2009 annual report - highly.ccshanghai highly (group) co., ltd. 2009 annual report 3 date of...

600619

2009 Annual Report

SHANGHAI HIGHLY (GROUP) CO., LTD. 2009 ANNUAL REPORT

1

I. IMPORTANT NOTES

1. The Company's Board of Directors, Board of Supervisors, their members and the senior

management personnel hereby warrant that there is no false statement, misleading representation, or material

omission in this Report, and they shall be collectively and individually liable for the authenticity, accuracy,

and completeness of the content of this Report.

2. Mr. Wu Hong, an independent director, and Mr. Zhou Zhiyan, a director, were unable to attend this

meeting in person due to another important meeting and a business trip abroad, respectively; thus fully

authorized Mr. Luo Weide, another independent director, and Mr. Zhang Fubiao, another director,

respectively, to exercise their voting rights on their behalf.

3. Ernst & Young Hua Ming Certified Public Accountants has issued a standard unqualified audit

report for the Company.

4. Mr. Shen Jianfang, the responsible person of the Company, Ms. Qin Wenjun, the responsible person

in charge of accounting work, and Mr. Liu Huicheng, the responsible person of the accounting institution

(accountant in charge), represent that they warrant the authenticity and completeness of the financial

statements in this Report.

5. No non-operating appropriation of fund of the Company by controlling shareholder and its affiliates

has occurred.

6. No security has been provided to other parties by the Company in contravention of any prescribed

decision-making procedures.

II. BASIC INFORMATION OF COMPANY

1. Company Information

Legal Chinese Name of Company 上海海立（集团）股份有限公司

Legal English Name of Company SHANGHAI HIGHLY (GROUP) CO.,LTD.

Abbreviation of the English Name of Company HIGHLY

Legal Representative of Company Shen Jianfang

2. Contact Person and Contact Information

Secretary of the Board of Directors Representative of Securities Affairs

Name Zhong Lei Xu Jie

Address No. 888 Ningqiao Road, Jinqiao Export Processing Zone, Pudong New Area, Shanghai, P.R.C.

Telephone 021-58547777

Fax 021-50326960

E-mail [email protected] [email protected]

3. Basic Information of Company

Registered Address and Principal Business

Address

No. 888 Ningqiao Road, Jinqiao Export Processing Zone,

Pudong New Area, Shanghai, P.R.C.

Postcode 201206

Website http://www.highly.cc

E-mail [email protected]


2

4. Information Disclosure and Place of the Report

Newspapers designated by the Company for

information disclosure

Shanghai Securities News and Ta Kung Pao (Hong

Kong)

The website selected by China Securities

Regulatory Commission (“CSRC”) for release of

the Company’s Annual Report

http://www.sse.com.cn

Place Where the Annual Report is Available for

Inspection Office of Company

5. Basic Information of the Shares of Company

Basic Information of the Shares of Company

Type of Shares Stock Exchange Abbreviation Share Code Abbreviation Prior

to Change

A Shares Shanghai Stock

Exchange Hai Li Gu Fen 600619 Bing Xiang Ya Suo

B Shares Shanghai Stock

Exchange Hai Li B Gu 900910 Bing Xiang B Gu

6. Other Relevant Information

Initial Registration Date of Company June 20, 1992

Place of Initial Registration of Company Shanghai Administration for Industry and Commerce

Date of Registration

Alteration

July 8, 1992

Place of Registration

Alteration Shanghai Administration for Industry and Commerce 1

st Alteration

Registration Number of the

Company’s Business License

150078700

Registration Alteration March 26, 1993


Alteration

State Administration for Industry and Commerce of

the P.R.C.



Gong Shang Qi Gu Fen Hu Zi No.00016

Tax Registration Number 310046607232705

2nd

Alteration

Organization Code 60723270-5


Alteration

January 9, 1995


Alteration


the P.R.C.



Gong Shang Qi Gu Fen Hu Zi No.00016


3rd

Alteration



Alteration

January 29, 1996


Alteration

State Administration of Industry and Commerce of

the P.R.C.



Qi Gu Hu Zong Zi No.019016


4th

Alteration



3


Alteration

May 7, 1996


Alteration


the P.R.C.





5th

Alteration



Alteration

December 12, 1996


Alteration


the P.R.C.





6th

Alteration



Alteration

April 2, 1998


Alteration


the P.R.C.



Qi Gu Hu Zong Zi No.019016 (Municipal Bureau)


7th

Alteration



Alteration

December 21, 1998


Alteration


the P.R.C.





8th

Alteration



Alteration

February 1, 2000


Alteration


the P.R.C.





9th

Alteration



Alteration

May 15, 2000


Alteration


the P.R.C.





10th

Alteration



Alteration

October 12, 2000


Alteration


the P.R.C.





11th

Alteration



4


Alteration

June 6, 2001


Alteration

Shanghai Administration for Industry and Commerce





12th

Alteration



Alteration

July 20, 2001


Alteration






13th

Alteration



Alteration

January 8, 2003


Alteration






14th

Alteration



Alteration

August 31, 2004


Alteration






15th

Alteration



Alteration

July 25, 2005


Alteration






16th

Alteration



Alteration

December 22, 2006


Alteration






17th

Alteration



Alteration

May 22, 2007


Alteration






18th

Alteration



5


Alteration

October 20, 2008


Alteration



Company’s Business License 310000400040612（Municipal Bureau）


19th

Alteration



Alteration

March 10, 2009


Alteration



Company’s Business License 310000400040612（Municipal Bureau）


20th

Alteration


Name of the Accounting Firm Engaged by Company Ernst & Young Hua Ming Certified Public

Accountants

Office Address of the Accounting Firm Engaged by

Company 23/F, No. 989 Changle Road, Shanghai

III. SUMMARY OF ACCOUNTING DATA AND BUSINESS DATA

1. Main Accounting Data

Unit: RMB Yuan

Item Amount

Operating profit 119,278,173.28

Total profit 128,209,776.70

Net profit attributable to shareholders of listed company 62,984,348.88

Net profit attributable to shareholders of listed company less non-recurring

gains and losses 13,554,769.63

Net cash flow generated from operating activities 484,580,196.33

2. Non-recurring Gains and Losses and the Amount Thereof

Unit: RMB Yuan

Item Amount Notes

Gains and losses from disposition of

noncurrent assets -1,275,192.28

Losses in the amount of

RMB1,392,185.16 from disposal of fixed

assets by Shanghai Hitachi

Governmental subsidies recorded into the

current gains and losses (excluding the

governmental subsidiaries closely relating to

the business of the enterprise and enjoyed by

a fixed quota or a fixed amount in accordance

with the national unified standards)

6,869,016.20

Highly Foundry, a subsidiary of

Company, received a VAT rebate from

the government of Jinshan District in an

amount of RMB591,830.00. Shanghai

Hitachi received a total amount of

RMB3,909,000.00 from government

appropriation for important technological

transformation projects and government

encouragement subsidies for projects of

procurement of advanced equipment from

abroad and absorption and innovation of

introduced technologies, etc. Shanghai

Highly Nakano Refrigerators Co., Ltd.

received a total amount of

RMB1,290,000.00 from government

subsidies for industrialization projects and

from Shanghai Xiaojuren Special Reward,

etc.


6

Gains and losses of the fair value change of

the trading financial asset and liability held

by the Company, investment income from the

disposal of the trading financial asset and

liability and available-for-sale financial asset,

except for the effective hedging business in

relation to the normal operation of Company

56,476,556.42

Investment income in the amount of

RMB26,480,926.42 for sale of tradable

stocks by Company.

Gains and losses of the fair value change,

in the amount of RMB29,995,630.00, of

the tradable stocks and the forward

foreign exchange contracts held inside the

group.

Non-operating incomes and expenditures

other than the above items 235,779.05

Income tax -5,353,481.97

Minority interest (after tax) -7,523,098.17

Total 49,429,579.25

3. Main Accounting Data and Financial Indices for the Three Years Prior to the End of this Report

Period

(Unit: RMB Yuan)

2007

Main Accounting Data 2009 2008

Increase/

Decrease on a

Year-on-year

Basis

Post-adjustment Pre-adjustment

Operating revenue 4,512,840,446.91 4,790,244,365.68 -5.79% 4,812,395,633.15 4,812,395,633.15

Gross profit 128,209,776.70 52,072,055.60 146.22% 179,552,178.85 179,552,178.85

Net profit attributable to

shareholders of listed company 62,984,348.88 16,085,333.82 291.56% 126,861,587.12 126,861,587.12

Net profit attributable to

shareholders of listed company

less non-recurring gains and

losses

13,554,769.63 23,659,683.13 -42.71% 39,776,007.34 60,067,424.77

Net cash flow from operating

activities 484,580,196.33 411,373,781.27 17.80% 96,093,535.47 96,093,535.47

End of 2007

End of 2009 End of 2008

Increase/

Decrease on a

Year-on-year

Basis Post-adjustment Pre-adjustment

Total assets 5,247,443,537.14 4,162,841,709.29 26.05% 5,306,095,277.94 5,306,095,277.94

Ownership interst (or

shareholders' equity interest) 1,546,368,466.73 1,468,137,384.79 5.33% 1,537,343,758.78 1,537,343,758.78

2007

Main Financial Indices 2009 2008 Increase/Decrease on a

Year-on-year Basis Post-adjustment Pre-adjustment

Basic earnings per share

(Yuan/Share) 0.11 0.03 266.67% 0.23 0.23

Diluted earnings per

share (Yuan/Share) 0.11 0.03 266.67% 0.23 0.23

Basic earnings per share

less non-recurring gains

and losses (Yuan/Share)

0.02 0.04 -50.00% 0.07 0.11

Weighted average ROE 4.17% 1.07% +3.10% 8.59% 8.59%

Weighted average ROE

less non-recurring gains

or losses

0.90% 1.58% -0.68% 2.69% 4.07%

Net cash flow per share

from operating activities

(Yuan/Share)

0.88 0.75 17.33% 0.21 0.21

End of 2007 End of 2009 End of 2008

Increase/Decrease on a

Year-on-year Basis Post-adjustment Pre-adjustment

Net assets per share

attributable to

shareholders of listed

company (Yuan/Share)

2.82 2.68 5.22% 3.37 3.37


7

4. Items Measured by Fair Value

(Unit: RMB Yuan)

Item Beginning

Balance

Ending

Balance

Current

Change

Change in

Current Profit

Financial Asset: financial asset

measured by fair value, the change in

which is recorded into the current

gains and losses

198,950.00 551,925.00 352,975.00 831,400.54

Financial Asset: available-for-sale

financial asset 47,727,105.76 65,082,669.60 17,355,563.84 26,721,336.09

Total 47,926,055.76 65,634,594.60 17,708,538.84 27,552,736.63

Item Beginning

Balance

Ending

Balance

Current

Change

Change in

Current Profit

Financial Liability 29,758,760.00 0.00 -29,758,760.00 29,758,760.00

Total 29,758,760.00 0.00 -29,758,760.00 29,758,760.00

IV. CHANGES IN SHARE CAPITAL & INFORMATION OF SHAREHOLDERS

A. Changes in Share Capital

1. Changes of share capital structure

No change occurred in the total share capital and equity structure of the Company in the Report Period.

2. Changes in the shares with trading restriction

No shares with trading restriction exist at the end of the Report Period.

B. Issuance and Listing of Securities

1. Issuance of securities in last 3 years

During the past three years to the end of the Report Period, the Company did not implement any issuance

or listing of securities

2. Changes in total share capital and shareholding structure of the Company

No change occurred in the total share capital and shareholding structure of the Company, whether due to

gift shares or share placements or otherwise, in the Report Period.

3. Existence of internal employee shares

No internal employee share of the Company existed at the end of the Report Period.


8

C. Information of the Shareholders and the Actual Controller

1． Number of the shareholders and shareholding status

Unit: Shares Total number of the shareholders at the end

of the Report Period 50637 (including: 33366 holding B shares)

Shareholding of the top ten majority shareholders

Name of shareholders Nature of

shareholders

Shareholding

proportion

Total

number of

the shares

held

Increase/Decrease

in the Report

Period

Number

of

shares

being

pledged

or

frozen

Shanghai Electric (Group) Co. State 30.49% 167,046,834 0 0

Shanghai Jiushi Corporation Other 4.46% 24,427,016 0 Unknown

Shanghai International Trust Co., Ltd. Other 1.76% 9,637,056 0 Unknown

Shanghai Shangli Industrial Co., Ltd.

Non-state

owned

domestic

legal person

0.88% 4,846,720 -1,140,000 Unknown

Shenyin&Wanguo-BOC-Shenyin&Wanguo

No.2 Strategy Reinforcement Collective

Asset Management Plan

Other 0.86% 4,694,190 4,694,190 Unknown

ICBC-Lion Balance Securities Investment

Fund Other 0.41% 2,223,110 2,223,110 Unknown

ICBC-Merchants Large-cap Bulechip Stock

Fund Other 0.34% 1,887,197 1,887,197 Unknown

Lin Zhenge Foreign

individual 0.34% 1,850,000 230,000 Unknown

NORGES BANK Foreign

legal person 0.24% 1,291,900 1,291,900 Unknown

He Lixin Domestic

individual 0.23% 1,246,981 1,246,981 Unknown

Whether the aforementioned shareholders

have any affiliated relationship, or concerted

action

Among the top ten majority shareholders, Shanghai Jiushi Corporation is the

affiliated enterprise of Shanghai International Trust Co., Ltd.

Except for the above, the Company is not aware of any affiliated relationship

or concerted action among any of the top ten majority shareholders.

2． Information of the controlling shareholder and the actual controller

(1) Information of the controlling shareholder

○ Legal Person

Unit: RMB10,000

Name Shanghai Electric (Group) Co.

Person in Charge or Legal

Representative Xu Jianguo

Date of Establishment May 28, 1998

Registered Capital 473,068

Principal Business or

Management Activities

General contracting of power engineering projects, whole-set assembly or

split supply of equipment, overseas labor contracting, industrial investment,

manufacturing and sales of mechanical and electrical products and

equipments for related industries, provision of technical consultation and

training for domestic and export programs, operating and managing

state-owned assets within its authorized scope granted by the State-owned

Assets Supervision and Administration Commission of Shanghai Municipal

Government and domestic trading.


9

30.49%

(2) Change of controlling shareholder or actual controller

There was no change of controlling shareholder or actual controller of the Company during the Report

Period.

Diagram of relationship of shareholding and control between the Company and its actual controller:

3． Other legal person shareholders holding more than 10% of the Company’s share capital

There was no other legal person shareholder holding more than 10% of the Company’s share capital as of

the end of the Report Period.

V. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT PERSONNEL

A. Information of Directors, Supervisors and Senior Management

Unit: RMB10,000 / Shares

Name Title Gender Age

Commence

-ment of

Term of

Office

Shares

held at the

beginning

of the

Year

Shares

held at

the end

of the

Year

Causes of

change

Total

Remuneration

from Company

during the

Report Period

(before tax)

Remuneration

or Allowance

from

Shareholders

or other

Affiliated

Entities

Shen

Jianfang

Chairman of

Board of

Directors M 54 2008-6-27 187,524 187,524 63.96

Zhang

Fubiao

Vice

Chairman of

Board of

Directors

M 59 2008-6-27 0 0 Yes

Luo

Weide Independent

Director M 53 2008-6-27 0 0 8

Xu Fei Independent

Director M 46 2008-6-27 0 0 8

Wu

Hong Independent

Director M 53 2008-6-27 0 0 8

Zhou

Zhiyan Director M 46 2008-6-27 0 0 Yes

Zhang

Jianwei Director M 55 2008-6-27 0 0 Yes

Guo

Zhuping

Director,

General

Manager F 49 2008-6-27 21,600 41,100 57.40

Feng

Guodong

Director,

Deputy

General

Manager

M 50 2008-6-27 98,511 83,451 43.39

Zhang

Zhaoqi

Chairman of

Board of

Supervisors

M 59 2008-6-27 27,000 30,000

Trade in

secondary

market

53.33

Shanghai Electrical (Group) Co.

Shanghai Highly (Group) Co., Ltd.


10

Liao

Derong Supervisor M 53 2008-6-27 0 0 Yes

Li Li Supervisor F 39 2008-6-27 18,240 18,240 31.80 Lv

Kangchu Supervisor M 55 2008-6-27 30,750 30,750 44.01

Luo Min Supervisor F 34 2008-6-27 0 0 29.18

Li Li

Deputy

General

Manager

M 47 2008-6-27 68,206 58,206 Trade in

secondary

market 42.65

Qin

Wenjun

Chief

Financial

Officer

F 46 2008-6-27 22,800 22,800 44.80

Zhong

Lei

Secretary of

Board of

Directors

F 53 2008-6-27 64,786 57,240 Trade in

secondary

market 41.58

Total / / / / 539,417 529,311 / 476.10 /

The expiry date of the term of office of the abovementioned directors, supervisors and senior

management personnel is the date of closing of the General Meeting of Shareholders of 2011.

Shen Jianfang, now serves as director, chairman of the Board of Directors and secretary of Party

committee of the Company and enjoys the special allowance provided by the State Council, and concurrently

as director, chairman of the Board of Directors and secretary of Party committee of Shanghai Hitachi

Electrical Appliance Co., Ltd., and during the past 5 years, served as director and vice chairman of the 4th

session of the Board of Directors, deputy secretary of Party committee and general manager of the Company,

and director, vice chairman of the Board of Directors, secretary of Party committee and general manager of

Shanghai Hitachi Electrical Appliance Co., Ltd. and concurrently as vice chairman of the Board of Directors

of Hitachi Highly Automobile Parts (Shanghai) Co., Ltd., chairman of the Board of Directors of Shanghai

Highly Special Refrigerators Co., Ltd., and chairman of the Board of Directors of Shanghai Highly Nakano

Refrigerators Co., Ltd.

Zhang Fubiao, now serves as head of Financial Budget Department of Shanghai Electric (Group) Co.,

and director and vice chairman of the Board of Directors of the Company, and concurrently as director of

Haitong Securities Co., Ltd., director of Shanghai Erfangji Co., Ltd., and chairman of the Board of

Supervisors of Shanghai Automation Instrumentation Co., Ltd., and during the past 5 years, served as head of

Asset and Financial Department, and general manager of No. 4 Management Department of Shanghai

Electric Asset Management Co., Ltd., chairman of the Board of Supervisors of Shanghai Power Transmission

& Distribution Co., Ltd., and supervisor and director of the 4th

session of the Board of Supervisors and the

Board of Directors of the Company.

Luo Weide, now serves as assistant bureau-level inspector of China Eastern Airlines Corporation

Limited, part-time professor of Civil Aviation Management Cadre Institute of China, visiting professor and

tutor of postgraduates of Civil Aviation University of China and independent director of the Company, and

concurrently as independent director of China Satcom Guomai Communications Co., Ltd. In addition to the

aforesaid positions, he was also chief financial officer and chief accountant of China Eastern Airlines

Corporation Limited, chairman of the Board of Directors of China Eastern Airlines Wuhan Co., Ltd.,

chairman of the Board of Directors of Eastern Air Beijing Jinjiang Hotel Co., Ltd. and independent director

of the 4th

session of the Board of Directors of the Company in the last five years.

Xu Fei, now serves as professor, doctoral advisor, director of Strategic Management Research Center of

Shanghai Jiaotong University, specialist of Shanghai Municipal Informationization Specialist Commission,

and independent director of the Company. He used to be the executive president of Antai College of

Economics and Management of Shanghai Jiaotong University, assistant to president of Shanghai Jiaotong

University, director of Shanghai Jiao Da Nan Yang Co., Ltd. and independent director of the 4th

session of the

Board of Directors of the Company in the last 5 years.

Wu Hong, now serves as dean, professor and doctoral advisor of Economic Law School of East China

University of Politics and Law, and independent director of the Company, and concurrently as independent

director of Shanghai Friendship Group Incorporated Company, Shanghai White Cat Shareholding Co., Ltd.


11

and Shanghai Material Trading Co., Ltd. respectively. He used to be teacher, deputy dean and secretary of

branch of Party committee of Economic Law Department of East China University of Politics and Law,

secretary of branch of Party committee of Intellectual Property Law School of East China University of

Politics and Law, independent director of Zhejiang Medicine Co., Ltd., and independent director of the 4th

session of the Board of Directors of the Company in the past five years.

Zhou Zhiyan, now serves as head of Investment Management Department of Shanghai Electric Asset

Management Co., Ltd., standing deputy head of Overseas Business Department of Shanghai Electric (Group)

Co., and director of the Company. He used to be the general manager of Shanghai Electric Industry Co., Ltd.,

chairman of Board of Directors of Shanghai Prime Machinery Co., Ltd., director of Shanghai Automation

Instrumentation Co., Ltd. and director of the 4th

session of the Board of Directors of the Company in the past

five years.

Zhang Jianwei, now serves as deputy general manager of Shanghai Jiushi Corporation and director of

the Company, and concurrently as director of Shanghai International Trust Investment Co., Ltd., Haitong

Securities Co., Ltd., Shenergy Company Ltd., China SFECO Group, Shanghai Chemical Industry Park

Development Co., Ltd., etc., and as supervisor of China Pacific Insurance (Group) Co., Ltd. He used to be

director of the 4th

session of the Board of Directors of the Company in the past five years.

Guo Zhuping, now serves as director, general manager and deputy secretary of Party committee of the

Company, and concurrently as director and vice chairman of the Board of Directors of Hitachi Highly

Automobile Parts (Shanghai) Co., Ltd., director and chairman of the Board of Directors of Shanghai Highly

Special Refrigerators Co., Ltd., and director and chairman of the Board of Directors of Shanghai Highly

Nakano Refrigerators Co. Ltd. She used to be deputy director of Investment Division, deputy manager and

manager of Assets Operation Department of Shanghai Light Industry Holding (Group) Company and deputy

general manager of the Company in the past five years.

Feng Guodong, now serves as director, deputy general manager and chief engineer of the Company, and

concurrently as director and vice chairman of the Board of Directors of Shanghai Konor Electrical Machinery

Co., Ltd. and director of Shanghai Highly Foundry Co., Ltd. In the past 5 years, he served as director of the 4th

session of the Board of Directors and deputy general manager of the Company, director and vice chairman of

the Board of Directors of Hitachi Highly Automobile Parts (Shanghai) Co., Ltd. and director and chairman of

the Board of Directors of Qingdao Highly Electric Machinery Co., Ltd.

Zhang Zhaoqi, now serves as supervisor and chairman of the Board of Supervisors and supervisor of the

building of CCP members of the Company. He used to be general manager of Shanghai Light Industry

Property Co., Ltd., and supervisor and chairman of the 4th

Session of the Board of Supervisors of the

Company in the last five years.

Liao Derong, now serves as deputy general manager of No. 3 Management Department of Shanghai

Electric Asset Management Co., Ltd. and supervisor of the Company. He used to be the director, vice

chairman of the Board of Directors, general manager and deputy secretary of Party committee of Shanghai

Haiwen (Group) Co., Ltd., director, vice chairman of the Board of Directors, general manager and deputy

secretary of Party committee of Shanghai Hero (Group) Co., Ltd., director, chairman of the Board of

Directors and general manager of Da Ying Modern Agriculture Corporation Limited, deputy general

manager of No. 5 Management Department of Shanghai Electric Asset Management Co., Ltd. and supervisor

of the 4th

session of the Board of Supervisors of the Company, in the past five years.

Li Li, now serves as supervisor and director of Audit Office of the Company and concurrently as

supervisor of Shanghai Jinxuan Real Estate Operation Co., Ltd., Shanghai Highly Foundry Co., Ltd.,

Shanghai Highly Group Trading Co., Ltd., Shanghai Highly Special Refrigerators Co., Ltd. and Hitachi

Highly Automobile Parts (Shanghai) Co., Ltd. She used to be the manager of Management Section and

Capital Section of Finance Department of Shanghai Hitachi Electrical Appliance Co., Ltd., and supervisor of

Qingdao Highly Electric Machinery Co., Ltd. in the past five years.

Lv Kangchu, now serves as supervisor, deputy secretary of Party committee, secretary of Discipline

commission of Party committee, and chairman of Labour Union of the Company, and concurrently as


12

director of Shanghai Nakano Refrigerators Co. Ltd. He used to be a supervisor of the 4th

session of the Board

of Supervisors of the Company in the last five years.

Luo Min, now serves as supervisor of the Company, and secretary of the Board of Directors, head of

Business Planning Department, member of Party committee and member of Discipline commission of Party

committee of Shanghai Hitachi Electrical Appliance Co., Ltd. She used to be the manager of Business

Inspection Section of Strategic Operation Department of Shanghai Hitachi Electrical Appliance Co., Ltd. in

the past five years.

Li Li, now serves as deputy general manager of the Company, and concurrently as director of Shanghai

Hitachi Electrical Appliance Co., Ltd. and director and chairman of the Board of Directors of Shanghai

Highly Group Trading Co., Ltd. He used to be director of Shanghai Hitachi Electrical Appliance Co., Ltd.,

and director and chairman of the Board of Directors of Shanghai Highly Group Trading Co., Ltd. in the last

five years.

Qin Wenjun, now serves as chief financial officer of the Company and concurrently as director of

Shanghai Hitachi Electrical Appliance Co., Ltd. and Shanghai Highly Nakano Refrigerators Co. Ltd.

respectively. She used to be a senior manager of Ernst & Young Dahua Certified Public Accountants Co., Ltd.

the chief financial officer and chief accountant of the Company in the last five years.

Zhong Lei, now serves as secretary of the Board of Directors of the Company. She has been secretary of

the Board of Directors of the Company since 1996.

B. Information of Positions in Shareholders

Name Name of Shareholder Position

Commencement

Date of Term of

Office

Expiry Date

of Term of

Office

Whether to have

remuneration or

allowance

Zhang

Fubiao

Shanghai Electric

(Group) Co.

Head of Financial Budget

Department;

General manager of Shanghai

Electric Industry Co., Ltd.

January 1, 2007 Yes

Zhou

Zhiyan

Shanghai Electric

Asset Management

Co., Ltd.

Head of Investment

Management Department March 1, 2004 Yes

Zhang

Jianwei

Shanghai Jiushi

Corporation Deputy general manager December 1, 2002 Yes

Liao

Derong

Shanghai Electric

Asset Management

Co., Ltd.

Deputy general manager of

No. 3 Management

Department

May 21, 2008 Yes

Information of positions in other entities

Name Name of Other

Entities Position

Commencement

Date of Term of

Office

Expiry Date

of Term of

Office

Whether to have

remuneration or

allowance

Luo

Weide

China Eastern

Airlines Corporation

Limited

Assistant bureau-level

inspector March 31, 2009 Yes

Xu Fei Shanghai Jiaotong

University

Professor;

Doctoral advisor October 15, 2008 Yes

Wu

Hong

East China University

of Politics and Law

Dean of Economic Law

School March 1, 2006 Yes


13

C. Remuneration of Directors, Supervisors and Senior Management Personnel

1． Decision making procedures regarding the remuneration of directors, supervisors and senior

management personnel

Decision making process regarding the remuneration of directors, supervisors and senior management

personnel of the Company: a comprehensive report will be formulated as a result of multi-facet assessment

on the directors, supervisors and senior management personnel in respects such as work performance,

workload and teamwork pursuant to the key work and financial budgets approved by the Board at the

beginning of the year; and then HR Department will prepare a corresponding performance incentive plan,

which plan will be implemented after approval. The remuneration of the independent directors will be

approved by the Shareholders’ General Meeting.

2． The basis to determine the remunerations payable to the directors, supervisors and senior

management personnel

The remuneration of incumbent directors, supervisors and senior management personnel for the year

2009 will be determined in accordance with Measures of Shanghai Highly (Group) Co., Ltd. for

Compensation Management and Measures of Shanghai Highly (Group) Co., Ltd. for Management of

Compensation System of Senior Management Personnel. The remuneration of the independent directors will

be implemented according to standards approved by the Shareholders’ General Meeting

D. Change of Directors, Supervisors and Senior Management Personnel of the Company

No change of directors, supervisors or senior management personnel occurred during the Report Period.

E. Employees of the Company

Number of Employees Enrolled by Company 3,298

Number of Retired Persons Whose Expenses Are

Born by Company 1,036

Specialties

Specialties Number of Employees

Operation and Management and Technical

Personnel 1,275

Including: Technical Personnel 630

Manufacture Personnel 1,770

Off-the-job Personnel 253

Education Level

Education Level Number of Employees (person)

Master or above Master 105

Bachelor or College Level Professional Education 1,324

Senior High School or High School Professional

Education 949

Junior High School or below Junior High School 667

VI. STRUCTURE OF CORPORATE GOVERNANCE

A. Corporate Governance of the Company

According to Section 2 of Chapter VII provided in the Corporate Governance Principles for Listed

Companies with respect to the information disclosure of corporate governance, which is promulgated by

CSRC, information about the corporate governance of the Company is disclosed as follows:


14

The Company strictly abides by the requirements of Company Law, Securities Law and other relevant

laws and regulations, and continuously improves its corporate governance and internal control systems, and

General Meetings of Shareholders, Board of Directors, Board of Supervisors and Management Personnel are

operated in compliance with the Articles of Association and rules of the Company, ensuring the efficiency

operation and protecting the legitimate interests of the investors and relevant beneficiary parties.

1． Members of the Board of Directors and the Board of Supervisors

The Board of Directors of the Company now comprises 9 directors, including 3 independent directors

and 2 outside directors. Members of the Board of Directors cover professionals specialized in various areas

such as enterprise management and strategy research, law, finance, accounting, investment management and

so forth. Their profession proportion is well-balanced and laid down a solid foundation for the scientific

decision-making and rational operation of the Board of Directors and development of the Company.

The Board of Supervisors now has 5 supervisors, among whom 3 are shareholder’s representatives and 2

are employees’ representatives. Members of the Board of Supervisors include personnel of finance

management and operation management and so on, ensuring the effective performance of the duties of the

supervisors.

2． All directors and supervisors of the Company have duly performed their duties in accordance with

their rights granted by laws and regulations and the Articles of Association of the Company. Please refer to

Chapter VIII, Report of the Board of Directors, and Chapter IX, Report of the Board of Supervisors, of this

Report for details of the work of the Board of Directors and the Board of Supervisors in 2009.

3． Special Activities of Strengthening Corporate Governance: The special activities of strengthening

corporate governance started full wing in 2007. After the completion of the three phases of self-inspection,

public evaluation and improvement and rectification, and in accordance with the No. [2008]27 Notice

promulgated by CSRC, the Company keeps on furthering the implementation of the special activities of

strengthening corporate governance, conducts self-inspection regarding the fund occupation and the

improvement of corporate governance, and disclosed the Statement of the Rectification Status about the

Special Activities of Strengthening Corporate Governance and the Report on Self-inspection on Status of

Fund Occupation on July 18, 2008. Following the completion of the rectification in 2008, the Company has

consolidated and deepened such special activities to further ensure the normativity and completeness of the

corporate governance structure of the Company.

B. Performance of Duties by Directors

1． Attendance of directors at meetings of the Board of Directors

Name of

Director

Whether or

Not an

Independent

Director

Number of

Meetings

Requiring

Attendance

Attendance

in Person

(Times)

Attendance via

Communications

(Times)

Attendance

by Proxy

(Times)

Absence

(Times)

Whether

or Not

Absent in

Person

from Two

Successive

Meetings

Shen

Jianfang No 6 6 2 0 0 No

Zhang

Fubiao No 6 6 2 0 0 No

Luo

Weide Yes 6 6 2 0 0 No

Xu Fei Yes 6 5 2 1 0 No

Wu

Hong Yes 6 6 2 0 0 No

Zhou

Zhiyan No 6 5 2 1 0 No


15

Zhang

Jianwei No 6 6 2 0 0 No

Guo

Zhuping No 6 6 2 0 0 No

Feng

Guodong No 6 6 2 0 0 No

Number of Meetings of the Board of Directors

During the Year 6

including: number of live meetings 4

Number of Meetings via Communications 2

2． Objection raised by independent directors to relevant issues of the Company

Within the Report Period, no objection has been raised by any independent director of the Company to

the proposals of board meetings or non-board meetings this year.

3． Establishment, perfection and main content of the working system related to independent directors

and performance of duties by independent directors

The Company has set up the Work Rules for Independent Directors and the Working System of Annual

Report of Independent Directors which provide for, among others, the qualifications, independence,

nomination, procedures for election and replacement, special powers, required independent opinions and the

relevant obligations and duties to be performed during the preparation of the annual report. In accordance

with the requirements of the foregoing work rules and working system, the independent directors have

carefully exercised their rights empowered by the Company and diligently performed their duties. During the

Report Period, all of them were able to attend the meetings of the Board of Directors in person or by proxy,

review and discuss various proposals carefully, fully express opinions and exercise independent voting rights.

They kept abreast of the production and operation information of the Company, took active part in onsite

inspection of the construction status of the major investment projects of the Company arranged by the Board

of Directors and paid close attention to the operation and development of the Company. They also put

forward pertinent opinions and suggestions with regard to the building of the internal control systems and the

inspection and supervision on internal control of the Company. In 2009, by issuance of independent opinions

regarding matters such as the related party transaction in relation with the application to the affiliated

enterprise of the controlling shareholder of the Company for financing credit, security provided to other

parties, and sale of the equity interest in Qingdao Highly, etc., they fully played their roles as independent

directors. During the preparation and disclosure of the annual report, they used their expertise to actively

communicate with the annual examination accountants, carefully review the financial statements and issue

examination opinions, and therefore practically ensured the truthfulness, accuracy and completeness of the

content of the annual report of the Company. The work of the independent directors has safeguarded the

legitimate rights of all the shareholders, especially the minority shareholders, of the Company.

C. Separation and Independence of the Company from Its Controlling Shareholder in Aspects such as

Business, Personnel, Assets, Corporate Structure and Financial Control

In the business aspect, the Company's business operation is independent of that of its controlling

shareholder. The Company has a complete business structure and an independent supply and sales system.

The Company's various operational decisions are solely made by itself without any interference from the

controlling shareholder.

In the personnel aspect, the Company is completely independent in its employee administration as well

as human resource and payroll management. The Company's senior management personnel work full time

for and receive their pays from the Company and none of them holds any position in any shareholders of the

Company.

In the assets aspect, the production systems, auxiliary production systems and supporting facilities for

compressor, foundry, special refrigeration equipment etc., and purchasing and sales systems are the assets


16

solely owned by the subsidiaries controlled by the Company and joint ventures or joint-operation companies

in which the Company holds interests. As invested by various investors, the Company’s subsidiaries and

investees have their own industrial property rights, trademarks, non-patent technologies and other intangible

assets.

In the corporate structure aspect, the Company has established a sound and complete internal

organization. The Company's Board of Directors, Board of Supervisors and other internal organs are

functioning independently and are not subordinate to the internal organs of the Company’s controlling

shareholder.

In the financial control aspect, the Company has an independent financial department and its own team

of financial personnel. Meanwhile, the Company has set up its independent financial accounting system and

financial control management system, and possesses its own bank account. The Company is an individual

entity for taxation purposes independently. Any usage of the Company's capital is subject to the decisions

made by the Company's management departments or the Board of Directors based on the relevant internal

rules, and there is no interference from the controlling shareholder in the use of the Company’s fund.

D. Establishment and Perfection of Internal Control Systems of the Company

General Plan of Building of Internal

Control

In accordance with the Guidelines for Internal Control of Listed

Companies promulgated by Shanghai Stock Exchange and the Basic

Rules for Internal Control of Enterprises issued by five ministries

including the Ministry of Finance, the Company set up internal

control systems suitable for the Company’s practical situations.

During the preparation and implementation of the internal control

systems, the Company took into account, among other things, five

basic factors including the internal control environment, risk

assessment, controlling activities, information and communication,

and internal supervision. The internal control systems of the

Company cover production and operation control, financial

management control, information disclosure control and financial

accounting and so forth.

The Company’s goal of the internal control systems is to ensure the

legitimacy and compliance of its operation and management, the

safety of its assets and the truthfulness and completeness of its

financial statements and other relevant information, to enhance

efficiency and effect of its business operation and to further the

implementation of its development strategies.

The principles of implementing the internal control systems are

comprehensiveness, importance, balancing, timeliness and cost

efficiency.

