarged Group can monitor the safety of deposits;

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LETTER FROM THE BOARD

(c) requesting the designated finance staff of the Enlarged Group to ask for quotations and terms from other commercial banks for the deposits and electronic bank acceptance bill services that are comparable to the same provided by Hisense Finance in order to ensure that the terms offered by Hisense Finance are not less favourable than other commercial banks; and
(d) regularly reviewing the financial statements of Hisense Finance to monitor its financial positions and if there is any extraordinary issues noted (such as the financial positions of Hisense Finance is severely deteriorated), the Enlarged Group can easily switch to other commercial banks given the non-exclusivity of the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement).

The Directors, having taken into consideration of the above matters, are of the view that the Enlarged Group can be benefited from Hisense Finance’s better understanding of the operations of the Enlarged Group which can provide more suitable and efficient service to the Enlarged Group comparing with those offered by other commercial banks in the PRC and that risk control measures implemented by the Enlarged Group are sufficient to mitigate the risks involved should the Enlarged Group fully utilise the Financial Services Revised Annual Caps.

The Financial Services Supplemental Agreement is conditional upon the approval of the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) by the Independent Shareholders.

In view of the above, the Directors (including the independent non-executive Directors) are of the view that the transactions contemplated under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) will be conducted in the ordinary and usual course of business of the Company, on normal commercial terms and on terms no less favourable to the Company than terms available to or from (as appropriate) independent third parties. As such, the Directors (including the independent non-executive Directors) consider that the terms of the Financial Services Agreement (as amended by the Financial Services Supplemental Agreement) and the Financial Services Revised Annual Caps thereunder are fair and reasonable and in the interest of the Company and the Shareholders as a whole.

FINANCIAL EFFECTS ON THE COMPANY FOR THE USE OF DEPOSIT SERVICES UNDER THE FINANCIAL SERVICES AGREEMENT (AS AMENDED AND SUPPLEMENTED BY THE FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT)

The use of deposit services allows the Enlarged Group to receive interests for its deposits kept in financial institution at a rate that is no less favourable than the interest rates for deposits offered by other commercial banks in the PRC for similar deposits. However, the annual interest income only accounts for a small portion of its profits, assets and liabilities. Therefore, the Company expects that its use of deposit services

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under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) will not have any material impact towards the profit, assets and liabilities of the Company.

REASONS FOR THE REVISION OF THE ANNUAL CAPS

As disclosed in the announcement of the Company dated 21 June 2019 and in this circular, Hisense Hitachi will become a subsidiary of the Company following completion of The Major Transaction. Hisense Hitachi (i) has purchased from and supplied to, and will continue to purchase from and supply to, Hisense Group and Hisense Electric and/or their subsidiaries electrical appliances, raw materials, parts and components, and services, and (ii) has engaged and will continue to engage Hisense Finance to provide certain financial services. Such transactions will constitute continuing connected transactions after completion of The Major Transaction. It is therefore expected that the volume of some of the transactions contemplated under the Business Co-operation Framework Agreement and the Financial Services Agreement will increase following completion of The Major Transaction, the Company has entered into the Business Co-operation Framework Supplemental Agreement and the Financial Services Supplemental Agreement to revise the annual caps for the year ending 31 December 2019 for some of the transactions contemplated under the Business Co-operation Framework Agreement and the Financial Services Agreement.

THE COMPANY’S INTERNAL POLICY REGARDING CONTINUING CONNECTED TRANSACTIONS

The Company has established the connected transaction management policy（關聯交易管理辦法）(the “ CT Management Policy ”), to ensure that connected transactions will be conducted in a fair, equal and public manner, on normal commercial terms and not prejudicial to the interests of the Company and its independent Shareholders.

According to the CT Management Policy, before entering into a definitive transaction, the Company will compare the price of similar existing transactions with or quotations obtained from independent third parties. Commencement of the definitive transaction with the connected party/parties is subject to the Company’s assurance that the price of such continuing connected transaction, according to the principles of fairness and reasonableness, is no less favourable to the Enlarged Group than those offered by independent third parties in order to ensure fairness of the price of the continuing connected transaction as well as the interests of the Company and the Independent Shareholders as a whole.

Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement)

Following the requirements under the CT Management Policy, the operation departments of the Enlarged Group will compare the terms of the proposed continuing connected transactions to those of the similar existing transactions with independent third parties or quotations offered by independent third parties (as the case may be) prior to the execution of the relevant orders or contracts. If the operation department of

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LETTER FROM THE BOARD

the relevant business sector is of the view that the terms of proposed orders or contracts are less favourable to the Enlarged Group than those with or offered by independent third parties, it will report to the senior management who will negotiate with the connected party on the terms of the relevant orders or contracts. If, after negotiation, the connected party cannot offer terms which are no less favourable to the Enlarged Group than those with or offered by independent third parties, the Enlarged Group will not execute the relevant orders or contracts.

The finance and securities department of the Company is responsible for the collection and summarization of all information in relation to the continuing connected transactions from each operation department and will prepare a summary report regarding the conduct of the continuing connected transactions on a quarterly basis and make timely report to the senior management regarding the operating status of the continuing connected transactions of Group. It will also conduct a monthly review on the terms of the continuing connected transaction and compare such terms with those of the similar transactions with independent third parties. In addition, the Company conducts annual review on the execution of the continuing connected transactions of the Enlarged Group.

The legal affairs department of the Company is responsible for reviewing and approving the Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement) and the new transaction agreements contemplated under the Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement).

Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement)

Following the requirements under the CT Management Policy, the finance department of the Enlarged Group will compare the interest rates on deposits and loans and the service fee for electronic bank acceptance bills offered by Hisense Finance to the Enlarged Group to those offered by commercial banks in the PRC prior to the execution of the relevant transactions. For deposit services, the designated finance staff of the Enlarged Group will review and compare the interest rates offered by Hisense Finance with the major commercial banks based on the nature and tenure of such deposits (e.g. the time deposits will be reviewed quarterly, the demand deposits will be reviewed monthly and the interest rates for loans will be reviewed regularly). For the purpose of ensuring the sufficiency of independent bank transactions that are subject to review, the finance staff will review the interest rates on deposits offered by the five major commercial banks in the PRC, namely, China Construction Bank, Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Agricultural Bank of China. The Company would randomly select three banks out of the aforementioned five major banks to obtain their quotations of the interest rates on deposits. For electronic bank acceptance bill services, our finance staff will conduct a monthly review on the service fees charged by external commercial banks, and the Company would randomly select three banks out of the five aforementioned major

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LETTER FROM THE BOARD

banks to obtain quotations of service fees for issuing electronic bank acceptance bills to ensure that the service fees charged by Hisense Finance are not higher than those charged by commercial banks.

If the finance department is of the view that the interest rates on deposits and loan and the service fee for electronic bank acceptance bills offered by Hisense Finance to the Enlarged Group are less favourable to the Enlarged Group than those offered by commercial banks in the PRC, it will report to the senior management who will negotiate with Hisense Finance on the terms of the relevant transactions. If, after negotiation, Hisense Finance cannot offer terms which are no less favourable to the Enlarged Group than those offered by commercial banks in the PRC, the Enlarged Group will not execute the relevant transactions. The designated finance staff responsible for reviewing and comparing the interest rates mentioned above is not a member of the aforesaid senior management, and his duties are segregated from those of the senior management.

The finance and securities department of the Company is responsible for the collection and summarization of all information in relation to the continuing connected transactions from the finance department and will prepare a summary report regarding the conduct of the continuing connected transactions on a quarterly basis and make timely report to the senior management regarding the operating status of the continuing connected transactions of the Enlarged Group. It will also conduct a monthly review on the terms of the continuing connected transaction and compare such terms with those of the similar transactions with independent third parties based on the information provided by the finance department. The scope of the review conducted by the finance department and the finance and securities department is the same so that the same information can be reviewed by personnel of different departments whose duties are segregated from each other. In addition, the Company conducts annual review on the execution of the continuing connected transactions of the Enlarged Group.

The legal affairs department of the Company is responsible for reviewing and approving the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) and the new transaction agreements contemplated under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement).

The Company and Hisense Finance periodically enter into deposit and loan agreements and electronic bank acceptance bill contracts pursuant to the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement). The approval process of the relevant agreements and contracts is initiated by the finance department and the agreements and contracts can only be executed after the approval by the responsible finance officer in charge of a specific business operation. The finance and securities department will closely monitor the daily balances of the deposit service and the loan and electronic bank acceptance bill service so that the relevant annual caps are not exceeded and the risks involved are under control.

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LETTER FROM THE BOARD

INFORMATION RELATING TO THE COMPANY, HISENSE GROUP, HISENSE ELECTRIC AND HISENSE FINANCE

The Company is principally engaged in the research, manufacture and sales of refrigerators, home air-conditioners, central air-conditioning, freezers, washing machines, kitchen appliances and other electrical products.

Hisense Group was incorporated in August 1979 with its registered address at No. 17 Donghai West Road, Shinan, Qingdao. Zhou Houjian is the legal representative of Hisense Group, a wholly state-owned enterprise with the registered capital of RMB806,170,000. The scope of business includes: the entrusted operation of state-owned assets; the manufacture and sales of TV sets, refrigerators, freezers, washing machines, small household appliances, disc players, audio sets, broadcasting appliances, air-conditioners, electronic computers, telephones, communication products, internet products and electronic products and the provision of related services; the development of software and the provision of internet services; the technological development and the provision of consultation services; the self-operated import and export business (with its operation subject to the list of projects as approved by the MOFTEC); the foreign economic and technical cooperation (with its operation subject to the list of projects as approved by the MOFTEC); operation of property rights transaction and provision of brokerage and information services; provision of industrial travel agency services; provision of relevant business trainings, property management, leasing of tangible property, leasing of immovable property; catering management services, catering services, conference services and parking services (projects which require permit/approval under the laws, commencement of operations of the businesses which require approval from the relevant department). The ultimate beneficial owner of Hisense Group is State-Owned Assets Supervision and Administration Commission of Qingdao Municipal Government（青島市人民政府國有資產監督管理委員會）.

Hisense Electric was established on 17 April 1997 and has a registered capital of RMB1,308,481,222. Its authorised representative is Mr. Liu Hong Xin and its registered address is at 218 Qian Wan Gang Road, Qingdao Economic and Technological Development Zone. The scope of business includes: the research and development, manufacture, sales, service, repair and recycling of TV sets, flat panel display sets, mobile phones, electric refrigerators, electric freezers, washing machines, water heaters, microwave ovens, small household appliance products (such as dishwashers, electric irons, electric hair dryers, electric cookers), broadcasting appliances, electronic computers, communication products, mobile communication appliances, information technology products, household and commercial appliances and electronic products; non-standardized equipment processing, installation and after-sales services; self-operated import and export business (with its operation subject to the list of projects as approved by the MOFTEC); production of terrestrial broadcasting receiver equipment for satellite televisions; leasing of houses, leasing of machinery and equipment, property management; general logistics. (for projects which require approval under the laws, commencement of the operations thereof shall be subject to the approval from the relevant departments). The ultimate beneficial owner of Hisense Electric is State-Owned Assets Supervision and Administration Commission of Qingdao Municipal Government（青島市人民政府國有資產監督管理委員會）.

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LETTER FROM THE BOARD

Hisense Finance is a non-bank financial institution established with the approval from the CBRC and is regulated by the CBRC and other regulatory authorities in the PRC. Hisense Finance was established in the PRC on 12 June 2008 with a registered capital of RMB1.3 billion. Hisense Finance is owned as to 39.45% by 青島海信通信有限公司 (Hisense Communications Co., Ltd.), 25.24% by Hisense Group, 26.92% by 青島海信空調有限公司 (Qingdao Hisense Air-conditioning Company Limited) and 8.39% by 青島海信電子產業控股股份有限公司 (Qingdao Hisense Electronic (Holdings) Company Limited). Hisense Finance is not a banking company as defined in Rule 14A.10 of the Listing Rules.

The business scope of Hisense Finance includes: providing financial and financing consultation services, credit appraisal and other relevant consultancy and agency services to member companies; assisting member companies in the receipt and payment of transaction proceeds; conducting approved insurance agency services; providing guarantees for member companies; handling of entrusted loans and entrusted investment among member companies; handling of draft acceptance and discount services for member companies; handling of intra-group transfer settlement and other related settlement between member companies and formulating settlement schemes; accepting deposit of member companies; arranging loan and finance leasing to member companies; engaging in lending and borrowing with business counterparts; underwriting corporate bonds for member companies; investing in securities other than investment in secondary markets for stocks; and providing consumer credit and buyer credit for products of member companies.

IMPLICATIONS UNDER THE LISTING RULES

(A) BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT

As at the Latest Practicable Date, as (i) Hisense Group (though its indirect interest in the Company held by Hisense Air-conditioning and Hisense HK) is a controlling shareholder of the Company and (ii) Hisense Electric is a subsidiary of Hisense Group, Hisense Group, Hisense Electric and their respective subsidiaries are connected persons of the Company according to the Listing Rules. As such, the transactions contemplated under the Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement) will constitute continuing connected transactions of the Company under the Listing Rules.

As the applicable percentage ratios for the transactions contemplated under the Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement) exceed 5% on an annual basis and the annual consideration exceeds HK$10,000,000, the Business Co-operation Framework Agreement (as amended and supplemented by the Business Co-operation Framework Supplemental Agreement) and the transactions contemplated thereunder and the Business Co-operation Revised Annual Caps in relation thereto are subject to the reporting, announcement, annual review and shareholders’ approval requirements under Chapter 14A of the Listing Rules.

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LETTER FROM THE BOARD

In view of the interests of Hisense Group and Hisense Electric in the Business Co-operation Framework Supplemental Agreement, Hisense Group and Hisense Electric and their respective associates will abstain from voting in relation to the resolution(s) to approve the Business Co-operation Framework Supplemental Agreement and the transactions contemplated thereunder and the Business Co-operation Revised Annual Caps at the EGM. As such, Hisense Air-conditioning, which held 516,758,670 Shares (representing approximately 37.92% of the issued share capital of the Company) and Hisense HK, which held 124,452,000 Shares (representing approximately 9.13% of the issued share capital of the Company) as at the Latest Practicable Date, will abstain from voting in relation to the relevant resolution(s) at the EGM. Each of Hisense Air-conditioning and Hisense HK controls or is entitled to exercise control the voting right in respect of their Shares.

(B) FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT

As at the Latest Practicable Date, as (i) Hisense Group (though its indirect interest in the Company held by Hisense Air-conditioning and Hisense HK) is a controlling shareholder of the Company and (ii) Hisense Finance is a subsidiary of Hisense Group, Hisense Finance is a connected person of the Company according to the Listing Rules. As such, the transactions contemplated under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) will constitute continuing connected transactions of the Company under the Listing Rules.

As the applicable percentage ratios for the Financial Services Revised Annual Caps in relation to the transactions for the provision of deposit, loan and electronic bank acceptance bill, and draft discount by Hisense Finance to the Enlarged Group contemplated under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) exceed 5%, the Financial Services Supplemental Agreement, Financial Services Revised Annual Caps, and the transactions contemplated thereunder and the Business Co-operation Revised Annual Caps in relation thereto are subject to the reporting, announcement, annual review and shareholders’ approval requirements under Chapter 14A of the Listing Rules.

The provision of deposit services to the Enlarged Group under the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement) also constitutes the provision of financial assistance by the Enlarged Group to Hisense Finance under Rule 14.04(1)(e) of the Listing Rules. Although one of the applicable percentage ratios for the provision of such deposit services is more than 100%, the provision of financial assistance does not constitute an acquisition or a series of acquisitions of assets by the Company and hence the transaction does not fall into the classification of very substantial acquisition under Rule 14.06(5) of the Listing Rules. Instead, it will constitute a major transaction of the Company under Chapter 14 of the Listing Rules and is subject to the reporting, announcement and shareholders’ approval requirements thereunder.

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LETTER FROM THE BOARD

The Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) and the transactions contemplated thereunder will be subject to approval of the Independent Shareholders at the EGM by poll.

In view of the interests of Hisense Finance in the Financial Services Agreement (as amended and supplemented by the Financial Services Supplemental Agreement), Hisense Finance and its associates will abstain from voting in relation to the resolution(s) to approve the Financial Services Agreement and the transactions contemplated thereunder and the Financial Services Revised Annual Caps at the EGM. As such, Hisense Air-conditioning, which held 516,758,670 Shares (representing approximately 37.92% of the issued share capital of the Company) and Hisense HK, which held 124,452,000 Shares (representing approximately 9.13% of the issued share capital of the Company) as at the Latest Practicable Date, will abstain from voting in relation to the relevant resolution(s) at the EGM. Each of Hisense Air-conditioning and Hisense HK controls or is entitled to exercise control the voting right in respect of their Shares.

GENERAL

Mr. Tang Ye Guo, Mr. Jia Shao Qian, Mr. Lin Lan and Mr. Dai Hui Zhong, being Directors, have abstained from voting on the relevant board resolution(s) for approving the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps), the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) and the transactions contemplated thereunder in view of their interest therein as set out below:–

(a) Mr. Tang Ye Guo, Mr. Jia Shao Qian, Mr. Lin Lan and Mr. Dai Hui Zhong are also directors or senior management of Hisense Group and/or some of its subsidiaries;
(b) Mr. Lin Lan and Mr. Dai Hui Zhong are also directors of Hisense Electric and/or some of its subsidiaries; and
(c) Mr. Tang Ye Guo and Mr. Jia Shao Qian are also directors of Hisense Finance.

EGM

The EGM will be held at the conference room of the Company’s head office, Shunde District, Foshan City, Guangdong Province, the PRC at 3 p.m. on 29 August 2019 (Thursday), at which resolutions will be proposed to approve, inter alia:– (i) to consider and approve the resolution on Transfer of Target Equity Interests and amendments to articles of association of Hisense Hitachi; (ii) to consider and approve the Business Co-operation Framework Supplemental Agreement, the continuing connected transactions contemplated thereunder and the relevant revised annual caps; (iii) to consider and approve the Financial Services Supplemental Agreement, the major transaction and the continuing connected transactions contemplated thereunder and the

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LETTER FROM THE BOARD

relevant revised annual caps; and (iv) to consider and approve the resolution on entrusted wealth management of idle self-owned funds of the Company; and the transactions contemplated thereunder by poll.

A notice of the EGM, a proxy form for use at the EGM and a reply slip have been despatched by the Company on 21 June 2019 and are also published on the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (http:// www.kelon.com). If you are not able to attend the meeting in person, you are requested to complete and return the proxy form in accordance with the instructions printed thereon and to lodge the same with the Company’s branch share registrar in Hong Kong, Hong Kong Registrars Limited, at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong, not less than 24 hours before the time fixed for holding the EGM or any adjournment thereof (as the case may be). Completion and delivery of the proxy form will not preclude you from attending and voting in person at the EGM or any adjournment thereof (as the case may be) if you so wish.

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

(a) the chairman of the meeting; or
(b) at least two Shareholders in person or by proxy entitled to vote at the general meeting; or
(c) one or more Shareholder(s) present in person or by proxy and individually or in aggregate representing 10% or more of all Shares carrying the voting rights at the general meeting.

Pursuant to Rule 13.39(4) of the Listing Rules, all votes casted at the EGM must be taken by poll (except those which relate purely to a procedural or administrative matter) and the chairman of the meeting will make such demand at the EGM and the results of the poll will be announced in the manner prescribed under Rule 13.39(5) of the Listing Rules.

The register of members of the Company has been closed since 5 July 2019 (Friday) until 29 August 2019 (Thursday) (both days inclusive). In order to qualify for attending the EGM, all transfer documents of H Shares together with the relevant share certificates must have been lodged with the Company’s branch share registrar in Hong Kong, Hong Kong Registrars Limited at Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong not later than 4:30 p.m. on 4th July 2019 (Thursday) for registration.

RECOMMENDATION

The Directors consider that the Sale and Purchase Agreement and the transactions contemplated thereunder and amendments to the articles of association of Hisense Hitachi are in the interests of the Company and the Shareholders as a whole and are

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fair and reasonable. Accordingly, the Directors recommend the Shareholders to vote in favour of the relevant special resolution to be proposed at the EGM to approve the same.

The Independent Board Committee, having taken into account the advice of the Independent Financial Adviser, considers that each of the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps), the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) and the transaction contemplated thereunder, and the Revised Annual Caps are on normal commercial terms and in the ordinary course of business of the Enlarged Group and are in the interest of the Company and are fair and reasonable so far as the Shareholders are concerned. The Independent Board Committee therefore recommends the Shareholders to vote in favour of the relevant ordinary resolutions to be proposed in the EGM to approve the same.

ADDITIONAL INFORMATION

Your attention is drawn to the letters from the Independent Board Committee and the Independent Financial Adviser in relation to the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps), the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) and the transactions contemplated thereunder and the Revised Annual Caps in relation thereto which are respectively set out on page 20 and pages 40 of this circular. Additional information is also set out in the appendices to this circular for your information.

Yours faithfully,

By Order of the Board of Hisense Home Appliances Group Co., Ltd. Tang Ye Guo Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

海信家電

HISENSE HOME APPLIANCES GROUP CO., LTD. 海信家電集團股份有限公司

(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 00921)

14 August 2019

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular issued by the Company to the Shareholders dated 14 August 2019 (the “ Circular ”) of which this letter forms part. Terms defined in the Circular shall have the same meanings in this letter unless the context otherwise requires.

We have been appointed by the Board as the members of the Independent Board Committee to consider the terms of the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps), the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) and the transactions contemplated thereunder and the Revised Annual Caps in relation thereto as to the fairness and reasonableness of the same. Yuanta Securities (Hong Kong) Co., Ltd. has been appointed as the independent financial adviser to advise the Independent Board Committee and the Shareholders in this regard.

RECOMMENDATION

We wish to draw your attention to the letter from the Board and the letter from the Independent Financial Adviser as set out on pages 7 to 57 and pages 60 to 102 of the Circular respectively. Having considered the principal factors and reasons considered by, and the advice of the Independent Financial Adviser as set out in its letter of advice, we concur with the views of the Independent Financial Adviser and consider that the terms of the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps), the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) and the Revised Annual Caps in relation thereto are on normal commercial terms and in the ordinary course of business of the Enlarged Group and are in the interests of the Company and the Shareholders as a whole and are fair and reasonable so far as the Shareholders are concerned.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Accordingly, we recommend the Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps), the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) and the transactions contemplated thereunder and the Revised Annual Caps.

Yours faithfully,

For and on behalf of the Independent Board Committee Ma Jin Quan Zhong Geng Shen Cheung Sai Kit Independent non-executive Directors Hisense Home Appliances Group Co., Ltd.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the text of the letter of advice from Yuanta Securities (Hong Kong) Company Limited to the Independent Board Committee and the Shareholders in relation to the Agreements prepared for the purpose of incorporation in this circular.

==> picture [23 x 23] intentionally omitted <==

Yuanta Securities (Hong Kong) Company Limited

23/F, Tower 1, Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong 香港金鐘夏慤道18號海富中心1座23樓 Tel/電話: (852) 3555 7888 Fax/傳真: (852) 3555 7889

To: The Independent Board Committee and the Shareholders of Hisense Home Appliances Group Company Limited

Dear Sirs,

PROPOSED REVISED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment as the independent financial adviser to the independent board committee of the Company (the “ Independent Board Committee ”) and the Shareholders in respect of the Business Co-operation Framework Supplemental Agreement, the Financial Services Supplemental Agreement (collectively the “ Agreements ”) and the proposed Revised Annual Caps, details of which are set out in the letter from the Board (the “ Letter from the Board ”) contained in the circular dated 14 August 2019 (the “ Circular ”), of which this letter forms part. Terms used in this letter shall have the same meanings as those defined in the Circular unless the context otherwise defined.

As stated in the Letter from the Board, Hisense Hitachi will become a subsidiary of the Company following completion of The Major Transaction. Hisense Hitachi (i) has purchased from and supplied to, and will continue to purchase from and supply to, Hisense Group, Hisense Electric and/or their respective subsidiaries for electrical appliances, raw materials, parts and components, and services, and (ii) has engaged and will continue to engage Hisense Finance to provide certain financial services. Such transactions will constitute continuing connected transactions after completion of The Major Transaction. It is therefore expected that the volume of some of the transactions contemplated under the Business Co-operation Framework Agreement and the Financial Services Agreement will increase following completion of The Major Transaction, the Company has entered into the Business Co-operation Framework Supplemental Agreement and the Financial Services Supplemental Agreement to revise the annual caps for the year ending 31 December 2019 for some of the transactions contemplated under the Business Co-operation Framework Agreement and the Financial Services Agreement.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

During the past two years, Yuanta had been engaged as the independent financial adviser for the continuing connected transactions in relation to the Business Co-operation Framework Agreement, Financial Services Agreement and the Supplemental agreement in relation to the Financial Business Framework Agreement (see Company’s circular dated 7 January 2019 for details). The professional fees for the aforesaid appointment have already been fully settled. We are not aware of the existence of or change in any circumstances that would affect our independence. As such, we consider that we are eligible to give independent advice on the Supplemental Agreements (stipulating the Revised Annual Caps).

Business Co-operation Framework Supplemental Agreement

Financial Services Supplemental Agreement

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

is a connected person of the Company according to the Listing Rules. As such, the transactions contemplated under the Financial Services Agreement will constitute continuing connected transactions of the Company under the Listing Rules.

INDEPENDENT BOARD COMMITTEE

The Independent Board Committee comprising all of the independent non-executive Directors, namely Mr. Ma Jin Quan, Mr. Zhong Geng Shen, Mr. Cheung Sai Kit, has been established to advise on the Sale and Purchase Agreement for the Transfer of the Target Equity Interests, the Business Co-operation Framework Supplemental Agreement (which

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stipulates the Business Co-operation Revised Annual Caps), the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) and the transaction contemplated thereunder.

We have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders as to whether the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps) and the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps) are in the ordinary and usual course of business of the Company and on normal commercial terms; and whether the terms of Business Co-operation Framework Supplemental Agreement, the Financial Services Supplemental Agreement and the proposed Revised Annual Caps for the Continuing Connected Transactions are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

BASIS OF OUR OPINION

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

We consider that we have reviewed all information and documents which are made available to us to enable us to reach an informed view and to justify our reliance on the information provided so as to provide a reasonable basis for our advice. We have no reason to doubt the truth, accuracy and completeness of the statements, information, opinions and representations provided to us by the Group and/or its Management and their respective advisers or to believe that material information has been withheld or omitted from the information provided to us or referred to in the aforesaid documents. We have not, however, carried out any independent verification of the information provided, nor have we conducted any independent investigation into the business and affairs of the Group or Hisense Group and Hisense Electric.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

INFORMATION ON THE COMPANY, HISENSE GROUP, HISENSE HITACHI, HISENSE ELECTRIC, HISENSE FINANCE AND MARKET

1. Information on the Company

As stated in the Letter from the Board, the Company is principally engaged in the research, manufacture and sales of refrigerators, home air-conditioners, central air-conditioners, freezers, washing machines, kitchen appliances and other electrical products.

2. Information on Hisense Group

As stated in the Letter from the Board, Hisense Group was incorporated in August 1979 with its registered address at No. 17 Donghai West Road, Shinan, Qingdao. Zhou Houjian is the legal representative of Hisense Group, a wholly state-owned enterprise with the registered capital of RMB806,170,000. The scope of business includes: the entrusted operation of state-owned assets; the manufacture and sales of TV sets, refrigerators, freezers, washing machines, small household appliances, disc players, audio sets, broadcasting appliances, air-conditioners, electronic computers, telephones, communication products, internet products and electronic products and the provision of related services; the development of software and the provision of internet services; the technological development and the provision of consultation services; the self-operated import and export business (with its operation subject to the list of projects as approved by the MOFTEC); the foreign economic and technical cooperation (with its operation subject to the list of projects as approved by the MOFTEC); operation of property rights transaction and provision of brokerage and information services; provision of industrial travel agency services; provision of relevant business trainings, property management, leasing of tangible property, leasing of immovable property; catering management services, catering services, conference services and parking services (projects which require permit/approval under the laws, commencement of operations of the businesses which require approval from the relevant department). The ultimate beneficial owner of Hisense Group is State-Owned Assets Supervision and Administration Commission of Qingdao Municipal Government（青島市人民政府國有資產監督管理委員會）.

3. Information on Hisense Hitachi

As stated in the Letter from the Board, the shareholding structure of Hisense Hitachi is as follows: 49% directly held by the Company; 29% directly held by 江森自控日立空調貿易（香港）有限公司 (Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited); 20% directly held by 台灣日立江森自控股份有限公司 (Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd.) and 2% directly held by the Transferor; among which 江森自控日立空調貿易（香港）有限公司 (Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited)and 台灣日立江森自控股份有限公司 (Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd.) are associated companies under common control. Hisense Hitachi was established in 2003; nature of the enterprise: company with limited liability; registered address: 218 Qian Wan Gang Road, Qingdao Economic and Technological Development Zone; legal representative: FRANZ WOLFGANG CERWINKA; registered capital: USD46 million. The scope of business include: research and development, manufacturing and sales

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of air-conditioners, heat pumps, refrigeration equipment, heating equipment, ventilation equipment, air purification equipment, intelligent electrical equipment and supporting facilities, electric water heaters and related parts; and the provision of installation, after-sales, technical testing services; import and export of the above goods and technologies.

The consolidated financial statements of Hisense Hitachi for the year ended 31 December 2016, the year ended 31 December 2017 and, the year ended 31 December 2018 and the three months ended 31 March 2019 were audited by its auditors in accordance with the accounting standards in the PRC. The following is the consolidated financial information of Hisense Hitachi:–

	For the year	For the year	For the year	For the three
Items	ended	ended	ended	months ended
	31 December	31 December	31 December	31 March
	2016/As at	2017/As at	2018/As at	2019/As at
	31 December	31 December	31 December	31 March
	2016	2017	2018	2019
	RMB’0000	RMB’0000	RMB’0000	RMB’0000
	(Approximately)	(Approximately)	(Approximately)	(Approximately)
	(audited)	(audited)	(audited)	(audited)
Total income	651,847	940,177	1,098,667	270,152
Operating profits	136,658	190,481	194,733	46,250
Net profit before tax	147,304	190,765	194,969	46,441
Net profit after tax	122,335	156,718	160,322	37,993
Total asset	686,412	963,532	1,191,738	1,256,502
Total liabilities	345,360	514,489	584,816	761,487
Net asset	341,052	449,042	606,921	495,015
Net cash flow from operating
activities	222,791	228,275	181,457	36,684

Further financial information of Hisense Hitachi is set out in Appendix II – Accountant’s Report of Hisense Hitachi of the circular.

4. Information on Hisense Electric

As stated in the Letter from the Board, Hisense Electric was established on 17 April 1997 and has a registered capital of RMB 1,308,481,222. Its authorised representative is Mr. Liu Hong Xin and its registered address is at 218 Qian Wan Gang Road, Qingdao Economic and Technological Development Zone. The scope of business includes: the research and development, manufacture, sales, service, repair and recycling of TV sets, flat panel display sets, mobile phones, electric refrigerators, electric freezers, washing machines, water heaters, microwave ovens, small household appliance products (such as dishwashers, electric irons, electric hair dryers, electric cookers), broadcasting appliances, electronic computers, communication products, mobile communication appliances, information technology products, household and commercial appliances and electronic products; non-standardized

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equipment processing, installation and after-sales services; self-operated import and export business (with its operation subject to the list of projects as approved by the MOFTEC); production of terrestrial broadcasting receiver equipment for satellite televisions; leasing of houses, leasing of machinery and equipment, property management; general logistics. (for projects which require approval under the laws, commencement of the operations thereof shall be subject to the approval from the relevant departments). The ultimate beneficial owner of Hisense Electric is State-Owned Assets Supervision and Administration Commission of Qingdao Municipal Government（青島市人民政府國有資產監督管理委員會）.

5. Information on Hisense Finance

As stated in the Letter from the Board, Hisense Finance is a non-bank financial institution established with the approval from the CBRC and is regulated by the CBRC and other regulatory authorities in the PRC. Hisense Finance was established in the PRC on 12 June 2008 with a registered capital of RMB1.3 billion. Hisense Finance is owned as to 39.45% by 青島海信通信有限公司 (Hisense Communications Co., Ltd.), 25.24% by Hisense Group, 26.92% by 青島海信空調有限公司 (Qingdao Hisense Air-conditioning Company Limited) and 8.39% by 青島海信電子產業控股股份有限公司 (Qingdao Hisense Electronic (Holdings) Company Limited). Hisense Finance is not a banking company as defined in Rule 14A.10 of the Listing Rules.

6. Prevailing market conditions about the demand for electrical appliances

In the Report on the Work of the Government, announced in the second session of the 13th National People’s Congress of the People’s Republic of China on March 2019, the PRC government estimated its gross domestic product (“ GDP ”) growth target at approximately 6.0%-6.5% for 2019. According to State Council Information Office of the People’s Republic of China, it indicated that the GDP in the first half quarter of 2019, being approximately RMB45.09 trillion, has achieved a year-on-year increase of approximately 6.3%.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

For total retail sales of consumer goods, according to the National Bureau of Statistics of China, from January to May 2019, it rose approximately 8.1% year-on-year to approximately RMB16,133.2 billion. Among the above, (i) retail sales in cities increased approximately 8.0% to approximately RMB13,796.5 billion; and (ii) retail sales at and below county level increased approximately 8.9% to approximately RMB2,336.7 billion.

White goods enterprises strive to offer products with better user experience through unceasing technological upgrades and innovations as well as refined management, and continue to optimize the product structure of white goods and upgrade industrial consumption by shifting to air-cooled products from two-door and three-door refrigerators, broadening product offerings with high-end French-style products, and upgrading air-conditioners products with inverter technology, energy efficiency, health and comfort and stronger cooling capacity.

According to the above statistic, the refrigerator industry, air-conditioner industry and the country’s retail sales of consumer goods have recorded an increased demand in 2019. Overall, the above market data on GDP consumption and retail sales indicate a positive economic landscape for the industry.

BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT

Hisense Hitachi is principally engaged in the manufacture of sale of central air-conditioners. For its operational needs, Hisense Hitachi requires commissioned processing for raw materials, parts and components for manufacturing use which tailored to the project-based contracts with clients. To satisfy such demand, Hisense Hitachi has been engaging Hisense Group, Hisense Electric and/or their respective subsidiaries for commissioned processing services and such involved mutual sale and purchase of raw materials, parts and components in the process.

Pursuant to the Business Co-operation Framework Supplemental Agreement, the Company agreed to revise the annual caps for the year ending 31 December 2019 for Purchase of electrical appliances, Purchase of raw materials, parts and components, Provision of services, Supply of electrical appliances, Supply of raw materials, parts and components and Provision of services by the Enlarged Group contemplated under the Business Co-operation Framework Agreement. The scope of the Business Co-operation Framework Supplemental Agreement covers transactions among the Enlarged Group, Hisense Group, Hisense Electric and/or their respective subsidiaries, as may be applicable from time to time. After discussing with the Management and reviewing the Business Co-operation Framework Agreement and the Business Co-operation Framework Supplemental Agreement, we further noted that the scope of “Purchase of home electrical appliances” and “Supply of home electrical appliances” under the Business Co-operation Framework Agreement have been amended as “Purchase of electrical appliances” and “Supply of electrical appliances” under the Business Co-operation Framework Supplemental Agreement.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In addition, the transaction summary of the provision of services by the Enlarged Group in the Business Co-operation Framework Agreement have been amended in the Business Co-operation Framework Supplemental Agreement. The provision of services by Hisense Hitachi to Hisense Group, Hisense Electric and/or their respective subsidiaries under the Business Co-operation Framework Supplemental Agreement has added the item “installation services” in the transaction summary. Besides the terms mentioned above, the rest of terms under the Business Co-operation Framework Supplemental Agreement will remain unchanged. Therefore, the Company will follow the pricing mechanism and all the policies set out in the Company’s circular dated 7 January 2019.

In particular, the Business Co-operation Framework Supplemental Agreement covers the following aspects of business co-operation between the contracting parties:

(1) Purchase of electrical appliances

Subject matter and terms of the Purchase of electrical appliances

As stated in the Letter from the Board, this specific transaction was categorised as purchase of “home electrical appliances” in the Business Co-operation Framework Agreement. After the completion of The Major Transaction, the sale and purchase of central air-conditioners (which may be for household or commercial use and conducted by Hisense Hitachi) will become one of the major business of the Enlarged Group and, therefore, the Company adopted the terms “electrical appliances” instead.

Based on our discussion with the Management, Hisense Hitachi does not only manufacture and sales of central air-conditioners for household use, but also manufacture and sales of central air-conditioners for commercial use. Hisense Hitachi has purchased from and will continue to purchase from Hisense Group, Hisense Electric and/or their respective subsidiaries for central air-conditioners. Therefore, the service Purchase of “home electrical appliances” under the Business Co-operation Framework Agreement is changed to Purchase of “electrical appliances” in the Business Co-operation Framework Supplemental Agreement.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Historical amounts and Revised Annual Caps

The table below shows the original annual caps, the historical transaction amounts, the expected transaction amount and the proposed Revised Annual Caps under the Business Co-operation Framework Supplemental Agreement:

Unit: RMB (Unaudited, exclusive of VAT)

Entities providing electrical appliances Hisense Group and/or its subsidiaries Hisense Electric and/or its subsidiaries Hisense International and/or its subsidiaries Total	Original cap for the financial year ending 31 December 2019 (1) 230,000 410,000 277,650,000 278,290,000	Actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 70,000 – – 70,000	Expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 (2) 880,000 – – 880,000	The percentage increase in the August to December 2019 Estimated amount is with reference to the August to December 2018 Actual Amount 1,157% – – 1,157%	Proposed Business Co-operation Revised Annual Caps for the Enlarged Group the financial year ending 31 December 2019 (1)+(2) 1,110,000 410,000 277,650,000
					279,170,000

As calculated from the table above, we note that the original annual caps in 2019 and Revised Annual Caps for the Purchase of electrical appliances were approximately RMB278.29million and RMB279.17million respectively. There is an approximately 0.32% increase in the 2019 Revised Annual Caps as compared to the original annual caps in the year 2019.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As advised by the Management, the Revised Annual Caps are composed as follow:

(i) RMB1,110,000 will be allocated to the purchase of electrical appliances from Hisense Group and/or its subsidiaries;
(ii) RMB410,000 will be allocated to the purchase of electrical appliances from Hisense Electric and/or its subsidiaries; and
(iii) RMB277.65 million will be allocated to the purchase of electrical appliances from Hisense International and/or its subsidiaries

As stated in the Letter from the Board, in determining the Revised Annual Caps, the Directors have considered (i) the expected demand of Hisense Hitachi in relation to purchase of electrical appliances by Hisense Hitachi from Hisense Group and/or its subsidiaries for the financial year ending 31st December 2019 and; (ii) projections on purchase based on the progress of the current on-going projects between Hisense Hitachi and Hisense Group and the value of such purchase was projected from the total value of the contracts of such current on-going projects.

In assessing the reasonableness of the proposed Revised Annual Caps of the Purchase of electrical appliances under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019, we have reviewed the original annual caps for the year ending 31 December 2019, the actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019.

Transaction between Hisense Hitachi and Hisense Group

For the period commencing from 1 August 2018 to 31 December 2018, the actual transaction amount of the purchase of electrical appliances by Hisense Hitachi from Hisense Group and/or its subsidiaries amounted to approximately RMB70,000 and for the period commencing from 1 August 2019 to 31 December 2019, the expected transaction amount of the purchase of electrical appliances by Hisense Hitachi from Hisense Group and/or its subsidiaries amounted to approximately RMB880,000. We note that there is an approximately 1157% increase in the 2019 expected transaction amount between Hisense Hitachi and Hisense Group. It is mainly because of having a new type of transaction from Hisense Hitachi.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As further discussed with the Management, there is a new project for special air-conditioners in subways in progress in the year 2019. Due to the project, Hisense Hitachi will purchase numerous electrical appliances. Therefore, the expected transaction amount of the purchase of electrical appliances by Hisense Hitachi from Hisense Group and/or its subsidiaries in the year 2019 will be much more than the actual transaction amount of the purchase of electrical appliances in the year 2018.

Therefore, taking into account the facts and reasons discussed above as well as the original annual caps, we consider that it is reasonable for the Company to raise the caps in response to the expected significant increase in transaction amounts under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019 as a result of the increasing capital expenditure for the Purchase of electrical appliances.

Based on the above, we are of the view that the proposed Revised Annual Caps of the Purchase of electrical appliances under the Business Co-operation Framework Supplemental Agreement is determined by the Directors after due and careful consideration and is fair and reasonable so far as the Independent Shareholders are concerned.

(2) Purchase of raw materials, parts and components

Subject matter and terms of the purchase of raw materials, parts and components

Pursuant to the terms of the Business Co-operation Framework Agreement, the Company and/or its subsidiaries will purchase from Hisense Group, Hisense Electric and/or their respective subsidiaries on a non-exclusive basis such quantities of raw materials, parts and components as they may require from time to time.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Historical amounts and Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

Entities providing electrical appliances Hisense Group and/or its subsidiaries Hisense Electric and/or its subsidiaries Hisense International and/or its subsidiaries Total	Original cap for the financial year ending 31 December 2019 (1) 237,660,000 29,540,000 700,000 267,900,000	Actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 29,050,000 9,280,000 – 38,330,000	Expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 (2) 67,150,000 20,000,000 – 87,150,000	The percentage increase in the August to December 2019 Estimated amount is with reference to the August to December 2018 Actual Amount 131% 116% – 127%	Proposed Business Co-operation Revised Annual Caps for the Enlarged Group the financial year ending 31 December 2019 (1)+(2) 304,810,000 49,540,000 700,000
					355,050,000

As calculated from the table above, we note that the original annual caps in 2019 and Revised Annual Caps for the Purchase of raw materials, parts and components were approximately RMB267.90 million and RMB355.05 million respectively. There is an approximately 32.53% increase in the 2019 Revised Annual Caps as compared to the original annual caps in 2019.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As advised by the Management, the Revised Annual Caps are composed as follow:

(i) RMB304.81 million will be allocated to the purchase of raw materials, parts and components from Hisense Group and/or its subsidiaries;
(ii) RMB49.54 million will be allocated to the purchase of raw materials, parts and components from Hisense Electric and/or its subsidiaries;
(iii) RMB700,000 will be allocated to the purchase of raw materials, parts and components from Hisense International and/or its subsidiaries; and

As stated in the Letter from the Board, in determining the Revised Annual Caps, the Directors have also considered (i) similar historical transactions between Hisense Hitachi and Hisense Group, Hisense Electric and/or their respective subsidiaries; (ii) the increase in proportion of the purchase of raw materials, parts and components by Hisense Hitachi from Hisense Group and/or its subsidiaries in the total amount of Hisense Hitachi’s purchase of raw materials, parts and components in 2019; (iii) the increase in the variety of raw materials, parts and components purchased by Hisense Hitachi from Hisense Group and/or its subsidiaries in 2019.

In assessing the reasonableness of the proposed Revised Annual Caps of the Purchase of raw materials, parts and components under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019, we have reviewed the original annual caps for the year ending 31 December 2019, the actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019.

Transaction between Hisense Hitachi and Hisense Group

For the period commencing from 1 August 2018 to 31 December 2018, the Actual amount of the Purchase of raw materials, parts and components by Hisense Hitachi from Hisense Group and/or its subsidiaries amounted to approximately RMB29,050,000 and for the period commencing from 1 August 2019 to 31 December 2019, the expected transaction amount of the Purchase of raw materials, parts and components by Hisense Hitachi from Hisense Group and/or its subsidiaries amounted to approximately RMB67,150,000. We note that there is an approximately 131% increase in the 2019 estimated amount between Hisense Hitachi and Hisense Group.

As stated in the Letter from the Board, the expected increase in purchase of raw materials, parts and components by Hisense Hitachi from Hisense Group and/or its subsidiaries for the period of August to December 2019 when compared to the same period in 2018 was determined with the following basis:

(a) the total transaction amount of commissioned processing of raw materials, parts and components purchased by Hisense Hitachi from Hisense Group and/or its subsidiaries will increase to around 40 % of the total transaction

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amount of purchase of raw materials, parts and components by Hisense Hitachi in 2019 compared to that of around 20% in 2018 and such increase will amount to approximately RMB29,020,000;

(b) Hisense Hitachi will engage Hisense Group and/or its subsidiaries for commissioned processing of 5 new types of raw materials, parts and components and the transaction amount will be approximately RMB8,930,000. All these five types models of raw materials, parts and components are for master control boards. The detail of transaction amounts of these 5 new types of raw materials, parts and components will be shown as the table below:

	Transaction
Type	amount
	(RBM’000)
A	3,760
B	570
C	330
D	1,140
E	3,130
Total	8,930

The transaction amount of the purchase of these five types raw materials, parts and components between Hisense Hitachi and Hisense Group will include the processing fees and auxiliary materials fees. Therefore, the transaction amount of the purchase of these five types raw materials, parts and components will be more than transaction amount of the supply of these five types raw materials, parts and components.

As further discussed with the Management, Hisense Hitachi has purchased the processed raw materials, parts and components from Hisense Group and/or its subsidiaries, and Hisense Hitachi will purchase more these types of processed raw materials, parts and components from Hisense Group and/or its subsidiaries. Due to the high quality of products and service provided by Hisense Group and/or its subsidiaries, Hisense Hitachi is expected to increase the proportion of these types of processed raw materials, parts and components purchased from 20% to 40%. At the same time, the Management also expects to purchase new types of raw materials, parts and components in the coming years.

Transaction between Hisense Hitachi and Hisense Electric

For the period commencing from 1 August 2018 to 31 December 2018, the actual transaction amount of the Purchase of raw materials, parts and components from Hisense Electric and/or its subsidiaries amounted to approximately RMB9,280,000 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Purchase of raw materials, parts and components from

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Hisense Electric and/or its subsidiaries amounted to approximately RMB20,000,000. We note that there is an approximately 116% increase in the 2019 expected transaction amount between Hisense Hitachi and Hisense Electric.

As stated in the Letter from the Board, the factories of Hisense Hitachi in relation to the purchase of raw materials, parts and components are in the same industrial zone with those of Hisense Electric and as usual practice, the water and electricity bills are unified to be issued to Hisense Electric and Hisense Electric will pay such bills of Hisense Hitachi’s behalf and Hisense Hitachi will pay to Hisense Electric the actual fees incurred. The expected increase in the transaction amount with Hisense Electric was determined with following basis:– (a) the expected increase in electrical usage in the new laboratories of such relevant factories of Hisense Hitachi; (b) the expected increase in electricity usage for commencement of operation of new factory plant of Hisense Hitachi.

As further discussed with the Management, Hisense Hitachi has built up new laboratories. Therefore, the increase of the number of staff, the office space, and the use of production and office equipment will lead to the expenditure of water supply and electricity increased. Those transactions mentioned above are classified as “the purchase of raw materials, parts and components” according to the Management. Thus, the transaction amount of the purchase of raw materials, parts and components between Hisense Hitachi and Hisense Electric from 1 August 2019 to 31 December 2019 will be more than the actual amount the purchase of raw materials, parts and components for the period commencing from 1 August 2018 to 31 December 2018.

Therefore, taking into account the facts and reasons discussed above as well as the original annual caps, we consider that it is reasonable for the Company to raise the caps in response to the expected significant increase in transaction amounts under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019 as a result of the increasing transaction amounts for the Purchase of raw materials, parts and components.

Based on the above, we are of the view that the proposed Revised Annual Caps of the Purchase of raw materials, parts and components under the Business Co-operation Framework Supplemental Agreement is determined by the Directors after due and careful consideration and is fair and reasonable so far as the Independent Shareholders are concerned.

(3) Provision of services

Subject matter and terms of the provision of services

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information system maintenance services; and (ii) Hisense Electric and/or its subsidiaries on non-exclusive basis for the provision of property, technical support and advertisement services.

