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Company Code：600619 Abbreviation：海立股份

Shanghai Highly (Group) Co., LTD. 2014 Annual Report

Important Notes

1. The Company's Board of Directors, Board of Supervisors, their members and the senior management personnel hereby warrant that the contents contained herein are authentic, accurate and complete, there is no false statement, misleading representation, or material omission, for which they shall be collectively and individually liable.

2. Absence of the Director

Title of the absent director

Name of the absent director

Cause for absence Name of the trustee

Director Xu Chao Public affair Sun Wei

3. Deloitte Touche Tohmatsu Certified Public Accountants LLP has issued a standard unqualified audit report for the Company.

4. Shen Jianfang, the responsible person of the Company, Qin Wenjun, the responsible person in charge of accounting work, and Liu Huicheng, the in-charge person of accounting institution (accountant in charge), represent that they warrant the authenticity , accuracy and completeness of the financial statements in this Annual Report.

5. Proposal reviewed by the Board of Directors for the profit distribution or the increase of share capital from reserved fund within the Report Period:

As audited and confirmed of the Company’s financial accounting report of 2014 by Deloitee Tohmatsu Certified Public Accountants LLP, the Company’s net profit of 2014 attributable to the shareholders of the listed company is RMB 93,518,544.32 and net profit of the parent company is RMB 63,834,818.70, plus the parent company’s undistributed profit after the case distribution within this year, i.e. RMB 100,626,668.86, the profit available for distribution at the end of this year is RMB 164,461,487.56. Pursuant to the AOA of the Company, after setting aside the statutory surplus reserves amounting to RMB 6,383,481.87, the parent company’s profit available for distribution at the end of this year is RMB 158,078,005.69.

On the basis of the sum of shares at the end of 2014, i.e.667,774,115 shares, the cash dividend contemplated to be distributed to all the shareholders is RMB1.00 per 10 shares (tax included), amounting to RMB 66,774,411.50(tax included). The remainder undistributed profits, i.e. RMB 91,303,594.19, will be reserved to the next year.

This proposal shall be submitted to the 2014 Annual General Meeting of the Shareholders for resolution.

6. Risk statement for forward-looking descriptions

The future plan, development strategy involved in this Report and other forward-looking descriptions shall not constitute material commitments to the investor. Please note the investment risks.

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7. Has any non-operating appropriation of fund of the Company occurred by controlling shareholder and

its affiliates?

No 8. Has any external security been provided to other parties in violation of any prescribed

decision-making procedures?

No

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Index Section 1.  Definitions and Major Risks Warning ................................................................................. 4 

Section 2.  Brief Introduction of the Company ..................................................................................... 6 

Section 3.  Summary of Accounting Data and Financial Indices .......................................................... 9 

Section 4.  Report of Board of Directors ............................................................................................. 13 

Section 5.  Important Events ............................................................................................................... 37 

Section 6.  Changes in Share Capital and Information of Shareholders ............................................. 45 

Section 7.  Information regarding Preemptive Shares ......................................................................... 51 

Section 8.  Directors, Supervisors, Senior Management Personnel and Employees ........................... 52 

Section 9.  Corporate Governance....................................................................................................... 62 

Section 10.  Internal Control ................................................................................................................. 67 

Section 11.  [to be inserted] ................................................................................................................... 69 

Section 12.  Index of Documents .......................................................................................................... 70 

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Section 1. Definitions and Major Risks Warning

A. Definition

Unless otherwise referred to in this Report, the abbreviation below shall have the following meanings: Definitions for common words Company, this Company, Highly Co.

Refer to Shanghai Highly (Group) Co., Ltd.

Electrical Co. Refer to Shanghai Electrical (Group) Co. Shanghai Electrical Co. Refer to Shanghai Electrical Group Shanghai Hitachi Refers to Shanghai Hitachi Electrical Appliances Co., Ltd. Highly Casting Refers to Shanghai Highly Casting Co., Ltd. Highly Special Refrigeration Refers to Shanghai Highly Special Refrigeration

Equipment Co., Ltd. Highly International Refer to Shanghai Highly International Trading Co., Ltd. Highly Nakano Refer to Shanghai Highly Nakano Refrigerators Co., Ltd. Hitachi Highly Products Refer to Hitachi Highly Automotive Products (Shanghai)

Co., Ltd. Hitachi Highly System Refer to Hitachi Highly Automotive System (Shanghai)

Co., Ltd. Anhui Highly Refers to Anhui Highly Precision Casting Co. , Ltd. Nanchang Highly Refers to Nanchang Highly Electrical Appliances Co., Ltd.Highly Realnen Refers to Shanghai Highly Realnen Environmental

Technology Co., Ltd. SRM Refers to Shanghai Refrigerating Machine Works Co., Ltd.Mianyang Highly Refers to Mianyang Highly Electrical Co., Ltd. Highly India Refers to Highly Electrical (India) Co., Ltd. Highly Japan Refers to Highly High-Tech Japan Co., Ltd. Highly H&C Refer to Nanchang Highly Heating & Cooling Technology

Co., Ltd.

Corporate Bonds Refers to

2012 corporate bonds of Shanghai Highly (Group) Co., Ltd. with a total amount not exceeding 1 billion Yuan (including 1 billion Yuan)

This Transaction/This Purchase of Assets through Issuing Shares and Collect Supporting Funds

Refer to Purchase of Assets through issuing shares and collect supporting funds conducted by Shanghai Highly (Group) Co., Ltd.

Fusheng Electrical Co. Refer to Hangzhou Fusheng Electrical Appliance Co., Ltd.Target Asset Refer to 100% shares of Hangzhou Fusheng Electrical

Appliance Co., Ltd. Report Period Refer to Year of 2014

AOA Refers to Articles of Association of Shanghai Highly (Group) Co., Ltd.

yuan, ten thousand yuan, one hundred million yuan

Refers to RMB yuan, RMB ten thousand yuan, RMB one hundred million yuan

B. Major Risk Warning

1. The existing risk factors of the Company and counterplans have been elaborated in details in

the “Discussion and Analysis on Future Development by the Board of Directors” of Section 4 of this Report, please kindly refer to the relevant parts. 2. The Company is planning to purchase assets through issuing shares, and is contemplating to purchase 100% shares of Hangzhou Fusheng Electrical Appliance Co., Ltd. held by its existing shareholders by issuing non-public offering to less than 10 designated investors for collecting relevant supporting funds, above plans have been adopted by the Company in the 6th Board Meeting of 7th session

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and the 1st Interim General Meeting of 2015. Investors may look up announcements published in specified media to note the investment risks.

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Section 2. Brief Introduction of the Company

A. Information of the Company

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

海立股份

Foreign Name of the Company SHANGHAI HIGHLY(GROUP)CO.,LTD. Abbreviation of Foreign Name of the Company

HIGHLY

Legal Representative of the Company Shen Jianfang

B. Contact Person and Contact Information

Secretary of the Board of Directors

Representative of Securities Affairs

Name Luo Min Xu Jie Address No. 888 Ningqiao Road, Jinqiao

Export Processing Zone, Pudong District, Shanghai, P.R.C.

No. 888 Ningqiao Road, Jinqiao Export Processing Zone, Pudong District, Shanghai, P.R.C.

Telephone 021-58547777、58547618 021-58547777、58547618 Fax 021-50326960 021-50326960 E-mail luomin@highly.cc xujie@highly.cc

C. Basic Information of the Company

Registered Address of the Company No. 888 Ningqiao Road, Jinqiao Export Processing Zone, Pudong District, Shanghai

Postcode of Registered Address of the Company

201206

Principal Business Address No. 888 Ningqiao Road, Jinqiao Export Processing Zone, Pudong District, Shanghai

Postcode of Principal Business Address of the Company

201206

Website of the Company http://www.highly.cc

E-mail heartfelt@highly.cc

D. 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 for release of the Company’s Annual Report

Http://www.sse.com.cn

Place where the Annual Report is available for inspection

Office of the Company

E. Basic Information of the Shares of the Company

Basic Information of the Shares of the Company

Type of Share Stock Exchange Abbreviation of Share

Share Code Abbreviation prior ot Change

A Share Shanghai Stock Exchange

Highly Share 600619 Refrigeration Comressor

B Share Shanghai Stock Exchange

Highly B Share 900910 Refrigeration B Share

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F. Registration Change of the Company during the Report Period

I. Basic Information

There was no change of registration of the Company during the Report Period.

II. Relevant Index of the Initial Registration of the Company

The initial registration of the Company is available at the basic information of 2009 Annual Report.

III. Change of Principal Business of the Company since its Listing

On February 27, 2009, Shanghai Municipal Commission of Commerce issued the Reply of Shanghai Municipal Commission of Commerce on the Change of Business Scope of Shanghai Highly (Group) Co., Ltd (Hu Shang Wai Zi Xie[2009] No.698), approving the Company to change its business scope as: development and sales of refrigeration equipment and parts, automobile parts, household electrical appliances and relevant materials, machinery, electronic products, wholesale and import and export business of products of affiliated enterprises within the group, and provision of relevant supporting services, investment and establishment of other enterprises (the business shall be subject to licenses as required).

On March 10, 2009, the Company completed the above change registration of business scope at Shanghai Administration for Industry and Commerce.

IV. Change of Controlling Shareholders of the Company since Listing

On May 5, 1992, as a Stockholding System Pilot, the Company was approved to be restrcuted from

Shanghai Freezer Compressor Factory as Shanghai Freezer Compressor Co., Ltd.in accordance with the Notice of Shanghai Municipal Economic Commission on Approving the Stockholding System Pilot of Shanghai Freezer Compressor Factory (Hu Jing Qi [1992] 299) issued by Shanghai Municipal Commission of Economy, and became a SSE listed company on January 18, 1993, among which, Shanghai Second Light Industry Bureau (state-owened capital) held 79,912,600 shares, accounting for 47.03% of total share capital, and acted as the controlling shareholder of the Company. In December 1995, the previous Shanghai Light Industry Bureau and Shanghai Second Light Industry Bureau were merged by Shanghai Light Industry Holding Company (Group), which became the controlling shareholder of the Company while with the shareholdering percentage of the controlling shareholder unchanged.

On March 29, 2007, Shanghai Light Industry Holding (Group) Company entered into an Equity

Transfer Agreement with Shanghai Electrical (Group) Co., in which Shanghai Light Industry Holding (Group) Company planed to transfer 135,482,287 shares (accounting for 29.67% of the total share capital of the Company) of the Company owned by it to Shanghai Electrical (Group) Co. On June 27, 2007 and September 24, 2007, the Company issued announcements that such transfer has already been approved by the Reply on Approving the Transfer of State-owned Shares of Shanghai Highly (Group) Co., Ltd (Guo Zi Chan Quan (2007) No.546) issued by State-owned Assets Supervision and Administration Commission and the Reply on Approval regarding Announcement of Shanghai Electrical (Group) Co.on the Purchase Report of Shanghai Highly (Group) Co., Ltd and Waiver of its Tender Offer Obligation (Zheng Jian Gong Si Zi (2007) No.152) issued by CSRC. The Company completed the share transfer formalities at Shanghai branch of China Securities Depository and Clearing Co., Ltd., as the controlling shareholder, Shanghai Electrical (Group) Co. held 139,205,695 shares which accounted for 30.49% of the total share capital. As of December 31, 2014, Shanghai Electrical (Group) Co., acting as the controlling shareholder, holds 218,357,822 shares of Company’s A shares, which accounts for 32.70% of the total share capital.

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G. Other Relevant Information

Name of Domestic Accounting Firm Engaged by the Company

Name Deloitte Touche Tohmatsu Certified Public Accountants LLP

Principal Business Address

Bund Center, No.222, East Yan’an Rd, Shanghai, China

Name of Accountant Who Affixes His/Her Signature

Zhou Hua; Chen Jialei

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Section 3. Summary of Accounting Data and Financial Indices

A. Main accounting Data and Financial Indices of the Company for the Past Three Years at the End of the Report Period

I. Main Accounting Data

Unit：Yuan Currency：RMB

Main Accounting Data 2014 2013 Increase/Decrease on a Year-on-year

Basis (%) 2012

Operating revenue 6,808,447,171.30 6,621,619,554.30 2.82 6,772,965,870.14

Net profit attributable to shareholders of listed company

93,518,544.32 104,129,188.62 -10.19 147,846,068.90

Net Profit attributable to Shareholders of listed company deducting non-recurring gains and losses

68,283,620.10 67,060,663.74 1.82 128,465,613.70

Net cash flow from operating activities

463,092,893.48 418,553,767.71 10.64 411,703,667.05

End of 2014 End of 2013

Increase/Decrease on a Year-on-year

Basis (%) End of 2012

Net assets attributable to shareholders of listed company

2,396,475,299.71 2,370,063,153.84 1.11 2,365,021,252.04

Total Assets 8,651,395,569.37 8,125,486,114.18 6.47 7,530,989,360.20

II. Main Financial Data

Main Financial Data 2014 2013 Increase/Decrease on a Year-on-year

Basis (%) 2012

Basic earnings per share (Yuan/Share)

0.14 0.16 -12.50 0.23

Diluted earnings per share (Yuan/Share)

0.14 0.16 -12.50 0.23

Basic earning per share deducting non-recurring gains and losses (Yuan/Share)

0.10 0.10 0.00 0.20

Weighted average return on equity (%)

3.92 4.40 Decreased percentage: 0.48

7.24

Weignted average return on equity deducting non-recurring gains and losses (%)

2.86 2.83 Decreased percentage: 0.03

6.29

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B. Difference of Accounting Date under the Domestic or Foreign Accounting Standard

I. Difference of the net profit in the financial report and net asset attributable to the shareholders of listed company between concurrently applying the IAS and solely applying the Chinese Accounting Standard

□Applicable√Not Applicable

II. Difference of the net profit in the financial report and net asset belongs to the shareholders of listed company between concurrently applying the foreign accounting standard and solely applying the Chinese Accounting Standard

□Applicable√Not Applicable

C. Item and Amount of Non-recurring Gains and Losses

√Applicable □Not Applicable Unit:Yuan Currency:RMB

Iterm of Non-recurring Gains and Losses

Amount of 2014

Notes (If Applicable)

Amount of 2013

Amount of 2012

Gains and losses from disposal of noncurrent assets

-2,343,921.85 -885,150.43 -2,589,513.31

Tax return, deduction and exemption results from unauthorized approval or without official written approval or orccurs contigently

Governmental subdidies calculatedinto the current gains and losses (excluding the governmental subsidiaries closely related to the business of the Company and enjoyed by a standard fixed quota or a fixed amount in accordance with the national policies)

26,325,843.78 Mainly the special fund for supporting the development of

enterprise amounting to RMB

9,128,410.00，amortization of

deferred income of RMB 13,691,352.60

38,440,970.05 34,800,327.67

Fund occupancy expenses from non-financial enterprise included in the current gains and losses

Profits gained from the difference between the amount invested in the subsidiaries, associated enterprise, joint venture enterprise by the Company and the fair value of the recognizable net asset of the invested entity upon aquisition, provided the former amount is lower than the latter amount

7,361,613.51 0 0

Gains and losses from the exchange of non-currency asset

Gains and losses from

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entrusting other party to invest and manage the asset Various asset impairment reserve accrued due to force majeure (such as suffering natural disaster)

Gains and losses from debt restructurig

Restructuring fees of the enterprise, such as expenses on resettling employee, restructuring expenses

Gains and losses from amout exceeds the fair value in a obviously unfiar transaction

Current gains and losses from the beginning of the Report Period to the combining date of the subsidiaries resulting from the merger of enterprises under the same control

0 0 -1,007,747.23

Gains and losses from contingency irrelevant to the normal business operation of the Company

Gains and losses of fair valuechange 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 the Company

-873,266.54 10,434,856.16 676,232.00

Impairment reserve reverse of recevables undertaken separately impairment test

Gains and losses from extending external entrusted loans

Gains and losses from the change of fair value of investment property which is later calculated by means of fair value model

Influence on the currenct gains and losses due to the one-off arrangement required by laws and regulations of tax and accounting

Escrow income from being entrusted to operate

Other non-operating 8,404,109.70 5,346,445.41 1,085,245.78

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incomesand expenditures except the above items Other items of gains and losses in accordance with definition of non-recurring gains and losses

Influence amount of minority shareholders’ interest

-8,444,589.82 -9,456,790.24 -6,578,402.01

Influence amount of income tax

-5,194,864.56 -6,811,806.07 -7,005,687.70

Total 25,234,924.22 37,068,524.88 19,380,455.20

D. Items Measured by Fair Value

Unit：Yuan Currency：RMB

Item Blance at the

Beginning Balance at the

End Current Change

Change Amount in

Current Profit Financial asset measured by fair value, the change in which is recorded into the current gains and losses

229,330.00 0 -229,330.00 150,501.46

Derivative financial instruments

97,285.23 0 -97,285.23 -7,459.90

Available-for-sale financial asset

27,997,892.20 41,774,327.80 13,776,435.60 537,205.00

Derivative financial debt 57,831.00 1,304,945.10 1,247,114.10 -1,011,731.10 Total 28,382,338.43 43,079,272.90 14,696,934.47 -331,484.54

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Section 4. Report of Board of Directors

A. Discussion and Analysis on the Operation of the Company during the Report Period by the Board of Directors

The principal business of the Company is the manufacture and sales of air-conditioning compressors. Currently with the Company’s development of residential air-conditioning compressors, the percentage of non-residential air-conditioning compressors (N-RAC) has been progressively increasing.

In 2014, the market for air conditioners and air-conditioning compressors, to which the Company belongs, has experienced low growth in demand and oversupply due to a weak real estate market and cool summer in China and other various factors. In addition, the concentration in the market has further increased, and therefore competition in this industry has become fiercer. During the report period, the Company has manufactured 18,340,000 air-conditioning compressors, an increase of 9.4% compared with last year, sold 18,010,000 air-conditioning compressors, an increase of 9.1% compared with last year, among which 2,697,000 are exported, an increase of 0.5% compared with last year, and sold 2,641,000 frequency conversion products, an increase of 8.9% compared with last year. In 2014, the market share of the Company’s products is 12.8%, and the Company has a market share of 29.5% in the non-self-support market. The Company has maintained a leading position in the industry.

In order to develop a new appliance field for air-conditioning compressor technologies, the Company has formally announced to increase efforts in developing the market for non-residential air-conditioning compressors (N-RAC). In 2014, the ratio of appliance field for N-RAC has further increased, and the Company has sold 1,400,000 N-RAC, an increase of 15.2% compared with last year, among which 3,231 pieces are compressors for vehicles, achieving a 15% market share in the pure electric passenger car market.

During the report period, the Company has slightly increased the profit margin by increasing the scale of sales, widening the appliance field of N-RAC products and increasing efforts in reducing design costs and procurement costs. In 2014, the net profits attributable to the shareholders of the listed company is RMB93,520,000, a decrease of 10.2% compared with last year, and the net profits after deducting the non-current profit and loss is RMB68,280,000, an increase of 1.8% compared with last year.

I. Analysis on Principal Business

1 Analysis Sheet of Changes of Relevant Profit Statement and Cash Flow Statement Items

Unit: Yuan Currency: RMB

Item Number of this

year Number of last

year Changes (%)

Operating Income 6,808,447,171.30 6,621,619,554.30 2.82Operating Cost 5,953,270,583.90 5,787,266,431.27 2.87Sales Expense 166,259,593.62 155,969,363.94 6.60Management Expense 456,975,794.85 437,865,589.73 4.36Financial Expense 104,966,727.65 123,956,380.70 -15.32Net Cash Flow from Operation 463,092,893.48 418,553,767.71 10.64Net Cash Flow from Investment -295,646,689.10 -494,740,018.99 N/ANet Cash Flow from Financing 12,318,692.79 187,270,823.48 -93.42Research and Development Expenditures

251,485,559.92 237,354,541.21 5.95

Chang of Profit Statement and Interpretation (Change Percentage is greater than 30%)

Asset Impairment Loss 9,247,498.80 3,988,870.87 131.83Gain on Fair Value Change -1,042,169.33 -44,155.77 N/A

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(1) Asset impairment loss increased by 131.83% compared with same period of last year within Report Period, mainly because the reserves withheld for decrease of inventory value during this Report Period has increased compared with the same period of last year.

(2) Gain on fair value change increased by minus RMB1,000,000 within Report Period compared with same period of last year, mainly because of losses due to reappraisal of undue USD loan swap business at the end of the Report Period.