Work Plan of Establishment and

Perfection of Internal Control

Systems and the Implementation

Thereof

The Company has formulated and implemented twenty three

internal control systems since the second half of 2007, and based on

the needs of business development in 2009, set up the Internal

Control System- Transactions of Financial Derivatives. Since the

fourth quarter of 2009, following the review of the existing internal

control systems, according to the Basic Rules for Internal Control of

Enterprises issued by five ministries including the Ministry of

Finance and based on the problems discovered during the practice

and implementation of the same, the Company amended part of the

internal control systems, which will be carried out upon approval by

the Board of Directors or the Manager’s Office. In 2010, the

Company will further the implementation of internal control

systems in accordance with the Basic Rules for Internal Control of

Enterprises and other internal control guidelines to be issued,

including the Guideline for Evaluation of Internal Control System,

the Guideline for Application of Internal Control System and the


17

Guideline for Identification of Internal Control System, timely

supplement and perfect the internal control systems to meet the

needs of business development, strengthen its capabilities to

identify and continuously assess material risks, improve the relevant

management measures, make effective rectifications on the weak

parts of the existing internal control systems, so as to promote the

sustained and healthy development of the Company.

Establishment of Inspection and

Supervision Department of Internal

Control Systems

The Audit Office of the Company assumes the function of routine

inspection and supervision on the internal audit and internal control.

Self-evaluation of Internal

Supervision and Internal Control

As directed by the Audit Committee under the Board of Directors,

the Audit Office has formulated the annual audit plan of the internal

control work, and based on the business characteristics of the

Company and its investees, conducted special audit on the execution

of the internal control systems such as Internal Control System -

Investment Management System, Internal Control System - Investee

Management System, Internal Control System – Information

Disclosure Management, Internal Control System – Related Party

Transaction, Internal Control System - Financing Management,

Internal Control System - Provision of Security to Other Parties,

Internal Control System - Purchase and Payment, Internal Control

System – Sale and Receipt of Payment, Internal Control System –

Engineering Project and Fixed Asset, and Internal Control System -

Use and Management of Cash and Bank, timely proposed

rectification requirements based on the discovered problems and

followed the rectification on a consistent basis until the systems are

effectively implemented.

The Audit Office takes charge of the self-evaluation of the

Company’s internal control systems and reports to the Audit

Committee under the Board of Directors about the testing and

evaluation of the implementation of the internal control systems of

the Company, which leads to the self-evaluation report on the

internal control systems to be submitted to the Board of Directors by

the Audit Committee. The same will then be disclosed to the public

after being reviewed and passed by the Board of Directors.

Internal Control Work Arranged by

the Board of Directors

The Audit Committee under the Board of Directors instructs the

Audit Office to formulate the annual audit plan of the internal

control work, hears the Report on the Inspection and Supervison

Work on Internal Control and the Internal Audit Work of the Audit

Office on a semi-annual basis and gives instructions and suggestions

about the work.. After an annual hearing and review of the report on

the self-inspection, testing and self-evaluation of the internal control

work, the Board of Directors will raise requirements on the these

work and approve the plan of establishing or amending the relevant

systems and the internal control audit plan of next year.

Improvement of Internal Control

Systems as to Financial Accounting

The Company has set up internal control systems with respect to

financing accounting, such as Internal Control System – Related

Party Transaction, Internal Control System - Financing

Management, Internal Control System - Provision of Security to

Other Parties, Internal Control System – Budget Management,

Internal Control System – Negotiable Instrument Management,

Internal Control System – Use and Management of Cash and

Bank, Internal Control System – Invoice and Taxation, Internal

Control System – Purchase and Payment, Internal Control System

– Sale and Receipt of Payment and Internal Control System –

Engineering Project and Fixed Asset, and established relevant


18

control procedures of controlling activities, mainly including the

separation of incompatible positions and controlling over trading

authorization, accounting system, asset protection, budget and

operation analysis.

Defect in and Rectification of Internal

Control Systems

After the audit of the implementation of some of the internal control

systems, no major defect has been detected in this regard and

basically all of the relevant internal control systems have been

effectively implemented. The Company will keep on perfecting and

furthering the implementation of its internal control systems.

E. Performance Review and Incentive Plans for Senior Management Personnel

The Company has established the Systems for the Management of Directors, Supervisors and Senior

Management Personnel, the Measures for Management of Compensation System of Senior Management

Personnel and other systems, and conducted the performance review of, and implemented the incentive plans

for the senior management personnel according to such systems

F. The Company disclosed the 2009 self-evaluation report on internal control of the Company

prepared by the Board of Directors of Shanghai Highly (Group) Co., Ltd. and the 2009 Enterprise Social

Responsibilities Report of Shanghai Highly (Group) Co., Ltd.

Website: www.sse.com.cn

1． Has the Company disclosed the self-evaluation report on internal control: Yes

Website: www.sse.com.cn

2． Has the Company disclosed the verification and assessment opinions of the audit institution on the

internal control report of the Company: No

G. Establishement by the Company of the Accountability System regarding the Major Mistakes in the

Information Disclosure of the Annual Report

The Company has established the accountability system regarding the major mistakes in the disclosure

of the annual report and other information, and has made it clear in the Information Disclosure Management

System that he or she would be held responsible for causing damages to the Company by disclosure of false

information or failure in compliant disclosure, or for failure to timely disclose the relevant information.

Furthermore, the Company will perfect the foregoing system, in accordance with the governmental

requirements, so as to constantly enhance the quality and transparency of the information disclosure. During

the Report Period, neither any major mistake in the information disclosure by the Company’s annual report

nor any supplementary disclosure or correction in announcements has ever occurred.

VII. BRIEF INTRODUCTION OF SHAREHOLDERS’ GENERAL MEETING

A. Annual General Meeting of Shareholders

The annual general meeting of the Shareholders of the year 2008 was held on June 19, 2009 and its

resolution announcement was made public on June 20, 2009 on Shanghai Securities News and Ta Kung Pao

(Hong Kong).


19

VIII. REPORT OF THE BOARD OF DIRECTORS

A. Management Discussion and Analysis

1． Review of the Company's overall operation within the Report Period

(1) Overall operation of the Company within the Report Period

The Company’s principal business is the R&D, manufacture and sale of air-conditioning compressors

and refrigerator compressors, which falls within the category of the industry of electrical machinery and

equipment manufacturing. During the Report Period, no material change occurred in the scope and structure

of the Company's principal business, and the principal business profit was still reaped from the business of

air-conditioning compressors.

As continuously influenced by the global financial crisis, the year 2009 saw ups and downs of the

international and domestic economic situation, and the Company also experienced the toughest challenge in

the history to its operating performance, which hit its record low in the beginning of the year and later

resumed growth in the latter half of the year. From the end of last year to the beginning of this year, the

air-conditioning industry faced a slump in the output and sales scale due to declines in both export and

domestic sales. Companies in the compressor industry were not immune either, all of which suffered great

drop in the output and sales on a year-on-year basis except for those having matching products. In the second

quarter, due to the effect emerging from the policies focusing on expansion of domestic demand, such as

“popularizing the household appliances in rural areas”, “saving energies to benefit people” and “replacing the

old with the new”, the output and sales of the air-conditioners and compressors started to rally. The Company

tightly seized the market opportunity, quickly adapted its technology development and manufacturing to the

market needs, and therefore turned from losses in the first quarter to gains in the second quarter, followed by

a “great turnaround” in the output and sales of air-conditioning compressors in the third quarter and then a

historic high in the fourth quarter.

In 2009, the Company’s output of air-conditioning compressors is 11,301,800 units, an increase of

5.58% compared with 2008; the sales of air-conditioning compressors is 11,365,800 units, an increase of

0.56% compared with 2008, including the export volume of 2,256,000 units, a year-on-year increase of

13.89%. According to the statistics of China Household Electrical Appliances Association, the sales of the

air-conditioning compressors produced by the Company in 2009 accounts for a share of 21.14% in the

national market.

Favored by the policies such as “popularizing the household appliances in rural areas”, the refrigerator

compressor industry began to thrive in both output and sales from the second quarter, but slowed down its

growth rate in the fourth quarter. Because it mainly specializes in manufacturing frequency conversion

refrigerator compressors, Qingdao Highly, a subsidiary of the Company, had a limited total quantityof the

units manufactured and sold despite that both had large margin increases compared with last year.

Facing the rapid change of economic situation and market needs, the Company promptly adjusted its

strategy and adopted a series of measures as follows: (1) the Company quickly adapted itself to the change of

the supply and demand relation of the market, timely adjusted its product range in the first half of the year to

meet the needs generated by the “popularizing the household appliances in rural areas” policy. And in the

second half of the year, the Company made full use of its scale advantage of output and sales to meet market

recovery and the demand in high efficiency products, by establishing a prompt response mechanism and

course of action, spared no effort to cater to clients’ needs and thus won good reputation and trust in the

industry; (2) in accordance with the governmental requirements on energy saving and emission reduction and

implementation of new standards of energy efficiency, the Company expedited the industrialization of

scientific and technological projects based on the product R&D results in recent years, accelerated the

development and coordination of new energy-efficient products, timely adjusted the product mix, increased

the market supply of the high efficiency, frequency conversion and new refrigerant products, etc. and raised

the output and sales ratio of the first and second level energy-efficient products; (3) the Company speeded up

the phase II SG-series transfer and restoration project of Nanchang Highly, completed the removing and

debugging of equipment in a short period and officially released for production within the year to meet the

rapid growth of the market needs in 2010; (4) through the newly established International Trade Department,


20

the Company further exploited the international market and greatly increased the export of the compressors;

and (5) the Company kept promoting lean manufacturing, enhanced the quality and cost control and

improved customer satisfaction; and (6) Through the acquisition of the equity interest in Qingdao Highly by

Shanghai Konor, the Company achieved synergy effect by integrating their resources and laid a solid

foundation for the development of the refrigerator compressors business.

In 2009, the Company achieved operating revenue of RMB4,512,840,000, a year-on-year decrease of

5.79%; the net profit attributable to the shareholders of the listed company is RMB62,980,000, a

year-on-year increase of 291.56%. The net profit less non-recurring gains and losses is RMB13,550,000, a

year-on-year decrease of 42.71 %.

(2) Principal business and status of operation

① Status of operation of principal business in different categories of industries and products

Unit: RMB Yuan

Category of

Industry or

Product

Operating

Revenue Operating Cost

Operating

Profit Rate

Increase /

Decrease of

Operating

Revenue

over Last

Year

Increase /

Decrease of

Operating Cost

over Last Year

Increase /

Decrease of

Operating Profit

Rate over Last Year

Industry

Manufacture 4,252,860,227.50 3,683,199,939.89 13.39% -4.74% -5.88% +0.93%

Product

Refrigeration

equipment 4,252,860,227.50 3,683,199,939.89 13.39% -4.74% -5.88% +0.93%

② Operation conditions of principal business in different geographic regions

Unit: RMB Yuan

Region Operating Revenue Increase /

Decrease of Operating Revenue over Last Year

Domestic 3,531,616,030.69 -9.04%

Overseas 932,944,475.96 15.95%

Total 4,464,560,506.65 -4.75%

③ Main suppliers and clients

Within the Report period, the Company’s total purchase from the top five suppliers amounted up to

RMB1,231,250,000, which accounted for 38.67% of the Company’s annual procurement amount; and the

Company’s total sales to the top five clients amounted up to RMB1,888,280,000, which accounted for

41.85% of the Company’s annual operating revenue.

(3) Assets composition and change

Unit: RMB Yuan

December 31, 2009 December 31, 2008

Name of Item Amount Proportion

(%)

Amount Proportion

(%)

Total Assets 5,247,443,537.14 100 4,162,841,709.29 100

Cash and Bank 161,536,015.58 3.08 147,287,429.56 3.54

Trading Financial Assets 551,925.00 0.01 198,950.00 -

Notes Receivable 804,993,646.10 15.34 375,108,893.22 9.01

Accounts Receivable 933,385,278.19 17.79 605,877,313.62 14.55

Prepaid Accounts 117,181,809.22 2.23 96,811,456.68 2.33

Other Receivable 49,807,879.37 0.95 19,308,431.22 0.46

Inventory 572,380,578.97 10.91 594,974,852.88 14.29

Available-for-sale

Financial Assets

65,082,669.60 1.24 47,727,105.76 1.15


21

Long-term Equity

Investment

153,411,947.47 2.92 162,099,790.04 3.89

Fixed Assets (Net Value) 1,977,809,516.90 37.69 1,587,673,333.26 38.14

Construction in Progress 94,888,871.36 1.81 196,396,328.56 4.72

Intangible Assets 259,877,338.01 4.95 267,724,925.08 6.43

Deferred Tax Assets 28,324,321.60 0.54 24,698,493.03 0.59

Interpretation of materially changed items

a. Over the year, the Trading Financial Assets was increased by 177.42%, mainly because the number of

shares aquired in the primary market increased this year and the final fair value of such shares increased the

value of such assets.

b. Over the year, the Notes Receivable was increased by 114.60%, mainly because more bank notes

were used as payment for goods sold this year.

c. Over the year, the Accounts Receivable was increased by 54.06%, mainly because the sales increased

in the fourth quarter of this year while the payment collection would take a certain period of time, hence the

increase in the final Account Receivable.

d. Over the year, the Other Receivable was increased by 157.96%, mainly because the export tax rebate

receivable increased due to the expansion of export business

e. Over the year, the Available-for-sale Financial Assets was increased by 36.36%, mainly because the

final fair value of the stocks of such other listed companies increased against the previous year, so that the

value of such assets increased.

f. Over the year, the Construction in Progress was decreased by 51.69%, mainly because the main

factory buildings of the phase I and II of Nanchang Highly Factory construction project were fairly

completed and most of the equipment were put into service and thus transferred to Fixed Assets.

g. Over the year, the Trading Financial Liability was decreased by 100%, mainly because the losses

arising from the change in the fair value of the forward exchange contracts for export recorded in the previous

year was transferred out of account due to settlement this year.

h. Over the year, the Notes Payable was increased by 55.53%, mainly because more notes were used as

payment for procurement of raw materials this year.

i. Over the year, the Accounts Payable was increased by 132.19%, mainly because the purchase amount

increased due to the production rise in the fourth quarter of this year and the payment would take a certain

period of time according to contracts.

j. Over the year, the Accounts Received in Advance was increased by 235.75%, mainly because the

payment by customers in advance increased at the end of this year.

k. Over the year, the Taxes and Charges Payable was decreased by RMB20,040,000, mainly because

Nanchang Highly purchased more equipment for the plant construction and the deductible VAT from

purchase correspondingly increased.

l. Over the year, the Other Payable was increased by 189.75%, mainly because of the amount payable by

Nanchang Highly for construction projects.

m. Over the year, the Long-term Loan was decreased by RMB11,000,000, mainly because Nanchang

Highly returned the long-term loan in advance.


22

n. Over the year, the Deferred Income Tax Liability was increased by 72.86%, mainly because the final

fair value of the Available-for-sale Financial Assets held by the Company increased this year and the

Deferred Income Tax Liability correspondingly rose.

o. Over the year, the Other Non-current Liability was increased by 51.11%, mainly because the

compensation payment in an amount of RMB31,810,000, which was received from the government for

relocation of some factory buildings and land on Changyang Road, less the asset losses and expenses arising

from the relocation, was recognized as compensation for the assets to be built. Additionally, some

subsidiaries project subsidies relating to assets, which will be transferred in by installment.

Measurement adopted for major assets

The major assets of the Company such as Inventories, Accounts Receivable, Long-term Equity

Investment, Real Estate Investment, Fixed Assets, and Intangible Assets were all measured in their initial

investment cost. The Real Estate Investment was subsequently measured in its cost. The Trading Financial

Assets and the Available-for-sale Financial Assets were measured in their fair value. The Trading Financial

Assets included the initially offered stocks subscribed in the primary market and the derivative financial

instruments, and the Available-for-sale Financial Assets mainly included the tradable stocks of other listed

companies, among which, the derivative financial instruments were measured in their prices offered in an

active market, and the initially offered stocks subscribed in the primary market and the tradable stocks of

other listed companies were measured in their prices publicly offered in the stock exchange market.

(4) Items in income statement and change

Unit: RMB Yuan

Name of Item 2009 2008 Increase/Decrease

Operating Income 4,512,840,446.91 4,790,244,365.68 -5.79%

Operating Cost 3,901,718,703.13 4,163,204,933.30 -6.28%

Operating Expense 137,254,177.83 146,119,639.88 -6.07%

G&A Expense 340,263,655.99 308,586,424.86 10.27%

Financial Expense 80,323,848.20 61,860,072.93 29.85%

Asset Impairment Loss -12,553,425.63 22,070,545.96 -156.88%

Gain on Fair Value Change 29,995,630.00 -55,889,881.75 -

Investment Income 25,059,264.34 3,464,964.91 623.22%

Operating Profit 119,278,173.28 34,491,637.32 245.82%

Non-operating Income 13,645,395.64 21,290,741.00 -35.91%

Total Profit 128,209,776.70 52,072,055.60 146.22%

Income Tax 34,388,655.33 10,166,619.96 238.25%

Net Profit Attributable to Shareholders of Listed Company

62,984,348.88 16,085,333.82 291.56%

Interpretation of materially changed items:

a. Over the year, the Asset Impairment Loss was decreased by RMB34,620,000, mainly because the

Provisions for Inventory of the preceding year was carried over due to sales of inventories this year and the

net Provisions for Inventory correspondingly reduced.

b. Over the year, the Gain on Fair Value Change was increased by RMB85,890,000, mainly because the

forward exchange contracts for export of the preceding year were due this year, and after settlement, the loss

on fair value in the amount of RMB29,760,000 recorded in the beginning of this year was transferred into the

Gain on Fair Value Change. There were no forward exchange contracts at the end of this year.

c. Over the year, the Investment Income was increased by 623.22%, mainly because this year the

Company sold more stocks of other listed companies and the equity value of the investees measured by the

equity method was increased.


23

d. Over the year, the Operating Profit was increased by 245.82%, mainly because the Asset Impairment

Loss reduced, and both the Gain on Fair Value Change and the Investment Income remarkably increased.

e. Over the year, the Non-operating Income was decreased by 35.91%, mainly because Qingdao Highly

carried over certain unpayable Accounts Payable in the previous year while no such accounts were carried

over this year.

f. Over the year, the Total Profit, Income Tax and Net Profit Attributable to Shareholders of Listed

Company were increased by 146.22%, 238.25%, and 291.56%, respectively, mainly because the Operating

Profit were remarkably increased this year.

(5) Cash flow

Unit: RMB Yuan

Name of Item 2009 2008 Increase/Decrease

Net Cash Flow from Operation 484,580,196.33 411,373,781.27 17.80%

Net Cash Flow from Investment -420,282,977.64 -370,701,177.96 13.38%

Net Cash Flow from Financing -40,355,834.41 -187,469,684.31 -78.47%

Interpretation of materially changed items:

a. Over the year, the Net Cash Flow from Operation was increased by 17.80%, mainly because of the

increase in the amount of the discounted bank notes and the increase in the amount of payment in bank notes

arising from the purchase of goods.

b. Over the year, the Net Cash Outflow from Investment was increased by 13.38%, mainly because this

year the Company expanded the investment in the construction of Nanchang Highly.

c. Over the year, the Net Cash Outflow from Financing was decreased by 78.47%, mainly because the

cash paid for repayment of debts was decreased against the previous year.

(6) Others (equipment, purchase order, sales, technical personnel change)

In the first half of 2009, due to the continuous impact of the financial crisis, the market demand for

air-conditioning compressors shrank in the first quarter. The Company had an apparent decrease in output

and sales, and the start-up rate of the production equipment was inadequate. In the latter half of the year,

benefited from the growth of domestic demand growth, to meet the market demands, the Company conducted

technical reform and gap-filling in a timely basis and adjusted the manufacture organization, allowing the

Company to maximize the start-up rate of the compressor production equipment of the high efficiency,

frequency conversion air-conditioning compressor in the latter half of the year, with the production

equipment in the status of running at full capacity.

The sale of air-conditioning compressors depends on the season. The sales of the Company were closely

connected with the market demands with the output-based-on-sales strategy.

In 2009, the Company stuck to the independent innovation and independent technological development,

fostered a team of technological development, and perfected the incentive measures to the technical

personnel, enabling the technical team to be relatively stable. In the meantime, the Company recruited new

undergraduates, graduates and doctors of relevant specialties to its R&D team every year, continuously

refreshing the team to maintain energy and a reasonable talent structure, and providing and reserving

corresponding technological specialists for the development of the Company.

(7) Operation and performance analysis of major subsidiaries

① Shanghai Hitachi Electrical Appliance Co., Ltd. has the principal business of manufacture and sale

of air-conditioning compressors and has a registered capital of USD219,040,000. The value of its total assets

up to the end of this period amounted to RMB4,354,070,000. In 2009, Shanghai Hitachi Electrical Appliance


24

Co., Ltd. respectively manufactured and sold 11,300,000 and 11,370,000 air-conditioning compressors, a

year-on-year increase of 5.58% and 0.56% respectively. The operating revenue was RMB3,967,710,000, a

year-on-year decrease of 7.03%. In the first half of this year, with the continuous impact of the financial crisis

to the real economy, the scale of sales volume of Shanghai Hitachi decreased by a large margin. However, in

the latter half of the year, the domestic market has maintained a brisk demand. Shanghai Hitachi exerted

maximum productivity, adjusted the structure of machine models and prices of part of its products, partially

wrote-off the factor of rise in the prices of main raw materials in the latter half of the year, and therefore

maintained the level of gross profit margin and achieved a net profit of RMB128,040,000, a year-on-year

increase of 27.35%.

② Shanghai Highly Foundry Co., Ltd. has the principal business of foundry and machine processing

of compressor casts. Its registered capital is RMB40,700,000 and the value of its total assets up to the end of

this period amounted to RMB238,500,000. Due to the reduced demand of casts influenced by the decrease in

the output of compressors in the first half of the year, the productivity of the whole year has slightly

decreased although it recovered to the normal level in the latter half of the year. The operating revenue in

2009 was RMB343,990,000, 4.08% lower than the previous year and the net profit was RMB4,600,000,

25.00% higher than the previous year.

③ Qingdao Highly Electric Machinery Co., Ltd. has the principal business of manufacture and sale of

refrigerator compressors. Its registered capital is RMB426,930,000 and the value of its total assets up to the

end of this period amounted to RMB262,620,000. In 2009, Qingdao Highly Electric Machinery Co., Ltd.

manufactured and sold respectively 450,000 and 440,000 refrigerator compressors, 37.85% and 106.59%

higher than the previous year respectively, and achieved operating revenue of RMB99,450,000, 56.24%

higher than the previous year. In spite of the relatively great boost to the growth of output and sales of the

refrigerator and refrigerator compressors industry by policies such as “popularizing the household appliances

in rural areas” during the report period, since Qingdao Highly mainly manufactured and sold frequency

conversion compressors, less products has benefited from such policies, therefore the output and sales

volume failed to reach the economic scale, and the company still suffered operating losses.

④ Shanghai Konor Electrical Machinery Co., Ltd. has the principal business of manufacture and sale

of refrigerator compressors and has a registered capital of RMB327,690,000 and the value of its total assets

up to the end of this period amounted to RMB924,400,000. In 2009, the company manufactured 3,800,000

refrigerator compressors and sold 3,670,000 refrigerator compressors, 25.10% and 18.43% higher than the

previous year respectively. The operating revenue was RMB963,300,000, 9.42% higher than the previous

year. In the Report Period, with the relatively great boost to the growth of output and sales of the refrigerator

and refrigerator compressors industry by policies such as “popularizing the household appliances in rural

areas”, the output and sales volume of the company increased by a relatively large margin. However, due to

the gradual price escalation of main raw materials like cooper, steal, etc. in the latter half of the year while the

price was still used as an competitive method in the market, in addition, the technological development and

promotion of the new products of Shanghai Konor required certain time, the company could not adjust and

increase the sales prices of its products. As a result, the gross profit rate was still at a relatively low level and

the company continuously suffered losses in its operation.

⑤ Hitachi Highly Automobile Parts (Shanghai) Co., Ltd. has the principal business of manufacture

and sale of the starting motors of automobiles and has a registered capital of USD21,000,000, and the value

of its total assets up to the end of this period amounted to RMB326,160,000. In 2009, the company

respectively manufactured and sold 2,190,000 and 2,170,000 starting motors of automobiles, 3.35% and

1.54% higher than the previous year respectively. The operating revenue was RMB376,830,000, 6.39%

lower than the previous year and the net profit amounted to RMB4,750,000, 3948.89% higher than the

previous year. In the Report Period, benefited from the positive influence of the automobile industry

encouragement policies of European countries, the company’s output and sales have increased slightly, but

exchange rate fluctuation of Euro and other currencies, sales settlement prices and exchange loss were still

the main reasons that influenced the company’s profits.

⑥ Shanghai Highly Special Refrigerators Co., Ltd. has the principal business of manufacture and sale

of refrigerators for industrial uses, high temperature air-conditioners and air-conditioners on vehicles and

ships. The company has a registered capital of RMB20,000,000, and the value of its total assets up to the end

of this period amounted to RMB60,010,000. In 2009, with the continuous impact of the financial crisis, the


25

market demand was still relatively low. In respect of the principal business of the company, the output was

9,265 and the sales volume was 9,751, 21.70% and 15.45% lower than the previous year respectively. The

operating revenue in 2009 was RMB61,640,000, 28.61% lower than the previous year. The company

suffered an annual loss for the first time.

⑦ Shanghai Highly Nakano Refrigerators Co. Ltd. has the principal business of manufacture and sale

of commercial-use freezing showcases and has a registered capital of USD17,161,000, and the value of its

total assets up to the end of this period amounted to RMB223,000,000. Due to decreased exports to Europe,

in 2009, the company manufactured 5,972 showcases and sold 6,213 showcases, 20.74% and 7.76% lower

than the previous year respectively. The operating revenue was RMB167,010,000 and the net profit

amounted to RMB9,210,000, 14.93% and 50.76% lower than the previous year respectively.

(8) Technological innovation, energy-saving and emission reduction in 2009

① Technological innovation of the Company in 2009

The Company’s principal business of air-conditioning compressor has evolved through five stages of

“technology introduction – absorption – joint development – independent development – independent

innovation”, and has formulated a complete independent innovation and R&D system for the basic elements

study, design technology as well as techniques.

The three major tasks of the current global industry of refrigeration and air conditioning are saving

energy, alternative refrigerants, saving materials. The technological development direction of the Company

is to follow the trends of global industry and product technology, and to always devote itself to the

development of energy and material saving products. In 2009, the company actively seized the opportunities

brought by the global trend of energy saving and emission reduction and the revolution of new energies.

Simulated by national subsidy policies such as “popularizing the household appliances in rural areas”,

“saving energies to benefit people”, etc., the Company promptly responded and seized the chance in using the

promotion of industrialization of new and high technologies as the key starting point for technological

innovations, emphatically carried out a series of projects on industrialization of new and high technologies

which was of international advanced level, led the advancement of industry technology, met the energy

saving and environmental protection needs of the society, and might enhance the competitiveness of the

enterprise. The carrying out of such projects has boosted the technological innovations and product

upgrading throughout the Company.

In the field of air-conditioning compressor, in 2009, the Company intensified efforts in the R&D input

of frequency conversion, high energy efficiency products, and has achieved material progress in the R&D

and industrialization of the R410A new refrigerant and frequency conversion series air-conditioning

compressor and the new air-conditioning energy efficiency corresponding compressor. In the meantime, the

Company actively explored in new application fields the technological R&D and industrialization of

compressors, including the successful R&D of the compressor specialized for the heat-pump water heater

which filled the domestic gaps and achieved to sell on the market, and the motor compressor project used by

new energy vehicles that has been included in the list of “2009 Shanghai key projects on industrialization of

new and high technologies of new energy”. The abovementioned activities have further laid a solid

foundation for keeping the advantages of the Company in the industry of air-conditioning compressors.

In the field of refrigerator compressor, in 2009, the Company intensified the R&D of high efficiency,

frequency conversion, large format and commercial use products, including the successful R&D of products

such as the small size, light weight, high efficiency HH series and the high efficiency, rod connecting,

frequency conversion CHK series, batch quantity of which were launched on the market.

As of the end of 2009, the Company had 339 items of patent applications in total, among which, 212

items of patent has been granted. In 2009, Shanghai Hitachi was elected “Shanghai patent pilot enterprise”,

“2008 leading enterprise of patent growth in Pudong New Area, Shanghai”, “The fourth batch of national IP

pilot entity among enterprises and institutions”.


26

② Energy saving and emission reduction of the Company in 2009

As a large-scale manufacturing enterprise, Highly produces compressors, which are energy-consuming

products, thus energy-saving has become an important strategic goal for the Company to be implemented

throughout the whole process of production and operation.

First, in respect of the technology development of compressors, the Company pursues the global trend

of the industry and the technology development of products, designs high efficiency, energy saving products,

and enhance the energy saving and emission reduction effect from the source. We commit ourselves to the

continuous technical innovation of compressor motor, pump structure, control, materials, fluid analysis, and

super-finishing technology, etc. and improve the energy efficiency levels of our products. In 2009, the

energy efficiency level of the air-conditioning compressors manufactured by the Company has arisen to 3.30,

and the consumed power per compressor in average has dropped by 100W as compared to that of 2008. If

calculating based on the running hour of a compressor at 1136 hours per year, the 11,360,000 compressors

sold by the Company in 2009 may save 1.3 billion kilowatt-hour of electricity per year for the society, and

reduce emission of CO2 by 1.3 million tons per year.

Second, the Company pays close attention to the resource saving and environmental protection in the

operation process. The Company has made great efforts in the energy saving and emission reduction

improvement and target management in the process of manufacture and the construction of key projects. The

Company has strengthened the energy management by improving the technique process of key energy

consumption equipment such as heat treatment furnace, die casting machine, etc., and increasing the

efficiency and perfection rate of equipment through adjustment to ways to get into furnace. Moreover, the

Company has conducted energy saving diagnosis to the compressed air powered system and the central

air-conditioning system so as to save the energy. The projects of the energy saving transformation of central

air-conditioning system, the energy saving transformation of compressed air powered system, and the

comprehensive energy saving technological transformation of manufacturing starting machine completed by

the Company in the recent years showed excellent energy saving effect in 2009, with the energy saving

amount in the whole year equivalent to 3015 ton of standard coal. In 2009, Shanghai Hitachi implemented a

new energy saving technological transformation project – “frequency conversion controlled and energy

saving transformation of compressed air powered system, energy saving transformation of transformer and

energy saving transformation of luminaries”, the estimated yearly electricity-saving amount of which may

reach approximated 2.71 million kilowatt-hour, equivalent to 1095 ton of standard coal. Such project has

been listed in the subsidy scheme of Shanghai Economic Commission. The Company devotes itself to the

construction of green environmental protection factory, sets energy saving and emission reduction target in

the construction planning of major projects, focuses on the application of new technology of energy saving

and environmental protection, and ensures from the source that the projects are green and environmental

protective after being put into operation. For example, the Nanchang Highly Factory that has been

constructed and put into operation on April 18, 2009 is a “green factory” combining various energy saving

technologies.

The Company continuously intensifies the notion of energy saving and emission reduction in the

building of enterprise culture, and makes energy saving and emission reduction become part of our life style.

To promote all employees’ awareness of energy-saving and emission reduction is the in-depth requirement of

energy-saving and emission reduction work. The publicity of energy-saving and emission reduction has been

made by means of internal information network, plasma screen in the dinning hall, Highly News, onsite

board and internal training courses. The company commits itself to enhance the employees’ awareness of

energy saving and emission reduction in every step, every aspect and in every detail so as to implement

actions of energy saving and emission reduction.

2. Prospects of the Company’s future development

(1) Trend of development and market competition of the Company’s industries

The development of the Company’s air-conditioner compressors and refrigerator compressors as

intermediate products is closely related to the development of air-conditioners and refrigerators.


27

① Trend of development and market competition of air-conditioner compressor industry

The influence of the financial crisis still exists, but the global economy tends to and is bound to recover.

In the medium and long term, there is still a great demand for air-conditioners in the world: household

air-conditioners have gradually become the necessities of life due to global warming. In regions with rapid

developing economy (such as China, India, Brazil and Middle East), the rapid growing economy has caused

continuous increasing demands for air-conditioners. In developed regions with strong consuming capacity,

such as Europe, the change in the idea of consuming and the economic recovery cause the huge potential of

growth for air-conditioners. China still has advantages as the global manufacture base of air-conditioners,

and there is still relevantly great room for the export of air-conditioners from China with the recovery of

global economy.

In the meantime, the domestic air-conditioner market faces a new round of growth opportunities, and

has a great potential in the medium and long term demand: the Chinese government actively implements

policies such as expanding domestic demands, increasing the income of farmers, popularizing the

household-appliance in rural area, projects of benefiting people using energy saving products, and replacing

the old with the new, etc. will have positive effects on the domestic air-conditioner consumption. Building a

well-off society in an all-round way, and pushing forward the construction of a new socialist rural area, etc.

will enable the continuous rise in the level of people’s living standards. The process of urbanization of China

is accelerated. The large consumer group of people born in 1980s and 1990s is rising in China; the demand

for updating air-conditioners is growing, etc.

The great trend of energy saving and emission reduction, as well as the air-conditioner energy efficiency

standards newly released will promote the development acceleration of the energy saving and emission

reduction technology of the industry.

In recent years, a new round of productive expansion in the air-conditioning compressor industry, the

further increase in the degree of concentration in the air-conditioner industry, and the vertical integration of

the industry makes the competition in the air-conditioning compressor industry even fiercer. Only

manufacturers with technological and scale advantages as well as advanced management will win the

leading position at the new round of competition. Although being challenged by others in the same industry

in the recent years, the Company is always holding a leading position in the domestic air-conditioner

compressor industry.

The financial crisis causes the slowing down in the growth of global and domestic economy and the

increase of uncertain factors.

● The rise of labor cost, the trend of RMB appreciation, the wild fluctuation in the price of energies/raw

materials

● relatively high business cost in the area of Shanghai

② Trend of Development and Market Competition of Refrigerator Compressor Industry

These years the refrigerator compressor industry of the world has the tendency of moving to China, and

China has become one of the world’s important manufacture bases. With respect to the domestic refrigerator

market, in the context of acceleration of the construction of a new rural area and the speed of urbanization,

and promoted by the active expansion of domestic demand by the state and the policy of “popularization of

appliances in rural area” on a nation scale, the third and the fourth tier township markets have become the

new growth point for domestic refrigerator need. Meanwhile, the domestic refrigerators have entered

replacement period, which brings opportunities to this industry.

The great trend of energy saving and emission reduction, as well as the refrigerator energy efficiency

standards newly implemented will promote the development acceleration of the energy saving and emission

reduction technology of the industry.


28

The rapid development in recent years has brought opportunities to refrigerator compressor

manufacturers. The domestic refrigerator compressor makers have been expanding continuously, causing

fiercer competition. Due to reasons attributed to shareholders a few years ago, Highly’s refrigerator

compressor business developed in a relatively slow speed. Recently, a series of major strategic initiatives of

Highly has enabled the refrigerator compressor sector of the Company to catch up with the others. In 2006,

Highly and Shanghai Aerospace Automobile Electromechanical Co., Ltd. acquired the foreign investors’

equity in Shanghai Zanussi and increased capital to expand the capacity of refrigerator compressor

manufacture. In 2007, Highly acquired Qingdao Sanyo and started to strengthen the R&D of new products

and focus on quality management in 2008. In 2009, the Company successfully integrated the equity interests

in Shanghai Konor and Qingdao Highly, and achieved unification of equity interests and resource

consolidation, so as to raise its overall competitiveness of Highly’s refrigerator compressor sector.

(2) Development planning of Highly

① Challenges confronted by the Company

The financial crisis caused the slowing down of global and domestic economic growth and the increase

of uncertain factors. The price of energies and raw materials as well as the exchange rate fluctuate; the

business cost to operate in the area of Shanghai is relatively high. The competition in air-conditioner

compressor and refrigerator compressor industries tends to be fiercer and fiercer.