Historical amounts and Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

Entities providing services Types of services provided Hisense Group and/or its subsidiaries Material processing services Installation and maintenance services Property services (including property management and property leasing) Information system maintenance services Equipment inspection services Distribution, medical, leasing, design, agency services, property construction, management consultancy and technical support services Total	Historical figures Original cap for the financial year ending 31 December 2019 (1) Actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 142,990,000 – 281,640,000 – 30,190,000 2,350,000 55,300,000 7,180,000 17,620,000 – 99,840,000 2,470,000 627,580,000 12,000,000	Additional Cap Expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 (2) – – 4,190,000 13,410,000 – 5,300,000 22,900,000	The percentage increase in the August to December 2019 Estimated amount is with reference to the August to December 2018 Actual Amount 78.30% 86.77% 114.57% 90.83%	Proposed Cap
	Original cap for the financial year ending 31 December 2019 (1) 142,990,000 281,640,000 30,190,000 55,300,000 17,620,000 99,840,000 627,580,000			Proposed Business Co-operation Revised Annual Caps for the Enlarged Group for the financial year ending 31 December 2019 (1)+(2) 142,990,000 281,640,000 34,380,000 68,710,000 17,620,000 105,140,000
				650,480,000

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Entities providing services Types of services provided Hisense Electric and/or its subsidiaries Property services (including property management and property leasing) Technical support and advertisement services Total Hisense International and/or its subsidiaries Maintenance services, agency services Hisense Commercial Trading and/or its subsidiaries Agency services Total –	Historical figures Original cap for the financial year ending 31 December 2019 (1) Actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 9,490,000 5,670,000 4,920,000 – 14,410,000 5,670,000 29,000,000 – 167,250,000 – 838,240,000 17,670,000	Additional Cap Expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 (2) 7,200,000 – 7,200,000 – – 30,100,000	The percentage increase in the August to December 2019 Estimated amount is with reference to the August to December 2018 Actual Amount 26.98% – 26.98% – – 70.35%	Proposed Cap
	Original cap for the financial year ending 31 December 2019 (1) 9,490,000 4,920,000 14,410,000 29,000,000 167,250,000 838,240,000			Proposed Business Co-operation Revised Annual Caps for the Enlarged Group for the financial year ending 31 December 2019 (1)+(2) 16,690,000 4,920,000
				21,610,000

				29,000,000 167,250,000
				868,340,000

As calculated from the table above, we note that the original annual caps in 2019 and Revised Annual Caps for the Provision of services were approximately RMB838.24 million and RMB868.34 million respectively. There is an approximately 3.59% increase in the 2019 Revised Annual Caps as compared to the original annual caps in 2019.

As advised by the Management, the Revised Annual Caps are composed as follow:

(i) RMB650.48 million will be allocated to the provision of services from Hisense Group and/or its subsidiaries;
(ii) RMB21.61 million will be allocated to the provision of services from Hisense Electric and/or its subsidiaries;

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(iii) RMB29 million will be allocated to the provision of services from Hisense International and/or its subsidiaries; and
(iv) RMB167.25 million will be allocated to the provision of services from Hisense Commercial Trading and/or its subsidiaries;

In assessing the reasonableness of the proposed Revised Annual Caps of the Provision of services under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019, we have reviewed the original annual caps for the year ending 31 December 2019, the actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019.

Transaction between Hisense Hitachi and Hisense Group

For the period commencing from 1 August 2018 to 31 December 2018, the actual transaction amount of the Provision of services from Hisense Group and/or its subsidiaries amounted to approximately RMB 12,000,000 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Provision of services from Hisense Group and/or its subsidiaries amounted to approximately RMB22,900,000. We note that there is an approximately 90.83% increase in the 2019 expected transaction amount between Hisense Hitachi and Hisense Group.

(i) As stated in the Letter from the Board in determining the Revised Annual Caps of property services (including property management and property leasing) between Hisense Hitachi and Hisense Group, the Directors have considered (i) similar transactions between Hisense Hitachi and Hisense Group and/or its subsidiaries in the past; and (ii) the projected increase in the scale of operation of Hisense Hitachi which leads to increase in area of property leased by Hisense Hitachi. The expected increase in the transaction amount for property services (including property management and property leasing) to be provided by Hisense Group and/or its subsidiaries was determined based on:
(a) The increase in the rental fees for office space and staff quarters of approximately RMB1,300,000 due to the new staff hired by Hisense Hitachi. Hisense Hitachi will hire new staff who will be provided staying places. The estimated transaction amount for the increase of office space, apartment for employees are approximately RMB980,000 and RMB320,000 correspondingly.
(b) The additional area of new buildings lead to the increase of rental fees. The estimated transaction amount for the increase of new office space amounted to approximately RMB540,000.

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Therefore, the Revised Annual Caps of the property services (including property management and property leasing) for the period from 1 August 2019 to 31 December 2019 between Hisense Hitachi and Hisense Group will be higher than the actual transaction amount of the property services (including property management and property leasing) for the period from 1 August 2018 to 31 December 2018 between Hisense Hitachi and Hisense Group.

(ii) As stated in the Letter from the Board in determining the Revised Annual Caps of information system maintenance services between Hisense Hitachi and Hisense Group, the Directors have considered (i) similar transactions between Hisense Hitachi and Hisense Group and/or its subsidiaries in the past; and (ii) the projected increase in the scale of operation of Hisense Hitachi in 2019 which leads to increase in maintenance fees for information system; and (iii) anticipated new projects of Hisense Hitachi in year 2019.

The expected increase in the transaction amount for information system maintenance services to be provided by Hisense Group and/or its subsidiaries was determined based on:

(a) The increase of approximately RMB3,640,000 (equivalent to around 83%) in the service fees for the information system services for 2019 when compared to those incurred in 2018. The increase in services fee for the information system for 2019 is mainly attributable to: (i) the growth in the scale of operation of Hisense Hitachi, which leads to the increase in the number of employees of Hisense Hitachi; (ii) Hisense Hitachi’s higher demand for confidentiality, which results in an increase in the number of users of encryption software; and (iii) the newly-added use of financial systems for the purpose of improving work efficiency.

As part of our due diligence, we have reviewed the contracts for the provision of services from Hisense Group and/or its subsidiaries for Hisense Hitachi. According to the information provided by the Management, the aggregate transaction amount with contracts for the provision of services from Hisense Group and/or its subsidiaries for

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Hisense Hitachi of information system maintenance service fees during the period from 1 August 2019 to 31 December 2019 will be amounted to approximately RMB6,400,000.

According to the Management, With reference to the encryption and financial system projects which are currently under negotiation and the project progresses in 2019, it is expected that the transaction amounts of information system service fees will be approximately RMB1,000,000 and RMB630,000 during the period from 1 August 2019 to 31 December 2019 respectively (as compared to the actual transaction amounts of approximately RMB 0 and RMB 0 for the period from August to December 2018 respectively). As such, it is expected that the total transaction amount for information system maintenance during the period from 1 August 2019 to 31 December 2019 would amount to approximately RMB8,030,000.

(b) The increase of approximately RMB2,590,000 (equivalent to around 93%) in the service fees for software development and maintenance services for 2019 when compared to those incurred in 2018. The increase in service fees for software development and maintenance services in 2019 is due to development and upgrade of newly-added warehousing and logistics, marketing management, cost management and after-sales services software systems.

As part of our due diligence, we have reviewed the contracts for the provision of the software development and maintenance services from Hisense Group and/or its subsidiaries for Hisense Hitachi. According to the information provided by the Management, the aggregate transaction amount with contracts for the provision of the software development and maintenance services from Hisense Group and/or its subsidiaries for Hisense Hitachi during the period from 1 August 2019 to 31 December 2019 will be amounted to approximately RMB3,240,000. According to the Management, it is expected that Hisense Hitachi and subsidiaries of Hisense Group will generate other projects for the software development and maintenance services, and will enter into new contracts for such transaction in the aggregate transaction amount of approximately RMB2,140,000.

Therefore, after reviewed the contracts provided by Hisense Hitachi and discussion with the Management, the Revised Annual Caps of the information system maintenance services for the period from 1 August 2019 to 31 December 2019 between Hisense Hitachi and Hisense Group will be higher than the actual transaction amount of the information system maintenance for the period from 1 August 2018 to 31 December 2018 between Hisense Hitachi and Hisense Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iii) As stated in the Letter from the Board in determining the Revised Annual Caps of distribution, medical, leasing, design, agency services, property construction, management consultancy and technical support services between Hisense Hitachi and Hisense Group, the Directors have considered (i) similar transactions between Hisense Hitachi and Hisense Group and/or its subsidiaries in the past; and (ii) the projected increase in the scale of operation of Hisense Hitachi leading to increase in fees; and (iii) anticipated technological projects of Hisense Hitachi in year 2019. The expected increase in the transaction amount for distribution, medical, leasing, design, agency services, property construction, management consultancy and technical support services to be provided by Hisense Group and/or its subsidiaries was determined based on:
(a) the increase of approximately RMB1,440,000 in the technical development fees due to the development fees to be incurred for development of new product cloud service for August to December 2019;
(b) the expected fees to be incurred for the new R&D project in the sum of approximately RMB1,050,000.

As part of our due diligence, we have reviewed the contracts for the provision of services of distribution, medical, leasing, design, agency services, property construction, management consultancy and technical support services between Hisense Hitachi and Hisense Group. According to the information provided by the Management, the aggregate transaction amount with contracts amounted of approximately RMB800,000, Hisense Hitachi and Hisense Group and/or its subsidiaries has entered into contracts for the software development and maintenance services and it is expected that Hisense Hitachi and subsidiaries of Hisense Group will enter into new contracts for such transactions in the aggregate transaction amount of approximately RMB4,500,000 after discussion and negotiation. As further discussed with the Management, Hisense Hitachi is in discussion with Hisense Group and/or its subsidiaries about the new project and Hisense Hitachi expects the project contracts will be signed for the period from 1 August 2019 to 31 December 2019.

As further discussed with the Management, the Revised Annual Caps of the distribution, medical, leasing, design, agency services, property construction, management consultancy and technical support services for the period from 1 August 2019 to 31 December 2019 between Hisense Hitachi and Hisense Group will be higher than the actual transaction amount of the distribution, medical, leasing, design, agency services, property construction, management consultancy and technical support services for the period from 1 August 2018 to 31 December 2018 between Hisense Hitachi and Hisense Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Transaction between Hisense Hitachi and Hisense Electric

For the period commencing from 1 August 2018 to 31 December 2018, the actual transaction amount of the Provision of services from Hisense Electric and/or its subsidiaries amounted to approximately RMB5,670,000 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Provision of services from Hisense Electric and/or its subsidiaries amounted to approximately RMB7,200,000. We note that there is an approximately 26.98% increase in the 2019 expected transaction amount between Hisense Hitachi and Hisense Electric.

As stated in the Letter from the Board in determining the Revised Annual Caps of property services (including property management and property leasing) between Hisense Hitachi and Hisense Electric, the Directors have considered (i) similar transactions between Hisense Hitachi and Hisense Electric and/or its subsidiaries in the past; and (ii) the projected increase in the scale of operation of Hisense Hitachi which leads to increase in area of property leased by Hisense Hitachi.

The increase in property services fee is mainly attributable to:

(a) The increase in the rental fees for staff quarters of approximately RMB520,000 due to the new staff hired by Hisense Hitachi. Hisense Hitachi will hire new staff who will be provided staying places.
(b) The additional area of new buildings lead to the increase of property management fees. The estimated transaction amount for the increase of new buildings space amounted to approximately RMB1,010,000.

As further discussed with the Management, Hisense Hitachi is developing its business so that the number of staff and the office space will be increased. The Revised Annual Caps of the property services (including property management and property leasing) for the period from 1 August 2019 to 31 December 2019 between Hisense Hitachi and Hisense Electric will be higher than the actual transaction amount of the property services (including property management and property leasing) for the period from 1 August 2018 to 31 December 2018 between Hisense Hitachi and Hisense Electric.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Based on the above, we are of the view that the proposed Revised Annual Caps of the Provision of services under the Business Co-operation Framework Supplemental Agreement is determined by the Directors after due and careful consideration and is fair and reasonable so far as the Independent Shareholders are concerned.

(4) Supply of electrical appliances

Subject matter and terms of the supply of electrical appliances

In addition, based on our discussion with the Management, Hisense Hitachi does not only manufacture and sales of central air-conditioners for household use, but also manufacture and sales of central air-conditioners for commercial use. Hisense Hitachi has supplied to and will continue to supply to Hisense Group, Hisense Electric and/or their respective subsidiaries the commercial central air-conditioners. Therefore, the service “Supply of home electrical appliances” under the Business Co-operation Framework Agreement is changed to “Supply of electrical appliances” in the Business Co-operation Framework Supplemental Agreement.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Historical amounts and Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

Entities providing electrical appliances Hisense Group and/or its subsidiaries Hisense Electric and/or its subsidiaries Hisense International and/or its subsidiaries Hisense Commercial Trading and/or its subsidiaries Total	Original cap for the financial year ending 31 December 2019 (1) 364,280,000 1,160,000 14,049,620,000 670,640,000 15,085,700,000	Actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 6,730,000 – – – 6,730,000	Expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 (2) 14,040,000 2,000,000 – – 16,040,000	The percentage increase in the August to December 2019 Estimated amount is with reference to the August to December 2018 Actual Amount 109% – – – 138%	Proposed Business Co-operation Revised Annual Caps for the Enlarged Group the financial year ending 31 December 2019 (1)+(2) 378,320,000 3,160,000 14,049,620,000 670,640,000
					15,101,740,000

As calculated from the table above, we note that the original annual caps in 2019 and Revised Annual Caps for the Supply of electrical appliances were approximately RMB15,085.70 million and RMB15,101.74 million respectively. There is an approximately 0.11% increase in the 2019 Revised Annual Caps as compared to the original annual caps in the year 2019.

As advised by the Management, the Revised Annual Caps are composed as follow:

(i) RMB378.32 million will be allocated to the Supply of electrical appliances for Hisense Group and/or its subsidiaries;
(ii) RMB3.16 million will be allocated to the Supply of electrical appliances for Hisense Electric and/or its subsidiaries;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iii) RMB14,049.62 million will be allocated to the Supply of electrical appliances for Hisense International and/or its subsidiaries; and
(iv) RMB670.64 million will be allocated to the Supply of electrical appliances for Hisense Commercial Trading and/or its subsidiaries.

As stated in the Letter from the Board, in determining the Revised Annual Caps, the Directors have considered (i) similar historical transactions between Hisense Hitachi and Hisense Group and/or its subsidiaries; (ii) the current market situation and market demand in respect of the relevant electrical appliances; (iii) Hisense Hitachi’s projected level of production and sale of electrical appliances for the financial year ending 31 December 2019; and (iv) projections of supply based on the progress of the current on-going projects of Hisense Hitachi with Hisense Group and Hisense Electric and the value of such supply was projected from the total value of the contracts of such current on-going projects.

In assessing the reasonableness of the proposed Revised Annual Caps of the Supply of electrical appliances under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019, we have reviewed the original annual caps for the year ending 31 December 2019, the actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019.

Transaction between Hisense Hitachi and Hisense Group

For the period commencing from 1 August 2018 to 31 December 2018, the actual transaction amount of the Supply of electrical appliances for Hisense Group and/or its subsidiaries amounted to approximately RMB 6,730,000 and the expected transaction amount of Hisense Hitachi and/or its subsidiaries for the period from 1 August 2019 to 31 December 2019 of the Supply of electrical appliances for Hisense Group and/or its subsidiaries amounted to approximately RMB14,040,000. We note that there is an approximately 109% increase in the 2019 expected transaction amount between Hisense Hitachi and/or its subsidiaries and Hisense Group and/or its subsidiaries.

As stated in the Letter from the Board, the expected increase in the transaction amount for the supply of electrical appliances to Hisense Group and/or its subsidiaries was determined on the following basis:

(a) Hisense Hitachi and Hisense Group and/or its subsidiaries has entered into contracts for sale of central air-conditioners with the aggregate transaction amount of approximately RMB9,000,000 and it is expected that Hisense Hitachi and another subsidiary of Hisense Group will enter into a new contract for such sale in the aggregate transaction amount of approximately RMB2,500,000;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(b) RMB2,540,000 buffer for entering into new transactions. Due to the focus on the development of the new contract for sale of central air-conditioners and the business is still in the initial stage of development, the amount of business is relatively low. In order to avoid the shortage of amounts due to extra projects and unexpected business developments, Hisense Hitachi will reserve the similar amount of connected transactions to ensure the development of the new contract for sale of central air-conditioners.

As part of our due diligence, we have reviewed the contracts for the supply of electrical appliances between Hisense Hitachi and Hisense Group and/or its subsidiaries. According to the contracts, the aggregate transaction amount for the supply of electrical appliances between Hisense Hitachi and Hisense Group and/or its subsidiaries of will be approximately RMB9,000,000. As further discussed with the Management, the increase is mainly due to the supply of central air-conditioners for Hisense School（海信學校）. Hisense Group has set up a new school, namely Hisense School in 2018. The school needs to install the new central air-conditioners for operation from 1 August 2019 to 31 December 2019. Thus, Hisense Hitachi will supply central air-conditioners for Hisense Group and lead to the transaction amount increased. Besides, Hisense Hitachi and/or its subsidiaries has purchased and used the central air-conditioners or air-conditioners for a period of time, the central air-conditioners or air-conditioners may be broken down or need to be replaced. Therefore, Hisense Hitachi will supply higher number of central air-conditioners for Hisense Group.

Moreover, there is a new project about developing smart home. It is expected that Hisense Hitachi and another subsidiary of Hisense Group will enter into new contracts for such sale in the aggregate transaction amount of approximately RMB2,500,000. The project is mainly to develop and produce smart electrical products such as refrigerators, home air-conditioners, freezers and washing machines, etc. for home use. As it needs the central air-conditioners or air-conditioners for the project, Hisense Hitachi will supply of electrical appliances for Hisense Group and/or its subsidiaries for the period from 1 August 2019 to 31 December 2019. Due to the focus on the development of the new contract for sale of central air-conditioners and the business is still in the initial stage of development, the amount of business is relatively low. In order to avoid the shortage of amounts due to extra projects and unexpected business developments, Hisense Hitachi will reserve the similar amount of connected transactions to ensure the development of the new contract for sale of central air-conditioners. Thus, RMB2,540,000 will be reserved for entering into new transactions.

Therefore, after reviewed the contracts provided by Hisense Hitachi and discussion with the Management, we understand the expected transaction amount of Hisense Hitachi and/or its subsidiaries for the period from 1 August 2019 to 31 December 2019 of the Supply of electrical appliances for Hisense Group and/or its subsidiaries amounted to approximately RMB14,040,000 is fair and reasonable.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Transaction between Hisense Hitachi and Hisense Electric

For the period commencing from 1 August 2018 to 31 December 2018, there is not any transaction amount of the Supply of electrical appliances for Hisense Electric and/or its subsidiaries. However, the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Supply of electrical appliances for Hisense Electric and/or its subsidiaries amounted to approximately RMB2,000,000.

As stated in the Letter from the Board, the expected increase in the transaction amount for the supply of electrical appliances to Hisense Electric and/or its subsidiaries was determined on the following basis:

(a) Hisense Hitachi and Hisense Electric and/or its subsidiaries has entered into contracts for sale of central air-conditioners with the aggregate transaction amount of approximately RMB1,520,000 due to the new project for sale of central air-conditioners. As part of our due diligence, we have reviewed the contracts for the supply of electrical appliances between Hisense Hitachi and Hisense Electric and/or its subsidiaries. According to the contracts, the aggregate transaction amount for the supply of electrical appliances between Hisense Hitachi and Hisense Electric and/or its subsidiaries of approximately RMB1,520,000. As further discussed with the Management, there is a new project between Hisense Hitachi and Hisense Electric and/or its subsidiaries. As it needs the central air-conditioners or air-conditioners for the project, Hisense Hitachi will supply of electrical appliances for Hisense Electric and/ or its subsidiaries for the period from 1 August 2019 to 31 December 2019.
(b) There is a reconstruction project about installation of central air-conditioners for the office space of Hisense Electric and/or its subsidiaries. The aggregate transaction amount for entering into new transactions is currently negotiating and of approximately RMB480,000. As further discussed with the Management, Hisense Hitachi is in discussion with Hisense Electric and/or its subsidiaries about the reconstruction project and Hisense Hitachi expects the project contract of the Supply of electrical appliances will be signed for the period from 1 August 2019 to 31 December 2019.

Therefore, the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Supply of electrical appliances for Hisense Electric and/or its subsidiaries amounted to approximately RMB2,000,000 is fair and reasonable.

To sum up, taking into account the facts and reasons discussed above as well as the original annual caps, we consider that it is reasonable for the Company to raise the caps in response to the expected significant increase in transaction amounts under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019 as a result of the increasing transaction amounts for the Supply of electrical appliances.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Based on the above, we are of the view that the proposed Revised Annual Caps of the Supply of electrical appliances under the Business Co-operation Framework Supplemental Agreement is determined by the Directors after due and careful consideration and is fair and reasonable so far as the Independent Shareholders are concerned.

(5) Supply of raw materials, parts and components

Subject matter and terms of the supply of raw materials, parts and components of Business Co-operation Framework Supplemental Agreement

Historical amounts and Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

Entities providing electrical appliances Hisense Group and/or its subsidiaries Hisense Electric and/or its subsidiaries Hisense International and/or its subsidiaries Total	Original cap for the financial year ending 31 December 2019 (1) 25,150,000 49,370,000 86,900,000 161,420,000	Actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 27,420,000 – – 27,420,000	Expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 (2) 62,330,000 – – 62,330,000	The percentage increase in the August to December 2019 Estimated amount is with reference to the August to December 2018 Actual Amount 127% – – 127%	Proposed Business Co-operation Revised Annual Caps for the Enlarged Group the financial year ending 31 December 2019 (1)+(2) 87,480,000 49,370,000 86,900,000
					223,750,000

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As calculated from the table above, we note that the original annual caps in 2019 and Revised Annual Caps for the Supply of raw materials, parts and components were approximately RMB161.42 million and RMB223.75 million respectively. There is an approximately 38.61% increase in the 2019 Revised Annual Caps as compared to the original annual caps in the year 2019.

As advised by the Management, the Revised Annual Caps are composed as follow:

(i) RMB87.48 million will be allocated to the Supply of raw materials, parts and components from Hisense Group and/or its subsidiaries;
(ii) RMB49.37 million will be allocated to the Supply of raw materials, parts and components from Hisense Electric and/or its subsidiaries; and
(iii) RMB86.9 million will be allocated to the Supply of raw materials, parts and components from Hisense International and/or its subsidiaries.

In assessing the reasonableness of the proposed Revised Annual Caps of the Supply of raw materials, parts and components under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019, we have reviewed the original annual caps for the year ending 31 December 2019, the actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019.

Transaction between Hisense Hitachi and Hisense Group

For the period commencing from 1 August 2018 to 31 December 2018, the actual transaction amount of the Supply of raw materials, parts and components from Hisense Group and/or its subsidiaries amounted to approximately RMB 27,420,000 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Supply of raw materials, parts and components from Hisense Group and/or its subsidiaries amounted to approximately RMB62,330,000. We note that there is an approximately 127% increase in the 2019 expected transaction amount between Hisense Hitachi and Hisense Group.

As stated in the Letter from the Board, in determining the Revised Annual Caps, the Directors have considered (i) similar historical transactions between Hisense Hitachi and Hisense Group and/or its subsidiaries; (ii) the increase in proportion of sale of raw materials, parts and components by Hisense Hitachi to Hisense Group and/or its subsidiaries in the total amount of Hisense Hitachi’s sale of raw materials, parts and components in 2019; and (iii) the increase in the variety of raw materials, parts and components sold by Hisense Hitachi to Hisense Group in 2019.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The expected increase in supply of raw materials, parts and components by Hisense Hitachi to Hisense Group and/or its subsidiaries for the period of August to December 2019 when compare to the same period in 2018 was determined with the following basis:

(a) The total transaction amount of commissioned processing of raw materials, parts and components supplied by Hisense Hitachi to Hisense Group and/or its subsidiaries will increase to around 40 % of the total transaction amount of raw materials, parts and components supplied by Hisense Hitachi in 2019 compared to that of around 20% in 2018 and such increase of supply relating to such arrangement will amount to approximately RMB27,420,000. One of Hisense Group’s subsidiaries is a professional company specializing in component adhesion and base plate processing. The subsidiary has dozens of component adhesion product lines with relatively high automation, ensuring high quality and high efficiency. Meanwhile, since the subsidiary and Hisense Hitachi are in the same industrial park, the transactions between the two parties can effectively save costs and responses to material guarantees can be conducted in a prompt manner. In view of this, the percentage of procurement of base plates by Hisense Hitachi from Hisense Group’s subsidiary will increase from 20% to 40%. Meanwhile, following the increase in Hisense Hitachi’s scale, the number of models procured by Hisense Hitachi from Hisense Group’s subsidiary will increase and the procurement amount will have a relatively significant year-on-year increase;
(b) Hisense Hitachi will engage Hisense Group and/or its subsidiaries for commissioned processing of 5 new types of raw materials, parts and components and the transaction amount for supply relating to such engagement will be approximately RMB7,240,000. The detail of transaction amounts of supplying these 5 new types of raw materials, parts and components will be shown as the table below:

	Transaction
Type	amount
	(RBM’000)
A	3,130
B	440
C	260
D	920
E	2,490
Total	7,240

After purchased these 5 new types of raw materials, parts and components, Hisense Group and/or its subsidiaries will process and supply for Hisense Hitachi for master control boards. The transaction amount of the purchase of these five types raw materials, parts and components between Hisense Hitachi and Hisense Group will include the processing fees and auxiliary materials fees. Therefore, the transaction

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amount of the purchase of these five types raw materials, parts and components will be more than transaction amount of the supply of these five types raw materials, parts and components.

As further discussed with the Management, Hisense Hitachi supplied the raw materials, parts and components to Hisense Group. As we mentioned before in the purchase of raw materials, parts and components, Hisense Group is commissioned processing the raw materials, parts and components, then supply the processed raw materials, parts and components for Hisense Hitachi. As we mentioned before in the purchase of raw materials, parts and components, Hisense Hitachi is expected to increase the proportion of these types of processed raw materials, parts and components purchased from 20% to 40% and will purchase more these types of processed raw materials, parts and components in the coming years. Therefore, the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Supply of raw materials, parts and components from Hisense Group and/or its subsidiaries will be increased.

Thus, the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Supply of raw materials, parts and components from Hisense Group and/or its subsidiaries is related to the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 of the Purchase of raw materials, parts and components from Hisense Group and/or its subsidiaries.

We concur that the underlying assumptions, basis and calculation of the 2019 annual cap are fair and reasonable. Therefore, taking into account the facts and reasons discussed above as well as the original annual caps, we consider that it is reasonable for the Company to raise the caps in response to the expected significant increase in transaction amounts under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019 as a result of the increasing transaction amounts for the Supply of raw materials, parts and components.

Based on the above, we are of the view that the proposed Revised Annual Caps of the Supply of raw materials, parts and components under the Business Co-operation Framework Supplemental Agreement is determined by the Directors after due and careful consideration and is fair and reasonable so far as the Independent Shareholders are concerned.

(6) Provision of services by the Enlarged Group

Subject matter and terms of the provision of services

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

According to the Management, the transaction summary of the provision of services by the Enlarged Group under the Business Co-operation Framework Supplemental Agreement is modified. The description of provision of services by the Company to Hisense Group under the Business Co-operation Framework Agreement is to provide design, processing services, property services. There is an extra item added and the description of provision of services by the Company to Hisense Group under the Business Co-operation Framework Supplemental Agreement is modified to provide design, processing services, property services and installation services.

We understood from the Management that the modification of summary is mainly due to a new project about setting up a school, namely Hisense School （海信學校）. Hisense Hitachi will provide the installation services of central air-conditioners for Hisense School （海信學校）. Due to this project, Hisense Group purchased central air-conditioners from Hisense Hitachi and is expected to contract Hisense Hitachi for and the installation. Therefore, the installation services of air-conditioners provided by Hisense Hitachi to Hisense Group will be needed for the period from 1 August 2019 to 31 December 2019.

In addition, the description of provision of services by the Company to Hisense Electric under the Business Co-operation Framework Agreement is to provide property services and processing services. There is an extra item added and the description of provision of services by the Company to Hisense Electric under the Business Co-operation Framework Supplemental Agreement is modified to be processing services, property services and installation services.

As discussed with the Management, the modification of summary is mainly due to a new project in which Hisense Hitachi will provide the installation services of central air-conditioners. Due to this project, Hisense electric purchased central air-conditioners from Hisense Hitachi and is expected to contract Hisense Hitachi for the installation. Therefore, the installation services of air-conditioners provided by Hisense Hitachi to Hisense Electric will be needed for the period from 1 August 2019 to 31 December 2019.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Historical amounts and Revised Annual Caps

Unit: RMB (Unaudited, exclusive of VAT)

Entities providing electrical appliances Hisense Group and/or its subsidiaries Hisense Electric and/or its subsidiaries Hisense International and/or its subsidiaries Total	Original cap for the financial year ending 31 December 2019 (1) 17,690,000 2,000,000 14,700,000 34,390,000	Actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 1,810,000 150,000 – 1,960,000	Expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 (2) 11,520,000 2,000,000 – 13,520,000	The percentage increase in the August to December 2019 Estimated amount is with reference to the August to December 2018 Actual Amount 536% 1233% – 590%	Proposed Business Co-operation Revised Annual Caps for the Enlarged Group the financial year ending 31 December 2019 (1)+(2) 29,210,000 4,000,000 14,700,000
					47,910,000

As calculated from the table above, we note that the original annual caps in 2019 and Revised Annual Caps for the Provision of services by the Enlarged Group were approximately RMB34.39million and RMB47.91million respectively. There is an approximately 39.31% increase in the 2019 Revised Annual Caps as compared to the original annual caps in 2019.

As advised by the Management, the Revised Annual Caps are composed as follow:

(i) RMB29.21 million will be allocated to the Provision of services by the Enlarged Group from Hisense Group and/or its subsidiaries;
(ii) RMB4.00 million will be allocated to the Provision of services by the Enlarged Group from Hisense Electric and/or its subsidiaries; and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iii) RMB14.7 million will be allocated to the Provision of services by the Enlarged Group from Hisense International and/or its subsidiaries.

As stated in the Letter from the Board, in determining the Revised Annual Caps, the Directors have considered (i) similar historical transactions between Hisense Hitachi, Hisense Group, Hisense Electric and/or their respective subsidiaries; and (ii) projected increase in sale of central air-conditioners by Hisense Hitachi, which leads to higher demand for provision of installation services of the Hisense Hitachi; and (iii) projection of services fees payable to Hisense Hitachi based on the progress of the current on-going projects of Hisense Hitachi with Hisense Group and Hisense Electric.

Hisense Hitachi, Hisense Group, Hisense Electric and/or their respective subsidiaries are negotiating contracts for installation services. Based on the previous practices, it is expected that the installation fees will be determined based on the product prices in respect of volume of installment work involved multiplied by certain ratio negotiated based on the relevant products’ value. In view of the transaction amount of the contracts entered or expected to be entered into by Hisense Hitachi with Hisense Group, Hisense Electric and/or their respective subsidiaries as disclosed on page 34 of this circular, it is estimated that during the period of August to December 2019, installation fees payable to Hisense Hitachi by Hisense Group and/or its subsidiaries will correspondingly increase to approximately RMB11,520,000 and installation fees payable to Hisense Hitachi by Hisense Electric and/or its subsidiaries will increase to approximately RMB2,000,000.

In assessing the reasonableness of the proposed Revised Annual Caps of the Provision of services by the Enlarged Group under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019, we have reviewed the original annual caps for the year ending 31 December 2019, the actual transaction amount of Hisense Hitachi for the period from 1 August 2018 to 31 December 2018 and the expected transaction amount of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019.

Transaction between Hisense Hitachi and Hisense Group

For the period commencing from 1 August 2018 to 31 December 2018, the actual transaction amount of the Provision of services by Hisense Hitachi to Hisense Group and/or its subsidiaries amounted to approximately RMB1,810,000 and for the period commencing from 1 August 2019 to 31 December 2019, the estimated amount of the Provision of services by Hisense Hitachi to Hisense Group and/or its subsidiaries amounted to approximately RMB11,520,000.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We note that there is an approximately 536% increase in the 2019 estimated amount between Hisense Hitachi and Hisense Group. We understood from the Management the increase is mainly due to the installation fee of central air-conditioners in Hisense School（海信學校）and the calculation of installation fee of central air-conditioners is based on the past experience and the calculation mechanism in the year 2018. As further discussed with the Management, Hisense Group has set up a new school, namely Hisense School. Due to this project, Hisense Group purchased central air-conditioners from Hisense Hitachi and is expected to contract Hisense Hitachi for the installation from 1 August 2019 to 31 December 2019. Besides, Hisense Hitachi will provide the replacement services of central air-conditioners for other offices of Hisense Group. Therefore, the transaction amount of the Provision of services by Hisense Hitachi to Hisense Group will have a substantial increase from 1 August 2019 to 31 December 2019.

Transaction between Hisense Hitachi and Hisense Electric

For the period commencing from 1 August 2018 to 31 December 2018, the actual transaction amount of the Provision of services by Hisense Hitachi to Hisense Electric and/or its subsidiaries amounted to approximately RMB150,000 and for the period commencing from 1 August 2019 to 31 December 2019, the estimated amount of the Provision of services by Hisense Hitachi to Hisense Electric and/or its subsidiaries amounted to approximately RMB2,000,000. We note that there is an approximately 1233% increase in the 2019 estimated amount between Hisense Hitachi and Hisense Electric.

As mentioned in the Supply of electrical appliances between Hisense Hitachi and Hisense Electric, there is a new project that Hisense Electric purchased the central air-conditioners from Hisense Hitachi for the project. According to the Management, Hisense Hitachi will provide the installation services of the central air-conditioners for Hisense Electric. The expected installation amount of the central air-conditioners for Hisense Electric will refer to the purchase amount of the central air-conditioners by Hisense Electric. Therefore, the expected installation fee of the central air-conditioners for Hisense Electric amounted to approximately RMB2 million and the expected transaction amount of the Provision of services by Hisense Hitachi to Hisense Electric and/or its subsidiaries amounted to approximately RMB2 million is fair and reasonable for the period from 1 August 2019 to 31 December 2019.

Thus, taking into account the facts and reasons discussed above as well as the original annual caps, we consider that it is reasonable for the Company to raise the caps in response to the expected significant increase in transaction amounts under the Business Co-operation Framework Supplemental Agreement for the year ending 31 December 2019 as a result of the increasing transaction amounts for the Provision of services by the Enlarged Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Based on the above, we are of the view that the proposed Revised Annual Caps of the Provision of services by the Enlarged Group under the Business Co-operation Framework Supplemental Agreement is determined by the Directors after due and careful consideration and is fair and reasonable so far as the Independent Shareholders are concerned.

FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT

Pursuant to the Financial Services Supplemental Agreement, the Company agreed to revise the annual caps for the year ending 31 December 2019 for the Deposit services and Loan and electronic bank acceptance bill service by the Enlarged Group contemplated under the Financial Services Agreement. The scope of the Financial Services Supplemental Agreement covers transactions among the Enlarged Group, Hisense Group, Hisense Electric and Hisense Finance, as may be applicable from time to time. Besides that, the rest of terms under the Business Co-operation Framework Supplemental Agreement will remain unchanged.

In particular, the Financial Services Supplemental Agreement covers the following aspects of financial services between the contracting parties:

(1) Deposit services

Subject matter and terms of the deposit services

Pursuant to the Financial Services Supplemental Agreement, the Company has agreed that the Revised Annual Caps for deposit services for the year ending 31 December 2019 was determined with reference to: (i) the historical cash flow figures of Hisense Hitachi; (ii) balance of monetary funds (inclusive of time deposits) of Hisense Hitachi as of 31 December 2018; and (iii) the expected growth plan in scale of Hisense Hitachi in 2019. In order to satisfy the business needs, the expected daily closing balance of deposits placed by Hisense Hitachi with Hisense Finance will not exceed RMB8,000,000,000 in 2019.

As stated in the Letter from the Board, the Company does not intend to deposit all its cash with Hisense Finance. However, a buffer in the maximum daily closing balance of deposit of the Enlarged Group with Hisense Finance is required in view of the deposit services required during the transitional period between expiry of wealth management products subscribed by the Enlarged Group and subscription of new wealth management products by the Enlarged Group; and the expectation that the amount used for wealth management products will be approximately RMB9 billion in 2019.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Historical figures and Revised Annual Caps

The table below shows the original maximum daily closing balance, the historical maximum daily closing balance, the expected maximum daily closing balance and the proposed maximum daily closing balance under the Financial Services Supplemental Agreement:

				The
				percentage
				increase in the
				August to
				December
		Original	Expected	2019
		maximum	maximum	maximum	Proposed
		daily closing	daily closing	daily closing	maximum
		balance of	balance of	balance is with	daily closing
	Maximum	Hisense	Hisense	reference to	balance for
	daily closing	Hitachi for the	Hitachi for the	the August to	the Enlarged
	balance for	period from	period from	December	Group for the
	the financial	1 August	1 August	2018	financial year
	year ending	2018 to	2019 to	maximum	ending
Services provided by	31 December	31 December	31 December	daily closing	31 December
Hisense Finance	2019 (1)	2018	2019 (2)	balance	2019 (1)+(2)
Deposit Services	8,000,000,000	5,300,000,000	8,000,000,000	50.94%	16,000,000,000

We note that the expected maximum daily closing balance of Hisense Hitachi for deposit services for the period from 1 August 2019 to 31 December 2019 is RMB8,000 million and the original maximum daily closing balance of Hisense Hitachi for deposit services for the period from 1 August 2018 to 31 December 2018 is RMB5,300 million. There is an approximately 50.94% increase in the 2019 maximum daily closing balance as compared to the 2018 maximum daily closing balance.

As set out in the Letter from the Board, the Company currently expects that the proposed maximum daily closing balance of the deposits to be placed by the Enlarged Group with Hisense Finance at any time during the term of the Financial Services Supplemental Agreement shall not exceed the respective cap of RMB16,000 million (inclusive of interest) on any given day for the year ending 31 December 2019.

According to the Management, the original maximum daily deposits amount placed by Hisense Hitachi with Hisense Finance is RMB5,300 million in 2018. However, there are an approximately RMB1,100 million deposits placed by Hisense Hitachi with other financial institutions. As long as the time deposits with other financial institutions will be expired for the period from 1 August 2019 to 31 December 2019, Hisense Hitachi will transfer and deposit the funds into Hisense Finance afterward. Therefore, the Enlarged Group is in need of a higher amount of the deposit services from RMB5.3 billion to RMB6.4 billion from Hisense Finance.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As further discussed with the Management, the interest rate payable for the deposits of Hisense Hitachi with Hisense Finance shall not be lower than the rate payable by normal commercial banks in the PRC for comparable deposits, the Company expects to keep using the deposit services as the past years did. Meanwhile, taking into account the fact that the revenue of Hisense Hitachi for the year ending 31 December 2018, the Company expects that there is a year-on-year increase of 20% for the projected increase in the scale of Hisense Hitachi for the year ending 31 December 2019, and the expected growth in Hisense Hitachi’s revenue along with the expected continuing market trend of shifting towards “high-end” and “intelligence” in 2019. It is anticipated by the Management that the highest daily closing balance of deposit for the period from 1 August 2019 to 31 December 2019 will be a year-on-year increase of 20% from the original highest daily closing balance for the period from 1 August 2018 to 31 December 2018. Therefore, the Enlarged Group is in need of a higher amount of the deposit services approximately RMB7.8 billion from Hisense Finance.

We have also discussed with the Management and understood that a buffer in the maximum daily closing balance in Hisense Hitachi’s deposit account with Hisense Finance is required but Hisense Hitachi does not intend to deposit all its cash with Hisense Finance. As mentioned above, it is because (i) deposit services required during the transition period between expiry of wealth management products subscribed by Hisense Hitachi and subscription of new wealth management products by Hisense Hitachi; and (ii) Hisense Hitachi will maintain deposit balances with Hisense Finance and also borrow loans from Hisense Finance. As advised by the Management, the proposed loans to be provided by Hisense Finance to Hisense Hitachi will be firstly be transferred by Hisense Finance to Hisense Hitachi in its deposit account with Hisense Finance for withdrawal. As such, Hisense Hitachi’s funding needs in terms of loans will also affect Hisense Hitachi’s deposits balance with Hisense Finance. A buffer for the deposit services by Hisense Finance to the Group is required according to the Management. Moreover, the inventories turnover was shortened by 3 days year-on-year, due to the further improvement of working capital management, the net cash flows from operating activities and the cash balance will further increase in 2019. Thus, the Company expects the inventories turnover will be further shortened by 3 days in 2019 when compared to the inventories turnover in 2018. The Management expects the monetary funds will increase by approximately RMB200 million due to the impact of the acceleration of inventories turnover in 2019.

Given that (i) the proposed transactions contemplated under the Financial Services Supplemental Agreement will be conducted in the ordinary and usual course of business of Hisense Hitachi and on normal commercial terms and on terms not less favourable to Hisense Hitachi than terms available from other normal commercial banks and financial institutions; and (ii) the non-exclusive arrangement under the Financial Services Supplemental Agreement provides Hisense Hitachi with the flexibility without any commitment on the actual transaction values. We are of the view that the expected maximum daily closing balance of Hisense Hitachi for the period from 1 August 2019 to 31 December 2019 is RMB8,000 million in respect of the deposit services under the Financial Services Supplemental Agreement is fair and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

reasonable. Thus, the proposed maximum daily closing balance for the Enlarged Group with Hisense Finance to be RMB16,000 million (inclusive of interest) on any given day for the year ending 31 December 2019 is also fair and reasonable.

Based on the above, we are of the view that the proposed maximum daily closing balance for the Enlarged Group for the financial year ending 31 December 2019 of deposit services under the Financial Services Supplemental Agreement is determined by the Directors after due and careful consideration and is fair and reasonable so far as the Independent Shareholders are concerned.

(2) Loan and electronic bank acceptance bill service

Subject matter and terms of the loan and electronic bank acceptance bill service

Pursuant to the Financial Services Supplemental Agreement, the Company has agreed that The Revised Annual Caps for the loan and electronic bank acceptance bill services for the year ending 31 December 2019 was determined with reference to: (i)the expected growth plan in scale of Hisense Hitachi in 2019; (ii) the expected percentage of payment by Hisense Hitachi by means of electronic acceptance bills; (iii) the terms for the provision of the loan and electronic bank acceptance bill services by Hisense Finance to Hisense Hitachi shall be no less favourable than those of other normal commercial banks and financial institutions and Hisense Finance has better knowledge about the background and financial status of Hisense Hitachi which will facilitate the loan application and issuing process of electronic bank acceptance bill services by Hisense Hitachi.

As at the Latest Practicable Date, the original annual caps and daily balances for the Relevant Financial Services Transactions have not been exceeded.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Historical figures and Revised Annual Caps

				The
				percentage
				increase in the
				August to
				December
			Expected	2019
		Maximum	maximum	maximum	Proposed
		daily closing	daily closing	daily closing	maximum
		balance of	balance of	balance is with	daily closing
	Maximum	Hisense	Hisense	reference to	balance for
	daily closing	Hitachi for the	Hitachi for the	the August to	the Enlarged
	balance for	period from	period from	December	Group for the
	the financial	1 August	1 August	2018	financial year
	year ending 31	2018 to	2019 to	maximum	ending 31
Services provided by Hisense	December	31 December	31 December	daily closing	December
Finance	2019 (1)	2018	2019 (2)	balance	2019 (1)+(2)
Loan and electronic bank
acceptance bill services	9,000,000,000	1,700,000,000	2,500,000,000	47.06%	11,500,000,000

We note that the expected maximum daily closing balance of Hisense Hitachi for the loan and electronic bank acceptance bill services for the period from 1 August 2019 to 31 December 2019 is RMB2,500 million and the original maximum daily closing balance of Hisense Hitachi for the loan and electronic bank acceptance bill services for the period from 1 August 2018 to 31 December 2018 is RMB1,700 million. There is an approximately 47.06% increase in the 2019 maximum daily closing balance as compared to the 2018 maximum daily closing balance.

As set out in the Letter from the Board, the Company currently expects that the proposed maximum daily closing balance for the loan and electronic bank acceptance bill services to be placed by the Enlarged Group with Hisense Finance at any time during the term of the Financial Services Supplemental Agreement shall not exceed the respective cap of RMB11,500 million (inclusive of interest) on any given day for the year ending 31 December 2019. Such cap was determined with reference to (i) the expected growth plan in scale of Hisense Hitachi in 2019; (ii) the expected percentage of payment by Hisense Hitachi by means of electronic acceptance bills; (iii) the terms for the provision of the loan and electronic bank acceptance bill services by Hisense Finance to Hisense Hitachi shall be no less favourable than those of other normal commercial banks and financial institutions and Hisense Finance has better knowledge

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

about the background and financial status of Hisense Hitachi which will facilitate the loan application and issuing process of electronic bank acceptance bill services by Hisense Hitachi.

As discussed with the Management, Hisense Hitachi wants to improve its efficiency of capital utilisation. The Company plans to adjust payment terms, increase payment via electronic bank acceptance bills, reduce payments via cash and endorsement of bills receivable. The Company can utilize the available capital to obtain income and improve cashflows; and reduce costs derived from endorsement of bills receivable. Therefore, Hisense Hitachi expects that it will continue to increase its use of the electronic bank acceptance bill service in 2019 and that the highest daily balance of the electronic bank acceptance bill service in 2019 will be approximately RMB2,500 million (inclusive of interest and service fees), taking into account the fact that, as discussed above and understood from the Management, the expected amount of purchase payment for the year ending 31 December 2019 is expected to have a 20% growth.

Moreover, we consider that it is beneficial for Hisense Hitachi to continue utilising such loan and electronic bank acceptance bills services from Hisense Finance as Hisense Hitachi will be able to reduce its finance costs and service charges. We also consider that it is of Hisense Hitachi’s interest to maximise the relevant annual cap so as to capture the potential interest and cost savings to the greatest extent. Therefore, the percentage of payment in form of electronic bills is expected to increase from 47% in the year ending 2018 to 57% in the year ending 2019.

According to the Management, the transaction amount of purchase payment for the year ending 31 December 2018 was approximately RMB6.2 billion. With the 20% growth rate in the year 2019, the expected amount of purchase payment for the year ending 31 December 2019 will be approximately RMB7.5 billion. As the efficiency and convenience of using the electronic bills, the percentage of payment in form of electronic bills is expected to increase to 57% in the year ending 2019, thus, the expected maximum daily closing balance of Hisense Hitachi for the loan and electronic bank acceptance bill services for the period from 1 August 2019 to 31 December 2019 will be RMB2.5 billion.

Given that the loan and electronic bank acceptance bill services under the Financial Services Supplemental Agreement will be conducted in the ordinary and usual course of business of the Enlarged Group and on normal commercial terms and on terms not less favourable to the Enlarged Group than terms available from other normal commercial banks and financial institutions, we are of the view that the 2019 annual cap in respect of the loan and electronic bank acceptance bill services under the Financial Services Supplemental Agreement is fair and reasonable.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

Based on the above, we are of the opinion that the proposed Revised Annual Caps, the transactions and terms contemplated under the Business Co-operation Framework Supplemental Agreement and the Financial Services Supplemental Agreement are (i) with fair and reasonable terms; (ii) on normal commercial terms or better and in the ordinary and usual course of business of the Group; and (iii) in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee advising the Shareholders to vote in favour of the relevant resolution to approve the Supplemental Agreement (stipulating the Revised Annual Caps) and the transactions contemplated thereunder at the relevant general meeting of the Company.

Yours faithfully For and on behalf of Yuanta Securities (Hong Kong) Company Limited Lei Hsi Wei

Executive Director

Investment Banking

Note: Mr. Lei Hsi Wei is a licensed person registered with the Securities and Futures Commission and regarded as a responsible officer of Yuanta Securities (Hong Kong) Company Limited to carry on Type 6 (advising on corporate finance) regulated activity under the SFO. Mr. Lei has over 10 years of experience in the corporate finance industry.

– 102 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. FINANCIAL INFORMATION OF THE GROUP

Financial information of the Group for each of the three financial years ended 31 December 2016, 2017 and 2018 are disclosed in the following documents which have been published on the websites of the Stock Exchange (www.hkex.com.hk) and the Company (http://www.kelon.com):

(a) on pages 68 to 191 of the annual report of the Company for the year ended 31 December 2016 published on 4 May 2017
(http://www.hkexnews.hk/listedco/listconews/SEHK/2017/0504/LTN20170504861.pdf);
(b) on pages 61 to 189 of the annual report of the Company for the year ended 31 December 2017 published on 27 April 2018 (http://www3.hkexnews.hk/listedco/listconews/SEHK/2018/0427/LTN201804272902.pdf); and
(c) on pages 66 to 207 of the annual report of the Company for the year ended 31 December 2018 published on 26 April 2019
(http://www3.hkexnews.hk/listedco/listconews/SEHK/2019/0426/LTN201904261930.pdf).

2. INDEBTEDNESS

As at the close of business on 30 June 2019, being the latest practicable date for the purpose of ascertaining the information contained in this indebtedness statement prior to the printing of this circular, apart from intra-group liabilities, the Enlarged Group did not have any debt securities issued and outstanding, or authorised or otherwise created but unissued, any other term loans, any other borrowings or indebtedness in the nature of borrowing (including but not limited to bank overdrafts and liabilities under acceptance (other than normal trade bills)), acceptance credits, finance lease or hire purchase commitments, which are either guaranteed, unguaranteed, secured or unsecured, any other mortgages and charges or any other material contingent liabilities or guarantees.