2 Revenue

(1) Analysis on Factors Motivating the Change of Business Revenues

The revenue of principal business of the Company in 2014 has increased by 2.1% on a year-on-year basis, mainly because of increase of sales of the air-conditioning compressors, the principal business of the Company.

(2) Analysis on Factors Affecting the Product Revenues (Mainly Physical Goods Sales) of the Company

The principal product in the principal business revenues is air-conditioning compressors, and the factors affecting its revenues are the following: 2014 2013 Increase / Decrease on a

Year-on-year Basis Manufacturing Volume (in ten thousand)

1,834.11 1,675.93 +9.44%

Sales Volume (in ten thousand)

1,800.70 1,650.11 +9.13%

Inventory (in ten thousand)

196.37 161.86 +21.32%

National Market Share* 12.8% 14.1% Decreased percentage: 1.3

(3) Analysis on Orders

Air-conditioning compressors, the principal business of the Company, is the key part of air conditioners. The manufacturing volume is determined by the sales volume based on the market demand. The product orders and the delivery cycle occur by turns, indicating the characteristics of short cycle and fast turnover. No material change in relation to the orders occurred at the end of this year compared to the same of the previous years.

(4) Impact Analysis on New Products and New Services

In 2014, the Company has restructured its original system of research and development departments and implemented a flexible mechanism for project specific management team, which effectively increased the pace of product development and technology service response. During the Report Period, the Company has achieved many breakthroughs in technology, among which the type H micro compressor with support stand is awarded first class award of the China Home Appliance Technology Development Award, the ATD low-temperature injection compressor is awarded third class award of the China Home Appliance Technology Development Award, eco-friendly new cold coal R290 compressor is awarded core award of the China Home Appliance Fair Aipulan Award, eco-friendly cold coal R32 frequency conversion compressor is awarded CR2014 China Refrigeration Creative Product Award, and the compressor for heat pump water heater is awarded second class of the 2014 China Machine Manufacture Technique Technology Product Award.

In January 2015, Highly U.S. Technology Service Center is established in Chicago, the U.S. After 18 years of specialization development, Highly has established technology centers in Chicago, the U.S., Tokyo, Japan, Milan, Italy, and Delhi, India. The development teams of Highly highly cooperate with each other and are focused on and specialized in development of compressor products and research in the appliance field, providing the clients with cutting-edge products, technologies and services. As the Europe and U.S. manufacture industry becoming warmer, and the global market demanding more energy-saving products, the demands in the markets for Highly heat pump dryers and heat pump water heaters, compressors for electric cars are increasing continually.

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(5) Information of Major Clients

Operating revenue from the top five largest clients of the Group Unit: Yuan Currency: RMB

Client Name Operation Revenue Percentage in the Total Revenue of the Group

(%) Client 1 1,958,925,922.97 28.77%Client 2 811,354,662.24 11.92%Client 3 628,787,529.82 9.24%Client 4 327,476,445.35 4.81%Client 5 227,381,012.33 3.34%Total 3,953,925,572.71 58.08%

3 Cost

(1) Cost Analysis Sheet

Unit: Yuan Information Categorized by Industry

Industry Cost

Structure Item

Amount This Year

Percentage of

Amount This

Year in Total

Cost (%)

Amount Last Year

Percentage of

Amount Last

Year in Total

Cost (%)

Percentage Changed

on a Year-on-year Basis

Notes

Manufacturing

Raw materials

4,324,418,933.67

75.74 4,254,649,851.74

75.78 1.64

Manufacturing

Labor cost 532,633,919.87

9.33 465,163,938.72

8.28 14.50

Manufacturing

Depreciation

269,674,690.82

4.72 290,797,128.31

5.18 -7.26

Manufacturing

Fuels and energy

149,725,131.45

2.62 162,764,247.07

2.90 -8.01

Information Categorized by Products

Product Cost

Structure Item

Amount This Year

Percentage of

Amount This

Year in Total

Cost (%)

Amount Last Year

Percentage of

Amount Last

Year in Total

Cost (%)

Percentage Changed

on a Year-on-year Basis

Notes

Refrigeration Equipment

Raw materials

4,324,418,933.67

75.74 4,254,649,851.74

75.78 1.64

Refrigeration Equipment

Labor cost 532,633,919.87

9.33 465,163,938.72

8.28 14.50

Refrigeration Equipment

Depreciation

269,674,690.82

4.72 290,797,128.31

5.18 -7.26

Refrigeration Equipment

Fuels and energy

149,725,131.45

2.62 162,764,247.07

2.90 -8.01

(2) Information of Major Suppliers

Suppler Major Materials Purchased Purchase Amount of This Year (Tax

Excluded) Supplier 1 Enameled Wire 530,380,229.88

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Supplier 2 Steel Board 452,254,201.78

Supplier 3 Steel Board 277,810,810.31

Supplier 4 Enameled Wire 275,894,732.03

Supplier 5 Aluminum Ingot 272,854,472.79

Total 1,809,194,446.79

Annual Total Purchase Amout 5,004,230,920.64

4 Expense

Within the Report Period, amplitudes of fluctuation compared with 2013 in marketing expense, management expense, financial expense and income tax expense of the Company do not exceed 30%.

5 R&D Expenditure

(1) Information of R&D Expenditure

Unit: Yuan Expensed R&D Expenditures This Year 204,691,521.11Capitalized R&D Expenditures This Year 46,794,038.81Total R&D Expenditures 251,485,559.92Percentage of Total Expenditures in Net Asset (%)

8.07

Percentage of Total Expenditures in Operating Revenue (%)

3.69

6 Cash Flow

No.

Item This Year Last Year Changes on a Year-to-year

Basis

1 Cash received from investment returns

12,928,051.63 24,486,907.91 -47.20%

2 Net cash received from disposal of subsidiaries and other operating entities

0 2,570,728.86 -100.00%

3 Net cash received from obtaining subsidiaries and other operating entities

4,146,884.48 0 N/A

4 Cash paid for investment 0 192,000,000.00 N/A5 Cash received from financing 0 3,000,000.00 N/A6 Cash received from borrowing 1,673,727,000.00 2,869,683,313.33 -41.68%

7 Cash received from issuance of bonds

0 990,000,000.00 N/A

8 Other cash received relating to financing

10,000,000.00 0 N/A

9 Cash paid to repay debts 1,474,901,052.25 3,472,337,359.05 -57.52%

(1) Cash received from investment returns decreased by 47.20%, mainly because of the income received by selling shares of other listing companies during the same period of last year.

(2) Received net cash from disposal of subsidiaries and other operating entities decreased by 100%, mainly because of the equity transfer amount received by subsidiary Highly Special Refrigeration by transferring equity of Highly Highly Te Klimat last year.

(3) Received net cash from obtainment of subsidiaries and other operating entities increased RMB4.15 million, mainly because of the cash and cash equivalents brought in by our subsidiary Shanghai Hitachi acquiring Mianyang Highly.

(4) Cash paid for investment decreased RMB192 million, mainly because of the entrusted loans to joint venture company Anhui Highly last year.

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(5) Cash received from financing decreases RMB3 million, mainly because of our subsidiary Highly International received investment from other shareholder last year.

(6) Cash received from borrowing and cash paid to repay debts have respectively decreased by 41.68% and 57.25%, mainly because the proceeds from bond issuance of the Company last year were used to repay debts, decreasing the amounts borrowed and used to repay debts this year.

(7) Cash received from issuance of bonds decreased by RMB990 million, mainly because of the proceeds of bond issuance by the Company last year.

(8) Other cash received relating to financing increased by RMB10 million, mainly because of borrowings by Highly Casting from other entities this year.

7 Others

(1) Detailed Explanation of Profit Composition or Material Change of Sources of Profits

The profit composition and sources of profits are essential the same compared with last year, i.e. derived from the gross profit of the sales of air-conditioning compressors, and there is no material change.

(2) Analysis and Interpretation on Implementation Progress of Various Financing, Major Assets Restructuring

a. The plan of private placement to Shanghai Electrical (Group) Co. was approved by the First Interim General Meeting of the Shareholders in 2010. By the Approval of Private Placement of Stock to Shanghai Electrical (Group) Co. (Zheng Jian Xu Ke [2012] 650) issued by the China Securities Regulatory Commission, the Company has non-publicly offered 65,000,000 domestic listing RMB ordinary shares (A shares) and collected RMB506,350,000. Deducting underwriting fees, sponsor fees, legal fees, audit fees and other issuance fees, the net funds collected are RMB497,289,521.70. Such funds have been deposited into our special account by the main underwriter, CITIC Securities Joint Stock Company on July 16, 2012, which was verified by Ernst & Young and issued an audit report. On July 26, 2012, custody registration formalities relating to this subscription with cash were completed at Shanghai branch of China Securities Depository and Clearing Co., Ltd. On August 1, 2012, the Company has completed exchanging its funds into the projects for the issuance with the collected funds and correspondingly made disclosures.

b. The 2nd Interim General Meeting of the Shareholders in 2012 approved issuance of Corporate Bonds not exceeding RMB 1 billion to the public. The issuance of Corporate Bonds was ratified and approved by CSRC Zheng Jian Xu Ke [2012] No. 1739 on December 31. The Company completed the issuance of the Corporate Bonds amounting to RMB 1 billion on March 4, 2013. The term of the bonds is 5 years; the coupon interest rate is 4.85%; the interest is paid annually; the principal will be repaid in a lump sum upon maturity. The value date of the bonds is February 28, 2013.

The Company issued interest payment announcement in February 21, 2014, according to the “Shanghai Highly (Group) Co., Ltd. Announcement of Nominal Interest Rate of Company’s Bond for 2012”, the nominal interest rate of the bonds is 4.85%, each “12 Shanghai Highly” bond’s (face value RMB 1,000) interest is RMB 48.5 (tax included). Payment amount for bonds within this period is RMB 48,500,000 (tax included), the interest payment date for this period is February 28, 2014.

The Company issued interest payment announcement on February 17, 2015, according to the “Shanghai Highly (Group) Co., Ltd. Announcement of Nominal Interest Rate of Company’s Bond for 2012”, the nominal interest rate of the bonds is 4.85%, each “12 Shanghai Highly” bond’s (face value RMB 1,000) interest is RMB 48.5 (tax included). Payment amount for bonds within this period is RMB 48,500,000 (tax included), the interest payment date for this period is March 2, 2015.

(3) Development Strategy and Business Plan

See details in “B. Discussion and Analysis on Future Development of the Company by the Board of Directors”.

II. Analysis on Industries, Products or Regional Operation

1 Information of Different Categories of Industries of Primary Business

Unit: Yuan Currency: RMB Information of Different Categories of Industries of Primary Business

Industry Operating Operating Cost Gross Increase / Increase / Increase /

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Revenue Margin (%)

Decrease of

Operating Revenue Over Last Year (%)

Decrease of

Operating Cost

Over Last Year (%)

Decrease of Gross Margin

Over Last Year (%)

Manufacturing 6,337,907,290.92 5,542,906,794.57 12.54 2.29 1.87 Increased percentage:

0.35%

Information of Different Categories of Products of Primary Business

Product Operating Revenue

Operating Cost Gross

Margin (%)

Increase / Decrease

of Operating Revenue Over Last Year (%)

Increase / Decrease

of Operating

Cost Over Last Year (%)

Increase / Decrease of Gross Margin

Over Last Year (%)

Refrigeration Equipment

6,337,907,290.92 5,542,906,794.57 12.54 2.29 1.87 Increased percentage:

0.35%

2 Information of Operation of Primary Business in Different Regions

Unit: Yuan Currency: RMB Region Operating Revenue Increase / Decrease of Operating

Revenue Over Last Year Domestic 5,491,786,341.06 3.52Overseas 1,028,711,964.95 -4.77

III. Analysis on Assets and Liabilities

1 Analysis Table of Assets and Liabilities

Unit: Yuan

Item Amount at the End of This Year

Percentage of

Amount at the

End of This Year in Total Assets

(%)

Amount at the End of Last

Year

Percentage of

Amount at the

End of Last Year in Total Assets

(%)

Percentage of Change of

Amount at the End of Year

on a Year-on-year

Basis

Notes

Monetary capital

528,717,043.59

6.11 338,161,954.88

4.16 56.35 Mainly caused by collection of debt at year end and increased acceptance of notes due.

Financial assets that are valued at their fair value and whose changes of value are taken into the profit

0 0.00 229,330.00 0.00 -100.00 Mainly caused by sale of shares of other listed company during this year

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and loss of this year Financial derivatives

0 0.00 97,285.23 0.00 -100.0 Mainly caused by closing of forward contracts on foreign exchange during this year

Prepaid amounts

78,916,699.64

0.91 149,883,668.42

1.84 -47.35 Mainly caused by a decrease of prepaid amount for procurement of materials

Salable financial assets

41,774,327.80

0.48 27,997,892.20

0.34 49.21 Mainly caused by an increase in value of shares of other listed companies due to reappraisal as the shares are cleared for trading

Development expenditure

64,311,208.33

0.74 31,917,574.78

0.39 101.49 Mainly caused by an increase of capitalized expenses for product development in the new appliance field for compressors (such as for vehicle and dryer use)

Deferred tax assets

54,845,814.88

0.63 31,552,350.54

0.39 73.82 Mainly caused by deferred income tax assets arising out of the losses of Mianyang Haili in previous years that are confirmed to be capable of being offset

Short-term loan

910,794,529.90

10.53 651,880,281.68

8.02 39.72 Mainly caused by an increase of borrowing for working capital due to control of financial cost and reducing discounts on bank notes

Derivative financial debts

1,304,945.10 0.02 57,831.00 0.00 2,156.48 Mainly caused by a decrease of value of USD deposits swap business due to reappraisal

Notes payable

1,966,147,389.51

22.73 1,396,534,340.33

17.19 40.79 Mainly caused by an increase of notes used for material procurement

Tax payable -31,287,950.45

-0.36 -49,810,716.54

-0.61 N/A Mainly caused by a decrease of deductibles of value added tax corresponding to a decrease of procurement for fix assets

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Other payables

136,994,233.97

1.58 97,033,384.77

1.19 41.18 Mainly cause by borrowing of Mianyang Haili from other shareholders; if the term is longer than one year, it is a long-term payable

Non-current liabilities due in one year

122,890,000.00

1.42 60,969,000.00

0.75 101.56 Mainly caused by converting the long-term loans that are due in one year into non-current liabilities

Long-term loan

53,714,000.00

0.62 97,550,400.00

1.20 -44.94 Mainly caused by converting the long-term loans that are due in one year into non-current liabilities

Long-term payables

15,915,041.55

0.18 0.00 0.00 N/A Mainly cause by borrowing of Mianyang Haili from other shareholders; if the term is longer than one year, it is a long-term payable

Deferred income tax liabilities

9,022,836.82 0.10 5,646,262.67 0.07 59.80 Mainly caused by the deferred income tax liabilities confirmed by reappraisal of shares of other listed companies that are cleared for trading

Other general profits

10,901,513.46

0.13 5,514,259.93 0.07 97.70 Mainly caused by the other general profits confirmed by reappraisal of shares of other listed companies that are cleared for trading

2 Explanation Regarding Relevant Change of Assets Measured by Fair Value and Measurement Attributes of Major Assets

See details in “C. Items Measured by Fair value” of “IV. Summary of Accounting Data and Financial Indices.”

IV. Analysis on Core Competitiveness

After many years’ development, Highly Co. has cultivated three capabilities to lay the foundation for future development of the Company.

1. Capability of Large-scale Lean Manufacturing and Management Mass-manufacturing experience: “3N, 4M, 5S” and “Seven Zeroes in Lean” field management,

TPM equipment management Prominent management systems: Integrated certification (ISO9001/ISO14001/GB28001/GB23331),

Six Sigma Management, Balanced Score Card. Advanced digital factories: digital management tools, digital product data, digital manufacturing

equipment, networked factories

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Integrated Management of different places: Strategic objectives with same goal, corporate Values with same faith, management mode within same IT network

2. Independent Technological Innovation Capability First-tier Research and Development platform: establishment of national level enterprise

technology center, processing analysis center, experimental identification center, dual-drive innovation platform

Excellent Research and Development staff: more than 300 highly educated professional and technical personnel, including almost 100 doctors and masters

Hi-tech integration capability: technologies integration experiences and capabilities of refrigeration, electrical machines, machinery, fluid, material, control, etc.

As of the end of the Report Period, Highly Group owned accumulatively 664 domestic patent applications, including 440 utility models, 204 inventions and 20 design patent; 465 authorized patents, including 401 utility models and 44 inventions.

3. Group Investment Management Capability Group operation capability: from the operation of products to the operation of companies; from

single factory to multiple companies and trans-regional operation management Resources integration capability: experienced in the uniform coordination and allocation of staffs,

capitals and materials Capital operation capability: experienced in joint venture and merger and acquisition Self-owned brand: the brand of “Highly” has certain degree of popularity Unique enterprise culture: operation principle of sincere devotion, shared prospects, mission and

responsibilities, shared values

V. Analysis on Investments

1 General Analysis on External Equity Investment

No.

Name of Company Invested

Balance as of December 31,

2013

Balance as of December 31,

2014

Amount Increased /

Decreased on a

Year-on-year Basis

Percentage on a

Year-on-year Basis

Percentage of

Shareholding

Principal Business

1

Shanghai Hitachi Electrical Appliance Co., Ltd.

1,470,419,310.68

1,470,419,310.68 0.00 0.00% 75%

Development and research of refrigeration compressors and relevant products, sales of self-manufactured products

2

Shanghai Highly Casting Co., Ltd.

32,560,000.00

32,560,000.00 0.00 0.00% 80%

Processing of casting parts, hardware, heat treatment, machine work

3

Anhui Highly Precision Casting Co., Ltd.

50,707,577.48

59,387,868.72 8,680,291.24 17.12% 40%

Processing of casting parts, hardware, heat treatment, machine work

4

Shanghai Highly Special Refrigeration Equipme

28,058,225.34

28,058,225.34 0.00 0.00% 70%

Manufacturing, sales and reparation of refrigeration, temperature regulation and

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nt Co., Ltd.

control equipment and relevant products.

5

Shanghai Highly Nakano Refrigerators Co., Ltd.

74,280,628.27

75,581,247.13 1,300,618.86 1.75% 43% Manufacturing of commercially used refrigerators

6

Hitachi Highly Automotive Products (Shanghai) Co., Ltd.

39,357,449.94

39,940,900.70 583,450.76 1.48% 33.33% Manufacturing of automotive parts

7

Hitachi Highly Automotive Products (Shanghai) Co., Ltd.

9,449,237.13 8,891,862.97 -557,374.16 -5.90% 33.33% Manufacturing of automotive parts

8

Shanghai Highly Realnen Environmental Technology Co., Ltd.

30,000,000.00

30,000,000.00 0.00 0.00% 100% Sales of heat-pump water heater

9

Shanghai Jinxuan Property Management Co., Ltd.

6,000,000.00 6,000,000.00 0.00 0.00% 100% Property management, house lease, etc.

10

Shanghai Highly Group Trading Co., Ltd.

16,000,000.00

16,000,000.00 0.00 0.00% 80%

Import and export of various commodities and technologies.

Total 1,756,832,42

8.84 1,766,839,415.54

10,006,986.70

0.57%

(1) Securities Investment

No Type of

Securities Code of

Securities Abbreviation of Securities

Initial Investment

Amount (Yuan)

Number of

Owned Shares

Book Value at the

End of the

Report Period

Percentage in Total

Securities Investment at the End

of the Report

Profit and Loss of the

Report Period (Yuan)

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(Yuan) Period (%) 1 Stock 601601 Zhong Guo

Tai Bao 240,000 0 0 0 9,840

2 Stock 601898 Zhong Mei Neng Yuan

286,110 0 0 0 187

Other owned securities investment at the end of the Report Period

0 / 0 0 0

Profit and loss of the sold securities investment in the Report Period

/ / / / 140,474.46

Total 526,110 / 0 100% 150,501.46

(2) Shareholding of Other Listed Companies

Unit: Yuan

Code of Securiti

es

Abbreviation of

Securities

Initial Investmen

t Cost

Shareholding

Percentage (%)

Book Value at the End

of the Report Period

Profit and Loss

of the Report Period

Change in Equity Interest

Account UnitSource of

Shares

600616 Jin Feng Jiu Ye

295,922.47

Less than 5%

5,628,000.00

60,000.00

346,500.00 Available-for-sale financial assets

Original shares of legal person

600827 Bai Lian Gu Fen

3,042,770.89

Less than 5%

23,104,935.00

297,045.00

7,768,372.50

Available-for-sale financial assets

Original shares of legal person

600636 San Ai Fu 76,202,43 Less than 5%

1,640,760.00

7,260.00 197,835.00 Available-for-sale financial assets

Original shares of legal person

600649 Cheng Tou Kong Gu

600,000.00

Less than 5%

2,067,780.00

42,900.00

-235,950.00

Available-for-sale financial assets

Original shares of legal person

600650 Jin Jiang Tou Zi

1,228,084.72

Less than 5%

8,125,000.00

130,000.00

2,328,750.00

Available-for-sale financial assets

Original shares of legal person

600689 Shang Hai San Mao

440,000.00

Less than 5%

1,207,852.80

0.00 -73,180.80 Available-for-sale financial assets

Original shares of legal person

Total 5,682,980.