In the meantime, the profitable business of the Company is not versatile and mainly depends on

air-conditioning compressors at present, and the newly invested businesses of the Company have little

contribution to the profitability of the Company and are to be further optimized.

② Opportunities and advantages for the Company’s development

Opportunities: The domestic demand is still huge and the world’s manufacture industry is moving to

China, therefore the industries of air-conditioner compressor and refrigerator compressor have large space

for expansion in the medium and long term. The state issues “the program of adjustment and revitalization of

light industry”. The industry of mobile parts also has a good prospect in China. The concentration on

environmental problems by the whole society advances the development and application of energy-saving

technologies.

Advantages: The principal business of air-conditioning compressor is at the leading position in the

industry and the Company has large capacity for the manufacture of mechanical and electromechanical

products; the Company has the only national-level technology centre in the air-conditioner compressor

industry and has the capability of technical development and its own intellectual property rights; the

Company has trained a group of proficient R&D and management personnel as well as technicians. The

brand of “海立/ HIGHLY” has been recognized as a Famous Trademark in China. The Company has

made some achievements in respect of multi-business developments.

③ Development strategy of the Company

The Company will firmly seize the opportunities of global economic recovery, global energy revolution

and the domestic policy of promoting domestic demand, ensuring growth and restructuring. With the market

demand as the orientation, and energy saving and environmental protection materials as the product

development direction, the Company will push forward the technological innovation of the enterprise by

industrialization of new and high technologies, raise the management level of the enterprise in all respects,

change enterprise development mode, enhance the competitiveness and profitability of the enterprise, and

ensure sustainable development of the enterprise. The strategic positioning of the Company: an enterprise

group with the development of compressors and other core components as well as affiliated businesses as the

strategic orientation. The industry direction of the Company: development of the three industrial sectors of

compressor, refrigeration related, and automobile parts. The vision of the Company: to become the most

competitive global supplier in the field of refrigeration compressor. The Mission of the Company: to improve

people's living environment, and to protect human’s survival environment.


29

④ Development plan of the Company

The development plan for the business of air-conditioner compressors: The Company will carry out the

strategy of “technology leading, largest scales and performance optimum” in order to realize the target of

“becoming the No.1 supplier of air-conditioner compressor worldwide”. The Company will develop high

value-added products such as high efficiency, frequency conversion and new refrigerant compressors, and

larger format bi-rotor compressors specialized for heat pump water heaters, etc. The Company will firmly

proceed with the project of Nanchang Highly Factory, accurately grasp the market demand and gradually

expand the scale of its production capacity. The Company will pay close attention to and investigate on the

new market opportunities and establish offshore manufacture base if there is an opportunity. The Company

will strengthen the marketing and the cooperation with air-conditioning manufacturers, and will actively

explore overseas markets. The Company will further enhance product quality and business profitability.

The development plan for the business of refrigerator compressors: The Company will take great efforts

in product quality and establish the advantage of “leadership in quality”; strengthen the input in R&D,

prioritize the development of high value-added products of frequency conversion, large format, commercial

use and high efficiency, etc., and implement differential competition. The factories in Shanghai and Qingdao

will be planned in a unified way for cooperative development; the Company will utilize Highly’s advantage

in the principal business of air-conditioning compressor field to achieve a platform of resource sharing.

Refrigeration related: The Company will maintain its existing leadership in the domestic industry of the

products of commercial-use freezing showcases and special refrigerators, improve the enterprise’s abilities of

technology integration and lean management. The Company will seize the developing opportunity of the new

technology of energy saving and emission reduction, and explore new fields of product by applying various

measures such as independent development, equity or contractual joint venture, merger and acquisition, etc.

Automobile parts: The Company will keep on the development of the existing automobile start-up motor

project of Hitachi Highly Automobile Parts (Shanghai) Co., Ltd. In addition, the Company will, with the

experience of scale production in the household appliances industry, apply various measures such as equity

or contractual joint venture, merger and acquisition, etc. to develop the new businesses of automobile parts.

(3) 2010 business plan and work objectives

In 2010, a recovered growth has occurred to China's economy, and the various policies and measures

implemented by the state to promote domestic demand shall continue to play a role. Meanwhile, in the latter

half of 2009, due to the continuous brisk domestic sale of compressors, the inventory in the industries of

air-conditioners and air-conditioning compressors falls at a relatively rapid speed, the output and sales of

air-conditioning compressors as the Company’s principal business are brisk, the income from which will

maintain a certain degree of growth. However, the rapid rebound in the price of resources due to economic

recovery and growth, as well as the currency policy moderately adjusted and controlled by the state bring cost

pressure to the Company. The Company will seize opportunities of the adjustment of economic structure and

the promotion of energy saving and emission reduction by the state, increase the science and technology

input, accelerate the scientific and technological industrialization, adjust product structure, expand the sale of

high value-added products, strictly control various types of costs, and strive to improve profitability.

The 2010 business objectives are: The Company achieves sales of 13 million air-conditioning

compressors, operating revenue of RMB4,831,820,000, and operating costs of RMB4,188,260,000. The

Company continuously maintains the leadership in domestic market occupancy, and actively expands the

global market share. In order to realize such business objectives, while actively pushing forward the phase III

engineering construction of Nanchang Highly Factory, the Company seizes the chance of energy revolution,

adjusts the product structure, breaks through the frequency conversion technology, and realizes that the sales

rate of the frequency conversion air-conditioning compressors is over 10%, and the sales rate of high

efficiency air-conditioning compressors reaches 70%.

With respect to the business of refrigerator compressor, the Company shall use the equity acquisition of

Qingdao Highly by Shanghai Konor and as an opportunity, make full use of the resource consolidation

advantage of the refrigerator compressor sector, advance the exploration of market and the technology of

new products, increase the proportion of the products entering into the mainstream market and the proportion


30

of differentiated products, strive to turn losses into gains, and catch up with the advanced level in the

industry.

(4) Finance for the Company’s development strategy

The Company attaches importance to the management of the relationship between shareholders and

investors, and pays close attention to the market value of the Company’s stock and its image, meanwhile, in

order to implement the determined development plan of the Company, it will actively explore and seek the

probability of capital market financing, and collect funds necessary for the development of the Company.

According to the plan, the outward capital investment of the Company will amount to approximately

RMB260 million from 2010 to 2012.

(5) Risk analysis

Highly is keeping the leading position in the domestic air-conditioner compressor industry, but due to

the enormous change in the market caused by factors such as the change of macro economic environment, the

Company will face certain risks brought by the deterioration of the overall environment. At the same time, as

currently the competition in the domestic air-conditioner compressor industry is mainly between a few big

companies and the economy of scale is obvious beneficial, the Company will probably lose its advantage in

competition in case of any mistake in quality control, scale expansion and new product development.

Therefore, we will need to stick to the scientific development policy, technological innovation, management

improvement, brand cultivation and accurate perception of the industry trend and keep advantages of the

scale, cost, technology and management, so as to limit and control the risks.

3. Internal control systems related to the measurement in fair value

For the purpose of effectively controlling the exposure out of the fair value change of the financial assets,

the Company established a working team for securities investment and risk control, which was implemented

in accordance with the Internal Control System - Investment Management System and the Operational Rules

on Subscription of the Initially Offered Stocks and Transfer of Tradable Stocks in the Securities Market. The

System and the Rules provide the approval and implementation procedures for the subscription and transfer

of stocks. The amount of the initially offered stocks subscribed in the primary market was controlled within

the extent approved by the Board of Directors.

To avoid exchange exposure, Shanghai Hitachi Electric Appliances Co., Ltd. carried out the forward

exchange transactions. Therefore this company worked out the Internal Control System - Financial

Derivatives, and specially established the Administrative Committee for Financial Exposure with a working

team under it. The System provides that the accumulated sum of the forward exchange transactions should

not exceed the total sum of actual amount of business, and that the incompatible positions must be isolated

with each other, and also provides respective authorization and approval procedures.

In this year, the Company established the International Trade Department, responsible in particular for

the Company’s and its subsidiaries’ businesses of air-conditioning compressor and refrigerator compressor

as well as the export businesses of other refrigeration products. In order to control risks such as transactions

of forward foreign exchange contract, the Company specifically formulated the Internal Control System –

Transactions of Financial Derivatives, the implementation of which was approved by the 7th

meeting of 5th

session of the Board of Directors after repeated review and revision by the Audit Committee of the Board of

Directors.

Currently, each of the Company and its subsidiaries carries out the financial derivatives business in

accordance with the relevant internal control systems.

4. No financial assets or liabilities in foreign currency by the Company in the Report Period

Whether the Company has disclosed earnings projection or business plan: Yes


31

Whether the Company's actual business performance is at least 20% lower or higher than the earnings

projection or business plan of the current year that has been publicly disclosed: No

Whether the Company prepares and discloses the earnings projection of the new year: No

B. Investment by the Company

1. Usage of funds collected from share issuance

Within the Report Period, no funds collected from publicly issued shares have been used for investment,

nor is there any funds collected from previous years' share issuance carried down for use within the Report

Period.

2. Projects financed by funds not collected from share issuance

(1) As reviewed and passed by the 7th

meeting of the 5th

Board of Directors of Highly as well as

approved by the 2008 annual general meeting of shareholders of Highly, Shanghai Hitachi implemented the

phase II Project of Nanchang Highly (the Project of Transfer and Restoration of the Product Line of SG

Series Air-conditioning Compressor). The total investment of the phase II project is RMB420 million, and

the register capital is RMB210 million, 100% contributed by Shanghai Hitachi Electrical Appliance Co., Ltd.

As of September 2009, the capital was fully funded and the new business license was obtained at the end of

September. The construction content of the phase II project is factory buildings and public utilities of a new

construction area of about 40,655 square meters, and transfer of the product line of SG series air-conditioning

compressor of Shanghai Hitachi Electrical Appliance Co., Ltd. with a yearly capacity of 2 million, and

formation of production capacity at 0.5 million in respect of the SJ series air-conditioning compressor with

certain equipment processing parts of the SG and SJ series air-conditioning compressors at the same time.

Through restoration, recovery and improvement of equipment accuracy of the product line of SG series

air-conditioning compressor, and simultaneous technological development on the product of SG series

air-conditioning compressor, the high efficiency product of new SG series air-conditioning compressor was

formed, the product line of which went into production on November 8, 2009. With the constructions of

phase I and phase II projects, Nanchang Highly had possessed a production cite capable of yearly production

of 6 million air-conditioning compressors by the end of 2009, forming a yearly capacity of assembling and

manufacturing 2 million SJ/SH series air-conditioning compressors and manufacturing 2 million SG series

air-conditioning compressors. From Arial 2009 to December 2009, Nanchang Highly manufactured and sold

446,000 and 383,000 air-conditioning compressors in total.

(2) As reviewed and passed by the 10th

meeting of the 5th

Board of Directors of Highly, transfer of

100% equity interest in Qingdao Highly from Highly to Shanghai Konor was approved, which transaction

was conducted through Shanghai United Assets and Equity Exchange and in the way of transfer by

agreement. The price for equity transfer was based on the assessed net asset value with September 30, 2009

as the base date, and the transfer price confirmed after negotiation was RMB35,550,700. Highly and

Shanghai Konor entered into the Equity Transfer Contract on December 30, 2009, and the first payment of

the transfer price was received by the Company and the closing of equity interest was completed on January

22, 2010. Qingdao Highly Electric Machinery Co., Ltd. is currently going through AIC registration change

formalities.

C. Representations on the Discussion Results of the Board of Directors regarding Reasons for and

Impacts on the Change in Company's Accounting Policies and Accounting Estimates, Correction of

Significant Accounting Errors, Supplement to Material Omissions of Information or Revisions to

Performance Forecasts, as well as on the Accountability Measures and Treatment Results Applied to

Relevant Persons Liable

Within this Report Period, the Company did not have any changes in accounting policies and accounting

estimates or corrections of significant accounting errors, nor did it have any supplement to material omissions

of information or revisions to performance forecasts.


32

D. Routine Work of the Board of Directors

1. Board meetings and resolutions

Meeting Date of

Meeting Resolution

Newspaper for

Disclosure of

Resolutions

Date of

Disclosure of

Resolutions

5th

meeting of 5th

session of Board

of Directors

March 27,

2009

The following resolutions were

reviewed and passed: 2008

Work Report of the Board of

Directors, 2008 General

Manager’s Work Report,

Proposal on 2008 Provision for

Asset Depreciation Reserve and

Bad Debts Written-off, 2008

Financial Settlement and 2009

Financial Budget, 2008 Profit

Distribution Plan, 2008 Annual

Report and its Summary, Plan

on Renewal of the Engagement

of 2009 Financial Auditing

Institution, Self-assessment

Report of Board of Directors on

Company's Internal Control in

2008 as well as Status Report

on the Inspection and

Supervision Work on Internal

Control and the Internal Audit

Work in 2008, 2008 Social

Responsibilities Report,

Working Rules of Audit

Committee of Board of

Directors on Annual Report

March 31, 2009

6th

meeting of 5th

session of Board

of Directors

April 22,

2009

Report of First Quarter of 2009

was reviewed and passed.

Shanghai

Securities

News and Ta

Kung Pao

(Hong Kong)

April 24, 2009


33

7th

meeting of 5th

session of Board

of Directors

May 22, 2009


reviewed and passed: Proposal

on Phase II Project of

Nanchang Highly Electrical

Appliance Co., Ltd. Invested

and Constructed by Shanghai

Hitachi Electrical Appliance

Co., Ltd. (the Transfer and

Restoration of the Product Line

of SG Series Air-conditioning

Compressor), Proposal on

Application for 2009 Financing

Credit and Relevant Financing

Security Arrangements to

Shanghai Electric (Group)

Finance Co., Ltd., Proposal on

Provision of Security to Other

Parties by the Company in

2009, Proposal on

Compensation for Removal and

Relocation from the Plot of No.

2555 Changyang Road,

Proposal on Amendment to

Articles of Association of the

Company, Internal Control

System – Transactions of

Financial Derivatives,

Proposal on Convening 2008

Annual General Meeting of

Shareholders, Proposal on

Execution of Comprehensive

Credit Line Contract between

Bank of Shanghai Yangpu

Branch and the Company.

May 26, 2009

8th

meeting of 5th

session of Board

of Directors

August 7,

2009


reviewed and passed: Proposal

on Provision for Diminution in

Value of the Accrued Assets of

the First Half of 2009, 2009

Semi-annual Report and Its

Summary.

August 11, 2009

9th

meeting of 5th

session of Board

of Directors

October 26,

2009

Report of Third Quarter of 2009


October 28,

2009

10th

meeting of

5th

session of

Board of

Directors

December

29, 2009

Proposal on Integration of

Businesses of Refrigerator

Compressor by Transferring

Equity Interest in Qingdao

Highly Electric Machinery Co.,

Ltd. to Shanghai Konor

Electrical Machinery Co., Ltd.


Shanghai

Securities

News and Ta

Kung Pao

(Hong Kong)

January 4, 2010


34

2. The implementation of the resolutions of the Shareholders’ General Meeting by the Board of

Directors:

(1) In accordance with the resolution of the 2008 Annual Shareholders’ General Meeting, the Board of

Directors has gone through relevant procedures regarding renewal of the engagement of the Ernst & Young

Hua Ming Certified Public Accountants as the Company’s financial audit institution of the year 2009.

(2) In accordance with the resolution of 2008 Annual Shareholders’ General Meeting, the Board of

Directors has implemented the security-related matters within its power authorized by the Shareholders’

General Meeting.

(3) In accordance with the resolution of 2008 Annual Shareholders’ General Meeting, the Company

has entered into finance and credit agreements in the total amount of no more than RMB190 million with

Shanghai Electrical Finance Co., Ltd., and has gone through relevant procedures for financing.

(4) In accordance with the relevant provisions of the Notice on Audit Related Issues of Companies

Domestic Listed in Foreign Currencies and Decision on Revision of Rules regarding Cash Dividends of

Listed Companies, in the meantime, based on the actual situation of the Company, the Board of Directors has

revised the provisions of the Company’s articles of association related to domestic or international audit

and profit distribution, and has reviewed and passed such revisions by 2008 annual Shareholders’ General

Meeting, and has completed the registration change formalities with AIC.

3. Summary Report on the Status of Establishment and Perfection as well as Main Content of the

Relevant Working Systems and the Performance of Duties of the Audit Committee under the Board of

Directors

(1) Information on relevant working systems of Audit Committee

According to the Company Law, the Code of Corporate Governance for Listed Companies, the Articles

of Association and other relevant provisions, the Board of Directors of the Company established the Audit

Committee of the Board, who has formulated the Implementation Rules of Audit Committee of Board of

Directors, the Working Rules of Audit Committee of Board of Directors on Annual Report, and other relevant

working systems.

The main content of the relevant working systems of the Audit Committee: the Implementation Rules of

Audit Committee of Board of Directors of the Company mainly set regulations to the relevant work of the

member of the Audit Committee from aspects of general rules, composition of personnel, responsibilities and

authorities, work procedures, and rules of procedure, etc. The Working Rules of Audit Committee of Board of

Directors on Annual Report mainly clarifies the procedures of understanding of the Company’s operation

and continuous communication with annual examination accountants, determination of the audit work plan,

and review of financial report during the process of preparing and disclosing of the annual report as well

evaluation and summarizing of the audit work, engagement of financial auditors and other aspects of work.

(2) Review of 2009 annual financial report

During the process of compiling 2009 Annual Report, the Audit Committee performed its

responsibilities in accordance with the relevant laws, regulations and the working rules on annual reports.

On January 21, 2010, the Audit Committee convened a meeting, giving audience to and confirming the

scheduling of the 2009 financial audit work of, and composition of the members of auditing team of Ernst &

Young Hua Ming Certified Public Accountants, as well as the focus points of the audit work. The Audit

Committee reviewed the financial statement, the annual economic operation analysis and other relevant

materials compiled by the Company, gave audience to the introduction of relevant status by the chief

financial officer. The Audit Committee provided its written opinion, approved to submit the financial

statement to Ernst & Young Hua Ming Certified Public Accountants.


35

On March 5, 2010, the Audit Committee held a discussion meeting, and the members of the Audit

Committee attending such meeting together with the independent directors reviewed the audited financial

statement of the primarily opinion issued by Ernst & Young Hua Ming Certified Public Accountants finished

the primary auditing work, communicated and discussed with the annual examination accountants of the

Ernst & Young Hua Ming Certified Public Accountants regarding the preliminary result of auditing work,

major accounting and auditing issues focused during the process of auditing, and signed a written opinion of

no objection to the preliminarily audited 2009 annual financial statements.

On March 26, 2010, the 5th

session of the Audit Committee held the 7th

meeting. The Audit Committee

reviewed the report on the auditing work provided by Ernst & Young Hua Ming Certified Public Accountants.

The meeting approved 2009 Financial Report and resolved to submit the same to the Board of Directors.

The Audit Committee evaluated the quality of 2009 financial auditing work provided by Ernst & Young

Hua Ming Certified Public Accountants. The Audit Committee thought, Ernst & Young Hua Ming abided by

principles of independence, impartiality and fairness, maintained the stability of major members of the

auditing team. In the 2009 annual financial report and audit work, Ernst & Young Hua Ming was able to

complete the work within the timeline as determined by the audit plan, submit audit report within the agreed

time limits, and promptly make communications with the Audit Committee of the Board of Directors and the

independent directors in accordance with the requirements of the regulatory authorities on excellent

conducting of the 2009 annual report work and the provisions of the Working Rules of Audit Committee of

Board of Directors on Annual Report of the Company. The 7th

meeting of 5th

session of the Audit Committee

adopted a resolution on submission for the Board’s approval of the proposal on renewal of the engagement of

Ernst & Young Hua Ming Certified Public Accountants as the Company’s financial auditing institution in

2010.

(3) Meetings of Audit Committee

On March 17, 2009, the Audit Committee convened the 4th

meeting of the 5th

session. During the

meeting, the Audit Committee heard the report by the CPA firm concerning Highly’s 2008 annual audit work.

The meeting passed the 2008 annual financial report and the plan on renewal of the 2009 engagement of

financial auditing institution, reviewed and passed the report on 2008 internal audit and inspection and

supervision on internal control and the 2008 internal control self-evaluation report after reviewing the Report

on 2008 Internal Control Testing and Self-examination Situation, and agreed on the submission of the

aforementioned reports and proposals for approval by the Board of Directors. The meeting also reviewed and

passed the Working Rules of Audit Committee of Board of Directors on Annual Report and required

submission for approval by the Board of Directors after amended in accordance with the opinion of the

meeting. The meeting reviewed the Internal Control System – Transactions of Financial Derivatives and

made suggestions for revision.

On May 14, 2009, the Audit Committee convened the 5th

meeting of the 5th

session, reviewed and passed

the Proposal on Application for 2009 Financing Credit and Relevant Financing Security Arrangements to

Shanghai Electric (Group) Finance Co., Ltd., the Proposal on Provision of Security to Other Parties by the

Company in 2009, and the Internal Control System of Transactions of Financial Derivatives, and agreed on

the submission of the aforementioned three proposals for approval by the Board of Directors.

On July 30, 2009, the Audit Committee convened the 6th

meeting of the 5th

session. During the meeting,

the Audit Committee reviewed and passed and agreed on the submission to Board of Directors for approval

the Financial Report of the First Half of 2009. The Audit Committee heard the Status Report on the

Inspection and Supervision Work on Internal Control and the Internal Audit Work of the First Half of 2009

and made suggestions regarding strengthening the basic management inside the enterprise and focusing on

the actual effect of the internal audit work.

4. Summary report on performance of duites by the Compensation Committee under Board of Directors

(1) During the review of 2009 annual report, the Compensation and Assessment Committee convened

meetings to review the total compensation in 2009 of directors, supervisors and senior management

personnel as disclosed in the annual report and released its opinion thereto: the compensation of directors,

supervisors and senior management personnel of the Company is determined according to Measures of


36

Shanghai Highly (Group) Co., Ltd. for Management of Compensation, Measures of Shanghai Highly (Group)

Co., Ltd. for Management of Compensation System of Senior Management Personnel and resolutions of the

Shareholders’ General Meeting. The actual income of the aforementioned personnel is consistent with their

2009 annual compensation as disclosed in 2009 annual report.

(2) Meetings of Compensation and Assessment Committee of Board of Directors

On March 17, 2009, the Compensation and Assessment Committee convened the 2nd

meeting of the 5th

session, reviewed the compensation in 2008 of directors, supervisors and senior management personnel as

disclosed in the annual report and released its opinion. 2008 Assessment and Performance Incentive Plan for

Senior Management was reviewed and passed on the meeting.

E. Plan on Profit Distribution or Capital Reserve Converting into Increased Share Capital

1. Plan on profit distribution

As audited by Ernst & Young Hua Ming Certified Public Accountants on the financial statements

prepared by the Company in accordance with the provisions of Enterprise Accounting Standards, in 2009,

the net profit of the Company attributable to the shareholders of the Company as a listed company is

RMB62,984,348.88, the net profit of the parent company is RMB15,569,276.49, plus its undistributed profit

at the beginning of the year of RMB56,887,564.49, the distributable profit of the parent company is

RMB72,456,840.98 at the end of the year. According to the provisions of the articles of association of the

Company, the profit of the parent company distributable to the shareholders at the end of the year is

RMB70,899,913.33 after the appropriation of statutory surplus reserves of RMB1,556,927.65.

The profit distribution plan for this year is: in addition to retain part of the profits for the development of

the Company, the Company plans to distribute cash dividends of RMB1.00 (tax included) per 10 shares to all

shareholders based on the total share capital of 547,949,195 shares on December 31, 2009, distributing cash

dividends of RMB54,794,919.50 in total with the remaining RMB16,104,993.83 to be carried forward to the

next year.

2. Plan of capital reserveconverting to increased share capital

According to the audit result of Ernst & Young Hua Ming Certified Public Accountants, as of December

31, 2009, the Company's capital reserve that can be converted into the share capital is RMB234,997,592.10.

The Plan of this conversion of capital reserve into the share capital is: using the total share capital on

December 31, 2009 of 547,949,195 as the base number, the Company will covert every 10 shares into 1 share

for all-together 54,794,920 shares to be converted. After the implementation of such plan, the total number of

shares of the Company will increase to 602,744,115 shares.

The foregoing plans will be implemented after submission for the approval by the 2009 Annual

Meeting of the Shareholders’ General Meeting.

F. Dividend Distribution in the Past 3 Years

Unit: RMB Yuan

Year Cash Dividend Amount (Tax

Inclusive)

Net Profit Attributable to

Shareholders of Listed

Company in the

Consolidated Statements

in the Year of Dividend

Distribution

Proportion

2006 45,662,432.90 62,653,742.94 72.88%

2007 126,861,587.12

2008 0 16,085,333.82 0


37

G. Establishment and Perfection of Management System of the Company’s Outside Information User

The Company strengthens the management of the report and submission as well as the use of external

information in accordance with the provisions of the Order of Hu Zheng Jian Gong Si Zi No. (2010) 8 of the

Shanghai Securities Regulatory Bureau, in the event of reporting and submitting relevant information to

specific outside information user in accordance with the laws and regulation, the Company will, at the same

time of reporting and submitting the information, deliver the other party the notice on information use of

listed companies, and explicitly notify the information user to fulfill the obligation of confidentiality, and in

the meantime, go through registration and filing formalities of the outside information user as an insider of

inside information.

IX. REPORT OF THE BOARD OF SUPERVISORS

A. Work of the Board of Supervisors

Times of the meetings convened 6

Meetings of the Board of Supervisors Subject Matter of the Meetings of the Board of

Supervisors

5th

meeting of 5th

session held by the Board of

Supervisors on March 27, 2009

The following resolutions were reviewed and passed on

the meeting: 2008 Working Report of the Board of

Supervisors, 2008 Annual Report and its Summary,

Proposal on 2008 Provision for Asset Depreciation

Reserve, 2008 Financial Settlement and 2009 Financial

Budget, 2008 Profit Distribution Plan, Plan on Renewal

of the Engagement of 2009 Financial Auditing

Institution.

6th

meeting of 5th


Supervisors on April 17, 2009

Report of First Quarter of 2009 was reviewed and

passed.

7th

meeting of 5th


Supervisors on May 22, 2009

The following resolutions were reviewed and passed:

Proposal on Application for 2009 Financing Credit and

Relevant Financing Security Arrangements to Shanghai

Electric (Group) Finance Co., Ltd., Proposal on

Provision of Security to Other Parties by the Company in

2009, Proposal on Compensation for Removal and

Relocation from the Plot of No. 2555 Changyang Road,

and the following resolutions were reviewed: Proposal

on Phase II Project of Nanchang Highly Electrical

Appliance Co., Ltd. Invested and Constructed by

Shanghai Hitachi Electrical Appliance Co., Ltd. (the

Transfer and Restoration of the Product Line of SG

Series Air-conditioning Compressor), Proposal on

Execution of Comprehensive Credit Line Contract

between Bank of Shanghai Yangpu Branch and the

Company.

8th

meeting of 5th


Supervisors on August 7, 2009

The following resolutions were reviewed and passed:

Proposal on Provision for Depreciation Reserve of the

Accrued Assets of the First Half of 2009, 2009

Semi-annual Report and its Summary.

9th

meeting of 5th


Supervisors on October 26, 2009

Report of Third Quarter of 2009 was reviewed and

passed.

10th

meeting of 5th


Supervisors on December 29, 2009

Proposal on Integration of Businesses of Refrigerator

Compressor by Transferring Equity Interest of Qingdao

Highly Electric Machinery Co., Ltd. to Shanghai Konor

Electrical Machinery Co., Ltd. was reviewed and passed.

The members of the Board of Supervisors, in accordance with the Company Law, other relevant laws

and regulations and the related provisions of Articles of Association of the Company, by attending the


38

meetings of the Board of Directors, the Shareholders’ General Meeting and the meetings of special

committees under the Board of Directors, supervise the decision-making procedures of the Company’s

material matters. By means of attending the Company’s administrative work meeting and monthly and

quarterly work meeting, reviewing various financial statements and visiting the investees on a monthly basis,

the supervisors were informed of the information of production, operation and management of the Company

in a timely manner. The Board of Supervisors, by itself or through the audit office, conducted investigations

and surveys periodically or from time to time, so as to inspect the operation and financial affairs of the

Company and the investees. The Board of Supervisors participated in the internal audit communication,

heard the status report by external auditing institution on annual examination and the work report periodically

provided by the audit office of the Company, and supervised the building and implementation of the internal

control systems.

B. Independent Opinion of the Board of Supervisors on Legal Compliance of the Company

In 2009, the Company’s operation was in compliance with the Company Law, the Articles of

Association of the Company and other relevant laws and regulations, and the Company’s decisions relating to

the operation were made in accordance with laws, regulations and rules. The building of the internal control

systems of the Company has been further improved and the Company and its investees have all set up

corresponding internal control systems. The internal control systems were prevalent in all the operational

activities, generally, and could meet the need of the operation and development of the Company and can

prevent the potential risks. After inspection, the internal control systems of the Company and investees were

basically being implemented. The directors and senior management personnel, in the performance of their

duties, abided by Chinese laws and regulations, the Articles of Association of the Company and various rules

and protected the interest of the Company and its shareholders.

C. Independent Opinion of the Board of Supervisors on Inspection of the Company’s Finance

Within the Report Period, the finance of the Company strictly complied with the Enterprise Accounting

Standards, the internal financial management system and the internal control systems of the Company. The

financial reports of the Company truthfully and completely reflected the financial status and business

performance within the Report Period. Ernst & Young Hua Ming Certified Public Accountants issued

unqualified audit reports.

D. Independent Opinion of the Board of Supervisors on Actual Investment of the Funds Last

Collected

No funds collected through share issuance were used within the Report Period.

E. Independent Opinion of the Board of Supervisors on Asset Acquisition and Sale by the Company

In the Report Period, as reviewed and passed by the 10th

meeting of the 5th

session of the Company’s

Board of Directors, the Company and Shanghai Konor Electrical Machinery Co., Ltd. entered into an Equity

Transfer Contract to transfer 100% equity interest in Qingdao Highly Electric Machinery Co., Ltd. held by

the Company to Shanghai Konor Electrical Machinery Co., Ltd. The whole decision-making procedures and

the implementing process of the acquisition were in compliance with relevant laws, regulations and relevant

rules of the Company.

F. Independent Opinion of the Board of Supervisors on Related Party Transactions of the Company

The Board of Supervisors has supervised the related party transactions of provision of capital or security,

purchase and sale of products and labour transaction, etc. between the Company and its controlling

shareholder, between the Company and other companies controlled by the same controlling shareholder,

between the Company and its investees and among the investees. The Board of Supervisors was of the

opinion that the related party transactions were in the ordinary course of business and the relevant

decision-making procedures were in accordance with laws and regulations as well as the internal rules of the

Company; the prices of the related party transactions were determined based on the fair market price and no

damage was caused to the interest of the Company and other shareholders.


39

X. IMPORTANT EVENTS

A. Major Legal Action or Arbitration

The Company was involved in no major legal action or arbitration this year.

B. Bankruptcy & Reorganization Matters

The Company was involved in no bankruptcy or reorganization matters this year.

C. Information regarding Holding Equity Interests of Other Listed Companies or Financial

Enterprises

1. Securities investment

Unit: RMB Yuan / Share

No. Type of

Securities

Code of

Securities

Abbreviation

of Securities

Initial

Investment

Cost

Amount

Book Value

at the end of

the Report

Period

Proportion in

Total

Securities

Investment at

the end of the

Report Period

(%)

P & L

1 Share 601898 Zhong Mei

Neng Yuan 286,110.00 17,000 230,860.00 41.83 123,490.21

2 Share 601601 Zhong Guo

Tai Bao 240,000.00 8,000 204,960.00 37.14 118,400.00

3 Share 601117 Zhong Guo

Hua Xue 76,020.00 14,000 76,020.00 13.77 0

4 Share 300039 Shang Hai

Kai Bao 19,000.00 500 19,000.00 3.44 0

5 Share 300037 Xin Zhou

Bang 14,495.00 500 14,495.00 2.63 0

6 Share 002330 De Li Si 6,590.00 500 6,590.00 1.19 0

Other securities investment at the end of the

Report Period 0 / 0 0 /

P & L of the securities investment sold in the

Report Period / / / / 589,510.33

Total 642,215.00 / 551,925.00 100% 831,400.54

2. Shareholding of other listed companies

Unit: RMB Yuan

Code of

Securiti

es

Abbreviati

on of

Securities

Initial

Investment

Cost

Shar

ehol

ding

Perc

enta

ge

Book Value at

the end of the

Report Period

P & L Change in

Equity Interest Account Source

600650 Jin Jiang

Tou Zi 3,684,254.16 23,820,000.00 450,000.00 8,805,185.08

600616 Jin Feng

Jiu Ye 295,922.47 8,960,000.00 8,566,309.92 -1,284,062.01

600649 Cheng Tou

Kong Gu 600,000.00 2,778,600.00 22,000.00 1,042,392.00

600631 Bai Lian

Gu Fen 3,042,770.89 27,030,000.00 5,636,148.47 8,150,375.86

600636 San Ai Fu 76,202.43 1,061,500.00 0 483,082.05

600689 Shang Hai

San Mao 440,000.00

Less

than

5%

1,432,569.60 0 448,328.32

600067 Guan

Cheng Da

Tong

0 - 0 7,451,081.29 -1,941,431.94

600622 Jia Bao Ji

Tuan 0 - 0 935,488.09 -157,956.86

Available

-for-sale

financial

assets

Former

Legal

Person

Shares


40

600665 Tian Di

Yuan 0 - 0 781,595.97 -12,355.20

600615 Feng Hua

Gu Fen 0 - 0 2,878,712.35 -286,824.24

In Total 8,139,149.95 / 65,082,669.60 26,721,336.09 15,246,733.06 / /

3. Trading of shares of other listed companies

Unit: RMB Yuan / Share

Share Name

Amount at the

Beginning of

the Year

Purchase Amount/Selling

Amount during Report

Period

Amount at the

End of the Year

Amount of Funds

Used

Investment

Returns

Zhong Guo

Tai Bao 8,000 0/0 8,000 0 2,400.00

Zhong Mei

Neng Yuan 17,000 0/0 17,000 0 2,620.21

Si Chuan

Cheng Yu 0 1000/1000 0 3,600 3,989.97

Zhong Guo

Jian Zhu 0 133000/133000 0 555,940 332,799.25

Guang Da

Zheng Quan 0 3000/3000 0 63,240 25,065.67

Bo Shen

Gong Ju 0 500/500 0 5,750 2,454.43

Luo Lai Jia

Fang 0 500/500 0 13,580 3,377.50

Zhong Guo

Zhong Zhi 0 23000/23000 0 124,660 33,390.82

Zhong Guo

Guo Lv 0 1000/1000 0 11,780 4,288.72

Te Rui De 0 500/500 0 11,900 9,047.50

Shen Zhou

Tai Yue 0 500/500 0 29,000 20,924.87

Nan Feng Gu

Fen 0 1000/1000 0 22,890 12,022.50

Lai Mei Yao

Ye 0 1000/1000 0 16,500 10,881.37

Li Si Chen 0 500/500 0 9,000 5,014.87

Qi Xin Wen

Ju 0 500/500 0 10,000 4,364.00

Hua Ce Jian

Ce 0 500/500 0 12,890 6,062.50

Ai Er Yan Ke 0 500/500 0 14,000 10,368.92

Yin Jiang Gu

Fen 0 500/500 0 10,000 5,461.25

Bao De Gu

Fen 0 500/500 0 9,800 6,439.30

Hong Ri Yao

Ye 0 500/500 0 30,000 18,453.56

Hua Yi

Xiong Di 0 500/500 0 14,290 17,460.42

Mei Ying

Sen 0 500/500 0 12,680 3,805.68

Xiang E Qing 0 500/500 0 9,450 4,205.77

Zhao Shang

Zheng Quan 0 1000/1000 0 31,000 4,021.22

Wei Chuang

Gu Fen 0 500/500 0 11,900 5,860.48

Zhong Guo

Zhong Gong 0 14000/14000 0 103,320 15,927.10

Zhong Lian

Dian Qi 0 1000/1000 0 30,000 11,775.30

Gang Yan

Gao Na 0 500/500 0 9,765 6,893.25

Xin Peng Gu

Fen 0 500/500 0 9,690 2,953.31

Zhong Guo 0 21000/21000 0 116,760 2,200.80


41

Bei Che

De Li Si 0 500/0 500 6,590 0

Xin Zhou

Bang 0 500/0 500 14,495 0

Shang Hai

Kai Bao 0 500/0 500 19,000 0

Zhong Guo

Hua Xue 0 14000/0 14,000 76,020 0

Total 1,419,490 594,530.54

The total investment returns from selling new shares subscribed during the Report Period amounted to

RMB589,510.33.