3. WORKING CAPITAL

The Directors are of the opinion that, after due and careful enquiry, taking into account the effect of the transactions contemplated under the Sale and Purchase Agreement and the Financial Services Supplemental Agreement, the cash flow generated from the operating activities, financial resources available to the Enlarged Group, including internally generated funds and the available credit financing, the Enlarged Group has sufficient working capital to meet its requirements for at least the next 12 months from the date of this circular, in the absence of unforeseeable circumstances.

4. FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

The range of application of central air-conditioners is wide with positive development prospects. According to statistics from www.aircon.com.cn, in 2018, the overall capacity of domestic central air-conditioner market was about 100 billion. From a central air-conditioner product type perspective, the growth rate of multi-connected products – the largest and most

– I-1 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

crucial category in central air-conditioner market – was approximately 10% in 2018. They accounted for 48.5% of the overall central air-conditioner market, and their market share is steadily increasing.

Hisense Hitachi is a strong competitor in the central air-conditioner market, according to statistics from www.aircon.com.cn, market share of Hisense Hitachi accounted for 22.3% in multi-connected central air-conditioner market in 2018, only 0.2 percentage point lower than the first place. Over the years, Hisense Hitachi has adhered to technology orientation and the operating concept of “producing products with high-quality”, it continued to maintain its strengths in the industry in technology and quality, as well as favourable growth momentum in terms of scale and profitability. In 2018, Hisense Hitachi achieved operating revenues of RMB11.0 billion, representing a year-on-year increase of 17% and net profits of RMB1.6 billion, representing a year-on-year increase of 2%, with a net profit margin of 15%.

After the Group has included Hisense Hitachi in the scope of consolidated financial statements, it will consolidate the total assets, operating revenues and total profits of Hisense Hitachi in accordance with the relevant requirements of the “Accounting Standards for Business Enterprises”, the Company’s net assets attributable to shareholders of listed company and net profits attributable to shareholders of listed company will increase thanks to interests and profits from the corresponding 0.2% equity interests of Hisense Hitachi. If the audited 2018 annual financial statements of the Company and the audited 2019 first quarterly financial statements of Hisense Hitachi are used to demonstrate the consolidation of statement information of Hisense Hitachi, after consolidation, the Group’s total assets will increase from RMB21.83 billion to RMB31.33 billion, representing an increase of 44%; operating revenues will increase from RMB36.02 billion to RMB46.49 billion, representing an increase of 29%; total profits will increase from RMB1.56 billion to RMB2.74 billion, representing an increase of 75%; net cash flows from operating activities will increase from RMB1.05 billion to RMB2.86 billion, representing an increase of 172%; the scale of the Company in terms of assets, revenues, total profits and cash flows, as well as the level of enterprise competitiveness, will increase significantly.

– I-2 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

The following is the text of a report set out on pages II-1 to II-130, received from the Company’s reporting accountants, Ruihua Certified Public Accountants (LLP), for the purpose of incorporation in this circular.

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通訊位址：北京市東城區永定門西濱河路 8 號院 7 號樓中海地產廣場西塔 9 層 Postal Address: 9/F, West Tower of China Overseas Property Plaza, Building 7, NO. 8, Yongdingmen Xibinhe Road, Dongcheng District, Beijing 郵政編碼 (Post Code): 100077 電話 (Tel): +86(10)88095588 傳真 (Fax): +86(10)88091199

ACCOUNTANT’S REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF HISENSE HOME APPLIANCES GROUP CO., LTD.

Rui Hua Zhuan Shen Zi [2019]95020006

Introduction

We report on the historical financial information of Qingdao Hisense Hitachi AirConditioning Systems Co., Ltd. (the “Target Company”) and its subsidiary (together, the “Target Group”) set out on pages II-4 to II-130, which comprises the consolidated balance sheets as at 31 December 2016, 2017 and 2018 and 31 March 2019, and the consolidated income statement, consolidated cash flow statement and consolidated statement of changes in owners’ equity for each of the years ended 31 December 2016, 2017 and 2018 and the three months ended 31 March 2019 (the “Relevant Periods”) and a summary of significant accounting policies and other explanatory information (collectively, the “Historical Financial Information”). The Historical Financial Information set out on pages II-4 to II-130 forms an integral part of this report, which has been prepared for inclusion in the circular dated 14 August 2019 (the “Circular”) in connection with the proposed acquisition of the Target Company.

Directors’ responsibility for the Historical Financial Information

The directors of the Company are responsible for the preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presentation set out in Note 2 to the Historical Financial Information, and for such internal control as the directors determine is necessary to enable the preparation of the Historical Financial Information that is free from material misstatement, whether due to fraud or error.

– II-1 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Reporting accountant’s responsibility

Our responsibility is to express an opinion on the Historical Financial Information and to report our opinion to you. We conducted our work in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 200, Accountants’ Reports on Historical Financial Information in Investment Circulars issued by the HKICPA. This standard requires that we comply with ethical standards and plan and perform our work to obtain reasonable assurance about whether the Historical Financial Information is free from material misstatement.

Our work involved performing procedures to obtain evidence about the amounts and disclosures in the Historical Financial Information. The procedures selected depend on the reporting accountant’s judgement, including the assessment of risks of material misstatement of the Historical Financial Information, whether due to fraud or error. In making those risk assessments, the reporting accountant considers internal control relevant to the entity’s preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presention set out in Note 2 to the Historical Financial Information in order to design 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. Our work also included 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 Historical Financial Information.

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

Opinion

In our opinion, the Historical Financial Information gives, for the purposes of the accountant’s report, a true and fair view of the consolidated financial position of the Target Group as at 31 December 2016, 2017, 2018 and 31 March 2019, and of the consolidated results of operations and cash flows of the Target Group for the Relevant Periods in accordance with the basis of preparation and presentation set out in Note 2 to the Historical Financial Information.

– II-2 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Review of stub period comparative financial information

We have reviewed the stub period comparative financial information of the Target Group which comprises the consolidated income statement, consolidated cash flow statement and consolidated statement of changes in owners’ equity for the three months ended 31 March 2018 and other explanatory information (collectively, the “Stub Period Comparative Financial Information”). The directors of the Target Company are responsible for the preparation and presentation of the Stub Period Comparative Financial Information in accordance with the basis of preparation and presentation set out in Note 2 to the Historical Financial Information. Our responsibility is to express a conclusion on the Stub Period Comparative Financial Information based on our review. We conducted our review in accordance with Hong Kong Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the HKICPA. A review mainly consists of making inquiries of persons responsible for financial and accounting matters, and applying analytical procedures. A review is substantially less in scope than an audit and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, for the purposes of the accountant’s report, nothing has come to our attention that causes us to believe that the Stub Period Comparative Financial Information is not prepared and presented, in all material respects, in accordance with the basis of preparation and presentation set out in Note 2 to the Historical Financial Information.

Adjustments

In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements have been made.

Dividends

We refer to Note 13.6 to the Historical Financial Information which contains information about the dividends paid by the Company in respect of the Relevant Periods.

Ruihua Certified Public Accountants (LLP)

Beijing, the People’s Republic of China 9 August 2019

– II-3 –

APPENDIX II ACCOUNTANTS’ REPORT OF HISENSE HITACHI

II THE HISTORICAL FINANCIAL INFORMATION OF THE TARGET GROUP

Preparation of the Historical Financial Information

Set out below is the Historical Financial Information which forms an integral part of this accountant’s report.

The Underlying Financial Statements, on which the Historical Financial Information is based, were audited by Ruihua Certified Public Accountants (LLP) in accordance with China Standards on Auditing issued by the Chinese Institute of Certified Public Accountants.

The Historical Financial Information is presented in Renminbi (“RMB”) except when otherwise indicated.

CONSOLIDATED BALANCE SHEETS

Prepared by: Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd.

Unit: RMB

Items Notes Current assets: Cash at bank and on hand 6.1 Financial assets at fair value through profit or loss Derivative financial assets Notes receivable and Accounts receivable 6.2 Including: Notes receivable 6.2(1) Accounts receivable 6.2(2) Prepayments 6.3 Other receivables 6.4 Including: Interests receivable 6.4(1) Dividends receivable Inventories 6.5 Assets held for sale Non-current assets due within one year Other current assets 6.6 Total current assets	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 6,341,112,859.66 5,640,344,205.81 2,328,175,973.02 1,908,148,936.32 173,000.00 2,578,607,891.84 2,368,272,681.58 1,807,467,070.08 1,208,083,348.96 2,088,694,716.15 1,928,737,483.93 1,420,421,510.79 997,760,251.09 489,913,175.69 439,535,197.65 387,045,559.29 210,323,097.87 3,343,894.23 6,649,329.75 9,136,619.20 14,273,674.58 268,224,529.45 282,573,640.43 164,771,894.67 55,428,721.44 218,746,182.52 201,768,840.62 132,306,553.42 47,504,541.65 790,567,659.89 730,974,541.13 735,537,080.66 557,862,796.64 38,202,383.55 12,458,004.24 245,021,227.42 311,694,623.10 10,020,059,218.62 9,041,445,402.94 5,290,109,865.05 4,055,492,101.04	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 6,341,112,859.66 5,640,344,205.81 2,328,175,973.02 1,908,148,936.32 173,000.00 2,578,607,891.84 2,368,272,681.58 1,807,467,070.08 1,208,083,348.96 2,088,694,716.15 1,928,737,483.93 1,420,421,510.79 997,760,251.09 489,913,175.69 439,535,197.65 387,045,559.29 210,323,097.87 3,343,894.23 6,649,329.75 9,136,619.20 14,273,674.58 268,224,529.45 282,573,640.43 164,771,894.67 55,428,721.44 218,746,182.52 201,768,840.62 132,306,553.42 47,504,541.65 790,567,659.89 730,974,541.13 735,537,080.66 557,862,796.64 38,202,383.55 12,458,004.24 245,021,227.42 311,694,623.10 10,020,059,218.62 9,041,445,402.94 5,290,109,865.05 4,055,492,101.04
		4,055,492,101.04

– II-4 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Items Notes Non-current assets: Available-for-sale financial assets Held-to-maturity investments Long-term receivables Long-term equity investments Investment properties Fixed assets 6.7 Construction in progress 6.8 Productive biological assets Oil and gas assets Intangible assets 6.9 Development costs Goodwill Long-term prepaid expenses 6.10 Deferred tax assets 6.11 Other non-current assets 6.12 Total non-current assets Total assets Current liabilities: Short-term borrowings Financial liabilities at fair value through profit or loss Derivative financial liabilities Notes payable and Accounts payable 6.13 Advances from customers 6.14 Employee remunerations payable 6.15 Taxes payable 6.16 Other payables 6.17 Including: Interests payable Dividends payable 6.17(1) Liabilities held for sale Non-current liabilities due within one year Other current liabilities Total current liabilities	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 428,194,930.86 443,308,332.60 364,172,119.30 293,048,315.88 75,718,397.06 16,805,524.76 50,388,838.71 12,833,701.68 1,279,344,183.62 1,204,175,640.08 711,876,057.41 17,956,565.26 1,507,853.87 1,253,223.62 460,195,259.48 410,391,423.85 331,392,479.47 191,409,171.06 300,000,000.00 800,000,000.00 2,887,376,447.59 2,293,376,447.59 2,544,960,624.89 2,875,934,144.91 4,345,205,942.48 2,808,624,201.47 12,565,019,843.51 11,917,379,547.85 9,635,315,807.53 6,864,116,302.51 2,667,502,746.15 2,620,055,490.95 2,436,972,786.55 1,685,043,098.48 519,627,834.92 344,272,925.06 339,462,564.79 242,949,035.54 136,355,133.37 220,089,761.86 188,582,697.91 124,144,098.93 269,772,495.28 305,440,331.65 250,328,331.19 203,357,718.46 3,865,763,111.32 2,203,738,480.71 1,825,970,196.69 1,117,853,050.09 1,466,022,000.00 7,459,021,321.04 5,693,596,990.23 5,041,316,577.13 3,373,347,001.50	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 428,194,930.86 443,308,332.60 364,172,119.30 293,048,315.88 75,718,397.06 16,805,524.76 50,388,838.71 12,833,701.68 1,279,344,183.62 1,204,175,640.08 711,876,057.41 17,956,565.26 1,507,853.87 1,253,223.62 460,195,259.48 410,391,423.85 331,392,479.47 191,409,171.06 300,000,000.00 800,000,000.00 2,887,376,447.59 2,293,376,447.59 2,544,960,624.89 2,875,934,144.91 4,345,205,942.48 2,808,624,201.47 12,565,019,843.51 11,917,379,547.85 9,635,315,807.53 6,864,116,302.51 2,667,502,746.15 2,620,055,490.95 2,436,972,786.55 1,685,043,098.48 519,627,834.92 344,272,925.06 339,462,564.79 242,949,035.54 136,355,133.37 220,089,761.86 188,582,697.91 124,144,098.93 269,772,495.28 305,440,331.65 250,328,331.19 203,357,718.46 3,865,763,111.32 2,203,738,480.71 1,825,970,196.69 1,117,853,050.09 1,466,022,000.00 7,459,021,321.04 5,693,596,990.23 5,041,316,577.13 3,373,347,001.50
		2,808,624,201.47
		6,864,116,302.51

		1,685,043,098.48 242,949,035.54 124,144,098.93 203,357,718.46 1,117,853,050.09
		3,373,347,001.50

– II-5 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Items Notes Non-current liabilities: Long-term borrowings Bonds payable Including: Preference shares Perpetual debts Long-term payables Long-term employee remunerations payable Provisions 6.18 Deferred income Deferred tax liabilities 6.11 Other non-current liabilities Total non-current liabilities Total liabilities Shareholders’ equity: Share capital 6.19 Other equity instruments Including: Preference shares Perpetual debts Capital reserve 6.20 Less: treasury shares Other comprehensive income Special reserves Surplus reserves 6.21 General risk provisions Undistributed profit 6.22 Total equity attributable to shareholders of the parent Minority interests Total shareholders’ equity Total liabilities and shareholders’equity	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 136,183,465.72 138,285,406.92 101,343,308.02 78,609,180.40 19,667,142.27 16,282,393.09 2,233,757.43 1,643,427.03 155,850,607.99 154,567,800.01 103,577,065.45 80,252,607.43 7,614,871,929.03 5,848,164,790.24 5,144,893,642.58 3,453,599,608.93 320,591,144.80 320,591,144.80 320,591,144.80 320,591,144.80 3,599,156.24 1,373,640,690.73 1,373,640,690.73 1,088,996,082.23 825,658,864.58 3,008,490,504.20 4,141,361,868.90 2,887,263,182.55 2,124,317,646.61 4,702,722,339.73 5,835,593,704.43 4,296,850,409.58 3,274,166,812.23 247,425,574.75 233,621,053.18 193,571,755.37 136,349,881.35 4,950,147,914.48 6,069,214,757.61 4,490,422,164.95 3,410,516,693.58 12,565,019,843.51 11,917,379,547.85 9,635,315,807.53 6,864,116,302.51	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 136,183,465.72 138,285,406.92 101,343,308.02 78,609,180.40 19,667,142.27 16,282,393.09 2,233,757.43 1,643,427.03 155,850,607.99 154,567,800.01 103,577,065.45 80,252,607.43 7,614,871,929.03 5,848,164,790.24 5,144,893,642.58 3,453,599,608.93 320,591,144.80 320,591,144.80 320,591,144.80 320,591,144.80 3,599,156.24 1,373,640,690.73 1,373,640,690.73 1,088,996,082.23 825,658,864.58 3,008,490,504.20 4,141,361,868.90 2,887,263,182.55 2,124,317,646.61 4,702,722,339.73 5,835,593,704.43 4,296,850,409.58 3,274,166,812.23 247,425,574.75 233,621,053.18 193,571,755.37 136,349,881.35 4,950,147,914.48 6,069,214,757.61 4,490,422,164.95 3,410,516,693.58 12,565,019,843.51 11,917,379,547.85 9,635,315,807.53 6,864,116,302.51
		80,252,607.43
		3,453,599,608.93

		320,591,144.80 3,599,156.24 825,658,864.58 2,124,317,646.61 3,274,166,812.23 136,349,881.35
		3,410,516,693.58

		6,864,116,302.51

– II-6 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

CONSOLIDATED INCOME STATEMENT

Prepared by: Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd. Unit: RMB

			Three months
		Three months	ended
		ended	31 March 2018
Items	Notes	31 March 2019	(Unaudited)	2018	2017	2016
I. Total operating revenue		2,701,523,556.04	2,250,391,334.72	10,986,666,830.49	9,401,772,350.86	6,518,467,286.38
Including: Operating revenue	6.23	2,701,523,556.04	2,250,391,334.72	10,986,666,830.49	9,401,772,350.86	6,518,467,286.38
II. Total operating costs		2,239,308,792.12	1,887,285,906.81	9,161,920,132.95	7,621,915,706.00	5,152,645,418.91
Including: Operating costs	6.23	1,536,498,113.65	1,346,013,442.86	6,678,727,996.35	5,408,483,705.79	3,576,415,290.47
Taxes and surcharges	6.24	24,424,038.03	15,429,827.78	84,507,929.16	79,460,064.52	56,615,965.61
Sales expenses	6.25	577,701,321.30	432,792,994.68	1,976,637,778.33	1,946,440,334.41	1,403,127,877.61
Management expenses	6.26	56,943,491.01	43,480,189.17	207,172,633.58	69,803,269.36	54,615,119.38
Research and development expenses	6.27	75,697,400.72	72,422,583.80	331,367,497.63	228,467,321.79	131,438,915.41
Financial expenses	6.28	-33,084,476.15	-24,674,277.23	-127,045,211.30	-116,245,261.28	-77,537,086.93
Including: Interest expense		54,881.50
Interest income		34,711,256.13	30,233,610.58	124,747,593.93	118,485,476.41	77,541,547.46
Impairment losses on assets	6.29	1,128,903.56	1,821,145.75	10,551,509.20	5,506,271.41	7,969,337.36
Add: Other income	6.30		20,575,670.96	122,234,003.83	124,951,715.95
Investment gain (loss expressed with “-”)		461,600.00				756,537.00
Including: Share of profit of associates and
joint ventures
Gain from changes in fair values (loss
expressed with “-”)		-173,000.00		173,000.00
Gains on disposal of asset (loss expressed
with “-”)	6.31		174,816.86	174,816.86
III. Operating profits (loss expressed with “–”)		462,503,363.92	383,855,915.73	1,947,328,518.23	1,904,808,360.81	1,366,578,404.47
Add: Non-operating incomes	6.32	2,070,238.10	441,183.49	2,987,348.28	3,520,222.04	107,590,615.40
Less: Non-operating expenses	6.33	168,300.70	39,184.19	623,580.26	680,226.23	1,124,172.11
IV. Total profit (total loss expressed with “–”)		464,405,301.32	384,257,915.03	1,949,692,286.25	1,907,648,356.62	1,473,044,847.76
Less: Income tax expenses	6.34	84,472,144.45	56,238,198.94	346,474,553.59	340,470,725.58	249,691,088.63

– II-7 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Three months

Items

V. Net profits (net loss expressed with “–”)

Three months ended ended 31 March 2018 Notes 31 March 2019 (Unaudited) 2018 2017 2016 379,933,156.87 328,019,716.09 1,603,217,732.66 1,567,177,631.04 1,223,353,759.13

(I) Classified according to the continuity of the

business

Net profit from continuing operations (net loss expressed with “-”)

379,933,156.87 328,019,716.09 1,603,217,732.66 1,567,177,631.04 1,223,353,759.13

Net profit from discontinued operations (net loss expressed with “-”)
(II) Classified according to the equity holdings
Profit and loss of minority interests (net loss expressed with “-”)
Net profit attributable to shareholders of the parent (net loss expressed with “-”)

13,804,521.57 12,759,687.41 64,474,437.81 67,896,314.34 52,054,998.76 366,128,635.30 315,260,028.68 1,538,743,294.85 1,499,281,316.70 1,171,298,760.37

VI. Other comprehensive income after tax, net

Other comprehensive income after tax attributable to owners of the parent, net
(1) Items not to be reclassified into profit

or loss

Changes arising from remeasurement
of defined benefit plan
Other comprehensive income that cannot be transferred to profit or loss under the equity method
(2) Items to be reclassified into profit or loss
Other comprehensive income that is convertible into gains and losses under the equity method
Gains and losses from changes in fair value of available-for-sale financial assets
Held-to-maturity investments are
reclassified as gains and losses on available-for-sale financial assets
Effective portion of profit or loss from cash flows hedges
Differences on translation of foreign currency financial statements
Others
Other comprehensive income after tax attributable to minority interests, net

– II-8 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Three months

Three months ended ended 31 March 2018 Items Notes 31 March 2019 (Unaudited) 2018 2017 2016 VII. Total comprehensive income Total comprehensive income 379,933,156.87 328,019,716.09 1,603,217,732.66 1,567,177,631.04 1,223,353,759.13 Total comprehensive income attributable to shareholders of the parent 366,128,635.30 315,260,028.68 1,538,743,294.85 1,499,281,316.70 1,171,298,760.37 Total comprehensive income attributable to minority interests 13,804,521.57 12,759,687.41 64,474,437.81 67,896,314.34 52,054,998.76

Items

VII. Total comprehensive income Total comprehensive income

– II-9 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

CONSOLIDATED CASH FLOW STATEMENT

Prepared by: Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd.

Unit: RMB

			Three months
		Three months	ended
		ended	31 March 2018
Items	Notes	31 March 2019	(Unaudited)	2018	2017	2016
I. Cash flows from operating activities:
Cash received from sales of goods and
rendering of services		2,668,438,222.93	2,113,941,690.39	10,326,606,262.83	9,004,217,986.35	6,745,349,616.25
Tax rebates received		9,001,892.01	37,071,986.58	159,331,701.54	132,540,882.17	109,007,682.46
Other cash received concerning operating
activities		4,131,136.67	22,841,724.91	44,510,971.68	27,632,647.39	18,272,387.43
Subtotal of cash inflows from operating
activities		2,681,571,251.61	2,173,855,401.88	10,530,448,936.05	9,164,391,515.91	6,872,629,686.14
Cash paid for purchases of commodities
and receipt of services		1,328,873,272.72	1,351,823,374.47	5,435,881,587.70	4,115,630,246.20	2,679,312,573.76
Cash paid to and for employees		298,057,827.02	267,171,853.35	773,805,898.68	571,904,550.72	409,282,481.96
Cash paid for taxes and surcharges		371,615,063.89	180,537,190.11	1,028,355,348.17	1,049,083,147.03	757,834,105.14
Cash paid for other operating activities		316,188,894.91	227,828,184.66	1,477,839,524.22	1,145,023,993.30	798,286,947.61
Subtotal of cash outflows from
operating activities		2,314,735,058.54	2,027,360,602.59	8,715,882,358.77	6,881,641,937.25	4,644,716,108.47
Net cash flows from operating activities	6.36	366,836,193.07	146,494,799.29	1,814,566,577.28	2,282,749,578.66	2,227,913,577.67

– II-10 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

			Three months
		Three months	ended
		ended	31 March 2018
Items	Notes	31 March 2019	(Unaudited)	2018	2017	2016
II. Cash flows from investing activities:
Cash received from recovery of investments				210,000,000.00	90,000,000.00	100,000,000.00
Cash received from investment income		311,300.00				801,929.22
Net cash received from disposals of fixed
assets, intangible assets and other
long-term assets		5,675.00	76,900.00	79,900.00	350.00	1,480.00
Net cash received from disposal of subsidiaries
and other operation units
Cash received relating to other investing
activities		551,175,138.06		1,471,117,182.69	2,096,873,561.41	2,516,778,774.66
Subtotal of cash inflows from investing
activities		551,492,113.06	76,900.00	1,681,197,082.69	2,186,873,911.41	2,617,582,183.88
Cash paid for acquisition of fixed assets,
intangible assets and other long-term assets		36,256,743.14	743,830,215.24	856,127,635.27	901,631,882.59	57,008,179.81
Cash paid for investments						400,000,000.00
Cash paid for acquiring subsidiaries and
other operation units		77,292,061.05
Cash paid relating to other investing activities		2,049,805,138.06		1,648,299,900.00	2,314,508,438.91	4,231,441,992.59
Subtotal of cash outflows from investing
activities		2,163,353,942.25	743,830,215.24	2,504,427,535.27	3,216,140,321.50	4,688,450,172.40
Net cash flows from investing activities		-1,611,861,829.19	-743,753,315.24	-823,230,452.58	-1,029,266,410.09	-2,070,867,988.52

– II-11 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

			Three months
		Three months	ended
		ended	31 March 2018
Items	Notes	31 March 2019	(Unaudited)	2018	2017	2016
III. Cash flows from financing activities:
Cash received from capital contribution
Including: Cash contribution to subsidiaries
from minority shareholders’ investment
Cash received from borrowings
Cash received from issuance of bonds
Cash received relating to other financing
activities
Subtotal of cash inflows from financing
activities
Cash paid for repayment of borrowings
Cash paid for distribution of dividends,
profit or payment of interest expenses		32,978,000.00		24,425,140.00	487,272,159.67	339,532,550.00
Including: Dividend and profit paid to minority
shareholders by subsidiaries				24,425,140.00	18,772,159.67	12,532,550.00
Cash paid relating to other financing activities
Subtotal of cash outflows from financing
activities		32,978,000.00		24,425,140.00	487,272,159.67	339,532,550.00
Net cash flows from financing activities		-32,978,000.00		-24,425,140.00	-487,272,159.67	-339,532,550.00
IV. Effects of foreign exchange rate changes on
cash and cash equivalents
V. Net increase in cash and cash equivalents		-1,278,003,636.12	-597,258,515.95	966,910,984.70	766,211,008.90	-182,486,960.85
Add: Balance of cash and cash equivalents at
the beginning of the period		1,868,786,151.72	901,875,167.02	901,875,167.02	135,664,158.12	318,151,118.97
VI. Balance of cash and cash equivalents at
the end of the period		590,782,515.60	304,616,651.07	1,868,786,151.72	901,875,167.02	135,664,158.12

– II-12 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

	Unit: RMB				Total	Minority shareholders’	interests equity	233,621,053.18 6,069,214,757.61					233,621,053.18 6,069,214,757.61	13,804,521.57 -1,119,066,843.13	13,804,521.57 379,933,156.87
						Undistributed	profits	4,141,361,868.90					4,141,361,868.90	-1,132,871,364.70	366,128,635.30
						General risk	provisions
						Surplus	reserves	1,373,640,690.73					1,373,640,690.73
						Special	reserves
CONSOLIDATED STATEMENT OF CHANGES IN OWNERS’ EQUITY	Prepared by: Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd.	Three months ended 31 March 2019	Attributable to the shareholders of the parent	Other equity instruments	Less: Other	Share Preference Perpetual Capital Treasury comprehensive	Items capital shares debts Others reserve shares imcome	I. Closing balance of previous year 320,591,144.80	Add: Changes in accounting policies	Correction for error in previous period	Business combination involving entities under common control	Others	II. Opening balance for the year 320,591,144.80	III. Movements in the current period (Decreases expressed with “–”)	(1) Total comprehensive income	(2) Owners’ contributions and capital reductions	1. Owners’ contributions	2. Capital contributions by holders of other equity instruments	3. Amount of share-based payment included in owners’ equity

– II-13 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

			Total	shareholders’	equity		-1,499,000,000.00			-1,499,000,000.00													4,950,147,914.48
				Minority	interests																		247,425,574.75
				Undistributed	profits		-1,499,000,000.00			-1,499,000,000.00													3,008,490,504.20
				General risk	provisions
				Surplus	reserves																		1,373,640,690.73
				Special	reserves
Three months ended 31 March 2019	Attributable to the shareholders of the parent		Less: Other	Capital Treasury comprehensive	reserve shares imcome
					Others
		Other equity instruments		Perpetual	debts
				Preference	shares
				Share	capital																		320,591,144.80
					Items	4. Others	(3) Profit Distribution	1. Appropriations to surplus reserve	2. Appropriations to general risk provisions	3. Distribution to owners	4. Others	(4) Transfer of owners’ equity	1. Transfer to capital (or share capital) from capital reserve	2. Transfer to capital (or share capital) from surplus reserve	3. Surplus reserves for making up losses	4. Changing amount of defined benefit plan carried forward to	retained earnings	5. Others	(5) Special reserves	1. Provided during the period	2. Used during the period	(6) Others	IV. Closing balance for the period

– II-14 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

			Total	shareholders’	equity	4,490,422,164.95					4,490,422,164.95	328,019,716.09	328,019,716.09
				Minority	interests	193,571,755.37					193,571,755.37	12,759,687.41	12,759,687.41
				Undistributed	profits	2,887,263,182.55					2,887,263,182.55	315,260,028.68	315,260,028.68
				General risk	provisions
				Surplus	reserves	1,088,996,082.23					1,088,996,082.23
Three months ended 31 March 2018 (Unaudited)	Attributable to the shareholders of the parent		Less: Other	Capital Treasury comprehensive Special	reserve shares imcome reserves
					Others
		Other equity instruments		Perpetual	debts
				Preference	shares
					Share capital	320,591,144.80					320,591,144.80
					Items	I. Closing balance of previous year	Add: Changes in accounting policies	Correction for error in previous period	Business combination involving entities under common control	Others	II. Opening balance for the year	III. Movements in the current period (Decreases expressed with “–”)	(1) Total comprehensive income	(2) Owners’ contributions and capital reductions	1. Owners’ contributions	2. Capital contributions by holders of other equity instruments	3. Amount of share-based payment included in owners’ equity	4. Others

– II-15 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

			Total	shareholders’	equity																	4,818,441,881.04
				Minority	interests																	206,331,442.78
				Undistributed	profits																	3,202,523,211.23
				General risk	provisions
				Surplus	reserves																	1,088,996,082.23
Three months ended 31 March 2018 (Unaudited)	Attributable to the shareholders of the parent		Less: Other	Capital Treasury comprehensive Special	reserve shares imcome reserves
					Others
		Other equity instruments		Perpetual	debts
				Preference	shares
					Share capital																	320,591,144.80
					Items	(3) Profit Distribution	1. Appropriations to surplus reserve	2. Appropriations to general risk provisions	3. Distribution to owners	4. Others	(4) Transfer of owners’ equity	1. Transfer to capital (or share capital) from capital reserve	2. Transfer to capital (or share capital) from surplus reserve	3. Surplus reserves for making up losses	4. Changing amount of defined benefit plan carried forward to	retained earnings	5. Others	(5) Special reserves	1. Provided during the period	2. Used during the period	(6)Others	IV. Closing balance for the period

– II-16 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

			Total	shareholders’	equity	4,490,422,164.95					4,490,422,164.95	1,578,792,592.66	1,603,217,732.66
				Minority	interests	193,571,755.37					193,571,755.37	40,049,297.81	64,474,437.81
				Undistributed	profits	2,887,263,182.55					2,887,263,182.55	1,254,098,686.35	1,538,743,294.85
				General risk	provisions
				Surplus	reserves	1,088,996,082.23					1,088,996,082.23	284,644,608.50
				Special	reserves
2018	Attributable to the shareholders of the parent		Less: Other	Capital Treasury comprehensive	reserve shares imcome
					Others
		Other equity instruments		Perpetual	debts
				Preference	shares
					Share capital	320,591,144.80					320,591,144.80
					Items	I. Closing balance of previous year	Add: Changes in accounting policies	Correction for error in previous period	Business combination involving entities under common control	Others	II. Opening balance for the year	III. Movements in the current period (Decreases expressed with “–”)	(1) Total comprehensive income	(2) Owners’ contributions and capital reductions	1. Owners’ contributions	2. Capital contributions by holders of other equity instruments	3. Amount of share-based payment included in owners’ equity

– II-17 –

APPENDIX II ACCOUNTANTS’ REPORT OF HISENSE HITACHI

			Total	shareholders’	equity		-24,425,140.00			-24,425,140.00													6,069,214,757.61
				Minority	interests		-24,425,140.00			-24,425,140.00													233,621,053.18
				Undistributed	profits		-284,644,608.50	-284,644,608.50															4,141,361,868.90
				General risk	provisions
				Surplus	reserves		284,644,608.50	284,644,608.50															1,373,640,690.73
				Special	reserves
2018	Attributable to the shareholders of the parent		Less: Other	Capital Treasury comprehensive	reserve shares imcome
					Others
		Other equity instruments		Perpetual	debts
				Preference	shares
					Share capital																		320,591,144.80
					Items	4. Others	(3) Profit Distribution	1. Appropriations to surplus reserve	2. Appropriations to general risk provisions	3. Distribution to owners	4. Others	(4) Transfer of owners’ equity	1. Transfer to capital (or share capital) from capital reserve	2. Transfer to capital (or share capital) from surplus reserve	3. Surplus reserves for making up losses	4. Changing amount of defined benefit plan carried forward to	retained earnings	5. Others	(5) Special reserves	1. Provided during the period	2. Used during the period	(6) Others	IV. Closing balance for the year

– II-18 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

			Total	shareholders’	equity	3,410,516,693.58					3,410,516,693.58	1,079,905,471.37	1,567,177,631.04
				Minority	interests	136,349,881.35					136,349,881.35	57,221,874.02	67,896,314.34	8,097,719.35
				Undistributed	profits	2,124,317,646.61					2,124,317,646.61	762,945,535.94	1,499,281,316.70
				General risk	provisions
				Surplus	reserves	825,658,864.58					825,658,864.58	263,337,217.65		-4,498,563.11
				Special	reserves
2017	Attributable to the shareholders of the parent		Less: Other	Capital Treasury comprehensive	reserve shares imcome	3,599,156.24					3,599,156.24	-3,599,156.24		-3,599,156.24
					Others
		Other equity instruments		Perpetual	debts
				Preference	shares
				Share	capital	320,591,144.80					320,591,144.80
					Items	I. Closing balance of previous year	Add: Changes in accounting policies	Correction for error in previous period	Business combination involving entities under common control	Others	II. Opening balance for the year	III. Movements in the current period (Decreases expressed with “–”)	(1) Total comprehensive income	(2) Owners’ contributions and capital reductions	1. Owners’ contributions	2. Capital contributions by holders of other equity instruments	3. Amount of share-based payment included in owners’ equity

– II-19 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

			Total	shareholders’	equity		-487,272,159.67			-487,272,159.67													4,490,422,164.95
				Minority	interests	8,097,719.35	-18,772,159.67			-18,772,159.67													193,571,755.37
				Undistributed	profits		-736,335,780.76	-267,835,780.76		-468,500,000.00													2,887,263,182.55
				General risk	provisions
				Surplus	reserves	-4,498,563.11	267,835,780.76	267,835,780.76															1,088,996,082.23
				Special	reserves
2017	Attributable to the shareholders of the parent		Less: Other	Capital Treasury comprehensive	reserve shares imcome	-3,599,156.24
					Others
		Other equity instruments		Perpetual	debts
				Preference	shares
				Share	capital																		320,591,144.80
					Items	4. Others	(3) Profit Distribution	1. Appropriations to surplus reserve	2. Appropriations to general risk provisions	3. Distribution to owners	4. Others	(4) Transfer of owners’ equity	1. Transfer to capital (or share capital) from capital reserve	2. Transfer to capital (or share capital) from surplus reserve	3. Surplus reserves for making up losses	4. Changing amount of defined benefit plan carried forward to	retained earnings	5. Others	(5) Special reserves	1. Provided during the period	2. Used during the period	(6) Others	IV. Closing balance for the year

– II-20 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

2016

Attributable to the shareholders of the parent
Other equity instruments
Share
capital
Preference
shares
Perpetual
debts
Others
Capital
reserve
Less:
Treasury
shares
Other
comprehensive
imcome
Special
reserves
Surplus
reserves
General risk
provisions
Undistributed
profits
Minority
interests
Total
shareholders’
equity
320,591,144.80
3,599,156.24
609,595,516.70
1,496,082,234.12
96,827,432.59
2,526,695,484.45
320,591,144.80
3,599,156.24
609,595,516.70
1,496,082,234.12
96,827,432.59
2,526,695,484.45
216,063,347.88
628,235,412.49
39,522,448.76
883,821,209.13
1,171,298,760.37
52,054,998.76
1,223,353,759.13
216,063,347.88
-543,063,347.88
-12,532,550.00
-339,532,550.00
216,063,347.88
-216,063,347.88
-327,000,000.00
-12,532,550.00
-339,532,550.00

– II-21 –

APPENDIX II

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

2016

– II-22 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

BALANCE SHEETS OF PARENT COMPANY

Prepared by: Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd.

Unit: RMB

Items Notes Current assets: Cash at bank and on hand Financial assets at fair value through profit or loss Derivative financial assets Notes receivable and Accounts receivable 14.1 Including: Notes receivable 14.1(1) Accounts receivable 14.1(2) Prepayments Other receivables 14.2 Including: Interests receivable 14.2(1) Dividends receivable Inventories Assets held for sale Non-current assets due within one year Other current assets Total current assets Non-current assets: Available-for-sale financial assets Held-to-maturity investments Long-term receivables Long-term equity investments 14.3 Investment properties Fixed assets Construction in progress Productive biological assets Oil and gas assets Intangible assets Development costs Goodwill Long-term prepaid expenses Deferred tax assets Other non-current assets Total non-current assets Total assets	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 3,523,170,025.97 3,255,683,655.31 1,619,739,488.64 1,850,143,129.02 173,000.00 741,513,781.79 484,054,079.65 235,434,614.46 138,126,888.09 31,681,177.82 36,661,523.47 32,242,272.23 44,767,968.62 709,832,603.97 447,392,556.18 203,192,342.23 93,358,919.47 2,329,534.77 5,581,108.29 9,136,619.19 128,570,692.98 275,590,633.22 203,730,726.96 124,973,889.52 46,336,899.12 141,440,445.27 134,608,894.79 93,781,466.22 39,642,656.72 619,946,849.71 575,881,719.44 597,641,436.78 434,278,671.91 4,606,195.31 3,972,182.44 235,610,550.07 306,591,126.09 5,167,157,020.77 4,529,076,472.09 2,822,536,598.66 2,904,047,407.21 652,822,430.83 560,000,000.00 160,000,000.00 160,000,000.00 414,916,912.38 429,367,592.83 361,372,689.70 293,048,315.88 16,128,592.17 16,805,524.76 50,388,838.71 12,833,701.68 1,159,575,498.66 1,204,175,640.08 711,876,057.41 17,956,565.26 1,507,853.87 1,253,223.62 188,427,277.95 189,191,752.49 162,596,377.83 126,533,965.51 300,000,000.00 800,000,000.00 1,937,376,447.59 1,343,376,447.59 2,733,378,565.86 3,200,793,733.78 3,383,610,411.24 1,953,748,995.92 7,900,535,586.63 7,729,870,205.87 6,206,147,009.90 4,857,796,403.13	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 3,523,170,025.97 3,255,683,655.31 1,619,739,488.64 1,850,143,129.02 173,000.00 741,513,781.79 484,054,079.65 235,434,614.46 138,126,888.09 31,681,177.82 36,661,523.47 32,242,272.23 44,767,968.62 709,832,603.97 447,392,556.18 203,192,342.23 93,358,919.47 2,329,534.77 5,581,108.29 9,136,619.19 128,570,692.98 275,590,633.22 203,730,726.96 124,973,889.52 46,336,899.12 141,440,445.27 134,608,894.79 93,781,466.22 39,642,656.72 619,946,849.71 575,881,719.44 597,641,436.78 434,278,671.91 4,606,195.31 3,972,182.44 235,610,550.07 306,591,126.09 5,167,157,020.77 4,529,076,472.09 2,822,536,598.66 2,904,047,407.21 652,822,430.83 560,000,000.00 160,000,000.00 160,000,000.00 414,916,912.38 429,367,592.83 361,372,689.70 293,048,315.88 16,128,592.17 16,805,524.76 50,388,838.71 12,833,701.68 1,159,575,498.66 1,204,175,640.08 711,876,057.41 17,956,565.26 1,507,853.87 1,253,223.62 188,427,277.95 189,191,752.49 162,596,377.83 126,533,965.51 300,000,000.00 800,000,000.00 1,937,376,447.59 1,343,376,447.59 2,733,378,565.86 3,200,793,733.78 3,383,610,411.24 1,953,748,995.92 7,900,535,586.63 7,729,870,205.87 6,206,147,009.90 4,857,796,403.13
		2,904,047,407.21

		160,000,000.00 293,048,315.88 12,833,701.68 17,956,565.26 126,533,965.51 1,343,376,447.59
		1,953,748,995.92
		4,857,796,403.13

– II-23 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Items Notes Current liabilities: Short-term borrowings Financial liabilities at fair value through profit or loss Derivative financial liabilities Notes payable and Accounts payable Advances from customers Employee remunerations payable Taxes payable Other payables Including: Interests payable Dividends payable Liabilities held for sale Non-current liabilities due within one year Other current liabilities Total current liabilities Non-current liabilities: Long-term borrowings Bonds payable Including: Preference shares Perpetual debts Long-term payables Long-term employee remunerations payable Provisions Deferred income Deferred tax liabilities Other non-current liabilities Total non-current liabilities Total liabilities	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 683,227,561.57 665,273,080.91 593,874,269.70 601,028,184.66 107,028,651.52 154,651,454.19 408,287,926.30 110,885,629.52 3,681,621.85 16,969,629.97 19,023,378.83 85,660,913.35 106,040,320.88 141,748,060.12 78,763,211.68 110,753,865.95 2,761,411,762.49 1,343,306,333.73 1,138,005,729.83 853,277,103.74 1,466,022,000.00 3,661,389,918.31 2,321,948,558.92 2,237,954,516.34 1,761,605,697.22 83,851,580.25 83,578,945.98 78,321,864.74 77,589,311.26 16,595,601.39 13,482,787.07 2,233,757.43 1,643,427.03 100,447,181.64 97,061,733.05 80,555,622.17 79,232,738.29 3,761,837,099.95 2,419,010,291.97 2,318,510,138.51 1,840,838,435.51	As at 31 March 2019 As at 31 December 2018 As at 31 December 2017 As at 31 December 2016 683,227,561.57 665,273,080.91 593,874,269.70 601,028,184.66 107,028,651.52 154,651,454.19 408,287,926.30 110,885,629.52 3,681,621.85 16,969,629.97 19,023,378.83 85,660,913.35 106,040,320.88 141,748,060.12 78,763,211.68 110,753,865.95 2,761,411,762.49 1,343,306,333.73 1,138,005,729.83 853,277,103.74 1,466,022,000.00 3,661,389,918.31 2,321,948,558.92 2,237,954,516.34 1,761,605,697.22 83,851,580.25 83,578,945.98 78,321,864.74 77,589,311.26 16,595,601.39 13,482,787.07 2,233,757.43 1,643,427.03 100,447,181.64 97,061,733.05 80,555,622.17 79,232,738.29 3,761,837,099.95 2,419,010,291.97 2,318,510,138.51 1,840,838,435.51
		1,761,605,697.22

		77,589,311.26 1,643,427.03
		79,232,738.29

		1,840,838,435.51

– II-24 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

As at As at As at As at Items Notes 31 March 2019 31 December 2018 31 December 2017 31 December 2016 Shareholders’ equity: Share capital 6.19 320,591,144.80 320,591,144.80 320,591,144.80 320,591,144.80 Other equity instruments Including: Preference shares Perpetual debts Capital reserve Less: treasury shares Other comprehensive income Special reserves Surplus reserves 1,378,139,253.84 1,378,139,253.84 1,093,494,645.34 825,658,864.58 General risk provisions Undistributed profit 2,439,968,088.04 3,612,129,515.26 2,473,551,081.25 1,870,707,958.24 Total shareholders’ equity 4,138,698,486.68 5,310,859,913.90 3,887,636,871.39 3,016,957,967.62 Total liabilities and shareholders’equity 7,900,535,586.63 7,729,870,205.87 6,206,147,009.90 4,857,796,403.13

– II-25 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

QINGDAO HISENSE HITACHI AIR-CONDITIONING SYSTEMS CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR 2016, 2017, 2018, THREE MONTHS ENDED 31 MARCH 2018 AND THREE MONTHS ENDED 31 MARCH 2019

(Unless otherwise expressly stated, amounts are denominated in RMB)

I. BASIC INFORMATION OF THE COMPANY

Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd. (hereinafter referred to as the “Target Company”), jointly invested and established by Hisense Company Limited, Hitachi Appliances, Inc. ( 日立空調家用電器株式會社 ), Taiwan Hitachi Co., Ltd. ( 台灣日立股份有限公司 ) and Unitecs Corporation ( 株式會社聯合貿易 ), was incorporated in January 2003 (unified social credit code: 913702117439759413). In 2009, the Target Company’s shareholder Hisense Company Limited transferred its equity interest to Qingdao Hisense Air-Conditioning Company Limited. In August 2010, the Target Company’s shareholder Qingdao Hisense Air-Conditioning Company Limited transferred its equity interest to Hisense Kelon Electrical Holdings Company Limited. The original registered capital of the Target Company was US$12.1 million, and according to the resolution passed by the third interim board of directors, in July 2011, the Target Company’s audited undistributed profits as at the end of 2010 were transferred to paid-up capital of US$33.9 million, and the registered capital after such change was US$46 million. After such capital increase, the proportion of shareholder’s capital contribution remained unchanged. In 2015, the Target Company’s shareholder Hitachi Appliances, Inc. ( 日立空調家用電器株式會社 ) transferred all its equity interest to Jchac HK Sub Holding B Limited ( 江日鉑香港持股有限公司 ). In August 2017, the shareholder HK Sub Holding B Limited ( 江日鉑香港持股有限公司 ) changed its name to Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited. In September 2018, the shareholder Taiwan Hitachi Co., Ltd. ( 台灣日立股份有限公司 ) changed its name to Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd. ( 台灣日立江森自控股份有限公司 ). In October 2018, the shareholder Hisense Kelon Electrical Holdings Company Limited changed its name to Hisense Home Appliances Group Co., Ltd. The legal representative of the Target Company was FRANZ WOLFGANG CERWINKA with its registered address at No. 218, Qianwangang Road, Qingdao Economic and Technological Development Zone ( 青島市經濟技術開發區前灣港路 218 號 ).

Three subsidiaries of the Target Company were included in the scope of consolidation in the three months ended 31 March 2019, details of which are set out in the Note VIII-1. “Interests in Subsidiaries”. The scope of consolidation of the Target Company for the three months ended 31 March 2019 had 1 more subsidiary included and 0 subsidiary excluded compared to 2018, while the scope of consolidation of the Target Company for 2018 had 1 more subsidiary included and 0 subsidiary excluded compared to 2017, details of which are set out in Note VII “Change in Scope of Consolidation”.

The main businesses of the Target Company include: the research and development, manufacturing and sales of air-conditioner, heat pump, refrigeration equipment, heating equipment, ventilation equipment, air-purification equipment, intelligent electrical equipment and supporting facilities, electric water heater and relevant components, and the provision of installation, after-sales and technical testing services; import and export of the above products and technologies. (None of the above-mentioned scope involves the implementation of special administrative measures as prescribed by the state.)

– II-26 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

II. BASIS OF PREPARATION OF FINANCIAL STATEMENTS

The financial statements of the Target Company are prepared based on going-concern assumption and actual transactions and events according to the Accounting Standards for Business Enterprises – Basic Standard (the Ministry of Finance Order No. 33 Issue, the Ministry of Finance Order No. 76 Amendment) issued by the Ministry of Finance, and 42 specific accounting standards, application guidelines for Accounting Standards for Business Enterprises, explanation of Accounting Standards for Business Enterprises and other relevant regulations (hereinafter collectively referred to as “Accounting Standards For Business Enterprises”) issued and revised on 15 February 2006 or later.

According to the relevant provisions of Accounting Standards for Business Enterprises, the Target Company’s financial accounting is conducted on accrual basis. Except for certain financial instruments, the financial statements take the historical cost as the accounting basis. If an asset is impaired, the provision for impairment shall be accrued in accordance with the relevant provisions.

III. STATEMENT OF COMPLIANCE WITH THE ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES

The financial statements prepared by the Target Company comply with the requirements of the Accounting Standards for Business Enterprises and truly and completely reflect the financial position as at 31 December 2016, 31 December 2017, 31 December 2018 and 31 March 2019 and the operating results, cash flows and other related information of the Target Company for the year 2016, 2017, 2018, the three months ended 31 March 2018 and the three months ended 31 March 2019.

IV. MAJOR ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

The Target Company and its subsidiaries are engaged in the production of household appliances. Based on actual production and management features, the Target Company and its subsidiaries formulated a number of specific accounting policies and accounting estimates for revenue recognition and other related transactions and matters in accordance with the relevant requirements of Accounting Standards for Business Enterprises. See this Note IV-24 “Revenue” for details. For the explanation on significant accounting judgments and estimates made by the management, please refer to Note IV-30 “Significant Accounting Judgments and Estimates”.

1. Accounting period

The Target Company’s accounting periods are divided into annual and interim periods. An interim period refers to a reporting period less than a full accounting year. The Target Company adopts a calendar year, being the period from 1 January to 31 December of each year, as its financial year.

2. Business cycle

A normal business cycle represents a period from purchase of assets used for production to realization of cash or cash equivalents by the Target Company. The Target Company adopts a 12-month period as its business cycle and the basis for liquidity classification between assets and liabilities.