51 / 41,774,327

.80537,205.

0010,332,326

.70 / /

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(3) Selling and Purchasing of Shares of Other Listed Companies

Name of Share Amount at the

Beginning of the Year (Share)

Purchased Amount During

the Report Period (Share)

Amount of Funds Used (Yuan)

Selling Amount During the Report

Period (Share)

Amount at the End of the Year

Investment Return (Yuan)

Zhong Guo Tai Bao 8,000 0 0 8,000 0 104,904.09 Zhong Mei Neng Yuan 17,000 0 0 17,000 0 35,570.37

The total investment returns from selling new shares subscribed during the Report Period amounted to RMB 140,474.46.

2 Entrusted Financing and Derivative Investment by Non-financial Companies

(1) Entrusted Loan

Unit: Yuan Currency: RMB

LenderEntrusted

Loan Amount

Loan Term

Interest Rate

Loan Purpose

Collateral or

Guarantor

Overdue or Not

Related Party

Transaction or Not

Extended or Not

Involved in

Lawsuit or Not

Capital Source

and Whethe

r it is for

Fund Raising

Relationship

Expended Profit

Investment Outcome

Anhui Highly Precision Casting Co., Ltd.

30,000,000 32 months

0.054 Working capital

Plant No Yes No No No Associated company

1,620,000

1,620,000

Anhui Highly Precision Casting Co., Ltd

162,000,000

32 months

0.054 Working capital

Plant No Yes No No No Associated company

8,748,000

8,748,000

Notes on entrusted loans: The interest rates abovementioned are annual interest rates; the expected profits are also annual expected profits.

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(2) Other Investment, financing and Derivative Investment

Type of Investment

Capital Source Contracting PartyInvestment

Amount Investment Term

Type of Product

Prospective Earnings

Profit and Loss of Investment

Litigation

USD swap business

Self-owned The Bank of Tokyo-Mitsubishi

USD15 million 2014.6-2015.6 Financial product

No Loss of RMB1.3 million

No

Forward foreign exchange contract

Self-owned Bank of Shanghai

EUR1.6 million

2014.6-2014.11 Financial product

No Profit of RMB290,000

No

Forward foreign exchange contract

Self-owned Bank of Communications

USD4.4577 million

2014.4-2014.9 Financial product

No Loss of RMB7,000 No

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3 Usage of Funds Collection

(1) General usage of Funds Collection

√Applicable □Not applicable Unit: Yuan Currency: RMB

Collection Year

Collection Type Total Amount

of Fund Collected

Total Amount of

Fund Collected

Used in the Current Year

Total Amount of the

Aggregate Used of Fund

Collected

Total Amount of Un-used

Fund Collected

Usage and Purpose of

Un-used Fund Collected

2012 Private Placement

506,350,000.00 0 506,350,000.00 0 No

Total / 506,350,000.00 0 506,350,000.00 0 /

Notes on the general usage of funds collection

In 2012, the Company completed the non-public issuance of 65,000,000 shares of domestic listing RMB ordinary shares (A share) to the first majority shareholder, Shanghai Electrical (Group) Co. The fund collected was transferred to the fund collection account of the Company on July 16, 2012, which was verified by the Capital Verification Report (No. An Yong Hua Ming (2012) Yan Zi No. 60467982-B01) as issued by Ernst & Young Hua Ming Accounting Firm. As of August 2012, the fund collected was used up in accordance with the fund use in the fund collection prospectus, of which 273,750,000.00 Yuan was used for the replacement of the self-collected funds invested in advance in the fund-collection project, and the remaining was use to supplement the Company’s cash flow.

(2) Usage of the Collected Fund by Commitment Projects

□Applicable √Not applicable

(3) Change of Commitment Projects for Collected Fund

□Applicable √Not applicable

4 Analysis on Major Subsidiaries and Holding Companies

(1) Shanghai Hitachi Electrical Appliance Co., Ltd. (75% held by the Company) is in the industry of electrical machinery and equipment manufacture, and has the principal business of manufacture and sales of air-conditioning compressors. The registered capital of such company is USD273,040,000. The value of its total assets up to the end of this period amounted to RMB7,630,830,000, and the net assets are RMB2,693,400,000. During the Report Period, the company manufactured 18,340,000 and sold 18,010,000 air-conditioning compressors. The annual operating revenue was RMB6,379,270,000. The operating profit was RMB131,080,000. The net profit was RMB147,220,000.

(2) Shanghai Highly Casting Co., Ltd. (80% held by the Company) is in the industry of electrical machinery and equipment manufacture, and has the principal business of machine processing of compressor casts and parts. The registered capital of the company is RMB40,700,000. The value of its total assets up to the end of this period amounted to RMB429,250,000, and the net assets are RMB83,300,000. During the Report Period, the manufacture and sales of the corresponding casts and machine processing are affected by the increase of the manufacture and sales of air-conditioning compressors. The annual operating revenue of air compressor parts has a year-on-year increase, and the expense has a decrease, leading to a net profit of RMB7,610,000.

(3) Anhui Highly Precision Casting Co. Ltd. (40% held by the Company) is in the industry of electrical machinery and equipment manufacture, and has the principal business of machine processing of compressor casts and parts. The registered capital of the company was RMB125,000,000, the final total assets was RMB474,470,000 and the net assets were RMB48,470,000. During the Report Period,

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affected by the increase of the manufacture and sales of air-conditioning compressors, and the steady increase of the manufacture and sales of compressor casts, taking full advantage of the casting capability, the net profit was RMB 21,700,000.

(4) Shanghai Highly Special Refrigeration Equipment Co. Ltd. (70% held by the Company) is in the industry of special equipment manufacture, and has the principal business of manufacturing and selling industrial refrigeration equipment, high temperature air conditioners, wind-electricity refrigeration, etc. The registered capital of the company was RMB40,000,000, the final total assets was RMB114,530,000 and the net assets were RMB38,540,000. During the Report Period, the market for industrial refrigeration and high temperature air conditioners remain inactive, but due to an increase of wind-electricity air conditioners, the company has an overall profit, and the net profit was RMB370,000.

(5) Shanghai Highly Nakano Refrigerators Co. Ltd. (43% held by the Company) is in the industry of electrical machinery and equipment manufacture, and has the principal business of manufacture and sale of freezing and refrigerating showcases. The company has a registered capital of USD 17,160,000, and the value of its total assets up to the end of this period amounted to RMB 241,470,000, and the net assets are RMB 175,770,000. During the Report Period, the company actively develops sales, and the net profit of the company was RMB 5,560,000.

(6) Hitachi Highly Automotive Products (Shanghai) Co., Ltd. (33% held by the Company) is in the industry of automobile manufacture, and has the principal business of the manufacture and sale of the starting motors of automobiles. The company has a registered capital of USD 21,000,000, and the value of its total assets up to the end of this period amounted to RMB 251,720,000, and the net assets are RMB118,070,000. During the Report Period of the Company, the net profit was RMB 5,870,000.

(7) Hitachi Highly Automotive Products (Shanghai) Co., Ltd. (33% held by the Company) is in the industry of automobile manufacture, and has the principal business of the manufacture and sale of the starting motors of automobiles. The company has a registered capital of RMB 30,000,000, and the value of its total assets up to the end of this period amounted to RMB95,910,000, and the net assets are RMB26,680,000. During the Report Period, because sale of Japanese cars did not meet the expectation, the net profit was minus RMB1,670,000.

(8) Shanghai Highly Realnen Environmental Technology Co., Ltd. (100% held by the Company) was in the industry of commercial service, and has the principle business of technology development and technology service in the heat pump technology field and other fields, and design, sales, installation of heat pump and its parts. The company has a registered capital of RMB30,000,000, and the value of its total assets up to the end of this period amounted to 20,080,000 Yuan, and the net assets are RMB15,960,000. During the Report Period, the end consumers still have to recognize the heat pump products, and the company was still at the phase of market cultivation. Despite developing distribution channels in East China and North China, and improving and completing the product series. The net profit did not reach expectation and was minus RMB5,400,000.

5 Non-fund-collected Projects

√Applicable □Not applicable Unit: 10,000 Yuan Currency: RMB

Project Amount Progress Investment

Amount This Year

Accumulative Investment

Amount

Proceeds of Project

Joint establishment on projects of Highly Electrical Appliances (India) Co., Ltd.

45,235 Project under construction

12,158.54 31,420.60 Under construction

Total 45,235 / 12,158.54 31,420.60 /

Notes on non-fund-collected projects

The total investment of Highly India construction project is RMB452,350,000 (USD71,800,000), and the project is planned to be implemented by phases and finally reaching a production capacity of

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2,000,000 compressors per year. As of December 30, 2014, Highly India has a capacity of assembling metal boards and 1,000,000 pieces per year, machine processing 500,000 pieces per year and 700,000 electricity motors per year.

B. Discussion and Analysis on Future Development by the Board of Directors

I Industry Competition and Trend of Development

1. Trend of industry of the air-conditioner compressor industry as the Company’s principal business As China’s economy turns into a transitional period from high speed growth, the real estate market is inactive, and the end of relevant appliance subsidies, the household air conditioner and compressor market has been development slowly these years. But from a mid to long-term perceptive, the domestic air-conditioner and compressor market still has a relatively large space for development. From a domestic perspective, there is still much room of development for the domestic consumption demand of air-conditioning compressors due to the objectives of developing into a well-off society in an all-round way and doubling the per-capita income in 2020 put forward by the 18th CPC National Congress, the acceleration of the progress of industrialization and urbanization and the opening-up of the vast rural consumption market. The demand to purchase new products of third and fourth level markets, the central and west regions as well as the rural regions, and the large demand for updated products will account for the most growth. From a global perspective, household air-conditioners have gradually become the necessities of life due to global warming; the emerging countries, especially India, will enjoy a midterm and long term economic growth with a relatively fast pace, and its vast consumption market has entered into the fast development stage; the economic recovery of European and American countries will boost the consumption demand. Meanwhile, residential air-conditioning compressor is meeting the opportunity of consumption upgrading and products upgrading of air conditioner in the domestic market. Product upgrading in towns and cities will account for the most future need for air conditioner. With the increasing income, the consumers in this respect would generally choose more high-end products when upgrading the air conditioners. The future demand for new household appliances, among others, substantially comes from weddings/new house renovations. Consumers in this respect are mainly generations after 70s, 80s and even 90s and will stimulate high-end consumption to some extent. While upgrading the level of consumption, such upgrading will stimulate the technology upgrades of products in air conditioner industry in China, including: shift from constant speed to variable frequency, change of focus from capacity of refrigeration to capacity of heating, more attention on energy efficiency, air conditioner energy-saving evaluation standard changing from rated efficiency of refrigeration and heating to annual operation efficiency, refrigerant replacement, concern for comfort and health, such as quietness, indoor air quality and etc. Besides, non-residential air-conditioning compressor is meeting development opportunities. Air-conditioning compressors utilize the technology of vapour compression heat conversion, which can not only be used for refrigeration, and can be used for heating by reverse refrigeration cycle. With the trend of energy saving and emission reduction and return of manufacturing industry in European and American countries, heat-pump water heaters and washing machines and clothes dryers have already enjoyed a fast growth trend, which brings a golden development opportunity to expand the uses of the technology of air-conditioning compressors. The global energies are experiencing the revolutionary changes, and the electric energy will become the main method of the ultimate transformation of new energies. The technology of vapour compression heat conversion adopted by air-conditioning compressors transfer heat through electric-driven operation. It meets the future trend of energy utilization and is able to achieve the highly-efficient environmental protection purpose. It now has a broad application fields. 2. Trend of Competition of the Air-conditioning Compressors Industry as the Company’s Principal Business China, as the major air-conditioning manufacture country in the world, accounts for almost 80% of the global output. According to information on chinaiol.com, in 2013, China had almost 30 household air conditioner manufacturers, which manufactured and sold approximately 101,000,000 air conditioners in total. The two largest air conditioning manufacturers, Gree and Midea accounted for 61% market shares; Haier, Chigo, Kelon, Aux, TCL, Panasonic, LG, Galanz are other strong competitors in this industry. Except China, India, East middle, East southern Asia and Latin America are the main global manufacture

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bases of air conditioners, such countries have multitudes of transnational and domestic manufacturers, and their output is 30,000,000. With the fast growth of the emerging countries such as India, East middle and etc., the rise of the local air conditioner manufacturers can be expected. China is the focus of the global competition of air-conditioning for many years. There are almost 10 domestic air-conditioning compressor manufacturers in China. Since the financial crisis, transnational manufacturers intended not to expand and develop the air-conditioning business; however, Chinese air-conditioning compressor manufacturers, such as GMCC, Highly and Lingda, seized the opportunity for their further development and became top three manufacturers in the world. Although being challenged by their peers, the Company remains to be top three in the air-conditioning compressor industry globally for many years. According to information on chinaiol.com, in 2014, the compressors manufactured by Highly accounted for approximately 12.8% of the share of Chinese compressor industry. Despite of the challenges from the rise of concentration ration of air conditioner industry, vertical integration of the industry and the rise of labor costs in Shanghai, the principal business of the Company, benefitting from the accumulation of years of technologies and management improvement, enjoys the advantages of advanced technologies, quality and scale. In addition, as the world-class, professional and independent air-conditioning compressor manufacturer, Highly will be the first choice as the air-conditioning compressor manufacturer from the perspective of the strategy of clients and industry situation. II Development Strategy of the Company 1. Challenges confronted by the Company First of all, the Company is faced with the challenges of the rise of concentration ration of air conditioner industry and vertical integration of the industry. According to data analysis of chinaiol.com, the market share of the top 10 manufacturers of the air conditioner industry has currently reach around 90%, and some air conditioner manufacturers have further expanded their output of self-facilitation compressors. The top two air conditioner enterprises have an increasing occupancy of self-facilitation, which makes the competition in the air conditioner compressor industry even more fierce. Second, among others, the rise of labor costs, price fluctuation of energy and raw materials, exchange rate fluctuation and the relatively heavy pressure of business cost in Shanghai are the challenges to the Company’s ability to control cost. In addition, the Company is in a fully competitive market but lacks relevant incentive mechanism. 2. Future Opportunities of the Company Air-conditioning compressors belongs to the technology of vapour compression heat conversion. In the foreseeable future, no revolutionary alternative technology exists for it. “Energy saving, Environment protection and Resource saving” are the technological development direction of the industry for a long time. In the midterm and long term, the industry of air-conditioner and compressor has large space for expansion and is meeting the opportunity of consumption upgrading and products upgrading of air conditioner; meantime, it is a global common tendency of energy saving and emission reduction, and revolutionary changes are occurring to global energies. There have increasingly extensive applications of air conditioner compressors in new fields. In addition, electronic technology has been developing rapidly, the Internet is becoming more advance, the industry 4.0 is coming, people seek healthier and more comfortable life, and state owned enterprise is reforming, the capital market is becoming more active, and others, all of which provide many opportunities for Highly to develop new fields and transition development. 3. Development Plan of the Company (1) Development Strategy of the Company The Company will firmly seize the economic and revolutionary opportunities of global energy saving, adjustment of energy structure and the Internet age, opportunities of promotion of domestic demand, guarantee of growth and adjustment of structure and the return of Europe and U.S. markets, opportunities of development of new type urbanization and the development of overseas emerging market; with the market demand as the orientation, the science and technology innovation as the foundation, energy saving and environmental protection materials as the product technology direction; the Company will use low cost as major competing manner, and use mergers and restructuring to activate the enterprise mechanism; the Company will have breakthroughs and be creative, once again develop entrepreneurship, implement internalized strategy, change development mode, raise the management level, enhance the competitiveness and profitability of the enterprise, and ensure rapid and sustainable development of the enterprise.

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The strategic positioning of the Company: an enterprise group with the development of compressors, electricity motors and driving control and other core components as well as affiliated businesses as the strategic orientation. The industry direction of the Company: development of compressor, electricity motors, driving control, and refrigeration related. (2) Development Plan of the Company The Company is currently furthering the acquisition of Hangzhou Fusheng Electrical Appliance Co., Ltd., after which transaction, the Company will transit from a single compressor business into having compressor, electricity motor, driving control and refrigeration related businesses. In the coming years, the Company will endeavor to multiply its revenue in three years by being creative and with mergers and acquisitions. The compressors business will continue to focus on professionalization, creativity and breakthroughs and form a competitive advantage around “technology, quality and costs.” The Company will grab the opportunity of revolution of the global energy industry and further develop new appliance fields for compressors. The Company will grab the opportunity of development in the new rising markets and Europe and the U.S. energy saving markets and further the globalization strategy. The Company will grab merger opportunities and conduct mergers and acquisitions at the right time. The electric motor business will stick to technology creativity, technique innovation and management innovation, hold on to the strategy of “largest scale, most advanced technology, best quality and lowest costs,” and become the most competitive supplier of professional electric motor for air-conditioning compressors. Driving control business will grab the opportunity of the Internet and becoming more intelligent trend, develop smart electric motor and driving control system for industrial, household and vehicle use. Refrigeration related business will strengthen product development, market development, creative operation models, raise competiveness, and seek to become stronger and bigger. III Operation Plan 1. Continue to further the internationalization of primary business Highly has achieved the arrangement of “four places, five plants, and six centers,” based on which Mianyang Highly will complete the construction of “frequency conversion cold coal spinning compressor corresponding to R410A/R32” project to satisfy the market needs of overseas clients and take advantage of synergies. Highly India plant will start the third phase project construction, further domestic operation and production, and focus on local talents and international materials; it will also go with the return of manufacturing industry and energy revolution, focus on U.S. heat pump clients, establish U.S. technology service center, and form cross region and multiple end development of products and service modes. Nanchang Technology Development Center is put into use and has formed multilayers of technologies and talents. By means of the above, we will ensure that the primary business stays competitive in the new round of market competition. 2. Continue to further mixed ownership reform and add energy to the corporate development The Company is actively furthering the asset restructuring with Hangzhou Fusheng Electrical Appliance Co., Ltd., after which Fusheng Electrical Appliance will become a wholly owned subsidiary of the Company. The restructuring will help enlarge the Company’s operation scale and strength the Company’s ability to profit continuously, have a larger market influence, further develop new electrical motor business, change the landscape that the Company is over dependent on air-conditioning compressors, and help implementing multiple end strategy and strengthen the Company’s risk resistance level and continuous profitability. In the meantime, the injection of private equity into the Company will help further optimize the shareholder structure of the Company and cause the Company to be more dynamic. 3. Grab the trend of Internet and smart appliance and push the transition and development of the Company After Highly acquires Fusheng Electrical Appliances, it will transit from a single compressor business into having four businesses of compressor, electricity motor, driving control and refrigeration related businesses. The Company will quicken its self-development and utilization of capital, grab opportunities, achieve breakthroughs and transition development. As the Internet, the Internet of things, information technology, software and automation technology develop rapidly, the trend of industrial automation and becoming more intelligent is upon us, smart household appliances and cars are developing, and the human race is stepping into a smart society. At this background, Highly will consolidate production systems and seek a smart production road for itself; on the other hand, it will actively grab the opportunity in this trend, development smart electrical motor and driving control system; meantime, it will continue to push Internet thinking in its corporate