D. Asset Transaction

As reviewed and passed by the 10th

meeting of the 5th

Board of Directors of Highly, the Company

transferred 100% equity interest in Qingdao Highly held by it to Shanghai Konor, which transaction was

conducted through Shanghai United Assets and Equity Exchange and in the way of transfer by agreement.

After negotiation, the price for equity transfer was confirmed as RMB35,550,700 based on the assessed net

asset value with September 30, 2009 as the base date. The Company and Shanghai Konor entered into the

Equity Transfer Contract on December 30, 2009, and the first payment of the transfer price was received by

the Company and the closing of equity interest was completed on January 22, 2010. The Announcement of

such equity transfer was published on Shanghai Securities News and Ta Kung Pao (Hong Kong) on January

4, 2010.

E. Major Related Party Transactions of the Company in the Report Period

As approved by the 2008 annual general meeting of shareholders of the Company, the Company

obtained a line of financing credit of RMB190,000,000 from Shanghai Electrical Finance Co., Ltd. The

maximum amount actually borrowed during this year was RMB120,000,000, among which, Shanghai Konor

Electrical Machinery Co., Ltd. borrowed RMB50,000,000, Qingdao Highly Electric Machinery Co., Ltd.

borrowed RMB50,000,000, and Shanghai Highly Foundry Co., Ltd. borrowed RMB20,000,000. The terms

of these loans were all one year. By the end of 2009, the outstanding amounts of Shanghai Konor Electrical

Machinery Co., Ltd., Qingdao Highly Electric Machinery Co., Ltd. and Shanghai Highly Foundry Co., Ltd.

owed to Shanghai Electrical (Group) Finance Co., Ltd. were respectively RMB25,000,000, RMB50,000,000

and RMB20,000,000, in total RMB95,000,000. Shanghai Electric (Group) Co., Ltd. granted security for all

of the aforementioned loans. Meanwhile, this Company issued to Shanghai Electric (Group) Co., Ltd. a

counter guarantee of RMB65,000,000 for the aforementioned security for loan. The interest was paid by the

aforesaid companies to the affiliated party based on the benchmark interest rate published by PBOC on the

actual utilization dates of these loans or such other preferential rate if the loans were utilized from other

commercial banks.

F. Material Contracts and Performance Thereof

1. Trusteeship, Contracting and Lease that Have Brought the Company Profits Accounting for 10% or

More of the Total Profit of the Current Period of the Company

(1) Trusteeship

No event of trusteeship took place during the Report Period.

(2) Contracting

No event of contracting took place during the Report Period.


42

(3) Lease

Qingdao Highly Electric Machinery Co., Ltd., a subsidiary of the Company, leased the factory premises

of Qingdao Haier International Trading Co., Ltd. located in Haier Industry Park in Qingdao High-Tech Park.

The lease term commenced from the completion of acquisition of Qingdao SANYO Electric Co., Ltd. and

expires on December 31, 2022. The rental for this year amounted to RMB10,831,200.

2. Security

Unit: RMB Yuan External Security of the Company (security for subsidiaries controlled by the Company not included)

Secured Party Security

Amount

Date of

Establishm

ent of

Security

(Agreemen

t Execution

Date)

Commence

ment Date

Expiration

Date

Type of

Security

Whether

Fulfilled

or Not

Whet

her

Over

due or

Not

Counter

-Securit

y or Not

Security

for

Affiliate

or Not

Affiliated

Relationshi

p

28,000,000.00 2008-1-18 2008-1-18 2009-1-18 Yes No Yes Yes

50,000,000.00 2008-7-25 2008-7-25 2009-4-26 Yes No Yes Yes

92,000,000.00 2008-9-28 2008-9-28 2009-12-11 Yes No Yes Yes

48,000,000.00 2009-1-15 2009-1-15 2009-12-28 Yes No Yes Yes

30,000,000.00 2009-5-6 2009-5-6 2009-11-6 Yes No Yes Yes

10,000,000.00 2009-6-26 2009-6-26 2010-6-25 No No Yes Yes

56,000,000.00 2009-7-15 2009-7-15 2010-5-10 No No Yes Yes

Shanghai

Konor

Electrical

Machinery Co.,

Ltd.

109,000,000.00 2009-7-15 2009-7-15 2010-10-22

Joint

and

Several

Liabilit

y

Security

No No Yes Yes

Joint

Venture

Company

Shanghai

Electric

(Group) Co.,

Ltd.

65,000,000.00 2009-8-21 2009-8-21 2010-12-21 No No No Yes Controlling

Shareholder

Total amount of security (security for subsidiaries not included) in the Report

Period 488,000,000.00

Balance of outstanding security (security for subsidiaries not included) at the

end of the Report Period 240,000,000.00

Security Provided by the Company to Subsidiaries Controlled by the Company

Total amount of security provided to the subsidiaries in the Report Period 439,945,060.71

Balance of outstanding security provided to the subsidiaries at the end of the

Report Period 63,207,969.65

Total Amount of Security Provided by the Company (including the amount of security for the subsidiaries controlled by the

Company)

Total amount of security 303,207,969.65

Proportion of the total amount of security to the net assets of the Company (%) 19.61

Of which:

Amount of security provided to shareholders, actual controller and their

affiliated parties 65,000,000.00

Amount of security directly or indirectly provided to any secured parties with

over 70% D/A ratio 235,748,981.60

Amount of security in excess of 50% of the net assets of the Company 0

Total amount of the above 3 kinds of security 300,748,981.60

*The USD, JPY, EUR and GBP in the total amount of security are converted to RMB amount according

to the central parity rate as of December 31, 2009 published by the People’s Bank of China and the converted

amount is calculated into the total amount of security.

3. Entrustment of financial management

Within the Report Period the Company was not involved in any entrustment of financial management.

4. Other material contracts

Within the Report Period there was no other material contract to which the Company was a party.


43

G. Commitments and Performance

During and until the end of the Report Period, shareholders holding over 5% of the total shares of the

Company made no commitment.

H. Engagement and Disengagement of Accounting Firm

Whether Engaging An Alternative Accounting Firm: No

Current Engagement

Name of Domestic Accounting Firm Ernst & Young Da Hua Certified Public Accountants

Co., Ltd.

Remuneration of Domestic Accounting Firm RMB870,000

Auditing Term of Domestic Accounting Firm 2 years

I. Penalties and Rectifications on the Part of the Company, Board of Directors, Directors, Supervisors,

Senior Management Personnel, Shareholders and Actual Controller

The Company, its directors, supervisors, senior management personnel, shareholders, and actual

controller were not subject to any inspection, administrative penalty, or public criticism from CSRC or any

public censure from the Stock Exchanges during this year.

J. Other Important Events

1. In April 2009, the “environmental protective new refrigerant R410A rotary compressor” of Shanghai

Hitachi Electrical Appliance Co., Ltd. has been awarded jointly by China Machinery Industrial Association

and Chinese Mechanical Engineering Society the “Second Prize for 2008 China Machinery Industry Science

and Technology Award”.

2. In March 2009, Shanghai Hitachi Electrical Appliance Co., Ltd. was awarded by Shanghai Municipal

People's Government the title of 2007~2008 Shanghai Civilized Entity.

3. In June 2009, the series products of HIGYLY air-conditioning compressor” manufactured by

Shanghai Highly (Group) Co., Ltd. / Shanghai Hitachi Electric Appliance Co., Ltd. were honored the title of

Exemption for Export Inspection.

4. In October 2009, Shen Jianfang, the chairman of the Board of Directors of Shanghai Highly (Group)

Co., Ltd. was honored by the Shanghai Hitachi Electric Appliances Co., Ltd. was awarded by China

Association for Quality and All China Federation of Labour Union the honorary title of the third round of

“China Excellent Person of Quality”.

5. In December 2009, Shanghai Highly (Group) Co., Ltd. Company was awarded the Employee Caring

Award in the top 20 of the “Outstanding Enterprises Award of Primary Financial • List of Chinese

Enterprises with Social Responsibilities” with the slogan of “Technology innovation and personnel training,

establishment of the refrigeration industry pioneer”.

K. Information Disclosure Index

Matter

Name and Page of the

Newspaper for

Information Disclosure

Publication Date

Website for Information

Disclosure and Searching

Route

Pre-warning Announcement

on 2008 Performance

Shanghai Securities

News, Page C13, Ta Kung

Pao (Hong Kong), Page

B2

January 13, 2009

Website:

http://www.sse.com.cn,

Enter “600619” into the

Information of Listed

Companies


44

Announcement on Obtaining

the Certificates of High-Tech

Enterprise by Shanghai

Hitachi Electric Appliance

Co., Ltd. and Two Other

Enterprises

Shanghai Securities



B8

February 13, 2009

Announcement on

Resolutions of 5th

Meeting of

5th

Session of Board of

Directors, Announcement on

Resolutions of 5th

Meeting of

5th

Session of Board of

Supervisors, 2008 Annual

Report and its Summary

Shanghai Securities

News, Page C178, Ta

Kung Pao (Hong Kong),

Page B8

March 31, 2009

2009 First Quarter Report

Shanghai Securities



B12

April 24, 2009

Announcement on

Resolutions of 7th

Meeting of

5th

Session of Board of

Directors, Related Party

Transaction Announcement

on Application for 2009

Financing Credit and

Relevant Financing Security

Arrangements to Shanghai

Electric (Group) Finance Co.,

Ltd., Announcement on

Provision of Security to Other

Parties, Announcement on

Resolutions of 7th

Meeting of

5th

Session of Board of

Supervisors, Announcement

on Convening 2008 Annual

General Meeting of

Shareholders

Shanghai Securities



B9

May 26, 2009

Announcement on

Resolutions of 2008 Annual

General Meeting of

Shareholders

Shanghai Securities



B12

June 20, 2009

Announcement on

Performance Forecast of the

First Half of 2009

Shanghai Securities



B3

July 17, 2009

Announcement on

Resolutions of 8th

Meeting of

5th

Session of Board of

Directors, Announcement on

Resolutions of 8th

Meeting of

5th

Session of Board of

Supervisors, 2009

Semi-annual Report and its

Summary

Shanghai Securities



B12

August 11, 2009

2009 Third Quarter Report

Shanghai Securities

News, Page C116, Ta

Kung Pao (Hong Kong),

Page B12

October 28, 2009

Website:

http://www.sse.com.cn,

Enter “600619” into the

Information of Listed

Companies


45

XI. FINANCIAL REPORT

Certified public accountants have audited the Annual Financial Report of the Company and issued a

standard unqualified audit report.

Audit Report and Financial Report (enclosed)

XII. INDEX OF DOCUMENTS

A. The accounting statements signed and sealed by the Company's legal representative, responsible

person in charge of accounting work and in-charge person of accounting institution;

B. The original audit report sealed by the CPA firm and signed and sealed by certified public

accountants;

C. Originals or original drafts of all the Company's documents and announcements published on the

newspapers designated by CSRC within the Report Period.

SHANGHAI HIGHLY (GROUP) CO., LTD.

Chairman of Board of Directors:Shenjianfang

April 9, 2010

APPENDIX I

2009 Self-Evaluation Report on Internal Control of the Company APPENDIX II

2009 Social Responsibilities Report of the Company

46

Shanghai Highly (Group) Co., Ltd. Audited Financial Statements For the year ended 31 December 2009

47


Contents

Pages I. Auditor’s report 48 - 49 II. Audited Financial Statements Consolidated Balance Sheet 50 - 52 Consolidated Income Statement 53 Consolidated Statement of Changes in Equity 54 - 55 Consolidated Cash Flow Statement 56 - 57 Company Balance Sheet 58 - 59 Company Income Statement 60 Company Statement of Changes in Equity 61 - 62 Company Cash Flow Statement 63 - 64 Notes to Financial Statements 65 - 168 Supplementary information to financial statements

1. The extraordinary profit and loss. 169 - 170 2. Return on equity and earnings per share 171 3. Analysis of Main Change of Financial Data 172 - 174

48

Auditor’s Report

Ernst & Young Hua Ming (2010) Shen Zi No. 60467982_B05

To the shareholders of Shanghai Highly (Group) Co., Ltd. We have audited the accompanying financial statements of Shanghai Highly (Group) Co., Ltd. (“the Company”) and its subsidiaries (“the Group”), which comprise the consolidated and the company balance sheets as at 31 December 2009, and the consolidated and the company income statements, the consolidated and the company statements of changes in equity and the consolidated and the company cash flow statements for the year then ended and notes to the financial statements. Management’s Responsibility for the Financial Statements The management is responsible for preparing financial statements in accordance with Accounting Standards for Business Enterprises. This responsibility includes (1) designing, implementing and maintaining the internal control relevant to the preparation of the financial statements that are free from material misstatement due to fraud or error; (2) selecting and applying appropriate accounting policies; and (3) making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit performed. We conducted our audit in accordance with the Chinese Auditing Standards issued by the Chinese Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain a reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The selection of procedures depends on the auditor’s judgment, including the assessment of the risks of material misstatement due to fraud or error in the financial statements. In making those risk assessments, we consider the internal control relevant to the entity’s preparation of financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of the accounting polices used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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

49

Opinion In our opinion, the financial statements present fairly, in all material aspects, the financial position of Shanghai Highly (Group) Co., Ltd. and its subsidiaries as 2009 and the financial results and the cash flows for the year then ended in accordance with Accounting Standards for Business Enterprises. Yuan Yongmin Ernst & Young Hua Ming Chinese Certified Public Accountant

Zhou Ping

Beijing, the People’s Republic of China Chinese Certified Public Accountant 7 April 2010


CONSOLIDATED BALANCE SHEET

As at 31 December 2009

Expressed in Renminbi Yuan

50

ASSETS Note V 2009 2008 Current assets Cash 1 161,536,015.58 147,287,429.56 Financial assets held for trading 2 551,925.00 198,950.00 Notes receivable 3 804,993,646.10 375,108,893.22 Accounts receivable 4/17 933,385,278.19 605,877,313.62 Advances to suppliers 6 117,181,809.22 96,811,456.68 Other receivables 5 49,807,879.37 19,308,431.22 Inventories 7/17 572,380,578.97 594,974,852.88 Total current assets 2,639,837,132.43 1,839,567,327.18 Non-current assets Available-for-sale financial assets 8 65,082,669.60 47,727,105.76 Long-term equity investments 9/10 153,411,947.47 162,099,790.04 Investment property 11 11,090,452.53 13,265,637.61 Fixed assets 12/17 1,977,809,516.90 1,587,673,333.26 Construction in progress 13 94,888,871.36 196,396,328.56 Intangible assets 14 259,877,338.01 267,724,925.08 Long-term prepayments 15 17,121,287.24 23,688,768.77 Deferred tax assets 16 28,324,321.60 24,698,493.03 Total non-current assets 2,607,606,404.71 2,323,274,382.11 Total assets 5,247,443,537.14 4,162,841,709.29


CONSOLIDATED BALANCE SHEET (Continued)



51

LIABILITIES AND EQUITY Note V 2009 2008 Current liabilities Short-term borrowings 18 667,286,520.00 636,827,360.00 Financial liabilities held for trading 19 - 29,758,760.00 Notes payable 20 1,080,005,711.03 694,388,093.99 Accounts payable 21 863,439,664.61 371,864,226.98 Advances from customers 22 12,429,845.87 3,702,083.15 Payroll payable 23 132,648,465.93 128,566,555.57 Taxes payable 24 (17,902,827.16) 2,136,621.64 Dividends payable 25 2,277,896.71 2,402,259.91 Other payables 26 79,217,542.93 27,339,703.48 Non-current liabilities due within one year 27 5,859,188.14 4,726,861.32 Total current liabilities 2,825,262,008.06 1,901,712,526.04 Non-current liabilities Long-term borrowings 28 - 11,000,000.00 Long-term payables 29 96,872,937.40 103,593,972.51 Provisions 30 25,620,852.53 27,129,365.57 Deferred tax liabilities 16 13,666,444.71 7,905,993.87 Other non-current liabilities 31 217,685,266.76 144,060,774.54 Total non-current liabilities 353,845,501.40 293,690,106.49 Total liabilities 3,179,107,509.46 2,195,402,632.53


CONSOLIDATED BALANCE SHEET (Continued)



52

LIABILITIES AND EQUITY Note V 2009 2008 Shareholder's equity Share capital 32 547,949,195.00 547,949,195.00 Capital reserve 33 437,601,992.28 422,355,259.22 Surplus reserve 34 190,681,533.95 189,124,606.30 Retained earnings 35 370,135,745.50 308,708,324.27 Equity attributable to equity holders of the parent 1,546,368,466.73 1,468,137,384.79 Minority interests 521,967,560.95 499,301,691.97 Total shareholder's equity 2,068,336,027.68 1,967,439,076.76 Total liabilities & shareholder's equity 5,247,443,537.14 4,162,841,709.29

Financial statements have been signed by :

Legal Representative：Shenjianfang Financial Controller：Qinwenjun Accounting Supervisor:Liuhuicheng


CONSOLIDATED INCOME STATEMENT

For the Year Ended 31 December 2009


53

Note V 2009 2008 Revenue 36 4,512,840,446.91 4,790,244,365.68 Less: Cost of sales 36 3,901,718,703.13 4,163,204,933.30 Taxes and surcharges 37 1,610,208.45 1,486,194.59 Distribution and selling expenses 137,254,177.83 146,119,639.88 General and administrative expenses 340,263,655.99 308,586,424.86 Financial expenses 38 80,323,848.20 61,860,072.93 Impairment loss of assets 39 (12,553,425.63) 22,070,545.96 Add: Gain arising from fair value changes 40 29,995,630.00 (55,889,881.75) Investment income 41 25,059,264.34 3,464,964.91 Incl: Share of profit of associates and jointed ventures (2,256,602.30) (10,150,392.90) Operating profit 119,278,173.28 34,491,637.32

Add：Non-operating income 42 13,645,395.64 21,290,741.00

Less：Non-operating expenses 43 4,713,792.22 3,710,322.72

Incl: Loss on disposal of non-current assets 4,126,012.22 2,269,044.60 Total profit 128,209,776.70 52,072,055.60

Less：Income tax 44 34,388,655.33 10,166,619.96

Net profit 93,821,121.37 41,905,435.64 Net profit attributable to equity

holders of the parent 62,984,348.88 16,085,333.82 Minority interest income 30,836,772.49 25,820,101.82 Earnings per share 45 Basic earnings per share 0.11 0.03 Diluted earnings per share 0.11 0.03 Other comprehensive income 46 15,246,733.06 (85,291,707.81) Total comprehensive income 109,067,854.43 (43,386,272.17)

Including：

Attributable to equity holders of The parent 78,231,081.94 (69,206,373.99) Attributable to minority interest 30,836,772.49 25,820,101.82


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY



54

Attributable to equity holder of the parent Share Capital Surplus Retained Subtotal Minority Total capital reserve reserve earnings interests equity 1. At the beginning of year 547,949,195.00 422,355,259.22 189,124,606.30 308,708,324.27 1,468,137,384.79 499,301,691.97 1,967,439,076.76 2. Movements of current year 1) Net profit - - - 62,984,348.88 62,984,348.88 30,836,772.49 93,821,121.37 2) Other comprehensive income - 15,246,733.06 - - 15,246,733.06 - 15,246,733.06 Subtotal of 1) and 2) - 15,246,733.06 - 62,984,348.88 78,231,081.94 30,836,772.49 109,067,854.43 3) Profit appropriation and distribution 1. Appropriation to surplus reserve - - 1,556,927.65 (1,556,927.65) - - - 2. Distribution to shareholders - - - - - (8,170,903.51) (8,170,903.51) 3. At the ending of year 547,949,195.00 437,601,992.28 190,681,533.95 370,135,745.50 1,546,368,466.73 521,967,560.95 2,068,336,027.68


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY



55

Attributable to equity holder of the parent Share Capital Surplus Retained Subtotal Minority Total capital reserve reserve earnings interests equity 1. At the beginning of year 456,624,329.00 507,646,967.03 189,124,606.30 383,947,856.45 1,537,343,758.78 473,647,999.36 2,010,991,758.14 2. Movements of current year 1) Net profit - - - 16,085,333.82 16,085,333.82 25,820,101.82 41,905,435.64 2) Other comprehensive income - (85,291,707.81) - - (85,291,707.81) - (85,291,707.81) Subtotal of 1) and 2) - (85,291,707.81) - 16,085,333.82 (69,206,373.99) 25,820,101.82 (43,386,272.17) 3) Injection and reduction 1. Injection - - - - - 2,000,000.00 2,000,000.00 2. Others - - - - - (204,680.17) (204,680.17) 4) Profit appropriation and distribution 1. Distribution to shareholders - - - - - (1,961,729.04) (1,961,729.04) 5) Internal transfer within equity 1. Transfer from retained earnings 91,324,866.00 - - (91,324,866.00) - - - 4. At the ending of year 547,949,195.00 422,355,259.22 189,124,606.30 308,708,324.27 1,468,137,384.79 499,301,691.97 1,967,439,076.76


CONSOLIDATED CASH FLOW STATEMENT



56

Note V 2009 2008 1. CASH FLOWS FROM OPERATING ACTIVITIES Cash received from sales of goods or rendering of services 4,443,909,160.23 6,074,955,664.37 Refunds of taxes 43,953,586.25 43,490,098.22 Cash received relating to other operating activities 47 85,929,800.34 75,730,476.99 Subtotal of cash inflows from operating activities 4,573,792,546.82 6,194,176,239.58 Cash paid for goods and services 3,364,796,348.10 5,068,744,348.53 Cash paid to and on behalf of employees 378,931,636.14 349,344,716.64 Cash paid for all types of taxes 218,773,220.78 149,108,635.51 Cash paid relating to other operating activities 47 126,711,145.47 215,604,757.63 Subtotal of cash outflows from operating activities 4,089,212,350.49 5,782,802,458.31 Net cash flows from operating activities 47 484,580,196.33 411,373,781.27 2. CASH FLOWS FROM INVESTING ACTIVITIES Cash received from sale of investments 31,435,931.48 15,473,865.25 Cash received from return on investments 7,266,180.48 8,453,392.57 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 29,937,564.17 533,782.75 Net cash inflows from disposal of subsidiaries and other business units - 218,118.39 Subtotal of cash flows from investing activities 68,639,676.13 24,679,158.96 Cash paid for acquisition of fixed assets intangible assets and other long-term assets 487,503,163.77 394,406,106.92 Cash paid for acquisition of investments 1,419,490.00 974,230.00 Subtotal of cash outflows from investing Activities 488,922,653.77 395,380,336.92 Net cash flows from investing activities (420,282,977.64) (370,701,177.96)


CONSOLIDATED CASH FLOW STATEMENT (Continued)



57

Note V 2009 2008 3. CASH FLOWS FROM FINANCING ACTIVITIES Cash received from capital contributions - 2,000,000.00 Incl: Cash received from capital contributions from minority shareholders - 2,000,000.00 Cash received from borrowings 1,273,232,640.00 1,311,126,310.00 Subtotal of cash inflows from financing Activities 1,273,232,640.00 1,313,126,310.00 Cash repayments of borrowings 1,253,658,680.00 1,434,587,810.00 Cash paid for distribution of dividends or profits and for interest expenses 46,293,476.26 59,730,780.97 Incl: Cash paid for distribution of dividends and profits to minority shareholders by subsidiaries 8,170,903.50 1,961,729.04 Cash paid relating to other financing activities 47 13,636,318.15 6,277,403.34 Subtotal of cash outflows from financing activities 1,313,588,474.41 1,500,595,994.31 Net cash flows from financing activities (40,355,834.41) (187,469,684.31) 4. EFFECT OF CHANGES IN EXCHANGE RATE ON CASH AND CASH EQUIVALENTS (391,182.13) (782,044.32) 5. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 23,550,202.15 (147,579,125.32)

Add: Cash and cash equivalents at beginning of year 128,926,250.41 276,505,375.73 6 CASH AND CASH EQUIVALENTS

AT END OF YEAR 47 152,476,452.56 128,926,250.41


BALANCE SHEET



58

ASSETS Note XI 2009 2008 Current assets Cash 64,819,246.13 45,996,135.52 Financial assets held for trading 551,925.00 198,950.00 Notes receivable 619,521.46 1,000,000.00 Accounts receivable 1 118,270,425.53 2,039,665.21 Advances to suppliers 2,202,179.06 5,797,221.08 Other receivables 2 32,173,887.19 921,488.55 Inventories 2,009,725.03 860,356.89 Total current assets 220,646,909.40 56,813,817.25 Non-current assets Available-for-sale financial assets 65,082,669.60 47,727,105.76 Long-term equity investments 3 1,457,915,804.67 1,466,602,953.52 Investment property 11,090,452.53 13,265,637.61 Fixed assets 1,665,092.04 2,297,506.96 Construction in progress 493,859.00 - Total non-current assets 1,536,247,877.84 1,529,893,203.85 Total assets 1,756,894,787.24 1,586,707,021.10


BALANCE SHEET (Continued) As at 31 December 2009

(Expressed in Renminbi Yuan)

59

LIABILITIES AND EQUITY Note XI 2009 2008 Current liabilities Short-term borrowings 290,000,000.00 335,000,000.00 Notes payable 50,000,000.00 - Accounts payable 101,851,472.48 1,800.00 Payroll payable 24,456,558.39 25,963,360.84 Taxes payable (1,365,978.02) (980,466.72) Dividends payable 2,277,896.71 2,402,259.91 Other payables 6,281,937.50 4,670,777.41 Total current liabilities 473,501,887.06 367,057,731.44 Non-current liabilities Deferred tax liabilities 13,666,444.71 7,905,993.87 Other non-current liabilities 27,167,150.13 - Total non-current liabilities 40,833,594.84 7,905,993.87 Total liabilities 514,335,481.90 374,963,725.31 Shareholder's equity Share capital 547,949,195.00 547,949,195.00 Capital reserve 433,028,663.06 417,781,930.00 Surplus reserve 190,681,533.95 189,124,606.30 Retained earnings 70,899,913.33 56,887,564.49 Total shareholder's equity 1,242,559,305.34 1,211,743,295.79 Total liabilities & shareholder's equity 1,756,894,787.24 1,586,707,021.10


INCOME STATEMENT



60

Note XI 2009 2008 Revenue 4 329,884,720.37 31,695,983.77 Less: Cost of sales 4 325,864,105.50 29,869,743.45 Distribution and selling expenses 4,219,528.53 53,340.00 General and administrative expenses 21,454,622.02 28,890,346.84 Financial expenses 13,131,331.81 23,728,424.30 Add: Gain arising from fair value changes 236,870.00 (696,660.00) Investment income 5 49,993,572.08 10,051,011.98 Incl: Share of profit of associates and jointed ventures (2,255,908.58) (10,126,892.25) Operating profit 15,445,574.59 (41,491,518.84)

Add：Non-operating income 2,794,479.77 300,743.46

Less：Non-operating expenses 2,670,777.87 -

Incl: Loss on disposal of non-current assets 2,670,777.87 - Total profit 15,569,276.49 (41,190,775.38) Net profit 15,569,276.49 (41,190,775.38)


STATEMENT OF CHANGES IN EQUITY



61

Share Capital Surplus Retained Total Capital reserve reserve earnings equity 1. At the beginning of year 547,949,195.00 417,781,930.00 189,124,606.30 56,887,564.49 1,211,743,295.79 2. Movements of current year 1) Net profit - - - 15,569,276.49 15,569,276.49 2) Other comprehensive income - 15,246,733.06 - - 15,246,733.06 Subtotal of 1) and 2) - 15,246,733.06 - 15,569,276.49 30,816,009.55 3) Profit appropriation and distribution 1. Appropriation to surplus reserve - - 1,556,927.65 (1,556,927.65) - 3 At the ending of year 547,949,195.00 433,028,663.06 190,681,533.95 70,899,913.33 1,242,559,305.34


STATEMENT OF CHANGES IN EQUITY



62

Share Capital Surplus Retained Total Capital reserve reserve earnings equity 1. At beginning of year 456,624,329.00 503,073,637.81 189,124,606.30 189,403,205.87 1,338,225,778.98 2. Movements of current year 1) Net profit - - - (41,190,775.38) (41,190,775.38) 2) Other comprehensive Income - (85,291,707.81) - - (85,291,707.81) Subtotal of 1) and 2) - (85,291,707.81) - (41,190,775.38) (126,482,483.19) 3) Internal transfer within equity 1. Other 91,324,866.00 - - (91,324,866.00) - 4. At 31 December 2008 547,949,195.00 417,781,930.00 189,124,606.30 56,887,564.49 1,211,743,295.79


CASH FLOW STATEMENT



63

Note XI 2009 2008 1. CASH FLOWS FROM OPERATING ACTIVITIES Cash received from sales of goods or rendering of services 206,245,373.66 33,859,335.75 Refunds of taxes 17,300,254.52 - Cash received relating to other operating activities 402,039.11 1,443,733.55 Subtotal of cash inflows from operating Activities 223,947,667.29 35,303,069.30 Cash paid for goods and services 210,023,436.19 35,823,937.41 Cash paid to and on behalf of employees 18,126,930.55 22,739,416.71 Cash paid for all types of taxes 766,142.15 217,037.66 Cash paid relating to other operating activities 8,075,307.21 5,175,677.79 Subtotal of cash outflows from operating Activities 236,991,816.10 63,956,069.57 Net cash flows from operating activities 6 (13,044,148.81) (28,653,000.27) 2. CASH FLOWS FROM INVESTING ACTIVITIES Cash received from sale of investments 31,435,931.48 15,473,865.25 Cash received from return on investments 32,199,794.51 14,938,958.71 Net cash received from disposal of fixed assets intangible assets and other long-term assets 29,602,835.00 323,194.63 Net cash inflows from disposal of subsidiaries and other business units - 951,395.93 Subtotal of cash flows from investing activities 93,238,560.99 31,687,414.52 Cash paid for acquisition of fixed assets, intangible assets and other long-term assets 55,962.02 341,093.00 Cash paid for acquisition of investments 1,419,490.00 642,040.00 Subtotal of cash outflows from investing Activities 1,475,452.02 983,133.00 Net cash flows from investing activities 91,763,108.97 30,704,281.52


CASH FLOW STATEMENTS (Contiuned)


(Expressed in Renminbin Yuan)

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Note XI 2009 2008 3. CASH FLOWS FROM FINANCING ACTIVITIES Cash received from borrowings 385,000,000.00 335,000,000.00 Subtotal of cash inflows from financing Activities 385,000,000.00 335,000,000.00 Cash repayments of borrowings 430,000,000.00 315,000,000.00 Cash paid for distribution of dividends or profits and for interest expenses 16,393,197.02 22,962,301.21 Subtotal of cash outflows from financing Activities 446,393,197.02 337,962,301.21 Net cash flows from financing activities (61,393,197.02) (2,962,301.21) 4. EFFECT OF CHANGES IN EXCHANGE RATE ON CASH AND CASH EQUIVALENTS (2,652.53) 3,683.02 5. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 17,323,110.61 (907,336.94) Add: Cash and cash equivalents at beginning of year 45,996,135.52 46,903,472.46 6. CASH AND CASH EQUIVALENTS AT END OF YEAR 63,319,246.13 45,996,135.52


NOTES TO FINANCIAL STATEMENTS



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ⅠⅠⅠⅠ. Group Information Upon the approval by Shanghai Municipality Economic Committee as evidenced by approval document HJQ (1992) 299, Shanghai Highly (Group) Co., Ltd. (“the Company”) was established as a joint stock company in Shanghai, the People’s Republic of China (“the PRC”). The legal person business license (Qi Gu Hu Zong Zi 019016 (SHIJU)) was issued by Shanghai Municipality Administration of Industry and Commence on 20 June 1992. The legal representative is Shen Jian Fang. The Company listed its A shares and B shares on Shanghai Stock Exchange on 16 November 1992 and 18 January 1993 respectively. The Company’s current registered capital is Rmb 547,949,195, consisting of 547,949,195 shares (the par value of each share is Rmb 1). The registered capital has been verified by Ernst & Young Da Hua Certified Public Accountants with capital verification report (2008) 639 issued. The Company has completed the reform of its unlisted state-owned shares on 21 December 2005. As of 31 December 2008, the company has no conditional tradable shares and non-conditional tradable shares are 547,949,195 shares. The Company and its subsidiaries manufacture electronic machine and equipment. The Company is principally engaged in the research and development and manufacture of refrigeration equipment and the components and parts related thereto, automobile components and parts, compressors used in household equipment and the relevant materials and instruments, sale of self-made products; investment in other enterprises (licenses are needed wherever specified by applicable laws, rules and regulations). The Group’s parent and ultimate parent company is Shanghai Electric (Group) Company incorporated in Shanghai. The financial statements were approved and authorized for issue, upon the resolution of the Company’s board of directors on 7 April 2010.


NOTES TO FINANCIAL STATEMENTS (Continued)



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II. Significant Accounting Policies and Estimates

1. Preparation basis of the financial statements The financial statements have been prepared in accordance with the Accounting Standards for Business Enterprises-Basic Standard and 38 specific standards issued in February 2006, and the implementation guidance, interpretations and other relevant provisions issued subsequently by the MOF (correctly referred to as “Accounting Standards for Business Enterprises”). The financial statements are presented on a going concern basis.

2. Statement of compliance with Accounting Standards for Business Enterprises

Except for certain financial instruments the Company’s accounts have been prepared on an accrual basis using the historical cost as the basis of measurement. If the assets are impaired, corresponding provisions should be made according to relevant provisions. The financial statements present fairly and fully, the financial position of the Group and the Company as at 31 December 2009 and the financial results and the cash flows for the year then ended in accordance with Accounting Standards for Business Enterprises.

3. Accounting year

The accounting year of the Group is from 1 January to 31 December of each calendar year.

4. Functional currency

The Group’s reporting and presentation currency is the Renminbi (“RMB”). Unless otherwise stated, the unit of the currency is Yuan.





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II. Significant Accounting Policies and Estimates (Continued) 5. Business combinations

A business combination is a transaction or event that brings together two or more separate entities into one reporting entity. Business combinations are classified into business combinations involving entities under common control and Business combinations not involving entities under common control. Business combinations involving entities under common control A business combination involving entities 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 involving entities under common control, the party that, on the combination date, obtains control of another entity participating in the combination is the acquiring party, while that other entity participating in the combination is a party being acquired. Combination date is the date on which the acquiring party effectively obtains control of the party being acquired. Assets and liabilities that are obtained by the acquiring party in a business combination shall be measured at their carrying amounts at the combination date as recorded by the party being acquired. The difference between the carrying amount of the net assets obtained and the carrying amount of the consideration paid for the combination (or the aggregate face value of shares issued as consideration) shall be adjusted to capital reserve. If the capital reserve is not sufficient to absorb the difference, any excess shall be adjusted against retained earnings. The cost of a combination incurred by the acquiring party includes any costs directly attributable to the combination, and shall be recognized as an expense when incurred.





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II. Significant Accounting Policies and Estimates (Continued) 5. Business combinations (continued)

Business combination involving entities not under common control A business combination involving entities 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 involving entities not under common control, the party that, on the acquisition date, obtains control of another entity participating in the combination is the acquirer, while that other entity participating in the combination is the acquiree. Acquisition date is the date on which the acquirer effectively obtains control of the acquiree. For a business combination that involves one single exchange transaction, the cost of combination is the aggregate of the fair values, at the acquisition date, of the assets given, liabilities incurred or assumed, and equity securities issued by the acquirer, in exchange for control of the acquiree. The acquirer shall measure the acquiree’s identifiable assets, liabilities and contingent liabilities acquired in the business combination at their fair values on the acquisition date. Where the cost of a business combination exceeds the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference shall be recognized as goodwill. Where the cost of combination is less than the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference shall be accounted for according to the following requirements: the acquirer shall reassess the measurement of the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities and measurement of the cost of combination; if after that reassessment, the cost of combination is still less than the acquirer’s interest in the fair values of the acquiree’s identifiable net assets, the acquirer shall recognize the remaining difference immediately in the income statement for the current period.