3. Reporting currency

Renminbi (RMB) is the currency in the primary economic environment in which the Target Company operate. The Target Company adopts RMB as its reporting currencies. RMB is the functional currency adopted by the Target Company in preparing these financial statements.

– II-27 –

APPENDIX II ACCOUNTANTS’ REPORT OF HISENSE HITACHI

4. Accounting treatment for business combinations involving entities under common and not under common control

Accounting treatment for business combinations involving entities under common and not under common control A business combination refers to the transaction or matter in which one reporting subject formed due to the combination of two or above separate entities. A business combination can be classified as the combination under common control and not under common control.

(1) Business combination involving entities under common control

A business combination under common control is a business combination in which all of the combining entities are ultimately controlled by the same party or parties both before and after the combination, and that control is not transitory. For a business combination under common control, the party that obtains the control of the other parties on the combination date is the acquirer, and other parties involving in the business combination are the acquires. The combination date is the date on which the acquirer effectively obtains the control of the acquirers

Assets and liabilities that are obtained by the acquirer in a business combination shall be measured at their carrying amount at the combination date as recorded by the acquirers. The difference between the carrying amount of the net assets obtained and the carrying amount of the consideration paid by the acquirer for the combination (or the aggregate par value of the issued shares) shall be adjusted to share premium under capital reserve (or capital premium). If the share premium under capital reserve (or capital premium) is not sufficient to absorb the difference, any excess shall be adjusted against retained earnings.

Expenses that are directly attributable to the business combination by the acquirer are charged to the profit and loss for the period in which they are incurred.

(2) Business combination involving entities not under common control

A business combination not under common control is a business combination in which all of the combining entities are not ultimately controlled by the same party or parties both before and after the combination. For a business combination not under common control, the party that obtains the control of the other parties on the acquisition date is the acquirer; other parties involving in the business combination are the acquirers. The acquisition date is the date on which the acquirer effectively obtains control of the acquirers.

For a business combination not under common control, the cost of business combination is the fair value of assets paid, liabilities incurred or undertaken, and equity securities issued by the acquirer for obtaining the control of the acquirers at the acquisition date. Expenses that are attributable to the business combination such as audit fees, legal services fees, consultancy fees and other administration expenses incurred by the Company as acquirer are expensed in the profit or loss for the period in which they are incurred. Transaction fees of equity securities or debt securities issued by the acquirer as consideration for a business combination are included in the initially recognised amount of equity securities or debt securities. Contingent consideration involved is recorded as the combination cost at its fair value on the acquisition date. Should any new or further evidence in relation to the circumstances existing on the acquisition date arise within 12 months after the acquisition date, making it necessary to adjust the contingent consideration, the goodwill arising from the business combination shall be adjusted accordingly. The cost of combination incurred and identifiable net assets obtained by the acquirer in a business combination are measured at fair value on the acquisition date. Where the cost of the combination exceeds the acquirer’s interest in the fair value of the acquirer’s identifiable net assets on the acquisition date, the difference is recognised as goodwill; where the cost of combination is lower than the acquirer’s interest in the fair value of the acquirer’s identifiable net assets on the acquisition date, the difference is recognised in profit or loss for the current year after a review of measurement for the fair value of identifiable assets, liabilities and contingent liabilities of the acquire and the combination cost.

– II-28 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

In relation to the deductible temporary difference acquired from the acquirer, which was not recognised as deferred tax assets due to non-fulfillment of the recognition criteria at the date of the acquisition, if new or further information that is obtained within 12 months after the acquisition date indicates that related conditions at the acquisition date already existed, and that the realization of the economic benefits brought by the deductible temporary difference of the acquirer on the acquisition date can be expected, the relevant deferred tax assets shall be recognised and goodwill shall be deducted accordingly. When the amount of goodwill is less than the deferred tax assets that shall be recognised, the difference shall be recognised in the profit or loss for the period. Except for the above circumstances, deferred tax assets in relation to business combination are recognised in the profit or loss for the period.

For a business combination involving entities not under common control that is achieved in stages, the Company shall determine whether the business combination shall be treated as “a bundle of transactions” in accordance with the determination standards as contained in the “Circular on the Publishment of Interpretation 5 on Accounting Standards for Business Enterprises” issued by the Ministry of Finance (Cai Kuai [2012] No. 19) and Section 51 of “Accounting Standards for Business Enterprises 33 – Consolidated Financial Statements” (Refer to Note IV-5-(2)) “Preparation of consolidated financial statements”. Where the business combination is treated as “a bundle of transactions”, the business combination shall be accounted for in accordance with the previous paragraphs and Note IV-12 “Long term equity investment”; where the business combination does not fall within “a bundle of transactions”, the business combination in the Company’s and the consolidated financial statements shall be accounted for as follows:

In the individual financial statements, the initial cost of the investment shall be the sum of the carrying amount of equity investment held in the acquirer prior to the acquisition date and the amount of additional investment made to the acquirer at the acquisition date. Other comprehensive income relating to the equity interest held in the acquirer prior to the acquisition date shall be, upon disposal of the investment, accounted for in accordance with the same basis as that the acquirer adopts in directly disposing of relevant assets or liabilities, that is, except for the acquirer’s interest in the changes arising from remeasurement of net assets or liabilities relating to the defined benefit plan of the acquirer that is accounted for in accordance with the equity method of accounting, the balance shall be transferred to investment income for the current year.

In the consolidated financial statements, the equity interest held in the acquirer prior to the acquisition date is re-measured according to its fair value at the acquisition date; the difference between the fair value and the carrying amount is recognised as investment income for the current period. Other comprehensive income relating to the equity interest held in the acquirer prior to the acquisition date shall be accounted for in accordance with the same basis as that the acquirer adopts in directly disposing of relevant assets or liabilities, that is, except for the acquirer’s interest in the changes arising from remeasurement of net assets or liabilities relating to the defined benefit plan of the acquirer that is accounted for in accordance with the equity method of accounting, the balance shall be transferred to investment income for the period within which the acquisition date falls.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

5. Preparation of consolidated financial statements

(1) Criteria for the recognition of scope of consolidated financial statements

The scope of consolidation shall be determined based on the concept of control. Control refers to the power of the Target Company over the investee, share of or entitlement to the risk exposure or rights of reward of variable returns, and the ability to affect the amount of such returns by using its power over the investee. The consolidated financial statements comprise the financial statements of the Target Company and all of its subsidiaries, which are defined as those entities controlled by the Target Company.

Once any change in the facts and circumstances arises which leads to a change in the elements involved in the definition of control, the Target Company will conduct an assessment.

(2) Preparation of consolidated financial statements

Subsidiaries are consolidated from the date on which the Target Company obtains their net assets and actual control over their operating decisions, and are deconsolidated from the date when such control ceases. For subsidiaries being disposed, the operating results and cash flows prior to the date of disposal are duly included in the consolidated income statement and consolidated cash flow statement; for subsidiaries disposed during the period, the opening balances of the consolidated balance sheet would not be restated. For subsidiaries acquired from a business combination not under common control, their operating results and cash flows subsequent to the acquisition date are included in the consolidated income statement and consolidated cash flow statement, and the opening balances and comparative figures in the consolidated financial statements would not be restated. For subsidiaries acquired from a business combination under common control, their operating results and cash flows from the date of commencement of the period in which the combination occurred to the date of combination are included in the consolidated income statement and consolidated cash flow statement, and the comparative figures in the consolidated financial statements would be restated.

In preparing the consolidated financial statements, where the accounting policies or the accounting periods are inconsistent between the Target Company and subsidiaries, the financial statements of subsidiaries are adjusted in accordance with the accounting policies and accounting period of the Target Company. For subsidiaries acquired from a business combination not under common control, their financial statements are adjusted based on the fair value of the identifiable net assets at the acquisition date.

All significant inter-group balances, transactions and unrealised profits are eliminated in preparing the consolidated financial statements.

The portion of a subsidiary’s equity and the portion of a subsidiary’s net profits and losses for the period not attributable to the Target Company are recognised as minority interests and profits and losses attributable to minority interests respectively, which are presented under shareholders ‘equity and net profit separately, in the consolidated financial statement. A subsidiary’s net profit and loss for the period attributable to minority interests is recognised as share of profit or loss of minority interests under net profit in the consolidated income statement. When the amount of a subsidiary’s loss attributable to the minority shareholders exceeds the minority shareholders ‘share of the opening balance of shareholders’ equity of the subsidiary, the excess is deducted from the minority interests.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

When the control over a subsidiary is lost due to disposal of a portion of equity investment or otherwise, the remaining equity interest is re-measured at the fair value on the date when the control ceased. The difference between the sum of the consideration received from disposal of equity interest and the fair value of the remaining equity interest, and the net assets of the former subsidiary attributable to the Company since the acquisition date as calculated based on its original shareholding percentage in that subsidiary, is recognised as the investment income for the period when the loss of control occurred. Other comprehensive incomes in relation to the equity investment of the subsidiary shall be, upon the loss of control, accounted for in accordance with the same basis as that the acquirer adopts in directly disposing of relevant assets or liabilities, that is, except for the changes arising from remeasurement of net assets or liabilities relating to the defined benefit plan of that subsidiary, the balance shall be transferred to investment income for the current year. Subsequent measurement of the remaining equity interests shall be in accordance with relevant accounting standards such as “Accounting Standards for Business Enterprises 2 — Long-term Equity Investments “or “Accounting Standards for Business Enterprises 22 — Recognition and Measurement of Financial Instruments”, which are detailed in Note IV-12 “Long term equity investment” or Note IV-9 “Financial instrument”.

The Target Company shall determine whether a series of transactions in relation to disposal of equity investment in or even loss of control over a subsidiary in stages should be treated as a bundle of transactions. When the economic effects and terms and conditions of the transactions in relation to the disposal of equity investment met one or more of the following situations, the series of transactions shall normally be accounted for as a bundle of transactions: (i) these transactions are entered into simultaneously or after considering the mutual consequences of each individual transaction; (ii) these transactions need to be considered as a whole in order to achieve a deal in commercial sense; (iii) the occurrence of an individual transaction depends on the occurrence of one or more individual transaction(s) in the series; (iv) The result of an individual transaction is not economical, but it would be economical after taking into account the other transactions in the series. When the transactions are not treated as a bundle of transactions, each of the individual transactions shall be accounted for as the “portion disposal of long term equity investment in a subsidiary which would not lead to loss of control” (detailed in Note IV12-(2)-(iv)) “Disposal of long-term equity investment” or the “loss of control due to portion disposal of equity investment in a subsidiary or otherwise” (detailed in the previous paragraph), as the case may be. When the transactions in relation to disposal of equity investment in or even loss of control over a subsidiary are treated as a bundle of transactions, each of the transactions shall be accounted for as one transaction in relation to disposal of the subsidiary leading to loss of control; however, the difference between the consideration received from the disposal and the share of net assets of the subsidiary disposed in each individual transaction before loss of control shall be recognised as other comprehensive income in the consolidated financial statements, and reclassified as profit or loss for the period when control is lost.

6. Classification of joint arrangements and accounting treatment for joint operations

A joint arrangement refers to an arrangement over which two or more parties have joint control. In accordance with the Target Company’s rights and obligations under a joint arrangement, the Target Company classifies joint arrangements into joint operations and joint ventures. A joint operation refers to a joint arrangement under which the Target Company is entitled to the assets and assumes the obligations. A joint venture refers to a joint arrangement under which the Target Company is only entitled to net assets.

The Target Company’s investment in joint ventures is accounted for using the equity method in accordance with the accounting policies as set out in Note IV-12-(2)-(ii) “Long-term equity investments accounted for by using the equity method”.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

As a party to a joint operation, the Target Company recognise the assets held and obligations assumed solely by the Target Company, and the assets held and obligations assumed jointly by the Target Company in proportion to the share of the Target Company; recognise the revenue from sales of the share of outputs of the joint operation of the Target Company; recognise the share of revenue from sales of outputs by the joint operation of the Target Company; recognise the expenses solely incurred by the Target Company; and recognise the expenses incurred by the joint operation in proportion to the share of the Target Company.

When the Target Company, as a party to a joint operation, invests in or disposes of an asset (not being a business, the same below) to or purchase an asset from the joint operation, the Target Company shall only recognise the portion of profit or loss arising from this transaction attributable to other parties to the joint operation before such disposal to any third party. Where an impairment loss of these assets that meets the requirements in “Accounting Standard for Business Enterprises 8 – Asset Impairment” arises, the Target Company shall recognise the loss in full in relation to the assets invested in or disposed of to the joint operation by the Target Company; and shall recognise the loss in proportion to the share of the Target Company in relation to the assets purchased from the joint operation by the Target Company.

7. Criteria for the recognition of cash and cash equivalents

Cash and cash equivalents of the Target Company include cash on hand, deposits readily available for payment, and highly liquid investments with a short maturity of generally within three months when acquired that are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value.

8. Foreign currency transactions and translation of financial statements in foreign currency

(1) Translation of foreign currency transactions

Foreign currency transactions of the Target Company are, on initial recognition, translated into the functional currency at the spot exchange rates prevailing at the dates of the transactions, i.e. the middle price of RMB exchange rate published by the People’s Bank of China on that date in general and the same below, except when the Company carries on a business of currency exchange or involves in currency exchange transactions, at the actual exchange rates which would be used.

(2) Translation of monetary items and non-monetary items in foreign currencies

At the balance sheet date, monetary items denominated in foreign currency are translated into the functional currency using the spot exchange rate prevailing at the balance sheet date. The resulting exchange differences are recognised in profit or loss for the current period, except for (i) those attributable to foreign currency borrowings that have been taken out specifically for the acquisition, construction or production of qualifying assets, which are capitalised as part of the cost of those assets; (ii) exchange difference arising from changes in carrying amount of available for sale foreign-currency monetary items other than changes in amortized cost, which is recognised in other comprehensive income.

For the purpose of preparing consolidated financial statements involving foreign operations, the exchange differences arising from changes in exchange rates in relation to translation of foreign currency monetary items which effectively constitute a net investment in the foreign operation, are recognized in other comprehensive income, or upon disposal of the foreign operation, in the profit or loss for the period.

Non-monetary items denominated in foreign currency that are measured at historical cost are translated into the functional currency using the spot rates prevailing at the dates of the transactions. Non-monetary items denominated in foreign currency that are measured at fair value are translated into the functional currency using the spot rate prevailing on the date when fair value is determined and the resulting exchange differences will be recognised as fair value change (including a change of exchange rate) in profit or loss for the period or as other comprehensive income.

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APPENDIX II

(3) Translation of financial statements in foreign currency

For the purpose of preparing consolidated financial statements involving foreign operations, the exchange differences arising from changes in exchange rates in relation to translation of foreign currency monetary items which effectively constitute a net investment in the foreign operation, are recognised as “exchange difference on translation of financial statements in foreign currency” in other comprehensive income, or upon disposal of the foreign operation, in the profit or loss for the period.

The following displays the methods for translating financial statements in foreign currency of foreign operations into the statements in RMB: The asset and liability items in the balance sheets are translated at the spot exchange rates on the balance sheet date. Under the shareholders’ equity, the items other than “undistributed profits” are translated at the spot exchange rates at the transaction dates. The income and expense items in the income statements are translated at the average exchange rates at the transaction dates. Opening balance of undistributed profits is equal to the closing balance of undistributed profits after translation in the previous year; closing balance of undistributed profit is measured and presented based on the items in profit distribution after translation. The exchange difference arising from translation of the sum of assets, liabilities and equity items is recognised as the difference on translation of financial statements in foreign currency in other comprehensive income. Such exchange difference in relation to the foreign operation as shown under shareholders’ equity in the balance sheet is recognised in the profit or loss for the period in full or on a pro rata basis upon disposal of the foreign operation leading to a loss of control.

The cash flows in foreign currency and of overseas operations are translated at the spot exchange rates on the dates of the cash flows or the average exchange rates for the current period. The effect of exchange rate changes on cash is presented separately as an adjustment item in the cash flow statement.

The opening balance and the prior year’s figures are presented as the balances after translation of the financial statements in the previous year.

On disposal of the entire owners’ equity held in a foreign operation by the Target Company, or upon a loss of control over a foreign operation due to partial disposal of equity investment or other reasons, the exchange differences arising on translation of the financial statements in foreign currency in relation to that foreign operation, which are attributable to owners’ equity of parent company as shown under shareholders’ equity in the balance sheet, are recognised in the profit or loss in the period in which the disposal took place.

In case of partial disposal of equity investment or other reason resulting in reduction in shareholding in a foreign operation without losing control over it, the exchange differences arising from the translation of financial statements in foreign currency in relation to the assets disposed will be attributable to minority interests and will not recognised in profit or loss for the period. For partial disposals of equity interests in foreign operations which are associates or joint ventures, the exchange differences arising from the translation of financial statements in foreign currency of the foreign operation is reclassified to profit or loss for the period in which the disposal took place on a pro rata basis.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

9. Financial instruments

The Target Company recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of a financial instrument. Financial assets are measured at fair value on initial recognition. The relevant transaction cost of financial assets at fair value through profit or loss is directly included in profit or loss of the current period, and that of other types of financial assets is included in the amount initially recognised.

(1) Determination of fair value for financial assets and financial liabilities

The fair value refers to the price that will be received when selling an asset or the price to be paid to transfer a liability in an orderly transaction between market participants on the date of measurement. For financial instruments that have an active market, fair value is determined by the Target Company based on the quoted price in such market. The quoted price in an active market refers to the price that is easily and regularly obtained from exchanges, brokers, industrial organisations and price fixing service organisations, representing the actual price of a market transaction that takes place in a fair deal. Where financial instruments do not have an active market, the fair value is determined using valuation technique by the Target Company. Valuation techniques include, among others, reference to the prices reached in recent market transactions entered into by both willing parties with an informed view, and reference to present fair values of other substantially identical financial instruments, cash flow discounting method and option pricing models.

(2) Classification, recognition and measurement of financial assets

Any regular purchase and sale of financial assets shall be recognised and derecognised at the transaction date. Financial assets are classified into financial assets at fair value through profit or loss, held-to maturity investments, loans and receivables and available-for-sale financial assets upon initial recognition.

(i) Financial assets at fair value through profit or loss

They include financial assets held-for-trading and those designated as financial assets at fair value through profit or loss. Financial assets measured at fair value by the Target Company through profit or loss are financial assets held-for-trading.

A financial asset is classified as held for trading if one of the following conditions is satisfied: A. It has been acquired mainly for the purpose of sale or repurchase in the near term; or B. it is part of a portfolio of identifiable financial instruments that the Group manages together and there is objective evidence that the Target Company has adopted a short-term profit-taking pattern recently; or C. it is a derivative, except for a derivative that is designated as and is an effective hedging instrument, or that is a financial guarantee contract, or a derivative that is linked to and must be settled by delivery of an unquoted equity instrument (without a quoted price in an active market) whose fair value cannot be reliably measured.

Financial assets held-for-trading are measured subsequently at fair value. Gains or losses arising from changes in fair value and any dividend and interest income on such assets are recognized in the profit or loss for the current period.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(ii) Held-to-maturity investments

They are non-derivative financial assets that have fixed or determinable payments and fixed maturity and for which the Target Company has the positive intention and ability to hold to maturity.

Held-to-maturity investments are measured subsequently at amoritised cost by using the effective interest rate method. Gains or losses arising on derecognition, impairment or amortization are recognized in the profit or loss for the current period.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or a group of financial assets or financial liabilities) and the interest income or interest expense over respective periods, using the effective interest rate. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset or financial liability or, where appropriate, a shorter period to the current carrying amount of the financial asset or financial liability.

When calculating the effective interest rate, the Target Company estimates future cash flows taking into account all contractual terms of the financial asset or financial liability (without considering future credit losses), and also considers all fees paid or received between the parties to the contract giving rise to the financial asset or financial liability that are an integral part of the effective interest rate, transaction costs, and premiums or discounts, etc.

(iii) Loans and receivables

They are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets, including notes receivable, trade receivable, interest receivable, dividends receivable and other receivables, are classified as loans and receivables by the Target Company.

Loans and receivables are measured subsequently at the amortised cost by using the effective interest rate method. Gains or losses arising on derecognition, impairment or amortisation are charged to profit or loss in the current period.

(iv) Available-for-sale financial assets

They include non-derivative financial assets that are designated as available for sale upon initial recognition and the financial assets other than those at fair value through profit or loss, loans and receivables and held-to-maturity investments.

The closing cost of available-for-sale debt instrument investments is recognised at amortised cost, i.e. the initially recognised amount less the principal repaid, and then plus or less the accumulated amortisation amount arising from the amortisation of the difference between the initially recognised amount and the amount at the maturity date using the effective interest rate method, and then further less the impairment loss already incurred. The closing cost of available-for-sale equity instrument investments is the cost on initial acquisition.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Available-for-sale financial assets are subsequently measured at fair value. Gain or loss arising from changes in fair value are recognised as other comprehensive income, except for impairment loss and exchange differences arising from translation of foreign currency monetary financial assets in relation to amortised cost which are accounted for through profit or loss for the current period. The financial assets will be transferred out on derecognition and accounted for through profit or loss for the current period. However, equity investment that is not quoted in an active market and the fair value of which cannot be measured reliably, and derivative financial assets that are linked to and must be settled by delivery of such equity instrument are subsequently measured at cost.

Interests received during the period in which available-for-sale financial assets are held and the cash dividends declared by the investee are recognised as investment income.

(3) Impairment of financial assets (other than receivables)

Except for financial assets at fair value through profit or loss for the current period, the Target Company assesses the carrying amount of other financial assets at each balance sheet date, and if there is objective evidence that the financial assets are impaired, provisions are made for the impairment.

(i) Impairment of held-to-maturity investments

The carrying amount of the financial assets measured at cost or amortised cost is written down to the present value of the estimated future cash flow and the written-down amount is recognised as the impairment loss in the profit or loss for the current period. The originally recognised impairment loss is reversed if there is objective evidence that the value of the financial assets has been recovered and the recovery can be linked objectively to an event occurring after the impairment loss was recognised. The carrying amount of the financial assets upon the reversal of the impairment loss will not exceed the amortised cost of the financial assets on the reversal date as if no impairment loss provision has been made.

(ii) Impairment of available-for-sale financial assets

In the event that decline in fair value of the available-for-sale equity instrument investment is regarded as severe or non-temporary decline on the basis of comprehensive related factors, it indicates that there is impairment loss of the available-for-sale equity instrument. In which, “severe decline” refers to accumulative decline in fair value which is more than 20%; and “non-temporary decline” refers to the fair value that decreased continuously for more than 12 months.

When the available-for-sale financial assets impair, the accumulated loss originally included in the other comprehensive income arising from the decrease in fair value will be transferred out and included in the profit or loss for the period. The accumulated loss that will be transferred out is the balance of the acquired initial cost of the assets, after deduction of the principal recovered and the amounts amortised, current fair value and the impairment loss originally included in the profit or loss.

The originally recognized impairment loss is reversed if there is objective evidence showing that the value of the financial assets has been recovered and the recovery can be linked objectively to an event occurring after the impairment loss of the financial assets was recognized. The impairment loss reversal of the available-for-sale equity instrument investment will be recognized as other comprehensive income, and the impairment loss reversal of the available-for-sale debt instrument will be included in the profit or loss for the period.

Equity instrument investment (that is not quoted in an active market and its fair value cannot be measured reliably) or the impairment loss of a derivative financial asset (which links to and must be settled by delivery of such equity instrument) will not be reversed.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(4) Basis for recognition and measurement of transfer of financial assets

The financial asset will be de-recognised if any of the following conditions is satisfied: (i) The contractual right to receive the cash flow of the financial asset is terminated; (ii) The financial asset has been transferred and substantially all of the risks and rewards of ownership of the financial asset have been transferred to the transferee; (iii) The financial asset has been transferred and the entity has waived the control over the financial asset although it has neither transferred nor reserved substantially all of the risks and rewards of ownership of the financial asset.

Where the entity has neither transferred nor reserved substantially all of the risks and rewards of ownership of the financial asset and not waived the control over the financial asset, to the extent of its continuous involvement in the financial asset transferred, the entity recognises the relevant financial asset and meanwhile, recognises the relevant liability accordingly. The extent of the continuous involvement is the level of risk to which the entity exposes due to changes in the value of such financial asset.

Where the conditions of de-recognition are satisfied upon overall transfer of the financial asset, the difference between the carrying amount of the transferred financial asset and the sum of the consideration received from the transfer and the accumulated changes in fair value previously recognised in other comprehensive income is recognised in the profit or loss for the current period.

Where the conditions of de-recognition are satisfied upon partial transfer of the financial asset, the carrying amount of the transferred financial asset is allocated between the derecognised and non-derecognised portion at the corresponding fair value, and the difference between the sum of the consideration received from the transfer and the accumulated changes in fair value previously recognised in other comprehensive income to be allocated to the de-recognised portion and the above mentioned allocated carrying amount is recognised in the profit or loss for the current period.

Where the Target Company disposes of the financial asset with the right of recourse or transfers the financial asset by endorsement, it shall be ascertained that whether substantially all the risks and rewards of ownership of the financial asset have been transferred. Where substantially all the risks and rewards of ownership of the financial asset have been transferred to the transferee, the financial asset are de-recognised; where substantially all the risks and rewards of ownership of the financial asset have been retained, the financial asset are not de-recognised; and where substantially all the risks and rewards of ownership of the financial asset have been neither transferred nor retained, it shall be determined whether the entity retains the control over the asset and the asset shall be accounted for in accordance with the above mentioned policies.

(5) Classification and measurement of financial liabilities

Upon initial recognition, financial liabilities are classified into financial liabilities at fair value through profit or loss and other financial liabilities. Upon initial recognition, financial liabilities are measured at fair value. For the financial liabilities at fair value through profit or loss, the relevant transaction costs are directly recognised in profit or loss for the current period; and for other financial liabilities, the relevant transaction costs are included in the initially recognised amount.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(i) Financial liabilities at fair value through profit or loss

The conditions for the financial liabilities to be classified as held for trading and to be designated to be measured at fair value through profit or loss upon initial recognition are the same as those for the financial assets to be classified as held for trading and to be designated to be measured at fair value through profit or loss upon initial recognition.

The financial liabilities at fair value through profit or loss are subsequently measured at the fair value. The gains or losses arising from the change in fair value and the dividend and interest expenses related to the financial liabilities are charged to the profit or loss for the current period.

(ii) Other financial liabilities

The derivative financial liabilities linked to and to be settled through delivery of the equity instruments that are not quoted in an active market and the fair value of which cannot be reliably measured such equity instruments are subsequently measured at cost. Other financial liabilities are subsequently measured at amortised cost using the effective interest rate method and the gains or losses arising from de-recognition or amortisation are recognised in profit or loss for the current period.

(iii) Financial guarantee contracts

The financial guarantee contracts other than the financial liabilities designated as at fair value through profit or loss are initially recognised at fair value and subsequently measured at the amount determined in accordance with the Accounting Standards for Business Enterprises 13 – Contingencies or the balance of the initially recognized amount less the accumulated amortisation determined in accordance with the Accounting Standards for Business Enterprises 14 – Income, whichever is the higher.

(6) De-recognition of financial liabilities

The financial liabilities may not be de-recognised in whole or in part unless and until the present obligations of the financial liabilities are discharged in whole or in part. Where the Target Company (the debtor) concludes an agreement with a creditor to replace the existing financial liabilities with the new financial liabilities and the contractual terms for new financial liabilities are materially not the same as existing financial liabilities, the existing financial liabilities are derecognised and the new financial liabilities are recognised.

Where the financial liabilities are de-recognised in whole or in part, the difference between the carrying amount of the de-recognised portion and the consideration paid (including nonmonetary assets transferred or new financial liabilities assumed) is recognised in profit or loss for the current period.

(7) Derivatives and embedded derivatives

Derivatives are initially measured at fair value at the date when the derivative contracts are entered into and are subsequently re-measured at fair value. The gain or loss arising from the change in fair value of a derivative is recognised in profit or loss for the current period, unless the derivative is designated and highly effective as a hedging instrument, in which case the timing of the recognition in profit or loss depends on the nature of the hedge relationship in accordance with hedging accounting policies.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

An embedded derivative is separated from the hybrid instrument, where the hybrid instrument is not designated as a financial asset or financial liability at fair value through profit or loss, and treated as a stand-alone derivative if the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. If the Group is unable to measure the embedded derivative separately either at acquisition or at a subsequent balance sheet date, it will designate the entire hybrid instrument as a financial asset or financial liability at fair value through profit or loss.

(8) Offsetting financial assets and financial liabilities

Where the Target Company has a legal right to offset the recognised financial assets and financial liabilities and may enforce this right at present and plans to net or realise the financial assets and settle the financial liabilities, the remaining balance upon the offset between the financial assets and the financial liabilities is presented in the balance sheet. Otherwise, the financial assets and the financial liabilities are separately presented in the balance sheet and do not offset against each other.

(9) Equity instruments

An equity instrument refers to a contract which proves the ownership of the remaining equities in net assets of the Target Company after deduction of all liabilities. The issuance (including refinancing), repurchase, sale or cancellation of equity instruments of the Target Company is accounted for as the change in equity. The Target Company does not recognise the change in fair value of equity instruments. Transaction costs related to equity transactions are charged to equity.

Various distribute ions (excluding dividends) made by the Target Company to holders of equity instruments reduce owners’ equity. The Target Company does not recognise the change in fair value of equity instruments.

10. Accounts receivable

Accounts receivable comprise accounts receivable and other receivables.

(1) Recognition standards of bad debts provision

The Target Company carries out an inspection, on the balance sheet date, on the carrying amount of the accounts receivable. Where there is any objective evidence as followings proving that such accounts receivable have been impaired, an impairment provision shall be made: (i) where the debtor is bankrupt, and the debt is nevertheless unrecoverable even after settlement; (ii) where the debtor is dead and there are no other obligators, the debt is nevertheless unrecoverable even after settlement out of legacy; (iii) where the overdue debtor failed to meet his debt obligations and there are enough evidences proving that recovery is impossible or remote, the debt is recognized as bad debt after being approved by the Board; (iv) other objective evidences showing the impairment of the accounts receivable.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2) Accounting method of provision for bad debts

The Company adopts the allowance method to account for bad debt losses.

Accounts receivable will be tested for impairment on each balance sheet date by the Company. Where there is objective evidence showing the impairment of the accounts receivable on the balance sheet date, the carrying amount of which is written down to the present value of the estimated future cash flow and the written-down amount is included in “impairment losses on assets” for the current period. The present value of the estimated future cash flow is determined based on the discount of effective interest rate of the accounts receivable upon initial recognition and the related collateral value is also taken into account. The estimated future cash flow of short-term accounts receivable will not be discounted when the relevant impairment loss is recognized if the difference between the estimated future cash flow of short-term accounts receivable and the present value of short-term accounts receivable is immaterial.

The originally recognized impairment loss on assets shall be reversed and included in “impairment losses on assets” for the current period if there is objective evidence showing that the value of the account’s receivable has been recovered and is objectively related to the events that occurred after such loss was recognized. However, the carrying amount reversed shall not exceed the amortized cost of such accounts receivable as at the date of reverse assuming no provision for impairment is made.

The provision for bad debts originally withdrawn shall be written off when the bad debt loss actually occurs. If the provision for bad debts is not sufficient to write off the loss, the difference shall be included in impairment losses on assets for the current period.

(3) Method for bad debts provision

(i) Individually significant receivables are tested for impairment separately by the Target Company. If it is determined that no impairment exists for an individually tested financial asset, the financial asset is included in a group of financial assets with similar credit risk characteristics and collectively tested for impairment. Receivables for which an impairment loss is individually recognized are not included in a group of receivables with similar credit risk characteristics and collectively tested for impairment.
(ii) Basis for determination and method of bad debts provision for receivable by credit risk features
A. Basis for determining the group of credit risk features

In respect of accounts receivable that are individually insignificant and those that are significant but are not impaired upon individual testing, the Target Company classifies financial assets based on the similarity and relevancy of credit risk features. These credit risks usually reflect debtors’ ability to settle all amounts that fall due based on the contracted terms of the assets, and are relevant to the estimated future cash flows of the inspected assets.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Basis for determining different groups:

Items Basis for determining group Group 1 This group is based on accounts receivable from special business. Group 2 This group includes the receivables excluding such receivables included in abovementioned groups 1 and subject to separate provision.

B. Measurement of determine bad debts provision based on credit risk feature group

When an impairment test is performed by means of a group, bad debts provision will be assessed and ascertained according to the structure of the group of accounts receivable and similar credit risk features (debtors’ ability to settle outstanding amounts based on contracted terms), taking into account historical experience and the prevailing economic situations as well as losses that are expected to have been incurred in the group of accounts receivable.

Basis for bad debts provision of different group:

Items Method of provision Group 1 Low credit risk upon assessment, no bad debts provided. Percentage of balance, bad debts provision is accrued based on a 1% of the balance at the end of period. Group 2 Bad debts provision is accrued based on analysis by age.

In respect of group, the method of bad debts provision for group is based on analysis by age

	Ratio of provision	Ratio of provision
	for accounts	for other
Age	receivable (%)	receivable (%)
Within 6 months (including 6 months,
the same below)	0.00	0.00
6 months – 1 year	5.00	5.00
1 – 2 years	10.00	10.00
2 – 3 years	20.00	20.00
3 – 4 years	50.00	50.00
4 – 5 years	80.00	80.00
Over 5 years	100.00	100.00

(iii) Individually insignificant receivables subject to separate provision

The Target Company conducts impairment tests for the single item with individually insignificant accounts receivable but with following features. if there is objective evidence indicating that the accounts receivable is impaired, then impairment loss will be recognised and provision for bad debts according to the difference when the present value of future cash flow is fewer than its carrying amounts such as accounts receivable with dispute against counterparties or involved in litigation or arbitration; there is obvious objective of the accounts receivable indicated that the debtor is likely to fail to comply with the repayment obligation, etc.

– II-41 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

11. Inventories

(1) Classification of inventories

Inventories mainly comprise raw materials, entrusted processing materials, packaging materials and low-value consumables, work in progress and finished goods.

(2) Measurement of acquisition and delivery of inventories

Planned cost is applied for the measurement of purchased raw materials in the ordinary course of business and for the transfer of raw materials issuance and occurrence. It will be adjusted to actual cost at the end of the month when material cost difference is transferred based on cost variances of the material cost for the current month; actual cost is applied for the measurement of finished goods(including semi-finished goods made by itself), whereas the actual cost of finished goods upon delivery is determined using the weighted average method.

(3) Basis for determination of net realizable value and method of provision for declines in value of inventories

Net realisable value refers to the amount of the estimated price of inventories less the estimated cost incurred upon completion, estimated sales expenses and other amounts after tax and levies in daily operation. The realisable value of inventories shall be determined on the basis of definite evidence, purpose of holding the inventories and effect of after-balance-sheet-date events.

At the balance sheet date, inventories are calculated at the lower of cost and net realisable value. Provision for inventory impairment is made when the net realisable value is lower than the cost. Provisions for impairment of inventory are generally made according to the amount by which the cost of a single item exceeds its net realisable value. For inventories in a large quantity and with relatively low unit prices, provision for impairment loss on inventories shall be made based on the category; for inventories relevant to the production and sales of products in the same region with same or similar use or purpose and difficult to measure separately, provision for impairment loss on inventories shall be made on an aggregated basis.

After making the provision for inventory impairment, in case the factors causing inventory impairment no longer exists, and the net realisable value of an inventory is higher than its bookvalue, the original provision for inventory impairment shall be transferred back and incorporated into the profit or loss for the current period.

(4) The group adopts the perpetual inventories system.
(5) Amortization of low-value consumables and packaging materials

Low-value consumables are expensed upon issuance. Packaging materials are calculated according to the actual cost, and the weighted average method shall be adopted for collection.

– II-42 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

12. Long-term equity investments

Long-term equity investments under this section refer to long-term equity investments in which the Target Company has control, joint control or significant influence over the investee. The long-term equity investment of the Target Company that is not able to control, jointly control or significantly influence on the investee is recognised as the financial assets at fair value through profit or loss. In particular, if such long-term equity investment is non-transactional, the Target Company may choose to designate it as the financial assets at fair value through other comprehensive income at the time of initial recognition. The related accounting policies refers to Note IV-9 “Financial instruments”.

Joint control is the Target Company’s contractually agreed sharing of control over an arrangement, the activities under which must be decided by unanimous agreement from parties who share the control. Significant influence is the power of the Target Company to participate in the decision-making for financial and operating policies of an investee, but not to control or joint control the formulation of such policies together with other parties.

(1) Determination of investment cost

For a long-term equity investment acquired through a business combination involving entities under common control, the initial investment cost shall be recognised at the carrying amount of the Company’s share of the combined party’s equity in the consolidated financial statements of the ultimate controlling party on the date of combination. The difference between the initial cost of the long-term equity investment and the cash paid, non-monetary assets transferred and the carrying amount of the debts assumed shall offset against the capital reserve. Where the capital reserve is insufficient to offset, the retained earnings shall be adjusted. In case that the consideration of the business combination is satisfied by issuing equity securities, the initial investment cost of the long-term equity investment shall be recognised at the carrying amount of the Company’s share of the combined party’s equity in the consolidated financial statements of the ultimate controlling party on the date of combination. With the total face value of the shares issued as share capital, the difference between the initial cost of the long-term equity investment and total face value of the shares issued shall be used to offset against the capital reserve. Where the capital reserve is insufficient to offset, the retained earnings shall be adjusted. For a business combination involving entities under common control by acquiring equity interests in the combined party under common control in a series of transactions, the transactions shall be treated separately: in case of “a bundle of transactions”, each of the transactions shall be accounted for as an acquisition of control; otherwise, the initial investment cost of the longterm equity investment shall be recognised at the carrying amount of the Company’s share of the combined party’s equity in the consolidated financial statements of the ultimate controlling party on the date of combination. The difference between the initial cost of the long-term equity investment and the sum of the carrying amount of the long-term equity investment before combination and the book value of the additional consideration paid for further acquisition of shares on the date of combination shall offset against the capital reserve. Where the capital reserve is insufficient to offset, the retained earnings shall be adjusted. Other comprehensive income recognised for the equity investment held prior to the date of combination by using equity method or for available-for-sale financial assets will not be accounted for in the financial statements.

– II-43 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

For a long-term equity investment acquired through a business combination involving entities not under common control, the initial investment cost of the long-term equity investment shall be recognised at the cost of combination on the date of acquisition. Cost of combination includes the aggregate fair value of assets paid, liabilities incurred or assumed and equity securities issued by the acquirer. For a business combination involving entities not under common control by acquiring the equity in the acquirer in a series of transactions, the transactions shall be treated separately: in case of “a bundle of transactions”, each of the transactions shall be accounted for as an acquisition of control; otherwise, the initial investment cost of the long-term equity investment shall be accounted for using the cost method at the sum of the carrying amount of equity investment previously held in the acquirer and the additional investment cost. Where the equity investment previously held is accounted for by using the equity method, the corresponding other comprehensive income will not be accounted for. Where the equity investment previously held is classified as an available-for-sale financial asset, the difference between its fair value and carrying amount, as well as the accumulated changes in fair value previously included in the other comprehensive income shall be recognised in the profit or loss for the current period.

Agent fees incurred by the combining party or the acquirer for a business combination such as audit, legal service, and valuation and consultation fees, and other related administration expenses are charged to profit or loss in the current period when such expenses incurred.

The long-term equity investment acquired other than by means of a business combination shall be initially measured at cost. Such cost, depending upon the means of acquisition of the long-term equity investment, is determined based on, among others, the purchase price actually paid by the Target Company in cash, the fair value of equity securities issued by the Target Company, the agreed value by the investment contracts or agreements, fair value or original carrying amount of the asset exchanged in a non-monetary asset exchange transaction, and fair value of the long-term equity investment. The costs, taxes and other necessary expenses that are directly attributable to the acquisition of the long-term equity investment are also included in the investment cost. Where an additional equity investment gives rise to an ability to exercise a significant influence or joint control over the investee but without obtaining the control, the cost of the long-term equity investment shall be the sum of fair value of the equity investment previously held determined in accordance with “Accounting Standard for Business Enterprises 22 – Recognition and Measurement of Financial Instruments” and additional investment cost.

(2) Subsequent measurement and recognition of profit or loss

A long-term equity investment with joint control (excluding that constituting a joint venture) over or significant influence on the investee is accounted for by using the equity method, and a long-term equity investment with control over the investee is accounted for in the Company’s financial statements by using the cost method.

(i) Long-term equity investments accounted for by using the cost method Under the cost method

A long-term equity investment is measured at its initial investment cost. The cost of the long-term equity investment shall be adjusted in case of any additional investment or return. Except for the actual consideration paid on acquisition of the investment or cash dividends or profits declared but not yet distributed which are included in the consideration, the gain on investment for the period is recognised at the Company’s share of cash dividends or profits declared by the investee.

– II-44 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(ii) Long-term equity investments accounted for by using the equity method

Under the equity method, where the initial investment cost of a long-term equity investment exceeds the Company’s share of fair value of the investee’s identifiable net assets at the acquisition date, no adjustment shall be made to the initial investment cost. Where the initial investment cost is less than the Company’s share of fair value of the investee’s identifiable net assets at the acquisition date, the difference shall be charged to profit or loss for the current period, and the cost of the long-term equity investment shall be adjusted accordingly.

Under the equity method, the gain on investment and other comprehensive income shall be recognised at the Target Company’s share of the net profit or loss and other comprehensive income realised by the investee, respectively, and carrying amount of the long-term equity investment shall be adjusted accordingly. Carrying amount of the longterm equity investment shall be reduced by the Target Company’s share of the profit or cash dividend declared by the investee. In respect of the changes in owners’ equity of the investee other than in net profit or loss, other comprehensive income and profit distribution, the carrying amount of the long-term equity investment shall be adjusted and included in the capital reserves. The Target Company recognises its share of the investee’s net profit or loss based on fair value of the investee’s identifiable assets at the time of acquisition, after making appropriate adjustments thereto. In the case of any inconsistency between the accounting policies and accounting periods adopted by the investee and by the Target Company, the financial statements of the investee shall be adjusted in accordance with the accounting policies and accounting periods of the Target Company, and the gain on investment and other comprehensive income shall be recognised accordingly. In respect of the transactions between the Target Company and its associates and joint ventures in which the assets invested or disposed of are not part of the business, the share of unrealised gain or loss arising from inter-group transactions shall be offset by the portion attributable to the Target Company, and the gain or loss on investment shall be recognised accordingly. However, any unrealised loss arising from inter-group transactions between the Target Company and an investee is not offset to the extent that the loss is impairment loss of the assets transferred. Where the Company invests to its joint ventures or associates an asset forming part of a business, giving rise to the acquisition of a long-term equity investment by the investor without obtaining control, the initial investment cost of the additional longterm equity investment shall be recognised at fair value of the business invested. The difference between initial investment cost and carrying amount of the business invested will be fully included in profit or loss for the current period. Where the Target Company disposes of an asset forming part of a business to its associates or joint ventures, the difference between the consideration received and the carrying amount of the business shall be fully included in profit or loss for the current period. Where the Target Company acquires from its associates or joint ventures an asset forming part of a business, the profit or loss related to the transaction shall be accounted for and recognised in accordance with “Accounting Standards for Business Enterprises 20 “Business Combination”.

The Target Company’s share of net loss of the investee shall be recognised to the extent that the carrying amount of the long-term equity investment and any long-term equity that substantially forms part of the investor’s net investment in the investee are written down to zero. If the Target Company has to assume additional obligations to the loss of the investee, the estimated liabilities shall be recognised for the estimated obligation assumed and charged to the profit or loss as investment loss for the period. Where the investee makes profits in subsequent periods, the Target Company shall re-recognise its share of the profits after setting off against the share of unrecognised losses.

– II-45 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(iii) Acquisition of minority interests

When preparing the consolidated financial statements, the Company adjusts the capital reserve and, if the capital reserve is insufficient, adjusts the retained earnings based on the difference between the additional long-term equity investment arising on acquisition of minority interests and the Target Company’s share in the net assets of the subsidiary accrued from the acquisition date (or combination date) in proportion to the additional shareholdings.

(iv) Disposal of long-term equity investment

In the consolidated financial statements, if the parent disposes part of the longterm equity investment in the subsidiary without losing its control, the difference between the disposal price and the Target Company’s share in the net assets of the subsidiary attributable to the disposal of the long-term equity investment is recognised in the shareholders’ equity; if the parent disposes part of the long-term equity investment in the subsidiary resulting in the loss of its control over the subsidiary, the accounting treatment shall be in accordance with the policies as set out in Note IV-5-(2) “Preparation of consolidated financial statements”.

In other cases, upon the disposal of a long-term equity investment, the difference between the carrying amount of the investment and the price received is recognised in the profit or loss for the current period.

For a long-term equity investment that is accounted for using the equity method where the remaining equity after disposal continues to be accounted for using the equity method, the portion of other comprehensive income previously included in shareholder’s equity shall be treated in accordance with the same basis as the investee directly disposes of relevant asset or liability on pro rata basis at the time of disposal. The owners’ equity recognised for the change in owners’ equity of the investee other than net profit or loss, other comprehensive income and profit distribution shall be transferred to profit or loss for the current period on pro rata basis.

For a long-term equity investment accounted for using the cost method where the remaining equity after disposal continues to be accounted for using cost method, other comprehensive income recognised using the equity method or in accordance with the standard for recognition and measurement of financial instruments prior to the acquisition of control over the investee shall be treated in accordance with the same basis as the investee directly disposes of relevant asset or liability, and transferred to profit or loss for the current period on pro rata basis. The change in owners’ equity recognised in net assets of the investee by using the equity method other than net profit or loss, other comprehensive income and profit distribution shall be transferred to profit or loss for the current period on pro rata basis.

– II-46 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

In preparing separate financial statements, if control is lost over the investee by the Target Company upon partial disposal of equity investment, the remaining equity with joint control or an ability to impose a significant influence over the investee after disposal shall be accounted for using the equity method, and shall be adjusted as if it has been accounted for using the equity method since it was acquired. The remaining equity without joint control or an ability to impose a significant influence over the investee after disposal shall be accounted for based on the standard for recognition and measurement of financial instruments, and the difference between its fair value and carrying amount as at the date of loss of control shall be included in profit or loss for the current period. In respect of other comprehensive income recognised using the equity method or in accordance with the standard for recognition and measurement of financial instruments prior to the acquisition of control over the investee, it shall be accounted for in accordance with the same basis as the investee directly disposes of relevant asset or liability when the control is lost. The change in owners’ equity recognised in net assets of the investee by using the equity method other than net profit or loss, other comprehensive income and profit distribution shall be transferred to profit or loss for the current period at the time when the control over investee is lost. Where the remaining equity after disposal is accounted for using the equity method, other comprehensive income and other owners’ equity shall be carried forward on pro rata basis. Where the remaining equity after disposal is accounted for in accordance with the standard for recognition and measurement of financial instruments, other comprehensive income and other owners’ equity shall be fully carried forward.

If the joint control or significant influence over the investee by the Target Company is lost upon partial disposal of equity investment, the remaining equity after disposal shall be accounted for in accordance with the standard for recognition and measurement of financial instruments. The difference between its fair value and carrying amount as at the date of loss of joint control or significant influence shall be included in profit or loss for the current period. For other comprehensive income recognised previously for the equity investment using equity method, it shall be accounted for in accordance with the same basis as the investee directly disposes of relevant asset or liability at the time when the equity method was ceased to be used. The owners’ equity recognised arising from the change in owners’ equity of the investee other than net profit or loss, other comprehensive income and profit distribution shall be transferred to profit or loss for the current period at the time when the equity method was ceased to be used.

Where the Target Company disposes of its equity investment in a subsidiary in a series of transactions until the control is lost, and such transactions form “a bundle of transactions”, each transaction shall be accounted for as a disposal of equity investment of the subsidiary resulting in a loss of control. The difference between the consideration for each transaction and the carrying amount of the long-term equity investment attributable to the equity interests disposed prior to loss of control shall be initially recognised as other comprehensive income, and upon loss of control, transferred to profit or loss for the period when the loss of control takes place.

(3) Impairment test and provision for impairment

For long-term equity investments in subsidiaries, joint ventures and associates, the Target Company provides for impairment in accordance with the policies in Note IV-20 “Impairment of long-term assets”.

– II-47 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

13. Investment properties

Investment properties are the properties held to earn rental or for capital appreciation or both, and represent buildings which have been leased out by the Target Company, including land use rights that have been leased, land use rights that are held and prepared for transfer after appreciation, and buildings that have been rented.

Investment property of the Target Company is initially measured at cost. Subsequent expenditures related to an investment property shall be included in cost of investment property only when the economic benefits associated with the asset will likely flow to the Group and its cost can be measured reliably. All other expenditures on investment property shall be included in profit or loss for the current period when incurred.

The Target Company adopts cost method for subsequent measurement of investment property, which is depreciated or amortised using the same policy as that for buildings and land use rights.