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management to be creative in operation, raise the management level and further the transition and development. 4. Quicken development of N-RAC and frequency conversion products, and optimize the structure of compressor business In recent years, as the trend of energy saving and people seeking more comfortable life, the market share of frequency conversion air conditioner has been rising. In the meantime, as the energy saving takes a global trend and revolution on energy structure, the manufacture market of Europe and the U.S. returns and rapid development of electronic technology, compressors are more and more used in non-residential air conditioner field. In 2015, the Company will quicken its development of compressors for heat pumps, new energy cars, and telecommunication facilities and enhance the competitiveness of its primary business. 5. Further reduce cost and increase corporate competiveness When there is no technology breakthrough in the air-conditioning compressor products, product cost remains to be the primary factor for selection by the market. Only with sufficient competiveness in product cost can have first opportunity in market competition. In 2015 the Company will link the sale price of products to its material costs, reduce design costs and procurement costs at the same time, focus on selection of materials at the beginning of designing, fully raise double usage of materials, optimize suppler allocation, and make a competitive supplier chain. The Company will optimize supplier system and raise the level of automation of production line. 6. Bring social responsibility into management system and create a better image of the Company The Company will bring social responsibility into the management system to make being socially responsible a part of the corporate development strategy and business operation, so as to realize the systematization and regulations of social responsibility management. All employees, all processes and all angles will comply with social responsibility, and achieving win-win for shareholders, employees, clients, business partners, the environment, and the society, raising the overall competitiveness of the Company. The economic trend in 2015 is still complex and difficult to foretell, and the Company faces significant competition and will steadily implement current strategy and further globalization and multiple end development, while closely following the opportunity of the Internet and ensuring sustainable development. In 2015, the Company targets to achieve a revenue of RMB7 billion, keeping the operation cost around 87% of operation revenues, and keeping the three periodical expense around 10% of operation revenues. IV Capital Demand of the Company for Maintenance of the Current Business and Completion of Projects under Construction By estimation, the capital demand for the maintenance of the current business and the completion of the projects under construction is about RMB390,000,000. The Company will implement the projects by all kinds of financing channels and try to reduce the financing costs. V Potential Risks 1. Industry Environment Risks The industry environment risk associated with air-conditioning compressors mainly come from the development trend of the air conditioner industry and the threat of technology advantage from competitors. Although the air conditioner and air-conditioning compressor industry still has relatively large scope for market growth, risks still exist such as climate change, supply-demand relationship and other risks causing market fluctuations. Meanwhile, the performance and development speed of new air-conditioning compressor products is becoming the major way to compete, and thus Highly Co. is faced with higher requirements of technology development and technology innovation due to the ever-increasing competition among air conditioner compressor manufacturers and the new energy saving standards and new cold coal replacement development trends. To grab development opportunity in new markets and the Europe and the U.S. markets, the Company further consolidate its market position and develop new appliance fields by establishing overseas plants, technology service centers in Europe/Japan/the U.S. Meanwhile, the Company increase research and development efforts and reduce costs, achieve different products, and raise competitiveness and profitability. 2. Risk of Production Cost

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The principal business of the Company is the manufacture and sale of air-conditioning compressors. Labor cost and copper/steel raw material cost are the two primary production cost for the Company. In 2014, the average salary for Shanghai workers raised by 8.2% compared with last year, and the labor cost for Shanghai urban entities is rising remarkably. Factors such as the economic situation, foreign exchange fluctuation and the relationship between demand and supply all give rise to the price adjustment of primary raw materials such as copper and steel. Such price adjustment will intensify the fluctuation risk of the production costs of the Company. To address the pressure arising from the abovementioned cost fluctuation, the Company, on one hand, enhances the skill training of its employees and increases input in the automation plants, so as to decrease the number of employees and increase their income through enhancing labor efficiency; on the other hand, conducts real-time tracking and analyses on the price trend of raw materials, overall implements of budget management, improving technology innovation and management innovation and effectively reduces the risks arising out of the price fluctuation of raw materials by improving the utilization rate of materials and the cost control and management method of technological levels 3. Technology Risk At the moment, frequency conversion has become the trend for air conditioners and compressors. After many years of technology accumulation, the Company has significant experience in frequency conversion compressors and controllers. But if the Company’s technology development cannot meet the market demands or turn technology into productivity, the Company may face risk of decrease in market share. Currently no revolutionary alternative technology exists for the vapour compression refrigeration; the technology direction is stable, but is faced with the continuous progress of technology. In particular, seeking new environmental refrigeration is the main task for the current air conditioning industry. The Company will pay close attention to the trend of market and technology and conduct research on the same, invest more on technology, expand research personnel, improve and expand the products, so as to boost our competitiveness and enhance our industrial leading position. 4. Foreign Exchange Risk regarding the Outbound Investment The Company established an overseas factory in India. Given the fact that India is a new market with the presence of hyperinflation and current account deficits, its foreign exchange is greatly influenced by Federal Reserve’s monetary policy. In 2014, Indian rupee against US dollar has depreciated by approximately 2.5%. To decrease the foreign exchange risk for rupee, the Company invested project capital to the Indian factory by several times, so as to control or decrease the losses arising from the fluctuation of foreign exchange. 5. Risk of Restructuring The Company is currently pushing for the merger with Hangzhou Fusheng Electrical Appliance Co., Ltd. As the merger is in process, there are many uncertainties to this asset restructuring, such as the transaction may be paused, terminated or cancelled, the transaction cannot obtain relevant approval, and others.

C. Interpretation by the Board of Directors regarding the Non-standard Audit Report Issued by the Accounting Firm

I Interpretation by the Board of Directors and Board of Supervisors regarding the Non-standard Audit Report Issued by the Accounting Firm □Applicable √Not applicable II Interpretation of the Board of Directors regarding the Reason for and Impact of the Change of Accounting Policies, Accounting Estimation or Accounting method □Applicable √Not applicable III Analysis and Interpretation of the Board of Directors regarding the Reasons for and Impact of the Rectification of Important Previous Mistakes □Applicable √Not applicable

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D. Proposal regarding Profit Distribution and Conversion of Capital Reserve

I Formulation, Implementation and Adjustment of Cash Dividend Distribution Policy After discussion and deliberation on the general meeting of shareholders in 2013, the Company, with the base number being 667,744,115 shares, distributed RMB1.00 per every 10 shares (tax included), totaled up to RMB66,774,411.50 (tax included) for cash dividend distribution, and the remaining undistributed profit amounting to RMB100,626,668.86 was carried forward to the next year. The aforesaid cash dividend distribution plan has been implemented thoroughly by August 12, 2014. The accumulative total amount of dividend of the Company for past three years is 213,678,116.80 Yuan (including 2014), accounting for 185.54% of average net profit attributable to shareholders of listed company for the past three years in the consolidated statements. On April 13, 2015, the Company convened the first interim meeting of the shareholders and approved the Resolution on Amending the Articles of Association of the Company. Pursuant to the Guidance on Articles of Association of Listed Companies (Amended 2014), Administrative Guidance No. 3 of Listed Companies—Cash Distributions of Listed Companies and other regulations, and taking into account the specific circumstances of the Company, the part in the Articles of Association relating to profit distribution is amended. The profit distribution cannot exceed the aggregate distributable profits and has to comply with the long-term interest of the Company, the interest of all shareholders and the continuous development of the Company, and follow the principles: the decision and debate on profit distribution has to fully consider the opinions of the independent directors and the public shareholders; cash dividends must be prioritized; statutory sequence must be followed; no distribution if there exists losses that have not been made up; same rights to all shares and same distributions to all shares. II Where the Company made profit and the undistributed profit of the parent company is positive, and no proposal regarding the cash and dividend distribution was put forward, the Company shall disclose the reason and the purpose and use plan of the undistributed profit. □Applicable √Not applicable III Profit Distribution Plan or Proposal, Conversion of Capital Reserve into Share Capital Plan or Proposal in the Last Three Years(including the Report Period) Unit: Yuan Currency: RMB

Year of Distribution

Number of Share Dividend for 10 Shares (Share)

Dividend for Each 10 Shares (Yuan, Tax-inclusive)

Number of Shares Converted From Each 10 Shares (Share)

Amount of Cash Dividend (Tax-inclusive)

Net Profits Attributable to the Shareholders of the Listed Company in the Consolidated Statement in the Year of the Dividends

Proportion in the Net Profits Attributable to the Shareholders of the Listed Company in the Consolidated Statement (%)

2014 1.00 66,774,411.50 93,518,544.32 71.40 2013 1.00 66,774,411.50 104,129,188.6

2 64.13

2012 1.20 80,129,293.80 147,846,068.90

54.20

E. Active performance of Social Responsibility

I Social Responsibility The 2014 social performance of Highly Co. has gone through on-site review and report review by Shanghai Audit Center of Quality System according to Corporate Social Responsibility Guide (SEO-CSR 1.0) of Shanghai Federation of Economic Organization. The dimensions involved include 2

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major parts, corporate social responsibility management and corporate social responsibility practice and performance, which involve corporate governance, scientific development, fair operation, environmental protection and energy conservation, safe production, rights and interests of customers and consumers, cooperation and mutual benefits, harmonious labor relations and community participation and development. After review, the social responsibility maturity of Highly Co. reached above 80 points. The social responsibility report of the Company can be found on the press release of column “Social Responsibility” from SSE’s website http://www.sse.com.cn and the Company’s website http://www.highly.cc. II Interpretations on the environmental protection situation of the listed company and its subsidiaries of severe contamination industry defined by the state environmental protection department None

F. Other Disclosure Matters

I. The 12th meeting of the 6th session of the Board of Directors and 2nd Interim General Meeting of the Shareholders of Highly Co. deliberated on and approved the proposal on the establishment of joint venture Highly Electrical Appliances (India) Co., Ltd. jointly invested by Shanghai Hitachi and Highly Trading. The investment amount for the project establishment is RMB 452.35 million (USD71.80 million). The production capability of Highly India is planned to take steps to reach 2 million sets of air-conditioning compressors of H/L series per year. On December 30, 2014, Highly India has a capacity of assembling metal boards and 1,000,000 pieces per year, machine processing 500,000 pieces per year and 700,000 electricity motors per year. II. The 17th meeting of the 6th session of Board of Directors of Highly Co. deliberated on and approved the proposal of the acquisition of 51% shares of the invested company Sichuan Changhong Dongyuan Precision Equipment Limited. The transfer of equity interests was conducted by way of agreement. Shanghai Hitachi received 51% equity interests of Sichuan Changhong Dongyuan Precision Equipment Limited in consideration of RMB1. After the transfer, the production line reform will be carried out and Highly Southwest Compressor Production Base will be established and renamed as "Mianyang Highly Electrical Appliances Limited", of which 51% equity interests is held by Shanghai Hitachi, 29 % is held by Mianyang Hongfa and 20% is held by Sichuan Changhong. On January 18, 2014, the said company has obtained the business license for enterprise legal person and the corporate name as approved by the administration of industry and commerce is “Mianyang Highly Electrical Appliances Limited,” and the company has begun formal operation in 2014. III. The 18th meeting of the 6th session of the Board of Directors of Highly Co. deliberated on and approved the Report on Registration and Name Change in Shanghai Free Trade Zone by Shanghai Highly Group Trading Co., Ltd. To fully take advantage of the relevant policies in the Shanghai Free Trade Zone and provide multiple financing channels for the Company’s business development, Shanghai Highly Group Trading Co., Ltd. changed its registered address to be in the Shanghai Free Trade Zone and changed its corporate name to Shanghai Highly International Trade Co., Ltd. On June 4, 2014, the said company has obtained the business license for enterprise legal person, and the corporate name as approved by the administration of industry and commerce is “Shanghai Highly International Trade Co., Ltd.” IV. The 19th meeting of the 6th session of the Board of Directors of Highly Co. deliberated on and approved the Resolution on Establishing a Wholly Owned Subsidiary by Shanghai Hitachi Electrical Appliances Co., Ltd. Pursuant to the globalization arrangement, the subsidiary of the Company, Shanghai Hitachi Electrical Appliances Co., Ltd., already has five factories in four places. In order to consolidate sale channels, a wholly owned subsidiary, Nanchang Highly Cold-warm Technology Co., Ltd. is newly established. The registered capital of the said company is RMB20 million, all of which are contributed by Shanghai Hitachi, and the main business scope include sale of refrigeration compressors and other products and provision of relevant service support. On May 8, 2014, the said company has obtained the business license for enterprise legal person, and its corporate name as approved by the administration of industry and commerce is “Nanchang Highly Cold-warm Technology Co., Ltd.” V. The 4th meeting of the 7th session of the Board of Directors of Highly Co. deliberated on and approved the Resolution on Consolidation of Equity of Anhui Highly Precise Casting Co., Ltd. (Invested Subsidiary) and Shanghai Highly Casting Co., Ltd. (Controlled Subsidiary). In order to achieve optimization of internal resources, further improve the good development of the casting business, and

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increase efforts on development of external business, the Company plans to consolidate the equity of Anhui Highly and Highly Casting, i.e. to make additional capital contribution to Anhui Highly with the 80% equity interest held by the Company in Highly Casting, and the other shareholders of Highly Casting will also make additional capital contribution to Anhui Highly with equity interest of Highly Casting held by them. After the capital increase, the Company’s percentage of shareholding of Anhui Highly will increase from 40% to 56.38% and become the controlling shareholder of Anhui Highly, other shareholders of Highly Casting will hold shares of Anhui Highly, and Highly Casting will become a wholly owned subsidiary of Anhui Highly. By January 2015, the Company has completed the equity consolidation and made amendment registration with administration of industry and commerce. VI. During the Report Period, the Company has been planning for the merger. Pursuant to the 1st interim meeting of the shareholder on April 13, 2015, the Company plans to acquire 100% equity of Fusheng Electrical Appliance (the “Target Assets”) by privately issuing stock to no more than 10 specific investors, the amount of which private issuance does not exceed 25% of the transaction amount (the “Transaction”). 1. Issuance of Stock and Purchase of Assets In this Transaction, the Company plans to issue no more than 149,333,333 shares to Hangzhou Fusheng Holding Co., Ltd., Zhejiang Rongsheng Venture Capital Co., Ltd., Zhejiang Wahaha Venture Capital Co., Ltd., Zhejiang HSBC Venture Capital Co., Ltd., Zhejiang Meilin Venture Capital Co., Ltd. and 39 individuals and acquires 100% equity interests in Fusheng Electrical Appliance held by them. The benchmark date for the price of this issuance of stock is the date of the announcement made by the 5th meeting of the 7th session of the Board of Directors. After negotiation among the parties to the Transaction, the price for this issuance of stock is 90% of the average trading price during the last 120 trading days before the benchmark date, i.e. RMB7.50 per share. Pursuant to the Enterprise Value Appraisal Report ([2014] No. 1102257) issued by Shanghai Dongzhou Assets Appraisal Co., Ltd., which has been filed with Shanghai State-owned Assets Supervision and Administration Commission, the appraisal value of the Target Assets is RMB1,160,300,000 as of October 31, 2014 (the appraisal benchmark date). After the appraisal benchmark date (on January 8, 2015), the meeting of shareholders of Fusheng Electrical Appliances resolved to distribute cash dividends in the amount of RMB10,000,000. After negotiation among the parties, the transfer price for the Target Assets in this Transaction is RMB1,120,000,000. After this Transaction is completed, Fusheng Electrical Appliances will become a wholly owned subsidiary of Highly Co., and the existing shareholder of Fusheng Electrical Appliances will become shareholders of Highly Co. 2. Supporting Funds Raised The Company plans to privately issue no more than 47,155,499 shares to no more than 10 specific, qualified investors with the supporting funds raised not exceeding RMB373,000,000 or 25% of the total amount of this Transaction. The supporting funds raised is planned to be used for the construction of Sichuan Fusheng high efficiency energy saving smart electrical motors, supplementing working capital of Fusheng Electrical Appliances, and paying the relevant fees of this Transaction. The price benchmark date for this issuance for raising supporting funds is the date of the announcement made by the 5th meeting of the 7th session of the Board of Directors, and the price for this issuance for raising supporting funds is not less than 90% of the average trading price during the last 120 trading days before the benchmark date, i.e. no less than RMB7.91 per share. This private issuance for raising supporting funds is conditioned upon the implantation of the issuance of stock for purchasing assets, but whether the issuance for raising supporting funds is successful or not will not affect implementation of the issuance of stock for purchasing assets.

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Section 5. Important Events

A. Major Legal Action, Arbitration and Event Widely Questioned by the Media

√ Not applicable

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B. Information regarding Occupation of Fund and Progress of Debt Repayment during the Report Period

√ Not applicable

C. Bankruptcy and Reorganization Matters

The Company was involved in no bankruptcy or reorganization matters this year

D. Asset Deal and Enterprise Merger Matters

√ Applicable

I Information regarding Undisclosed Event or Event with Subsequent Progress in Interim Announcement

1 Information regarding Acquisition of Assets

Unit: Yuan Currency: RMB

Transaction Counterparty or Ultimate Control Party

Acquired Asset Acquisition Date

Asset Acquisition Price

Net Profit Contributable to Listed Company from Acquisition Date to End of This Year

Net Profit Contributable to Listed Company from Beginning to End of This Year (Applicable to Merger of Enterprises under Same Control)

Whether it is an Affiliated Transaction (If yes, explain pricing principle)

Pricing Principle of Asset Acquisition

Whether Entitlements of involved Assets are Transferred

Whether Involved Creditor's Rights and Liabilities are Transferred

Ratio of Net Profit of Such Assets Contributable to Listed Company against Total Profit (%)

Affiliation Relationship

Mianyang Hongfa Machinery Manufacturing Co., Ltd

51% shares of Sichuan Changhong precision equipment Co., Ltd

January 16, 2014

1.00 17,816,836.38 No Agreed price

Yes Yes 19.05

E. Information and Effect regarding the Company’s Stock Option Incentive

√ Not applicable

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F. Major Related Party Transactions

√ Applicable

I Related Party Transactions regarding Daily Operation

1 Event Disclosed in Interim Announcement while with Subsequent Implementation Progress or Change

As approved by the 2014 Annual General Meeting of Shareholders of the Company, in 2014 the Company obtained an accumulative bank acceptance bill discount credit of RMB 4,500,000,000，a bill issuance credit of RMB300,000,000 (electronic bill included) from Shanghai Electrical Finance Co., Ltd., and an entrusted loan amount of RMB990,000,000. The accumulative bank discount for the year was RMB879,330,000, among which RMB684,690,000 was for Shanghai Hitachi Electrical Appliance Co., Ltd. accumulatively, RMB155,570,000 was for Shanghai Highly Casting Co., Ltd. accumulatively, RMB17,480,000 was for Shanghai Highly Special Refrigeration Equipment Co., Ltd. accumulatively and RMB21,590,000 was for Shanghai Highly Group Trading Co., Ltd. accumulatively. The discount interest rate was paid at the same favorable interest rate of other commercial banks. The accumulative issued electronic bank acceptance bill for the year was RMB179,300,000, among which RMB179,300,000 was for Shanghai Hitachi Electrical Appliance Co., Ltd. The accumulative credit of maximum actual entrusted loan through Shanghai Electrical Finance Co., Ltd was 766,000,000, among which RMB574,000,000 was issued for Shanghai Hitachi Electrical Appliance Co., Ltd. and RMB 192,000,000 was issued for Anhui Highly Precision Casting Co., Ltd. All the interest for entrusted loan will be paid to the Company. The procedural fee rate of entrusted loan will be as preferential as other commercial banks.

Information regarding procurement of merchandises and acceptance of labor services

Unit: Yuan Currency: RMB

Related Party Content of related party

transaction

Cost incurred this year Cost incurred last year

Amount Amount

Anhui Highly Procure components such as

castings 286,708,228.30 208,508,278.95

Electric Research

Center

Procure production

equipment 22,125,476.70 20,621,083.71

Standard Five

Fastener Procure raw materials 3,900,573.01 3,372,266.93

Japan Highly

Component

Procure start dynamo for

automobile 0 1,068,438.13

Japan Hitachi Use of trademark and royalty

fee 672,898.90 0

Electric Network Accept Internet platform

service 460,757.19 559,349.23

Machinery Research

Center

Procure raw materials and

accept experimental test

service

67,030.20 211,757.49

Japan Highly

System

Procure start dynamo for

automobile 0 21,121,878.84

Total 313,934,964.30 255,463,053.28

Information regarding sales of merchandises and acceptance of labor services

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Unit: Yuan Currency: RMB

Related Party Content of related party

transaction

Cost incurred this year Cost incurred last year

Amount Amount

Japan Hitachi Sales of compressor 61,470,674.38 35,680,666.70

Wind Power

Company

Sales of wind power

air-conditioner 35,681,522.96 18,756,481.68

Anhui Highly Sales of production

equipment 23,258,246.96 70,245,581.11

Japan Highly

Component

Sales of starting engine

components for automobiles 18,197,571.06 12,637,294.29

Japan Highly

System

Sales of starting engine

components for automobiles 163,848.73 151,945.49

Electric Research

Center Sales of accessories 74,358.97 9,230.77

Shang Qi Factory Sales of high temperature

air-conditioner 68,803.40 602,222.23

Shang Ji Factory Sales of refrigeration

air-conditioner 111,324.78 237,948.72

Total 139,026,351.24 138,321,370.99

G. Materials Contracts and Performance Thereof

1 Trusteeship, Contracting and Lease

√ Not applicable.