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II. Significant Accounting Policies and Estimates (Continued) 6. Consolidated financial statements

The scope of consolidation of consolidated financial statements is determined based on control, and includes the financial statements of the Company and all of its subsidiaries for the year ended 31 December 2009. A subsidiary is an enterprise or entity that is controlled by the Company. Consolidated financial statements are prepared using uniform reporting dates and accounting policies. All significant inter-company transactions and balances within the Group are eliminated on consolidation. For any subsidiary consolidated by the Group, the portion of the profit or loss and net assets of such a subsidiary attributable to equity interests that are not owned, directly or indirectly by the Group is separately presented as minority interest in the consolidated financial statements.

7. Cash and cash equivalents Cash refers to cash on hand and cash in bank that can be readily used for payment at any time. Cash equivalents are short-term, highly liquid investments held by the Group, that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

8. Foreign currency translation The Group translates the amount of foreign currency transactions occurred into functional currency. The foreign currency transactions are recorded, on initial recognition in the functional currency, by applying to the spot exchange rate at the beginning of the month. At the balance sheet date, foreign currency monetary items are translated using the spot exchange rate at the balance sheet date. All the exchange differences, except for those relating to foreign currency borrowings specifically for construction and acquisition of fixed assets was capitalized, are recognized in profit and loss for the reporting period. Non-monetary foreign currency items measured at historical cost should still be translated at the spot exchange rate prevailing on the transaction date, and the amount denominated in the functional currency should not be changed. Non-monetary foreign currency items measured at fair value should be translated at the spot exchange rate prevailing at the date when the fair values are determined. The exchange difference thus resulted should be recognized as the income statement or capital surplus of the current period.





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II. Significant Accounting Policies and Estimates (Continued) 8. Foreign currency translation (continued)

Foreign currency cash flows and the cash flows of foreign subsidiaries are translated using the spot exchange rate prevailing at the beginning of the month that the cash flows occur. The effect of exchange rate changes on cash is separately presented as an adjustment item in the cash flow statement.

9. Financial instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Recognition and derecognition The Group recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the financial instrument. The Group derecognizes a financial asset (or part of a financial asset, or part of a group of similar financial assets) when the following conditions are met: (1) the rights to receive cash flows from the asset have expired; (2) the Group has transferred its rights to receive cash flows from the asset, or has

assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

If the underlying obligation of a financial liability has been discharged or cancelled or has expired, the financial liability is derecognized. If an existing financial liability is replaced by the same creditor, with a new financial liability that has substantially different terms, or if the terms of an existing financial liability are substantially revised, such replacement or revision is accounted for as the derecognition of the original liability and the recognition of a new liability, and the difference thus resulted is recognized in profit or loss for the current period.





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II. Significant Accounting Policies and Estimates (Continued) 9. Financial instruments (continued)

Recognition and derecognition(continued) Financial assets purchased and sold in the regular course are recognized and derecognized on the trade date. The regular course of purchases and sales of financial assets means transactions that require delivery of assets within the period agreed in the contract or generally established by regulations or conventions in the marketplace, the trade date being the date the Group commits to purchase or sell the assets.

Classification and measurement of financial assets Financial assets are, on initial recognition, classified into the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. A financial asset is recognized initially at fair value. In the case of financial assets at fair value through profit or loss, relevant transaction costs are directly charged to the profit and loss of the current period; transaction costs relating to financial assets of other categories are included in the amount initially recognized. The subsequent measurement of financial assets depends on their classification as follows: Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and those designated upon initial recognition as at fair value through profit or loss. A financial asset held for trading is the financial asset that meets one of the following conditions: 1) the financial asset is acquired for the purpose of selling it in a short term; 2) the financial asset is a part of a portfolio of identifiable financial instruments that are collectively managed, and there is objective evidence indicating that the enterprise recently manages this portfolio for the purpose of short-term profits; 3) the financial asset is a derivative, except for a derivative that is designated and effective hedging instrument, or 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 from an active market) whose fair value cannot be reliably measured. For such kind of financial assets, fair values are adopted for subsequent measurement. All the realized or unrealized gains or losses on these financial assets are recognized in profit or loss for the current period.





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Classification and measurement of financial assets (continued) Financial assets at fair value through profit or loss (continued) A financial asset is designated on initial recognition as at fair value through profit or loss only when it meets one of the following conditions: (1) the designation eliminates or significantly reduces the inconsistency in the

measurement or recognition of relevant gains or losses that would otherwise arise from measuring the financial instruments on different bases.

(2) a group of financial instruments is managed and its performance is evaluated on a fair value basis, and is reported to the enterprise’s key management personnel. Formal documentation regarding risk management or investment strategy has prepared.

(3) a hybrid instrument involves a hybrid instrument that contains one or more embedded derivatives, except where the embedded derivative does not significantly modify the cash flows of the hybrid instrument; or it is clear that separation of the embedded derivative(s) is prohibited.

(4) a hybrid instrument contains an embedded derivative that would need to be separately recorded and cannot be separately measured on acquisition or at the subsequent balance sheet date.

Investments in equity instruments that do not have a quoted market price in an active market and whose fair values cannot be reliably measured shall not be designated as financial assets at fair value through profit or loss. Financial assets on initial recognition classified as financial assets at fair value through profit or loss cannot be reclassified into financial assets of other categories; financial assets of other categories cannot be reclassified into financial assets at fair value through profit or loss, either.





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Classification and measurement of financial assets (continued)

Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity. Such kind of financial assets are subsequently measured at amortized cost using the effective interest method. Gains or losses arising from derecognition, impairment or amortization are recognized in profit or loss for the current period. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such kind of financial assets are subsequently measured at amortized cost using the effective interest method. Gains or losses arising from derecognition, impairment or amortization are recognized in profit or loss for the current period. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. After initial recognition, available-for-sale financial assets are measured at fair value. The premium/discount is amortized using effective interest method and recognized as interest income or expense. A gain or loss arising from a change in the fair value of an available-for-sale financial asset is recognized in a separate component of capital reserve, except for impairment losses and foreign exchange gains and losses resulted from monetary financial assets, until the financial asset is derecognized or determined to be impaired, at which time the accumulated gain or loss previously recognized in capital reserve is removed from capital reserve and recognized in profit or loss for the current period. Interests and dividends relating to an available-for-sale financial asset are recognized in profit or loss for the current period.





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Classification and measurement of financial liabilities The Group’s financial liabilities are, on initial recognition, classified into financial liabilities at fair value through profit or loss and other financial liabilities. For financial liabilities at fair value through profit or loss, relevant transaction costs are directly recognized in profit or loss for the current period, and transaction costs relating to other financial liabilities are included in the initial recognition amounts. The subsequent measurement of financial liabilities depends on their classification as follows: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and those designated as at fair value through profit or loss. A financial liability held for trading is the financial liability that meets one of the following conditions: 1) the financial liability is assumed for the purpose of repurchasing it in a short term; 2) the financial liability is a part of a portfolio of identifiable financial instruments that are collectively managed, and there is objective evidence indicating that the enterprise recently manages this portfolio for the purpose of short-term profits; 3) the financial liability is a derivative, except for a derivative that is designated and effective hedging instrument, or 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 form an active market) whose fair value cannot be reliably measured. For such kind of financial liabilities, fair values are adopted for subsequent measurement. All the realized or unrealized gains or losses on these financial liabilities are recognized in profit or loss for the current period. A financial liability is designated on initial recognition as at fair value through profit or loss only when it meets one of the following conditions: (1) the designation eliminates or significantly reduces the inconsistency in the

measurement or recognition of relevant gains or losses that would otherwise arise from measuring the financial instruments on different bases.

(2) a group of financial instruments is managed and its performance is evaluated on a fair value basis, and is reported to the enterprise’s key management personnel. Formal documentation regarding risk management or investment strategy has prepared.





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Classification and measurement of financial liabilities (continued)

(3) a hybrid instrument involves a hybrid instrument that contains one or more embedded derivatives, except where the embedded derivative does not significantly modify the cash flows of the hybrid instrument; or it is clear that separation of the embedded derivative(s) is prohibited.

(4) a hybrid instrument contains an embedded derivative that would need to be separately recorded and cannot be separately measured on acquisition or at the subsequent balance sheet date.

Financial liabilities on initial recognition classified as financial liabilities at fair value through profit or loss cannot be reclassified into financial liabilities of other categories; financial liabilities of other categories cannot be reclassified into financial liabilities at fair value through profit or loss, either. Other financial liabilities After initial recognition, such kind of financial liabilities are measured at amortized costs by using the effective interest method. Financial guarantee contracts A financial guarantee contract is an agreement between the guarantor and the creditor where the guarantor is required to assume the obligations and liabilities pursuant to the terms of a debt instrument when the debtor fails to perform the contract. Financial guarantee contracts are measured, on initial recognition, at fair value. For financial guarantee contracts that are not designated as at fair value through profit or loss, they are, after initial recognition, subsequently measured at the higher of: (i) the amount of the best estimate of the expenditure required to settle the present obligation at the balance sheet date, and (ii) the amount initially recognized less the accumulated amortization determined according to the principles of Accounting Standards for Business Enterprises No. 14 - Revenue.





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Derivative financial instruments and hedging The Group uses derivative financial instruments such as forward currency contracts and interest rate swap contracts to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. However, a derivative that is linked to and must be settled by delivery of an unquoted equity instrument (without a quoted price from an active market) whose fair value cannot be reliably measured, is measured at cost. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are directly recognized in profit or loss for current period.

Fair value of financial instruments The fair value of financial assets and liabilities for which there are active markets is determined by reference to the quoted market prices. For financial instruments where there are no active markets, fair value is determined using valuation techniques. Such techniques using recent arm's length market transactions; reference to the current market value of another instrument which is substantially the same; a discounted cash flow analysis; and option pricing models or other valuation models. Impairment of financial assets The Group assesses at the balance sheet date the carrying amount of every financial asset. If there is objective evidence indicating a financial asset may be impaired, a provision is provided for the impairment. Objective evidence that a financial asset is impaired is one or more events that occur after the initial recognition of the asset and have an impact (which can be reliably estimated) on the expected future cash flows of the financial asset.





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Impairment of financial assets (continued) Financial assets carried at amortized cost If there is objective evidence that an impairment loss on a financial asset has incurred, the carrying amount of the asset is reduced to the present value of expected future cash flows (excluding future credit losses that have not been incurred). The present value of expected future cash flows is discounted at the financial asset’s original effective interest rate and includes the value of any related collateral. For a financial asset that is individually significant, the asset is individually assessed for impairment, and the amount of impairment is recognized in profit or loss if there is objective evidence of impairment. For a financial asset that is not individually significant, it is included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment [or individually assessed for impairment]. If no objective evidence of impairment incurs for an individually assessed financial asset (whether the financial asset is individually significant or not individually significant), it is included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment. Assets for which an impairment loss is individually recognized is not included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment. If, subsequent to the Group’s recognition of an impairment loss on a financial asset carried at amortized cost, there if objective evidence of a recovery in value of the financial asset and the recovery can be related to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed and recognized in profit or loss. However, the reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment loss not been recognized at the date the impairment is reversed.





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Impairment of financial assets (continued) Available-for-sale financial assets If there is objective evidence that an available-for-sale asset is impaired, the accumulated loss arising from decline in fair value previously recognized in owner’s equity is removed from owner’s equity and recognized in profit or loss. The accumulated loss that removed from owner’s equity is the difference between the acquisition cost (net of any principal repayment and amortization) and the current fair value, less any impairment loss on the financial asset previously recognized in profit or loss. If, after an impairment loss has been recognized on an available-for-sale debt instrument, the fair value of the debt instrument increases in a subsequent period and the increase can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss is reversed with the amount of the reversal recognized in profit or loss. The impairment loss on an available-for-sale equity instrument is not reversed through profit or loss. Financial assets carried at cost If there is objective evidence that such an asset is impaired, the difference between its carrying amount and the present value of expected future cash flows which are discounted at the current market yield is recognized as an impairment loss in profit or loss. Once an impairment loss is recognized, it is not reversed. For a long-term equity investment accounted for according to the Accounting Standards for Business Enterprises No. 2- Long-term Equity Investments and which is not quoted in an active market and for which the fair value cannot be reliably measured, any impairment is accounted for in accordance with the above principles.





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Transfer of financial assets If the Group transfers substantially all the risks and rewards of ownership of the financial asset, the Group derecognizes the financial asset; if the Group retains substantially all the risks and rewards of ownership of the financial asset, the Group does not derecognize the financial asset. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, it accounts for the transactions as follows: (i) if the Group has not retained control, it derecognizes the financial asset and recognize any assets or liabilities resulted; (ii) if the Group has retained control, it continues to recognize the financial asset to the extent of its continuing involvement in the transferred financial asset and recognizes an associated liability.

10. Accounts receivable

The Group adopts allowance method to account for bad debt provision. Individual impairment assessment is performed for individually significant receivables. When there is objective evidence indicating that the individually significant receivables are impaired, impairment losses are recognized and bad debt provision is made according to the difference between present value of future cash flow and carrying value. The Company evaluates impairment losses for other receivables on an individual assessment basis, irrespective of materiality of amounts of other receivables.

11. Inventories

Inventory includes raw materials, work in progress, merchandise in stock, turnover materials and materials sent out for processing. Inventories are initially carried at the actual cost. Cost of inventories comprises all costs of purchase, costs of conversion and other costs. The actual cost of inventories transferred out is assigned by using weighted average method. Turnover materials include low value consumables and packing material, which are amortized by using immediate write-off method. The Group applies a perpetual inventory system.





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II. Significant Accounting Policies and Estimates (Continued) 11. Inventories (continued)

At the balance sheet date, the inventory is stated at the lower of cost and net realizable value. If the cost is higher than the net realizable value, provision for the inventory is made through profit or loss. If factors that result in the provision for the inventory disappear and make the net realizable value higher than their carrying amount, the amount of the write-down is reversed, to the extent of the amount of the provision for the inventory, and the reversed amount is recognized in profit or loss for the current period. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale and relevant taxes. The provision for decline in value of inventories is made on a category basis or an individual basis.

12. Long-term equity investments Long-term equity investments include investments in subsidiaries, joint ventures and associates, and investments where the Group does not have joint control or significant influence over the investees and which are not quoted in an active market and the fair values of which cannot be reliably measured. A long-term investment is recorded at its initial investment cost on acquisition. For long-term equity investments acquired through a business combination of entities under common control, the initial investment cost is the absorbing party’s share of the owner’s equity of the party being absorbed. For investments acquired through a business combination not involving entities under common control, the initial investment cost is the cost of acquisition. The initial investment cost of a long-term equity investment acquired other than through a business combination shall be (1) the actual purchase price paid and the costs, taxes and other necessary expenditures directly attributable to the acquisition if acquired by paying cash; (2) the fair value of the securities issued if acquired by issue of equity securities; and (3) the value stipulated in the investment contract or agreement if contributed by an investor, except where the value stipulated in the contract or agreement is not fair.





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II. Significant Accounting Policies and Estimates (Continued) 12. Long-term equity investments (continued)

The following long-term equity investments are accounted for using cost method: 1) a long-term equity investment where the Group does not have joint control or significant influence over the investee and which is not quoted in an active market and whose fair values cannot be reliably measured, 2) a long-term equity investment where the Group can exercise control over the investee. Under the cost method, the long-term equity investment is measured at its initial investment cost. Cash dividends or profit distributions declared by the investee is recognized as investment income in the current period. The investment income recognized is limited to the amount distributed to the Group out of the accumulated net profits of the investee arising after the investment was made. Any cash dividends or profit distributions received in excess of this amount are treated as a recovery of initial investment cost. The equity method is adopted when the Group holds jointly control, or exercises significant influence on the investee. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Under equity method, where the initial investment cost of a long-term equity investment exceeds the investing enterprise’s interest in the fair values of the investee’s identifiable net assets at the acquisition date, no adjustment is made to the initial investment cost. Where the initial investment cost is less than the investing enterprise’s interest in the fair values of the investee’s identifiable net assets at the acquisition date, the difference is charged to profit or loss for the current period, and the cost of the long-term equity investment is adjusted accordingly.





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II. Significant Accounting Policies and Estimates (Continued) 12. Long-term equity investments (continued)

Under the equity method, the Group recognizes its share of the net profits or losses made by the investee as investment income or losses, and adjusts the carrying amount of the investment accordingly. The Group recognizes its share of the investee’s net profits or losses after making appropriate adjustments to the investee’s net profits and losses based on the fair values of the investee’s identifiable assets at the acquisition date, using the Group’s accounting policies and periods, and eliminating the portion of the profits or losses arising from internal transactions with its joint ventures and associates, attributable to the investing entity according to its share ratio (but losses arising from internal transactions that belong to losses on the impairment of assets, shall be recognized in full). For the long-term equity investments in joint ventures and associations held before the first-adoption of new ASBEs, where there is debit balance of long-term equity investment related to the investment, the investment income and losses is recognized after deducting the debit balance amortized over the previous remaining period by using straight-line amortization method. The carrying amount of the investment is reduced based on the Group’s share of any profit distributions or cash dividends declared by the investee. The Group’s share of net losses of the investee is recognized by reducing the carrying amount of the investment together with any long-term interests that in substance for part of its net investment in the investee to zero, except to the extent that the Group has incurred obligations to assume additional losses. The Group adjusts the carrying amount of the long-term equity investment for any changes in owner’s equity of the investee (other than net profits or losses), includes the corresponding adjustments in the owner’s equity of the Group and transfers the changes to profit or loss for the current period on a pro-rata basis according to the proportion disposed of. On disposal of a long-term equity investment, the difference between the proceeds actually received and carrying amount is recognized in profit or loss for the current period. For a long-term equity investment accounted for using equity method, any changes in the owners’ equity of the investee (other than net profits or losses) included in the owner’s equity of the Group is transferred to profit or loss for the current period on a pro-rata basis according to the proportion disposed of.





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II. Significant Accounting Policies and Estimates (Continued) 13. Investment property

Investment property is property held to earn rentals or for capital appreciation or both. Investment property includes a land use right that is leased out, a land use right held for transfer upon capital appreciation, and a building that is leased out. An investment property is measured initially at its cost. If the economic benefits relating to an investment property will probably flow in and the cost can be reliably measured, subsequent costs incurred for the property is included in the cost of the investment property. Otherwise, subsequent costs are recognized in profit or loss for the period in which they are incurred. The Group uses the cost model for subsequent measurement of its investment property.

Useful life Residual Annual Value rate depreciation rate

Buildings leased out 20 4% 4.8% For the details of impairment tests and provisions for impairment of the investment property using cost model for subsequent measurement, please refer to No. 24 of Note II.

14. Fixed assets Fixed assets are tangible assets that are held by the Group for use in production of goods, supply of services, for rental or for administrative purposes, and have useful lives more than one accounting year. A fixed asset is recognized only when the economic benefits associated with the asset will probably flow to the Group and the cost of the asset can be measured reliably. Subsequent expenditure incurred for a fixed asset that meet the recognition criteria shall be included in the cost of the fixed asset, and the carrying amount of the component of the fixed asset that is replaced shall be derecognized. Otherwise, such expenditure shall be recognized in profit or loss in the period in which they are incurred.





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II. Significant Accounting Policies and Estimates (Continued) 14. Fixed assets (continued)

Fixed assets are initially measured at cost and the effect of any expected costs of abandoning the asset are considered. The cost of a purchased fixed asset comprises the purchase price, relevant taxes and any directly attributable expenditure for bringing the asset to working condition for its intended use. Depreciation is calculated using the straight-line method. The estimated useful lives, estimated residual value rates and annual depreciation rates of fixed assets are as follows:

Useful life Residual Annual Value rate depreciation

Buildings 20 4~10% 4.5~4.8% Machinery 10 4~10% 9~9.6% Vehicles 5 4~10% 18~19.2% Office equipment and others 5 4~10% 18~19.2%

Fixed assets that are held under finance leases shall be depreciated by applying the same policy as that for the fixed assets owned by the Group. If it can be reasonably determined that the ownership of the leased assets can be obtained at the end of the lease period, the leased assets are depreciated over their useful lives; otherwise, the leased assets are depreciated over the shorter of the lease terms and the useful lives of the leased assets. The Group reviews the useful life and estimated net residual value of a fixed asset and the depreciation method applied at least at each financial year-end, and make adjustments if necessary. For details of impairment tests and provions for impairment of fixed assets, please refer to No.24 of Note II.

15. Construction in progress The cost of construction in progress is determined according to the actual expenditure incurred for the construction, including all necessary construction expenditure incurred during the construction period, borrowing costs that shall be capitalized before the construction reaches the condition for intended use and other relevant expenses. Construction in progress is transferred to fixed assets when the asset is ready for its intended use.





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II. Significant Accounting Policies and Estimates (Continued) 16. Borrowing costs

Borrowing costs are interest and other costs incurred by the Group in connection with the borrowing of the funds. Borrowing costs include interest, amortization of discounts or premiums related to borrowings, ancillary costs incurred in connection with the arrangement of borrowings, and exchange differences arising from foreign currency borrowings. The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized. The amounts of other borrowing costs incurred are recognized as an expense in the period in which they are incurred. Qualifying assets are asset (fixed assets, investment property and inventories, etc.) that necessarily take a substantial period of time for acquisition, construction or production to get ready for their intended use or sale. The capitalization of borrowing costs commences only when all of the following conditions are satisfied: (1) Expenditures for the asset are being incurred; (2) Borrowing costs are being incurred; and (3) Activities relating to the acquisition, construction or production of the asset

that are necessary to prepare the asset for its intended use or sale have commenced.

Capitalization of borrowing costs ceases when the qualifying asset begins acquired, constructed or produced becomes ready for its intended use or sale. Any borrowing costs subsequently incurred are recognized as an expense in the period in which they are incurred. During the capitalization period, the amount of interest to be capitalized for each accounting period shall be determined as follows (1) Where funds are borrowed for a specific-purpose, the amount of interest to

be capitalized is the actual interest expense incurred on that borrowing for the period less any bank interest earned form depositing the borrowed funds before being used on the asset or any investment income on the temporary investment of those funds.





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II. Significant Accounting Policies and Estimates (Continued) 16. Borrowing costs (continued)

(2) Where funds are borrowed for a general-purpose, the amount of interest to be capitalized on such borrowings is determined by applying a weighted average interest rate to the weighted average of the excess amounts of accumulated expenditure on the asset over and above the amounts of specific-purpose borrowings

Capitalization of borrowing costs is suspended during periods in which the acquisition, construction or production of a qualifying asset is interrupted by activities other than those necessary to prepare the asset for its intended use or sale, when the interruption is for a continuous period of more than 3 months. Borrowing costs incurred during these periods recognized as an expense for the current period until the acquisition, construction or production is resumed.

17. Intangible assets Intangible assets of the Group are measured initially at cost.

The useful life of an intangible asset is determined according to the period over which it is expected to generate economic benefits for the Group. An intangible asset is regarded as having an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate economic limit to benefits for the Group.

The useful lives of the intangible assets are as follow:

Useful life Land use right 46-50 years Know-how 3-7 years Software use right 5 years

Land use rights that are purchased by the Group are accounted for as intangible assets. Buildings, such as plants that are developed and constructed by the Group, and relevant land use rights and buildings, are accounted for as intangible assets and fixed assets, respectively. Payments for the land and buildings purchased are allocated between the land use rights and the buildings; if they cannot be reasonably allocated all of the land use rights and buildings are accounted for as fixed assets.





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II. Significant Accounting Policies and Estimates (Continued) 17. Intangible assets (continued)

An intangible asset with a finite useful life is amortized using the straight-line method over its useful life. For an intangible asset with a finite useful life, the Group reviews the useful life and amortization method at least at each financial year-end and makes adjustment if necessary. The Group distinguishes the research and development costs between costs for research activities and costs for development activities.

Research activities can be defined as original investigation directed primarily towards obtaining and understanding new scientific and technical knowledge. Development activities involve the application of research findings and other scientific knowledge into certain program or design to produce materials, devices and products, etc, which are new or substantially improved. Expenditure on the research phase shall be recognized in profit or loss in the period in which it is incurred. Expenditure on the development phase can be capitalized only when the Group can demonstrate: (1) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (2) its intention to complete the asset and use or sell it; (3) how the intangible asset will generate economic benefits, along with the demonstration of existence of a market for the output of the intangible asset or the intangible asset itself, or that it is to be used internally, and the usefulness of the intangible asset; (4) the availability of adequate technical, financial and other resources to complete the development and the ability to use or sell the intangible asset; and (5) the ability to reliably measure the expenditure attributable to the intangible asset during its development. Expenditure which does not meet these criteria is recognized in profit or loss in the period in which it is incurred. Deferred development costs are stated at cost less any impairment losses and are amortized using the straight-line method over the commercial lives of the underlying products, commencing on the date when the products are put into commercial production. For the detail of the impairment tests and provisions for impairment of intangible assets, please refer to No. 24 of Note II.





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II. Significant Accounting Policies and Estimates (Continued) 18. Long-term deferred expenses

Long-term deferred expenses is amortized by straight-line method, the period is

listed below：

Period

Molds 3-5 years 19. Provisions

The Group recognizes a provision for an obligation related to a contingency meets the following conditions: (1) The obligation is a present obligation of the Group; (2) It is probable that an outflow of economic benefits from the Group will be

required to settle the obligation; (3) The amount of the obligation can be measured reliably.

A provision is initially measured at the best estimate of the expenditure required to settle the related present obligation, with comprehensive consideration of factors such as the risks, uncertainty and time value of money relating to a contingency. The carrying amount of a provision is reviewed at the balance sheet date. If there is clear evidence that the carrying amount does not reflect the current best estimate, the carrying amount is adjusted to the best estimate.

20. Revenue Revenue is recognized only when it is probable that the associated economic benefits will flow to the Group, its amount can be measured reliably, and all of the following conditions are satisfied. Revenue from the sales of goods The Group has transferred to the buyer the significant risks and rewards of ownership of the goods; the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the associated costs incurred or to be incurred can be measured reliably.





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II. Significant Accounting Policies and Estimates (Continued) 20. Revenue (continued)

Revenue from the rendering of services When the outcome of a transaction involving the rendering of services can be estimated reliably at the balance sheet date, revenue associated with the transaction is recognized using the percentage of completion method, or otherwise, the revenue is recognized to the extent of costs incurred that are expected to be recoverable. The outcome of a transaction involving rendering of services can be estimated reliably when all of the following conditions are satisfied: the amount of revenue can be measured reliably; it is probable that the associated economic benefits will flow to the Group; the stage of completion of the transaction can be measured reliably; the costs incurred and to be incurred for the transaction can be measured reliably. The Group determines the stage of completion of a transaction involving the rendering of services by using the proportion of services performed to date to the total services to be performed. When the Group has entered into a contract or agreement with other enterprises comprising both sales of goods and rendering of services, if the sales of goods and the rendering of services can be separately identified and measured, they are accounted for separately; if the sales of goods and the rendering of services cannot be separately identified, or can be separately identified but cannot be separately measured, the contract is treated as the sales of goods. Interest income It is determined according to the length of time for which the Group’s currency fund is used by others and the effective interest rate. Royalty income It is determined according to period and method of charging as stipulated in the relevant contract or agreement. Lease income Lease income from operating leases is recognized on a straight-line basis over the lease term.





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II. Significant Accounting Policies and Estimates (Continued) 21. Government grants

Government grant shall be recognized only when the attached conditions are met. The government grant shall be measured at the amount received or receivable when in the form of monetary asset, and at fair value when in the form of non-monetary asset. Where the fair value is not reliably determinable, the government grant is measured at the nominal amount. Government grant related to income shall be recognized as deferred income and recognized in profit or loss over the periods in which the related costs are recognized if it is a compensation for related expenses or losses to be incurred by the entity in subsequent periods, and shall be recognized immediately in profit or loss for the current period if it is a compensation for related expenses or losses already incurred. Government grant related to an asset shall be recognized as deferred income and evenly amortized to profit or loss over the useful life of the related asset. That measured at a nominal amount, however, is recognized immediately in profit or loss for the current period.

22. Income taxes

Income tax comprises current and deferred tax. Income tax is recognized as income or an expense and included in profit or loss for the current period, or recognized directly in owner’s equity if it is arising from a business combination or relating to a transaction or event which is recognized directly in owner’s equity. Current income tax liabilities or assets for the current and prior periods are measured at the amount expected to be paid (or recovered) according to the requirements of tax laws. For temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts, and temporary differences between the carrying amounts and the tax bases of items, the tax bases of which can be determined for tax purposes, but which have not been recognized as assets and liabilities, deferred taxes are provided using the liability method. A deferred tax liability is recognized for all taxable temporary differences,

except：





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II. Significant Accounting Policies and Estimates (Continued)

22. Income taxes (continued) (1) where the taxable temporary differences arise from the initial recognition

of goodwill, or the initial recognition of an asset or liability in a transaction which contains both of the following characteristics: (i) the transaction is not a business combination; and (ii) at the time of the transaction, it affects neither accounting profit nor taxable profit or deductible loss.

(2) in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

A deferred tax asset is recognized for deductible temporary differences, carry forward of unused deductible tax losses and tax credits, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of deductible tax losses and tax credits can be utilized, except: (1) where the deferred tax asset arises from a transaction that is not a business

combination and, at the time of the transaction, neither the accounting profit nor taxable profit or loss is affected.

(2) in respect of the deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, a deferred tax asset is only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized in the future.

At the balance sheet date, deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, according to the requirements of tax laws. The measurement of deferred tax assets and deferred tax liabilities reflects the tax consequences that would follow from the manner in which the Group expects at the balance sheet date, to recover the assets or settle the liabilities. At the balance sheet date, the Group reviews the carrying amount of deferred tax assets. If it is no longer probable that sufficient taxable profit will be available in future periods to allow the benefits of the deferred tax assets to be used, the Group reduces the carrying amount of deferred tax assets. The amount of such reduction is reversed when it becomes probable that sufficient taxable profit will be available.





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23. Leases

A finance lease is a lease that transfers in substance all the risks and rewards incident to ownership of an asset. An operating lease is a lease other than a finance lease. In the case of the lessee of an operating lease Lease payments under an operating lease are recognized by a lessee on a straight-line basis over the lease term, and either included in the cost of the related asset or charged to profit or loss for the current period. In the case of the lessor of an operating lease Rent income under a finance lease is recognized by a lessor on a straight-line basis over the lease term, through profit or loss. In the case of the lessee of a finance lease For an asset that is held under a finance lease, at the lease commencement, the leased asset is recorded at the lower of its fair value at the lease commencement and the present value of the minimum lease payments, and the minimum lease payments is recorded as the carrying amount of the long-term payables; the difference between the recorded amount of the leased asset and the recorded amount of the payable is accounted for as unrecognized finance charge, which is amortized using the effective interest rate method over each period during the lease term.





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II. Significant Accounting Policies and Estimates (Continued) 24. Impairment of assets

The Group determines the impairment of assets, other than the impairment of inventories, deferred income taxes and financial assets, using the following methods: The Group assesses at the balance sheet date whether there is any indication that an asset may be impaired. If any indication exists that an asset may be impaired, the Group estimates the recoverable amount of the asset and perform impairment tests. Goodwill arising in a business combination and an intangible asset with an indefinite useful life are tested for impairment at least at each year-end, irrespective of whether there is any indication that the asset may be impaired. The recoverable amount of an asset is the higher of its fair value less costs to sell and the present value of the future cash flow expected to be derived from the asset. The Group estimates the recoverable amount on an individual basis. If it is not possible to estimate the recoverable amount of the individual asset, the Group determines the recoverable amount of the asset group to which the asset belongs. Identification of an asset group is based on whether major cash inflows generated by the asset group are largely independent of the cash inflows from other assets or asset groups. When the recoverable amount of an asset or asset group is less than its carrying amount, the carrying amount is reduced to the recoverable amount. The reduction in carrying amount is treated as impairment loss and recognized in profit or loss for the current period. For the purpose of impairment testing, the carrying amount of goodwill acquired in a business combination is allocated from the acquisition date on a reasonable basis, to each of the related asset groups; if it is impossible to allocate to the related asset groups, it is allocated to each of the related sets of asset groups. Each of the related asset groups or sets asset groups is an asset group or set of asset group that is able to benefit from the synergies of the business combination and shall not be larger than a reportable segment determined by the Group.





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II. Significant Accounting Policies and Estimates (Continued) 24 Impairment of assets (continued)

In testing an asset group or a set of asset groups to which goodwill has been allocated for impairment, if there is any indication of impairment, the Group firstly tests the asset group or set of asset groups excluding the amount of goodwill allocated for impairment, i.e., it determines and compare the recoverable amount with the related carrying amount and recognize any impairment loss. After that, the Group tests the asset group or set of asset groups including goodwill for impairment, the carrying amount (including the portion of the carrying amount of goodwill allocated) of the related asset group or set of asset groups is compared to its recoverable amount. If the carrying amount of the asset group or set of asset groups is higher than its recoverable amount, the amount of the impairment loss firstly reduces the carrying amount of the goodwill allocated to the asset group or set of asset groups, and then reduce the carrying amount of other assets (other than the goodwill) within the asset group or set of asset groups, pro rata on the basis of the carrying amount of each asset. Once the above impairment loss is recognized, it cannot be reversed in subsequent accounting periods.

25. Employee benefits

Employee benefits are all forms of consideration given and other relevant expenditures incurred by the Group in exchange for service rendered by employees. In the accounting period in which an employee has rendered service to the Group, the employee benefits payable is recognized as a liability. For employee benefits payable due in more than 1 year after the balance sheet date, if the discounted value is significant, it is presented at the present value. The employees of the Group participate in social insurance, such as pension insurance, medical insurance, unemployment insurance, etc., and housing accumulation fund, which is managed by the local government, and the relevant expenditure is recognized, when incurred, in the costs of relevant assets or the profit and loss for the current period.





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II. Significant Accounting Policies and Estimates (Continued) 25. Employee benefits (continued)

When the Group terminates the employment relationship with employees before the end of the employment contracts or provides compensation as an offer to encourage employees to accept voluntary redundancy, a provisions recognized for the compensation arising from termination of employment relationship with employees, with a corresponding charge to profit or loss for the current period, when both of the following conditions are satisfied: (a) The Group has a formal plan for termination of employment relationship, or has made an offer for voluntary redundancy, which will be implemented immediately. (b) The Group cannot unilaterally withdraw from the termination plan or the redundancy offer. The same principle is applied to the early retirement plan, as it is for the above-mentioned termination benefits. The Group recognizes salaries, social insurance premiums, etc., to be paid for the early retired employees, during the period from the date when the employees stop rendering service to the normal retirement date, as employee benefits payable through profit or loss for the current period, when the above conditions for the recognition of termination benefit plan are satisfied.

26. Significant accounting judgments and estimates

The preparation of the Group's financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the balance sheet date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future. Judgments In the process of applying the Group's accounting policies, management has made the following judgments which have significant effect on the amounts recognized in the financial statements: Operating lease-the Group as lessor The Group has entered into lease contracts on its investment property portfolio. The Group has determined, based on an evaluation of the terms and conditions of the contracts, that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.





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26. Significant accounting judgments and estimates (continued) Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the future accounting periods, are discussed below. Impairment of available-for-sale financial assets The Group classifies certain assets as available-for-sale and recognizes the movements of their fair values in equity. When the fair value declines, management shall make assumptions about the decline in value to determine whether an impairment loss exists that should be recognized in the income statement. Impairment of non-financial assets (other than goodwill) The Group assesses whether there are any indicators of impairment for all non-financial assets at the balance sheet date. Intangible assets with indefinite useful lives are tested for impairment annually and at other times when such indicator exists. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When calculating the present value of expected future cash flows from an asset or asset group, the management shall estimate the expected future cash flows from the asset or asset group and choose a suitable discount rate in order to calculate the present value of those cash flows.

Deferred tax assets Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profit together with future tax planning strategies.