The method for impairment test of investment property and measurement of impairment provision are detailed in Note IV-20 “Impairment of long-term assets”.

In the event that an owner-occupied property or inventories is converted to an investment property (or vice versa), upon the conversion, the property shall be stated at the carrying amount prior to the conversion.

If an investment property is disposed of or if it withdraws permanently from use and no economic benefit will be obtained from the disposal, the recognition of it as an investment property shall be terminated. When an investment property is sold, transferred, retired or damaged, the amount of proceeds on disposal of the property net of the carrying amount and related tax and surcharges is recognised in profit or loss for the current period.

14. Fixed assets

(1) Recognition of fixed assets

Fixed assets are tangible assets that are held for producing goods, rendering of services, leasing out to other parties or administrative purposes, with useful life more than one accounting year. Fixed assets are recognized when they meet the following conditions:

(i) When it is probable that the economic benefits associated with the fixed asset will flow into the Target Company;
(ii) The cost of the fixed asset can be reliably measured.

– II-48 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2) Depreciation of fixed assets

Fixed assets are depreciated by categories using the straight-line method over their useful life. Depreciations are provided since the following month after the fixed assets are available for intended use, and are terminated when the fixed assets are derecognised or classified as noncurrent assets held-for-sale (except for fixed assets that are fully depreciated and are still in use, and lands that are accounted separately). When no impairment provision is made, the annual depreciation rates for different fixed assets of the Target Company which are determined by asset category, estimated useful life and estimated residual value are as follows:

		Rate of	Annual
	Useful life	residual	depreciation
Category	(year)	value (%)	rates (%)
Buildings and structures	20	5	4.75
Machinery and equipment	10	5	9.50
Instrument	5	5	19.00
Motor vehicles	5	3	19.40
Electronic equipment	5	3	19.40
Moulds	3	0	33.33

Estimated net residual value of a fixed asset is the estimated amount that the Target Company would obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset was already of the stage and in the condition expected at the end of its useful life.

(3) Impairment test and provision for impairment loss of fixed assets

Please see Note IV-20 “Impairment of long-term assets” for recognition of provision for impairment of fixed assets of the Target Company.

(4) Explanation on other matters

Subsequent expenditures incurred for a fixed asset shall be included in the cost of the fixed asset, only if it is probable that economic benefits associated with the asset will flow to the Company and the relevant cost can be measured reliably. Other subsequent expenditures shall be charged to profit or loss when incurred.

Fixed assets are derecognised when there is no economic benefit arising from disposal or expected use or disposal of fixed assets. When a fixed asset is sold, transferred, retired or damaged, the Company shall recognise the amount of any proceeds on disposal of the asset net of the carrying amount and related taxes in profit or loss for the current period.

The Target Company reviews the useful life and estimated net residual value of a fixed asset and the depreciation method applied at least at each year-end. A change in the useful life or estimated net residual value of a fixed asset or the depreciation method used shall be accounted for as a change in accounting estimate.

– II-49 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

15. Construction in progress

(1) Measurement of construction in progress

Constructions in progress of the Target Company are measured at actual cost and are accounted for by individual projects.

(2) Timing of transfer from construction in progress to fixed assets

Constructions in progress are transferred to fixed assets at all the actual expenses incurred when they are ready for intended use. When construction in progress is ready for its intended use but has not completed the final accounts, it shall be transferred to fixed assets at estimated cost, which is based on project budget, project price or actual construction cost, on the date when it is ready for intended use, and depreciation is made accordingly pursuant to the Target Company’s depreciation policy in relation to fixed assets. The estimated cost will be adjusted for the actual cost after the completion of the final accounts without adjustments to the depreciation already provided.

(3) Provision for impairment of construction in progress

Please see Note IV-20 “Impairment of long-term assets” for the recognition of provision for impairment on construction in progress of the Target Company.

16. Borrowing costs

Borrowing costs include interest on borrowings, amortization of discounts or premiums, ancillary costs, and exchange differences arising from foreign currency borrowings. In the event that the expenditures on assets and borrowing costs have been incurred, the borrowing costs have been incurred and the acquisition and construction or production activities necessary to prepare the asset for its intended use or for sale have already commenced, the borrowing costs that can be directly attributable to the acquisition and construction or production activities of assets shall be capitalized; the capitalization shall be ceased when the assets eligible for capitalization obtained through acquisition and construction or production are qualified for its intended use or for sale. The remaining borrowing costs shall be recognized as expenses in the period in which they are incurred.

The actual interest expense of specific borrowings incurred in the current period (deducting the interest income from depositing the unused specific borrowings with the bank or any investment income arising on the temporary investment of those borrowings) shall be capitalized; for the general borrowing obtained for the acquisition and construction or production of a qualifying asset, the interest expense to be capitalized is determined by multiplying the capitalization rate of general borrowing used by the weighted average of the excess amount of cumulative expenditures on the asset over the amount of specific borrowings. The capitalization rate shall be calculated and determined in light of the weighted average interest rate of the general borrowings.

During the capitalization period, all of the exchange differences of specific borrowings denominated in foreign currencies shall be capitalized; the exchange differences of general borrowings denominated in foreign currencies shall be recognized in profit or loss for the current period.

Assets eligible for capitalization refer to the fixed assets, investment properties, inventories and other assets that require a substantially long period of time of acquisition and construction or production activities for intended use or for sale.

Where the acquisition and construction or production activities of a qualifying asset is interrupted abnormally and the interruption period lasts for more than 3 months, the capitalization of the borrowing costs shall be suspended, until the acquisition and construction or production activities of the asset is resumed.

– II-50 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

17. Intangible asset

(1) Initial measurement of intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance owned or controlled by the Target Company.

An intangible asset shall be initially measured at cost. The expenditures incurred on an intangible asset shall be recognised as cost of the intangible asset only if it is probable that economic benefits associated with the asset will flow to the Target Company and the cost of the asset can be measured reliably. Other expenditures on an item asset shall be charged to profit or loss when incurred.

Land use right acquired shall normally be recognised as an intangible asset. For selfconstructed buildings (e.g. plants), the expenditures on the land use right and cost of the buildings shall be separately accounted for as an intangible asset and fixed asset. For buildings and structures purchased, the purchase consideration shall be allocated among the land use right and the buildings on a reasonable basis. In case there is difficulty in making a reasonable allocation, the consideration shall be recognised in full as a fixed asset.

(2) Subsequent measurement of intangible assets

(i) Useful life of intangible assets

The useful life of intangible assets is determined upon acquisition by the Target Company. For an intangible asset with definite useful life, the Target Company estimates the years of its useful life or the amount of similar measurement units such as production capacity constituting a useful life. An intangible asset with unforeseeable life to bring economic benefits to the Company is deemed to be an intangible asset with indefinite useful life.

(ii) Amortisation of intangible assets

An intangible asset with a definite useful life is amortized over the estimated useful life from the month of acquisition using the straight-line method. An intangible asset with indefinite useful life is not amortized but an impairment test is carried out at the end of the year.

During the end of the period, the Company shall check the useful life and the amortization method of intangible assets with limited useful life and carry out accounting estimate change in case that a change happens. In addition, the Company shall check the useful life of intangible assets with indefinite useful life, if there are evidences showing that the intangible assets can bring economic benefit for the Company within the foreseeable period, the Company shall estimate the useful life and carry out amortization according to the amortization policy for intangible assets with finite useful life.

(iii) When an intangible asset is expected to no longer generate any future economic benefits to the Target Company at the end of the year, the carrying amount of the intangible asset is entirely transferred into the profit or loss for the period.
(iv) Impairment of intangible assets

Please see Note IV-20 “Impairment of long-term assets” for the recognition of provision for impairment of intangible assets of the Target Company.

– II-51 –

APPENDIX II ACCOUNTANTS’ REPORT OF HISENSE HITACHI

18. Expenditure on research and development

(1) The Target Company classifies the expenditure on an internal research and development project into expenditure at the research phase and expenditure at the development phase.
(2) Specific criteria for the classification of the Company’s internal research and development projects into research phase and development phase:

Research phase: the phase at which creative investigation and research activities are carried out as planned for the purpose of obtaining and understanding new scientific or technical knowledge.

Development phase: the phase at which the research achievement or other knowledge is applied to a particular project or design in order to produce new or substantially improved materials, devices, products and etc. before commercial production or utilization.

(3) Expenditure at the research phase of an internal research and development project is recognized in profit or loss for the period when it is incurred.
(4) Expenditure at the development phase of an internal research and development project is recognised as an intangible asset only if all of the following conditions are satisfied at the same time:
- (i) It is technically feasible to complete the intangible asset so that it will be available for use or sale;
- (ii) Management intends to complete and to use or sell the intangible asset;
- (iii) It can be demonstrated how the intangible asset will generate economic benefits, including demonstrating that there is an existing market for products produced by the intangible asset or for the intangible asset itself, and that it can be used if the intangible asset is to be used internally;
- (iv) There are adequate technical, financial and other resources to complete the development and the ability to use or sell the intangible assets;
- (v) The expenditure attributable to the intangible asset at its development phase can be reliably measured.
(5) All the expenditures on research and development which cannot be distinguished between the research phase and development phase are recognised in the profit or loss when incurred.

19. Long-term prepaid expenses

(1) Long-term prepaid expenses are expenditures of the Target Company that have been incurred but should be recognized as expenses over more than one year in the current and subsequent periods. Long-term prepaid expenses are amortized on a straight-line basis over the expected beneficial period.
(2) Pre-operating expenses during the establishment period should be recognized directly in profit or loss in the month as incurred.

– II-52 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

20. Impairment of long-term assets

The Target Company will judge if there is any indication of impairment as at the balance sheet date in respect of noncurrent non-financial assets such as fixed assets, construction in progress, intangible assets with a finite useful life, investment properties measured at cost, and long-term equity investments in subsidiaries, joint controlled entities and associates. If there is any evidence indicating that an asset may be impaired, recoverable amount shall be estimated for impairment test. Goodwill, intangible assets with an indefinite useful life and intangible assets not ready for use will be tested for impairment annually, regardless of whether there is any indication of impairment.

If the impairment test result shows that the recoverable amount of an asset is less than its carrying amount, the impairment provision will be made according to the difference and recognised as an impairment loss. The recoverable amount of an asset is the higher of its fair value less costs of disposal and the present value of the future cash flows expected to be derived from the asset. An asset’s fair value is the price in a sale agreement in an arm’s length transaction. If there is no sale agreement but the asset is traded in an active market, fair value shall be determined based on the bid price. If there is neither sale agreement nor active market for an asset, fair value shall be based on the best available information. Costs of disposal are expenses attributable to disposal of the asset, including legal fee, relevant tax and surcharges, transportation fee and direct expenses incurred to prepare the asset for its intended sale. The present value of the future cash flows expected to be derived from the asset over the course of continued use and final disposal is determined as the amount discounted using an appropriately selected discount rate. Provisions for assets impairment shall be made and recognised for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the Company shall determine the recoverable amount of the asset group to which the asset belongs. The asset group is the smallest group of assets capable of generating cash flows independently.

An impairment loss recognised on the aforesaid assets shall not be reversed in a subsequent period in respect of the restorable value.

21. Employee benefits

Staff remuneration of the Target Company mainly includes short-term staff remuneration, postemployment benefits, termination benefits and other long-term staff benefits, in which:

Short-term remuneration mainly includes salaries, bonuses, allowance and subsides, staff welfare, medical insurance premium, maternity insurance premium, work-related injury insurance premium, housing provident funds, union operation costs and employee education costs and non-monetary welfare etc. Short-term remuneration incurred during the accounting period in which the staff provided services for the Target Company is recognised as a liability, and included in profit or loss for the current period or as related asset cost. Non-monetary welfare is measured at fair value.

Post-employment benefits mainly include defined contribution plan. Defined contribution plan mainly includes pension insurance premium and unemployment insurance premium. Relevant contribution amount is included as part of related asset cost or in profit or loss for the current period during the period in which the expenses incurred.

Where the Target Company terminates the employment relationship with employees before the expiration of the employment contracts or proposes compensation to encourage employees to accept voluntary redundancy, it shall recognise employee compensation liabilities arising from termination benefit and included in profit or loss for the current period, on the date when the Target Company may not revoke unilaterally the termination benefit provided due to the termination of employment relationship plans or employee redundancy proposals or when the Target Company recognises the cost and expenses related to restructuring involving in the payment of termination benefit, whichever is earlier. However, if the termination benefit is not expected to be fully paid within 12 months from the end of the reporting period, it shall be accounted for as other long-term staff remuneration.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

The early retirement plan shall be accounted for in accordance with the same accounting principles for termination benefit abovementioned. The salaries or wages and the social contributions to be paid by the Target Company to the retiring employees for the period from the date on which the employees cease rendering services to the scheduled retirement date, shall be recognised as termination benefit in profit or loss for the current period if the recognition criteria for provisions are satisfied.

22. Provisions

Obligations pertinent to the contingencies which satisfy all the following conditions are recognised as accrued liabilities: (1) The obligation is a current obligation borne by the Target Company; (2) it is likely that an outflow of economic benefits will be resulted from the performance of the obligation; and (3) the amount of the obligation can be reliably measured.

At the balance sheet date, accrued liabilities shall be measured at the best estimate of the necessary expenses required for the performance of existing obligations, after taking into account relevant risks, uncertainties, time value of money and other factors pertinent to the contingencies.

If all or part of the expenses required for settlement of accrued liabilities are expected to be compensated by a third party, the compensation amount shall, on a recoverable basis, be recognised as an asset separately, and compensation amount recognised shall not be more than the carrying amount of the accrued liabilities.

23. Share-based payments and equity instruments

(1) Share-based payments

Equity-settled share incentives are granted to senior management by the Target Company. Equity instruments used for share incentives are measured at their fair value as at the date of grant.

(2) Accounting treatment of share-based payments

The equity-settled share-based payment in return for employees’ services shall be measured based on the fair value of equity instruments granted to the employees on the grant date. If the equity-settled share-based payment cannot be vested until the services are completed in vesting period or until the prescribed performance conditions are met, then within the vesting period, the amount of fair value should, based on the best estimate of the number of vested equity instruments, be included in relevant costs or expenses according to the straight-line method, and the capital reserves should be increased accordingly when the equity instruments can be vested upon grant.

(3) Determination of fair value of equity instruments

If there is an active market for an equity instrument granted such as share option, the fair value of the equity instrument is determined based on the quoted price in the active market. If not, the fair value is determined using the option pricing model.

(4) Recognition basis for the best estimate of exercisable equity instruments

On each balance sheet date within the vesting period, the estimated number of exercisable equity instruments is amended based on the best estimate made by the Target Company according to the latest available subsequent information as to changes in the number of employees with exercisable rights. The effect of the above estimate is included in relevant costs or expenses for the period and the capital reserve is adjusted accordingly. As at the exercise date, the final estimated number of exercisable equity instruments should equal the actual number of exercisable equity instruments.

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APPENDIX II

(5) Accounting treatment for implementation, amendment and termination of share-based payments

When there is changes in the Target Company’s share-based payment plans, if the modification increases the fair value of the equity instruments granted, corresponding recognition of service increases in accordance with the increase in the fair value of the equity instruments. Increase in the fair value of equity instruments refers to the differences between the fair values of the date of modification. If the modification reduces the total fair value of shares paid or is not conductive to the use of other employees’ share-based payment plans, it will continue to be accounted for, as if the change had not occurred, unless the Target Company cancelled some or all of the equity instruments granted.

During the vesting period, if the equity instruments granted are cancelled, the Target Company would treat the cancelled equity instruments granted as accelerated vesting, and the amount within the remaining period should be recognized immediately in profit or loss while recognizing the capital reverses. If employees or other parties can meet non-vesting conditions but do not meet within the vesting period, the Target Company will treat it as cancelled equity instruments granted.

24. Revenue

(1) sale of goods

Revenue from the sale of goods is recognised when all the following conditions are satisfied: the significant risks and rewards of ownership of the goods have been transferred to purchaser; the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; it is probable that the associated economic benefits will flow to the Target Company; the relevant revenue and costs can be measured reliably.

(2) Rendering of services

On the balance sheet date, outcome of a transaction on rendering of services that could be reliably estimated shall be recognised using percentage-of-completion method. The Company determines the total revenue from rendering of services based on the purchase price received or receivable by the party to whom the services are rendered under the contract or agreement, except when the purchase price is unfair.

The outcome of a transaction concerning the rendering of services can be reliably estimated, which shall concurrently satisfy: (i) The relevant amount of revenue can be reliably measured; (ii) it is probable that the economic benefits will flow into the enterprise; (iii) the completion schedule of the transaction can be reliably ascertained; and (iv) transaction costs incurred and to be incurred can be reliably measured.

On the balance sheet date, where the outcome of a transaction on rendering of services cannot be reliably estimated, accounting treatment is carried out as follows:

(i) If the cost incurred is expected to be recoverable, the revenue from rendering of services shall be recognised at the cost that has been incurred, and an equivalent amount is carried forward to profit or loss as service cost.
(ii) If the cost incurred is not expected to be recoverable, the cost that has been incurred shall be recognised in the profit or loss for the period, and no revenue from such services is recognised.

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APPENDIX II

When a contract or agreement signed by the Target Company includes sales of goods and rendering of services, if sales of goods and rendering of services can be differentiated and separately measured, they will be recognized respectively. If sales of goods and rendering of services cannot be differentiated or cannot be separately measured, they will be recognized as sales of goods in full.

(3) Transfer of asset use rights

When it is probable that the economic benefits related to the transaction will flow to the Target Company and the revenue from transfer of asset use rights can be reliably measured, it is recognised as follows:

(i) The interest income is recognised on basis of the length of time during which and effective interest rate at which the Target Company’s cash funds are utilized by the others.
(ii) The royalty income is recognised as income on the accrual basis in accordance with the underlying contracts or agreements.

25. Government grants

Government grants are monetary assets or non-monetary assets transferred from the government to the Target Company at no consideration, excluding capital considerations from the government as an owner of the Company. Government grants are divided into asset-related government grants and income-related government grants.

Government grants obtained for acquisition or construction of long-term assets or other forms of long-term asset formation are classified as related to assets. Other government grants are classified as related to revenue. If related government documents do not specify the objective of the grants, the grants are classified as related to assets or income as follows: (1) In case a project for which the grants are granted is specified in such documents, the grants are classified as related to assets and income based on the budgeted ratio of the expenditure on asset formation and the expenditure recorded as expenses, where such ratio should be reviewed and, if necessary, changed on each balance sheet date; and (2) in case of general description without specifying any project in such documents, the grants are classified as related to income.

If a government grant is in the form of monetary asset, the item shall be measured at the amount received or receivable. If a government grant is in the form of non-monetary asset, the item shall be measured at fair value. If fair value is not reliably determinable, the item shall be measured at a nominal amount and recognized immediately in profit or loss for the period.

Government grants are generally recognized when received and measured at the amount actually received, but are measured at the amount likely to be received when there is conclusive evidence at the end of the period that the Target Company will meet related requirements of such grants and will be able to receive the grants. The government grants so measured should also satisfy the following conditions: (1) the amount of the grants be confirmed with competent authorities in written form or reasonably deduced from related requirements under financial fund management measures officially released without material uncertainties; (2) the grants be given based on financial support projects and fund management policies officially published and voluntarily disclosed by local financial authorities in accordance with the Requirements for Disclosure of Government Information, where such policies should be open to any company satisfying conditions required and not specifically for certain companies; (3) the date of payment be specified in related documents and the payment thereof will be covered by corresponding budget to ensure such grants will be paid on time as specified; (4) pursuant to the specific situation between the Target Company and such grants, other relevant conditions (if any) should be satisfied.

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APPENDIX II

A government grant related to an asset shall be recognized as deferred income, and included in profit or loss over the useful life of the asset based on reasonable and systemic methods. For government grants related to income, where the grant is a compensation for related expenses or losses to be incurred in the subsequent periods, the grant is recognised as deferred income, and included in profit or loss over the periods in which the related costs or losses are recognised; where the grant is a compensation for related expenses or losses already incurred, the grant is recognised immediately in profit or loss for the current period.

At the same time, if the government grants contain both assets related and income related, the accounting treatment will depend on the different parts of government grants; if it is difficult to distinguish, the whole government grants are classified as the income-related government grants.

The government grants related to daily activities of the Target Company, depending on the essence of economic business, are recognized in other income or used to offset relevant cost and expenses, otherwise, recognized in non-operating income or non-operating expenses.

For the repayment of a government grant already recognized, if there is any balance of related deferred income, the repayment shall be set-off against the book balance of deferred income, and any excess shall be recognized in profit or loss for the period; if there is other circumstance, the repayment shall be recognized immediately in profit or loss for the period.

26. Deferred tax assets/deferred tax liabilities

(1) Current income tax

At the balance sheet date, current income tax liabilities (or assets) for the current and prior periods shall be measured at the income tax expected to be paid (or returned) as required by tax laws. Taxable income, based on which the current income tax expense is calculated, is derived after adjusting the accounting profit before tax for the year in accordance with relevant requirements of tax laws.

(2) Deferred income tax assets and deferred income tax liabilities

Temporary differences arising from the difference between the carrying amount of an asset or liability and its tax base, and the difference between the tax base and the carrying amount of an item that is not recognised as an asset or liability but has a tax base that can be determined according to tax laws, shall be recognised for deferred income tax assets and deferred income tax liabilities using the balance sheet liability method.

Deferred income tax liabilities are not recognised for taxable temporary differences related to: the initial recognition of goodwill; and the initial recognition of an asset or liability in a transaction which is neither a business combination nor affects accounting profit or taxable income (or deductible loss) at the time of the transaction. In addition, for taxable temporary differences associated with investments in subsidiaries, associates, and joint ventures, if the Target Company is able to control the timing of the reversal of the temporary difference, and it is probable that the temporary difference will not reverse in the foreseeable future, relevant deferred income tax liabilities are not recognised either. Except for abovementioned circumstances, the Target Company recognises deferred income tax liabilities arising from other taxable temporary differences.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Deferred income tax assets are not recognised for deductible temporary differences related to the initial recognition of an asset or liability in a transaction which is neither a business combination nor affects accounting profit or taxable income (or deductible loss) at the time of the transaction. In addition, for deductible temporary differences associated with investments in subsidiaries, associates and joint ventures, if it is not probable that the temporary difference will reverse in the foreseeable future, and it is not probable that taxable income will be available in the future against which the deductible temporary difference can be utilised, relevant deferred income tax assets are not recognised. Except for abovementioned circumstances, the Target Company recognises deferred income tax assets arising from other deductible temporary differences to the extent that it is probable that taxable income will be available against which the deductible temporary differences can be utilised.

The Target Company recognises a deferred income tax asset for deductible losses and tax credits that can be carried forward to subsequent periods, to the extent that it is probable that future taxable income will be available against which the deductible losses and tax credits can be utilised.

At the balance sheet date, deferred income tax assets and deferred income tax liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, according to the tax laws.

At the balance sheet date, the Target Company reviews the carrying amount of a deferred income tax asset. If it is probable that sufficient taxable income will not be available in future periods against which the benefit of deferred income tax asset can be utilised, the carrying amount of the deferred income tax asset shall be written down. Any amount so written down shall be reversed when it becomes probable that sufficient taxable income will be available.

(3) Income tax expense

Income tax expense comprises current income tax expense and deferred income tax expense.

Current and deferred income tax expense or income is included in profit or loss for the current period, except for those recognised as other comprehensive income or current income tax and deferred income tax related to transactions or events that are directly recognised in shareholders’ equity, which are recognised in other comprehensive income or shareholders’ equity, and except for deferred income tax arising from a business combination, which is used to adjust the carrying amount of goodwill.

(4) Offsetting income tax

With the legal rights of netting off and with an intention to net off or realize the assets and settle the liabilities, the Target Company records the net current income tax assets and current income tax liabilities after offsetting between the assets and liabilities.

When the Target Company has the legal rights of netting off current income tax assets and liabilities, and deferred income tax assets and deferred income tax liabilities are related to income tax imposed on the same taxable entity by the same tax competent authority or related to different taxable entities, the Target Company records the net current income tax assets and current income tax liabilities after offsetting between the assets and liabilities, provided that the taxable entity involved is intended to net off current income tax assets and liabilities or, realise assets and settle liabilities during each significant future period whenever deferred income tax assets and liabilities would be reversed.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

27. Segment information

The Target Company identifies operating segments based on the internal organization structure, management requirements and internal reporting system, and discloses segment information of reportable segments on the basis of operating segments.

An operating segment is a component of the Target Company that satisfies all the following conditions:

(1) The component is able to generate revenues and incur expenses in the course of ordinary activities;
(2) The operating results of the component are regularly reviewed by the Target Company’s management in order to make decisions about resources to be allocated to the segment and to assess its performance;
(3) Information on financial position, operating results and cash flows of the component is available to the Company. The accounting policies of operating segments are the same with the major accounting policies of the Target Company.

The segment revenue, operating results, assets and liabilities include the amount that is directly attributable to the segment and can be allocated to the segment on a reasonable basis. Revenue, assets and liabilities of an operating segment are determined at the amount before the elimination of intergroup transactions and inter-group current account balances. Transfer price between operating segments is calculated based on terms similar to those of the transactions with other parties.

28. Operating leases

(1) The Target Company as lessee under operating leases

Lease payment for operating lease is recognized as related asset cost or profits and losses for the current period using the straight-line method over the lease term. The initial direct cost is accounted in profit or loss for the current period. Contingent rental is recognized as profit or loss for the current period upon occurrence.

(2) The Target Company as lessor under operating leases

Rental income is recognized in profit or loss for the current period using the straight-line method over the lease term. The initial direct cost where the amount is significant is capitalized when incurred, and accounted for as profit or loss for the current period on the same basis as recognition of rental income over the entire lease period; the initial direct cost where the amount is less significant is included in the profit or loss for the period when incurred. Contingent rental is recognized as profit or loss for the current period upon occurrence.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

29. Changes in significant accounting policies and accounting estimates

(1) Changes in accounting policies

On 28 April 2017, the Ministry of Finance issued the Accounting Standards for Business Enterprises No. 42 – Non-current Assets and Disposal Groups Held for Sale and Termination of Business Operation based on Accounting [2017] No. 13, and such accounting standards were implemented since 28 May 2017. On 10 May 2017, the Ministry of Finance issued the Accounting Standards for Business Enterprises No. 16 – Government Grants (2017 revision) based on Accounting [2017] No. 15, and such accounting standards were implemented since 12 June 2017. The Target Company started to implement the above two accounting standards according to the schedule required by the Ministry of Finance.

Prior to the implementation of the Accounting Standards for Business Enterprises No. 16 – Government Grants (2017 revision), the Target Company included the government grants received in the non-operating income. After the implementation of the Accounting Standards for Business Enterprises No. 16 – Government Grants (2017 revision), the Target Company applied the new standard to the government grants which existed on 1 January 2017, while adjustments were made on the government grants newly conferred between 1 January 2017 and the date of implementation of this standard in accordance with this standard, which were: the government grants relating to ordinary activities and existed after 1 January 2017 would be included in other income; the government grants not relating to ordinary activities would be included in nonoperating income.

(2) Changes in accounting estimates

In order to reflect the Target Company’s financial conditions and operating results in a more objective and fair manner, the Target Company has changed standard of classification and method of bad debts provision for receivable by credit risk features since 1 January 2017;

(i) Before the changes in accounting estimates, the Company adopted the following basis of determination and method of bad debts provision for receivable by credit risk features:
Bad debts provision would be accrued based on 3% of the balance of accounts receivable at the end of the year and would be included in impairment loss on assets.
(ii) After the changes in accounting estimates, the related accounting policies refers to Note IV-10 “Accounts receivable”.
(iii) Impact on the Target Company’s financial statements arising from the changes in accounting estimates

According to the Accounting Standards for Enterprises No. 28 – Changes in Accounting Policy and Estimation and Correction of Errors (《企業會計准則第 28 號—會計政策、會計估計變更和差錯更正》), the changes in accounting estimates of the Target Company will adopt prospective application for accounting treatment and no retroactive adjustment is required.

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

30. Significant accounting judgements and estimates

The Target Company needs to make judgments, estimates and assumptions as to the carrying amount of statement items which cannot be accurately measured in applying its accounting policies due to inherent uncertainties of operation activities. Such judgments, estimates and assumptions are made based on the historical experience of the Target Company’s management and taking into account other relevant factors, and may affect the reported amount of revenue, expenses, assets and liabilities and disclosure of contingent liabilities at the balance sheet date. However, the actual results derived from the uncertainties of such estimates may differ from the current estimation of the Target Company’s management, which may cause critical adjustment to the carrying amount of assets or liabilities which may be affected in the future.

The Target Company regularly reviews the aforesaid judgments, estimates and assumptions on a going concern basis. A revision to accounting estimate is recognised in the period in which the estimate is revised if it only affects that period. A revision is recognised in the period of the revision and future periods if it affects both current and future periods.

At the balance sheet date, the critical areas where the Target Company needs to make judgments, estimates and assumptions as to the number of items in the financial statements are set out below:

(1) Classification of leases

The Target Company classifies the leases as operating lease and financing lease in accordance with “Accounting Standards for Business Enterprises 21 – Leases”. When making the classification, the management needs to analyse and judge whether all the risks and rewards relating to the ownership of leased out assets have been substantially transferred to the leasee, or whether the Target Company has been substantially obliged to all the risks and rewards relating to the ownership of leased assets.

(2) Provision for bad debts

The Target Company adopts the allowance method to account for bad debt loss under the accounting policies of accounts receivable. Impairment of accounts receivable is based on the recoverability of assessed accounts receivable. Given the management’s judgment and estimate required for impairment of accounts receivable, the difference between the actual outcome and original estimate will affect the carrying amount of accounts receivable and provision and reversal of bad debts of accounts receivable during the estimate revision period.

(3) Allowance for inventories

In accordance with the accounting policies of inventories and by measuring at the lower of cost and net realisable value, the Target Company makes allowance for inventories which have costs higher than net realisable value or become obsolete and slow-moving. Write-down of inventories to their net realisable values is based on the valuation of marketability and net realisable values of inventories. Determination of impairment of inventories requires the management to make judgments and estimates on the basis of definite evidence and taking into account the purpose of holding inventories and impacts of events after balance sheet date. The difference between the actual outcome and original estimates shall affect the carrying number of inventories and provision for and reversal of the provision for the impairment of inventories during the period in which the estimates are revised.

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APPENDIX II

(4) Provision for impairment of long-term assets

At the balance sheet date, the Target Company makes its judgment as to whether there is any evidence indicating potential impairment of non-current assets other than financial assets. Intangible assets with indefinite useful life shall be tested for impairment when there is any indication of impairment in addition to the annual impairment testing. Other non-current assets other than financial assets shall be tested for impairment if there is any evidence indicating that their carrying amount cannot be recovered.

When the carrying amount of an asset or asset groups is higher than the recoverable amount, which is the higher of its fair value less costs of disposal and the present value of the future cash flows expected to be derived from the asset, it indicates impairment.

The net amount of the fair value less costs of disposal is determined by making reference to the price in a sale agreement in an arm’s length transaction or the observable market price less the incremental costs directly attributable to such asset’s disposal.

In projecting the present value of the future cash flows, critical judgments shall be made to the output, selling price and relevant operating costs of such assets (or asset groups) and the discount rate applied in calculating the discount. In estimating the recoverable amount, the Target Company may adopt all relevant materials including the projections as to the output, selling price and relevant operating costs based on reasonable and supportive assumptions.

(5) Depreciation and amortization

The Target Company shall provide depreciation and amortisation for investment properties, fixed assets and intangible assets over their useful lives and after taking into account of their residual value by using straight-line method. The Target Company shall regularly review the useful lives to determine the amount depreciated and amortised to be accounted for in each reporting period. The useful life is determined by the Target Company according to its previous experience on similar assets and estimated technical updates. If there is any material change in the estimate previously made, the depreciation and amortisation will be adjusted over the future period.

(6) Deferred income tax assets

The deferred income tax assets will be recognized by the Target Company for all unused tax losses to the extent that it is probable there will be sufficient taxable profits against which the loss is utilised. This requires the Target Company’s management to apply numerous judgments to estimate the timing and amount of the future taxable profits so as to determine the amount of deferred income tax assets to be recognised with reference to the tax planning strategy.

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APPENDIX II

(7) Income tax

There are some uncertainties in tax treatment and calculation for some transactions of the Target Company during its ordinary course of business. The approval from the tax authority is required for pre-tax expending of some items. Any difference between the final determined outcome of such tax matters and the initially estimated amount will exert an effect on the current income tax and deferred income tax during the period in which the final amount is determined.

(8) Sales discount

In recognising revenue from sales of goods, the Target Company estimates the relevant expenses in accordance with the terms of the sales agreement and deducts the sales discounts provided to customers from the revenue from sales of goods.

(9) Provisions

Provision for matters including product quality guarantee shall be recognised in terms of contract, current knowledge and historical experience by the Target Company. If the contingent event has formed a practical obligation which probably results in outflow of economic benefits from the Target Company, a projected liability shall be recognised on the basis of the best estimate of the expenditures to settle relevant practical obligation. Recognition and measurement of the projected liability significantly rely on the management’s judgments in consideration of the assessment of factors including relevant risks and uncertainties related to the contingent events.

In particular, the Target Company makes provisions for after-sales quality maintenance commitments to the customers in respect of sold and repaired goods. In making provisions, the Target Company considers recent repair experience and data, but recent repair experience may not be able to reflect the future repair situation. Any increase or decrease in such provisions may affect the profit or loss in the future years.

V. TAXATION

1. Major taxes and tax rates

Type of taxes	Tax basis	Tax rate
Value-added tax	Output value-added tax is computed at 3%, 6%,	3%, 6%, 10%, 16%
	10% and 16% of taxable income. Value-added tax
	is computed on the difference after deduction of
	input value-added tax. Input value-added tax is
	not deductible for value-added tax to which simple
	collection method is applicable.
City maintenance and	Turnover tax payable	7%
construction tax
Education surcharges	Turnover tax payable	3%
Enterprise income tax	Taxable income	As the table below

VAT taxable sales activities or imports of the Target Company were subject to tax rates 17%,11% formerly. According to the Notice of the Ministry of Finance and the State Administration of Taxation on the Adjustment of VAT Tax Rate (Finance & Taxation 2018 No.32),the tax rates were adjusted to 16%,10% since 1 May 2018.

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APPENDIX II

Notes on taxpayers subject to different enterprise income tax rates

Name of taxpayers	Income tax rate
Qingdao Hisense Hitachi Air-Conditioning System Co., Ltd.	15%
Qingdao Hisense Hitachi Air-Conditioning Marketing Co., Ltd.	25%
Qingdao Johnson Controls Air-Conditioning Co.,Ltd.	25%
Qingdao Hisense Hvac Equipment Co., Ltd.	25%

2. Tax preferences and approvals

The Target Company is a national high-tech enterprise and according to the Enterprise Income Tax Law and its Implementation Regulations and other relevant regulations, its income tax rate for the year 2016, 2017, 2018, the three months ended 31 March 2018 and the three months ended 31 March 2019 was 15%.

VI. NOTES TO THE ITEMS OF CONSOLIDATED FINANCIAL STATEMENTS

Unless otherwise specified, “End of the Period” refers to 31 March 2019.

1. Cash at bank and on hand

Item	31 March 2019	31 December 2018	31 December 2017	31 December 2016
Bank deposits	6,340,987,598.66	5,604,462,544.31	2,328,050,712.02	1,907,839,703.12
Other cash at bank
and on hand	125,261.00	35,881,661.50	125,261.00	309,233.20
Total	6,341,112,859.66	5,640,344,205.81	2,328,175,973.02	1,908,148,936.32
Including: Total
amount deposited
overseas

Note: Other cash at bank and on hand at the end of the period represented mainly security deposit.

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APPENDIX II

2. Notes receivable and Accounts receivable

Item Notes receivable Accounts receivable Total	31 March 2019 2,088,694,716.15 489,913,175.69 2,578,607,891.84	31 December 2018 1,928,737,483.93 439,535,197.65 2,368,272,681.58	31 December 2017 1,420,421,510.79 387,045,559.29 1,807,467,070.08	31 December 2016 997,760,251.09 210,323,097.87
				1,208,083,348.96

(1) Notes receivable
① Classification of notes receivable

Category Bank acceptance notes Commercial acceptance notes Total	31 March 2019 1,935,290,579.28 153,404,136.87 2,088,694,716.15	31 December 2018 1,701,700,708.09 227,036,775.84 1,928,737,483.93	31 December 2017 1,339,637,068.82 80,784,441.97 1,420,421,510.79	31 December 2016 951,138,383.26 46,621,867.83
				997,760,251.09

② As at the end of the period, there were no pledged notes receivable.
③ Notes endorsed as at the end of the year but not due as at the balance sheet date

Item Bank acceptance notes Total	Amount derecognized as at the end of the period 167,170,898.01 167,170,898.01	Amount not derecognized as at the end of the period

④ As at the end of the period, there were no notes receivable that were reclassified into accounts receivable due to failure of the issuers to settle the notes.

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APPENDIX II ACCOUNTANTS’ REPORT OF HISENSE HITACHI

(2) Accounts receivable
① Accounts receivable disclosed by category as follows

31 March 2019 Book value Provision for bad debts Category Amount % Amount % Carrying amount Accounts receivable individually significant for which provision for bad debts has been individually made Accounts receivable for which provision for bad debts has been made on group basis by credit risk characteristics 500,904,240.94 100.00 10,991,065.25 2.19 489,913,175.69 Group 1 37,717,151.35 7.53 37,717,151.35 Group 2 463,187,089.59 92.47 10,991,065.25 2.37 452,196,024.34 Accounts receivable individually insignificant but for which provision for bad debts has been individually made Total 500,904,240.94 100.00 10,991,065.25 2.19 489,913,175.69 (1 continued)

Category Accounts receivable individually significant for which provision for bad debts has been individually made Accounts receivable for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Accounts receivable individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 450,387,672.45 100.00 27,531,640.43 6.11 422,856,032.02 93.89 450,387,672.45 100.00	31 December 2018 Provision for bad debts Amount % 10,852,474.80 2.41 10,852,474.80 2.57 10,852,474.80 2.41	Carrying amount 439,535,197.65 27,531,640.43 412,003,557.22
			439,535,197.65

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APPENDIX II

(2 continued)

Category Accounts receivable individually significant for which provision for bad debts has been individually made Accounts receivable for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Accounts receivable individually insignificant but for which provision for bad debts has been individually made Total (3 continued) Category Accounts receivable individually significant for which provision for bad debts has been individually made Accounts receivable for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Accounts receivable individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 396,903,338.50 100.00 12,639,848.87 3.18 384,263,489.63 96.82 396,903,338.50 100.00 Book value Amount % 216,726,133.65 100.00 3,291,607.67 1.52 213,434,525.98 98.48 216,726,133.65 100.00	31 December 2017 Provision for bad debts Amount % 9,857,779.21 2.48 9,857,779.21 2.57 9,857,779.21 2.48 31 December 2016 Provision for bad debts Amount % 6,403,035.78 2.95 6,403,035.78 3.00 6,403,035.78 2.95	Carrying amount 387,045,559.29 12,639,848.87 374,405,710.42
			387,045,559.29

			Carrying amount 210,323,097.87 3,291,607.67 207,031,490.20
			210,323,097.87

– II-67 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

A. Accounts receivable in the group provided for bad debts by using ageing analysis method are analyzed based on the date of recognition as follows:

Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to3 years 3 years to 4 years 4 years to5 years Over 5 years Total (1 continued) Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to3 years 3 years to 4 years 4 years to5 years Over 5 years Total (2 continued) Ageing Within 6 months 6 months to 1 year 1 year to2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total	31 March 2019 Accounts receivable Bad debts 418,881,174.08 20,341,756.48 1,017,087.83 8,175,394.10 817,539.41 5,020,278.95 1,004,055.79 3,120,573.29 1,560,286.65 5,279,085.59 4,223,268.47 2,368,827.10 2,368,827.10 463,187,089.59 10,991,065.25 31 December 2018 Accounts receivable Bad debts 363,310,992.66 34,968,221.32 1,748,411.07 11,368,744.96 1,136,874.49 4,171,251.69 834,250.34 1,838,598.93 919,299.47 4,922,915.16 3,938,332.13 2,275,307.30 2,275,307.30 422,856,032.02 10,852,474.80 31 December 2017 Accounts receivable Bad debts 335,533,377.62 22,675,978.46 1,133,798.92 6,171,731.69 617,173.17 9,792,882.60 1,958,576.52 7,069,020.26 3,534,510.13 2,033,892.67 1,627,114.14 986,606.33 986,606.33 384,263,489.63 9,857,779.21	% 5.00 10.00 20.00 50.00 80.00 100.00
		2.37

		% 5.00 10.00 20.00 50.00 80.00 100.00
		2.57

		% 5.00 10.00 20.00 50.00 80.00 100.00
		2.57

– II-68 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(3 continued)

Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Total	31 Accounts receivable 170,714,222.36 9,990,790.97 17,317,506.81 12,102,480.34 2,322,919.17 986,606.33 213,434,525.98	December 2016 Bad debts 5,121,426.67 299,723.73 519,525.20 363,074.41 69,687.58 29,598.19 6,403,035.78	% 3.00 3.00 3.00 3.00 3.00 3.00
			3.00

② Provision for bad debts made, recovered or reversed

Provision for bad debts for the three months ended 31 March 2019, 2018, 2017 and 2016 amounted to RMB715,646.30, RMB994,695.59, RMB11,343,236.32 and RMB882,199.46 respectively, and provision for bad debts recovered or reversed amounted to RMB577,055.85 and RMB7,888,492.89 for the three months ended 31 March 2019 and 2017 respectively.

③ There were no accounts receivable written-off during the reporting period.
④ Top five accounts receivable by closing balance of debtors

The total top five accounts receivable of the Target Company by closing balance of debtors amounted to RMB168,276,042.03, accounting for 33.59% of the closing balance of accounts receivable. A provision for bad debts of RMB0.00 in total was made as at the end of the year.

3. Prepayments

(1) Prepayments are presented by ageing as follows

Ageing Within 1 year Total	31 March 2019 3,343,894.23 3,343,894.23	31 December 2018 6,649,329.75 6,649,329.75	31 December 2017 9,136,619.20 9,136,619.20	31 December 2016 14,273,674.58
				14,273,674.58

The Target Company had no prepayments with ageing over one year and significant amount as at the end of each period.

(2) Top five prepayments by supplier based on closing balance

The total top five prepayments of the Target Company by supplier based on closing balance amounted to RMB3,343,894.21, accounting for 100.00% of total closing balance of prepayments.

– II-69 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

4. Other receivables

Item Interest receivable Other receivables Total	31 March 2019 218,746,182.52 49,478,346.93 268,224,529.45	31 December 2018 201,768,840.62 80,804,799.81 282,573,640.43	31 December 2017 132,306,553.42 32,465,341.25 164,771,894.67	31 December 2016 47,504,541.65 7,924,179.79
				55,428,721.44

(1) Interests receivable
① Interests receivable categories

Item Time deposits Others Total	31 March 2019 218,563,165.08 183,017.44 218,746,182.52	31 December 2018 200,993,357.28 775,483.34 201,768,840.62	31 December 2017 130,287,834.11 2,018,719.31 132,306,553.42	31 December 2016 44,344,653.97 3,159,887.68
				47,504,541.65

(2) Other receivables
① Other receivables are disclosed by category as follows

Category Other receivables individually significant for which provision for bad debts has been individually made Other receivables for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Other receivables individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 53,560,142.00 100.00 3,785,112.04 7.07 49,775,029.96 92.93 53,560,142.00 100.00	31 March 2019 Bad debts Amount % 4,081,795.07 7.62 4,081,795.07 8.20 4,081,795.07 7.62	Carrying amount 49,478,346.93 3,785,112.04 45,693,234.89
			49,478,346.93

– II-70 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(1 continued)

Category Other receivables individually significant for which provision for bad debts has been individually made Other receivables for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Other receivables individually insignificant but for which provision for bad debts has been individually made Total (2 continued) Category Other receivables individually significant for which provision for bad debts has been individually made Other receivables for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Other receivables individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 84,167,712.08 100.00 27,781,801.77 33.01 56,385,910.31 66.99 84,167,712.08 100.00 Book value Amount % 34,494,572.92 100.00 1,016,604.88 2.95 33,477,968.04 97.05 34,494,572.92 100.00	31 December 2018 Bad debts Amount % 3,362,912.27 4.00 3,362,912.27 5.96 3,362,912.27 4.00 31 December 2017 Bad debts Amount % 2,029,231.67 5.88 2,029,231.67 6.06 2,029,231.67 5.88	Carrying amount 80,804,799.81 27,781,801.77 53,022,998.04
			80,804,799.81

			Carrying amount 32,465,341.25 1,016,604.88 31,448,736.37
			32,465,341.25

– II-71 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(3 continued)

Category Other receivables individually significant for which provision for bad debts has been individually made Other receivables for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Other receivables individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 8,166,163.19 100.00 100,050.00 1.23 8,066,113.19 98.77 8,166,163.19 100.00	31 December 2016 Bad debts Amount % 241,983.40 2.96 241,983.40 3.00 241,983.40 2.96	Carrying amount 7,924,179.79 100,050.00 7,824,129.79
			7,924,179.79

A. Other receivables in the group provided for bad debts by aging are as follows:

Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Within 6 months Total	31 March 2019 Other receivable Provision for bad debts 7,296,484.10 18,009,589.49 900,479.47 21,256,224.40 2,125,622.44 2,618,293.13 523,658.63 9,777.48 4,888.74 287,577.84 230,062.27 297,083.52 297,083.52 49,775,029.96 4,081,795.07	% 5.00 10.00 20.00 50.00 80.00 100.00
		8.20

– II-72 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(1 continued)

Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total (2 continued)	31 Other receivable 29,914,182.73 2,843,199.21 20,715,796.40 2,125,313.37 11,954.60 286,656.48 488,807.52 56,385,910.31	December 2018 Provision for bad debts 142,159.96 2,071,579.64 425,062.67 5,977.30 229,325.18 488,807.52 3,362,912.27	% 5.00 10.00 20.00 50.00 80.00 100.00
			5.96

Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total (3 continued) Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total	31 Other receivable 9,152,446.33 20,725,631.80 2,500,662.30 200,000.00 329,660.81 157,566.80 412,000.00 33,477,968.04 31 Other receivable 5,439,216.61 771,857.07 245,208.49 374,927.42 822,903.60 412,000.00 8,066,113.19	December 2017 Provision for bad debts 1,036,281.59 250,066.23 40,000.00 164,830.41 126,053.44 412,000.00 2,029,231.67 December 2016 Provision for bad debts 163,176.51 23,155.71 7,356.25 11,247.82 24,687.11 12,360.00 241,983.40	% 5.00 10.00 20.00 50.00 80.00 100.00
			6.06

			% 3.00 3.00 3.00 3.00 3.00 3.00 3.00
			3.00

– II-73 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

② Provision for bad debts made, recovered or reversed

Provision for bad debts for the three months ended 31 March 2019, 2018, 2017 and 2016 amounted to RMB718,882.80, RMB1,333,680.60, RMB1,787,248.27 and RMB55,037.34 respectively, no provision for bad debts to be recovered or reversed.