2 Security

√ Applicable

Unit: Yuan Currency: RMB

External Security of the Company (security for subsidiaries not included)

Guaran

tor

Relationsh

ip between

Guarantor

and Listed

Company

Secure

d Party

Securit

y

Amoun

t

Date

of

Establi

shmen

t of

Securit

y

(Agree

ment

Execut

ion

Date)

Comme

ncemen

t Date

Expirat

ion

Date

Type

of

Securi

ty

Whethe

r

Fulfille

d or

Not

Whethe

r

Overdu

e or

Not

Overdu

e

Amoun

t

Counter

-Securit

y or

Not

Securit

y for

Affiliat

e or

Not

Affi

liate

d

Rel

atio

nshi

p

Total amount of security (security for subsidiaries

not included) in the Report Period

0

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Balance of outstanding security (security for

subsidiaries not included) at the end of the Report

Period (A)

0

Security Provided by the Company to Subsidiaries Controlled by the Company

Total amount of security provided to the subsidiaries

in the Report Period

439,157,791.00

Balance of outstanding security provided to the

subsidiaries at the end of the Report Period (B)

338,526,387.87

Total Amount of Security Provided by the Company (including the amount of security for the subsidiaries)

Total amount of security (A+B) 338,526,387.87

Proportion of the total amount of security to the net

assets of the Company (%)

14.13

Of which:

Amount of security provided to shareholders, actual

controller and their affiliated parties (C)

0

Amount of security directly or indirectly provided to

any secured parties with over 70% D/A ratio (D)

15,593,808.79

Amount of security in excess of 50% of the net

assets of the Company (E)

0

Total amount of the above 3 kinds of security

(C+D+E)

15,593,808.79

Information regarding possible joint and several

liability for undue security

Information regarding security *Foreign currency in the amount of security in the Report

Period and balance of outstanding security at the end of the

Report Period has been converted into RMB according to the

middle rate at the end of the Report Period.

3 Other material contracts

There was no other material contract to which the Company was party this year.

H. Commitment and Performance

√ Not applicable.

I. Engagement and Disengagement of Accounting Firm

Unit: Yuan Currency: RMB Whether Engaging An

Alternative Accounting Firm No

Previous

Engagement Current Engagement

Name of Domestic Accounting

Firm

Deloitte Touche Tohmatsu Certified Public

Accountants LLP

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Remuneration of Domestic

Accounting Firm

102

Auditing Term of Domestic Accounting Firm

3 years

Name of Accounting Firm Remuneration

Accounting Firm of Internal

Control Audit

Deloitte Touche Tohmatsu Certified Public

Accountants LLP

40

Financial Advisor

Sponsor

Information regarding engagement and disengagement of accounting firm

The Company’s general meeting of shareholders in 2013 has deliberated and approved “Plan

for Engaging Financial Auditing Agency in 2014”. To continue to engage Deloitte Touche

Tohmatsu Certified Public Accountants LLP in 2014 as the financial auditing agency is approved.

Resolution of the general meeting of shareholders was published on “Shanghai Securities News”,

Hong Kong Ta Kung Pao and Shanghai Stock Exchange Website on June 20, 2014.

J. Penalties and Rectifications on the Part of the Company, Directors, Supervisors, Senior Management Personnel, Shareholders Having More than 5% Shareholding in the Company, Actual Controller and Purchaser.

The Company, its directors, supervisors, senior management personnel, shareholders having

more than 5% shareholding in the Company, actual controller and purchaser were not subject to

any inspection, administrative penalty, or public criticism from CSRC or any public censure from

the Stock Exchanges during this year.

K. Information regarding convertible bonds of the Company

√ Not applicable.

L. The impact of adopting new accounting standard on the consolidation of financial statement

On July 1, 2014, the Company started to adopt the newly enacted “Enterprise Accounting

Standards No.39 – Measurement of Fair Value”, “Enterprise Accounting Standards No.40 – Joint

Venture Arrangement”, “Enterprise Accounting Standards No.41 – Disclosure of Interests in Other

Entities”, and amended “Enterprise Accounting Standards No.2 – Long-term Equity Investments”,

“Enterprise Accounting Standards No.2 – Wages and Salaries of Employees”, “Enterprise

Accounting Standards No.30 – Presentation of Financial Statements”, “Enterprise Accounting

Standards No.33 – Consolidated Financial Statements” by Ministry of Finance in 2014, and at the

same time adopted “Enterprise Accounting Standards No.37 – Presentation of Financial

Instruments” amended by Ministry of Finance in 2014

After adopting “Enterprise Accounting Standards No.2 – Long-term Equity Investments”, the

Group will not have joint control or major impact on the invested entities, and will not have equity

investment which cannot be accurately calculated by bidding price or fair market value as

accounting method for financial assets to be sold in the active market. The adoption of such

standards did not have major impact on the financial statement of the Group.

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After adopting “Enterprise Accounting Standards No.9 – Wages and Salaries of Employees”,

the accounting policy of dismissal welfare is in annotation 3, clause 20. The adoption of such

standards did not have major impact on the financial statement of the Group.

“Enterprise Accounting Standards No.33 – Consolidated Financial Statements” amended the

definition of “control”, defining it as “investor has certain power over the investee, and can enjoy

variable returns through participating in the relevant activities of the investee, and is able to

exercise its power over the investee to affect the amount of such returns” and explicitly specified

the accounting treatment for special transaction. The adoption of such standards did not have

major impact on the financial statement of the Group.

“Enterprise Accounting Standards No.37 – Presentation of Financial Instruments” added

rules and disclosure requirements regarding offsetting, added disclosure requirements for transfer

of financial asset, and amended the disclosure requirements for maturity term analysis of financial

asset and financial debts. This financial statement has presented relevant information according to

such standard, and has made adjustment to the disclosure of comparable annual financial

statement annotation.

“Enterprise Accounting Standards No.30 – Presentation of Financial Statements” divided

“other comprehensive income” into two categories: (1) other comprehensive income item in the

future accounting period which cannot be reclassified into profit and loss; (2) other comprehensive

income item in the future accounting period which can be reclassified into profit and loss upon

satisfaction of certain conditions; and specify the presentation of items such as available for sale

item. This financial statement has presented relevant information according to such standard, and

has made adjustment to the disclosure of comparable annual financial statement annotation.

“Enterprise Accounting Standards No.39 – Measurement of Fair Value” specified the

calculation and disclosure of fair market value. Adopting such standard did not have major impact

on the financial statement items, but will cause the Group to make wider disclosure of fair market

value information in the annotation of the financial statement. This financial statement has

presented relevant information according to such standard.

“Enterprise Accounting Standards No.41 – Disclosure of Interests in Other Entities” applies

to the enterprise’s disclosure of equity interest in subsidiary, joint venture, joint operation and

structured body not included in the consolidated financial statement. Adopting such standard will

cause the Group to make wider disclosure in the annotation of the financial statement. This

financial statement has presented relevant information according to such standard, and has made

adjustment to the disclosure of comparable annual financial statement annotation.

For these changes to the accounting policy, we have adjusted opening balance of this

financial statement or the contrast number last year using retroactive adjustment method, and have

restated the financial statement of the comparable year. Among the changes to the accounting

policy mentioned above, only “presentation of financial statement” had impact on the asset, debt

and ownership interest dated January 1, 2013 and December 31, 2013. Such impact is presented as

followed:

December 31, 2013 adjusted number December 31, 2013

(before restatement) (after restatement)

RMB(yuan) RMB(yuan) RMB(yuan)

Transactional financial asset 326,615.23 (326,615.23) -

(Calculated by fair market

2014 Annual Report

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value with changes)

(Financial asset for - 229,330.00 229,330.00

the current profit and loss)

Derivative financial asset - 97,285.23 97,285.23

Transactional financial debt 57,831.00 (57,831.00) -

Derivative financial debt - 57,831.00 57,831.00

Capital reserve 834,205,223.72 (16,736,183.77) 817,469,039.95

Translation reserve (11,221,923.84) 11,221,923.84 -

Other comprehensive income - 5,514,259.93 5,514,259.93

January 1, 2013 adjusted number January 1, 2013

(before restatement) (after restatement)

RMB(yuan) RMB(yuan) RMB(yuan)

Transactional financial asset 312,940.00 (312,940.00) -

(Calculated by fair market

value with changes)

(Financial asset for - 312,940.00 312,940.00

the current profit and loss)

Capital reserve 834,528,093.89 (17,059,053.94) 817,469,039.95

Other comprehensive income - 17,059,053.94 17,059,053.94

The above changes to accounting policy have no impact on the total amount of ownership

interest dated January 1, 2013 and December 31, 2013 or the net profit in the year of 2013.

M. Other Important Events

√ Applicable

1、In 2014, Shanghai Highly (Group) Co., Ltd was awarded the title of “Shanghai Five-Star Enterprise of Integrity”.

2、In 2014, Shanghai Hitachi was awarded the title of “Shanghai Major Project Merit Competition Outstanding Enterprise”.

3、In 2014, Shanghai Hitachi was awarded the title of “Shanghai Harmonious Labor Relation

and Employee Satisfied Enterprise” of the years 2012-2013.

2014 Annual Report

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Section 6. Changes in Share Capital and Information of Shareholders

A. Changes in Share Capital

I. Table of Changes of Share Capital Structure

1. Table of Changes of Share Capital Structure

No change of total shares and shareholding ratio in the Report Period.

2. Others the Company Deems Necessary or Required by Securities Regulatory Institution to Disclose

The Company has disclosed its information in strict accordance with the relevant laws and

regulations, and no other information to be disclosed.

II. Changes in the Shares with Trading Restriction

Unit: Shares

Name of

Shareholder

Shares with

Trading

Restriction

at

Beginning

of this Year

Lifting of

Shares

with

Trading

Restriction

of this

Year

Increased

Shares

with

Trading

Restriction

of this

Year

Shares with

Trading

Restriction

at End of

this Year

Reasons for

Trading

Restriction

Date of

Lifting

Trading

Restriction

Shanghai

Electric

(Group)

Co.

65,000,000 0 0 65,000,000

2012 private

placement of

newly

increased

shares with

trading

restriction

July 27,

2015

Total 65,000,000 0 0 65,000,000 / /

B. Issuance and Listing of Securities

I. Each Securities Issuance of the Latest Three Years up to the End of the Report Period

Unit: Shares Currency: RMB

Type of Share and

its Derivative

Securities

Issuance

Date

Issuance

Price (or

Interest

Rate)

Issuance

Quantity

Listing

Date

Approved

Listed

Transaction

Quantity

Transaction

Termination

Date

Common Shares

2012 private

placement

shares

July 16,

2012 7.79 65,000,000

July 26,

2012 65,000,000

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II. Changes of the Company’s total shares and shareholder structure and changes of the

Company’s asset and liability structure

No change of total shares and shareholding ratio due to share dividend, allotment of shares

and other reason in the Report Period.

C. Information of the Shareholders and the Actual Controller

I. Total Number of the Shareholders

Total number of the shareholders up to the end of

the Report Period

50,660( including 30949 holding B shares)

Total number of the shareholders at the end of the

fifth trading day before the disclosure date of the

annual report

50,052( including 29736 holding B shares)

II. Shareholding Status of the top ten shareholders and the top ten shareholders without trading

restriction up to the end of the Report Period

Unit: Shares

Shareholding of the top ten shareholders

Name of

shareholders

(full name)

Increase/Decre

ase in the

Report Period

Total

number of

the shares

held

Shareholdi

ng

Proportion

(%)

Number

of the

trading

restricted

shares

held

Status of shares

being pledged

or frozen Nature of

shareholdersStatus

of

shares

Numb

er

Shanghai

Electric

(Group) Co.

-30,393,695 218,357,8

22

32.70 65,000,0

00 Non

State

Shanghai

Jiushi

Corporation

0 26,869,65

9

4.02 0Unkno

wn

Other

Changan

Fund－China

Everbright

Bank－

Changan

Qunying

No.11

Hierarchical

Asset

Management

Plan

8,338,683 8,338,683 1.25 0

Unkno

wn

Other

Gu Hefu -1,493,448 5,985,367 0.90 0 Unkno

wn

Domestic

individual

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Lin Zhenge 1,010,000 4,330,000 0.65 0 Unkno

wn

Domestic

individual

Shanghai

Shangli

Industrial

Co., Ltd.

-506,700 2,993,300 0.45 0

Unkno

wn

Domestic

non-state-ow

ned legal

person

Yang Jingli 2,664,949 2,664,949 0.40 0 Unkno

wn

Domestic

individual

SIG Asset

Management

Co., Ltd.

0 2,389,357 0.36 0Unkno

wn

Other

Vanguard

Total

International

Stock Index

Fund

437,500 1,862,900 0.28 0

Unkno

wn

Other

Guotai Junan

Securities(H

ong Kong)

Limited

-140,000 1,605,478 0.24 0

Unkno

wn

Other

Shareholding of the top ten shareholders without trading restriction

Name of shareholders

Number

of the

shares

without

trading

restriction

held

Type and amount of shares

Type of shares Amount of shares

Shanghai Electric (Group)

Co.

153,357,8

22RMB ordinary shares

153,357,822

Shanghai Jiushi Corporation 26,869,65

9RMB ordinary shares

26,869,659

Changan Fund－China

Everbright Bank－Changan

Qunying No.11 Hierarchical

Asset Management Plan

8,338,683

RMB ordinary shares

8,338,683

Gu Hefu 5,985,367 RMB ordinary shares 5,985,367

Lin Zhenge 4,330,000 domestic listing foreign shares 4,330,000

Shanghai Shangli Industrial

Co., Ltd.

2,993,300RMB ordinary shares

2,993,300

Yang Jingli 2,664,949 RMB ordinary shares 2,664,949

SIG Asset Management Co.,

Ltd.

2,389,357RMB ordinary shares

2,389,357

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Vanguard Total International

Stock Index Fund 1,862,900 domestic listing foreign shares 1,862,900

Guotai Junan Securities(Hong

Kong) Limited 1,605,478 domestic listing foreign shares 1,605,478

Whether the aforementioned

shareholders have any

affiliated relationship, or

concerted action

Among the top ten 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 persons acting in concert among any of the top ten

shareholders.

Shareholding number and trading restriction condition of the top ten shareholders with trading

restriction

Unit: Shares

No. Name of Shareholder

with trading restriction

Number of

shares with

trading

restriction

Listed transaction

of shares with

trading restriction

Trading restriction

condition Time for

listed

transactio

n

Numb

er of

newly

increa

sed

listed

transa

ction

shares

1 Shanghai Electric

(Group) Co.

65,000,000 July 27，

2015

Not transferable

within 36 months

upon the completion

of the Company’s

2012 private

placement

D. Information of the change of controlling shareholder and the actual controller

I. Information of the Controlling Shareholder

1. Legal Person

Unit: Yuan Currency: RMB

Name Shanghai Electric (Group) Co.

Person in Charge or Legal

Representative

Huang Dinan

Date of Establishment May 28, 1998

Organizational Code 13221287-3

Registered Capital 6,829,766,000

Principal Business General contracting of power engineering projects, whole-set

assembly or split supply of equipment, external labor

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contracting, industrial investment, manufacturing and sales

of mechanical and electrical product and equipment 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 (except specific

provisions).

Future Development Strategy To thoroughly implement the scientific outlook on

development, and in accordance with the requirements of

"innovation drive, transition development", to seize the

opportunity for reform and change, and to further promote

the "restart a business" activity. Rely on science and

technology, deepen the reform and pay great attention to the

talents to lay a solid foundation for establishing Shanghai

Electric as a modernized and internationalized industrial

equipment group.

Information of Shares of Other

Controlling and Holding Domestic

and Foreign Listing Companies

during the Report Period

As of December 31, 2014, Shanghai Electric (Group) Co. has controlling listing companies as follows: Shanghai Electric (holding 57.174%), Shanghai Prime Machinery Company Limited (holding 49.75%), Shanghai Automation Instrumentation Co. (holding 26.50%), Shanghai Highly (Group) Co., Ltd. (holding 32.70%).

Other information

2. Index and date of changes of the controlling shareholder in the Report Period

No change of the controlling shareholder in the Report Period.

II. Information of the Actual Controller

1. Legal Person

Unit: Yuan Currency: RMB

Name Shanghai State-owned Assets Supervision and

Administration Commission

2. Index and date of changes of the actual controller in the Report Period

No change of the actual controller in the Report Period.

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3. Diagram of Relationship of Shareholding and Control between the Company and Its Actual Controller

Shanghai State-owned Assets Supervision

and Administration Commission

Shanghai Electrical (Group) Co.

Shanghai Highly (Group) Co., Ltd.

100%

32.70

2014 Annual Report

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Section 7. Information regarding Preemptive Shares

There is no such matter regarding preemptive shares during the Report Period.

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Section 8. Directors, Supervisors, Senior Management Personnel and Employees

A. Shareholding Changes and Remuneration

I Shareholding Changes and Remuneration of Directors, Supervisors and Senior Management at the Post and Leave the Post during the Report Period

Unit: Shares

Name Title (note) Gender Age Commencement

of Term of Office

Expiry Date of Term of Office

Shares held at the beginning

of the Year

Shares held at the end of the

Year

Amount of Annual Share

Increased and

Decreased Change

Causes of Increase

and Decrease Change

Total Payable

Remuneration Received

from Company during the

Report Period (before tax)(ten

thousand RMB)

Remuneration Payable on

Received from Shareholders

during the Report Period

Shen Jianfang

Chairman of Board of Directors

M 59 2014-06-19 274,276 274,276 0 65.8

Xu Chao Vice Chairman of Board of Directors

M 59 2014-06-19 0 0 0 65

Zhu RongEn

Independent Director

M 60 2014-06-19 0 0 0 12

Wang Yu Independent Director

F 61 2014-06-19 0 0 0 12

Zhang Chi Independent Director

M 56 2014-06-19 0 0 0 6

Sun Wei Director M 44 2014-06-19 0 0 0 34.7 Yao Guizhang

Director M 55 2014-06-19 0 0 0 44.76

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Guo Zhuping

Director, General Manager

F 54 2014-06-19 115,110 115,110 0 59.2

Zheng Jiandong

Director M 54 2014-06-19 49,400 49,400 0 78.7

Dong Jianhua

Chairman of Board of Supervisors

M 49 2014-06-19 0 0 0 75

Tong Liping Supervisor F 43 2014-06-19 0 0 0 65.6 Li Li Supervisor F 44 2014-06-19 50,764 50,764 0 42 Li Li Supervisor M 52 2014-06-19 91,765 91,765 0 56.7 Wang Yi Supervisor M 39 2014-06-19 1,025 1,025 0 46.4 Feng Guodong

Deputy General Manager

M 55 2014-06-19 127,096 127,096 0 59.8

Zheng Min

Deputy General Manager

F 47 2014-06-19 62,400 62,400 0 55.2

Cai Jinlv Deputy General Manager

M 36 2014-06-19 0 0 0 47.3

Qin Wenjun

Chief Financial Officer

F 51 2014-06-19 83,780 83,780 0 58.7

Luo Min Secretary of Board of Directors

F 39 2014-06-19 30,000 30,000 0 56.6

Yang Zhongxiao

Independent Director (Leave the Post)

M 48 2012-04-05 2014-06-19 0 0 0 6

Dong Xiaoqing

Director (Leave the Post)

M 58 2011-06-17 2014-06-19 88,142 88,142 0 74.7

Lv Supervisor M 60 2011-06-17 2014-06-19 52,325 52,325 0 44

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Kangchu (Leave the Post)

Zhu Haoli Supervisor (Leave the Post)

M 41 2011-06-17 2014-06-19 0 0 0 60.5

Total / / / / / 1,026,083 1,026,083 0 / 841.6 /

Name Major Work Experience during last five years Shen Jianfang

now serves as director, chairman of the Board of Directors and secretary of Party committee of the Company, professorial senior engineer, and enjoys the special allowance provided by the State Council. Concurrently serves as director and chairman of the Board of Directors of Shanghai Hitachi Electrical Appliance Co., Ltd., director and chairman of the Board of Directors of Nanchang Highly Electrical Appliances Co., Ltd, director and chairman of the Board of Directors of Highly Electrical Appliances (India) Co., Ltd., and director and chairman of the Board of Directors of Highly High-Technologies Japan Corporation. In the past five years, he served as director and chairman of the 6th session of the Board of Directors of the Company, and concurrently as secretary of Party committee of Shanghai Hitachi Electrical Appliance Co., Ltd.