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III. Taxes 1. The major categories of taxes applicable to the Group and respective tax rates are

as follows: Value added tax (VAT) – VAT is levied at 17% on the invoiced value of sales,

but the Group may deduct the VAT it has paid on eligible purchases.

Business tax – The Group is subject to a business tax of 5% on its

taxable profit. City maintenance and Construction surtax – It is levied at 1% and 7% on the turnover taxes paid.

Educational surcharge – It is levied at 3% on the turnover taxes paid. Corporate income tax * – In accordance with the Corporate Income Tax Laws

of the PRC effective from 1 January 2008, the corporate income tax shall be levied at 15% and 25% on the taxable profit from 2008. The Group changed the corporate income tax rate of 15% and 33% into 15%, 20%and25%.

2. The following is the corporate income tax rate and relating approval for the

company and the subsidiaries within the consolidated scope: (1) Shanghai Hitachi Electrical Appliance Co., Ltd. and Shanghai Hailite Special

Compressor Co. Ltd. received "high-tech enterprise certificate" jointly issued by Science and Technology Commission of Shanghai Municipality, Shanghai Municipal Finance Bureau, Shanghai National Tax Bureau and Shanghai Local Tax Bureau. The certification is valid for 3 years. According to the tax policies relating to high-tech enterprises, the applicable corporate income tax rate for the company is 15% within three years (2008-2010) after the certification is obtained.

(2) For those companies, including the company and Shanghai Highly Group Trading

Co., Ltd. enjoying a favorable corporate income tax rate of 15%, the corporate income tax rate will transit to 25% gradually on a five-year basis. Other subsidiaries are subject to a corporate income tax rate of 25% of the taxable income according to Corporate Income Tax Laws of the PRC and relevant regulations implemented as of 1 January, 2008.





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IV. Consolidation Scope 1. The subsidiaries The material subsidiaries of the Company are as follows: Investee Registered Business Registered Investment Shareholding Voting Consol Monitory Remarks address capital (‘000) (‘000) power Interest Shanghai Hitachi Electric Appliance Co., Ltd. Shanghai Industry USD 219,040 RMB 1,279,870 75 75 Yes 502,050,029.03 Shanghai Jinxuan Real Estate Co., Ltd. Shanghai Real estate RMB 6,000 RMB 6,000 100 100 Yes Shanghai Highly Foundry Co., Ltd. Shanghai Industry RMB 40,700 RMB 32,560 80 80 Yes 12,743,823.45 Shanghai Hailite Special Compressor Co. Ltd. Shanghai Industry RMB 20,000 RMB 14,000 70 70 Yes 5,124,720.64 Shanghai Highly (Group) Trade Co., Ltd. Shanghai Commerce RMB 5,000 RMB 4,000 80 80 Yes 1,316,992.63 Qingdao Highly Electric Machinery Co., Ltd. Qingdao Industry RMB 426,930 RMB 43,950 100 100 Yes Nanchang Highly Electric Machinery Co., Ltd. Nanchang Industry RMB 410,000 RMB 410,000 75*100 100 Yes Note 1 Shanghai Hailite-Klimat Refrigerating Equipements Co., Ltd. Shanghai Industry RMB 5,000 RMB 3,000 70*60 60 Yes

Note 1: Shanghai Hitachi Electric Appliance Co., Ltd. injected capital RMB

210,000,000.00 to Nanchang Highly Electric Machinery Co., Ltd. As at 31 December 2009, the registered capital of Nanchang Highly Electric Machinery Co., Ltd. has been raised from RMB 200,000,000.00 to RMB 410,000,000.00.

2. Changes of consolidation scope

The consolidation scope remains the same as last year.





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V. Notes to Key Items of Consolidated Financial Statements 1. Cash and cash equivalents

2009 2008 Original Rate Equivalent Original Rate Equivalent currency in RMB currency in RMB Cash — RMB 98,681.96 103,451.40 — USD 3,370.70 6.8282 23,015.84 1,141.94 6.8346 7,804.70 — JPY 1,050,736.70 0.0738 77,544.37 2,156,147.00 0.0757 163,112.53 — EUR 2,523.32 9.7971 24,721.22 4,023.49 9.6590 38,862.89 223,963.39 313,231.52 Cash in bank — RMB 122,168,339.40 117,367,019.02 — USD 2,482,511.09 6.8282 16,951,082.25 1,552,027.07 6.8346 10,607,484.21 — JPY 725,796.88 0.0738 53,563.81 844,529.00 0.0757 63,888.62 — EUR 64.85 9.7971 635.41 52,291.54 9.6590 505,083.98 — INR 1,359,557.56 0.1475 200,534.74 416,421.87 0.1406 58,548.91 139,374,155.61 128,602,024.74 Others — RMB 21,937,896.58 18,372,173.30 161,536,015.58 147,287,429.56 Less: Items not included in

cash and cash equivalents (Note) 9,059,563.02 18,361,179.15 Cash and cash equivalents 152,476,452.56 128,926,250.41

As at 31 December 2009, The ownership of deposit for letters for credit with the amount of RMB9,059,563.02 is restricted. (As at 31 December 2008: RMB 18,361,179.15) Interest income earned on current deposits is calculated by using current deposit interest rate.

2. Financial assets held for trading 2009 2008 Investments in equity instruments

held for trading 551,925.00 198,950.00

The management believes that there are no significant restrictions on the realization of the financial assets held for trading at 31 December, 2009.





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V. Notes to Key Items of Consolidated Financial Statements (Continued) 3. Notes receivable

2009 2008 Trade acceptance bill 425,456.11 - Bank acceptance bill 804,568,189.99 375,108,893.22

804,993,646.10 375,108,893.22

As at 31 December 2009, top 5 of endorsement on recourse but outstanding notes was as follows:

Drawer Date of issue Date of expiry Amount

Zhuhai Gree Electric Appliance Co., Ltd. 2009-07-31 2010-01-31 22,127,182.70 Electrical isolation of Hainan integrity Marketing Co., Ltd. 2009-09-09 2010-03-09 10,000,000.00 Qingdao Haida Rui Procurement Services Limited 2009-12-24 2010-06-23 10,000,000.00 Shanghai Crane Transportation Machinery Factory Co., Ltd. 2009-09-23 2010-03-23 4,758,000.00 Nanchang Ochs Electric Manufacturing Co., Ltd. 2009-12-01 2010-06-01 4,500,000.00 51,385,182.70

As at 31 December 2008, top 5 of endorsement on recourse but outstanding notes was as follows:

Drawer Date of issue Date of expiry Amount

Sichuan Changhong Electric Co., Ltd. 2008-07-30 2009-01-29 6,649,581.30 Gree Electric Appliance (Chongqing) Co., Ltd. 2008-11-28 2009-05-28 5,000,000.00 Chongqing No.2 Light Industry Supply & Sales Co. Ltd. 2008-09-28 2009-03-28 5,000,000.00 Wuhan Industry & Trade Co., Ltd. 2008-10-30 2009-04-29 5,000,000.00 Qingdao Haier Co., Ltd. Parts Procurement 2008-11-11 2009-05-11 4,127,460.48 25,777,041.78

As at 31 December 2009, notes receivable with the value of RMB 887,960,997.12 have been discounted. (As at 31 December 2008: RMB 603,360,019.87 ).





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V. Notes to Key Items of Consolidated Financial Statements (Continued)

4. Accounts receivable The transaction terms between the Group and its customers are mainly on credit, and they require the new customers to make prepayments or pay right after the delivery of the good. The credit period is generally 2 months. An aging analysis of accounts receivable is as follows:

2009 2008 Within 1 year 929,538,394.72 603,813,446.81 1 to 2 years 4,814,009.33 5,360,476.82 2 to 3 years 4,507,411.43 285,108.29 Over 3 years 11,971,302.22 11,944,868.97 950,831,117.70 621,403,900.89 Less: Provision 17,445,839.51 15,526,587.27 933,385,278.19 605,877,313.62

Changes in provision for bad debts are as follows: Opening balance Provision Decrease Closing Reversal Write-off balance 2009 15,526,587.27 1,934,059.22 488,255.82 (473,448.84) 17,445,839.51 2008 19,666,709.66 3,507,978.32 284,226.33 7,363,874.38 15,526,587.27

2009 2008 Amount Percentage Bad debt Provision Amount Percentage Bad debt Provision Provision rate Provision rate Individually significant items 835,969,652.80 87.92% 11,944,868.97 1.43% 523,711,949.98 84.28% 11,944,868.97 2.28% Group of individually insignificant items with similar credit risk characteristics, that have significant risk 114,861,464.90 12.08% 5,500,970.54 4.79% 97,691,950.91 15.72% 3,581,718.30 3.67% 950,831,117.70 100.00% 17,445,839.51 1.83% 621,403,900.89 100.00% 15,526,587.27 2.50%





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V. Notes to Key Items of Consolidated Financial Statements (Continued) 4. Accounts receivable (continued)

As at 31 December 2009, the bad debts of accounts receivable, which are individually significant items or individually insignificant items, the impairment of which is separately tested are listed below:

Amount Bad debt Percentage Reason Provision

Fedders Xinle Co. Ltd. 2,838,906.39 2,838,906.39 100% uncollectible Qingdao Aucma Group Air-Conditioner Supporting materials Co., Ltd. 11,944,868.97 11,944,868.97 100% uncollectible 14,783,775.36 14,783,775.36

As at 31 December 2008, the bad debts of accounts receivable, which are individually significant items or individually insignificant items, the impairment of which is separately tested are listed below:

Amount Bad debt Percentage Reason Provision

Fedders Xinle Co. Ltd. 2,838,906.39 2,838,906.39 100% uncollectible Qingdao Aucma Group Air-Conditioner Supporting materials Co., Ltd. 11,944,868.97 11,944,868.97 100% uncollectible 14,783,775.36 14,783,775.36

The amount of accounts receivable group of individually insignificant items with similar credit risk characteristics, which have significant risk are as follows:

2009 2008 Book Value Bad Debt Provision Book Value Bad Debt Provision Amount Percentage Amount Percentage Amount Percentage Amount Percentage % % % % Within 1 year 105,513,610.89 91.87% 1,013,356.98 0.96% 92,046,365.80 94.22% 124,454.51 0.14% Within 6 months 54,845,761.47 47.76% - - 85,823,640.40 87.85% - - 6 to 12 months 50,667,849.42 44.11% 1,013,356.98 2.00% 6,222,725.40 6.37% 124,454.51 2.00% 1 to 2 years 4,814,009.33 4.19% 962,801.87 20.00% 5,360,476.82 5.49% 3,343,220.47 62.37% 2 to 3 years 4,507,411.43 3.92% 3,506,308.41 77.79% 285,108.29 0.29% 114,043.32 40.00% Over 3 years 26,433.25 0.02% 18,503.28 70.00% - - - - 114,861,464.90 100.00% 5,500,970.54 4.79% 97,691,950.91 100.00% 3,581,718.30 3.67%





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V. Notes to Key Items of Consolidated Financial Statements (Continued) 4. Accounts receivable (continued) The amount of the accounts receivable written off during 2009 is as follows:

There is no accounts receivable written off this year within the group.

The amount of the accounts receivable written off during 2008 is as follows: Nature Amount of Reason of Related-party written off written off transactions Beijing Jing Electric payment Refrigeration for goods Equipment Co., Ltd. 6,459,135.03 Unreceivable No

Shanghai Fei Shu payment Appliance Co., Ltd. for goods 588,375.00 Unreceivable No Wu Ye Heavy payment Engineering Limited for goods Liability Company 181,732.00 Unreceivable No

Others payment for goods 134,632.35 Unreceivable No 7,363,874.38

At 31 December 2009, within the aforesaid balance of accounts receivable, there

was no amount due from shareholders that held 5% or more of the Company’s voting shares (As at 31 December 2008: nil).





104

V. Notes to Key Items of Consolidated Financial Statements (Continued) 4. Accounts receivable (continued) Top 5 debtors at 12 December 2009 are listed as follows: Relationship Amount Aging Percentage with the group %

Zhuhai Gree Electric Appliance Co., Ltd. The third party 92,504,832.67 within 2 months 9.91%

Guangdong Chigo The third party 38,428,062.00 within 2 months 4.12% Air Conditioning 45,197,118.00 2 to 4 months 4.84% Co., Ltd. 5,339,098.29 4 to 12 months 0.57% Ningbo Aux Air-conditioning Co., Ltd. The third party 75,960,715.65 within 2 months 8.14% Gree Electric Appliance

(Chongqing) Co., Ltd. The third party 43,379,211.06 within 2 months 4.65% Nanchang Ochs Electric

Manufacturing Co., Ltd. The third party 38,189,080.52 within 2 months 4.09% 338,998,118.19 36.32%

Top 5 debtors at 12 December 2008 are listed as follows:

Relationship Amount Aging Percentage with the group %

Guangdong Chigo The third party 55,067,567.00 within 2 months 9.09% Air Conditioning 12,031,380.00 2 to 4 months 1.99% Co., Ltd. 1,146,332.49 4 to 6 months 0.19% Zhuhai Gree Electric

Appliance Co., Ltd. The third party 66,394,261.48 within 2 months 10.96% Guangdong Midea Group Wuhu Refrigeration Equipment Co., Ltd. The third party 18,708,870.00 within 2 months 3.09% 19,547,150.00 2 to 4 months 3.23% 16,411,555.17 4 to 6 months 2.71% Midea Group Wuhan

Refrigeration Equipment Co., Ltd. The third party 40,962,488.13 within 2 months 6.76% Ningbo Aux

Air-conditioning Co., Ltd. The third party 40,778,737.61 within 2 months 6.73%

271,048,341.88 44.74%





105

V. Notes to Key Items of Consolidated Financial Statements (Continued) 4. Accounts receivable (continued) The amount of related parties at 31 December 2009 is listed below： Relation Amount Percentage with the group % Kena Shanghai Electric Machinery Co., Ltd. joint venture 42,435,121.38 4.55% The amount of related parties at 31 December 2008 is listed below： Relationship Amount Percentage with the group % Kena Shanghai Electric Machinery Co., Ltd. joint venture 3,601,573.97 0.59%

The accounts receivable denominated in foreign currency is listed below:

2009 2008 Original currency Rate Equivalent Original currency Rate Equivalent in RMB in RMB — RMB 767,501,416.59 516,354,785.20 — USD 21,600,647.59 6.8282 147,493,541.87 13,066,049.05 6.8346 89,301,218.84 — JPY 57,945,600.00 0.0738 4,276,385.28 46,739.10 0.0757 3,538.15 — EUR 1,440,623.70 9.7971 14,113,934.45 22,545.96 9.6590 217,771.43 933,385,278.19 605,877,313.62





106

V. Notes to Key Items of Consolidated Financial Statements (Continued) 5. Other receivables

An aging analysis of other receivables is as follows: 2009 2008 Within 1 year 42,073,032.46 13,287,787.24 1 to 2 years 4,242,997.22 2,514,452.49 2 to 3 years 1,317,700.40 598,062.17 Over 3 years 2,174,149.29 2,908,129.32 49,807,879.37 19,308,431.22

Less：Provision

for bad debt - - 49,807,879.37 19,308,431.22 2009 2008 Amount Percentage Bad debt Provision Amount Percentage Bad debt Provision provision rate provision rate Individually significant items 30,126,293.23 60% - - - - - - Other insignificant items 19,681,586.14 40% - - 19,308,431.22 100% - - 49,807,879.37 100% - - 19,308,431.22 100% - -





107

V. Notes to Key Items of Consolidated Financial Statements (Continued) 5. Other receivables (continued) Top 5 debtors at 31 December 2009 are listed below: Relationship Amount Aging Percentage with the group %

Export tax refund receivable the third party 30,126,293.23 within 6 months 60.48%

Car loans the third party 4,318,435.00 over 3 years 8.67% Imprest the third party 1,381,548.16 over 3 years 2.77% Lending staff salaries the third party 1,055,695.83 within 6 months 2.12% Earnest money the third party 827,700.00 over 3 years 1.66% 37,709,672.22 75.71%

Top 5 debtors at 31 December 2008 are listed below:

Relationship Amount Aging Percentage with the group %

Car loans the third party 6,549,185.00 over 3 years 33.91% Temporary borrowing the third party 6,000,000.00 within 6 months 31.07% Imprest the third party 1,049,788.66 over 3 years 5.44% Earnest money the third party 827,700.00 over 3 years 4.29% Lending staff salaries the third party 588,176.57 within 6 months 3.05% 15,014,850.23 77.75%

At 31 December 2009, within the aforesaid balance, there was no amount due from the related parties (2008: nil).





108


6．．．． Prepayments

An aging analysis of the prepayments is as follows:

2009 2008 Balance Percent Balance Percent Within 1 year 110,438,229.22 94.25% 96,811,456.68 100% 1 to 2 years 6,743,580.00 5.75% - - 117,181,809.22 100% 96,811,456.68 100%

A description of the prepayments is as follows:

Nature Amount Prepaid Time Reasons for not Clearing Shanghai Satake Cool-Heat & Control Equipment Technique Co.,Ltd. Procurement 3,627,900.00 1 to 2 years Under acceptance Shinwa Kohsan Co.,Ltd. Equipment Procurement 2,054,223.00 1 to 2 years Under acceptance Baoding Sanyi Tianxing Equipment Electric Co.,Ltd Procurement 707,400.00 1 to 2 years Under acceptance

Shenzhen Kingcable Equipment Electronics Co., Ltd. Procurement 74,400.00 1 to 2 years Under acceptance

Top 5 debtors at 31 December 2009 are listed below: Relationship Amount Prepaid Time Reasons for with the group not Clearing Choka Trading co.,Ltd the third party 15,791,522.18 within 1 year Under acceptance The Multi-Trade Co.,Ltd. the third party 10,382,184.00 within 1 year Under acceptance Shanghai Municipal Electric Power Co. (East Bureau) the third party 10,350,011.32 within 6 months Not Settled Nihon Meiwa Co., Ltd. the third party 6,366,577.44 within 6 months Under acceptance Western Japan Trading Co., Ltd the third party 6,079,759.68 within 6 months Under acceptance

48,970,054.62





109


6．．．． Prepayments (continued)

Top 5 debtors at 31 December 2008 are listed below: Relationship Amount Prepaid Time Reasons for With the Group not Clearing Choka Trading co.,Ltd the third party 7,155,423.34 within 1 year Under acceptance The Minster Machine Company the third party 6,626,144.70 within 6 months Under acceptance Nihon Meiwa Co., Ltd. the third party 4,930,053.76 within 1 year Under acceptance ChuYi System Co., Ltd. the third party 4,140,165.57 within 6 months Under acceptance Western Japan Trading Co., Ltd the third party 3,960,277.50 within 6 months Under acceptance 26,812,064.87

7. Inventories

2009 2008 Carring Amount Provision Book Value Carrying Amount Provision Book Value Raw materials 175,678,255.62 (27,838,354.98) 147,839,900.64 141,627,926.68 (29,614,641.90) 112,013,284.78 Work in progress 56,020,020.90 (1,365,180.28) 54,654,840.62 35,552,669.50 (1,198,891.37) 34,353,778.13 Merchandise in stock 367,081,634.57 (10,558,601.82) 356,523,032.75 455,237,468.75 (22,947,832.84) 432,289,635.91 Turnover materials 11,204,584.57 - 11,204,584.57 14,498,374.89 - 14,498,374.89 Materials sent out for processing 2,158,220.39 - 2,158,220.39 1,819,779.17 - 1,819,779.17 612,142,716.05 (39,762,137.08) 572,380,578.97 648,736,218.99 (53,761,366.11) 594,974,852.88

Changes in provision for decline in value of inventories are as follows:

2009 Opening Provision Decrease Closing balance Reversal Write-off balance Raw materials 29,614,641.90 54,565.14 1,830,852.06 - 27,838,354.98 Work in progress 1,198,891.37 592,892.24 426,603.33 - 1,365,180.28 Merchandise in stock 22,947,832.84 5,684,839.50 18,074,070.52 - 10,558,601.82 53,761,366.11 6,332,296.88 20,331,525.91 - 39,762,137.08





110

V. Notes to Key Items of Consolidated Financial Statements (Continued) 7. Inventories (continued)

2008 Opening Provision Decrease Closing balance Reversal Write-off balance Raw materials 23,786,426.00 8,284,872.90 2,456,657.00 - 29,614,641.90 Work in progress 261,834.47 964,344.13 27,287.23 - 1,198,891.37 Merchandise in stock 10,866,311.67 22,947,832.84 10,866,311.67 - 22,947,832.84 34,914,572.14 32,197,049.87 13,350,255.90 - 53,761,366.11

Inventories are stated at the lower of cost and net realizable value. When the factors of the previous provision disappear, the provision can be reversed with the accrued amount. The reversal amount of the total same type of inventory at year end:

2009 2008 Raw materials 1.24% 2.19% Work in progress 0.78% 0.08% Merchandise in stock 5.07% 2.51%

At 31 December 2009，there are no restrictions on ownership of the stocks.

8. Available-for-sale financial assets 2009 2008 Available-for-sale

equity instruments 65,082,669.60 47,727,105.76





111

V. Notes to Key Items of Consolidated Financial Statements (Continued) 9. Equity Investment to joint-controlled entities and associates: At end of 2009

Business Registration Legal Business Registered Type Address Representative Nature Capital Jointly controlled entities Shanghai Konor Domestic-funded Electro-mechanic Enterprises Shanghai Ding Hongqi Industry 327,685,938.00 Shanghai Hero Foreign Trading Co., Ltd. Enterprises Shanghai Peng Xueguang Trade 1,105,473.64 Associates Hitachi & Highly Auto Component Foreign (Shanghai) Co., Ltd Enterprises Shanghai Zhuiming Junyi Industry 173,813,150.00 Shanghai Highly Nakano Refrigerator Foreign Co., Ltd. Enterprises Shanghai Guo Zhuping Industry 148,417,385.10

Total Assets Total liabilities Net Assets Revenue Net profit At end of 2009 At end of 2009 At end of 2009 2009 2009 Jointly controlled entities Shanghai Konor Electro-mechanic 924,400,895.84 835,739,051.10 88,661,844.74 963,300,314.50 (14,869,413.28) Shanghai Hero

Trading Co., Ltd. 974,414.00 1,105,473.64 131,059.64 - (8,550.00) Associates Hitachi & Highly Auto Component (Shanghai) Co., Ltd 326,163,600.01 216,251,451.55 109,912,148.46 376,827,634.70 4,753,355.12 Shanghai Highly Nakano Refrigerator

Co., Ltd. 222,999,715.41 49,839,647.19 173,160,068.22 167,012,635.81 9,205,877.41

At end of 2008

Business Registration Legal Business Registered Type Address Representative Nature Capital Jointly controlled entities Shanghai Konor Domestic-funded Electro-mechanic Enterprises Shanghai Zhang Weiqiang Industry 327,685,938.00 Shanghai Hero Foreign Trading Co., Ltd. Enterprises Shanghai Peng Xueguang Trade 1,105,473.64 Associates Hitachi & Highly Auto Component Foreign (Shanghai) Co., Ltd Enterprises Shanghai Zhuiming Junyi Industry 173,813,150.00 Shanghai Highly Nakano Refrigerator Foreign Co., Ltd. Enterprises Shanghai Guo Zhuping Industry 148,417,385.10





112

V. Notes to Key Items of Consolidated Financial Statements (Continued) 9. Equity Investment to joint-controlled entities and associates (continued)

Total Assets Total liabilities Net Assets Revenue Net profit At end of 2008 At end of 2008 At end of 2008 2008 2008 Joint-controlled entities Shanghai Konor Electro-mechanic 881,727,296.32 778,196,038.30 103,531,258.02 880,356,400.41 (35,557,123.45) Shanghai Hero

Trading Co., Ltd. 978,732.81 2,931.36 975,801.45 - (47,001.30)

Associates Hitachi & Highly Auto Component (Shanghai) Co., Ltd 314,740,870.69 209,582,077.35 105,158,793.34 402,545,628.30 117,399.10 Shanghai Highly Nakano Refrigerator

Co., Ltd. 226,230,164.37 46,384,827.55 179,845,336.82 196,312,207.58 18,695,465.89

10. Long-term equity investments

2009 Initial amount Opening Increase/ Closing Proportion Proportion of Cash balance Decrease balance of shares voting rights dividend (%) (%)

Equity method: Joint-controlled entities Shanghai Konor

Electro- mechanic Co., Ltd 79,690,078.30 49,228,941.56 (7,396,935.07) 41,832,006.49 50% 50% -

Shanghai Hero Trading Co., Ltd 549,258.64 484,422.54 (693.72) 483,728.82 70*50% 50% -

Associates

Hitachi & Highly Auto component (Shanghai) Co., Ltd. 28,969,150.00 35,052,931.11 1,584,451.71 36,637,382.82 33.33% 33.33% -

Shanghai Highly Nakano Refrigerator Co., Ltd. 70,949,674.92 77,333,494.83 (2,874,665.49) 74,458,829.34 43% 43% 6,431,240.27

180,158,161.86 162,099,790.04 (8,687,842.57) 153,411,947.47 6,431,240.27

2008 Initial amount Opening Increase/ Closing Proportion Proportion of Cash balance Decrease balance of shares voting rights dividend (%) (%)

Equity method: Joint-controlled entities Shanghai Konor

Electro- mechanic Co., Ltd 79,690,078.30 66,969,731.67 (17,740,790.11) 49,228,941.56 50% 50% -

Shanghai Hero Trading Co., Ltd 549,258.64 178,664.55 305,757.99 484,422.54 70*50% 50% -

Associates

Hitachi & Highly Auto component (Shanghai) Co., Ltd. 28,969,150.00 35,013,798.08 39,133.03 35,052,931.11 33.33% 33.33% -

Shanghai Highly Nakano Refrigerator Co., Ltd. 70,949,674.92 77,187,600.00 145,894.83 77,333,494.83 43% 43% 7,428,870.00

180,158,161.86 179,349,794.30 (17,250,004.26) 162,099,790.04 7,428,870.00





113

V. Notes to Key Items of Consolidated Financial Statements (Continued) 11. Investment property Cost method applied for subsequent measurement: 2009

Opening balance Increase Decrease Closing balance Original cost Buildings 36,858,953.81 - 4,774,948.19 32,084,005.62 Accumulated depreciation and amortization Buildings 23,593,316.20 1,438,118.21 4,037,881.32 20,993,553.09

Net book value Buildings 13,265,637.61 (1,438,118.21) 737,066.87 11,090,452.53 Provision Buildings - - - -

Carrying amount Buildings 13,265,637.61 (1,438,118.21) 737,066.87 11,090,452.53

2008

Opening balance Increase Decrease Closing balance Original cost Buildings 36,858,953.81 - - 36,858,953.81 Accumulated depreciation and amortization Buildings 22,007,410.48 1,585,905.72 - 23,593,316.20 Net book value Buildings 14,851,543.33 (1,585,905.72) - 13,265,637.61 Provision Buildings - - - - Carrying amount Buildings 14,851,543.33 (1,585,905.72) - 13,265,637.61 In 2009 the depreciation and amortization amount is RMB1,438,118.21(2008：

RMB1,585,905.72). The decrease of the investment property this year is related to relocation programme by the municipal government.





114

V. Notes to Key Items of Consolidated Financial Statements (Continued) 12. Fixed assets

2009 Opening balance Increase Decrease Closing balance

Original cost Buildings 517,409,401.49 199,017,418.01 - 716,426,819.50 Fixed assets held under finance leases 113,509,568.58 - - 113,509,568.58 Machinery 3,058,226,758.78 490,453,350.27 433,447,562.10 3,115,232,546.95 Vehicles 57,083,251.82 5,029,385.86 6,825,604.32 55,287,033.36 Office and other equipment 344,554,934.92 22,744,462.97 12,268,573.92 355,030,823.97 4,090,783,915.59 717,244,617.11 452,541,740.34 4,355,486,792.36

Accumulated depreciation

Buildings 222,471,492.25 25,783,300.67 - 248,254,792.92 Fixed assets held under finance leases 9,304,063.05 7,443,250.44 - 16,747,313.49 Machinery 2,048,078,169.09 173,965,130.07 341,629,947.94 1,880,413,351.22 Vehicles 33,338,785.40 5,697,167.67 5,794,204.18 33,241,748.89 Office and other equipment 188,094,187.60 21,066,847.12 10,470,237.76 198,690,796.96 2,501,286,697.39 233,955,695.97 357,894,389.88 2,377,348,003.48 Net book value Buildings 294,937,909.24 173,234,117.34 - 468,172,026.58 Fixed assets held under finance leases 104,205,505.53 (7,443,250.44) - 96,762,255.09 Machinery 1,010,148,589.69 316,488,220.20 91,817,614.16 1,234,819,195.73 Vehicles 23,744,466.42 (667,781.81) 1,031,400.14 22,045,284.47 Office and other equipment 156,460,747.32 1,677,615.85 1,798,336.16 156,340,027.01 1,589,497,218.20 483,288,921.14 94,647,350.46 1,978,138,788.88

Impairment provision Buildings - - - - Fixed assets held under finance leases - - - - Machinery 1,803,282.70 - 1,494,612.96 308,669.74 Vehicles - - - - Office and other equipment 20,602.24 - - 20,602.24 1,823,884.94 - 1,494,612.96 329,271.98 Carrying value Buildings 294,937,909.24 173,234,117.34 - 468,172,026.58 Fixed assets held under finance leases 104,205,505.53 (7,443,250.44) - 96,762,255.09 Machinery 1,008,345,306.99 316,488,220.20 90,323,001.20 1,234,510,525.99 Vehicles 23,744,466.42 (667,781.81) 1,031,400.14 22,045,284.47 Office and other equipment 156,440,145.08 1,677,615.85 1,798,336.16 156,319,424.77 1,587,673,333.26 483,288,921.14 93,152,737.50 1,977,809,516.90





115

V. Notes to Key Items of Consolidated Financial Statements (Continued) 12. Fixed assets (continued)


Original cost Buildings 494,166,167.85 23,243,233.64 - 517,409,401.49 Fixed assets held under finance leases 113,509,568.58 - - 113,509,568.58 Machinery 3,005,518,667.77 66,396,289.78 13,688,198.77 3,058,226,758.78 Vehicles 52,807,834.96 7,748,532.52 3,473,115.66 57,083,251.82 Office and other equipment 314,449,843.32 35,442,779.90 5,337,688.30 344,554,934.92 3,980,452,082.48 132,830,835.84 22,499,002.73 4,090,783,915.59 Accumulated depreciation Buildings 199,714,643.15 22,756,849.10 - 222,471,492.25 Fixed assets held under finance leases 1,860,812.61 7,443,250.44 - 9,304,063.05 Machinery 1,887,870,264.89 172,248,030.37 12,040,126.17 2,048,078,169.09 Vehicles 30,344,944.48 5,657,277.01 2,663,436.09 33,338,785.40 Office and other equipment 166,377,340.05 26,261,940.05 4,545,092.50 188,094,187.60 2,286,168,005.18 234,367,346.97 19,248,654.76 2,501,286,697.39 Net book value Buildings 294,451,524.70 486,384.54 - 294,937,909.24 Fixed assets held under finance leases 111,648,755.97 (7,443,250.44) - 104,205,505.53 Machinery 1,117,648,402.88 (105,851,740.59) 1,648,072.60 1,010,148,589.69 Vehicles 22,462,890.48 2,091,255.51 809,679.57 23,744,466.42 Office and other equipment 148,072,503.27 9,180,839.85 792,595.80 156,460,747.32 1,694,284,077.30 (101,536,511.13) 3,250,347.97 1,589,497,218.20 Impairment provision Buildings - - - - Fixed assets held under finance leases - - - - Machinery 1,815,866.60 - 12,583.90 1,803,282.70 Vehicles - - - - Office and other equipment 20,602.24 - - 20,602.24 1,836,468.84 - 12,583.90 1,823,884.94 Carrying value Buildings 294,451,524.70 486,384.54 - 294,937,909.24 Fixed assets held under finance leases 111,648,755.97 (7,443,250.44) - 104,205,505.53 Machinery 1,115,832,536.28 (105,851,740.59) 1,635,488.70 1,008,345,306.99 Vehicles 22,462,890.48 2,091,255.51 809,679.57 23,744,466.42 Office and other equipment 148,051,901.03 9,180,839.85 792,595.80 156,440,145.08 1,692,447,608.46 (101,536,511.13) 3,237,764.07 1,587,673,333.26





116


12. Fixed assets (continued) In 2009 the depreciation amount is RMB 233,955,695.97(2008：RMB 234,367,346.97).

In 2009, the amount of construction in progress transferred to fixed assets is RMB 614,336,701.98(2008：RMB46,483,403.28).

At 31 December 2009, the original cost of fixed assets fully depreciated but still in

use was RMB 107,219,957.18 (2008： RMB 139,434,531.20).

Fixed assets which are temporarily idle are as follows:

2009 Original cost Accumulated Impairment Carrying depreciation provision amount

Buildings 893,248.38 621,817.34 271,431.04 - Vehicles 54,762.78 17,524.08 37,238.70 - Other equipment 61,823.38 41,221.14 20,602.24 -

1,009,834.54 680,562.56 329,271.98 -

2008

Original cost Accumulated Impairment Carrying depreciation provision amount

Machinery 3,046,902.22 1,243,619.52 1,803,282.70 - Other equipment 61,823.38 41,221.14 20,602.24 - 3,108,725.60 1,284,840.66 1,823,884.94 -

Fixed assets held under finance leases are listed as follows: 2009 Original cost Accumulated Impairment Carrying depreciation provision amount Buildings 113,509,568.58 16,747,313.49 - 96,762,255.09

2008

Original cost Accumulated Impairment Carrying depreciation provision amount Buildings 113,509,568.58 9,304,063.05 - 104,205,505.53





117

V. Notes to Key Items of Consolidated Financial Statements (Continued) 13. Construction in progress 2009 Budget Opening Additions Transferred Other Closing Source Proportion (‘000) balance to fixed deductions balance of funds of assets investment to budget TE project USD12,000 61,195,054.55 10,325,894.13 60,711,774.09 1,014,000.00 9,795,174.59 Own funds 87.26% Processing and analysis center II USD5,000 778,518.68 - 467,755.02 310,763.66 - Own funds 89.76% Modern manufacture tech center RMB40,000 981,286.00 11,996,657.97 9,450,774.00 - 3,527,169.97 Own funds 85.05% Nanchang project I RMB680,000 131,408,274.90 490,460,091.70 541,264,266.98 - 80,604,099.62 Own funds 91.45% Others 2,033,194.43 2,443,082.81 2,442,131.89 1,071,718.17 962,427.18 Total 196,396,328.56 515,225,726.61 614,336,701.98 2,396,481.83 94,888,871.36

The capitalized amount of borrowing costs in closing balance is RMB 7,758,168.00.