③ There were no accounts receivable written-off during the reporting period.
④ Other receivables by nature

Item Security deposit Current account with related parties Other current account Total	31 March 2019 43,933,174.69 236,322.00 9,390,645.31 53,560,142.00	31 December 2018 47,405,959.99 26,534,346.00 10,227,406.09 84,167,712.08	31 December 2017 32,206,113.94 383,922.23 1,904,536.75 34,494,572.92	31 December 2016 7,059,025.27 1,760.00 1,105,377.92
				8,166,163.19

⑤ Top five other receivables by closing balance of debtors

Item Nature Top 1 Security deposit Top 2 Security deposit Top 3 Other current account Top 4 Security deposit Top 5 Security deposit Total	Amount Ageing Percentage of the total other receivables (%) 16,000,000.00 1 year to 2 years 29.87 8,683,931.70 Within six months, 6 months to 1 year 16.21 4,725,051.67 Within six months 8.82 4,200,000.00 6 months to 1 year, 1 year to 2 years, 2 years to 3 years 7.84 3,857,596.00 6 months to 1 year 7.20 37,466,579.37 69.94	Provision for bad debts 1,600,000.00 484,196.59 435,000.00 192,879.80
		2,712,076.39

– II-74 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

5. Inventories

Item Raw materials Works in progress Finished goods Total (1 continued) Item Raw materials Works in progress Finished goods Total (2 continued) Item Raw materials Works in progress Finished goods Total (3 continued) Item Raw materials Works in progress Finished goods Total	Book value 131,927,221.73 6,625,540.80 659,761,790.11 798,314,552.64 Book value 119,698,687.33 1,779,616.83 617,079,159.10 738,557,463.26 Book value 118,839,777.06 2,887,209.08 614,431,472.67 736,158,458.81 Book value 117,312,809.70 1,555,312.54 443,824,433.17 562,692,555.41	31 March 2019 Provision for declines in value 7,485,299.32 261,593.43 7,746,892.75 31 December 2018 Provision for declines in value 7,425,259.85 157,662.28 7,582,922.13 31 December 2017 Provision for declines in value 275,885.36 345,492.79 621,378.15 31 December 2016 Provision for declines in value 49,943.41 4,779,815.36 4,829,758.77	Carrying amount 124,441,922.41 6,625,540.80 659,500,196.68
			790,567,659.89

			Carrying amount 112,273,427.48 1,779,616.83 616,921,496.82
			730,974,541.13

			Carrying amount 118,563,891.70 2,887,209.08 614,085,979.88
			735,537,080.66

			Carrying amount 117,262,866.29 1,555,312.54 439,044,617.81
			557,862,796.64

– II-75 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

6. Other current assets

Item Tax deductible Others Total Fixed assets Item Fixed assets Total	31 March 2019 26,992,382.32 11,210,001.23 38,202,383.55 31 March 2019 428,194,930.86 428,194,930.86	31 December 2018 978,654.67 11,479,349.57 12,458,004.24 31 December 2018 443,308,332.60 443,308,332.60	31 December 2017 26,065,916.97 218,955,310.45 245,021,227.42 31 December 2017 364,172,119.30 364,172,119.30	31 December 2016 5,089,509.32 306,605,113.78
				311,694,623.10

				31 December 2016 293,048,315.88
				293,048,315.88

7. Fixed assets

(1) Fixed assets
① Particulars of fixed assets for the three months ended 31 March 2019

	Buildings and	Machinery and	Motor	Office
Item	structures	equipment	vehicles	equipment	Instrument	Moulds	Total
I. Original carrying amount
1. Opening balance	192,595,556.53	323,719,305.21	1,044,944.82	40,801,218.41	127,662,211.24	157,669,000.27	843,492,236.48
2. Increase for the period	448,473.29	741,903.91		1,486,169.48	1,901,945.49	2,385,344.76	6,963,836.93
(1) Additions				1,486,169.48			1,486,169.48
(2) Transfer from construction
in progress	448,473.29	741,903.91			1,901,945.49	2,385,344.76	5,477,667.45
3. Decrease for the period		1,204,546.68		174,300.81	1,438,484.86	7,174,019.59	9,991,351.94
(1) Disposal or retirement		1,204,546.68		174,300.81	1,438,484.86	7,174,019.59	9,991,351.94
4. Closing balance	193,044,029.82	323,256,662.44	1,044,944.82	42,113,087.08	128,125,671.87	152,880,325.44	840,464,721.47
II. Accumulated depreciation
1. Opening balance	68,941,676.54	130,377,087.18	1,013,596.48	20,576,113.16	63,472,295.31	115,583,857.51	399,964,626.18
2. Increase for the period	2,293,514.42	6,893,286.98		1,743,179.45	4,008,405.27	6,963,156.12	21,901,542.24
(1) Provision made	2,293,514.42	6,893,286.98		1,743,179.45	4,008,405.27	6,963,156.12	21,901,542.24
3. Decrease for the period		893,393.95		164,754.07	1,366,560.63	7,174,019.59	9,598,728.24
(1) Disposal or retirement		893,393.95		164,754.07	1,366,560.63	7,174,019.59	9,598,728.24
4. Closing balance	71,235,190.96	136,376,980.21	1,013,596.48	22,154,538.54	66,114,139.95	115,372,994.04	412,267,440.18
III. Provision for impairment
1. Opening balance		219,277.70					219,277.70
2. Increase for the period
3. Decrease for the period		216,927.27					216,927.27
(1) Disposal or retirement		216,927.27					216,927.27
4. Closing balance		2,350.43					2,350.43
IV. Carrying amount
1. Carrying amount as at the end of
the period	121,808,838.86	186,877,331.80	31,348.34	19,958,548.54	62,011,531.92	37,507,331.40	428,194,930.86
2. Carrying amount as at the beginning
of the year	123,653,879.99	193,122,940.33	31,348.34	20,225,105.25	64,189,915.93	42,085,142.76	443,308,332.60

– II-76 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

② Particulars of fixed assets for 2018

	Buildings and	Machinery and	Motor	Office
Item	structures	equipment	vehicles	equipment	Instrument	Moulds	Total
I. Original carrying amount
1. Opening balance	190,356,902.13	262,299,558.16	1,308,713.82	32,794,506.73	77,190,963.50	140,666,890.69	704,617,535.03
2. Increase for the year	2,238,654.40	70,405,393.03		10,241,982.36	52,240,811.75	22,035,901.14	157,162,742.68
(1) Additions				7,369,449.54			7,369,449.54
(2) Transfer from construction in progress	2,238,654.40	70,405,393.03		2,872,532.82	52,240,811.75	22,035,901.14	149,793,293.14
3. Decrease for the year		8,985,645.98	263,769.00	2,235,270.68	1,769,564.01	5,033,791.56	18,288,041.23
(1) Disposal or retirement		8,985,645.98	263,769.00	2,235,270.68	1,769,564.01	5,033,791.56	18,288,041.23
4. Closing balance	192,595,556.53	323,719,305.21	1,044,944.82	40,801,218.41	127,662,211.24	157,669,000.27	843,492,236.48
II. Accumulated depreciation
1. Opening balance	59,850,837.52	114,752,051.29	1,258,657.62	17,015,106.77	54,901,853.20	92,483,613.38	340,262,119.78
2. Increase for the year	9,090,839.02	23,290,097.81	10,794.79	5,729,219.38	10,251,527.91	28,134,035.69	76,506,514.60
(1) Provision made	9,090,839.02	23,290,097.81	10,794.79	5,729,219.38	10,251,527.91	28,134,035.69	76,506,514.60
3. Decrease for the year		7,665,061.92	255,855.93	2,168,212.99	1,681,085.80	5,033,791.56	16,804,008.20
(1) Disposal or retirement		7,665,061.92	255,855.93	2,168,212.99	1,681,085.80	5,033,791.56	16,804,008.20
4. Closing balance	68,941,676.54	130,377,087.18	1,013,596.48	20,576,113.16	63,472,295.31	115,583,857.51	399,964,626.18
III. Provision for impairment
1. Opening balance		183,295.95					183,295.95
2. Increase for the year		216,927.27					216,927.27
(1) Provision made		216,927.27					216,927.27
3. Decrease for the year		180,945.52					180,945.52
(1) Disposal or retirement		180,945.52					180,945.52
4. Closing balance		219,277.70					219,277.70
IV. Carrying amount
1. Carrying amount as at the end
of the year	123,653,879.99	193,122,940.33	31,348.34	20,225,105.25	64,189,915.93	42,085,142.76	443,308,332.60
2. Carrying amount as at the beginning
of the year	130,506,064.61	147,364,210.92	50,056.20	15,779,399.96	22,289,110.30	48,183,277.31	364,172,119.30

– II-77 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

③ Particulars of fixed assets for 2017

	Buildings and	Machinery and	Motor	Office
Item	structures	equipment	vehicles	equipment	Instrument	Moulds	Total
I. Original carrying amount
1. Opening balance	148,251,068.48	224,988,069.86	1,308,713.82	27,448,222.61	72,354,303.42	102,879,753.76	577,230,131.95
2. Increase for the year	42,105,833.65	41,708,787.24		6,309,637.52	5,803,404.88	37,863,136.93	133,790,800.22
(1) Additions				6,220,782.82	342,748.87		6,563,531.69
(2) Transfer from construction
in progress	42,105,833.65	41,708,787.24		88,854.70	5,460,656.01	37,863,136.93	127,227,268.53
3. Decrease for the year		4,397,298.94		963,353.40	966,744.80	76,000.00	6,403,397.14
(1) Disposal or retirement		4,397,298.94		963,353.40	966,744.80	76,000.00	6,403,397.14
4. Closing balance	190,356,902.13	262,299,558.16	1,308,713.82	32,794,506.73	77,190,963.50	140,666,890.69	704,617,535.03
II. Accumulated depreciation
1. Opening balance	52,797,344.70	99,380,025.22	1,137,478.00	13,172,619.33	47,184,226.71	69,839,515.41	283,511,209.37
2. Increase for the year	7,053,492.82	19,024,168.98	121,179.62	4,775,528.19	8,636,034.11	22,646,209.08	62,256,612.80
(1) Provision made	7,053,492.82	19,024,168.98	121,179.62	4,775,528.19	8,636,034.11	22,646,209.08	62,256,612.80
3. Decrease for the year		3,652,142.91		933,040.75	918,407.62	2,111.11	5,505,702.39
(1) Disposal or retirement		3,652,142.91		933,040.75	918,407.62	2,111.11	5,505,702.39
4. Closing balance	59,850,837.52	114,752,051.29	1,258,657.62	17,015,106.77	54,901,853.20	92,483,613.38	340,262,119.78
III. Provision for impairment
1. Opening balance		670,606.70					670,606.70
2. Increase for the year		34,401.71					34,401.71
(1) Provision made		34,401.71					34,401.71
3. Decrease for the year		521,712.46					521,712.46
(1) Disposal or retirement		521,712.46					521,712.46
4. Closing balance		183,295.95					183,295.95
IV. Carrying amount
1. Carrying amount as at the end of
the year	130,506,064.61	147,364,210.92	50,056.20	15,779,399.96	22,289,110.30	48,183,277.31	364,172,119.30
2. Carrying amount as at the beginning
of the year	95,453,723.78	124,937,437.94	171,235.82	14,275,603.28	25,170,076.71	33,040,238.35	293,048,315.88

– II-78 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

④ Particulars of fixed assets for 2016

	Buildings and	Machinery and	Motor	Office
Item	structures	equipment	vehicles	equipment	Instrument	Moulds	Total
I. Original carrying amount
1. Opening balance	149,010,591.03	217,511,410.49	1,308,713.82	25,337,782.90	76,098,844.34	94,756,676.85	564,024,019.43
2. Increase for the year	483,130.23	9,788,685.45		3,115,620.69	2,750,618.67	22,603,418.78	38,741,473.82
(1) Additions				3,115,620.69			3,115,620.69
(2) Transfer from construction
in progress	483,130.23	9,788,685.45			2,750,618.67	22,603,418.78	35,625,853.13
3. Decrease for the year	1,242,652.78	2,312,026.08		1,005,180.98	6,495,159.59	14,480,341.87	25,535,361.30
(1) Disposal or retirement	1,242,652.78	2,312,026.08		1,005,180.98	6,495,159.59	14,480,341.87	25,535,361.30
4. Closing balance	148,251,068.48	224,988,069.86	1,308,713.82	27,448,222.61	72,354,303.42	102,879,753.76	577,230,131.95
II. Accumulated depreciation
1. Opening balance	46,487,976.65	83,745,301.15	983,150.26	9,923,468.53	43,929,793.07	54,535,781.74	239,605,471.40
2. Increase for the year	7,075,429.01	17,791,546.41	154,327.74	4,224,176.55	9,424,835.23	23,963,372.70	62,633,687.64
(1) Provision made	7,075,429.01	17,791,546.41	154,327.74	4,224,176.55	9,424,835.23	23,963,372.70	62,633,687.64
3. Decrease for the year	766,060.96	2,156,822.34		975,025.75	6,170,401.59	8,659,639.03	18,727,949.67
(1) Disposal or retirement	766,060.96	2,156,822.34		975,025.75	6,170,401.59	8,659,639.03	18,727,949.67
4. Closing balance	52,797,344.70	99,380,025.22	1,137,478.00	13,172,619.33	47,184,226.71	69,839,515.41	283,511,209.37
III. Provision for impairment
1. Opening balance
2. Increase for the year		670,606.70					670,606.70
(1) Provision made		670,606.70					670,606.70
3. Decrease for the year
4. Closing balance		670,606.70					670,606.70
IV. Carrying amount
1. Carrying amount as at the end of
the year	95,453,723.78	124,937,437.94	171,235.82	14,275,603.28	25,170,076.71	33,040,238.35	293,048,315.88
2. Carrying amount as at the beginning
of the year	102,522,614.38	133,766,109.34	325,563.56	15,414,314.37	32,169,051.27	40,220,895.11	324,418,548.03

⑤ As at the end of the period, the Target Company has no transitorily idle fixed assets.
⑥ As at the end of the period, the Target Company has no fixed assets held under finance lease.
⑦ As at the end of the period, the Target Company has no fiexed assets rented out under operating lease.
⑧ As at the end of the period, fixed assets which has not obtained the ownership certificate including Buildings and structures II and the north of Buildings and structures I.

– II-79 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

8. Constructions in progress

Item Equipment, moulds Others Total (continued) Item Equipment, moulds Total	31 March 2019 Book value Impairment provision 16,768,236.99 58,950,160.07 75,718,397.06 31 December 2017 Book value Impairment provision 50,388,838.71 50,388,838.71	Carrying amount 16,768,236.99 58,950,160.07 75,718,397.06 Carrying amount 50,388,838.71 50,388,838.71	31 December 2018 Book value Impairment provision 16,805,524.76 16,805,524.76 31 December 2016 Book value Impairment provision 12,833,701.68 12,833,701.68	Carrying amount 16,805,524.76
				16,805,524.76

				Carrying amount 12,833,701.68
				12,833,701.68

(1) Movement in constructions in progress during the three months ended 31 March Item Opening balance Increase for the period Transferred to fixed assets Other Decrease Equipment, moulds 16,805,524.76 5,440,379.68 5,477,667.45 Others 58,950,160.07 Total 16,805,524.76 64,390,539.75 5,477,667.45 (2) Movement in constructions in progress during 2018 Item Opening balance Increase for the year Transferred to fixed assets Other Decrease Equipment, moulds 50,388,838.71 116,209,979.19 149,793,293.14 Total 50,388,838.71 116,209,979.19 149,793,293.14 (3) Movement in constructions in progress during 2017 Item Opening balance Increase for the year Transferred to fixed assets Other Decrease Equipment, moulds 12,833,701.68 164,782,405.56 127,227,268.53 Total 12,833,701.68 164,782,405.56 127,227,268.53	2019 Closing balance 16,768,236.99 58,950,160.07
	75,718,397.06

	Closing balance 16,805,524.76
	16,805,524.76

	Closing balance 50,388,838.71
	50,388,838.71

– II-80 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(4) Movement in constructions in progress during 2016.

Item Equipment, moulds Total	Opening balance 4,444,943.53 4,444,943.53	Increase for the year Transferred to fixed assets 44,014,611.28 35,625,853.13 44,014,611.28 35,625,853.13	Other Decrease	Closing balance 12,833,701.68
				12,833,701.68

The capital of the construction project of the target company is all self-raised, no interest on borrowing is capitalized, and no impairment of the value of the construction project occurs.

All constructions in progress of the Target Company were self-financed, without capitalisation of borrowing cost and interest. The Target Company has made no provision for constructions in progress.

9. Intangible assets

(1) Particulars of intangible assets for the three months ended 31 March 2019

Item		Software	Land use rights	Others	Total
I. Original carrying amount
1.	Opening balance	26,888,631.04	10,780,045.79	1,367,924,526.95	1,405,593,203.78
2.	Increase for the period	1,258,252.43	120,746,183.69		122,004,436.12
	(1) Additions	1,258,252.43			1,258,252.43
	(2) Additions from business
	combination		120,746,183.69		120,746,183.69
3.	Decrease for the period
4.	Closing balance	28,146,883.47	131,526,229.48	1,367,924,526.95	1,527,597,639.90
II. Accumulated amortisation
1.	Opening balance	15,059,341.70	2,772,137.33	183,586,084.67	201,417,563.70
2.	Increase for the period	1,058,585.59	1,041,222.14	44,736,084.85	46,835,892.58
	(1) Provision made	1,058,585.59	267,758.65	44,736,084.85	46,062,429.09
	(2) Additions from business
	combination		773,463.49		773,463.49
3.	Decrease for the period
4.	Closing balance	16,117,927.29	3,813,359.47	228,322,169.52	248,253,456.28
III. Provision for impairment
1.	Opening balance
2.	Increase for the period
3.	Decrease for the period
4.	Closing balance
IV. Carrying amount
1.	Carrying amount as at the
	end of the period	12,028,956.18	127,712,870.01	1,139,602,357.43	1,279,344,183.62
2.	Carrying amount as at the
	beginning of the year	11,829,289.34	8,007,908.46	1,184,338,442.28	1,204,175,640.08

– II-81 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2) Particulars of intangible assets for 2018

Item		Software	Land use rights	Others	Total
I. Original carrying amount
1.	Opening balance	19,192,628.20	10,780,045.79	707,547,168.79	737,519,842.78
2.	Increase for the year	7,696,002.84		660,377,358.16	668,073,361.00
	(1) Additions	7,696,002.84		660,377,358.16	668,073,361.00
3.	Decrease for the year
4.	Closing balance	26,888,631.04	10,780,045.79	1,367,924,526.95	1,405,593,203.78
II. Accumulated amortisation
1.	Opening balance	11,409,324.73	2,517,243.69	11,717,216.95	25,643,785.37
2.	Increase for the year	3,650,016.97	254,893.64	171,868,867.72	175,773,778.33
	(1) Provision made	3,650,016.97	254,893.64	171,868,867.72	175,773,778.33
3.	Decrease for the year
4.	Closing balance	15,059,341.70	2,772,137.33	183,586,084.67	201,417,563.70
III. Provision for impairment
1.	Opening balance
2.	Increase for the year
3.	Decrease for the year
4.	Closing balance
IV. Carrying amount
1.	Carrying amount as at the
	end of the year	11,829,289.34	8,007,908.46	1,184,338,442.28	1,204,175,640.08
2.	Carrying amount as at the
	beginning of the year	7,783,303.47	8,262,802.10	695,829,951.84	711,876,057.41

(3) Particulars of intangible assets for 2017

Item		Software	Land use rights	Others	Total
I. Original carrying amount
1.	Opening balance	17,330,552.97	10,780,045.79		28,110,598.76
2.	Increase for the year	1,862,075.23		707,547,168.79	709,409,244.02
	(1) Additions	1,862,075.23		707,547,168.79	709,409,244.02
3.	Decrease for the year
4.	Closing balance	19,192,628.20	10,780,045.79	707,547,168.79	737,519,842.78
II. Accumulated amortisation
1.	Opening balance	7,891,683.45	2,262,350.05		10,154,033.50
2.	Increase for the year	3,517,641.28	254,893.64	11,717,216.95	15,489,751.87
	(1) Provision made	3,517,641.28	254,893.64	11,717,216.95	15,489,751.87
3.	Decrease for the year
4.	Closing balance	11,409,324.73	2,517,243.69	11,717,216.95	25,643,785.37
III. Provision for impairment
1.	Opening balance
2.	Increase for the year
3.	Decrease for the year
4.	Closing balance
IV. Carrying amount
1.	Carrying amount as at the
	end of the year	7,783,303.47	8,262,802.10	695,829,951.84	711,876,057.41
2.	Carrying amount as at the
	beginning of the year	9,438,869.52	8,517,695.74		17,956,565.26

– II-82 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(4) Particulars of intangible assets for 2016

Item		Software	Land use rights	Total
I. Original carrying amount
1.	Opening balance	14,343,422.76	10,780,045.79	25,123,468.55
2.	Increase for the year	2,987,130.21		2,987,130.21
	(1) Additions	2,987,130.21		2,987,130.21
3.	Decrease for the year
	(1) Disposal or retirement
4.	Closing balance	17,330,552.97	10,780,045.79	28,110,598.76
II. Accumulated amortisation
1.	Opening balance	4,315,435.86	2,007,456.41	6,322,892.27
2.	Increase for the year	3,576,247.59	254,893.64	3,831,141.23
	(1) Provision made	3,576,247.59	254,893.64	3,831,141.23
3.	Decrease for the year
4.	Closing balance	7,891,683.45	2,262,350.05	10,154,033.50
III. Provision for impairment
1.	Opening balance
2.	Increase for the year
3.	Decrease for the year
4.	Closing balance
IV. Carrying amount
1.	Carrying amount as at the
	end of the year	9,438,869.52	8,517,695.74	17,956,565.26
2.	Carrying amount as at the
	beginning of the year	10,027,986.90	8,772,589.38	18,800,576.28

As at the end of the period, the Target Company has no land usd right which has not obtained ownership certificate.

10. Long-term prepaid expenses

(1) Particulars of long-term prepaid expenses for the three months ended 31 March 2019

Item Opening balance Increase for the period Amortization for the period Long-term prepaid expenses 1,253,223.62 398,409.57 143,779.32 Total 1,253,223.62 398,409.57 143,779.32 Particulars of long-term prepaid expenses for 2018 Item Opening balance Increase for the year Amortization for the year Long-term prepaid expenses 1,297,548.18 44,324.56 Total 1,297,548.18 44,324.56	Other deductions Other deductions	Closing balance 1,507,853.87
		1,507,853.87

		Closing balance 1,253,223.62
		1,253,223.62

(2) Particulars of long-term prepaid expenses for 2018

– II-83 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

11. Deferred tax assets/deferred tax liabilities

(1) Breakdown of deferred tax assets

31 March 2019 Item Deductible temporary difference Deferred tax assets Provision for impairment of assets 22,822,103.50 3,482,610.56 Accrued expenses 2,161,180,358.03 425,284,977.56 Others 159,251,317.53 31,427,671.36 Total 2,343,253,779.06 460,195,259.48 (continued) 31 December 2017 Item Deductible temporary difference Deferred tax assets Provision for impairment of assets 12,691,684.98 1,995,343.63 Accrued expenses 1,629,741,232.48 308,047,487.00 Others 116,727,341.24 21,349,648.84 Total 1,759,160,258.70 331,392,479.47 Breakdown of deferred tax liabilities 31 March 2019 Item Taxable temporary difference Deferred tax liabilities Fixed assets accelerated depreciation 122,923,506.08 19,667,142.27 Total 122,923,506.08 19,667,142.27 (continued) 31 December 2017 Item Taxable temporary difference Deferred tax liabilities Fixed assets accelerated depreciation 14,891,716.20 2,233,757.43 Total 14,891,716.20 2,233,757.43	31 December 2018 Deductible temporary difference Deferred tax assets 22,017,586.90 3,410,874.26 1,966,464,042.64 375,939,592.75 157,595,405.72 31,040,956.84 2,146,077,035.26 410,391,423.85 31 December 2016 Deductible temporary difference Deferred tax assets 12,584,294.16 2,706,348.48 979,522,101.02 168,723,204.45 110,954,196.99 19,979,618.13 1,103,060,592.17 191,409,171.06 31 December 2018 Taxable temporary difference Deferred tax liabilities 101,083,671.21 16,282,393.09 101,083,671.21 16,282,393.09 31 December 2016 Taxable temporary difference Deferred tax liabilities 10,956,180.20 1,643,427.03 10,956,180.20 1,643,427.03	31 December 2018 Deductible temporary difference Deferred tax assets 22,017,586.90 3,410,874.26 1,966,464,042.64 375,939,592.75 157,595,405.72 31,040,956.84 2,146,077,035.26 410,391,423.85 31 December 2016 Deductible temporary difference Deferred tax assets 12,584,294.16 2,706,348.48 979,522,101.02 168,723,204.45 110,954,196.99 19,979,618.13 1,103,060,592.17 191,409,171.06 31 December 2018 Taxable temporary difference Deferred tax liabilities 101,083,671.21 16,282,393.09 101,083,671.21 16,282,393.09 31 December 2016 Taxable temporary difference Deferred tax liabilities 10,956,180.20 1,643,427.03 10,956,180.20 1,643,427.03
		1,643,427.03

(2) Breakdown of deferred tax liabilities

– II-84 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

12. Other non-current assets

Item Time deposits Total	31 March 2019 300,000,000.00 300,000,000.00	31 December 2018 800,000,000.00 800,000,000.00	31 December 2017 2,887,376,447.59 2,887,376,447.59	31 December 2016 2,293,376,447.59
				2,293,376,447.59

13. Notes payable and Accounts payable Category 31 March 2019 Notes payable 1,856,136,708.99 Accounts payable 811,366,037.16 Total 2,667,502,746.15 (1) Notes payable Category 31 March 2019 Bank acceptance notes 1,352,002,485.36 Commercial acceptance notes 504,134,223.63 Total 1,856,136,708.99	31 December 2018 1,858,672,139.66 761,383,351.29 2,620,055,490.95 31 December 2018 1,323,672,137.88 535,000,001.78 1,858,672,139.66	31 December 2017 1,758,735,193.12 678,237,593.43 2,436,972,786.55 31 December 2017 1,335,487,649.10 423,247,544.02 1,758,735,193.12	31 December 2016 1,042,690,207.18 642,352,891.30
			1,685,043,098.48

			31 December 2016 870,399,244.63 172,290,962.55
			1,042,690,207.18

Note: There was no outstanding notes payable due as at the end of the period.

(2) Accounts payable

① Ageing analysis of accounts payable based on the date of recognition is as follows:

Item Within one year Over one year Total	31 March 2019 810,001,926.19 1,364,110.97 811,366,037.16	31 December 2018 760,019,240.32 1,364,110.97 761,383,351.29	31 December 2017 676,923,482.46 1,314,110.97 678,237,593.43	31 December 2016 639,837,980.09 2,514,911.21
				642,352,891.30

② As at 31 March 2019, accounts payable with ageing of over one year amounted to RMB1,364,110.97 (31 December 2018: RMB1,364,110.97; 31 December 2017: 1,314,110.97; 31 December 2016: RMB2,514,911.21), which represented mainly raw material payable and was not settled yet.

– II-85 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

14. Advances from customers

(1) Ageing analysis of advances from customers.

Item Within one year Over one year Total	31 March 2019 485,208,593.79 34,419,241.13 519,627,834.92	31 December 2018 310,100,325.84 34,172,599.22 344,272,925.06	31 December 2017 337,433,103.21 2,029,461.58 339,462,564.79	31 December 2016 241,873,993.36 1,075,042.18
				242,949,035.54

(2) As at 31 March 2019, advances from customers with ageing of over one year amounted to RMB56,936,725.17 (31 December 2018: RMB34,172,599.22;31 December 2017: RMB2,029,461.58; 31 December 2016: RMB1,075,042.18), which represented advances from customers for sale of goods and were not recognised as revenue yet as the relevant products had not been sold.

15. Compensations payable to employee

(1) Compensations payable to employee are listed as follows
① Compensations payable in the three months ended 31 March 2019

Item I. Short-term compensations II. Post-employment benefits defined contribution plans III. Termination benefits Total	Opening balance 220,089,761.86 220,089,761.86	Increase for the period 188,634,072.48 14,364,481.76 728,885.53 203,727,439.77	Decrease for the period 272,368,700.97 14,364,481.76 728,885.53 287,462,068.26	Closing balance 136,355,133.37
				136,355,133.37

② Compensations payable in 2018

Item I. Short-term compensations II. Post-employment benefits defined contribution plans III. Termination benefits Total	Opening balance 188,582,697.91 188,582,697.91	Increase for the year 718,495,624.97 55,795,013.17 1,148,703.50 775,439,341.64	Decrease for the year 686,988,561.02 55,795,013.17 1,148,703.50 743,932,277.69	Closing balance 220,089,761.86
				220,089,761.86

– II-86 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

③ Compensations payable in 2017

Item Opening balance I. Short-term compensations 124,144,098.93 II. Post-employment benefits defined contribution plans III. Termination benefits Total 124,144,098.93 Compensations payable in 2016 Item Opening balance I. Short-term compensations 85,631,870.26 II. Post-employment benefits defined contribution plans III. Termination benefits Total 85,631,870.26	Increase for the year 603,846,383.77 41,040,369.03 836,523.50 645,723,276.30 Increase for the year 397,902,101.59 30,029,791.69 1,226,822.50 429,158,715.78	Decrease for the year 539,407,784.79 41,040,369.03 836,523.50 581,284,677.32 Decrease for the year 359,389,872.92 30,029,791.69 1,226,822.50 390,646,487.11	Closing balance 188,582,697.91
			188,582,697.91

			Closing balance 124,144,098.93
			124,144,098.93

④ Compensations payable in 2016
(2) Short-term compensations are as follows
① Short-term compensations in the three months ended 31 March 2019

Item 1. Wages and salaries, bonuses, allowances and subsidies 2. Staff welfare 3. Social insurance Including: Medical insurance Work-related injury insurance Maternity insurance 4. Housing provident funds 5. Labour union funds and employee education funds Total	Opening balance 220,089,761.86 220,089,761.86	Increase for the period 164,577,471.03 5,852,290.86 9,020,091.73 7,569,307.75 160,561.07 1,290,222.91 7,680,808.41 1,503,410.45 188,634,072.48	Decrease for the period 248,312,099.52 5,852,290.86 9,020,091.73 7,569,307.75 160,561.07 1,290,222.91 7,680,808.41 1,503,410.45 272,368,700.97	Closing balance 136,355,133.37
				136,355,133.37

– II-87 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

② Short-term compensations in 2018

Item Opening balance 1. Wages and salaries, bonuses, allowances and subsidies 188,582,697.91 2. Staff welfare 3. Social insurance Including: Medical insurance Work-related injury insurance Maternity insurance 4. Housing provident funds 5. Labour union funds and employee education funds Total 188,582,697.91 ③ Short-term compensations in 2017 Item Opening balance 1. Wages and salaries, bonuses, allowances and subsidies 124,144,098.93 2. Staff welfare 3. Social insurance Including: Medical insurance Work-related injury insurance Maternity insurance 4. Housing provident funds 5. Labour union funds and employee education funds Total 124,144,098.93	Increase for the year 635,430,710.54 16,605,762.51 31,580,205.40 26,256,476.78 848,192.80 4,475,535.82 27,984,064.56 6,894,881.96 718,495,624.97 Increase for the year 539,059,181.90 15,025,131.61 23,027,851.42 19,752,049.28 1,081,129.99 2,194,672.15 20,771,037.53 5,963,181.31 603,846,383.77	Decrease for the year 603,923,646.59 16,605,762.51 31,580,205.40 26,256,476.78 848,192.80 4,475,535.82 27,984,064.56 6,894,881.96 686,988,561.02 Decrease for the year 474,620,582.92 15,025,131.61 23,027,851.42 19,752,049.28 1,081,129.99 2,194,672.15 20,771,037.53 5,963,181.31 539,407,784.79	Closing balance 220,089,761.86
			220,089,761.86

			Closing balance 188,582,697.91
			188,582,697.91

– II-88 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

④ Short-term compensations in 2016

Item 1. Wages and salaries, bonuses, allowances and subsidies 2. Staff welfare 3. Social insurance Including: Medical insurance Work-related injury insurance Maternity insurance 4. Housing provident funds 5. Labour union funds and employee education funds Total	Opening balance 85,631,870.26 85,631,870.26	Increase for the year 354,565,185.66 9,465,611.21 17,040,151.56 14,224,638.17 1,234,998.04 1,580,515.35 15,950,407.22 880,745.94 397,902,101.59	Decrease for the year 316,052,956.99 9,465,611.21 17,040,151.56 14,224,638.17 1,234,998.04 1,580,515.35 15,950,407.22 880,745.94 359,389,872.92	Closing balance 124,144,098.93
				124,144,098.93

(3) Defined contribution plans are as follows
① Defined contribution plans for the three months ended 31 March 2019

Item Opening balance 1. Basic pension insurance 2. Unemployment insurance Total ② Defined contribution plans for 2018 Item Opening balance 1. Basic pension insurance 2. Unemployment insurance Total ③ Defined contribution plans for 2017. Item Opening balance 1. Basic pension insurance 2. Unemployment insurance Total	Increase for the period 13,762,377.73 602,104.03 14,364,481.76 Increase for the year 53,706,429.79 2,088,583.38 55,795,013.17 Increase for the year 39,504,098.54 1,536,270.49 41,040,369.03	Decrease for the period 13,762,377.73 602,104.03 14,364,481.76 Decrease for the year 53,706,429.79 2,088,583.38 55,795,013.17 Decrease for the year 39,504,098.54 1,536,270.49 41,040,369.03	Closing balance


			Closing balance


			Closing balance

– II-89 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

④ Defined contribution plans for 2016.

Item 1. Basic pension insurance 2. Unemployment insurance Total 16. Taxes payable Item Value-added tax Enterprise income tax Others Total 17. Other payables Item Dividends payable Other payables Total (1) Dividends payable as follows Item Hisense Home Appliances Group Co., Ltd. Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd. Unitecs Corporation Total	Opening balance 31 March 2019 102,505,535.27 151,252,374.72 16,014,585.29 269,772,495.28 31 March 2019 1,466,022,000.00 2,399,741,111.32 3,865,763,111.32 31 March 2019 734,510,000.00 434,710,000.00 269,820,000.00 26,982,000.00 1,466,022,000.00	Increase for the year 28,449,276.34 1,580,515.35 30,029,791.69 31 December 2018 61,547,595.77 232,452,918.24 11,439,817.64 305,440,331.65 31 December 2018 2,203,738,480.71 2,203,738,480.71 31 December 2018	Decrease for the year 28,449,276.34 1,580,515.35 30,029,791.69 31 December 2017 8,742,507.92 236,499,834.00 5,085,989.27 250,328,331.19 31 December 2017 1,825,970,196.69 1,825,970,196.69 31 December 2017	Closing balance


				31 December 2016 26,253,287.25 171,142,057.14 5,962,374.07
				203,357,718.46

				31 December 2016 1,117,853,050.09
				1,117,853,050.09

				31 December 2016

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APPENDIX II

(2) Other payables as follows

Item Accrued expenses Others Total	31 March 2019 2,309,656,607.61 90,084,503.71 2,399,741,111.32	31 December 2018 2,028,288,402.21 175,450,078.50 2,203,738,480.71	31 December 2017 1,674,007,104.57 151,963,092.12 1,825,970,196.69	31 December 2016 1,019,498,488.88 98,354,561.21
				1,117,853,050.09

As at the end of the period, there were no significantly other payables with ageing of over 1 year.

18. Provisions

Item Provision for warranties Total	31 March 2019 136,183,465.72 136,183,465.72	31 December 2018 138,285,406.92 138,285,406.92	31 December 2017 101,343,308.02 101,343,308.02	31 December 2016 78,609,180.40
				78,609,180.40

19. Paid-in capital

(1) Change in paid-in capital during the three months ended 31 March 2019

Shareholder’s name Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited Hisense Home Appliances Group Co., Ltd. Unitecs Corporation Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd. Total	Opening balance 92,971,825.00 157,089,139.20 6,411,680.60 64,118,500.00 320,591,144.80	Increase for the period	Decrease for the period	Closing balance 92,971,825.00 157,089,139.20 6,411,680.60 64,118,500.00 320,591,144.80	Shareholding ratio (%) 29.00 49.00 2.00 20.00
					100.00

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APPENDIX II

(2) Change in paid-in capital during 2018

Shareholder’s name Opening balance Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited 92,971,825.00 Hisense Home Appliances Group Co., Ltd. 157,089,139.20 Unitecs Corporation 6,411,680.60 Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd. 64,118,500.00 Total 320,591,144.80 (3) Change in paid-in capital during 2017 Shareholder’s name Opening balance Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited 92,971,825.00 Hisense Home Appliances Group Co., Ltd. 157,089,139.20 Unitecs Corporation 6,411,680.60 Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd. 64,118,500.00 Total 320,591,144.80 (4) Change in paid-in capital during 2016 Shareholder’s name Opening balance Johnson Controls-Hitachi Air Conditioning Trading (Hong Kong) Limited 92,971,825.00 Hisense Home Appliances Group Co., Ltd. 157,089,139.20 Unitecs Corporation 6,411,680.60 Johnson Controls-Hitachi Air Conditioning Taiwan Co., Ltd. 64,118,500.00 Total 320,591,144.80	Increase for the year Increase for the year Increase for the year	Decrease for the year Decrease for the year Decrease for the year	Closing balance 92,971,825.00 157,089,139.20 6,411,680.60 64,118,500.00 320,591,144.80 Closing balance 92,971,825.00 157,089,139.20 6,411,680.60 64,118,500.00 320,591,144.80 Closing balance 92,971,825.00 157,089,139.20 6,411,680.60 64,118,500.00 320,591,144.80	Shareholding ratio (%) 29.00 49.00 2.00 20.00
				100.00

				Shareholding ratio (%) 29.00 49.00 2.00 20.00
				100.00

				Shareholding ratio (%) 29.00 49.00 2.00 20.00
				100.00

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

20. Capital reserve

(1) Change in capital reserve during the three months ended 31 March 2019

There was no capital reserve in the three months ended 31 March 2019.

(2) Change in capital reserve during 2018.

There was no capital reserve in 2018.

(3) Change in capital reserve during 2017.

Item Share premium Total	Opening balance 3,599,156.24 3,599,156.24	Increase for the year	Decrease for the year 3,599,156.24 3,599,156.24	Closing balance

(4) Change in capital reserve during 2016.

Item Share premium Total	Opening balance 3,599,156.24 3,599,156.24	Increase for the year	Decrease for the year	Closing balance 3,599,156.24
				3,599,156.24

21. Surplus reserve

(1) Change in surplus reserve during the three months ended 31 March 2019

Item Reserve funds Enterprise development funds Total	Opening balance 684,571,063.81 689,069,626.92 1,373,640,690.73	Increase for the period	Decrease for the period	Closing balance 684,571,063.81 689,069,626.92
				1,373,640,690.73

(2) Change in surplus reserve during 2018

Item Reserve funds Enterprise development funds Total	Opening balance 542,248,759.56 546,747,322.67 1,088,996,082.23	Increase for the year 142,322,304.25 142,322,304.25 284,644,608.50	Decrease for the year	Closing balance 684,571,063.81 689,069,626.92
				1,373,640,690.73

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APPENDIX II

(3) Change in surplus reserve during 2017

Item Opening balance Reserve funds 412,829,432.29 Enterprise development funds 412,829,432.29 Total 825,658,864.58 (4) Change in surplus reserve during 2016 Item Opening balance Reserve funds 304,797,758.35 Enterprise development funds 304,797,758.35 Total 609,595,516.70 22. Undistributed profits Item Three months ended 31 March 2019 Undistributed profits at the end of the previous year before adjustment 4,141,361,868.90 Adjustment for total undistributed profits as at the beginning of the year (+ for increase and-for decrease) Undistributed profits as at the beginning of the year after adjustment 4,141,361,868.90 Add: Net profits attributable to the shareholders of the parent in current year 366,128,635.30 Less: Appropriation of Reserve funds Appropriation of Enterprise development funds Dividends payable on ordinary shares 1,499,000,000.00 Undistributed profits at the end of the period 3,008,490,504.20	Increase for the year 133,917,890.38 133,917,890.38 267,835,780.76 Increase for the year 108,031,673.94 108,031,673.94 216,063,347.88 2018 2,887,263,182.55 2,887,263,182.55 1,538,743,294.85 142,322,304.25 142,322,304.25 4,141,361,868.90	Decrease for the year 4,498,563.11 4,498,563.11 Decrease for the year 2017 2,124,317,646.61 2,124,317,646.61 1,499,281,316.70 133,917,890.38 133,917,890.38 468,500,000.00 2,887,263,182.55	Closing balance 542,248,759.56 546,747,322.67
			1,088,996,082.23

			Closing balance 412,829,432.29 412,829,432.29
			825,658,864.58

			2016 1,496,082,234.12 1,496,082,234.12 1,171,298,760.37 108,031,673.94 108,031,673.94 327,000,000.00
			2,124,317,646.61

– II-94 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

23. Operating revenue and operating costs

(1) Operating revenue and operating costs

Item Revenue from principal operations Revenue from other operations Total operating revenue Costs of principal operations Costs of other operations Total operating costs	Three months ended 31 March 2019 2,469,291,374.52 232,232,181.52 2,701,523,556.04 1,322,167,400.50 214,330,713.15 1,536,498,113.65	Three months ended 31 March 2018 2018 (Unaudited) 2,016,431,834.62 9,972,846,483.84 233,959,500.10 1,013,820,346.65 2,250,391,334.72 10,986,666,830.49 1,123,201,654.28 5,709,396,021.30 222,811,788.58 969,331,975.05 1,346,013,442.86 6,678,727,996.35	2017 8,630,564,517.23 771,207,833.63 9,401,772,350.86 4,687,600,836.22 720,882,869.57 5,408,483,705.79	2016 6,077,171,704.92 441,295,581.46 6,518,467,286.38 3,199,018,335.60 377,396,954.87
				3,576,415,290.47

(2) The percentage of top five customers of the Target Company to the total revenue from principal operations for the three months ended 31 March 2019 is 5.58 %, of which,the percentage of top one customer is 1.39%; The percentage of top five customers of the Target Company to the total revenue from principal operations in the three months ended 31 March 2018(Unaudited) is 4.43%, of which,the percentage of top one customer is 0.95%; The percentage of top five customers of the Target Company to the total revenue from principal operations in 2018 is 4.10%, of which,the percentage of top one customer is 1.00%; The percentage of top five customers of the Target Company to the total revenue from principal operations in 2017 is 5.08%, of which,the percentage of top one customer is 1.24%; The percentage of top five customers of the Target Company to the total revenue from principal operations in 2016 is 6.56%, of which,the percentage of top one customer is 1.76%.

– II-95 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

24. Tax and surcharges

Item City maintenance and construction tax Education surcharges Others Total	Three months ended 31 March 2019 12,835,873.18 5,501,088.50 6,087,076.35 24,424,038.03	Three months ended 31 March 2018 (Unaudited) 7,717,330.23 3,307,427.23 4,405,070.32 15,429,827.78	2018 40,568,338.55 28,977,384.66 14,962,205.95 84,507,929.16	2017 39,479,906.13 28,199,932.94 11,780,225.45 79,460,064.52	2016 30,135,045.67 21,525,032.65 4,955,887.29
					56,615,965.61

Note: For details of the standard charge rate of various taxes and surcharges, please see note V “Taxation”.

25. Sales expenses

Item Sales expenses Total	Three months ended 31 March 2019 577,701,321.30 577,701,321.30	Three months ended 31 March 2018 (Unaudited) 432,792,994.68 432,792,994.68	2018 1,976,637,778.33 1,976,637,778.33	2017 1,946,440,334.41 1,946,440,334.41	2016 1,403,127,877.61
					1,403,127,877.61

In the three months ended 31 March 2019, significant sales expenses include installation and maintenance, publicity and promotion, warehousing and logistics, and employee compensation, with the percentage to the total sales expenses over 70% (in the three months ended 31 March 2018(unaudited): over 70%, in the year 2018: over 70%, in the year 2017:over 70%, in the year 2016: over 70%)

26. Management expenses

Item Management expenses Total	Three months ended 31 March 2019 56,943,491.01 56,943,491.01	Three months ended 31 March 2018 (Unaudited) 43,480,189.17 43,480,189.17	2018 207,172,633.58 207,172,633.58	2017 69,803,269.36 69,803,269.36	2016 54,615,119.38
					54,615,119.38

In the three months ended 31 March 2019, significant management expenses include employee compensation, depreciation and amortization, and executive office fee, with the percentage to the total management expenses over 80% (in the three months ended 31 March 2018(unaudited): over 80%, in the year 2018:over 80%, in the year 2017:over 80%, in the year 2016: over 80%)

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APPENDIX II

27. Research and development expenses

Item Research and development expenses Total	Three months ended 31 March 2019 75,697,400.72 75,697,400.72	Three months ended 31 March 2018 (Unaudited) 72,422,583.80 72,422,583.80	2018 331,367,497.63 331,367,497.63	2017 228,467,321.79 228,467,321.79	2016 131,438,915.41
					131,438,915.41

In the three months ended 31 March 2019, significant research and development expenses include employee compensation, depreciation and amortization, and direct expenses, with the percentage to the total research and development expenses over 80% (in the three months ended 31 March 2018(unaudited): over 80%, in the year 2018:over 80%, in the year 2017:over 80%, in the year 2016: over 80%)

28. Financial expenses

Item Interest expenses* Less: Interest incomes Exchange gain or loss Others Total	Three months ended 31 March 2019 54,881.50 34,711,256.13 1,928,103.88 -356,205.40 -33,084,476.15	Three months ended 31 March 2018 (Unaudited) 30,233,610.58 5,155,638.23 403,695.12 -24,674,277.23	2018 124,747,593.93 -672,819.88 -1,624,797.49 -127,045,211.30	2017 118,485,476.41 7,169,498.06 -4,929,282.93 -116,245,261.28	2016 77,541,547.46 474,065.76 -469,605.23
					-77,537,086.93

For the three months ended 31 March 2019, all interest expenses are the interest on the borrowings of which the last repayment dates are within 5 years.