Xu Chao now serves as director and vice chairman of the Board of Directors of the Company, vice chief economist and director of Investment Management Department of Shanghai Electric (Group) Co., executive director and general manager of Shanghai Electric Industry Co., Ltd.. In the past five years, he served as head of Financial Budget Department of Shanghai Electric (Group) Co., vice president, CEO assistant, CFO of Shanghai Electric Asset Management Co., Ltd.，vice president and CFO of Shanghai Turbines Co., Ltd., as vice manager of Shanghai Electric Power Generation Equipment Co., Ltd., Shanghai Turbines Factory and executive director of Shanghai Electric Industry Co., Ltd.

Zhu RongEn

now serves as president of Shanghai New Century Credit Appraisal Investment Service Co., Ltd. and independent director of the Company and now concurrently as vice chairman member of Credit Rating Committee of National Association of Financial Market Institutional Investors, member of National Committee of Standards of Internal Control, professor and doctoral supervisor of Shanghai University of Finance and Economics, independent director of Huayu Automotive Systems Co., Ltd., Shenergy Company Limited and Anxin Trust Investment Company Limited by Shares.

Wang Yu now serves as professor and doctoral advisor of International Business Administration School of Shanghai University of Finance & Economics and independent director of the Company, and concurrently as vice chairman of Shanghai Enterprise Development Promotion Committee and vice chairman of Shanghai Education Administration Committee.

Zhang Chi now serves as professor of East China University of Politics and Law, and independent director of the Company, and concurrently as independent director of Baotou Tomorrow Technology Co., Ltd., Insigma Technology Company Ltd., China Shipping Environmental Technology (Shanghai) Co., Ltd. and Broadex Technologies Co .,Ltd, part-time lawyer at Shanghai Zhongxin Zhengyi Law Firm, arbitrator at Shanghai Arbitration Commission.

Sun Wei now serves as director of the Company and head of Strategy Planning Department of Shanghai Electric (Group) Co. and concurrently serves as head of Industry Development Department of Shanghai Electric Group Company Limited. In the past five years, he served as deputy head of Strategy Planning Department of Shanghai Electric (Group) Co., manager of Industry Development Department of Shanghai Electric Group Company Limited, general manager assistant and deputy general manager of Shanghai Railway Transportation Equipment Development Co., Ltd. and general manager of Shielding Door Construction Company of Shanghai Railway Transportation Equipment Development Co., Ltd.

Yao now serves as full-time director of Shanghai Jiushi Corporation, director of this Company. In the past five years, he served as manager of Audit and

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Guizhang Supervision Department, manager of Financial Management Department of Shanghai Jiushi Corporation. 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 Nakano Refrigerators Co. Ltd., director and vice chairman of the Board of Directors of Hitachi Highly Automotive Systems (Shanghai) Co., Ltd. She served as director of the 6th session of the Board of Directors of the Company, director and chairman of the Board of Directors of Shanghai Highly Special Refrigerators Co., Ltd., director and chairman of the Board of Directors of Shanghai Highly Realnen Environmental Technology Co., Ltd. in the past five years.

Zheng Jiandong

now serves as director of the Company, and concurrently as director, general manager, vice secretary of Party committee of Shanghai Hitachi Electrical Appliance Co., Ltd., director of Nanchang Highly Electrical Appliances Co., Ltd., director of Highly Electrical Appliances (India) Co., Ltd. In the past five years, he served as director, deputy general manager of Shanghai Hitachi Electrical Appliance Co., Ltd., director, general manager and secretary of Party committee of Nanchang Highly Electrical Appliances Co., Ltd.

Dong Jianhua

now serves as supervisor, chairman of Board of Supervisors of the Company, chief financial officer of Shanghai Electric (Group) Co., chairman of Board of Supervisors of Shanghai Electric Group Company Limited and chairman of Board of Supervisors of Shanghai Prime Machinery Company Limited in the past five years. In the past five years, he served as director of Audit Office of Shanghai Electric (Group) Co.

Tong Liping

now serves as supervisor of the Company, chief legal officer and head of Legal Department of Shanghai Electric Group Company Limited. She served as general counsel and deputy head of Department of Legal Affairs of Shanghai Electric Group Company Limited, director of Legal Center of Shanghai Electric Group Company Limited, head of Legal Department of Shanghai Electric Power Generation Group and director of law and audit of Shanghai Electric Power Generation Group in the past five years.

Li Li now serves as supervisor and director of Audit Office of this Company and concurrently as supervisor of Shanghai Hitachi Electrical Appliance Co., Ltd., Shanghai Jinxuan Property Management Co., Ltd., Shanghai Highly Casting Co., Ltd., Shanghai Highly Group Trading Co., Ltd., Shanghai Highly Special Refrigeration Equipment Co., Ltd. and Hitachi Highly Automotive Products (Shanghai) Co., Ltd., Hitachi Highly Automotive Systems (Shanghai) Co., Ltd., Nanchang Highly Electrical Appliance Co., Ltd., Highly Electrical Appliances (India) Co., Ltd., Highly High-Technologies Japan Corporation, Anhui Highly Precision Casting Co., Ltd., Shanghai Refrigerating Machine Works Co., Ltd.

Li Li now serves as supervisor, chairman of Labor Union, secretary of Discipline commission of Party committee of the Company, and concurrently as director, chairman of the Board of Directors of Shanghai Highly Special Refrigerators Co., Ltd., director and chairman of the Board of Directors of Shanghai Highly Realnen Environmental Technology Co., Ltd. In the past five years, he served as deputy general manager of Shanghai Highly (Group) Co., Ltd., director of Shanghai Hitachi Electrical Appliance Co., Ltd., director and chairman of the Board of Directors of Shanghai Highly Group Trading Co., Ltd.

Wang Yi now serves as supervisor of the Company, deputy general manager, secretary of Party General Branch, vice chairman of Labor Union of Shanghai Hitachi Electrical Appliance Co., Ltd. Shanghai Factory. In the past five years, he served as manager of Personnel Coordination, deputy manager of Human Resources Department, director assistant of Manufacturing System, and manager of Electrical Appliance Manufacturing Department of Manufacturing System.

Feng Guodong

now serves as deputy general manager and chief engineer of the Company, and concurrently as director of Shanghai Hitachi Electrical Appliance Co., Ltd., director and chairman of the Board of Directors of Shanghai Highly International Trading Co., Ltd. He served as director of the 5th session of the Board of Directors and deputy general manager of the Company, director and vice chairman of the Board of Directors of Shanghai Kena Electric

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Machinery Co., Ltd., director and vice chairman of the Board of Directors of Qingdao Highly Electric Machinery Co., Ltd., and director and chairman of the Board of Directors of Shanghai Highly Casting Co., Ltd. in the past five years.

Zheng Min

now serves as deputy general manager of the Company and concurrently as director and chairman of the Board of Directors of Anhui Highly Precision Casting Co., Ltd., director and chairman of the Board of Directors of Shanghai Highly Casting Co., Ltd., director of Hitachi Highly Automotive Products (Shanghai) Co., Ltd. and director of Hitachi Highly Automotive Systems (Shanghai) Co., Ltd. In the past five years, she served as head of Investment Department of the Company, director of Shanghai Highly Realnen Environmental Technology Co., Ltd. and director of Shanghai Highly Special Refrigeration Equipment Co., Ltd.

Cai Jinlv now serves as deputy general manager of the Company. In the past five years, he served as vice secretary of Youth League Committee of Shanghai Electrical (Group) Co., manager of Leader Human Resources Department, manager of Study Office and vice secretary of Youth League Committee of Shanghai Electric Group Co., Ltd.

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.

Luo Min now serves as secretary of the Board of Directors of the Company and concurrently as office director of the Board of Directors of the Company, secretary of the Board of Directors of Shanghai Hitachi Electrical Appliance Co., Ltd., secretary of the Board of Directors of Nanchang Highly Electrical Appliance Co., Ltd. In the past five years, she served as supervisor of the 5th Session of the Board of Supervisors of the Company, secretary of the Board of Directors and head of Business Planning Department of Shanghai Hitachi Electrical Appliance Co., Ltd.

Yang Zhongxiao

now serves as professor and dean of postgraduate education school of Economic Law School of East China University of Politics and Law. In the past five years, he served as independent director of the 6th Session of the Board of Directors of the Company, vice dean and executive vice dean of postgraduate education school of East China University of Politics and Law.

Dong Xiaoqing

now serves as and concurrently as director and vice chairman of the Board of Directors of Nanchang Highly Electrical Appliance Co., Ltd., chairman of the Board of Directors of Mianyang Highly Electrical Co., Ltd., and director of Highly Electrical Appliances (India) Co., Ltd. He served as director of the 6th Session of the Board of Directors of the Company, general manager and deputy secretary of Party committee, secretary of Discipline commission of Party committee of Shanghai Hitachi Electrical Appliance Co., Ltd., and director and vice chairman of the Board of Directors of Nanchang Highly Electrical Appliances Co., Ltd. in the past five years.

Lv Kangchu

in the past five years served as supervisor of the 6th Session of the Board of Supervisors, deputy secretary of Party committee, secretary of Discipline commission of Party committee, and chairman of Labor Union of the Company, and director of Shanghai Nakano Refrigerators Co. Ltd.

Zhu Haoli now serves as department manager of Automotive Career Department of Shanghai Hitachi Electrical Appliance Co., Ltd. He served as supervisor of the 6th Session of the Board of Supervisors of the Company, manager of Production Planning Department and manager of Machinery Processing Department, general manager of Vortex Career Department and deputy director of Manufacturing System of Shanghai Hitachi Electrical Appliance Co., Ltd.

Other information

Mr. Yang Zhongxiao as independent director, Mr. Dong Xiaoqing as director, Mr. Lv Kangchu as supervisor and Mr. Zhu Haoli as supervisor have leaved their posts on June 19, 2014, and the expiry date of the term of office of the other abovementioned directors, supervisors and senior management personnel is subject to the date of closing of the General Meeting of Shareholders of 2017.

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II Stock Option Incentive Granted to Directors, Supervisors and Senior Management during the Report Period

□Applicable √Not applicable B. Information regarding Directors, Supervisors and Senior Management at the Post and Leave the Post during the Report Period I Information of Positions in Shareholders

√Applicable □Not applicable

Name Name of Shareholders Position in Shareholder’s

Entities Commencement Date

of Term of Office Expiry Date of Term of

Office Xu Chao Shanghai Electric (Group) Co. Vice chief economist and

director of Investment Management Department

2013-12-30

Sun Wei Shanghai Electric (Group) Co. Head of Strategy Planning Department

2011-6-8

Sun Wei Shanghai Electric Group Co., Ltd Head of Industry Development Department

2012-3-19

Yao Guizhang Shanghai Jiushi Corporation Full-time Director 2012-1-15 Dong Jianhua Shanghai Electric (Group) Co. Chief financial officer 2008-4-1 Dong Jianhua Shanghai Electric Group Co., Ltd Chairman of Board of Supervisors 2010-10-1 Tong Liping Shanghai Electric Group Co., Ltd Chief legal officer 2012-3-19 Tong Liping Shanghai Electric Group Co., Ltd Head of Legal Department 2009-6-16 Note on information of positions in shareholders

II Information of Positions in Other Entities

√Applicable □Not applicable

Name Name of Other Entities Position in Other Unit Commencement Date of Term of Office

Expiry Date of Term of Office

Zhu RongEn Shanghai New Century Credit AppraisalInvestment Service Co., Ltd.

President 1992-7-30

Wang Yu International Business Administration School of Shanghai University of Finance & Economics

Professor 1997-6-30

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Wang Yue International Business Administration School of Shanghai University of Finance & Economics

Doctoral advisor 2002-1-30

Zhang Chi East China University of Politics and Law Professor 2000-12-21 Note on information of positions in other entities

C. Information of Remuneration of Directors, Supervisors and Senior Management Personnel

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

According to the key work in the 12th Five-Year Operation Goal Responsibility Letter and the financial budget as approved by the Board of Directors at the beginning of this year, a comprehensive assessment will be carried out on the directors, supervisors and senior management personnel in respects such as work performance, capability and quality, and then HR Department will prepare a corresponding performance incentive plan, which will be implemented after approval. The remuneration of the independent directors will be approved by the General Meeting of Shareholders.

The basis to determine the remunerations payable to the directors, supervisors and senior management personnel

The remuneration 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 Shareholder General Meeting.

The payment of the remunerations payable to the directors, supervisors and senior management personnel

During the Report Period, the total payment of the remunerations payable to the directors, supervisors and senior management personnel at the Company is RMB8,056,000.

The total actual payment of the remunerations received by all the directors, supervisors and senior management personnel at the end of the Report Period

The total actual payment of the remunerations received by all the directors, supervisors and senior management personnel at the Company during the Report Period is RMB8,056,000. The total actual payment of the remunerations received by the independent directors during the Report Period is RMB360,000.

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

Name Position Changes Reason for Changes Zhang Chi Independent Director Elected election at expiration of office terms Zheng Jiandong Director Elected election at expiration of office terms Li Li Employee Supervisor Elected election at expiration of office terms Wang Yi Employee Supervisor Elected election at expiration of office terms Yang Zhongxiao Independent Director Left the post Dong Xiaoqing Director Left the post expiration of office term Lv Kangchu Employee Supervisor Left the post expiration of office term

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Zhu Haoli Employee Supervisor Left the post expiration of office term Li Li Deputy General Manager Left the post expiration of office term

E. Core Technical Team or Key Technical Personnel of the Company

During the Report Period, there is no change of the core technical team or key technical personnel of the Company.

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F. Employees of the Company and Main Subsidiaries

I Information of Employees

Number of Employees Enrolled by Company 49Number of Employees Enrolled by Main Subsidiaries

4,626

Total Number of Employees Enrolled 4,730Number of Retired Persons Whose Expenses Are Born by Company and its Main Subsidiaries

Specialties Specialties Number of Employees

Manufacture Personnel 3,163Sales Personnel 98

Technical Personnel 777Financial Personnel 80

Administrative Personnel 387Others 225

Total 4,730

Education Level Education Level Number of Employees (person)

Bachelor and Above 935College Level Professional Education 784Senior High School, High School Professional Education or Junior High School and Below

3,011

Total 4,730

II Remuneration Policy

The Company implements the post-and-performance-based payment system in terms of operation management personnel and administrative service personnel, and the salary of particular post is determined according to the post evaluation, market salary competitiveness, personal competence and other factors, at the same time, the quarterly and annual performance is evaluated according to the Company's business performance and the completion statues of the Board of Directors’ goal, based on which the quarterly performance reward and double pay are provided.

In accordance with the relevant national policies, the Company has the following policies: the employees enjoy the paid vacation; the Company pays the "five social insurances and one housing fund" for the employees, and the Company implements the enterprise annuity plan and supplementary medical insurance plan according to the business situation.

III Training Plan

According to the strategic planning, personnel and competence requirements for company operation, the Company carries out the employee training through combination of both the internal training and external training resources. The Company has become Shanghai Training Base for High Skilled Talents in 2012 with approval of Shanghai Municipal Human Resources and Social Security Bureau, training skill operation personnel suitable for intelligent manufacturing through the implementation of “school-enterprise cooperation” and "technician trains an accomplished apprentice" plan, and at the same time promoting the employee's competence through post professional training and safety education training in terms of different professional categories. External training resources are introduced mainly for the training of business capacity, management competence and leadership level of employee of posts such as management and technology.

 

IV

V

Specialties C

Educational

Composition

Level Statist

Statistical Ch

tical Chart

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hart

Report

0 

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Section 9. Corporate Governance

A. Relevant Information regarding Corporate Governance and Insider Registration Management

I. Development and Implementation of Corporate Governance related System The Company strictly follows the provision of Company Law, Securities Law and other relevant

laws and regulations, and continuously improves its corporate governance and formalize company operation, strengthen the information disclosure. So far, the Company has formed a corporate governance system with a clear division of power and responsibility, effective right balance, harmonious operation. The General Meetings of Shareholders, Board of Directors, Board of Supervisors shall respectively fulfil its own responsibility and obey its duty, and protect the interests of investors and the Company.

During the Report Period, the Company manages to complete the change of Board of Directors,

Board of Supervisors and the Management Personnel in accordance with applicable laws, regulations and AoA of the Company, which achieve the healthy and stable development of the corporate governance.

II. Special Campaign of Corporate Governance During the Report Period, the Company further improves the construction of corporate governance

and internal system, continue to carry forward with the implementation of the Basic Rules for Corporate Governance. In 2014, the Company made and revised the Auditing System of Resignation, System of Financial Derivative, Contract Management, Internal Control System – Basic Rules and other systems, meanwhile, the Company carries out the work self-assessment, achieves the dynamic self-assessment and update of the internal control system, strengthen the risk prevention ability of the Company and facilitate the healthy and persistent development of the Company.

III. Development and Implementation of Insider Registration Management System In 2010, the Company formulated the Insider Management System. During the Report Period, the

Company strictly implemented relevant provisions of the Insider Management System, and, in the preparation of regular disclosure reports, plan to purchase asset by issuing shares and such significant events, the Company prepared the Insider Registration Form, and truthfully and completely recorded the insider information as well as all the insider list of each stage before publicity.

Whether there exists any difference between the corporate governance and the requirements from Company Law and other relevant regulations from CSRC; if any, please explain.

No.

B. Brief Introduction of the General Meeting of Shareholders

Session of Meeting

Convening Date

Name of Meeting ProposalApproval

of Proposal

Search Index of Designated

Website Publishing Proposal

Disclosure Date of

Publishing Proposal

2013 Annual General Meeting of Shareholders

2014-06-19

2013 Annual Work Report of Board of Directors; 2013 Annual Work Report of Board of Supervisors;

Approved all the Proposals

www.sse.com.cn 2014-06-20

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2013 Annual Report and Abstract; 2013Financial Final Accounts and 2014 Financial Budget; 2013 Profit Distribution Plan; Engagement of 2014 Financial Audit Institution; Proposal of 2014 Daily Affiliated Transactions; Proposal of 2014 External Security; Work Report of the change of the 6th session of Board of Directors and the Proposal of appointment of the Directors for the 7th session of Board of Directors; Work Report of the change of the 6th session of Board of Supervisors and the Proposal of appointment of the Supervisors for the 7th session of Board of Supervisors; Proposal for the allowance of Independent Directors of the Company

Overview of the General Meeting of Shareholders

The 2013 Annual General Meeting of Shareholders of the Company was convened at Shanghai Zijinshan Hotel on June 19, 2014. The number of shareholders and agents of shareholders attending at the meeting was 75, which represents the Company’s 282,214,035 voting shares, accounting for 42.2638% of the Company’s total voting shares. This General Meeting of Shareholders deliberated eleven proposals, and passed all the proposals by open voting. This General Meeting of Shareholders was witnessed by Fangda Partners (Shanghai) at the meeting site and Fangda Partners (Shanghai) issued the legal opinion, who deemed the convening and convening procedure of this General Meeting of Shareholders is in accordance with the provisions of relevant laws and procedures, and the qualifications of personnel attending the meeting is legal and valid; the qualification of the meeting convener is legal and valid; the voting procedure and result of the meeting is legal and valid.