2008

Budget Opening Additions Transferred Other Closing Source Proportion (‘000) balance to fixed deductions balance of funds of assets investment to budget Processing and analysis center II USD5,000 31,093,558.18 - 30,315,039.50 - 778,518.68 Own funds 89.30% Modern manufacture tech center RMB 40,000 662,493.00 318,793.00 - - 981,286.00 Own funds 80.65% SD project USD 3,750 1,856,012.00 - 1,856,012.00 - - Own funds 100% SL/TL Project III USD 12,300 4,576,973.85 - 4,576,973.85 - - Own funds 100% TE project USD 12,000 8,703,248.73 52,491,805.82 - - 61,195,054.55 Own funds 74.55% Urban rail transit air conditioner testing lab RMB 2,345 1,524,833.21 772,820.00 2,297,653.21 - - Own funds 97.98% Nanchang project I RMB 260,000 - 131,408,274.90 - - 131,408,274.90 Own funds 50.54% Others 2,494,099.68 7,257,010.47 7,437,724.72 280,191.00 2,033,194.43 Total 50,911,218.65 192,248,704.19 46,483,403.28 280,191.00 196,396,328.56

The capitalized amount of borrowing costs in closing balance is RMB10,560.00. 2009

Progress Accumulated Current year interest capitalized interest capitalized interest capitalization rate Nanchang project 91.45% 7,768,728.00 7,758,168.00 5.64%

2008

Progress Accumulated Current year interest capitalized interest capitalized interest capitalization rate Nanchang project 50.54% 10,560.00 10,560.00 5.76%





118

V. Notes to Key Items of Consolidated Financial Statements (Continued) 14. Intangible assets

2009 Opening balance Increase Decrease Closing balance Original cost Land use rights 311,167,973.90 - - 311,167,973.90 Software use right 348,850.00 44,000.00 122,624.90 270,225.10 Know-how 6,129,022.04 37,716.67 - 6,166,738.71 317,645,845.94 81,716.67 122,624.90 317,604,937.71 Accumulated amortization Land use rights 47,679,754.12 6,137,190.27 - 53,816,944.39 Software use right 209,532.41 50,611.93 122,624.90 137,519.44 Know-how 2,031,634.33 1,741,501.54 - 3,773,135.87 49,920,920.86 7,929,303.74 122,624.90 57,727,599.70 Carrying amount Land use rights 263,488,219.78 (6,137,190.27) - 257,351,029.51 Software use right 139,317.59 (6,611.93) - 132,705.66 Know-how 4,097,387.71 (1,703,784.87) - 2,393,602.84 267,724,925.08 (7,847,587.07) - 259,877,338.01

2008

Opening balance Increase Decrease Closing balance Original cost Land use rights 172,815,115.90 138,352,858.00 - 311,167,973.90 Software use right 325,850.00 23,000.00 - 348,850.00 Know-how 1,751,249.51 4,377,772.53 - 6,129,022.04 174,892,215.41 142,753,630.53 - 317,645,845.94 Accumulated amortization Land use rights 42,740,471.97 4,939,282.15 - 47,679,754.12 Software use right 160,869.61 48,662.80 - 209,532.41 Know-how 1,056,961.55 974,672.78 - 2,031,634.33 43,958,303.13 5,962,617.73 - 49,920,920.86 Carrying amount Land use rights 130,074,643.93 133,413,575.85 - 263,488,219.78 Software use right 164,980.39 (25,662.80) - 139,317.59 Know-how 694,287.96 3,403,099.75 - 4,097,387.71 130,933,912.28 136,791,012.80 - 267,724,925.08

In 2009, the amortization of intangible assets is RMB 7,929,303.74 (2008：RMB 5,962,617.73).





119

V. Notes to Key Items of Consolidated Financial Statements (Continued) 15. Long-term deferred expenses

2009

Opening Balance Increase Amortization Closing Balance

Moulds 22,941,912.90 7,307,515.44 14,201,805.54 16,047,622.80

Rented housing decoration fee 701,855.87 883,271.00 513,929.11 1,071,197.76

Lease expense45,000.00 - 45,000.00 -

Royalty fee - 7,400.00 4,933.32 2,466.68 23,688,768.77 8,198,186.44 14,765,667.97 17,121,287.24 2008

Opening Balance Increase Amortization Closing Balance Moulds 19,513,535.41 16,183,490.33 12,755,112.84 22,941,912.90

35KV Transformer substation 424,385.00 - 424,385.00 -

Lease expense105,000.00 - 60,000.00 45,000.00

Rented housing decoration fee 115,822.67 851,157.00 265,123.80 701,855.87 20,158,743.08 17,034,647.33 13,504,621.64 23,688,768.77





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V. Notes to Key Items of Consolidated Financial Statements (Continued) 16. Deferred tax assets/liabilities

Deferred tax assets and liabilities are listed before offset:

Recognized deferred tax assets and liabilities： 2009 2008 Deferred tax assets Provision for impairment 7,985,645.25 9,039,205.27 Depreciation difference 4,035,014.10 8,070,028.19 Deductible loss 846,973.97 - Early retirement benefits 577,327.35 66,525.90 Quality warranty 3,328,398.37 3,058,919.67 Withholding pay of workers 11,550,962.56 - Adjustment in fair value of Derivative financial instrument - 4,463,814.00 28,324,321.60 24,698,493.03 2009 2008 Deferred tax liabilites Adjustment of fair

value of financial assets available- for-sale 13,666,444.71 7,905,993.87

Deductible temporary differences and taxable temporary differences are listed as follows：

2009 2008 Deductible temporary differences 175,460,240.10 142,302,259.81 Taxable temporary differences (68,332,223.55) (43,922,188.17) 107,128,016.55 98,380,071.64





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V. Notes to Key Items of Consolidated Financial Statements (Continued) 16. Deferred tax assets/liabilities (continued)

Deferred tax assets and liabilities are listed after offset:

2009 2008 Deductible/(Taxable) Deferred Tax Deductible/(Taxable) Deferred Tax temporary differences assets/liabilities temporary differences assets/liabilities Deferred tax assets Provision for impairment of assets 50,629,102.03 7,985,645.25 59,427,083.25 9,039,205.27 Depreciation difference 16,140,056.40 4,035,014.10 32,280,112.76 8,070,028.19 Deductible loss 5,646,493.13 846,973.97 - - Early retirement benefits 3,848,849.00 577,327.35 443,506.00 66,525.90 Quality warranty 22,189,322.47 3,328,398.37 20,392,797.80 3,058,919.67 Withholding pay of workers 77,006,417.07 11,550,962.56 - - Adjustment in fair value of Derivative financial instrument - - 29,758,760.00 4,463,814.00 175,460,240.10 28,324,321.60 142,302,259.81 24,698,493.03 2009 2008 Deductible/(Taxable) Deferred Tax Deductible/(Taxable) Deferred Tax temporary differences assets/liabilities temporary differences assets/liabilities Deferred tax liabilities Adjustment of fair

value of financial assets available- for-sale 68,332,223.55 13,666,444.71 43,922,188.17 7,905,993.87

17. Provision for impairment of assets

2009

Opening balance Provision Decrease Closing Reversal Write-off balance

Provision for bad debt 15,526,587.27 1,934,059.22 488,255.82 (473,448.84) 17,445,839.51

Provision for decline in value of inventories 53,761,366.11 6,332,296.88 20,331,525.91 - 39,762,137.08

Provision for impairment

of fixed assets 1,823,884.94 - - 1,494,612.96 329,271.98

71,111,838.32 8,266,356.10 20,819,781.73 1,021,164.12 57,537,248.57





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V. Notes to Key Items of Consolidated Financial Statements (Continued) 17. Provision for impairment of assets (continued)

2008 Opening balance Provision Decrease Closing Reversal Write-off balance

Provision for bad debt 19,666,709.66 3,507,978.32 284,226.33 7,363,874.38 15,526,587.27

Provision for decline in

value of inventories 34,914,572.14 32,197,049.87 13,350,255.90 - 53,761,366.11

Provision for impairment of

fixed assets 1,836,468.84 - - 12,583.90 1,823,884.94

56,417,750.64 35,705,028.19 13,634,482.23 7,376,458.28 71,111,838.32

18. Short-term loans 2009 2008 Credit loans 667,286,520.00 636,827,360.00

At 31 December 2009, the annual interest rate for the above loans was 4.779%～5.84% (As at 31 December 2008：5.31%～7.47%)

At 31 December 2009, there was no failure to repay the principal and interest on schedule under contracts.

19. Financial liabilities held for trading 2009 2008 Derivative financial liabilities - 29,758,760.00





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V. Notes to Key Items of Consolidated Financial Statements (Continued) 20. Notes payable

2009 2008 Trade acceptance 20,000,000.00 - Bank acceptance 1,060,005,711.03 694,388,093.99 1,080,005,711.03 694,388,093.99

The carrying amount of notes payable which will be due in the next accounting year is RMB1,080,005,711.03.

21. Accounts payable The accounts payable denominated in foreign currency is listed below:

2009 2008 Original currency Rate Equivalent Original currency Rate Equivalent in RMB in RMB — RMB 822,751,463.37 357,894,265.23 — USD 4,419,067.75 6.8282 30,174,278.41 1,690,609.51 6.8346 11,554,639.76 — JPY 136,590,801.48 0.0738 10,080,401.15 31,927,587.48 0.0757 2,415,321.99 — EUR 44,250.00 9.7971 433,521.68 - 9.6590 - 863,439,664.61 371,864,226.98

At 31 December 2009, within the aforesaid balance, there was no accounts

payable to shareholding companies that held 5% or more of the Company’s voting shares or to related parties (As at 31 December 2008: nil).

At 31 December 2009, there was no significant accounts payable aging over one year.

22. Advance from customers

2009 2008 Original currency Rate Equivalent Original currency Rate Equivalent in RMB in RMB — RMB 5,356,585.16 2,373,397.61 — USD 981,295.37 6.8282 6,700,481.05 194,405.75 6.8346 1,328,685.54 — EUR 38,050.00 9.7971 372,779.66 - 9.6590 - 12,429,845.87 3,702,083.15





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V. Notes to Key Items of Consolidated Financial Statements (Continued) 22. Advance from customers (continued)

At 31 December 2009, within the aforesaid balance, there was no advances from shareholding companies that held 5% or more of the Company’s voting shares or from related parties (As at 31 December 2008: nil).

At 31 December 2009, there was no significant advance from customers aging over one year.

23. Employee benefits payable

2009

Opening balance Increase Payments Closing balance

Salaries, bonuses, allowances and subsidies 54,479,052.21 282,097,605.40 280,686,054.88 55,890,602.73 Staff welfare 51,232,603.69 5,113,412.60 5,295,589.70 51,050,426.59 Social security 1,423,139.90 72,238,402.76 72,225,880.75 1,435,661.91 Housing funds 8,632.00 12,625,870.58 12,634,826.58 (324.00) Union running costs and employee education costs 1,514,413.78 5,665,153.63 4,896,900.35 2,282,667.06 Compensation for termination

of employment relationship 19,908,713.99 5,267,511.43 3,186,793.78 21,989,431.64 Others - 5,590.10 5,590.10 - 128,566,555.57 383,013,546.50 378,931,636.14 132,648,465.93

2008

Opening balance Increase Payments Closing balance Salaries, bonuses, allowances

and subsidies 67,685,705.36 238,113,380.51 251,320,033.66 54,479,052.21 Staff welfare 64,628,923.21 2,035,949.01 15,432,268.53 51,232,603.69 Social security - 66,644,541.52 65,221,401.62 1,423,139.90 Housing funds 480.00 11,240,224.00 11,232,072.00 8,632.00 Union running costs

and employee education costs 1,279,233.80 4,308,048.64 4,072,868.66 1,514,413.78 Compensation for termination

of employment relationship 21,877,338.90 97,447.20 2,066,072.11 19,908,713.99 Total 155,471,681.27 322,439,590.88 349,344,716.58 128,566,555.57

At 31 December 2009, the group has no wage arrears to its employees (As at 31 December 2008：Nil).

In 2009 the amount of Union running costs and employee education costs is RMB 2,282,667.06 (2008 RMB1,514,413.78)





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VI. Notes to Key Items of Consolidated Financial Statements (Continued) 24. Taxes payable

2009 2008 Value-added tax (48,146,295.94) 3,296,744.09 Business tax 235,351.26 412,283.20 City maintenance and

Construction surtax 16,274.56 37,480.44 Corporate income tax 28,185,885.33 (3,236,344.54)

Individual income tax 976,063.01 597,786.29 Withholding tax 643,784.01 966,425.30 Others 186,110.61 62,246.86 (17,902,827.16) 2,136,621.64 25. Dividends payable

2009 2008 Reason for credit balance No pick-up from original non-tradable Shareholders of tradable shares 2,277,896.71 2,402,259.91 shareholders

26. Other payables

2009 2008

Other payables 79,217,542.93 27,339,703.48 The other payables denominated in foreign currency are listed below:

2009 2008 Original currency Rate Equivalent Original currency Rate Equivalent in RMB in RMB — RMB 70,635,680.24 18,697,365.71 — USD 269,238.07 6.8282 1,838,411.39 747,936.78 6.8346 5,111,848.72 — JPY 85,500,401.37 0.0738 6,309,929.62 46,668,725.00 0.0757 3,530,489.05 — EUR 44,250.00 9.7971 433,521.68 - 9.6590 - 79,217,542.93 27,339,703.48





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VI. Notes to Key Items of Consolidated Financial Statements (Continued)

26. Other payables (continued) At 31 December 2009, within the aforesaid balance, there was no amount

payable to shareholding companies that held 5% or more of the Company’s voting shares or to related parties( As at 2008: nil). At 31 December 2009, there were no significant other payables aging over one year. At 31 December 2009, significant other payables are listed below:

2009 2008 Nature Chinese People's Armed Police Corps 2nd 34,655,160.00 - Construction fees China Haicheng Engineering Science and Technology Co., Ltd. 8,550,543.78 - Engineering design fees

27. Long-term loans due within one year

2009 2008 Long-term loans due within one year 5,859,188.14 4,726,861.32

28. Long-term loans

2009 2008 Credit loan - 11,000,000.00 In November 2009, the group paid back the long-term loan which was originally due in October 2010 in advance.





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VI. Notes to Key Items of Consolidated Financial Statements (Continued) 29. Long-term payables

2009 2008 Finance Lease 140,805,244.11 175,767,293.15 Less: Long-term payables due within one year 5,859,188.14 4,726,861.32 Unrecognized financing expense (38,073,118.57) (67,446,459.32)

96,872,937.40 103,593,972.51

30. Provisions 2009

Opening balance Increase Decrease Closing balance Quality warranties 27,129,365.57 8,072,393.13 9,580,906.17 25,620,852.53

2008

Opening balance Increase Decrease Closing balance Quality warranties 24,226,519.23 12,949,702.82 10,046,856.48 27,129,365.57

The Group accrues quality warranty provision for those products which are still under warranty based on the previous experience of fix and replacement of the same kind of products.

31. Other non-current liabilities

2009 2008

Pending exchange gain 61,228,220.90 61,228,220.90 Deferred income 156,457,045.86 82,832,553.64

217,685,266.76 144,060,774.54





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VI. Notes to Key Items of Consolidated Financial Statements (Continued) 31. Other non-current liabilities (continued)

The deferred income is listed as follows：

2009 2008 Government grants related to assets Project grants 124,301,295.73 77,832,553.64 Compensation for demolition 27,167,150.13 - Compressor equipment grants 4,988,600.00 5,000,000.00 156,457,045.86 82,832,553.64

32. Share capital

2009

Opening balance Increase (decrease) in the number of shares Closing New shares Bonus Transferred Others Subtotal balance Issued shares from capital I.Restricted shares 1. State-owned shares - - - - - - -

2. Shares held by state-owned legal persons - - - - - - -

Total restricted shares - - - - - - -

II. Non-restricted shares 1. RMB ordinary shares 289,613,188 - - - - - 289,613,188

2. Domesticaly listed foreign shares 258,336,007 - - - - - 258,336,007

Total non-restricted shares 547,949,195 - - - - - 547,949,195

III. Total number of shares 547,949,195 - - - - - 547,949,195

2008

Opening balance Increase (decrease) in the number of shares Closing New shares Bonus Transferred Others Subtotal balance Issued shares from capital

I.Restricted shares 1. State-owned shares 89,819,855 - 17,963,971 - （107,783,826) (89,819,855) -

2. Shares held by state-owned - - - - - - -

Total restricted shares 89,819,855 - 17,963,971 - （107,783,826) (89,819,855) -

II. Non-restricted shares 1. RMB ordinary shares 151,524,468 - 30,304,894 - 107,783,826 138,088,720 289,613,188

2. Domesticaly listed foreign Shares 215,280,006 - 43,056,001 - - 43,056,001 258,336,007

Total non-restricted shares 366,804,474 - 73,360,895 - 107,783,826 181,144,721 547,949,195

III. Total number of shares 456,624,329 - 91,324,866 - - 91,324,866 547,949,195





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33. Capital reserves

2009 Opening balance Increase Decrease Closing balance Share premium 234,997,592.10 - - 234,997,592.10 Other capital reserves Change in fair value of available-for-sale

financial assets 28,030,341.88 29,085,985.11 13,839,252.05 43,277,074.94 Capital reserves under

old system 112,021,655.48 - - 112,021,655.48 Others 47,305,669.76 - - 47,305,669.76 422,355,259.22 29,085,985.11 13,839,252.05 437,601,992.28

The reasons for the changes in capital reserve: Project Reason for changes Amount

Other capital reserve Change of available-for-sale financial assets 29,085,985.11 Transfer out from disposal of available-for-sale financial assets (13,839,252.05) Total 15,246,733.06

2008 Opening balance Increase Decrease Closing

balance Share premium 234,997,592.10 - - 234,997,592.10 Other capital reserves Change in fair value of available-for-sale

financial assets 113,322,049.69 (99,514,404.79) (14,222,696.98) 28,030,341.88 Capital reserves under

old system 112,021,655.48 - - 112,021,655.48 Others 47,305,669.76 - - 47,305,669.76 507,646,967.03 (99,514,404.79) (14,222,696.98) 422,355,259.22





130

VI. Notes to Key Items of Consolidated Financial Statements (Continued) 33. Capital reserves (continued)

The reasons for the changes in capital reserve:

Project Reason for changes Amount

Other capital reserve Change of available-for-sale financial assets (99,514,404.79) Transfer out from disposal of available-for-sale financial assets 14,222,696.98 Total (85,291,707.81)

34. Surplus reserves

2009 Opening balance Increase Decrease Closing balance Statutory surplus reserves 189,124,606.30 1,556,927.65 - 190,681,533.95


Statutory surplus reserves 189,124,606.30 - - 189,124,606.30

According to the provisions of Company Law and the Company’s articles of association, the Company appropriated statutory surplus reserves at 10% of the net profit. Where the accumulated amount of surplus reserves reaches 50% or more of the Company’s registered capital, appropriation is not needed.





131

VI. Notes to Key Items of Consolidated Financial Statements (Continued) 35. Retained earnings

2009 2008

Retained earnings at year-end of prior year 308,708,324.27 383,947,856.45 Changes in accounting policies

, correction of prior period errors - - Opening balance after retrospective

adjustment 308,708,324.27 383,947,856.45 Net profit 62,984,348.88 16,085,333.82 Less: Appropriation to statutory

surplus reserves 1,556,927.65 - Cash dividends payable - - Dividends transferred to

share capital - 91,324,866.00

Retained earnings at year-end 370,135,745.50 308,708,324.27

Profit distribution for 2008 According to the resolution of the 5 Session of the 5th Board’s Meeting on the distribution of profit, no profit is going to be distributed or transferred.

Profit distribution for 2009

According to the resolution of the 5th Session of the 11th Board’s Meeting on the distribution of profit, the Group will distribute cash dividend RMB ( ) per share based on the total shares at the end of 2009 to all shareholders. As the total share at the end of 2009 is 547,949,195, the total cash dividend distributed is RMB ( ). Also, the Group will turn Capital surplus to increase capital, with percentage of ( ). The preliminary distribution plan is yet to be approved by the Annual General Meeting.





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36. Operating revenue and expenses The operating revenue is listed as follows: 2009 2008 Operating revenue from

principal operations 4,464,560,506.65 4,687,067,761.31 Other operating revenue 48,279,940.26 103,176,604.37 4,512,840,446.91 4,790,244,365.68

The operating revenue is listed as follows:

2009 2008

Operating expenses 3,901,718,703.13 4,163,204,933.30 The operating revenue from principal operations and its expenses are listed as follows:

Presented by business segment: Business 2009 2008 Revenue Expense Revenue Expense Refrigeration 4,252,860,227.50 3,683,199,939.89 4,464,642,673.12 3,913,119,677.95 Trade 204,012,845.35 199,542,440.61 215,797,159.19 211,619,622.08 lease 7,687,433.80 1,018,589.10 6,627,929.00 968,182.90 Total 4,464,560,506.65 3,883,760,969.60 4,687,067,761.31 4,125,707,482.93

Presented by geographical segment: Location 2009 2008 Revenue Expense Revenue Expense Domestic 3,531,616,030.69 3,047,816,507.90 3,882,472,849.24 3,386,923,432.09 Foreign 932,944,475.96 835,944,461.70 804,594,912.07 738,784,050.84 Total 4,464,560,506.65 3,883,760,969.60 4,687,067,761.31 4,125,707,482.93





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VI. Notes to Key Items of Consolidated Financial Statements (Continued) 36. Operating revenue and expenses (continued)

The operating revenues from the top five customers in 2009 are listed as follows: Amount Rate Zhuhai Gree Electric Appliance Co., Ltd. 745,789,011.85 16.53% Gree Electric Appliance (Hefei) Co., Ltd. 361,518,303.52 8.01% Gree Electric Appliance (Chongqing) Co., Ltd. 313,950,667.45 6.96% Ningbo Aux Air-conditioning Co., Ltd. 295,585,682.96 6.55% Guangdong Chigo Air Conditioning Co., Ltd. 171,436,849.41 3.80% 1,888,280,515.19 41.85%

The operating revenues from the top five customers in 2008 are listed as follows:

Amount Rate Zhuhai Gree Electric Appliance Co., Ltd. 1,072,896,266.81 22.40% Gree Electric Appliance (Chongqing) Co., Ltd. 374,622,619.45 7.82% Guangdong Midea Group Wuhu Refrigeration Equipment Co., Ltd. 242,212,748.68 5.06% Ningbo Aux Air-conditioning Co., Ltd. 203,108,021.39 4.24% Guangdong Chigo Air Conditioning Co., Ltd. 202,273,631.61 4.22% 2,095,113,287.94 43.74%

The operating revenue is listed as follows: 2009 2008

Sales of goods 4,456,873,072.85 4,680,439,832.31 Revenue from lease 7,687,433.80 6,627,929.00 Others 48,279,940.26 103,176,604.37 4,512,840,446.91 4,790,244,365.68





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VI. Notes to Key Items of Consolidated Financial Statements (Continued) 37. Business tax and surcharges 2009 2008 Business tax 559,263.16 470,856.91 City maintenance and

construction surtax 440,759.98 481,741.29 Others 610,185.31 533,596.39 1,610,208.45 1,486,194.59 For calculation and payment standard for business tax and surcharges, refer to

Note IV Taxes.

38. Financial expenses 2009 2008

Interest expense 47,137,549.63 82,782,234.22 Less: Interest income 1,257,806.65 2,003,429.36 Exchange gains or losses 25,138,456.63 (30,846,289.54) Amortization of unrecognized

financing expense 6,328,643.25 9,324,344.77 Handling fee 2,977,005.34 2,603,212.84

80,323,848.20 61,860,072.93

The capitalized interest with the amount of RMB 7,758,168.00 has been recorded in the account construction in progress.

39. Impairment loss on assets

2009 2008

Bad debt loss 1,445,803.40 3,223,751.99 Loss due to decline in

Value of inventories (13,999,229.03) 18,846,793.97 (12,553,425.63) 22,070,545.96





135

VI. Notes to Key Items of Consolidated Financial Statements (Continued) 40. Gain arising from change in fair value 2009 2008 Equity instrument investments held

for trading 236,870.00 (696,660.00) Derivative financial instruments 29,758,760.00 (55,193,221.75)

29,995,630.00 (55,889,881.75)

41. Investment income 2009 2008 Long-term equity investment income

accounted for using equity method (2,256,602.29)(10,150,392.90) Dividend income of financial assets held 834,940.21 1,024,522.56 Gain or loss arising from disposal of long-term equity investment - 132,675.22 Gain or loss arising from disposal of financial instruments 26,480,926.42 12,458,160.03 25,059,264.34 3,464,964.91

At the balance sheet date, the remittance of the Group’s investment income was subject to no significant restriction.

42. Non-operating revenue 2009 2008 Gain on the disposal

of non-current assets 2,850,819.94 541,355.22

Fines 749,429.17 345,426.95 Other payables can't be paid - 12,494,873.39 Government grants 9,971,016.20 7,871,268.00 Others 74,130.33 37,817.44 13,645,395.64 21,290,741.00





136

VI. Notes to Key Items of Consolidated Financial Statements (Continued) 42. Non-operating revenue (continued) The details of government grants are listed as follows: 2009 2008

Government grants related to income grant for new products 50,000.00 1,100,000.00 VAT refund 2,850,830.00 1,723,870.67 Special supportive fund 7,070,186.20 5,047,397.33 9,971,016.20 7,871,268.00

43. Non-operating expense 2009 2008 Loss on the disposal of non-current assets 4,126,012.22 2,269,044.60

Including：loss on the disposal

of fixed assets 4,126,012.22 2,269,044.60 Donation payment 580,000.00 1,263,707.50 Compensation, liquidated damages, and various fines 7,780.00 49,793.20 Other - 127,777.42 4,713,792.22 3,710,322.72

44. Income tax expenses 2009 2008 Current tax expense 38,060,613.89 20,329,342.25 Deferred tax expense (3,671,958.56) (10,162,722.29) 34,388,655.33 10,166,619.96

The relationship between the income tax expense and the total profit is listed as follows:





137

VI. Notes to Key Items of Consolidated Financial Statements (Continued) 44. Income tax expenses (continued) 2009 2008 Total profit 128,209,776.70 52,072,055.60 Income tax expense at the statutory

or applicable tax rate 25,641,955.34 9,372,970.01 Effect of different tax rates

used by some subsidiaries (3,686,023.89) (4,627,105.98) Adjustments to current tax of previous periods 2,337,090.75 (2,168,953.04) Profits and losses attributable to jointly-controlled

entities and associates 539,181.72 3,004,098.96 Income not subject to tax (486,765.20) (6,777,983.02) Expenses not deductible for tax 12,865,195.05 2,865,021.95 Effect of change in tax rate on the

opening balance of deferred tax - 41,571.03 Tax losses utilized from previous periods - (29,889.18) Effect of unrecognized deductible temporary difference and deductible losses (2,821,978.44) 8,486,889.23 Tax charge at the Group's effective rate 34,388,655.33 10,166,619.96

45. Earnings per share (EPS) The basic EPS is calculated by dividing the net profit of the current period

attributable to the ordinary shareholders of the Company by the weighted average number of outstanding ordinary shares.

The detailed calculation of the basic EPS is as follows:

2009 2008 Earnings Net profit of the current period attributable to the ordinary shareholders of the Company 62,984,348.88 16,085,333.82 Shares Weighted average number of the outstanding ordinary shares of the Company 547,949,195 547,949,195 The Company has no dilutive potential ordinary shares.





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46. Other comprehensive income

2009 2008

Available-for sale securities: Changes in fair value recognized during the year 21,007,183.90 (105,716,226.36)

Reclassification adjustments for amounts transferred

to profit or loss: (5,760,450.84) 20,424,518.55 15,246,733.06 (85,291,707.81)

47. Other cash payments or receipts relating to operating/investing/financing activities

In particular, significant cash flows are listed as follows:

2009 2008

Other cash receipts relating to operating activities Subsidy revenue 61,882,330.00 67,871,268.00 Interest income 1,257,806.65 2,003,429.97

63,140,136.65 69,874,697.97

2009 2008 Other cash payments relating to operating activities Research and development expense 77,557,688.80 40,300,033.82 Hitachi trademark fee and commission 3,802,770.22 18,975,749.15 Advertisement fee 6,895,903.10 10,238,301.39 Planting expense 7,246,980.08 9,712,161.89 Travel expense 8,204,843.18 11,266,398.48 Lease expense 7,636,685.80 8,286,725.57 111,344,871.18 98,779,370.30 Other cash payments relating to financing activities

2009 2008 Lease expense for finance lease 11,004,270.15 6,277,403.34





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47. Other cash payments or receipts relating to operating/investing/financing activities (continued)

(1) Cash flows from operating activities calculated by adjusting the net profit: 2009 2008

Net profit 93,821,121.37 41,905,435.64 Plus: Impairment provision for assets (12,553,425.63) 22,070,545.96 Depreciation of fixed assets 235,393,814.18 235,953,252.69 Amortization of intangible assets 7,929,303.74 5,962,617.73 Amortization of long-term

deferred expenses 14,765,667.97 13,504,621.64 Losses from disposal of fixed assets, intangible assets and other

long-term assets 1,275,192.28 1,727,689.38 Losses from changes in fair value (29,995,630.00) 55,889,881.75 Financial expenses 38,329,703.15 67,875,441.02

Investment loss (25,059,264.34) (3,464,964.91) Decrease in deferred tax assets (3,625,828.57) (6,288,247.96)

Increase in deferred tax liabilities 5,760,405.84 (3,815,169.26) Decrease in inventories 36,593,502.94 141,682,677.07 Decrease in operating receivables (781,164,402.88) 819,140,754.61 Increase in operating Payables 903,110,036.28 (980,770,754.09) Net cash flows from

operating activities 484,580,196.33 411,373,781.27





140


47. Other cash payments or receipts relating to operating/investing/financing activities (continued)

(2) Cash and cash equivalents

2009 2008 Cash 152,476,452.56 128,926,250.41 Including: Cash on hand 223,963.39 313,231.52 Bank deposits that can be

readily used 139,374,155.61 128,602,024.74 Other monetary capital that can be

readily used 12,878,333.56 10,994.15 Cash equivalents Including: Bond investments

due within 3 months Balance of “cash and cash equivalents”

at year-end 152,476,452.56 128,926,250.41

VI. Related Party Relationships and Transactions

1. Holding companies Business Registered Legal Business Registered Holding Voting power Organization Type addressRepresentative nature capital percentage percentage Code (‘000) Shanghai State-owned Shanghai XuJianguoManufacturing 4,730,680 30.49% 30.49% 132212873 Electric (Group)

The holding company of the Group is Shanghai Electric (Group) Company (Head

Office). 2. Subsidiaries

Please refer to Note IV “Consolidation Scope” for the details of subsidiaries of the Group.





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VI. Related Party Relationships and Transactions (Continued) 3. Other related parties

Related party Organization relationships code Shanghai Konor Electro-mechanic Co., Ltd. Joint-venture 60738500-7 Shanghai Hero Trading Co., Ltd. Joint-venture 66439712-7 Shanghai Highly Nakano Refrigerator Co., Ltd. Associate 60726086-1 Hitachi & Highly Auto component (Shanghai) Co., Ltd. Associate 75697280-3

Finance Company for Shanghai Other entities Electric (Group) under common control 13224819-8 Shanghai Crane Works Co., Ltd. Other entities under common control 13303168-7 Shanghai Machine Tool Works Co., Ltd. Other entities under common control 13220450-7 Shanghai Electric Wind Power Other entities Equipment Co., Ltd. under common control 79275971-9 Shanghai Mechanical Manufacturing Technology Research Institute Other entities Co., Ltd. under common control 42500331-1

4. Major transactions between the Group and its related parties

(1) Sales of goods to related parties

2009 2008 Amount Rate(%) Amount Rate (%) Shanghai Konor Electro mechanic Co., Ltd 50,711,241.23 1.14% 34,276,261.62 0.72% Hitachi & Highly Auto Component (Shanghai) 124,791,014.75 2.80% 25,853,388.23 0.55% Shanghai Highly Nakano Refrigerator - 0.00% 12,492.81 0.00% Shanghai Crane Works Co., Ltd. 1,535,972.65 0.03% - - Shanghai Machine Tool Works Co., Ltd. 997,521.37 0.02% - - Shanghai Electric Wind Power Equipment Co., Ltd. 1,793,107.66 0.04% - - 179,828,857.66 4.03% 60,142,142.66 1.27%





142

VI. Related Party Relationships and Transactions (Continued)

4. Major transactions between the Group and its related parties (continued)

(2) Purchases of goods from related parties 2009 2008 Amount Rate (%) Amount Rate (%) Shanghai Konor Electro mechanic Co., Ltd 56,793,067.36 1.78% 4,103,846.24 1.38% Hitachi & Highly Auto Component (Shanghai) 104,667,541.49 3.29% 51,487,619.05 0.11% Shanghai Mechanical Manufacturing Technology Research Institute Co., Ltd. 1,123,076.92 0.04% - - 162,583,685.77 5.11% 55,591,465.29 1.49%

(3) Services from related parties

2009 2008 Amount Rate (%) Amount Rate (%) Shanghai Mechanical Manufacturing Technology Research Institute Co., Ltd. 129,360.00 - - -





143



(4) Guarantee between the Group and its related parties

The Group provided joint responsibility guarantee for its subsidiaries which were included in the consolidation scope for RMB 52 million. 2009 Secured Notes Secured Guarantee Guarantee Guarantee party amount start day due day completed Shanghai Highly Foundry Co. Ltd 15,000,000.00 2009-9-23 2010-11-24 No

Shanghai Hailite Special Compressor

Co. Ltd Note1 12,000,000.00 2009-7-22 2010-12-6 No Shanghai Highly (Group) Trade

Co. Ltd. Note2 10,000,000.00 2009-10-16 2010-5-22 No Qingdao Highly Electric Machinery

Co. Ltd 15,000,000.00 2009-6-30 2010-6-29 No

Note1：The Group provided guarantee with a maximum amount of RMB 21 million for financial institution loans and bank acceptance of Shanghai Hailite

Special Compressor Co. Ltd. Among the actual guaranteed amount, 12 million was for loans and 6,782,460.00 for bank acceptance.

Note2：The Group provided guarantee with a maximum amount of RMB 20 million for financial institution loans and bank acceptance of Shanghai Highly (Group) Trade Co. Ltd. Among the actual guaranteed amount, 10 million was for loans and 1,966,521.60 was for bank acceptance.





144




2008 Secured Notes Secured Guarantee Guarantee Guarantee party amount start day due day completed Shanghai Highly 24,000,000.00 2008-9-9 2009-11-23 Yes Foundry Co. Ltd

Shanghai Hailite Special Compressor

Co. Ltd Note1 11,200,000.00 2008-7-24 2009-12-3 Yes Shanghai Highly (Group) Trade

Co. Ltd. Note2 3,000,000.00 2008-8-26 2009-2-26 Yes Qingdao Highly Electric Machinery

Co. Ltd Note3 20,000,000.00 2008-9-12 2009-3-11 Yes

Note1: The Group provided guarantee with a maximum amount of RMB 21 million for financial institution loans and bank acceptance of Shanghai Hailite Special Compressor Co. Ltd. Among the actual guaranteed amount, 11.2 million was for loans and 7 million was for bank acceptances.

Note2: The Group provided guarantee with a maximum amount of RMB 25 million for financial institution loans, bank acceptance and letters of credit of Shanghai Highly Group Trade Co., Ltd. Among the actual guaranteed amount, 3 million was for loans and 285,686.28 was for letters of credits.

Note3: The Group provided guarantee with a maximum amount of RMB 20 million for financial institution loans and RMB 20 million for bank acceptance of Qingdao Highly Electric Machinery Co., Ltd. Among the actual guaranteed amount for bank acceptance is 11,865,462.51.





145


4. Major transactions between the Group and its related parties (continued) (4) Guarantee between the Group and its related parties

The Group offered guarantee for bank loans for the following companies:

2009 Secured Notes Secured Guarantee Guarantee Guarantee party amount start day due day completed

Shanghai Konor Electro mechanic

Co.Ltd Note 119,000,000.00 2009-6-26 2010-10-22 No

Note: The Group provided guarantee for the RMB 119 million of financial

loans and RMB 46 million of bank acceptance of Shanghai Konor Electro

mechanic Co., Ltd. The Group also provided guarantee with a maximum amount of RMB20 million for trade acceptance bills. Among the actual guaranteed amount for trade acceptance bills is 10 million. At the same time, Shanghai Konor Electro-mechanic Co. Ltd. offered counter-guarantee with its property Hu Shi Zi (2001) No.005959 and Hu Pu Zi (2008) No. 000596 as collaterals.

2008 Secured Notes Secured Guarantee Guarantee Guarantee party amount start day due day completed

Shanghai Konor Electro mechanic

Co.Ltd Note 170,000,000.00 2008-1-18 2009-12-16 Yes

Note: The Group provided the RMB 170 million guarantee for financial

institution loans

At the same time, Shanghai Konor Electro-mechanic Co. Ltd. offered counter-guarantee with its real estate Hu Shi Zi (2001) 005959 No. 2001006054 and Hu Pu Zi No (2008) 000596 as a collateral, with a total amount of RMB 170 million.