– II-97 –

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APPENDIX II

29. Impairment losses on assets

Item Bad debt loss Decline in value of inventories Impairment loss on fixed assets Total 30. Other income Item Immediate refund of value-added tax Other government grants related to daily operation Others Total 31. Gains on disposal of assets Item Gains on disposal of non-current assets (loss expressed with “-”) Including: Gains on disposal of fixed assets (loss expressed with “-”) Total	Three months ended 31 March 2019 857,473.25 271,430.31 1,128,903.56 Three months ended 31 March 2019 Three months ended 31 March 2019	Three months ended 31 March 2018 (Unaudited) 1,624,521.10 196,624.65 1,821,145.75 Three months ended 31 March 2018 (Unaudited) 20,575,670.96 20,575,670.96 Three months ended 31 March 2018 (Unaudited) 174,816.86 174,816.86 174,816.86	2018 2,328,376.19 8,006,205.74 216,927.27 10,551,509.20 2018 119,150,802.35 1,277,563.00 1,805,638.48 122,234,003.83 2018 174,816.86 174,816.86 174,816.86	2017 4,803,082.19 668,787.51 34,401.71 5,506,271.41 2017 123,439,826.95 1,511,889.00 124,951,715.95 2017	2016 1,348,890.16 5,949,840.50 670,606.70
					7,969,337.36

					2016


					2016

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APPENDIX II

32. Non-operating income

Item Gain from scrapping of non-current assets Including: Fixed assets Government grants not related to daily Others Total Non-operating expenses Item Loss on scrapping of non-current assets Including: Fixed assets Others Total	Three months ended 31 March 2019 305,657.93 305,657.93 1,764,580.17 2,070,238.10 Three months ended 31 March 2019 168,300.70 168,300.70 168,300.70	Three months ended 31 March 2018 (Unaudited) 400.00 400.00 440,783.49 441,183.49 Three months ended 31 March 2018 (Unaudited) 39,184.19 39,184.19 39,184.19	2018 257,354.65 257,354.65 2,729,993.63 2,987,348.28 2018 557,331.10 557,331.10 66,249.16 623,580.26	2017 7,800.00 7,800.00 3,512,422.04 3,520,222.04 2017 286,033.98 286,033.98 394,192.25 680,226.23	2016 6,317.97 6,317.97 106,400,092.38 1,184,205.05
					107,590,615.40

					2016 932,109.60 932,109.60 192,062.51
					1,124,172.11

33. Non-operating expenses

34. Income tax expense

(1) Income tax expense

Item Current income tax expenses Deferred income tax expenses Total	Three months ended 31 March 2019 130,891,230.90 -46,419,086.45 84,472,144.45	Three months ended 31 March 2018 (Unaudited) 86,774,281.97 -30,536,083.03 56,238,198.94	2018 411,424,862.31 -64,950,308.72 346,474,553.59	2017 479,863,703.59 -139,392,978.01 340,470,725.58	2016 351,069,305.48 -101,378,216.85
					249,691,088.63

– II-99 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2) Reconciliation of accounting profit and income tax expenses is as follows:

	Amount in the
	three months
	ended
Item	31 March 2019
Total profits	464,405,301.32
Income tax expense calculated at statutory/applicable tax rates	69,660,795.20
Effect of application of different tax rate to subsidiaries	7,987,086.91
Effect of income tax in previous year before adjustment
Effect of non-taxable income
Effect of non-deductible cost, expense and loss	6,824,262.34
Effect of utilization of deductible losses unrecognized as
deferred tax assets in previous period
Effect of deductible temporary difference or deductible
loss unrecognized as deferred tax assets for the year
Changes in opening balance of deferred tax assets/liabilities
arising from changes in tax rate
Super deduction of research and development expense and
wages of the disabled
Income tax expense	84,472,144.45

35. Notes to cash flows statement

(1) Other cash receipt related to operating activities

Item Interest incomes Government grants Others Total Other cash payment related t Item Cash payments for sales expenses Bank charges Cash payments for other expenses Others Total	Three months ended 31 March 2019 Three months ended 31 March 2018 (Unaudited) 2,169,889.60 854,660.56 1,961,247.07 21,987,064.35 4,131,136.67 22,841,724.91 o operating activities Three months ended 31 March 2019 Three months ended 31 March 2018 (Unaudited) 248,015,706.12 168,980,019.71 523,447.54 440,819.90 66,091,439.35 57,514,770.05 1,558,301.90 348,274.50 316,188,894.91 227,828,184.66	2018 19,024,799.98 3,083,201.48 22,402,970.22 44,510,971.68 2018 1,182,119,379.78 1,761,163.85 289,405,852.02 4,553,128.57 1,477,839,524.22	2017 14,098,348.77 1,511,889.00 12,022,409.62 27,632,647.39 2017 905,650,264.86 1,495,642.26 232,761,433.88 5,116,652.30 1,145,023,993.30	2016 2,654,165.83 1,367,470.50 14,250,751.10
				18,272,387.43

				2016 703,530,443.31 1,188,019.91 90,214,075.27 3,354,409.12
				798,286,947.61

(2) Other cash payment related to operating activities

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APPENDIX II

(3) Other cash receipt related to investing activities

Item Withdrawal of time deposits upon maturity Interest incomes Total Other cash payment related t Item Placement of time deposits Total	Three months ended 31 March 2019 Three months ended 31 March 2018 (Unaudited) 535,276,447.59 15,898,690.47 551,175,138.06 o investing activities Three months ended 31 March 2019 Three months ended 31 March 2018 (Unaudited) 2,049,805,138.06 2,049,805,138.06	2018 1,426,175,500.00 44,941,682.69 1,471,117,182.69 2018 1,648,299,900.00 1,648,299,900.00	2017 2,066,508,438.91 30,365,122.50 2,096,873,561.41 2017 2,314,508,438.91 2,314,508,438.91	2016 2,469,700,000.00 47,078,774.66
				2,516,778,774.66

				2016 4,231,441,992.59
				4,231,441,992.59

(4) Other cash payment related to investing activities

– II-101 –

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APPENDIX II

36. Supplementary information to cash flows statement

(1) Supplementary information to cash flows statement

	Three months	Three months
	ended	ended
Supplementary information	31 March 2019	31 March 2018
		(Unaudited)
1. Reconciliation of net profit to cash flows
from operating activities:
Net profit	379,933,156.87	328,019,716.09
Add: Provision for assets impairment	1,128,903.56	1,821,145.75
Depreciation of fixed assets, depletion
of oil and gas assets and depreciation
of productive biological assets	21,901,542.24	18,126,070.29
Amortization of intangible assets	46,062,429.09	38,541,934.37
Amortization of long-term prepaid expenses	143,779.32
Loss on disposal of fixed assets, intangible
assets and other long-term assets (Gain
denoted in “-”)		-174,816.86
Loss on retirement of fixed assets
(Gain denoted in “-”)	-137,357.23	38,784.19
Loss on change in fair value
(Gain denoted in “-”)	173,000.00
Financial expenses (Gain denoted in “-”)	-32,646,119.56	-29,298,592.46
Investment loss (Gain denoted in “-”)	-461,600.00
Decrease in deferred tax assets (Increase
denoted in “-”)	-49,803,835.63	-30,849,790.67
Increase in deferred tax liabilities
(Decrease denoted in “-”)	3,384,749.18	313,707.64
Decrease in inventories (Increase denoted
in “-”)	-59,757,089.38	-171,821,128.57
Decrease in operating receivables
(Increase denoted in “-”)	-201,712,708.53	-382,254,861.78
Increase in operating payables (Decrease
denoted in “-”)	258,627,343.14	374,032,631.30
Others
Net cash flows from operating activities	366,836,193.07	146,494,799.29
2. Significant investment and financing
activities not involving cash receipts
and payments:
Liabilities converted into equity
Convertible company debentures due within
one year
Fixed assets under finance leases
3. Net movement in cash and cash equivalents:
Cash at the end of the period	590,782,515.60	304,616,651.07
Less: Cash at the beginning of the year	1,868,786,151.72	901,875,167.02
Add: Cash equivalents at the end of the period
Less: Cash equivalents at the beginning of the
year
Net increase in cash and cash equivalents	-1,278,003,636.12	-597,258,515.95

– II-102 –

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APPENDIX II

(continued)

Supplementary information	2018	2017	2016
1. Reconciliation of net profit to cash flows
from operating activities:
Net profit	1,603,217,732.66	1,567,177,631.04	1,223,353,759.13
Add: Provision for assets impairment	10,551,509.20	5,506,271.41	7,969,337.36
Depreciation of fixed assets, depletion
of oil and gas assets and depreciation
of productive biological assets	76,506,514.60	62,256,612.80	62,633,687.64
Amortization of intangible assets	175,773,778.33	15,489,751.87	3,831,141.23
Amortization of long-term prepaid expenses	44,324.56
Loss on disposal of fixed assets, intangible
assets and other long-term assets
(Gain denoted in “-”)	-174,816.86
Loss on retirement of fixed assets (Gain
denoted in “-”)	299,976.45	278,233.98	925,791.63
Loss on change in fair value (Gain denoted
in “-”)	-173,000.00
Financial expenses (Gain denoted in “-”)	-113,351,510.61	-116,308,302.64	-74,887,381.63
Investment loss (Gain denoted in “-”)			-756,537.00
Decrease in deferred tax assets (Increase
denoted in “-”)	-78,998,944.38	-139,983,308.41	-101,753,088.48
Increase in deferred tax liabilities
(Decrease denoted in “-”)	14,048,635.66	590,330.40	374,871.63
Decrease in inventories (Increase denoted
in “-”)	-2,399,004.45	-173,465,903.40	-193,407,555.64
Decrease in operating receivables
(Increase denoted in “-”)	-585,179,697.64	-645,776,345.35	-219,618,380.56
Increase in operating payables
(Decrease denoted in “-”)	714,401,079.76	1,706,984,606.96	1,519,247,932.36
Others
Net cash flows from operating activities	1,814,566,577.28	2,282,749,578.66	2,227,913,577.67
2. Significant investment and financing
activities not involving cash receipts and
payments:
Liabilities converted into equity
Convertible company debentures due within
one year
Fixed assets under finance leases
3. Net movement in cash and cash
equivalents:
Cash at the end of the year	1,868,786,151.72	901,875,167.02	135,664,158.12
Less: Cash at the beginning of the year	901,875,167.02	135,664,158.12	318,151,118.97
Add: Cash equivalents at the end of the year
Less: Cash equivalents at the beginning of
the year
Net increase in cash and cash equivalents	966,910,984.70	766,211,008.90	-182,486,960.85

– II-103 –

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APPENDIX II

(2) Net cash paid for acquiring subsidiaries each year

Item Three months ended 31 March 2019 Three months ended 31 March 2018 2018 2017 2016 (Unaudited) Cash or cash equivalents paid in the current year (period) for business combination occurred during the year (period) 92,822,430.83 Including: Qingdao Hisense Hvac Equipment Co., Ltd. 92,822,430.83 Less: cash and cash equivalents held by the subsidiary on the date of acquisition 15,530,369.78 Including: Qingdao Hisense Hvac Equipment Co., Ltd. 15,530,369.78 Net cash paid for acquiring subsidiaries 77,292,061.05 Details of cash and cash equivalents Item Three months ended 31 March 2019 Three months ended 31 March 2018 (Unaudited) 1. Cash 590,782,515.60 304,616,651.07 Including: Cash on hand Bank deposits that are readily available for payment 590,782,515.60 304,616,651.07 Other cash at bank and on hand that are readily available for payment 2. Cash and cash equivalents at the end of the period 590,782,515.60 304,616,651.07 (continued) Item 2018 2017 2016 1. Cash 1,868,786,151.72 901,875,167.02 135,664,158.12 Including: Cash on hand Bank deposits that are readily available for payment 1,868,786,151.72 901,875,167.02 135,664,158.12 Other cash at bank and on hand that are readily available for payment 2. Cash and cash equivalents at the end of the year 1,868,786,151.72 901,875,167.02 135,664,158.12		2017 2016 Three months ended 31 March 2018 (Unaudited) 304,616,651.07 304,616,651.07 304,616,651.07	2016

(3) Details of cash and cash equivalents

Notes: Cash and cash equivalents subject to restrictions on use are not included in cash and cash equivalents.

– II-104 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

37. Monetary items in foreign currencies

(1) Monetary items in foreign currencies

			Closing balance
	Closing balance of		denominated
Item	foreign currency	Translation rate	in RMB
Cash at bank and on hand
including: USD	3,414,616.87	6.7335	22,992,322.69
Accounts receivable
including: USD	9,793,190.99	6.7335	65,942,451.53
EUR	384,792.53	7.5607	2,909,300.88
Accounts payable
including: USD	2,133,188.52	6.7335	14,363,824.90
JPY	212,366,692.00	0.0609	12,926,123.44

38. Government grants

(1) Basic information of government grants

All government grants received by the Target Company during the reporting period are recognised in the profit or loss as other income or non-operating income. For details, please refer to Note VI. 30 Other Income and VI. 32 Non-operating Income.

(2) There was no refund of government grants for the reporting period.

VII. CHANGE IN SCOPE OF CONSOLIDATION

The Target Company invested and established the Qingdao Johnson Controls Air Conditioning Co., Ltd. on 5 March, 2018, with a registered capital of RMB 400 million, of which, the Target Company actually contributed RMB 400 million, accounting for 100.00% of the registered capital. The Target Company obtained the control and included it in the scope of consolidation since 5 March, 2018.

On 5 March 2019, the Target Company acquired 100% equity interest in Qingdao Hisense Hvac Equipment Co., Ltd. and obtained its control. Such company was included in the scope of consolidation since 5 March 2019.

VIII. INTERESTS IN OTHER ENTITIES

1. Interests in subsidiaries

(1) Composition of enterprise group

			Shareholding	Shareholding
			percentage (%)
	Place of	Business			Method for
Name of subsidiary	registration	nature	Direct	Indirect	acquisition
Qingdao Hisense Hitachi	Qingdao	Trading	75.00		Establishment
Air-Conditioning Marketing					or investment
Co., Ltd.
Qingdao Johnson Controls	Qingdao	Manufacturing	100.00		Establishment
Air-Conditioning Co., Ltd.					or investment
Qingdao Hisense Hvac	Qingdao	Manufacturing	100.00		Equity transfer
Equipment Co., Ltd.

– II-105 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

IX. RISKS RELATING TO FINANCIAL INSTRUMENTS

The major financial instruments of the Target Company include: cash at bank and on hand, derivative financial instruments, notes receivable, accounts receivable, other receivables, notes payable, accounts payable, other payables. Details of the financial instruments were disclosed in the relevant notes.

Risks with respect to the above financial instruments include: credit risk, liquidity risk, interest rate risk and foreign currency risk.

1. Credit risk

Credit risk is the risk to which the Target Company is exposed to on financial losses due to the failure of clients or financial instrument counterparties to fulfill their contractual obligations, mainly with respect to bank balances, trade and other receivables and financial derivative.

The Target Company maintains substantially all of its bank balances in domestic financial institutions with higher credit rating. The Board believes these assets are not exposed to significant credit risk that would cause financial losses.

The Target Company mitigates its exposure to risks in respect of trade and other receivables by dealing with diversified customers with healthy financial positions. Certain new customers are required by the Target Company to make cash payment in order to minimise credit risk. The Company seeks to maintain strict control over its outstanding receivables and has a credit control policy to minimize credit risk. In addition, all receivable balances are monitored on an ongoing basis and overdue balances are followed up by senior management.

The credit risk on derivative instruments is not significant as the counterparties are high creditworthy banks rated by international credit-rating agencies.

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

2. Liquidity risk

In respect of the management of liquidity risk, the Target Company monitors and maintains cash and cash equivalents at a level which is adequate, in the management’s point of views, to finance the Target Company’s operations and mitigate the effects of short-term fluctuations in cash flows. The Target Company’s treasury department is responsible for maintaining a balance between continuity of funding and flexibility through the use of bank credit in order to meet the Target Company’s liquidity requirements.

In order to mitigate the liquidity risk, the directors have carried out a detailed review of the liquidity of the Target Company, including maturity profile of its accounts and other payables, availability of borrowings and loan financing provided by Hisense Finance, and it is concluded that the Target Company has adequate funding to fulfill its short-term obligations and capital expenditure requirements.

– II-106 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

As at the balance sheet date, the undiscounted contractual cash flows of financial assets and financial liabilities of the Target Company based on maturity date were as follows:

31 March 2019

Item Financial assets Cash at bank and on hand Notes receivable Accounts receivable Other receivables Other non-current assets Total Financial liabilities Notes payable Accounts payable Other payables Total 31 December 2018 Item Financial assets Cash at bank and on hand Financial assets at fair value through profit or loss Notes receivable Accounts receivable Other receivables Other non-current assets Total Financial liabilities Notes payable Accounts payable Other payables Total	Within 1 year 6,341,112,859.66 2,088,694,716.15 500,904,240.94 53,560,142.00 8,984,271,958.75 1,856,136,708.99 811,366,037.16 2,399,741,111.32 5,067,243,857.47 Within 1 year 5,640,344,205.81 173,000.00 1,928,737,483.93 450,387,672.45 84,167,712.08 8,103,810,074.27 1,858,672,139.66 761,383,351.29 2,203,738,480.71 4,823,793,971.66	1 to 2 years 300,000,000.00 300,000,000.00 1 to 2 years 800,000,000.00 800,000,000.00	2 to 5 years 2 to 5 years	Over 5 years Over 5 years	Total 6,341,112,859.66 2,088,694,716.15 500,904,240.94 53,560,142.00 300,000,000.00
					9,284,271,958.75

					1,856,136,708.99 811,366,037.16 2,399,741,111.32
					5,067,243,857.47

					Total 5,640,344,205.81 173,000.00 1,928,737,483.93 450,387,672.45 84,167,712.08 800,000,000.00
					8,903,810,074.27

					1,858,672,139.66 761,383,351.29 2,203,738,480.71
					4,823,793,971.66

– II-107 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

31 December 2017

Item Financial assets Cash at bank and on hand Notes receivable Accounts receivable Other receivables Other current assets Other non-current assets Total Financial liabilities Notes payable Accounts payable Other payables Total 31 December 2016 Item Financial assets Cash at bank and on hand Notes receivable Accounts receivable Other receivables Other current assets Other non-current assets Total Financial liabilities Notes payable Accounts payable Other payables Total	Within 1 year 2,328,175,973.02 1,420,421,510.79 396,903,338.50 34,494,572..92 210,000,000.00 4,389,995,395.23 1,758,735,193.12 678,237,593.43 1,825,970,196.69 4,262,942,983.24 Within 1 year 1,908,148,936.32 997,760,251.09 216,726,133.65 8,166,163.19 300,000,000.00 3,430,801,484.25 1,042,690,207.18 642,352,891.30 1,117,853,050.09 2,802,896,148.57	1 to 2 years 2,087,376,447.59 2,087,376,447.59 1 to 2 years 206,000,000.00 206,000,000.00	2 to 5 years 800,000,000.00 800,000,000.00 2 to 5 years 2,087,376,447.59 2,087,376,447.59	Over 5 years Over 5 years	Total 2,328,175,973.02 1,420,421,510.79 396,903,338.50 34,494,572..92 210,000,000.00 2,887,376,447.59
					7,277,371,842.82

					1,758,735,193.12 678,237,593.43 1,825,970,196.69
					4,262,942,983.24

					Total 1,908,148,936.32 997,760,251.09 216,726,133.65 8,166,163.19 300,000,000.00 2,293,376,447.59
					5,724,177,931.84

					1,042,690,207.18 642,352,891.30 1,117,853,050.09
					2,802,896,148.57

The maturity of bank and other borrowings were analyzed as follows:

The Target Company had no bank and other borrowings as at 31 March 2019, 31 December 2018, 31 December 2017 and 31 December 2016.

– II-108 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

3. Interest rate risk

The Target Company is exposed to interest rate risk due to changes in interest rates of interestbearing financial assets and liabilities. Interest-bearing financial assets are mainly depositing with banks, which are mostly short-term in nature whereas interest-bearing financial liabilities are primarily short-term bank borrowings. As at 31 March 2019, the Target Company had no bank borrowings. As such, any change in the interest rate is not considered to have significant impact on the Target Company’s performance.

4. Foreign currency risk

Foreign currency risk is the risk of loss due to adverse change in exchange rates with respect to investments and transactions denominated in foreign currencies. The Target Company’s monetary assets and transactions are mainly denominated in RMB, USD and EUR. The exchange rates between RMB, USD and EUR are not pegged, and there is fluctuation in exchange rates between RMB, USD and EUR.

The carrying amounts of the Target Company’s monetary assets and liabilities denominated in foreign currencies at the end of reporting period are as follows:

Currency USD EUR JPY (continued) Currency USD EUR JPY	31 March 2019 Assets Liabilities 88,934,774.22 14,363,824.90 2,909,300.88 12,926,123.44 31 December 2017 Assets Liabilities 149,048,867.40 12,516,662.35 2,939,685.83 7,298,232.81	31 December 2018 Assets Liabilities 82,774,476.49 17,174,082.19 1,601,742.46 5,487,312.29 31 December 2016 Assets Liabilities 21,745,766.09 17,149,407.22 29,426,368.38

The following table indicates the approximate effect of reasonably possible foreign exchange rate changes on the net profit, to which the Target Company has significant exposure at the end of reporting period:

Sensitivity analysis of change in exchange rate:

	Three months	Three months	Three months	Three months
		ended		ended
Item	31 March 2019		31 March 2018		2018	2017	2016
				(Unaudited)
	Increase/Decrease		Increase/Decrease		Increase/Decrease	Increase/Decrease	Increase/Decrease
	in profit after tax		in profit after tax		in profit after tax	in profit after tax	in profit after tax
USD to RMB
Appreciates by 5%		2,796,410.60		1,876,039.28	2,460,014.79	5,119,957.69	172,363.46
Depreciates by 5%		-2,796,410.60		-1,876,039.28	-2,460,014.79	-5,119,957.69	-172,363.46
EUR to RMB
Appreciates by 5%		109,098.78		59,227.20	60,065.34	110,238.22
Depreciates by 5%		-109,098.78		-59,227.20	-60,065.34	-110,238.22
JPY to RMB
Appreciates by 5%		-484,729.63		-496,797.97	-205,774.21	-273,683.73	-1,103,488.81
Depreciates by 5%		484,729.63		496,797.97	205,774.21	273,683.73	1,103,488.81

– II-109 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

X. RELATED PARTIES AND RELATED PARTY TRANSACTIONS

1. The situation of related parties where control exists

Category of Registration Name of enterprise Relationship enterprise address Legal representative Hisense Home Appliances Group Joint control State-owned Shunde, Foshan, Tang Ye Guo ( 湯業國 ) Co., Ltd. (Hisense Home holding Guangdong Appliances Group) Province Johnson Controls-Hitachi Air Joint control Foreign capital Hong Kong Iris Tsang Conditioning Trading (Hong Kong) enterprise Limited (Johnson Controls-Hitachi Hong Kong) Johnson Controls-Hitachi Air Joint control Foreign capital Taiwan Shu-Fen Liu Conditioning Taiwan Co., Ltd. enterprise (Johnson Controls-Hitachi Taiwan)

Subsidiaries of the Target Company

Please see Note VIII-1 “Interests in subsidiaries”.

3. Other related parties

Name of other related parties

Relationship with the Company

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

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

Johnson Controls-Hitachi Air Conditioning Holding (UK) Ltd. (Johnson Controls-Hitachi)

Ultimate Controlling shareholder of Hisense Home Appliances Group Subsidiary of ultimate holding company of Hisense Home Appliances Group Controlling shareholder of Johnson Controls-Hitachi Hong Kong and Johnson Controls-Hitachi Taiwan

– II-110 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

4. Related transactions

(1) Purchase of goods/receipt of services

	Particulars of	Three months	Three months
	related party	ended	ended
Related party	transactions	31 March 2019	31 March 2018
			(Unaudited)
Hisense Electric and its subsidiaries	Purchase of materials	5,990,185.09	3,630,290.69
Hisense Group and its subsidiaries	Purchase of materials	72,273,922.93	49,600,968.06
Hisense Home Appliances Group and	Purchase of materials
its subsidiaries		711,657.29	367,602.87
Johnson Controls-Hitachi and its subsidiaries	Purchase of materials	147,656,369.36	174,776,660.30
Hisense Group and its subsidiaries	Purchase of goods	253,627.24
Hisense Home Appliances Group and	Purchase of goods
its subsidiaries		111,031,223.98	67,957,104.14
Johnson Controls-Hitachi and its subsidiaries	Purchase of goods	24,243,543.81	34,249,033.12
Hisense Electric and its subsidiaries	Receipt of services	2,401,604.05	1,548,633.93
Hisense Group and its subsidiaries	Receipt of services	6,766,497.45	3,359,251.58
Hisense Home Appliances Group and	Receipt of services
its subsidiaries		864,135.04
Johnson Controls-Hitachi and its subsidiaries	Receipt of services	11,609,944.20	581,493.20

(continued)

	Particulars of
	related party
Related party	transactions	2018	2017	2016
Hisense Electric and its	Purchase of
subsidiaries	materials	18,414,324.13
Hisense Group and its	Purchase of goods
subsidiaries		259,581,650.95	217,600,837.22	149,976,288.64
Hisense Home Appliances	Purchase of goods
Group and its subsidiaries		506,023,580.55	413,159,313.16	205,016,523.55
Johnson Controls-Hitachi	Purchase of goods
and its subsidiaries		659,660,434.11	591,782,819.33	543,542,444.03
Hisense Electric and its	Receipt of services
subsidiaries		9,508,576.83	19,196,363.02	16,802,051.13
Hisense Group and its	Receipt of services
subsidiaries		23,337,241.28	12,356,822.13	10,796,574.82
Hisense Home Appliances	Receipt of services
Group and its subsidiaries		83,003.90	125,400.60
Johnson Controls-Hitachi and	Receipt of services
its subsidiaries		1,269,382.28	33,798.24
Johnson Controls-Hitachi	Purchase of
and its subsidiaries	Intangible assets	200,000,000.00

– II-111 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2) Sales of goods/rendering of services

	Particulars of	Three months	Three months
	related party	ended	ended
Related party	transactions	31 March 2019	31 March 2018
			(Unaudited)
Hisense Group and its subsidiaries	Sale of materials	16,385,205.50	1,238,946.81
Hisense Home Appliances Group and its	Sale of materials
subsidiaries		7,798,468.55	1,753,800.80
Johnson Controls-Hitachi and its subsidiaries	Sale of materials	675,255.78	652,797.98
Hisense Group and its subsidiaries	Sales of goods	5,643,570.16	7,529,102.27
Hisense Home Appliances Group and its	Sales of goods
subsidiaries		1,103,872.11	273,960.68
Johnson Controls-Hitachi and its subsidiaries	Sales of goods	131,558.97	25,882,633.22
Hisense Electric and its subsidiaries	Rendering of services	1,037.74
Hisense Home Appliances Group and its	Rendering of services
subsidiaries		12,264.15

(continued)

	Particulars of
	related party
Related party	transactions	2018	2017	2016
Hisense Electric and its	Sales of goods
subsidiaries		1,299,799.15	226,748.14
Hisense Group and its	Sales of goods
subsidiaries		80,295,340.40	6,533,878.78	80,235,674.86
Hisense Home Appliances	Sales of goods
Group and its subsidiaries		11,468,907.92	11,958,364.33	7,454,966.23
Johnson Controls-Hitachi and	Sales of goods
its subsidiaries		128,443,620.15	140,269,935.07	102,595,129.72
Hisense Electric and its	Rendering of
subsidiaries	services	581,818.18
Hisense Group and its	Rendering of
subsidiaries	services	3,210,869.27	12,617.95
Hisense Home Appliances	Rendering of
Group and its subsidiaries	services		348,938.84
Johnson Controls-Hitachi and	Rendering of
its subsidiaries	services	64,053.45

– II-112 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(3) Capital lending/borrowing of related parties

	Particulars of	Three months	Three months
	related party	ended	ended
Related party	transaction	31 March 2019	31 March 2018	2018	2017	2016
			(Unaudited)
Qingdao Hisense Hvac	Lending capital
Equipment Co., Ltd.		28,000,000.00	26,568,150.00
Hisense Group and	Fund repayment
its subsidiaries		29,756,614.61
(continued) Interests on the borrowings/loans			with related parties
	Particulars of	Three months	Three months
	related party	ended	ended
Related party	transaction	31 March 2019	31 March 2018	2018	2017	2016
			(Unaudited)
Qingdao Hisense Hvac	Interest income
Equipment Co., Ltd.		354,706.25	68,150.00
Hisense Group and	Interest expense
its subsidiaries		54,881.50

5. Receivables from and payables to related parties

(1) Receivables from related parties

Item Related party Accounts receivable Hisense Electric and its subsidiaries Accounts receivable Hisense Group and its subsidiaries Accounts receivable Hisense Home Appliances Group and its subsidiaries Accounts receivable Johnson Controls-Hitachi and its subsidiaries Subtotal Other receivables Hisense Group and its subsidiaries Other receivables Hisense Home Appliances Group and its subsidiaries Subtotal Prepayments Hisense Group and its subsidiaries Subtotal	31 March 2019 Book value Provision for bad debts 1,521,865.00 26,517,438.88 9,677,847.47 49,296,646.10 32,507.35 87,013,797.45 32,507.35 86,322.00 150,000.00 236,322.00 0.02 0.02	31 December 2018 Book value Provision for bad debts 1,520,765.00 21,887,670.29 4,123,205.14 29,247,910.18 56,779,550.61 26,534,346.00 26,534,346.00 53,862.02 53,862.02	31 December 2018 Book value Provision for bad debts 1,520,765.00 21,887,670.29 4,123,205.14 29,247,910.18 56,779,550.61 26,534,346.00 26,534,346.00 53,862.02 53,862.02

– II-113 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(continued)

Item Related party Notes receivable Hisense Electric and its subsidiaries Notes receivable Hisense Group and its subsidiaries Notes receivable Hisense Home Appliances Group and its subsidiaries Subtotal Accounts receivable Hisense Electric and its subsidiaries Accounts receivable Hisense Group and its subsidiaries Accounts receivable Hisense Home Appliances Group and its subsidiaries Accounts receivable Johnson Controls-Hitachi and its subsidiaries Subtotal Other receivables Hisense Group and its subsidiaries Other receivables Hisense Home Appliances Group and its subsidiaries Subtotal Prepayments Hisense Group and its subsidiaries Subtotal Notes receivable Hisense Electric and its subsidiaries Notes receivable Hisense Group and its subsidiaries Notes receivable Hisense Home Appliances Group and its subsidiaries Subtotal	31 December 2017 Book value Provision for bad debts 56,007,759.73 15,224,161.62 56,738,137.95 127,970,059.30 306,034.99 10,735,743.21 1,598,070.67 20,095,689.05 32,735,537.92 184,251.04 199,671.19 383,922.23 748,353.42 748,353.42 14,119,941.12 18,762,486.99 11,261,402.46 44,143,830.57	31 December 2016 Book value Provision for bad debts 42,951,420.20 65,779,650.54 57,205,075.51 165,936,146.25 1,224,139.99 1,762,145.33 305,322.35 21,126,470.02 24,418,077.69 50.00 1,710.00 1,760.00 82,267.30 82,267.30 15,537,318.99 3,152,186.81 18,689,505.80	31 December 2016 Book value Provision for bad debts 42,951,420.20 65,779,650.54 57,205,075.51 165,936,146.25 1,224,139.99 1,762,145.33 305,322.35 21,126,470.02 24,418,077.69 50.00 1,710.00 1,760.00 82,267.30 82,267.30 15,537,318.99 3,152,186.81 18,689,505.80

– II-114 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2) Paypables to related parties

Item Related party Accounts payable Hisense Group and its subsidiaries Accounts payable Hisense Home Appliances Group and its subsidiaries Accounts payable Johnson Controls-Hitachi and its subsidiaries Subtotal Advances Hisense Group and its subsidiaries Advances Hisense Home Appliances Group and its subsidiaries Advances Johnson Controls-Hitachi and its subsidiaries Subtotal Other payables Hisense Group and its subsidiaries Other payables Hisense Home Appliances Group and its subsidiaries Subtotal Notes payable Hisense Home Appliances Group and its subsidiaries Notes payable Johnson Controls-Hitachi and its subsidiaries Subtotal	31 March 2019 20,579,874.68 52,117,757.16 53,294,887.26 125,992,519.10 180,256.04 260.00 43,302.81 223,818.85 354,521.64 1,209,073.98 1,563,595.62 1,918,000.00 186,114,145.52 188,032,145.52	31 December 2018 1,154.34 24,096,042.36 52,172,280.59 76,269,477.29 190,798.04 766,032.56 956,830.60 44,761.29 1,280,914.00 1,325,675.29 2,865,600.00 197,289,744.27 200,155,344.27	31 December 2017 23,158,148.69 43,931,270.20 67,089,418.89 36,800.32 36,800.32 3,234,332.41 6,828,250.25 10,062,582.66 5,000,000.00 184,497,678.85 189,497,678.85	31 December 2016 24,443,078.35 26,437,663.41
				50,880,741.76

				101,248.00
				101,248.00

				260,246.13 1,490,721.24
				1,750,967.37

				22,729,116.25
				22,729,116.25

– II-115 –

APPENDIX II ACCOUNTANTS’ REPORT OF HISENSE HITACHI

XI. COMMITMENTS AND CONTINGENCIES

1. Significant commitments

(1) Capital commitments

Unit: RMB’0000

Item

31 March 2019

Commitments in respect of investment in subsidiaries and jointly controlled entity (commitment to purchase long-term assets): – Authorized but not contracted – Contracted but not paid 19,063.96 Commitments in respect of acquisition of the property, plant and equipment of subsidiaries (commitment for external investment): – Contracted but not paid

(2) Operating lease commitments

Please see Note XIII-5 “Lease” for details

2. Contingencies

As of 31 March 2019, there was no contingency for Target Company to disclose.

XII. SUBSEQUENT EVENTS

As of the date of approval of these financial statements, the Target Company has no other events subsequent to the balance sheet date that need to be disclosed.

XIII. OTHER SIGNIFICANT EVENTS

1. Capital management

The primary objectives of the Target Company’s capital management are to safeguard the Target Company’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholders’ value.

The Target Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Target Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital as of 31 March 2019, 31 December 2018, 31 December 2017 and 31 December 2016.

– II-116 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

The Target Company monitors capital using a gearing ratio, which is net debt divided by the total capital plus net debt. Net debt includes bank and other borrowings, accounts payable, notes payable, other payables and debentures payables, less cash and cash equivalents. The gearing ratios as at the end of the reporting periods were as follows:

	31 March	31 December	31 December	31 December
Item	2019	2018	2017	2016
Total debt	7,614,871,929.03	5,848,164,790.24	5,144,893,642.58	3,453,599,608.93
Including: Short-term borrowings
Accounts payable	811,366,037.16	761,383,351.29	678,237,593.43	642,352,891.30
Notes payable	1,856,136,708.99	1,858,672,139.66	1,758,735,193.12	1,042,690,207.18
Other payables	3,865,763,111.32	2,203,738,480.71	1,825,970,196.69	1,117,853,050.09
Less: Cash and cash equivalents	590,782,515.60	1,868,786,151.72	901,875,167.02	135,664,158.12
Net debt	7,024,089,413.43	3,979,378,638.52	4,243,018,475.56	3,317,935,450.81
Equity attributable to shareholders
of parent	4,702,722,339.73	5,835,593,704.43	4,296,850,409.58	3,274,166,812.23
Capital and net debt	11,742,342,122.94	9,814,972,342.95	8,539,868,885.14	6,592,102,263.04
Gearing ratio	59.82%	40.54%	49.68%	50.33%

2. Emoluments of directors

(1) Emoluments of directors

As at 31 December 2016, 2017 and 2018 and 31 March 2019, the sum of emoluments paid or payable to directors is RMB 1.77 millions, RMB 1.27 millions, RMB 2.21 millions and RMB0.3362 million respectively, for the services offered by directors

During the above periods, the Target Company did not pay any directors emoluments as bonuses for joining the Target Company or after that, or as exit packages.

3. Five highest paid individuals

As at 31 December 2016, 2017 and 2018 and 31 March 2019 five highest paid individuals

Unit: RMB’0000

Item Director Non-director Total	Number of individuals (As at the end of the year) 31 March 2019 31 December 2018 31 December 2017 31 December 2016 1 1 1 1 4 4 4 4 5 5 5 5	Number of individuals (As at the end of the year) 31 March 2019 31 December 2018 31 December 2017 31 December 2016 1 1 1 1 4 4 4 4 5 5 5 5
		5

– II-117 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

Among the above highest emoluments, the emoluments paid to non-directors individuals:

Unit: RMB’0000

	Three months	Three months
	ended	ended
Item	31 March 2019	31 March 2018	2018	2017	2016
		(Unaudited)
Salaries, allowance and pension scheme contributions	74.26	75.85	787.07	600.01	657.67

The emolument range of the above highest paid non-director individuals:

			Number of individuals (As at the end of the year)	Number of individuals (As at the end of the year)	Number of individuals (As at the end of the year)
	Three months		Three months
		ended	ended
Item	31 March 2019		31 March 2018	2018	2017	2016
			(Unaudited)
0.5 million		4	4
1 million-1.5 millions				4	4	4

During the above periods, the Target Company did not pay the above non-director individuals any emoluments as bonuses for joining the Target Company or after that, or as exit packages.

4. Pension scheme

The Target Company and its subsidiaries contributes mainly to a defined contribution pension scheme, which is administered by the provincial government, in respect of employees of the Company and its subsidiaries According to such scheme, the Target Company and its subsidiaries shall make contributions to the pension fund at certain percentage of the total salaries and wages of their employees.

5. Lease

(1) Target Company as lessee under operating lease

The Target Company leases certain leasehold land and buildings under operating leases with lease terms ranging from one to five years. The operating lease payments for each reporting period were as follows:

Unit: RMB’0000

Operating lease payments Leasehold land and buildings Total	Three months ended 31 March 2019 1,148.87 1,148.87	Three months ended 31 March 2018 (Unaudited) 993.57 993.57	2018 4,331.72 4,331.72	2017 3,388.67 3,388.67	2016 2,558.69
					2,558.69

– II-118 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2) The total future minimum lease payments under non-cancellable operating leases at the end of reporting period due as follows:

Unit: RMB’0000

Item Within one year Over one year but within five years Total	31 March 2019 3,133.47 3,710.22
	6,843.70

6. Dividend

Item Paid dividends Total	Three months ended 31 March 2019 32,978,000.00 32,978,000.00	Three months ended 31 March 2018 (Unaudited)	2018	2017 468,500,000.00 468,500,000.00	2016 327,000,000.00
					327,000,000.00

On 5 March 2019, 5 September 2017 and 5 May 2016, The Board of the Target Company approved the distribution of profits among the shareholders in proportion to their investment.

– II-119 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

XIV. NOTES TO MAJOR ITEMS OF THE FINANCIAL STATEMENTS OF THE PARENT

1. Notes receivable and Accounts receivable

Item Notes receivable Accounts receivable Total	31 March 2019 31,681,177.82 709,832,603.97 741,513,781.79	31 December 2018 36,661,523.47 447,392,556.18 484,054,079.65	31 December 2017 32,242,272.23 203,192,342.23 235,434,614.46	31 December 2016 44,767,968.62 93,358,919.47
				138,126,888.09

(1) Notes receivable
① Classification of notes receivable

Category Bank acceptance notes Commercial acceptance notes Total	31 March 2019 28,229,788.24 3,451,389.58 31,681,177.82	31 December 2018 26,602,116.95 10,059,406.52 36,661,523.47	31 December 2017 18,592,932.63 13,649,339.60 32,242,272.23	31 December 2016 29,830,649.63 14,937,318.99
				44,767,968.62

② As at the end of the period, there were no pledged notes receivable.
③ Notes endorsed as at the end of the period but not due as at the balance sheet date

Item Bank acceptance notes Total	Amount derecognized as at the end of the period 41,945,433.43 41,945,433.43	Amount not derecognized as at the end of the period

④ As at the end of the period, there were no notes receivable that were reclassified into accounts receivable due to failure of the issuers to settle the notes.

– II-120 –

APPENDIX II ACCOUNTANTS’ REPORT OF HISENSE HITACHI

(2) Accounts receivable
① Accounts receivable disclosed by category as follows

Category Accounts receivable individually significant for which provision for bad debts has been individually made Accounts receivable for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Accounts receivable individually insignificant but for which provision for bad debts has been individually made Total (1 continued) Category Accounts receivable individually significant for which provision for bad debts has been individually made Accounts receivable for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Accounts receivable individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 720,522,283.20 100.00 475,067,098.35 65.93 245,455,184.85 34.07 720,522,283.20 100.00 Book value Amount % 457,366,589.11 100.00 232,964,016.10 50.94 224,402,573.01 49.06 457,366,589.11 100.00	31 March 2019 Provision for bad debts Amount % 10,689,679.23 1.48 10,689,679.23 4.36 10,689,679.23 1.48 31 December 2018 Provision for bad debts Amount % 9,974,032.93 2.18 9,974,032.93 4.44 9,974,032.93 2.18	Carrying amount 709,832,603.97 475,067,098.35 234,765,505.62
			709,832,603.97

			Carrying amount 447,392,556.18 232,964,016.10 214,428,540.08
			447,392,556.18

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ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2 continued)

Category Accounts receivable individually significant for which provision for bad debts has been individually made Accounts receivable for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Accounts receivable individually insignificant but for which provision for bad debts has been individually made Total (3 continued) Category Accounts receivable individually significant for which provision for bad debts has been individually made Accounts receivable for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Accounts receivable individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 212,261,913.38 100.00 2,943,511.66 1.39 209,318,401.72 98.61 212,261,913.38 100.00 Book value Amount % 96,144,506.43 100.00 3,291,607.67 3.42 92,852,898.76 96.58 96,144,506.43 100.00	31 December 2017 Provision for bad debts Amount % 9,069,571.15 4.27 9,069,571.15 4.33 9,069,571.15 4.27 31 December 2016 Provision for bad debts Amount % 2,785,586.96 2.90 2,785,586.96 3.00 2,785,586.96 2.90	Carrying amount 203,192,342.23 2,943,511.66 200,248,830.57
			203,192,342.23

			Carrying amount 93,358,919.47 3,291,607.67 90,067,311.80
			93,358,919.47

– II-122 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

A. Accounts receivable in the group provided for bad debts by using ageing analysis method are analyzed based on the date of recognition as follows:

Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to3 years 3 years to 4 years 4 years to5 years Over 5 years Total (1 continued) Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to3 years 3 years to 4 years 4 years to5 years Over 5 years Total (2 continued) Ageing Within 6 months 6 months to 1 year 1 year to2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total	31 March 2019 Accounts receivable Bad debts 206,240,008.21 15,671,486.11 783,574.31 7,964,105.10 796,410.51 4,819,278.95 963,855.79 3,120,573.29 1,560,286.65 5,270,906.09 4,216,724.87 2,368,827.10 2,368,827.10 245,455,184.85 10,689,679.23 31 December 2018 Accounts receivable Bad debts 180,939,560.31 19,905,569.40 995,278.47 10,558,549.72 1,055,854.97 3,970,251.69 794,050.34 1,830,419.43 915,209.72 4,922,915.16 3,938,332.13 2,275,307.30 2,275,307.30 224,402,573.01 9,974,032.93 31 December 2017 Accounts receivable Bad debts 172,498,635.48 12,834,897.19 641,744.86 4,947,492.69 494,749.27 8,963,607.10 1,792,721.42 7,053,270.26 3,526,635.13 2,033,892.67 1,627,114.14 986,606.33 986,606.33 209,318,401.72 9,069,571.15	% 5.00 10.00 20.00 50.00 80.00 100.00
		4.36

		% 5.00 10.00 20.00 50.00 80.00 100.00
		4.44

		% 5.00 10.00 20.00 50.00 80.00 100.00
		4.33

– II-123 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(3 continued)

Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Total	31 Accounts receivable 58,319,332.41 7,185,677.54 13,354,492.96 10,683,870.35 2,322,919.17 986,606.33 92,852,898.76	December 2016 Bad debts 1,749,579.96 215,570.33 400,634.79 320,516.11 69,687.58 29,598.19 2,785,586.96	% 3.00 3.00 3.00 3.00 3.00 3.00
			3.00

② Provision for bad debts made, recovered or reversed

Provision for bad debts for the three months ended 31 March 2019, 2018, 2017 and 2016 amounted to RMB715,646.30, RMB904,461.78, RMB6,283,984.19 and RMB 373,096.63 respectively, no provision for bad debts to be recovered or reversed.

③ There were no accounts receivable written-off during the reporting period.

④ Top five accounts receivable by closing balance of debtors

The total top five accounts receivable of the Target Company by closing balance of debtors amounted to RMB147,091,514.57, accounting for 20.41% of the closing balance of accounts receivable. A provision for bad debts of RMB430,802.24 in total was made as at the end of the period.

2. Other receivables

Item 31 March 2019 Interest receivable 141,440,445.27 Other receivables 134,150,187.95 Total 275,590,633.22 (1) Interests receivable ① Interests receivable categories Item 31 March 2019 Time deposits 141,421,537.69 Others 18,907.58 Total 141,440,445.27	31 December 2018 134,608,894.79 69,121,832.17 203,730,726.96 31 December 2018 134,287,329.89 321,564.90 134,608,894.79	31 December 2017 93,781,466.22 31,192,423.30 124,973,889.52 31 December 2017 92,417,878.44 1,363,587.78 93,781,466.22	31 December 2016 39,642,656.72 6,694,242.40
			46,336,899.12

			31 December 2016 36,482,769.05 3,159,887.67
			39,642,656.72

– II-124 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2) Other receivables
① Other receivables are disclosed by category as follows

Category Other receivables individually significant for which provision for bad debts has been individually made Other receivables for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Other receivables individually insignificant but for which provision for bad debts has been individually made Total (1 continued) Category Other receivables individually significant for which provision for bad debts has been individually made Other receivables for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Other receivables individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 138,028,333.32 100.00 95,888,852.23 69.47 42,139,481.09 30.53 138,028,333.32 100.00 Book value Amount % 72,309,591.14 100.00 26,718,848.70 36.95 45,590,742.44 63.05 72,309,591.14 100.00	31 March 2019 Bad debts Amount % 3,878,145.37 2.81 3,878,145.37 9.20 3,878,145.37 2.81 31 December 2018 Bad debts Amount % 3,187,758.97 4.41 3,187,758.97 6.99 3,187,758.97 4.41	Carrying amount 134,150,187.95 95,888,852.23 38,261,335.72
			134,150,187.95

			Carrying amount 69,121,832.17 26,718,848.70 42,402,983.47 –
			69,121,832.17

– II-125 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(2 continued)

Category Other receivables individually significant for which provision for bad debts has been individually made Other receivables for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Other receivables individually insignificant but for which provision for bad debts has been individually made Total (3 continued) Category Other receivables individually significant for which provision for bad debts has been individually made Other receivables for which provision for bad debts has been made on group basis by credit risk characteristics Group 1 Group 2 Other receivables individually insignificant but for which provision for bad debts has been individually made Total	Book value Amount % 33,147,458.74 100.00 793,147.36 2.39 32,354,311.38 97.61 33,147,458.74 100.00 Book value Amount % 6,901,279.28 100.00 50.00 0.00 6,901,229.28 100.00 6,901,279.28 100.00	31 December 2017 Bad debts Amount % 1,955,035.44 5.90 1,955,035.44 6.04 1,955,035.44 5.90 31 December 2016 Bad debts Amount % 207,036.88 3.00 207,036.88 3.00 207,036.88 3.00	Carrying amount 31,192,423.30 793,147.36 30,399,275.94
			31,192,423.30

			Carrying amount 6,694,242.40 50.00 6,694,192.40
			6,694,242.40

– II-126 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

A. Other receivables in the group provided for bad debts by aging are as follows:

Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total (1 continued) Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total (2 continued) Ageing Within 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total	31 March 2019 Other receivable Provision for bad debts 1,189,545.93 17,699,589.49 884,979.47 20,700,500.00 2,070,050.00 1,955,406.83 391,081.37 9,777.48 4,888.74 287,577.84 230,062.27 297,083.52 297,083.52 42,139,481.09 3,878,145.37 31 December 2018 Other receivable Provision for bad debts 20,537,625.56 2,183,271.21 109,163.56 20,620,000.00 2,062,000.00 1,462,427.07 292,485.41 11,954.60 5,977.30 286,656.48 229,325.18 488,807.52 488,807.52 45,590,742.44 3,187,758.97 31 December 2017 Other receivable Provision for bad debts 9,101,182.98 20,064,769.69 1,003,238.48 2,089,131.10 208,913.11 200,000.00 40,000.00 329,660.81 164,830.41 157,566.80 126,053.44 412,000.00 412,000.00 32,354,311.38 1,955,035.44	% 5.00 10.00 20.00 50.00 80.00 100.00
		9.20

		% 5.00 10.00 20.00 50.00 80.00 100.00
		6.99

		% 5.00 10.00 20.00 50.00 80.00 100.00
		6.04

– II-127 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

(3 continued)

Ageing Within six months 6 months to 1 year 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Over 5 years Total	31 Other receivable 4,360,955.07 685,234.70 245,208.49 374,927.42 822,903.60 412,000.00 6,901,229.28	December 2016 Provision for bad debts 136,828.66 20,557.04 7,356.25 5,247.82 24,687.11 12,360.00 207,036.88	% 3.00 3.00 3.00 3.00 3.00 3.00 3.00
			3.00

② Provision for bad debts made, recovered or reversed

Provision for bad debts for the three months ended 31 March 2019, 2018, 2017 and 2016 amounted to RMB690,386.40, RMB1,232,723.53, RMB1,747,998.56 and RMB20,215.78 respectively, no provision for bad debts to be recovered or reversed.

③ There were no accounts receivable written-off during the reporting period.
④ Other receivables by nature

Item 31 March 2019 Security deposit 41,724,561.55 Current account with related parties 95,579,226.77 Other current account 724,545.00 Total 138,028,333.32	31 December 2018 45,116,769.29 26,534,346.00 658,475.85 72,309,591.14	31 December 2017 31,368,660.24 579,922.23 1,198,876.27 33,147,458.74	31 December 2016 6,104,554.50 50.00 796,674.78
			6,901,279.28

⑤ Top five other receivables by closing balance of debtors

Item Nature Top 1 Security deposit Top 2 Security deposit Top 3 Security deposit Top 4 Security deposit Top 5 Security deposit Total	Amount Ageing Percentage of the total other receivables (%) 16,000,000.00 1 year to 2 years 11.59 8,683,931.70 Within six months, 6 months to 1 year 6.29 4,200,000.00 6 months to 1 year, 1 year to 2 years, 2 years to 3 years 3.04 3,857,596.00 6 months to 1 year 2.79 1,215,000.00 6 months to 1 year 0.88 33,956,527.70 24.60	Provision for bad debts 1,600,000.00 484,196.59 435,000.00 192,879.80 60,750.00
		2,772,826.39

– II-128 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

3. Long-term equity investments

(1) Breakdown of long-term equity investments

==> picture [359 x 239] intentionally omitted <==

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

Item 31 March 2019 31 December 2018
Impairment Carrying Impairment Carrying
Book value provision amount Book value provision amount
Investments in subsidiaries 652,822,430.83 652,822,430.83 560,000,000.00 560,000,000.00
Investments in associates
and joint ventures
Total 652,822,430.83 652,822,430.83 560,000,000.00 560,000,000.00
(continued)
Item 31 December 2017 31 December 2016
Impairment Carrying Impairment Carrying
Book value provision amount Book value provision amount
Investments in subsidiaries 160,000,000.00 160,000,000.00 160,000,000.00 160,000,000.00
Investments in associates
and joint ventures
Total 160,000,000.00 160,000,000.00 160,000,000.00 160,000,000.00
----- End of picture text -----

(2) Investments in subsidiaries
① Particulars of investments in subsidiaries for the three months ended 31 March 2019

Investee Qingdao Hisense Hitachi Air-Conditioning Marketing Co., Ltd. Qingdao Johnson Controls Air-Conditioning Co., Ltd. Qingdao Hisense Hvac Equipment Co., Ltd. Total	Opening balance 160,000,000.00 400,000,000.00 560,000,000.00	Increase for the period 92,822,430.83 92,822,430.83	Decrease for the period	Closing balance 160,000,000.00 400,000,000.00 92,822,430.83 652,822,430.83	Provision for Impairment made during the period	Closing balance of provision for impairment

– II-129 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX II

② Particulars of investments in subsidiaries for 2018

Investee Qingdao Hisense Hitachi Air-Conditioning Marketing Co., Ltd. Qingdao Johnson Controls Air-Conditioning Co., Ltd. Total	Opening balance 160,000,000.00 160,000,000.00	Increase for the year 400,000,000.00 400,000,000.00	Decrease for the year	Closing balance 160,000,000.00 400,000,000.00 560,000,000.00	Provision for impairment made during the year	Closing balance of provision for impairment

③ Particulars of investments in subsidiaries for 2017

Investee Qingdao Hisense Hitachi Air-Conditioning Marketing Co., Ltd. Total	Opening balance 160,000,000.00 160,000,000.00	Increase for the year	Decrease for the year	Closing balance 160,000,000.00 160,000,000.00	Provision for impairment made during the year	Closing balance of provision for impairment

④ Particulars of investments in subsidiaries for 2016

Investee Qingdao Hisense Hitachi Air-Conditioning Marketing Co., Ltd. Total	Opening balance 160,000,000.00 160,000,000.00	Increase for the year	Decrease for the year	Closing balance 160,000,000.00 160,000,000.00	Provision for impairment made during the year	Closing balance of provision for impairment

– II-130 –

APPENDIX III ACCOUNTANTS’ REPORT OF HISENSE HITACHI

==> picture [83 x 56] intentionally omitted <==

==> picture [83 x 29] intentionally omitted <==

INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE PREPARATION OF UNAUDITED PRO FORMA FINANCIAL INFORMATION

Rui Hua He Zi [2019] 95020014

TO THE DIRECTORS OF HISENSE HOME APPLIANCES GROUP CO., LTD.