C. Performance of Duties by Directors

I. Attendance of Directors at Meetings of the Board of Directors and General Meeting of Shareholder

Name of Director

Whether or not an

Independent Director

Attendance at meetings of the Board of Directors

Attendance at

General Meeting

of

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Shareholders

Number of

Meetings Requiring Attendan

ce this year

Attendance in

Person (Times)

Attendance via

Communications (Times)

Attendance by

Proxy (Times

)

Absence (Times)

Whether or not

absent in person

from two successiv

e meetings

Attendance

(Times)

Shen Jianfang

No 8 8 3 0 0 No 1

Xu Chao

No 8 8 3 0 0 No 1

Zhu Rongen

Yes 8 8 3 0 0 No 1

Wang Yu

Yes 8 8 3 0 0 No 1

Zhang Chi

Yes 4 4 1 0 0 No 0

Sun Wei No 8 7 3 1 0 No 0Yao Guizhang

No 8 8 3 0 0 No 1

Guo Zhuping

No 8 8 3 0 0 No 1

Zheng Jiandong

No 4 4 1 0 0 No 0

Yang Zhongxiao

Yes 4 4 2 0 0 No 1

Dong Xiaoqing

No 4 3 2 1 0 No 1

Number of Meetings of the Board of Directors during the year

8

Number of live meetings 5 Number of Meetings via Communications 3 Number of Live Meetings combined with Communication

0

II. Objection Raised by Independent Directors of 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.

D. Important Opinions and Suggestions Raised by Special Committees under the Board of Directors while Performing Duties during the Report Period

During the Report Period, Independent Director and Outside Director of the Auditing Committee of

the Board of Directors and Deloitte convened an independent communication meeting without the participation of the Managements, the present directors suggested Deloitte to pay attention to the 2013

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Report of Tracking Rate Of The Company Bond, and further pay attention to the strategic development and the control ability under international strategy during the internal-control auditing.

On November 16, 2014, the Strategy Committee convened the 2nd expanding meeting of the 7th

session and had a discussion on the Proposal of Purchasing Hangzhou Fusheng Electrical Appliance Co., Ltd. of the Company, studied and raised suggestions on the material restructuring matter related to the listed company in accordance with the implementation rules of the Strategy Committee.

On May 20, 2014, Nominations Committee convened the 4th meeting of the 6th session via

Communications, ran a qualification inspection on the candidates of the 7th Board of Directors and senior managements contemplated to hire for the 7th session, and agreed to submit the above to the Board of Directors and General Meeting of Shareholders for consideration.

E. Explanation of Exhibiting Risks found by the Board of Supervisors

During the Board of Supervisors’ supervision in the Report Period, no material risks are found, and

there are no objections to the supervising matters.

F. Explanation of 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 principal business operation is independent of that of its

controlling shareholder. The Company has an independent and complete procurement, production and sales network. The procurement of raw materials and sales are all carried out independently.

In the personnel aspect, 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. All the directors are appointed by General Meeting of Shareholders through legal procedures.

In the assets aspect, the title of the assets owned by the Company is independent from major

shareholders and other affiliates. No major shareholder or other affiliate is occupying the capital and assets of the Company or its subsidiaries.

In the corporate structure aspect, the Company has established the General Meeting of Shareholders,

Board of Directors and Board of Supervisors and has an independent organization. In the financial control aspect, the Company has an independent financial department and 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 in accordance with laws.

If there is any horizontal competition due to the reasons such as shareholding reform, industry characteristics, national policy, merger and acquisition, the Company’s corresponding measures, work schedule and follow-up work plan: there is no horizontal competition in the Company due to the reasons such as shareholding reform, industry characteristics, national policy, merger and acquisition. G. Establishment and Implementation of Performance Review System and Incentive System for Senior

Management Personnel during the Report Period

The performance review of the senior managements of the Company is mainly based on the business goals set by the Board of Directors and also the performance of various business indices, budget, key tasks and key works contained Review Scheme Of The Twelve Five-Year Business Goal. The performance review will be carried out by means of self-statement of work, self-assessment, business evaluation, democratic discussion and other measures. Meanwhile, the opinion of discipline inspection committee and auditing committee on whether the senior managements conducted any material violation on disciplines or regulations and whether there is any event with material adverse effect shall also be

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taken into consideration. By assessing the business budget achievement of the Company, the annul work performance of the area the specific senior managements is allocated to and democratic assessment outcome, the Company will provide with each of the senior management a personal comprehensive performance evaluation. The evaluation level is divided into excellent, qualified, barely qualified, disqualified, and the amount of annual salary will be influenced by the evaluation.

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Section 10. Internal Control

A. Internal Control Responsibility Statement and Internal Control System Establishment

I. Internal Control Responsibility Statement The Board of Directors shall be responsible for the establishment of sound internal control and

effective implementation of such internal control; the Board of Supervisors shall supervise the Board of Directors to establish and implement the internal control; the manager staff shall be responsible for organizing and leading the daily operation of the Company’s internal control.

The goal of the Company’s internal control is to reasonably ensure the business legal compliance,

asset security, authenticity and integrity of financial reports and related information, improve the management efficiency and effect, and promote the realization of development strategy. Due to the inherent limitations of internal control, only reasonable assurance for the realization of the above goals can be provided.

The Board of Directors has evaluated on the internal control over financial report in accordance

with the requirements of the Fundamental Norms of Enterprise Internal Control, and deemed that it was valid on December 31, 2014 (Benchmark Day). The Company has not found any material defects and major defects of internal control related to the non-financial report during the self-assessment process of internal control. Deloitte Touche Tohmatsu Certified Public Accountants LLP engaged by this Company has audited on the validity of the internal control over financial report. Audit results stated that: the Company maintained the valid internal control over financial report in all material respects in accordance with the Fundamental Norms of Enterprise Internal Control and related regulations on December 31, 2014.

II. Basis of Internal Control over Financial Report and Establishment of Internal Control System According to requirements of Company Law, Security Law, Basic Internal Control Norms for

Enterprises and other relevant laws and regulations, and with combination of the Company’s operation, the Company established controlling procedure relating controlling activities, the Company’s internal control system, and the Internal Control Handbook with reference to the supporting guidelines of the Fundamental Norms of Enterprise Internal Control.

The construction of the Company’s internal control system covers the risk point, control goals, key

control activities related to main control activities, including but not limited to aspects of internal operation management, financing security, investment management, affiliated transactions, funds management and information disclosure, etc..

III. Self-assessment Report of Internal Control The Board of Directors of the Company authorizes the Company’s Audit Office to be in charge of

the specific organization and implementation of internal control assessment. The Company and its holding subsidiaries are incorporated into the assessment scope.

The businesses and matters incorporated into the assessment scope includes: organization structure,

development strategy, risk assessment, internal supervision, financial report, comprehensive budget, information system, guarantee business, procurement business, sales business, storage management, R&D, contract control, fixed assets and other major business procedures.

The self-assessment of the Company’s internal control covers the main aspects of the operation and

management of the Company. Through self-examination, by the end of the Report Period, no material defects of the Company were discovered regarding internal control design and its implementation.

Whether there is any disclosure of internal control self-assessment report: yes

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B. Self-assessment Report of Internal Control

Deloitte Touche Tohmatsu Certified Public Accountants LLP, the internal control audit institution of the Company, has issued the Standard Clean Opinion Internal Control Audit Report, and the audit conclusion stated that the Company has maintained the valid internal control over financial report in all material respects in accordance with the Fundamental Norms of Enterprise Internal Control and related regulations.

Whether there is any disclosure of internal control self-assessment report: yes

C. Explanation of Liability Investigation System of Material Errors in Annual Report and Related Implementation

Liability Investigation System of Material Errors of Information Disclosure in Annual Report of Shanghai Highly (Group) Co., Ltd. provides detailed provision on the liability investigation and dispose measures upon the occurrence of material errors. The system provides stipulations such as the Board of Directors shall investigate liabilities of relevant persons responsible based on principles of seeking truth from facts, objectiveness and fairness and the necessity to correct mistakes whenever discovered in case there is any material error of information disclosure in annual report; faults and liabilities of the same degree; relative responsibilities and rights, and may give the person responsible for such errors the instructions of correct and review, the punishment of criticism, post transfer, suspension, demotion, removal, penalty, reduction in salary, dissolution of the labor contract depending on the seriousness of each case.

The formulation and implementation of the above system improve the normality of the Company’s

operation, increase the liability to be undertaken by the one who is responsible for disclosing information in annual report, enhance the quality and transparency of the disclosure of information in annual report, and also make sure the authenticity, correctness, completeness and promptness of the information disclosure.

During the Report Period, there was no material error, material information omission of information

disclosure and other situation in annual report.

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Section 11. [to be inserted]

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Section 12. Index of Documents

Index of DocumentsI. 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.

Index of DocumentsII. The original audit report sealed by the accounting firm and signed and sealed by certified public accountants.

Index of DocumentsIII. Originals or original drafts of all the Company's documents and announcements published on the newspapers designated by CSRC within the Report Period.

Chairman：Shen Jianfang

Approval and submission date：April 28, 2015

Revision information

Edition of the Report Issuance date of updated and supplementary announcement

Content of updated and supplementary announcement

SHANGHAI HIGHLY (GROUP) CO., LTD. Financial Statements and Auditor’s Report For the year ended 31 December 2014

SHANGHAI HIGHLY (GROUP) CO., LTD.

FINANCIAL STATEMENTS AND AUDITOR’S REPORT FOR THE YEAR ENDED 31 DECEMBER 2014 CONTENTS PAGE

AUDITOR'S REPORT 1 - 2

THE COMPANY AND CONSOLIDATED BALANCE SHEETS 3 - 6

THE COMPANY AND CONSOLIDATED INCOME STATEMENTS 7 - 8

THE COMPANY AND CONSOLIDATED CASH FLOW STATEMENTS 9 - 10

THE COMPANY AND CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

11 - 12

NOTES TO THE FINANCIAL STATEMENTS 13 – 84

Page 1

De Shi Bao (Shen) Zi (15) No. P1801

AUDITOR'S REPORT To the shareholders of Shanghai Highly (Group) Co., Ltd.: We have audited the accompanying financial statements of Shanghai Highly (Group) Co., Ltd., which comprise the company's and consolidated balance sheets as at 31 December 2014, and the company's and consolidated income statements, the company's and consolidated statements of changes in shareholders' equity and the company's and consolidated cash flow statements for the year then ended, and the notes to the financial statements. 1. Management's responsibility for the financial statements

Management of Shanghai Highly (Group) Co., Ltd., is responsible for the preparation and fair presentation of these financial statements. This responsibility includes: (1) preparing the financial statements in accordance with Accounting Standards for Business Enterprises to achieve fair presentation of the financial statements; (2) designing, implementing and maintaining internal control which is necessary to enable that the financial statements are free from material misstatement, whether due to fraud or error.

2. Auditor’s responsibility

Our responsibility is to express an audit opinion on these financial statements based on our audit. We conducted our audit in accordance with China Standards on Auditing. China Standards on Auditing require that we comply with the Code of Ethics for Chinese Certified Public Accountants and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing audit procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, Certified Public Accountants consider the internal control relevant to the preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of 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.

Page 2

3. Opinion

In our opinion, the financial statements of Shanghai Highly (Group) Co., Ltd., present fairly, in all material respects, the company's and consolidated financial position as of 31 December 2014, and the company's and consolidated results of operations and cash flows for the year then ended in accordance with Accounting Standards for Business Enterprises.

Deloitte Touche Tohmatsu Certified Public Accountants LLP Chinese Certified Public Accountant: Shanghai, China Zhou Hua Chen Jia Lei 24 April 2015

The auditors' report and the accompanying financial statements are English translations of the Chinese auditors' report and statutory financial statements prepared under accounting principles and practices generally accepted in the People's Republic of China. These financial statements are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in other countries and jurisdictions. In case the English version does not conform to the Chinese version, the Chinese version prevails.

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 3

AT 31 DECEMBER 2014

Consolidated Balance Sheet

Unit: RMB ITEM Note (VI) Closing balance Opening balance Current Assets: Cash and bank balances 1 528,717,043.59 338,161,954.88Financial assets at fair value through profit or loss 2 - 229,330.00Derivative financial assets 3 - 97,285.23Notes receivable 4 1,884,371,689.20 1,652,435,981.42Accounts receivable 5 1,466,968,390.84 1,466,144,778.92Prepayments 7 78,916,699.64 149,883,668.42Other receivables 6 64,819,066.35 54,701,367.62Inventories 8 894,158,743.13 832,121,824.01Total current assets 4,917,951,632.75 4,493,776,190.50Non-current Assets: Available-for-sale financial assets 9 41,774,327.80 27,997,892.20Long-term equity investments 10 183,801,879.52 173,794,892.82Investment properties 11 7,671,979.02 8,050,243.25Fixed assets 12 2,715,970,004.15 2,687,090,090.26Construction in progress 13 191,991,570.42 202,380,879.99Intangible assets 14 243,787,921.63 234,876,213.42Development expenditure 15 64,311,208.33 31,917,574.78Long-term prepaid expenses 16 37,289,230.87 42,049,786.42Deferred tax assets 17 54,845,814.88 31,552,350.54Other non-current assets 18 192,000,000.00 192,000,000.00Total non-current assets 3,733,443,936.62 3,631,709,923.68 TOTAL ASSETS 8,651,395,569.37 8,125,486,114.18

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 4

AT 31 DECEMBER 2014

Consolidated Balance Sheets - continued

Unit: RMB ITEM Note (VI) Closing balance Opening balance Current Liabilities: Short-term borrowings 19 910,794,529.90 651,880,281.68Derivative financial liabilities 20 1,304,945.10 57,831.00Notes payable 21 1,966,147,389.51 1,396,534,340.33Accounts payable 22 984,598,553.35 1,404,039,935.31Receipts in advance 23 30,866,094.34 38,224,426.68Employee benefits payable 24 37,947,837.55 54,176,579.78Taxes payable 25 (31,287,950.45) (49,810,716.54)Interest payable 26 40,644,876.83 40,641,439.06Dividends payable 27 2,183,696.66 2,183,569.64Other payables 28 136,994,233.97 97,033,384.77Non-current liabilities due within one year 29 122,890,000.00 60,969,000.00Other current liabilities 34 13,830,454.94 12,986,279.58Total current liabilities 4,216,914,661.70 3,708,916,351.29Non-current Liabilities: Long-term borrowings 30 53,714,000.00 97,550,400.00Bonds payable 31 993,464,000.11 991,534,688.09Long-term payables 32 15,915,041.55 -Provisions 33 25,090,840.03 29,820,595.12Deferred tax liabilities 17 9,022,836.82 5,646,262.67Other non-current liabilities 34 221,852,697.71 226,262,365.96Total non-current liabilities 1,319,059,416.22 1,350,814,311.84TOTAL LIABILITIES 5,535,974,077.92 5,059,730,663.13SHAREHOLDERS’ EQUITY: Share capital 35 667,744,115.00 667,744,115.00Capital reserves 36 817,469,039.95 817,469,039.95 Other comprehensive income 37 10,901,513.46 5,514,259.93 Surplus reserves 38 229,476,103.80 223,092,621.93Unappropriated profits 39 670,884,527.50 656,243,117.03Total shareholders' equity attributable to equity holders of the company

2,396,475,299.71 2,370,063,153.84

Minority interests 718,946,191.74 695,692,297.21TOTAL SHAREHOLDERS’ EQUITY 3,115,421,491.45 3,065,755,451.05TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

8,651,395,569.37 8,125,486,114.18

The accompanying notes form part of the financial statements. The financial statements on pages 3 to 84 were signed by the following: Legal Representative:_____________ Person in Charge of the Accounting Body: _____________ Chief Accountant:_____________

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 5

AT 31 DECEMBER 2014

Balance Sheet of the Company Unit: RMB

ITEM Note Closing balance Opening balance Current Assets: Cash and bank balances 44,465,093.01 142,941,903.49Financial assets at fair value through profit or loss - 229,330.00Notes receivable - 1,500,000.00Accounts receivable (XV)、1 3,624,757.77 57,001,238.12Prepayments 839,305.82 5,824,018.09Other receivables (XV)、2 21,801,295.87 31,789,505.82Inventories 16,688.00 600,965.58Total current assets 70,747,140.47 239,886,961.10Non-current Assets: Available-for-sale financial assets 41,774,327.80 27,997,892.20Long-term equity investments (XV)、3 1,766,839,415.54 1,756,832,428.84Investment properties 11,728,400.10 12,588,615.37Fixed assets 1,211,636.09 951,867.03Construction in progress (XV)、4 55,050,897.32 5,860,197.34Intangible assets 1,751,581.15 994,091.74Other non-current assets (XV)、5 990,000,000.00 990,000,000.00Total non-current assets 2,868,356,258.00 2,795,225,092.52TOTAL ASSETS 2,939,103,398.47 3,035,112,053.62

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 6

AT 31 DECEMBER 2014

Balance sheet of the Company - continued Unit: RMB

Item Note Closing balance Opening balance Current Liabilities: Derivative financial liabilities - 57,831.00Notes payable - 48,100,000.00Accounts payable 100,000.00 60,474,152.25Receipts in advance 5,359,296.87 1,931,278.87Employee benefits payable 7,836,458.12 10,789,868.70Tax payable (3,070,464.27) (1,395,096.51)Interest payable 40,416,666.70 40,416,666.68Dividends payable 2,183,696.66 2,183,569.64Other payables 15,097,603.32 14,126,644.74Other current liabilities 13,152.00 13,152.00Total current liabilities 67,936,409.40 176,698,067.37Non-current Liabilities: Bonds payable (XI)、31 993,464,000.11 991,534,688.09Deferred tax liabilities 9,022,836.82 5,578,727.92Other non-current liabilities 20,611,582.58 20,624,734.58Total non-current liabilities 1,023,098,419.51 1,017,738,150.59TOTAL LIABILITIES 1,091,034,828.91 1,194,436,217.96SHAREHOLDERS’ EQUITY: Share capital (XI)、35 667,744,115.00 667,744,115.00Capital reserve 765,701,834.60 765,701,834.60Other comprehensive income 27,068,510.47 16,736,183.77Surplus reserves (XI)、38 229,476,103.80 223,092,621.93Unappropriated profits 158,078,005.69 167,401,080.36TOTAL SHAREHOLDERS’ EQUITY 1,848,068,569.56 1,840,675,835.66TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

2,939,103,398.47 3,035,112,053.62

The accompanying notes form part of the financial statements.

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 7

FOR THE YEAR ENDED 31 DECEMBER 2014

Consolidated Income Statements

Unit: RMB ITEM Note (VI) 2014 2013 I. Total Operating income 6,808,447,171.30 6,621,619,554.30 Including: Operating income 40 6,808,447,171.30 6,621,619,554.30 Less: Operating costs 40 5,953,270,583.90 5,787,266,431.27

Business tax and levies 41 13,094,157.20 10,083,561.15Selling expenses 42 166,259,593.62 155,969,363.94Administrative expenses 43 456,975,794.85 437,865,589.73Financial expenses 44 104,966,727.65 123,956,380.70Impairment losses of assets 45 9,247,498.80 3,988,870.87

Add: Gains from changes in fair values 46 (1,042,169.33) (44,155.77) Investment income 47 22,320,567.19 24,554,244.96 Including: Income from investment in associates and joint ventures

11,097,882.40 5,824,482.77

II. Operating profit 125,911,213.14 126,999,445.83 Add: Non-operating income 48 45,179,347.24 45,522,862.54 Including: Gains from disposal of non-current

assets

321,888.40 835,818.36

Less: Non-operating expenses 49 5,431,702.10 4,561,417.77 Including: Losses from disposal of non-current

assets

2,665,810.25 3,661,789.05

III. Total profit 165,658,858.28 167,960,890.60 Less: Income tax expenses 50 28,257,870.38 26,628,830.09IV. Net profit 137,400,987.90 141,332,060.51 Net profit attributable to owners of the company 93,518,544.32 104,129,188.62 Profit or loss attributable to minority interests 43,882,443.58 37,202,871.89V. Other comprehensive income after income tax 37 3,767,195.05 (15,262,630.14) Other comprehensive income after income tax attributable to owners of the company

5,387,253.53 (11,544,794.01)

(I)Other comprehensive income that will be reclassified subsequently to profit or loss

5,387,253.53 (11,544,794.01)

1.gains or losses arising on changes in fair value of available-for-sale financial assets

10,332,326.70 (322,870.17)

2.Translation differences of financial statements denominated in foreign currencies

(4,945,073.17) (11,221,923.84)

Other comprehensive income after income tax attributable to minority interests

(1,620,058.48) (3,717,836.13)

VI. Total comprehensive income: 141,168,182.95 126,069,430.37 Total comprehensive income attributable to owners of the company

98,905,797.85 92,584,394.61

Total comprehensive income attributable to minority interests

42,262,385.10 33,485,035.76

VII. Earnings per share: (I) Basic earnings per share 0.14 0.16 (II) Diluted earnings per share 0.14 0.16

The accompanying notes form part of the financial statements.