146

VI. Related Party Relationships and Transactions (Continued) 4. Major transactions between the Group and its related parties (continued)


The Group’s related party, Shanghai Electric (Group) Finance Company provided joint responsibility guarantee for the subsidiaries which were included in the consolidation scope for RMB 95 millions:

Company name 2009 2008

Shanghai Highly Foundary Co., Ltd. 20,000,000.00 20,000,000.00

Qingdao Highly Electric Machinary Co., Ltd 50,000,000.00 20,000,000.00

Shanghai Konor Electro-mechanic Co., Ltd. 25,000,000.00 50,000,000.00

The Group offered counter-guarantee with an amount of 65 million for the guarantee that the holding company, Shanghai Electric (Group), has provided to Shanghai Electric Group Finance Company.

(5) Other related-party transactions

2009 2008 Amount Rate (%) Amount Rate (%) Remuneration for key management personnel 4,521,000 94.96% 4,648,800 95.68% Annual allowance for independent directors240,000 5.04% 210,000 4.32%





147

VI. Related Party Relationships and Transactions (Continued) 5. Amounts due from/to related parties

2009 2008 Accounts receivable Shanghai Konor Electro-mechanic Co., Ltd. 42,435,121.38 3,601,573.97

Shanghai Crane Works Co., Ltd. 1,660,355.01 -

Shanghai Machine Tool Works Co., Ltd. 465,443.58 -

Shanghai Electric Wind Power Equipment

Co., Ltd. 503,915.96 - 2009 2008 Short-term borrowings Shanghai Electric (Group) Finance Company 70,000,000.00 40,000,000.00 Accounts payable Shanghai Konor Electro-mechanic Co., Ltd. 16,160,537.85 - Hitachi & Highly Auto component (Shanghai) Co., Ltd. 12,953,770.36 9,062,208.30

Shanghai Mechanical Manufacturing Technology Research Institute

Co., Ltd. 116,885.00 -

Amounts due from/to related parties were interest-free and unsecured, with no fixed terms of repayment. The annual interest rate of short-term borrowings from related parties is 5.31%.

6. Cash deposits at the related parties 2009 2008

Shanghai Electric (Group) Finance Company 275,640.66 1,104,762.30

In 2009, the annual interest rate for the above deposits was 0.36% (2008：0.36%).





148

VII. Contingencies 2009 2008 Contingent liabilities arising from discounted

bank acceptance bills 887,960,997.12 603,360,019.87 Contingent liabilities arising from transferred

bank acceptance bills 190,480,204.45 82,636,992.54 Contingent liabilities arising from guarantees provided for outsiders 175,000,000.00 170,000,000.00 1,253,441,201.57 855,997,012.41

Please refer to Note VI 4 (4) for the guarantees that the Group provided for outsiders.

VIII. Commitments 2009 2008

Capital commitments contracted, but not provided for 70,791,738.54 292,906,086.93

IX. The Balance Sheet Events 1. Equity transfer of Qingdao Highly Electric Machinery Co. Ltd

On 26 December 2009, the company has signed an agreement with Shanghai Konor Electro Mechanic Co.,Ltd on the equity transfer of Qingdao Highly Electric Machinery Co. Ltd. The company transferred 100% of its shares of Qingdao Highly Electric Machinery Co. Ltd to Shanghai Konor Electro Mechanic Co., Ltd, at the price of RMB 35,550,700. The company received the initial transfer payment of RMB 10,670,000.00 from Shanghai Konor on 22 January 2010. The procedures for registration change of Qingdao Highly are still undergoing by the reporting date.

2. The registration cancellation of Shanghai Hero Trading Co., Ltd

The board of Shanghai Hero Trading Co., Ltd.(“Hero”) has made the resolution to discontinue the operation and go liquidation. As of 8 February 2010, Hero had completed the procedure for registration cancellation.





149

IX. The Balance Sheet Events (Continued) 3. Proposal for Profit and Dividend Distribution

According to the resolution of the 11th Session of the 5th Board’s Meeting held on 7 April, 2010, the company approved the proposal for profit and dividend distribution for 2009. For details of the proposal, refer to No 35 of Note V.

X. Other Important Matters 1 Leasing arrangements As the lessee

Finance Leases: On 31 December 2009, the balance of the unrecognized finance charge was RMB 38,073,118.57 (31 December 2008: RMB 67,446,459.32), which was amortized using the effective interest rate method over each period within the lease term. According to the lease contract signed with the lessor, the minimum lease payments under non-cancellable leases are as follows:

2009 2008 Less than 1 year (including 1 year) 5,859,188.14 4,726,861.32 1 to 2 years (including 2 years) 6,142,758.56 5,068,454.08 2 to 3 years (including 3 years) 6,440,053.11 5,434,732.48 Over 3 years 84,290,125.74 93,090,785.95 102,732,125.55 108,320,833.83





150

X、、、、 Other Important Matters (Continued) 2 Segment reporting

Business segments For management purposes, the Group is organized into business units based on

their products and services and has the following three business segments: (1) The refrigerating compressor segment mainly produces and sells

refrigerating compressors; (2) The trade segment mainly imports and exports all kinds of commodities

and technologies and sells compressor parts, vehicle parts, steel products and air-conditioner, etc.;

(3) The lease segment mainly engages in building lease business.

For the purpose of resource allocation and performance assessment, the Group manages the operating results of different segments separately. The performance assessment of the business segment is based on the profit of the business segment. The indicators are those after adjustment of the total profit of the segment from continuing operation, and are consistent with that of the Group, excluding interest income, finance expenses, dividend income, gains from the fair value change of financial instruments.

Segment assets do not contain deferred income tax assets, prepaid income tax, cash and cash equivalents, financial assets at fair value through profit or loss, derivatives, and other unallocated assets of the headquarter, because these assets are managed by the Group. Segment liabilities do not contain derivatives, loans, liabilities to the ultimate controlling party, convertible bonds, tax payables, deferred income tax liabilities and other unallocated liabilities of the headquarter, because these liabilities are managed by the Group. The intersegment transfer pricing is determined by reference to the fair price used in transactions with a third party.





151

X、、、、 Other Important Matters (Continued)

2 Segment reporting (continued)

Business segments (continued)

2009

Compressor Trade Lease Eliminations Total Operating revenue Revenue from external transactions 4,301,140,167.76 204,012,845.35 7,687,433.80 - 4,512,840,446.91 Revenue from inter-segment transactions 11,205,889.73 52,384,397.73 1,486,840.00 (65,077,127.46) - Subtotal 4,312,346,057.49 256,397,243.08 9,174,273.80 (65,077,127.46) 4,512,840,446.91 Operating results Segment profit 210,349,583.62 (121,131,293.49) (847,094.06) 65,077,127.46 153,448,323.53 Total assets 3,448,195,915.81 177,323,596.28 5,968,489.01 (15,662,924.67) 3,615,825,076.43

Total liabilities 2,717,563,383.71 213,788,801.36 1,097,742.41 (15,662,924.67) 2,916,787,002.81 Additional information Capital expenditure 488,619,503.77 17,618.26 303,150.00 - 488,940,272.03 Depreciation and amortization expenses 255,474,412.00 79,749.75 271,128.99 - 255,825,290.74 Impairment loss on assets 29,995,630.00 - - - 29,995,630.00

2008

Compressor Trade Lease Eliminations Total Operating revenue Revenue from external transactions 4,567,819,277.49 215,797,159.19 6,627,929.00 - 4,790,244,365.68 Revenue from inter-segment transactions 32,199,272.59 54,945,813.23 1,548,734.40 (88,693,820.22) - Subtotal 4,600,018,550.08 270,742,972.42 8,176,663.40 (88,693,820.22) 4,790,244,365.68 Operating results Segment profit 209,364,245.67 1,963,281.91 82,985.05 - 211,410,512.63 Total assets 3,751,960,056.58 40,099,661.47 6,810,297.93 (15,662,924.67) 3,783,207,091.31 Total liabilities 1,693,585,854.93 33,662,114.44 533,028.69 (15,662,924.67) 1,712,118,073.39 Additional information Capital expenditure 393,220,425.76 399,388.36 786,292.80 - 394,406,106.92

Depreciation and amortization expenses 234,379,798.69 78,676.09 14,145.20 - 234,472,619.98 Impairment loss on assets 22,070,545.96 - - - 22,070,545.96





152

X、、、、 Other Important Matters (Continued)

2 Segment reporting (continued) Business segments (continued)

Information of the Group

Information of the products and services

External transaction revenue

2009 2008 Air-conditioning compressor 4,003,804,896.79 4,210,805,902.40 Refrigerator compressor 141,326,094.48 55,439,625.16 Auto parts sales 30,349,742.23 30,540,698.41 Trade 204,012,845.35 215,797,159.19 Lease 7,687,433.80 6,627,929.00 Other main business 77,379,494.00 167,856,447.15 Other operating income 48,279,940.26 103,176,604.37 4,512,840,446.91 4,790,244,365.68

Geographic information External transaction revenue

2009 2008 Mainland China 3,579,895,970.95 3,985,649,453.61 Other countries and areas 932,944,475.96 804,594,912.07 4,512,840,446.91 4,790,244,365.68 The external transaction revenue is calculated by the location of the customers.





153

X. Other Important Matters (Continued)

2 Segment reporting (continued) Business segments (continued) Main customer information

The operating revenue of RMB 1,421,257,982.82(2008: 1,447,518,886.26) is generated from the sales of refrigerating compressors segment to Zhuhai Gree Electric Appliance Co., Ltd.(including all the entities known to be under the control of the customer).

3. Financial instruments and their risks

The Group's principal financial instruments, other than derivatives, comprise bank loans, and cash, etc. The main purpose of these financial instruments is to raise funds for the Group's operations. The Group has various other financial assets and liabilities such as accounts receivable, notes receivable, trade payables and notes payable, etc. arising directly from its operations. The Group also enters into derivative transactions, including principally forward currency contracts. The purpose is to manage the currency risks arising from the Group's operations and its sources of finance. The main risks arising from the Group's financial instruments are credit risk, liquidity risk and market risk. The Board of Directors reviews and approves policies for managing these risks

Financial instruments by category The carrying amounts of each of the categories of financial instruments as at the

balance sheet date are as follows:





154

X、、、、 Other Important Matters (Continued) 3. Financial instruments and their risks (continued) Financial instruments by category (continued) 2009

Financial assets Financial assets at fair value Loans and Financial assets Total through profit or loss receivables available for-sale Cash and cash equivalents - 161,536,015.58 - 161,536,015.58 Financial assets held for trading 551,925.00 - - 551,925.00 Notes receivable - 804,993,646.10 - 804,993,646.10 Accounts receivable* - 933,385,278.19 - 933,385,278.19 Other receivable - 49,807,879.37 - 49,807,879.37 Financial assets available-for-sale - - 65,082,669.60 65,082,669.60 551,925.00 1,949,722,819.24 65,082,669.60 2,015,357,413.84

Financial liabilities Financial liabilities at fair value Other Total through profit or loss financial liabilities Short-term borrowings - 667,286,520.00 667,286,520.00 Notes payable - 1,080,005,711.03 1,080,005,711.03 Accounts payable - 863,439,664.61 863,439,664.61 Other payable - 79,217,542.93 79,217,542.93 - 2,689,949,438.57 2,689,949,438.57





155

X、、、、 Other Important Matters (Continued) 3. Financial instruments and their risks (continued) Financial instruments by category (continued) 2008

Financial assets Financial assets at fair value Loans and Financial assets Total through profit or loss receivables available for-sale Cash and cash equivalents - 147,287,429.56 - 147,287,429.56 Financial assets held for trading 198,950.00 - - 198,950.00 Notes receivable - 375,108,893.22 - 375,108,893.22 Accounts receivable - 605,877,313.62 - 605,877,313.62 Other receivable - 19,308,431.22 - 19,308,431.22 Financial assets available-for-sale - - 47,727,105.76 47,727,105.76 198,950.00 1,147,582,067.62 47,727,105.76 1,195,508,123.38

Financial liabilities Financial liabilities at fair value Other Total through profit or loss financial liabilities Short-term borrowings - 636,827,360.00 636,827,360.00 Financial liabilities held for trading 29,758,760.00 - 29,758,760.00 Notes payable - 694,388,093.99 694,388,093.99 Accounts payable - 371,864,226.98 371,864,226.98 Other payable - 27,339,703.48 27,339,703.48 Long-term borrowings - 11,000,000.00 11,000,000.00 29,758,760.00 1,741,419,384.45 1,771,178,144.45





156

X、、、、 Other Important Matters (Continued) 3. Financial instruments and their risks (continued) Credit risk

Credit risk is the risk of financial loss on one party of a financial instrument, due to the failure of another party to meet its obligations.

It is the Group's policy that all customers who wish to trade on credit terms are

subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis to ensure that the Group's exposure to bad debts is not significant. With respect to the bad debt provisions, the Group has considered all the elements that relate to the collectability of accounts receivable. As the Group has already had the risk dispersed among a large number of customers, the Group does not have significant credit risk concentration.

The credit risk of the Group's other financial assets, which comprise cash and

cash equivalents, available-for-sale financial assets, other receivables and certain derivative instruments, arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments.

Liquidity risk Liquidity risk is the risk that an enterprise may encounter deficiency of funds in

meeting obligations associated with financial liabilities. The Group monitors its risk of deficiency of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial instruments and expected cash flows from the Group’s operations.

The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans, debentures and etc. The Group matches the terms of assets and its corresponding liabilities to control liquidity risk.





157

X、、、、 Other Important Matters (Continued) 3. Financial instruments and their risks (continued)

Liquidity risk(continued) The table below summarizes the maturity profile of the Group's financial assets and liabilities as at the balance sheet date, based on the contractual undiscounted cash flows:

2009

Financial assets Within one year Over one year Total Cash and cash equivalents 161,536,015.58 - 161,536,015.58 Financial assets held for trading other than derivatives 551,925.00 - 551,925.00 Notes receivable 804,993,646.10 - 804,993,646.10 Accounts receivable 933,385,278.19 - 933,385,278.19 Other receivable 49,807,879.37 - 49,807,879.37 Financial Assets available for sale - 65,082,669.60 65,082,669.60 Total 1,950,274,744.24 65,082,669.60 2,015,357,413.84

Financial liabilities Within one year Over one year Total Short-term borrowings 667,286,520.00 - 667,286,520.00 Notes payable 1,080,005,711.03 - 1,080,005,711.03 Accounts payable 863,439,664.61 - 863,439,664.61 Other payables 79,217,542.93 - 79,217,542.93 Total 2,689,949,438.57 - 2,689,949,438.57

2008

Financial assets

Within one year Over one year Total Cash and cash equivalents 147,287,429.56 - 147,287,429.56 Financial assets held for trading other than derivatives 198,950.00 - 198,950.00 Notes receivable 375,108,893.22 - 375,108,893.22 Accounts receivable 605,877,313.62 - 605,877,313.62 Other receivable 19,308,431.22 - 19,308,431.22 Financial Assets available for sale - 47,727,105.76 47,727,105.76 Total 1,147,781,017.62 47,727,105.76 1,195,508,123.38





158


Liquidity risk (continued)

Financial liabilities

Within one year Over one year Total Short-term borrowings 636,827,360.00 - 636,827,360.00 Derivative financial liabilities 29,758,760.00 - 29,758,760.00 Notes payable 694,388,093.99 - 694,388,093.99 Accounts pyable 371,864,226.98 - 371,864,226.98 Other payables 27,339,703.48 - 27,339,703.48 long-term borrowings - 11,000,000.00 11,000,000.00 Total 1,760,178,144.45 11,000,000.00 1,771,178,144.45

. Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. It mainly includes interest rate risk, currency risk and other price risk, such as equity price risk.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. All the short-term loans of the Group have fixed interest rate, and the other financial instruments bear no interest.

The financial instrument with fixed interest rate has a fixed interest rate before their maturity. Bearing-no-interest financial instruments have no interest rate risk. Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group’s exposure to foreign currency risk mainly relates to its operating activities and its net investments on overseas subsidiaries.





159


Market risk(continued) Currency risk(continued)

The Group has transactional currency exposures. Such exposures arise from sales or purchases by operating units in currencies other than the units' functional currency and the forward currency contract.

The following table demonstrates the sensitivity at the balance sheet date to a reasonably possible change in the USD exchange rate, with all other variables held constant, of the Group's profit before tax and the Group's equity

USD exchange rate Total profit Equity Increase/(decrease) Increase/(decrease) Increase/(decrease)* 2009 If RMB weakens

against USD 1.00% (609,939.09) (609,939.09) If RMB strengthens

against USD 1.00% 609,939.09 609,939.09 2008 If RMB weakens

against USD 1.00% (5,803,217.94) (5,803,217.94) If RMB strengthens

against USD 1.00% 5,803,217.94 5,803,217.94





160


Market risk (continued)

Equity price risk

Equity price risk is the risk that the fair values of equity securities decrease as a result of changes in the levels of share indices and the value of individual securities. The Group was exposed to equity price risk arising from individual equity investments classified as equity investments held for trading as at 31 December 2008. The Group held listed equity investments that are listed on the Shanghai, Shenzhen stock exchanges and are valued at quoted market prices at the balance sheet date.

The market share indices for the following stock exchanges, at the close of business of the nearest trading day in the year to the balance sheet date, and their respective highest and lowest points during the year were as follows:

2009 2009 2008 2008 31December Highest/lowest 31December Highest/lowest Shanghai—Index 3,437 3,644/1,956 1,912 5,771/1,793 Shenzhen—Index 1,261 1,296/600 582 1,660/480

The following table demonstrates the sensitivity to every 1.00% change in the fair values of the equity investments, with all other variables held constant and without considering any tax effects, based on their carrying amounts at the balance sheet date.





161


Market risk(continued)

Equity price risk 2009 Carrying amount Increase/ Increase/ of equity investments (decrease) (decrease)

in total profit in equity* Investments listed in Shanghai—Held-for-trading 551,925.00 5,519.25 5,519.25 —Available-for-sale 65,082,669.60 - 650,826.70

2008 Carrying amount Increase/ Increase/ of equity investments (decrease) (decrease) in total profit in equity * Investments listed in Shanghai—Held-for-trading 198,950.00 1,989.50 1,989.50 —Available-for-sale 47,727,105.76 - 477,271.06

*Excluding retained earnings

Fair value The following are the carrying amounts and fair values of the Group’s financial

instruments of different categories:





162


Fair value (continued)

31 December 2009 31 December 2008 Carrying Fair value Carrying Fair value amount amount

Financial assets Cash and cash equivalents 161,536,015.58 161,536,015.58 147,287,429.56 147,287,429.56 Financial assets held for trading 551,925.00 551,925.00 198,950.00 198,950.00 Notes receivable 804,993,646.10 804,993,646.10 375,108,893.22 375,108,893.22 Accounts receivable 950,831,117.70 933,385,278.19 621,403,900.89 605,877,313.62 Other receivable 49,807,879.37 49,807,879.37 19,308,431.22 19,308,431.22 Financial assets available for sale 65,082,669.60 65,082,669.60 47,727,105.76 47,727,105.76 Financial liabilities Short-term borrowings 667,286,520.00 667,286,520.00 636,827,360.00 636,827,360.00 Financial liabilities held for trading - - 29,758,760.00 29,758,760.00 Notes payable 1,080,005,711.03 1,080,005,711.03 694,388,093.99 694,388,093.99 Accounts payable 863,439,664.61 863,439,664.61 371,864,226.98 371,864,226.98 Other payable 79,217,542.93 79,217,542.93 27,339,703.48 27,339,703.48 Long-term borrowings - - 11,000,000.00 11,000,000.00

4、、、、 Comparative data

Some comparative data has been restated to meet the presentation requirements of current year.

XI. Notes to key items in the Company’s financial statements 1. Accounts Receivable The transaction terms between the Group and its customers are mainly on

credit, and they require the new customers to make prepayments or pay right after the delivery of the good. The credit period is generally 1 month.

An aging analysis of the net accounts receivable as at the balance sheet date is as

follows:





163

XI. Notes to Key Items in the Company’s Financial Statements (Continued)

1．．．． Accounts Receivable (continued) 2009 2008

Within one year 118,270,425.53 2,039,665.21 Minus: bad debt provision - - 118,270,425.53 2,039,665.21 2009 2008 Amount Percent Bad debt Provision Amount Percent Bad debt Provision Provision rate Provision rate Individually significant items 97,844,018.68 82.73% - - - - - - Group of individually insignificant items with similar credit risk characteristics, that has significant risk 20,426,406.85 17.27% - - 2,039,665.21 100.00% - - Total 118,270,425.53 100% - - 2,039,665.21100.00% - -

On 31 December 2009, the top five accounts receivables are listed as follows： Relationships with Amount Aging Percentage the company (%) Drive India Enterprise Solutions Ltd. Third party 31,648,707.00 within 2 months 26.76% Shanghai Konor Electro mechanic Joint-controlled Co., Ltd. venture 15,045,704.57 within 1 month 12.72% LG Electronics (Tianjin) Appliance Co., Ltd. Third party 11,598,399.51 within 1 month 9.81% Carrier Airconditioning&Refrigeration Limited Third party 9,527,046.05 within 4 months 8.06% O.Y.L.Manufactory Co SDN BHD. Third party 8,136,565.33 within 4 months 6.88% 75,956,422.46 64.23%





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XI. Notes to Key Items in the Company’s Financial Statements (Continued) 1. Accounts Receivable (continued)

At 31 December 2008, the main accounts receivable is listed as follows：

Relationships with Amount Aging Percentage the company (%) Shanghai Volkswagen Automobile Co., Ltd Third party 2,039,665.21 within 6 months 100.00%

On 31 December 2009, within the aforesaid balance, there is no amount due from shareholders that hold 5% or more of the Group’s voting shares(As at 31 December 2008: nil).

2．．．． Other receivables

An aging analysis of the other receivables as at the balance sheet date is as follows:

2009 2008 Within 1 year 31,562,285.64 719,588.55 1 to 2 years 517,601.55 67,900.00 2 to 3 years - 84,000.00 Over 3 years 94,000.00 50,000.00 32,173,887.19 921,488.55 Minus: bad debt provision - - Total 32,173,887.19 921,488.55

2009 2008 Amount Percent Bad debt Provision Amount Percent Bad debt Provision Provision rate Provision rate Individually significant items 30,126,293.23 93.64% - - - - - -

- Other insignificant items 2,047,593.96 6.36% - - 921,488.55 100.00% - - Total 32,173,887.19 100.00% - - 921,488.55 100.00% - -





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2．．．． Other receivables (continued) At 31 December 2009, the top five other receivables are listed as follows： Relationships with Amount Aging Percentage the company (%) The export tax rebate Third party 30,126,293.23 within 6 months 93.64% Shanghai Hailite Special Compressor Co. Ltd. Subsidiary 960,442.01 within 6 months 2.99% Qingdao Highly Electric Machinery Co. Ltd Subsidiary 738,908.14 within 6 months 2.30% Imprest Subsidiary 143,968.07 within 6 months 0.45% Customs deposits Third party 130,000.00 within 6 months 0.40% 32,099,611.45 99.78%

At 31 December 2008, the top two other receivables are listed as follows： Relationships with Amount Aging Percentage the company (%) Imprest Third party 428,387.00 within 6 months 46.49% Shanghai Hailite Special Compressor Co. Ltd. Co. Ltd. Subsidiary 493,101.55 within 6 months 53.51% 921,488.55 100.00%

At 31 December 2009, within the aforesaid balance, there is no amount due from shareholders that hold 5% or more of the Group’s voting shares(As at 31 December 2008: nil).

3. Long term investment

2009 Initial Opening Current year Closing Share Proportion of Cash investment balance movement balance Proportion voting right dividend (%) (%) Equity method： Joint-controlled entities Shanghai Konor Electro mechanic Co.Ltd. 79,690,078.30 49,228,941.56 (7,396,935.07) 41,832,006.49 50% 50% - Associate Hitachi & Highly Auto Component (Shanghai) 28,969,150.00 35,052,931.11 1,584,451.71 36,637,382.82 33.33% 33.33% - Shanghai Highly Nakano Refrigerator 70,949,674.92 77,333,494.83 (2,874,665.49) 74,458,829.34 43% 43% 6,431,240.27 Cost method： Shanghai Hitachi Electric Appliance Co. Ltd. 1,204,419,360.68 1,204,419,360.68 - 1,204,419,360.68 75% 75% 21,750,000.00 Shanghai Jinxuan Real Estate Co. Ltd. 6,000,000.00 6,000,000.00 - 6,000,000.00 100% 100% - Shanghai Highly Foundry Co. Ltd 32,560,000.00 32,560,000.00 - 32,560,000.00 80% 80% 1,769,404.81 Shanghai Highly





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3. Long term investment (continued)

2009 (continued) Initial Opening Current year Closing Share Proportion of Cash investment balance movement balance Proportion voting right dividend Cost method： Shanghai Hailite Special Compressor Co. Ltd. 14,058,225.34 14,058,225.34 - 14,058,225.34 70% 70% 700,000.00 Shanghai Highly (Group) Trade Co. Ltd. 4,000,000.00 4,000,000.00 - 4,000,000.00 80% 80% 714,209.22 Qingdao Highly Electric Machinery Co. Ltd 43,950,000.00 43,950,000.00 - 43,950,000.00 100% 100% - 1,484,596,489.24 1,466,602,953.52 (8,687,148.85) 1,457,915,804.67 31,364,854.30

2008

Initial Opening Current year Closing Share Proportion of Cash investment balance movement balance Proportion voting right dividend Equity method： Joint-controlled entities Shanghai Konor Electro mechanic Co.Ltd 79,690,078.30 66,969,731.67 (17,740,790.11) 49,228,941.56 50% 50% - Associate Hitachi & Highly Auto Component (Shanghai) 28,969,150.00 35,013,798.08 39,133.03 35,052,931.11 33.33% 33.33% - Shanghai Highly Nakano Refrigerator 70,949,674.92 77,187,600.00 145,894.83 77,333,494.83 43% 43% 7,428,870.00 Cost method： Shanghai Hitachi Electric Appliance Co. Ltd. 1,204,419,360.68 1,204,419,360.68 - 1,204,419,360.68 75% 75% - Shanghai Jinxuan Real Estate Co. Ltd. 6,000,000.00 6,000,000.00 - 6,000,000.00 100% 100% - Shanghai Highly Foundry Co. Ltd 32,560,000.00 32,560,000.00 - 32,560,000.00 80% 80% 3,837,436.15 Shanghai Haiyun Artificial Flower Co. Ltd 741,740.44 741,740.44 (741,740.44) - - - - Shanghai Hailite Special Compressor Co. Ltd. 14,058,225.34 14,058,225.34 - 14,058,225.34 70% 70% 1,905,890.00 Shanghai Highly (Group) Trade Co. Ltd. 4,000,000.00 4,000,000.00 - 4,000,000.00 80% 80% 742,240.00 Qingdao Highly Electric Machinery Co. Ltd 43,950,000.00 43,950,000.00 - 43,950,000.00 100% 100% - 1,485,338,229.68 1,484,900,456.21 (18,297,502.69) 1,466,602,953.52 13,914,436.15





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4. Operating revenue and expenses

The operating revenue is listed as follows: 2009 2008 Operating revenue from

principal operations 328,792,415.65 30,540,698.41 Other operating revenue 1,092,304.72 1,155,285.36 329,884,720.37 31,695,983.77

The operating revenue from principal operations and its expenses are listed as follows :

2009 2008 Revenue Expense Revenue Expense Refrigeration equipments 298,442,673.42 295,973,839.26 - - Sales of car accessories 30,349,742.23 29,809,644.58 30,540,698.41 29,749,905.54 328,792,415.65 325,783,483.84 30,540,698.41 29,749,905.54

5．．．． Investment income 2009 2008

Long-term equity investment income accounted for using equity method (2,255,908.58) (10,126,892.25)

Long-term equity investment income accounted for using cost method 24,933,614.03 6,485,566.15

Gain or loss arising from disposal of Long-term equity investments - 209,655.49

Dividend income of financial assets held 834,940.21 1,024,522.56 Gain or loss arising from disposal of

Financial instruments 26,480,926.42 12,458,160.03

49,993,572.08 10,051,011.98

At the balance sheet date, the remittance of the Group’s investment income was subject to no significant restriction





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6．．．． Cash flows from operating activities Cash flows from operating activities calculated by adjusting the net profit: 2009 2008

Net profit 15,569,276.49 (41,190,775.38) Plus: Impairment provision for assets - - Depreciation of fixed assets 2,263,495.15 2,473,141.03 Losses from disposal of fixed assets, intangible assets and other long-term assets (123,701.76) (300,743.46) Losses from changes in fair value (236,870.00) 696,660.00 Financial expenses 17,038,731.00 24,167,757.11 Investment loss (49,993,572.08) (10,051,011.98) Decrease in inventories (1,149,368.14) 1,085,715.85 Decrease in operating

receivables (158,988,303.84) (4,962,020.48) Increase in operating payables 162,576,164.37 (571,722.96) Net cash flows from

operating activities (13,044,148.81) (28,653,000.27)

XII. Approval of the Financial Statements The financial statements were approved and authorized for issue, upon the

resolution of the Company’s board of directors on 7 April 2010.





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1111、、、、 Extraordinary Profit and Loss

Year 2009

Profit and loss arising from disposal of non-current assets, including the reversal amount for the accrued impairment (1,275,192.28) Government grants recorded in profit/loss for the period, (excluding the grants

closely related to main operating business, in compliance with the government regulations and can be consistently granted with certain amount) 6,869,016.20

Gain/loss from fair value changes of held-for-trading financial Assets and liabilities other than the effective hedging operations related to the normal operation business of the group and investment income generated from disposal of held-for-trading financial assets and financial liabilities and available-for-sale financial assets 56,476,556.42 Other non-operating income/expense other than items above 235,779.05 Effect of the extraordinary profit and loss on income tax (5,353,481.97) Net effect of profit and loss attributable to minority shareholders (7,523,098.17)

49,429,579.25

The Group recognizes extraordinary profit and loss according to the requirements of China Securities Regulatory Commission Notice [2008] No. 43 Explanatory Announcement on Information Disclosure for Companies Offering Their Securities to the Public No.1- Extraordinary Profit and Loss.

Notes to Extraordinary Profit and Loss:

(1) Gain and loss on disposal of non-current assets In 2009, Shanghai Hitachi Electric Appliance Co. Ltd. recorded a loss of RMB 1,392,185.16 on disposal of fixed assets.

(2) Government Grant

In 2009, Shanghai Highly Foundry Co. Ltd received a VAT refund of RMB 591,830.00 from Finance Bureau of Jinshan district, Shanghai.





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1111、、、、 Extraordinary Profit and Loss (Continued) Notes to Extraordinary Profit and Loss:

（2）Government Grant (continued)

In 2009, Shanghai Hitachi Electrical Appliance Co., Ltd. received grants from local government of RMB 3,909,000.00 for important technological reforms, encouraging the procurement of advanced equipment from overseas, encouraging investment in fixed assets in some industries and attracting new technologies and innovative projects. In 2009, Shanghai Hailite Special Compressor Co. Ltd received subsidies of RMB 1,290,000.00 for a special award named “Xiao juren” and others.

(3) Gain and loss on disposal of trading financial assets and available-for-sale financial assets

In 2009, the group obtained a investment income of RMB 26,480,926.42 by selling the stocks in circulation.

(4) Gain and loss from change in fair value

In 2009, the group obtained an earning of RMB 29,995,630.00 from the change of fair value of the stocks and forward foreign exchange contracts it held.





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2. Return on Equity and Earnings per Share

2009 Return on equity (%) Earnings per share Weighted average Diluted Basic Net profit attributable to the Company’s ordinary shareholders 4.17% 0.11 0.11 Net profit attributable to the Company’s ordinary shareholders after deducting extraordinary profit and loss 0.90% 0.02 0.02

2008 Return on equity Earnings per share Weighted average Diluted Basic Net profit attributable to the Company’s ordinary shareholders 1.07% 0.03 0.03 Net profit attributable to the Company’s ordinary shareholders after deducting extraordinary profit and loss 1.58% 0.04 0.04

The Company has no dilutive potential ordinary share.





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3、、、、 Analysis of Main Change of Financial Data

The following is the analysis for those data with a fluctuation of above 30% ,or accounting for more than 5% of the total assets at balance sheet day or 10% of the total profit of the reporting period, or the accounts which are not specified in the accounting standards or of which the name cannot represent its nature and content: Trading financial assets increased by 177.42% compared with that of last year, mainly because the group bought more stocks from primary market, which increased the amount of the assets after being measured its fair value at the end of 2009. Bills receivable increased by 114.60% compared with that of last year, mainly because a large portion of sales are settled with bank bills. Accounts receivable increased by 54.06% compared with that of last year, mainly because the sales in the 4th quarter increased whereas the collection of accounts receivable takes time. Other receivable increased by 157.96% compared with that of last year, mainly because of the export tax rebate from the new export business launched in 2009 that has been generated but has not been received by the end of 2009. Available-for-sale financial assets increased by 36.36% compared with that of last year, mainly because the fair value of the stocks of other listed companies at the end of period increased on that of the beginning of the period. Construction in progress decreased by 51.69% compared with that of last year, mainly because it was transferred to fixed assets since the first two phases of the new factory construction in Nanchang was approaching to the end, and most equipment had been put into use. Trading financial liabilities decreased by 100% compared with that of last year, mainly because the loss of last year caused by the fair value change of forward foreign exchange contracts was transferred out as these contracts matured in 2009. Bills payable increased by 55.53% compared with that of last year, mainly because more raw material purchases were paid with bills.





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3、、、、 Analysis of Main Change of Financial Data (Continued)

Accounts payable increased by 132.19% compared with that of last year, mainly because the output of the 4th quarter increased, which resulted in the increase of purchase whereas the payment lags behind for a certain period. Advance from customers increased by 235.75% compared with that of last year, mainly because group received more advance from customers at the end of 2009. Tax payable decreased by RMB 20,039,448.80 compared with that of last year, mainly because Nanchang Highly acquired some equipment for the construction of the new factory, which increased the deductable VAT input. Other payable increased by 189.75% compared with that of last year, mainly because of the increase in payables related to construction of the new factory of Nanchang Highly. Long-term borrowings decreased by 11,000,000.00 compared with that of last year, mainly because Nanchang Highly paid off the long-term borrowings ahead of time. Deferred income tax liabilities increased by 72.86% compared with that of last year, mainly because the fair value of the available-for-sale financial assets increased which in turn caused the increase in deferred income tax liabilities. Other non-current liabilities increased by 51.11%, mainly because the group received a compensation of RMB 31,807,900.00 for moving some factories out of Chang yang road for urban relocation plan of the municipal government. Meanwhile its subsidiaries received some assets-related project subsidy which will be paid by installment. The impairment loss of assets decreased by RMB 34, 623,971.59 compared with that of last year, mainly because the sales of inventory, for which the inventory reserve were accrued last year, led to the reversal of inventory reserve. The income from fair value change increased by RMB 85,885,511.75 compared with that of last year, mainly because the export-related forward foreign exchange contracts matured in 2009. The company transferred the loss of RMB29,758,760.00 recorded at fair value change at the beginning of the period to profit from change of fair value. The group has no more forward foreign exchange contracts at the end of 2009. Investment income increased by 623.22% compared with that of last year, mainly because of the increase in the sales of stocks of other listed companies and the increase in the equity of invested companies accounted for by equity methods.





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3、、、、 Analysis of Main Change of Financial Data (Continued)

Operating profit increased by 245.82% compared with that of last year, mainly because of the decrease in impairment loss, and the increase of profit from fair value change and investment income. Non-operating income decreased by 35.91% compared with that of last year, mainly because last year Qingdao Highly Electric Machinery Co. Ltd transferred some payables that could not be paid off into non-operating income. However, no such transfers occurred in 2009. In 2009, the total profit before tax, corporate income tax, net profit attributable to the shareholders of the listed company increased by 146.22%, 238.25%, and 291.56% respectively, mainly because the operating profit increased sharply in 2009 compared with that of last year. Net operating cash flow increased by 17.80% compared with that of last year, mainly because the group discounted more bank notes in 2009. Meanwhile, the increase of purchase resulted in the increase of payment through bank notes. Net cash flow related to investment activities increased by 13.38% compared with that of last year, mainly because the group injected more investment into the construction of Nanchang Highly. Net cash flow related to raising fund decreased by 78.47%, mainly because of the decrease in the money used to repay liabilities.

2009 annual report - highly.ccshanghai highly (group) co., ltd. 2009 annual report 3 date of...

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