We have completed our assurance engagement and issued our report on the preparation of unaudited pro forma financial information of Hisense Home Appliances Group Co., Ltd. (the ‘ ‘Company ’’) and its subsidiaries (collectively the ‘ ‘Group ’’) prepared by the directors of the Company (the ‘ ‘Directors ’’) for illustrative purposes only. The unaudited pro forma financial information consists of the unaudited pro forma consolidated balance sheet as at 31 December 2018 and the unaudited pro forma consolidated income statement and unaudited pro forma consolidated cash flow statement for the year ended 31 December 2018 and related notes (the “unaudited pro forma financial information”) as set out on pages III-4 to III-22 of the circular dated 14 August 2019 issued by the Company in relation to the proposed acquisition of 0.2% equity interests in Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd. ( 青島海信日立空調系統有限公司 ) and the amendments to the articles of association (the “Transaction”). The applicable criteria used by the Directors in the preparation of the unaudited pro forma financial information are described on pages III-4 to III-22.

The unaudited pro forma financial information has been prepared by the Directors to illustrate the possible impact of the Transaction on the Group’s financial position as at 31 December 2018 and the Group’s operating results and cash flows for the year ended 31 December 2018 as if the Transaction had taken place on 31 December 2018 and 1 January 2018 respectively. In this process, the Directors have extracted the information about the Group’s financial position, operating results and cash flows from the financial statements in the annual report of the Group for the year ended 31 December 2018, on which an audit report has been published.

DIRECTORS’ RESPONSIBILITIES FOR THE UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Directors are responsible for preparation of the unaudited pro forma financial information in accordance with Rule 4.29 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’’ (‘‘ AG 7 ’’) issued by the Hong Kong Institute of Certified Public Accountants (‘ ‘HKICPA ’’).

– III-1 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

OUR INDEPENDENCE AND QUALITY CONTROL

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

We apply Hong Kong Standard on Quality Control 1 issued by the HKICPA and accordingly maintain a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

Reporting Accountants’ Responsibilities for the Unaudited Pro Forma Financial Information

Our responsibility is to express an opinion, as required by Rule 4.29(7) 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 preparation 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.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 issued by the HKICPA. This standard requires us to plan and perform procedures to obtain reasonable assurance about whether the Directors have prepared the unaudited pro forma financial information in accordance with Rule 4.29 of the Listing Rules, and with reference to AG 7 issued by the HKICPA.

For purpose of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in preparing the unaudited pro forma financial information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in preparing the unaudited pro forma financial information.

The purpose of unaudited pro forma financial information included in a circular is solely to illustrate the impact of a significant event or transaction on the unadjusted financial information of the entity as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the Transactions as at 31 December 2018 or 1 January 2018 would have been as presented.

– III-2 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

A reasonable assurance engagement to report on whether the unaudited pro forma financial information has been properly prepared on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the preparation of the unaudited pro forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:

the related pro forma adjustments give appropriate effect to those criteria; and
the unaudited pro forma financial information reflects the proper application of those adjustments to the unadjusted financial information.

The procedures selected depend on the reporting accountants’ judgement, having regard to the reporting accountants’ understanding of the nature of the company, the event or transaction in respect of which the unaudited pro forma financial information has been prepared, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the unaudited pro forma financial information.

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

OPINION

In our opinion:

(a) the unaudited pro forma financial information has been properly prepared by the Directors 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 Rule 4.29(1) of the Listing Rules.

Ruihua Certified Public Accountants (LLP) Beijing, the PRC 9 August 2019

– III-3 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the unaudited pro forma financial information of the Enlarged Group (being the Company and its subsidiaries (collectively the “ Group ”) together with Qingdao Hisense Hitachi Air-Conditioning Systems Co., Ltd. (the “ Target Company ”) and its subsidiaries (collectively the “ Target Group ”)), comprising the unaudited pro forma consolidated balance sheet as at 31 December 2018 and the unaudited pro forma consolidated income statement and unaudited pro forma consolidated cash flow statement for the year ended 31 December 2018. It has been prepared by the Directors of the Company in accordance with Rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘ Listing Rules ’’) for the purpose of illustrating the effect of the proposed acquisition of 0.2% equity interests in the Target Company and the amendments to the articles of association of the Target Company (the “ Transaction ”) on the Group’s financial position as at 31 December 2018 and the Group’s operating results and cash flows for the year ended 31 December 2018 as if the Transaction had been completed on 31 December 2018 and 1 January 2018 respectively.

This unaudited pro forma financial information has been prepared using accounting policies consistent with those of the Group and based upon the (i) unaudited consolidated balance sheet of the Group as at 31 December 2018 as extracted from the Company’s published annual report for the year then ended, (ii) the consolidated income statement and the consolidated cash flow statement of the Group for the year ended 31 December 2018 as extracted from the Company’s published annual report for the year then ended, after making certain pro forma adjustments as described below. These pro forma adjustments of the Transaction are (i) directly attributable to the Transaction concerned and not relating to future events or decisions; and (ii) factually supportable based on the terms of the acquisition agreement.

The unaudited pro forma financial information of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information. As a result of these assumptions, estimates and uncertainties, the unaudited pro forma financial information of the Enlarged Group does not purport to describe the actual financial position of the Enlarged Group as at 31 December 2018 or the actual operating results and cash flows of the Enlarged Group that would have been attained had the Transaction been completed on 31 December 2018 and 1 January 2018, respectively, or any future date. Furthermore, the unaudited pro forma financial information of the Enlarged Group is for illustrative purposes only, and because of its hypothetical nature, it may not give a true picture of the financial information of the Enlarged Group or predict the future financial information of the Enlarged Group.

– III-4 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

In addition, for the purpose of the unaudited pro forma financial information of the Enlarged Group, the Board considered that the fair values of the equity interests in the Target Company and identifiable net assets of the Target Group may change after the date of the Circular as the fair value of equity interests in the Target Company and identifiable net assets of the Target Group to be acquired will be assessed on the completion date of the acquisition. As the unaudited pro forma financial information of the Enlarged Group is prepared for illustrative purposes only, the Directors have assumed that the fair value of the identifiable net assets of the Target Group as at 31 December 2018 and 1 January 2018 was their respective carrying amount and the fair value of the equity interests in the Target Company was the book value of the net assets of the Target Group. The possible change in fair value of equity interests in the Target Company and identifiable net assets of the Target Group is not reflected in the unaudited pro forma financial information of the Enlarged Group.

The unaudited pro forma financial information of the Enlarged Group should be read in conjunction with the historical financial information of the Group set out in the Company’s published annual report for the year ended 31 December 2018, and the historical financial information of the Target Group set out in Appendix II and other information included elsewhere in this Circular.

– III-5 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2018

Prepared by:Hisense Home Appliances Group Co., Ltd.

Prepared by:Hisense Home Appliances Group Co., Ltd. Items The Group (Note 1) The Target Group (Note 2) Notes Current assets: Cash at bank and on hand 3,648,463,609.61 6,341,112,859.66 3 Transactional financial assets 207,350.00 Financial assets at fair value through profit or loss N/A Derivative financial assets Notes receivable and Accounts receivable 6,068,203,234.09 2,578,607,891.84 5 Including: Notes receivable 2,971,748,608.75 2,088,694,716.15 5 Accounts receivable 3,096,454,625.34 489,913,175.69 5 Prepayments 224,120,738.37 3,343,894.23 Other receivables 318,926,986.30 268,224,529.45 Including: Interests receivable 197,325.00 218,746,182.52 Dividends receivable Inventories 2,955,752,775.71 790,567,659.89 5 Contract assets N/A Assets held for sale Non-current assets due within one year Other current assets 1,081,172,953.81 38,202,383.55 Total current assets 14,296,847,647.89 10,020,059,218.62	Pro forma adjustments -25,000,000.00 -79,024,096.25 -49,523,934.75 -29,500,161.50 -83,516,726.01 -187,540,822.26	Unit: RMB The Enlarged Group 9,964,576,469.27 207,350.00 N/A 8,567,787,029.68 5,010,919,390.15 3,556,867,639.53 227,464,632.60 587,151,515.75 218,943,507.52 3,662,803,709.59 1,119,375,337.36
		24,129,366,044.25

– III-6 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

Items Non-current assets: Investments in debt Available-for-sale financial assets Other investments in debt Held-to-maturity investments Long-term receivables Long-term equity investments Other equity investment Other non-current financial assets Investment properties Fixed assets Construction in progress Productive biological assets Oil and gas assets Intangible assets Development costs Goodwill Long-term prepaid expenses Deferred tax assets Other non-current assets Total non-current assets Total assets	The Group (Note 1) The Target Group (Note 2) Notes N/A N/A N/A N/A 3,326,783,023.78 3 N/A N/A 22,511,361.05 3,263,931,920.41 428,194,930.86 84,296,518.04 75,718,397.06 714,706,893.47 1,279,344,183.62 25,349,762.41 1,507,853.87 93,477,911.35 460,195,259.48 300,000,000.00 7,531,057,390.51 2,544,960,624.89 21,827,905,038.40 12,565,019,843.51	Pro forma adjustments -2,876,748,851.06 -2,876,748,851.06 -3,064,289,673.32	The Enlarged Group N/A N/A 450,034,172.72 N/A N/A 22,511,361.05 3,692,126,851.27 160,014,915.10 1,994,051,077.09 26,857,616.28 553,673,170.83 300,000,000.00 7,199,269,164.34

			31,328,635,208.59

– III-7 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

Items Current liabilities: Short-term borrowings Transactional financial assets Financial liabilities at fair value through profit or loss Derivative financial liabilities Notes payable and accounts payable Advances from customers Employee remunerations payable Taxes payable Other payables Including: Interests payable Dividends payable Contract liabilities Liabilities held for sale Non-current liabilities due within one year Other current liabilities Total current liabilities Non-current liabilities: Long-term borrowings Bonds payable Including: Preference shares Perpetual debts Long-term payables Long-term employee remunerations payable Provisions Deferred income Deferred tax liabilities Other non-current liabilities Total non-current liabilities Total liabilities	The Group (Note 1) The Target Group (Note 2) Notes 2,765,900.00 N/A N/A 9,815,704,300.63 2,667,502,746.15 5 519,627,834.92 4 328,800,107.19 136,355,133.37 230,675,886.53 269,772,495.28 1,766,319,446.79 3,865,763,111.32 3, 5 1,466,022,000.00 3 716,041,073.75 4 646,178,914.93 13,506,485,629.82 7,459,021,321.04 329,557,537.00 136,183,465.72 98,410,309.53 4,044,585.32 19,667,142.27 432,012,431.85 155,850,607.99 13,938,498,061.67 7,614,871,929.03	Pro forma adjustments -161,259,908.26 -519,627,834.92 -735,790,914.00 -734,510,000.00 519,627,834.92 -897,050,822.26 -897,050,822,26	The Enlarged Group 2,765,900.00 N/A 12,321,947,138.52 465,155,240.56 500,448,381.81 4,896,291,644.11 731,512,000.00 1,235,668,908.67 646,178,914.93
			20,068,456,128.60

			465,741,002.72 98,410,309.53 23,711,727.59 587,863,039.84

			20,656,319,168.44

– III-8 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

Items Shareholders’ equity: Share capital Other equity instruments Including: Preference shares Perpetual debts Capital reserve Less: treasury shares Other comprehensive income Special reserves Surplus reserves General risk provisions Undistributed profit Total equity attributable to shareholders of the parent Minority interests Total shareholders’ equity Total liabilities and shareholders’ equity	The Group (Note 1) The Target Group (Note 2) Notes 1,362,725,370.00 320,591,144.80 3 2,076,473,214.56 3 16,896,290.49 556,272,909.16 1,373,640,690.73 3 3,339,456,580.66 3,008,490,504.20 3 7,351,824,364.87 4,702,722,339.73 537,582,611.86 247,425,574.75 3 7,889,406,976.73 4,950,147,914.48 21,827,905,038.40 12,565,019,843.51	Pro forma adjustments -320,591,144.80 -15,594,555.32 -1,373,640,690.73 -2,846,395,408.79 -4,556,221,799.64 2,388,982,948.58 -2,167,238,851.06 -3,064,289,673.32	The Enlarged Group 1,362,725,370.00 2,060,878,659.24 16,896,290.49 556,272,909.16 3,501,551,676.07 7,498,324,904.96 3,173,991,135.19 10,672,316,040.15
			31,328,635,208.59

– III-9 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT AS OF 31 DECEMBER 2018

Prepared by:Hisense Home Appliances Group Co., Ltd.

Prepared	by:Hisense Home A	ppliances Gro	up Co., Ltd.			Unit: RMB
		The Group	The Target Group		Pro forma	The Enlarged
Items		(Note 1)	(Note 2)	Notes	adjustments	Group
I. Total operating revenue		36,019,598,304.79	10,986,666,830.49	6	-517,575,492.37	46,488,689,642.91
Including:	Operating revenue	36,019,598,304.79	10,986,666,830.49	6	-517,575,492.37	46,488,689,642.91
II. Total operating costs		35,641,100,116.57	9,161,920,132.95	6	-517,575,492.37	44,285,444,757.15
Including:	Operating costs	29,171,524,760.00	6,678,727,996.35	6	-517,575,492.37	35,332,677,263.98
	Taxes and surcharges	311,637,390.87	84,507,929.16			396,145,320.03
	Sales expenses	5,005,944,320.73	1,976,637,778.33			6,982,582,099.06
	Management expenses	425,693,468.96	207,172,633.58			632,866,102.54
	Research and development
	expenses	686,772,325.33	331,367,497.63			1,018,139,822.96
	Financial expenses	34,610,575.42	-127,045,211.30			-92,434,635.88
	Including: Interest expense	3,987,499.99				3,987,499.99
	Interest income	36,481,903.61	124,747,593.93			161,229,497.54
	Impairment losses on assets	2,550,168.03	10,551,509.20	4	-2,328,376.19	10,773,301.04
	Impairment losses on credit	2,367,107.23	N/A	4	2,328,376.19	4,695,483.42
	Add: Other income	302,603,027.45	122,234,003.83			424,837,031.28
	Investment gain (loss
	expressed with “-”)	828,685,091.63		7	-771,292,150.37	57,392,941.26
Including:	Share of profit of associates
	and joint ventures	783,792,628.40		7	-750,896,755.51	32,895,872.89
	Net open hedge income
	(loss expressed with “-”)		N/A
	Gain from changes in fair
	values (loss expressed with
	“-”)	-2,267,497.17	173,000.00			-2,094,497.17
	Gains on disposal of asset
	(loss expressed with “-”)	1,210,083.22	174,816.86			1,384,900.08
III. Operating profits (loss expressed
with “–”)		1,508,728,893.35	1,947,328,518.23		-771,292,150.37	2,684,765,261.21
Add: Non-operating incomes		74,020,079.75	2,987,348.28			77,007,428.03
Less: Non-operating expenses		17,843,104.64	623,580.26			18,466,684.90

– III-10 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

		The Group	The Target Group		Pro forma	The Enlarged
Items		(Note 1)	(Note 2)	Notes	adjustments	Group
IV. Total profit (total loss expressed with
“–”)		1,564,905,868.46	1,949,692,286.25		-771,292,150.37	2,743,306,004.34
Less: Income tax expenses		141,831,492.77	346,474,553.59			488,306,046.36
V. Net	profits (net loss expressed with
“–”)		1,423,074,375.69	1,603,217,732.66		-771,292,150.37	2,254,999,957.98
(I)	Classified according to the
	continuity of the business
	1. Net profit from continuing
	operations (net loss expressed
	with “-”)	1,423,074,375.69	1,603,217,732.66		-771,292,150.37	2,254,999,957.98
	2. Net profit from discontinued
	operations (net loss expressed
	with “-”)
(II)	Classified according to the equity
	holdings
	1. Net profit attributable to
	shareholders of the parent (net
	loss expressed with “-”)	1,377,457,177.70	1,538,743,294.85		-1,552,973,744.15	1,363,226,728.40
	2. Profit and loss of minority
	interests (net loss expressed
	with “-”)	45,617,197.99	64,474,437.81	8	781,681,593.78	891,773,229.58

– III-11 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

			The Group	The Target Group		Pro forma	The Enlarged
Items			(Note 1)	(Note 2)	Notes	adjustments	Group
VI. Other comprehensive income after
tax,	net		3,618,965.46				3,618,965.46
Other comprehensive income after tax
attributable to owners of the parent, net			3,605,594.90				3,605,594.90
(1)	Items not to be reclassified into
	profit or loss
	1.	Changes arising from
		remeasurement of defined
		benefit plan
	2.	Other comprehensive income
		that cannot be transferred to
		profit or loss under the equity
		method
	3.	Changes in fair value of other
		equity instruments investment		N/A
	4.	Changes in the fair value of
		the company’s own credit risk		N/A
	5.	Others		N/A
(2)	Items to be reclassified into profit
	or loss		3,605,594.90				3,605,594.90
	1.	Other comprehensive income
		that is convertible into gains
		and losses under the equity
		method	-289,459.62				-289,459.62
	2.	Changes in fair value of other
		investments in debt		N/A
	3.	Gains and losses from changes
		in fair value of available-for-
		sale financial assets	N/A				N/A
	4.	The amount of financial
		assets reclassified into other
		comprehensive income		N/A
	5.	Held-to-maturity investments
		are reclassified as gains and
		losses on available-for-sale
		financial assets	N/A				N/A
	6.	Credit impairment provisions
		for other debt investment		N/A
	7.	Cash flow hedge reserve
		(Effective portion of profit or
		loss from cash flows hedges)
	8.	Differences on translation
		of foreign currency financial
		statements	3,895,054.52				3,895,054.52
	9.	Others

– III-12 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

	The Group	The Target Group		Pro forma	The Enlarged
Items	(Note 1)	(Note 2)	Notes	adjustments	Group
Other comprehensive income after tax
attributable to minority interests, net	13,370.56				13,370.56
VII. Total comprehensive income	1,426,693,341.15	1,603,217,732.66			2,258,618,923.44
Total comprehensive income
attributable to shareholders of the
parent	1,381,062,772.60	1,538,743,294.85			1,366,832,323.30
Total comprehensive income
attributable to minority interests	45,630,568.55	64,474,437.81			891,786,600.14
VIII. Earnings per share:
(1) Basic earnings per share	1.01	4.80			1.00
(2) Diluted earnings per share	1.01	4.80			1.00

– III-13 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

UNAUDITED PRO FORMA CASH FLOW STATEMENT AS OF 31 DECEMBER 2018

Prepared by:Hisense Home Appliances Group Co., Ltd.	Prepared by:Hisense Home Appliances Group Co., Ltd.	Prepared by:Hisense Home Appliances Group Co., Ltd.			Unit: RMB
	The Group	The Target Group		Pro forma	The Enlarged
Items	(Note 1)	(Note 2)	Notes	adjustments	Group
I. Cash flows from operating activities:
Cash received from sales of goods and
rendering of services	26,105,882,573.53	10,326,606,262.83	9	-22,309,450.64	36,410,179,385.72
Tax rebates received	1,267,772,435.41	159,331,701.54			1,427,104,136.95
Other cash received concerning
operating activities	783,571,827.20	44,510,971.68	9	-237,681.57	827,845,117.31
Subtotal of cash inflows from
operating activities	28,157,226,836.14	10,530,448,936.05		-22,547,132.21	38,665,128,639.98
Cash paid for purchases of
commodities and receipt of services	18,570,325,803.56	5,435,881,587.70	9	-5,229,777.50	24,000,977,613.76
Cash paid to and for employees	3,169,188,048.40	773,805,898.68			3,942,993,947.08
Cash paid for taxes and surcharges	1,223,056,073.41	1,028,355,348.17			2,251,411,421.58
Cash paid for other operating activities	4,145,290,346.52	1,477,839,524.22	9	-10,431,854.71	5,612,698,016.03
Subtotal of cash outflows from
operating activities	27,107,860,271.89	8,715,882,358.77		-15,661,632.21	35,808,080,998.45
Net cash flows from operating
activities	1,049,366,564.25	1,814,566,577.28		-6,885,500.00	2,857,047,641.53

– III-14 –

APPENDIX III ACCOUNTANTS’ REPORT OF HISENSE HITACHI

	The Group	The Target Group		Pro forma	The Enlarged
Items	(Note 1)	(Note 2)	Notes	adjustments	Group
II. Cash flows from investing activities:
Cash received from recovery of
investments	12,542,200.00	210,000,000.00			222,542,200.00
Cash received from investment income	48,100,716.69				48,100,716.69
Net cash received from disposals of
fixed assets, intangible assets and other
long-term assets	5,540,355.55	79,900.00			5,620,255.55
Net cash received from disposal of
subsidiaries and other operation units
Cash received relating to other
investing activities	2,810,000,000.00	1,471,117,182.69			4,281,117,182.69
Subtotal of cash inflows from
investing activities	2,876,183,272.24	1,681,197,082.69			4,557,380,354.93
Cash paid for acquisition of fixed
assets, intangible assets and other long-
term assets	330,020,326.20	856,127,635.27	9	-6,885,500.00	1,179,262,461.47
Cash paid for investments	47,750,000.00				47,750,000.00
Cash paid for acquiring subsidiaries
and other operation units
Cash paid relating to other investing
activities	2,270,000,000.00	1,648,299,900.00			3,918,299,900.00
Subtotal of cash outflows from
investing activities	2,647,770,326.20	2,504,427,535.27		-6,885,500.00	5,145,312,361.47
Net cash flows from investing
activities	228,412,946.04	-823,230,452.58		6,885,500.00	-587,932,006.54

– III-15 –

APPENDIX III ACCOUNTANTS’ REPORT OF HISENSE HITACHI

	The Group	The Target Group		Pro forma	The Enlarged
Items	(Note 1)	(Note 2)	Notes	adjustments	Group
III. Cash flows from financing activities:
Cash received from capital contribution
Including: Cash contribution to
subsidiaries from minority
shareholders’ investment
Cash received from borrowings	200,000,000.00				200,000,000.00
Cash received from issuance of bonds
Cash received relating to other
financing activities
Subtotal of cash inflows from
financing activities	200,000,000.00				200,000,000.00
Cash paid for repayment of borrowings	200,000,000.00				200,000,000.00
Cash paid for distribution of dividends,
profit or payment of interest expenses	619,102,646.78	24,425,140.00			643,527,786.78
Including: Dividend and profit paid to
minority shareholders by
subsidiaries	15,515,983.99	24,425,140.00			39,941,123.99
Cash paid relating to other financing
activities	542,073,128.96				542,073,128.96
Subtotal of cash outflows from
financing activities	1,361,175,775.74	24,425,140.00			1,385,600,915.74
Net cash flows from financing
activities	-1,161,175,775.74	-24,425,140.00			-1,185,600,915.74

– III-16 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

	The Group	The Target Group		Pro forma	The Enlarged
Items	(Note 1)	(Note 2)	Notes	adjustments	Group
IV. Effects of foreign exchange rate
changes on cash and cash equivalents	-7,558,642.39				-7,558,642.39
V. Net increase in cash and cash
equivalents	109,045,092.16	966,910,984.70			1,075,956,076.86
Add: Balance of cash and cash
equivalents at the beginning of
the period	952,318,970.66	901,875,167.02	10	-25,000,000.00	1,829,194,137.68
VI. Balance of cash and cash equivalents
at the end of the period	1,061,364,062.82	1,868,786,151.72		-25,000,000.00	2,905,150,214.54

– III-17 –

APPENDIX III ACCOUNTANTS’ REPORT OF HISENSE HITACHI

NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. The consolidated balance sheet as at 31 December 2018 and the consolidated income statement and consolidated cash flow statement for the year ended 31 December 2018 of the Group were extracted from the Group’s published annual report for the year ended 31 December 2018.

2. The consolidated balance sheet as at 31 March 2019 and the consolidated income statement and consolidated cash flow statement for the year ended 31 December 2018 of the Target Group were extracted from the Accountant’s Report set out in Appendix II to the Circular.

3. Pursuant to the Equity Interest Transfer Agreement entered into between the Company and Unitecs Corporation ( 株式會社聯合貿易 )(“ Unitecs ”), the 0.2% equity interests in the Target Company will be transferred to the Company for the consideration of RMB25 million and the shareholders of the Target Company agreed to amend some terms of the articles of association of the Target Company to revise provisions relating to structure of the board of directors and the directors appointed by the shareholders of the Target Company. After signing the agreement, the Company shall pay 50% of the price for the equity transfer (the “ Consideration ”) (equivalent to RMB12.50 million) to Unitecs as deposit within 20 business days of obtaining approval from the board of directors of the Target Company in respect of the transfer by way of written resolutions; the Company shall pay the remaining 50% of Consideration (equivalent to RMB12.50 million) to Unitecs within 20 business days from the date on which the business registration procedure in respect of the transfer of equity have been completed.

For the preparation of statements, we have assumed that the acquisition has taken place on 31 December 2018 and the Consideration shall be fully paid on that date.

Upon completion of the equity transfer and amendments to the articles of association of the Target Company, the Company will hold 49.2% equity interests in the Target Company, meanwhile, the number of members of the board of directors of the Target Company will increase from currently seven to nine, among which board members to be appointed by the Company will increase from the existing three members to five. The Company will include the Target Company in the scope of the consolidated statements of the Company. According to the Accounting Standards for Business Enterprises No. 20 – Business Combination, the Transaction is to be treated according to the requirements of business combinations involving entities not under common control and the identifiable net assets of the Target Group should be presented in the consolidated financial statements of the Enlarged Group at fair value. For the preparation of the unaudited pro forma financial information, the Directors have assumed that the Transaction was completed on 31 December 2018 and 1 January 2018 and the fair value of the identifiable net assets of the Target Group was their respective carrying amount and the fair value of the equity interests in the Target Company was the book value of the net assets of the Target Group.

(1) The cost of and goodwill in business combination:

Item	Target Group
Cost of combination
– Cash	25,000,000.00
– Fair value at the acquisition date of the equity interests held
before the acquisition date	2,304,333,946.47
– Others	-15,594,555.32
Total cost of combination	2,313,739,391.15
Less: the acquired interest in the fair value of the identifiable net assets	2,313,739,391.15

The goodwill/cost of combination is less than the amount of the acquired interest in the fair value of the identifiable net assets

– III-18 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

① Determination of the fair value of the cost of combination

The Company will acquire 0.2% equity interests in the Target Company for RMB25 million. As the acquisition price includes other factors, it does not represent the fair value of 0.2% equity interests in the Target Company. The Company has assumed that as at 31 December 2018, the fair value of equity interests in the Target Company was the book value of the net assets of the Target Group and 0.2% equity interests correspond to net assets of RMB9,405,444.68 (RMB4,702,722,339.73 (the Target Group’s net assets as at 31 March 2019) × 0.2%), and its difference with the acquisition price of RMB-15,594,555.32 included in the capital reserves.

The unaudited pro forma consolidated balance sheet is prepared based on the consolidated balance sheet of the Group as at 31 December 2018 and the consolidated balance sheet of the Target Group as at 31 March 2019 through adjustment. To reflect the acquisition issue, therefore, the fair value of the 0.2% equity interest to be acquired as at 31 December 2018 is calculated based on the net assets of the Target Group as at 31 March 2019.

The Company has assumed that as at 31 December 2018, the fair value of the identifiable net assets of the Target Group was their respective carrying amount and no goodwill existed.

(2) Gain or loss on re-measurement of the fair value of the equity interests held before the acquisition date

Assuming that the Transaction was completed on 31 December 2018, the carrying amount and the fair value of the equity interests held before the acquisition date were RMB2,876,748,851.06 and RMB2,859,440,915.17 (RMB5,835,593,704.43 (the Target Group’s net assets as at 31 December 2018) × 49%) respectively. The difference of RMB-17,307,935.89 was recognised as gain on investment.

The book value of the 49% equity interest in the Target Company held by the Company as at 31 December 2018 is calculated based on the net assets of the Target Group as at 31 December 2018 under the equity method. To ensure the consistency of the calculation basis, the fair value of the 49% equity interest originally held by the Group before the date of acquisition of the target equity interest is calculated based on the net assets of the Target Group as at 31 December 2018.

Assuming that the Transaction was completed on 1 January 2018, the carrying amount and the fair value of the equity interests held before the acquisition date were RMB2,125,852,095.55 and RMB2,105,456,700.69 (RMB4,296,850,409.58 (the Target Group’s net assets as at 1 January 2018) × 49%) respectively. The difference of RMB-20,395,394.86 was recognised as gain on investment.

(3) On the date of acquisition, the Company’s long-term equity investments were offset against the Target Group’s equity, and the Target Company’s dividend was offset.

Item	①	②	③	④	Total
Share capital	-320,591,144.80				-320,591,144.80
Surplus reserves	-1,373,640,690.73				-1,373,640,690.73
Undistributed profit	-4,141,361,868.90	-186,725,604.00	1,499,000,000.00		-2,829,087,472.90
Long-term equity investments	-2,859,440,915.17			-9,405,444.68	-2,868,846,359.85
Minority interests	2,976,152,789.26	186,725,604.00	-764,490,000.00	-9,405,444.68	2,388,982,948.58
Dividends payable			-734,510,000.00		-734,510,000.00

① The fair value of the 49% equity interest held by the Company before the date of acquisition of the target equity interest is calculated based on the net assets of the Target Group as at 31 December 2018. Therefore, the fair value of the 49% equity investment (RMB 2,859,440,915.17) is offset by the owner’s equity of the Target Group at 31 December 2018 (Share capital RMB 320,591,144.80, Surplus reserves RMB 1,373,640,690.73, Undistributed profit RMB 4,141,361,868.90), and the minority interests of RMB 2,976,152,789.26 is calculated at 51% (the Target Group’s net assets as at 31 December 2018 RMB 5,835,593,704.43 *51%)

– III-19 –

APPENDIX III ACCOUNTANTS’ REPORT OF HISENSE HITACHI

② During the three months ended 31 March 2019, only the undistributed profit changes in respect of the owner’s equity of the Target Group, of which the portion attributable to minority shareholders is distributed as minority interests, and the remaining portion as retained earnings of the Enlarged Group.

The Target Group’s realized net profit of RMB186,725,604.00 (the Target Group’s net profit attributable to the parent company for the three months ended 31 March 2019 of RMB 366,128,635.30 *51%) is distributed to minority shareholders.

③ In March 2019, the Target Company declared to pay a dividend of RMB1,499,000,000.00, of which RMB 734,510,000.00 was distributed to the Company and RMB 764,490,000.00 was distributed to minority shareholders. As the dividend distribution was not recorded in the balance sheet of the Group as at 31 December 2018, the portion distributed to the Company was restored in the pro forma consolidated balance sheet adjustment, and the minority interests were reduced by the portion distributed to minority shareholders.
④ On 31 March 2019, the Company acquired the 0.2% equity interest in the Target Company, reducing the minority interests by RMB 9,405,444.68 (the Target Group’s net assets as at 31 March 2019 RMB 4,702,722,339.73*0.2%), and offsetting the long-term equity investments confirmed in notes 3 (1).

Summary of the above adjustments:

Item	3(1)	3(2)	3(3)	Total
Long-term equity investments	9,405,444.68	-17,307,935.89	-2,868,846,359.85	-2,876,748,851.06
Cash	-25,000,000.00			-25,000,000.00
Capital reserve	-15,594,555.32			-15,594,555.32
Undistributed profit		-17,307,935.89	-2,829,087,472.90	-2,846,395,408.79
Share capital			-320,591,144.80	-320,591,144.80
Surplus reserves			-1,373,640,690.73	-1,373,640,690.73
Minority interests			2,388,982,948.58	2,388,982,948.58
Dividends payable			-734,510,000.00	-734,510,000.00

4. In accordance with the requirements of the Ministry of Finance of the People’s Republic of China, the Target Company has not adopted Accounting Standards for Business Enterprises (“ASBE”) No. 22 — Recognition and Measurement of Financial Instruments (2017 revision) (Cai Kuai [2017] No. 7), ASBE No. 23 — Transfer of Financial Assets (2017 revision) (Cai Kuai [2017] No. 8), ASBE No. 24 — Hedge Accounting (2017 revision) (Cai Kuai [2017] No. 9), ASBE No. 37 — Presentation of Financial Instruments (2017 revision) (Cai Kuai [2017] No.14) and ASBE No. 14 — Revenue (2017 revision) (Cai Kuai [2017] No. 22).

The Company has adopted the Accounting Standards for Business Enterprises mentioned above. In the preparation of the unaudited pro forma financial information of the Enlarged Group, the financial statements of the Target Group were adjusted according to such Accounting Standards for Business Enterprises.

– III-20 –

ACCOUNTANTS’ REPORT OF HISENSE HITACHI

APPENDIX III

5. Balance offset:

(1) Balances between the Group and the Target Group as at 31 December 2018 were eliminated.

As at 31 December 2018, the balance of receivable and payable between the Group and the Target Group as follows:

		Balance recorded
	Balance recorded	by the	Total amount
Item	by the Group	Target Group	offsetting
Accounts receivable	25,376,956.36	4,123,205.14	29,500,161.50
Accounts payable	4,123,205.14	24,096,042.36	28,219,247.50
Other payables		1,280,914.00	1,280,914.00
Notes receivable	47,813,870.45	57,205,075.51	105,018,945.96
Notes payable			105,018,945.96

Because the Group and the Target Group only count notes payable directly drawn on the other party, not including the notes endorsed to the other party, the amount of notes payable is inconsistent with the amount of notes receivable recorded by the other party. The amount of notes receivable is offset.

(2) The Target Group’s unrealized inventory arising from the transactions with the Group as of 31 March 2019 was eliminated. Assuming that the tax effect is not considered, the unrealized inventory amounted to RMB83,516,726.01. This part of the inventory corresponded to accounts payable of RMB28,021,714.80 as at the end of the period. The Target Company settled the remaining amount with the notes receivable.

Transactions between the Group and the Target Group occurred during the three months ended 31 March 2019.These transactions are recorded in the balance sheet as at 31 March 2019 of the Target Group, but not recorded in the balance sheet as at 31 December 2018 of the Group, so the Group adopts the following principles in adjustments: all the balances (including receivables, payables and inventories) as at 31 March 2019 brought out by the transactions between the Target Group and the Group would not be counted, if external sales of relevant inventories are realized, regarded as balances of receivable and payable brought by the expansion of external sales or purchases of the Group. If external sales of relevant inventories are not realized, these inventories would be offset. As at 31 March 2019, the amount of unrealized inventories is RMB 83,516,726.01, its corresponding balance of accounts payable is RMB 28,021,714.80(the balance of accounts payable as at 31 March 2019 is RMB 62,010,704.12,the balance of accounts payable as at 31 December 2018 is RMB 24,096,042.36), without considering unrealized internal profits(RMB 2,697,590.25), other payables is settled by the Target Group with notes receivable, so the adjustment as follows:

Item	Amount
Notes receivable	55,495,011.21
Accounts payable	-28,021,714.80
Inventories	-83,516,726.01

No other adjustment has to be made, except the above adjustments.

– III-21 –

APPENDIX III ACCOUNTANTS’ REPORT OF HISENSE HITACHI

Summary of the above adjustments:

Item	5 (1)	5 (2)	Total
Notes receivable and Accounts receivable	-134,519,107.46	55,495,011.21	-79,024,096.25
Including: Notes receivable	-105,018,945.96	55,495,011.21	-49,523,934.75
Accounts receivable	-29,500,161.50		-29,500,161.50
Notes payable and accounts payable	-133,238,193.46	-28,021,714.80	-161,259,908.26
Including: Notes payable	-105,018,945.96		-105,018,945.96
Accounts payable	-28,219,247.50	-28,021,714.80	-56,240,962.30
Other payables	-1,280,914.00		-1,280,914.00
Inventories		-83,516,726.01	-83,516,726.01

6. Transactions between the Group and the Target Group for the year ended 31 December 2018 were eliminated.

Breakdown and details of adjustment as follows:

		Particulars of
		related party
The sales party	The purchasing party	transactions	Amount
the Group	the Target Group	Sales of goods	488,465,628.95
the Group	the Target Group	Sale of materials	2,656,194.08
the Group	the Target Group	Sale of moulds	14,901,757.52
the Group	the Target Group	Rendering of services	83,003.90
the Target Group	the Group	Sales of goods	32,191.45
the Target Group	the Group	Sale of materials	11,436,716.47
Total			517,575,492.37

7. The gain on investment recognised by the Company for the Target Group under the equity method of RMB750,896,755.51 was reversed and adjustment was also made for the investment gain of RMB -20,395,394.86 mentioned in 3 (2) above.

8. Assuming that the Transaction was completed on 1 January 2018, the profit or loss attributable to noncontrolling shareholders for the year ended 31 December 2018 was calculated basing on 50.8%.

9. The cash flows between the Group and the Target Group for the year ended 31 December 2018 were eliminated.

10. Assuming that the Transaction was completed on 1 January 2018, the acquisition price payable by the Company for the equity interests is RMB25 million.

11. As the amount of the transaction costs of the Transaction is small, it is not accounted for in the unaudited pro forma financial information of the Enlarged Group.

12. Save as mentioned above, no other adjustments have been made to the unaudited pro forma financial information of the Enlarged Group to reflect any operating results or other transactions entered into by the Group and the Target Group in relation to the unaudited pro forma consolidated balance sheet subsequent to 31 December 2018 and 31 March 2019, respectively, and the unaudited pro forma consolidated income statement and unaudited pro forma consolidated cash flow statement subsequent to 31 December 2018.

– III-22 –

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accepts full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquires, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement contained herein or this circular misleading.

2. DISCLOSURE OF INTERESTS

Interests of Directors, supervisors and chief executive of the Company in the securities of the Company

As at the Latest Practicable Date, the interests and short positions of the Directors, supervisors and chief executive of the Company in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he was taken or deemed to have under such provisions of the SFO) or which were required, pursuant to section 352 of the SFO, to be entered in the register maintained by the Company referred to therein, or which were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies of the Listing Rules (the “ Model Code ”) to be notified to the Company and the Stock Exchange were as follows:

Long position in the Shares

				Approximate
				percentage of
			Approximate	total issued
			percentage of	share capital
Name of Director/		Number of	issued A	of the
Supervisor	Nature of interest	A Shares	Shares	Company
			(%)	(%)
Mr. Tang Ye Guo	Beneficial owner	831,600	0.092	0.061
Mr. Jia Shao Qian	Beneficial owner	404,360	0.045	0.030
Mr. Wang Yun Li	Beneficial owner	52,120	0.006	0.004

Save as disclosed above, 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 of 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, supervisor or chief executive was taken or deemed to have under such

– IV-1 –

GENERAL INFORMATION

APPENDIX IV

provisions of the SFO) or which were required pursuant to section 352 of the SFO, to be entered into the register maintained by the Company referred to therein or which were required, pursuant to the Model Code to be notified to the Company and the Stock Exchange.

Other interests

As at the Latest Practicable Date:

(a) none of the Directors or supervisors of the Company had any interest, direct or indirect, in any asset which have been, since 31 December 2018, 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 which were proposed to be acquired or disposed of by or leased to any member of the Group;
(b) 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 subsisting as at the Latest Practicable Date and which was significant in relation to the business of the Group; and
(c) Mr. Tang Ye Guo, Mr. Jia Shao Qian, Mr. Lin Lan and Mr. Dai Hui Zhong, being Directors, are also directors or senior management of Hisense Group or some of its subsidiaries. Hisense Group was deemed to have an interest in the Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

3. SERVICE AGREEMENTS

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

– IV-2 –

GENERAL INFORMATION

APPENDIX IV

4. COMPETING BUSINESS

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

Name of entity which business is considered to compete or likely to compete with the Name of business of the Director Group

Description of business of the entity which is considered to compete or likely to compete with the Nature of interest business of the of the Director in Group the entity

Mr. Tang Ye The subsidiaries of Production of Director and/or Guo Hisense Group electrical products senior management
Mr. Jia Shao The subsidiaries of Production of Director and/or Qian Hisense Group electrical products senior management
Mr. Lin Lan Hisense Group or Production of Director and/or Hisense Electric electrical products senior management
Mr. Dai Hui Hisense Group or Production of Director and/or Zhong Hisense Electric electrical products senior management

As at the Latest Practicable Date, save as disclosed above, none of the Directors or their respective close associates had interests in the businesses which competed or were likely to compete, either directly or indirectly, with the businesses of the Group.

5. LITIGATION

As at the Latest Practicable Date, there was no litigation, arbitration or claims of material importance known to the Directors to be pending or threatened by or against the Company or any member of the Group.

6. MATERIAL CONTRACTS

During the two years immediately preceding the date of this circular, the Company has entered into the Sales and Purchase Agreement (not being contracts entered into in the ordinary course of business):

– IV-3 –

GENERAL INFORMATION

APPENDIX IV

Save and except the Sale and Purchase Agreement, during the two years immediately preceding the date of this circular, no contract (not being contracts entered into in the ordinary course of business) has been entered into by the Company and/or members of the Group and is or may be material.

7. NO MATERIAL ADVERSE CHANGE

As 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 2018 (being the date to which the latest published audited financial statements of the Group were made up).

8. EXPERT

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

Name Qualifications Ruihua Certified Public Certified Public Accountants Accountants Yuanta Securities (Hong Kong) a corporation licensed to carry Type 1 (Dealing in Co., Ltd. securities), Type 2 (Dealing in future contracts), Type 4 (Advising on securities), Type 5 (Advising on future contracts), Type 6 (Advising on corporate finance) and Type 9 (Asset management) regulated activities under the SFO, being the independent financial adviser appointed by the Independent Board Committee to advise the Independent Board Committee and the Shareholders in respect of (a) the Business Co-operation Framework Supplemental Agreement (which stipulates the Business Co-operation Revised Annual Caps) and (b) the Financial Services Supplemental Agreement (which stipulates the Financial Services Revised Annual Caps)

As at the Latest Practicable Date, each of Ruihua Certified Public Accountants and Yuanta Securities (Hong Kong) Co., Ltd.:–

(a) did not have any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group;

– IV-4 –

GENERAL INFORMATION

APPENDIX IV

(b) did not have any interest, direct or indirect, in any assets which have been, since 31 December 2018, 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 which were proposed to be acquired or disposed of by or leased to any member of the Group; and
(c) has given and has not withdrawn its written consent to the issue of this circular with the inclusion of and references to its name and letter in the form and context in which they are included.

9. GENERAL

(a) The registered office of the Company is at No. 8 Ronggang Road, Ronggui, Shunde, Foshan, Guangdong Province, the PRC. The Company’s head office and principal place of business in Hong Kong is situated at Room 3101-05, Singga Commercial Centre, No. 148 Connaught Road West, Hong Kong.
(b) The secretary of the Company is Ms. Wong Tak Fong, who is a fellow member of the Hong Kong Institute of Chartered Secretaries and the Institute of Chartered Secretaries and Administrators in the United Kingdom, a certified tax adviser and a fellow member of the Taxation Institute of Hong Kong. She acted as the managing director of General Bright Consultants Ltd. since November 1994 to May 2014. She was the chief financial controller of DIAMOND DRAGON FASHION LTD（鑽龍時裝有限公司）from December 2010 to March 2019.
(c) In case of inconsistency, the Chinese text of this circular shall prevail over its English text.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the Company’s principal place of business in Hong Kong at Room 3101-05, Singga Commercial Centre, No. 148 Connaught Road West, Hong Kong during normal business hours from the date of this circular up to and including 29 August 2019:

(a) the articles of association of the Company;
(b) the letter from the Independent Board Committee dated 14 August 2019;
(c) the letter from the Independent Financial Adviser dated 14 August 2019;
(d) the resolutions passed by the tenth session of the Board on 21 June 2019 and 5 March 2019;
(e) prior approval and independent opinion of the independent non-executive Directors dated 21 June 2019 and 5 March 2019 in relation to the continuing connected transactions and major transactions;

– IV-5 –

GENERAL INFORMATION

APPENDIX IV

(f) the Sale and Purchase Agreement;
(g) the Financial Services Agreement;
(h) the Financial Services Supplemental Agreement;
(i) the Business Co-operation Framework Agreement;
(j) the Business Co-operation Framework Supplemental Agreement;
(k) the accountants’ reports on the financial information of Hisense Hitachi prepared by Ruihua Certified Public Accountants, the text of which is set out in Appendix II of this circular;
(l) the report from Ruihua Certified Public Accountants in respect of the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III of this circular;
(m) the consent letters issued by Ruihua Certified Public Accountants and Yuanta Securities (Hong Kong) Co., Ltd. referred to in the paragraph headed “Expert” in this appendix;
(n) the annual reports and consolidated audited accounts of the Company for the 3 years ended 31 December 2018;
(o) the circulars of the Company dated 7 January 2019; and
(p) this circular.

– IV-6 –

AI assistant

Medlive Technology Co., Ltd. — Proxy Solicitation & Information Statement 2019

50436_rns_2019-08-14_54be367c-efca-4824-87dc-6466f4f9c246.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

海信家電

HISENSE HOME APPLIANCES GROUP CO., LTD. 海信家電集團股份有限公司

(1) MAJOR TRANSACTION;

(2) CONTINUING CONNECTED TRANSACTIONS – BUSINESS CO-OPERATION REVISED ANNUAL CAPS AND BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT; AND

(3) MAJOR TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS – FINANCIAL SERVICES REVISED ANNUAL CAPS AND FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

海信家電

HISENSE HOME APPLIANCES GROUP CO., LTD. 海信家電集團股份有限公司

(1) MAJOR TRANSACTION;

(2) CONTINUING CONNECTED TRANSACTIONS – BUSINESS CO-OPERATION REVISED ANNUAL CAPS AND BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT; AND (3) MAJOR TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS – FINANCIAL SERVICES REVISED ANNUAL CAPS AND FINANCIAL SERVICES SUPPLEMENTAL AGREEMENT

(1) MAJOR TRANSACTION

TRANSFER OF TARGET EQUITY INTERESTS

ASSETS TO BE TRANSFERRED

CONSIDERATION

EFFECTIVE DATE OF THE SALE AND PURCHASE AGREEMENT

COMPLETION OF TRANSFER OF TARGET EQUITY INTERESTS

AMENDMENTS OF THE ARTICLES OF ASSOCIATION OF HISENSE HITACHI AND BOARD COMPOSITION OF HISENSE HITACHI

INFORMATION RELATING TO THE COMPANY

INFORMATION RELATING TO THE TRANSFEROR

INFORMATION RELATING TO HISENSE HITACHI

LETTER FROM THE BOARD

BUSINESS DISCUSSION AND ANALYSIS OF HISENSE HITACHI

1. Characteristics analysis of the industry where Hisense Hitachi situated

Industry overview analysis

Analysis of competitions in the industry

Favorable and unfavorable factors affecting the development of the industry

2. Hisense Hitachi’s core competitiveness and status in the industry

3. Analysis of financial position and profitability of Hisense Hitachi

Analysis of financial position

Analysis of assets and liabilities structure

Charges on Hisense Hitachi’s assets

Liquidity and financial resources

Trust deposits

Solvency analysis

Capital structure

Future plans for material investments or capital assets

Contingent liabilities

Analysis of business performance

(iii) Analysis of Profitability

Human resources and employees’ remuneration polices and training schemes

REASONS AND BENEFITS OF THE MAJOR TRANSACTION AND ITS FINANCIAL IMPACT ON THE COMPANY

IMPLICATIONS UNDER THE LISTING RULES

GENERAL

BACKGROUND

CONTINUING CONNECTED TRANSACTIONS – BUSINESS CO-OPERATION REVISED ANNUAL CAPS AND THE BUSINESS CO-OPERATION FRAMEWORK SUPPLEMENTAL AGREEMENT

Revision of annual caps:

(1) Purchase of electrical appliances[(note)]

Pricing

Reasons and benefits

(2) Purchase of raw materials, parts and components

LETTER FROM THE BOARD

Pricing

Reasons and benefits

(3) Provision of services

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Pricing

LETTER FROM THE BOARD

Reasons and benefits

(4) Supply of electrical appliances

LETTER FROM THE BOARD

Pricing

Reasons and benefits

(5) Supply of raw materials, parts and components

Pricing

Reasons and benefits

(6) Provision of services by the Enlarged Group

Pricing

Medlive Technology Co., Ltd. Proxy Solicitation & Information Statement 2019