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 8

FOR THE YEAR ENDED 31 DECEMBER 2014

Income Statements of the Company

Unit: RMB Item Note 2014 2013 I. Total Operating income (XV)、6 212,367,093.82 468,748,288.06

Less: Total Operating cost (XV)、6 209,079,748.66 451,074,818.39 Business tax and levies 2,840,854.16 2,269,793.47 Selling expenses 534,316.41 3,368,889.65 Administrative expenses 25,961,723.85 23,914,472.71 Financial expenses 49,810,919.33 50,123,520.86 Add: Gains from changes in fair values 360,061.00 (141,441.00) Investment income (XV)、7 139,481,973.98 176,276,134.99 Including: Income from investment in associates and joint ventures

11,097,882.40 5,824,482.77

II. Operating profit 63,981,566.39 114,131,486.97 Add: Non-operating income 14,955.49 61,607.08 Including: Gains from disposal of non-current assets

- 46,724.31

Less: Non-operating expenses 161,703.18 588,315.44 Including: Losses from disposal of non-current assets

8,073.84 88,186.45

III. Total profit 63,834,818.70 113,604,778.61 Less: Income tax expenses - -IV. Net profit 63,834,818.70 113,604,778.61V. Other comprehensive income after income tax 10,332,326.70 (322,870.17) (I)Other comprehensive income that will be reclassified subsequently to profit or loss

10,332,326.70 (322,870.17)

1.gains or losses arising on changes in fair value of available-for-sale financial assets

10,332,326.70 (322,870.17)

VI. Total comprehensive income 74,167,145.40 113,281,908.44

The accompanying notes form part of the financial statements.

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 9

FOR THE YEAR ENDED 31 DECEMBER 2014

Consolidated Cash Flow Statements

Unit: RMB Item Note(VI) 2014 2013

I. Cash flows from operating activities:

Cash receipts from the sale of goods and the rendering of services 6,225,393,990.17 6,170,562,881.95 Receipts of tax refunds 99,608,979.36 108,369,404.36 Other cash receipts relating to operating activities 51 45,433,815.07 36,413,630.88 Sub-total of cash inflows from operating activities 6,370,436,784.60 6,315,345,917.19 Cash payments for goods purchased and services received 4,659,892,174.69 4,766,786,417.41 Cash payments to and on behalf of employees 747,371,604.20 607,106,754.71 Payments of various types of taxes 156,892,201.70 143,586,535.11 Other cash payments relating to operating activities 51 343,187,910.53 379,312,442.25 Sub-total of cash outflows from operating activities 5,907,343,891.12 5,896,792,149.48 Net cash flow from operating activities 52 463,092,893.48 418,553,767.71II. Cash flows from investing activities: Cash receipts from investments income 12,928,051.63 24,486,907.91 Net cash receipts from disposals of fixed assets, intangible assets and other long-term assets 11,863,278.43 15,590,488.06

Net cash receipts from disposals of subsidiaries and other business units - 2,570,728.86

Net cash receipts from acquisitions of subsidiaries and other business units 52 4,146,884.48 -

Other cash receipts relating to investing activities 51 6,675,859.71 7,000,000.00 Sub-total of cash inflows from investing activities 35,614,074.25 49,648,124.83 Cash payments to acquire or construct fixed assets, intangible assets and other long-term assets 331,260,763.35 352,388,143.82

Cash payments to acquire investments - 192,000,000.00 Sub-total of cash outflows from investing activities 331,260,763.35 544,388,143.82

Net cash flow from investing activities (295,646,689.10) (494,740,018.99)III. Cash flows from financing activities:

Cash receipts from capital contributions - 3,000,000.00 Including: cash receipts from capital contributions from minority owners of subsidiaries - 3,000,000.00

Cash receipts from borrowings 1,673,727,000.00 2,869,683,313.33Cash receipts from issue of bonds - 990,000,000.00Other cash receipts relating to financing activities 51 10,000,000.00 -

Sub-total of cash inflows from financing activities 1,683,727,000.00 3,862,683,313.33 Cash repayments of borrowings 1,474,901,052.25 3,472,337,359.05

Cash payments for distribution of dividends or profits or settlement of interest expenses 196,507,254.96 203,075,130.80

Including: payments for distribution of dividends or profits to minority owners of subsidiaries 24,175,000.82 39,117,501.87

Sub-total of cash outflow from financing activities 1,671,408,307.21 3,675,412,489.85 Net cash flow from financing activities 12,318,692.79 187,270,823.48IV. Effect of foreign exchange rate changes on cash and cash equivalents

6,825,501.86 (28,552,250.40)

V. Net Increase in Cash and Cash Equivalents 186,590,399.03 82,532,321.80 Add: Opening balance of cash and cash equivalents 52 323,091,447.46 240,559,125.66VI. Closing balance of cash and cash equivalents 52 509,681,846.49 323,091,447.46

The accompanying notes form part of the financial statements.

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 10

FOR THE YEAR ENDED 31 DECEMBER 2014

Cash Flow Statement of the Company

Unit: RMB Item Note(XV) 2014 2013

I. Cash Flows from Operating Activities: Cash receipts from the sale of goods and the rendering of services 224,988,237.67 619,688,707.62 Receipts of tax refunds 51,901,885.65 94,099,871.99 Other cash receipts relating to operating activities 1,356,541.52 2,574,928.26 Sub-total of cash inflows from operating activities 278,246,664.84 716,363,507.87 Cash payments for goods purchased and services received 301,814,399.08 700,801,867.41 Cash payments to and on behalf of employees 17,367,558.18 18,432,313.37 Payments of various types of taxes 3,479,875.31 5,393,832.05 Other cash payments relating to operating activities 18,736,506.99 17,151,002.64 Sub-total of cash outflows from operating activities 341,398,339.56 741,779,015.47 Net cash flow from operating activities 8 (63,151,674.72) (25,415,507.60)II. Cash Flows from Investing Activities:

Cash receipts from investments income 130,006,547.28 177,403,418.20Net cash receipts from disposals of fixed assets, intangible assets

and other long-term assets 18,333,889.62 16,894,851.73

Other cash receipts relating to investing activities 1,000,000.00 -Sub-total of cash inflows from investing activities 149,340,436.90 194,298,269.93Cash payments to acquire or construct fixed assets, intangible

assets and other long-term assets 69,391,161.16 21,492,751.96

Cash payments to acquire investments - 1,012,000,000.00Sub-total of cash outflows from investing activities 69,391,161.16 1,033,492,751.96Net cash flow from investing activities 79,949,275.74 (839,194,482.03)

III. Cash Flows from Financing Activities: Cash receipts from issue of bonds - 990,000,000.00Sub-total of cash inflows from financing activities - 990,000,000.00Cash payments for distribution of dividends or profits or

settlement of interest expenses 115,274,411.50 80,129,457.89

Sub-total of cash outflow from financing activities 115,274,411.50 909,870,542.11Net cash flow from financing activities (115,274,411.50) 909,870,542.11

IV. Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents

- (5,634,509.93)

V. Net Increase in Cash and Cash Equivalents (98,476,810.48) 39,626,042.55 Add: Opening balance of cash and cash equivalents 8 142,941,903.49 103,315,860.94VI. Closing Balance of Cash and Cash Equivalents 8 44,465,093.01 142,941,903.49

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 11

FOR THE YEAR ENDED 31 DECEMBER 2014

Consolidated Statement of Changes in Shareholders’ Equity Unit: RMB

Amount for the current period

Attributable to owners of the Company

Minority interests Total owners’ equity Share capital Capital reserve

Other comprehensive income

Surplus reserve Retained profits

Translation differences arising on translation of

financial statements denominated in foreign

currencies

2014

I. Closing balance of the preceding year 667,744,115.00 834,205,223.72 - 223,092,621.93 656,243,117.03 (11,221,923.84) 695,692,297.21 3,065,755,451.05

Add: Changes in accounting policies - (16,736,183.77) 5,514,259.93 - - 11,221,923.84 - -

II. Opening balance of the current year 667,744,115.00 817,469,039.95 5,514,259.93 223,092,621.93 656,243,117.03 - 695,692,297.21 3,065,755,451.05

III. Changes for the year - - 5,387,253.53 6,383,481.87 14,641,410.47 - 23,253,894.53 49,666,040.40

(I) Total comprehensive income - - 5,387,253.53 - 93,518,544.32 - 42,262,385.10 141,168,182.95

(II) Profit distribution - - - 6,383,481.87 (78,877,133.85) - (26,081,414.31) (98,575,066.29)

1．Transfer to surplus reserve - - - 6,383,481.87 (6,383,481.87) - - -

2．Distributions to shareholders - -- -

(66,774,411.50)-

(24,175,000.82) (90,949,412.32)

3．Transfer to bonus and welfare fund - - - - (5,719,240.48) - (1,906,413.49) (7,625,653.97)

(III) Others (note VII (3)) - - - - - - 7,072,923.74 7,072,923.74

IV. Closing balance of the current year 667,744,115.00 817,469,039.95 10,901,513.46 229,476,103.80 670,884,527.50 - 718,946,191.74 3,115,421,491.45

2013

I. Closing balance of the preceding year 667,744,115.00 834,528,093.89 - 211,732,144.07 651,016,899.08 - 701,501,949.49 3,066,523,201.53

Add: Changes in accounting policies (17,059,053.94) 17,059,053.94 - - - - -

II. Opening balance of the current year 667,744,115.00 817,469,039.95 17,059,053.94 211,732,144.07 651,016,899.08 - 701,501,949.49 3,066,523,201.53

III. Changes for the year - - (11,544,794.01) 11,360,477.86 5,226,217.95 - (5,809,652.28) (767,750.48)

(I) Total comprehensive income - - (11,544,794.01) - 104,129,188.62 - 33,485,035.76 126,069,430.37

(II) Owners’ contributions in capital - - - - - - 2,293,880.17 2,293,880.17

1．Capital contribution from owners - - - - - - 3,000,000.00 3,000,000.00

2．Others - - - - - - (706,119.83) (706,119.83)

(II) Profit distribution - - - 11,360,477.86 (98,902,970.67) - (41,588,568.21) (129,131,061.02)

1．Transfer to surplus reserve - - - 11,360,477.86 (11,360,477.86) - - -

2．Distributions to shareholders - - - - (80,129,293.80) - (39,117,501.87) (119,246,795.67)

3．Transfer to bonus and welfare fund - - - - (7,413,199.01) - (2,471,066.34) (9,884,265.35)

IV. Closing balance of the current year 667,744,115.00 817,469,039.95 5,514,259.93 223,092,621.93 656,243,117.03 - 695,692,297.21 3,065,755,451.05

SHANGHAI HIGHLY (GROUP) CO., LTD.

Page 12

FOR THE YEAR ENDED 31 DECEMBER 2014

Statement of Changes in Shareholders’ Equity of the Company Unit: RMB

Items Amount for the current period

Share capital Capital reserve Other comprehensive income Surplus reserve Retained profits Total owners’ equity

2014

I. Closing balance of the preceding year 667,744,115.00 782,438,018.37 - 223,092,621.93 167,401,080.36 1,840,675,835.66

Add: Changes in accounting policies (16,736,183.77) 16,736,183.77 - - -

I. Opening balance of the current year 667,744,115.00 765,701,834.60 16,736,183.77 223,092,621.93 167,401,080.36 1,840,675,835.66

III. Changes for the year - - 10,332,326.70 6,383,481.87 (9,323,074.67) 7,392,733.90

(I) Total comprehensive income - - 10,332,326.70 - 63,834,818.70 74,167,145.40

(II) Profit distribution - - - 6,383,481.87 (73,157,893.37) (66,774,411.50)

1. Transfer to surplus reserve - - - 6,383,481.87 (6,383,481.87) -

2. Distributions to shareholders - - - - (66,774,411.50) (66,774,411.50)

III. Closing balance of the current year 667,744,115.00 765,701,834.60 27,068,510.47 229,476,103.80 158,078,005.69 1,848,068,569.56

2013

I. Closing balance of the preceding year 667,744,115.00 782,760,888.54 - 211,732,144.07 145,286,073.41 1,807,523,221.02

Add: Changes in accounting policies (17,059,053.94) 17,059,053.94 - - -

I. Opening balance of the current year 667,744,115.00 765,701,834.60 17,059,053.94 211,732,144.07 145,286,073.41 1,807,523,221.02

III. Changes for the year - - (322,870.17) 11,360,477.86 22,115,006.95 33,152,614.64

(I) Total comprehensive income - - (322,870.17) - 113,604,778.61 113,281,908.44

(II) Profit distribution - - - 11,360,477.86 (91,489,771.66) (80,129,293.80)

1. Transfer to surplus reserve - - - 11,360,477.86 (11,360,477.86) -

2. Distributions to shareholders - - - - (80,129,293.80) (80,129,293.80)

III. Closing balance of the current year 667,744,115.00 765,701,834.60 16,736,183.77 223,092,621.93 167,401,080.36 1,840,675,835.66

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 13

I. BASIC INFORMATION ABOUT THE COMPANY

Upon the approval by Shanghai Municipality Economic Committee as evidenced by approval document HJQ (1992) 299 on June 20, 1992, 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 Company listed its A shares and B shares on Shanghai Stock Exchange on November 16, 1992 and January 18, 1993 respectively. The legal person business license is Qi Gu Hu Zong Zi 019016 (SHIJU). The Company’s current registered capital is RMB 667,744,115.00, and the Company is now registered in 888, ningqiao Road, Pu Dong New District, Shanghai. The legal representative is Shen Jian Fang. The Company offered 65,000,000 A shares to the largest shareholder, Shanghai Electric (Group) Corporation (“the Company’s parent”) non-publicly in 2012. This issue was registered in China Securities Depository and Clearing Corporation Limited Shanghai Branch on July 26, 2012 and lock-up period of subscribing for shares is 36 months from the month of the new shares listed. As at 31 December, 2014, the Company has 602,744,115 non-conditional tradable shares and 65,000,000 conditional tradable shares, with in total 667,744,115 shares. The Company and its subsidiaries ( together the "Group") 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 main businesses of the Company are the sales of compressor and refrigeration equipment, trading and real estate leasing. The Group’s parent and ultimate parent company is Shanghai Electric (Group) Corporation incorporated in Shanghai.

II. BASIS OF PREPARATION OF FINANCIAL STATEMENTS

Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with Accounting Standards for Business Enterprises issued by Ministry of Finance (including the accounting policies newly published and amended in 2014). In addition, the Group has disclosed relevant financial information in accordance with Information Disclosure and Presentation Rules for Companies Offering Securities to the Public No. 15-General Provisions on Financial Reporting (Revised in 2014). Basis of accounting and principle of measurement

The Group has adopted the accrual basis of accounting. Except for certain financial instruments which are measured at fair value, the Group has adopted the historical cost as the principle of measurement of the financial statements. Where assets are impaired, provisions for asset impairment are made in accordance with relevant requirements. Where the historical cost is adopted as the measurement basis, assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds or assets received or the contractual amounts for assuming the present obligation, or, at the amounts of cash or cash equivalents expected to be paid to settle the liabilities in the normal course of business. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observed or estimated using another valuation technique. Fair value measurement and disclosure in the financial statements are determined according to the above basis.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 14

III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

Fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

• Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date;

• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

• Level 3 inputs are unobservable inputs for the asset or liability. Notes for significant accounting policies and accounting estimates: The Group made the accounting policies and accounting estimates in accordance with its production and operation, especially, for bad debt provision of accounts receivable (Note III 10), valuation of inventories (Note III 11), investment properties depreciation, fixed assets depreciation and intangible assets amortization (Note III 13,14 and 17) and sales recognition (Note III 22). 1. Statement of compliance with the Accounting Standards for Business Enterprises

The financial statements present fairly and fully, the financial position of the Group and the Company as at 31 December 2014 and the financial results and the cash flows for the year then ended in accordance with Accounting Standards for Business Enterprises.

2. Accounting year The accounting year of the Group is from 1 January to 31 December of each calendar year. 3. Operating cycle The operating cycle covers the period from acquisition of the assets for production to realization of cash and cash equivalents. The operating cycle of the Group is 12 months. 4. Functional currency Renminbi ("RMB") is the currency of the primary economic environment in which the Company and its domestic subsidiaries operate. Therefore, the Company and its domestic subsidiaries choose RMB as their functional currency. The Company's foreign subsidiaries Highly Electrial Appliances India Pvt. Ltd. and Highly High-tech Corporation (Japan) choose INR and JPY respectively as their functional currency on the basis of the primary economic environment in which they operate. The Group adopts RMB to prepare its financial statements.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 15

III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

5. The accounting treatment of business combinations involving enterprises under common control and

business combinations not involving enterprises under common control Business combinations are classified into business combinations involving enterprises under common control and business combinations not involving enterprises under common control. 5.1 Business combinations involving entities under common control A business combination involving enterprises under common control is a business combination in which all of the combining enterprises are ultimately controlled by the same party or parties both before and after the combination, and that control is not transitory. Assets and liabilities obtained shall be measured at their respective carrying amounts as recorded by the combining entities at the date of the combination. The difference between the carrying amount of the net assets obtained and the carrying amount of the consideration paid for the is adjusted to the share premium in capital reserve. If the share premium is not sufficient to absorb the difference, any excess shall be adjusted against retained earnings. Costs that are directly attributable to the combination are charged to profit or loss in the period in which they are incurred. 5.2 Business combinations not involving enterprises under common control and goodwill A business combination not involving enterprises under common control is a business combination in which all of the combining enterprises are not ultimately controlled by the same party or parties before and after the combination. 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. Where a business combination not involving enterprises under common control is achieved in stages that involve multiple transactions, the cost of combination is the sum of the consideration paid at the acquisition date and the fair value at the acquisition date of the acquirer's previously held interest in the acquiree. The intermediary expenses incurred by the acquirer in respect of auditing, legal services, valuation and consultancy services, etc. and other associated administrative expenses attributable to the business combination are recognised in profit or loss when they are incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities, acquired by the acquirer in a business combination, that meet the recognition criteria shall be measured at fair value at the acquisition date. Where the cost of combination exceeds the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference is treated as an asset and recognised as goodwill, which is measured at cost on initial recognition. Where the cost of combination is less than the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the acquirer firstly reassesses 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 value of the acquiree’s identifiable net assets, the acquirer recognises the remaining difference immediately in profit or loss for the current period. Goodwill arising on a business combination is measured at cost less accumulated impairment losses, and is presented separately in the consolidated financial statements.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 16

III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

6. Preparation of consolidated financial statements The scope of consolidation in the consolidated financial statements is determined on the basis of control. Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its operating activities. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. For a subsidiary disposed of by the Group, the operating results and cash flows before the date of disposal (the date when control is lost) are included in the consolidated income statement and consolidated statement of cash flows, as appropriate. For a subsidiary acquired through a business combination not involving enterprises under common control, the operating results and cash flows from the acquisition date (the date when control is obtained) are included in the consolidated income statement and consolidated statement of cash flows, as appropriate. No matter when the business combination occurs in the reporting period, subsidiaries acquired through a business combination involving enterprises under common control are included in the Group's scope of consolidation as if they had been included in the scope of consolidation from the date when they first came under the common control of the ultimate controlling party. Their operating results and cash flows from the beginning of the earliest reporting period are included in the consolidated income statement and consolidated statement of cash flows, as appropriate.

The significant accounting policies and accounting periods adopted by the subsidiaries are determined based on the uniform accounting policies and accounting periods set out by the Company. All significant intra-group balances and transactions are eliminated on consolidation. The portion of subsidiaries' equity that is not attributable to the Company is treated as minority interests and presented as "minority interests" in the consolidated balance sheet within shareholders' equity. The portion of net profits or losses of subsidiaries for the period attributable to minority interests is presented as "minority interests" in the consolidated income statement below the "net profit" line item. When the amount of loss for the period attributable to the minority shareholders of a subsidiary exceeds the minority shareholders' portion of the opening balance of sharehodlers' equity of the subsidiary, the excess amount are still allocated against minority interests. Acquisition of minority interests or disposal of interest in a subsidiary that does not result in the loss of control over the subsidiary is accounted for as equity transactions. The carrying amounts of the Company's interests and minority interests are adjusted to reflect the changes in their relative interests in the subsidiary. The difference between the amount by which the minority interests are adjusted and the fair value of the consideration paid or received is adjusted to capital reserve under shareholders' equity. If the capital reserve is not sufficient to absorb the difference, the excess are adjusted against retained earnings. When the Group loses control over a subsidiary due to disposal of certain equity interest or other reasons, any retained interest is re-measured at its fair value at the date when control is lost. The difference between (i) the aggregate of the consideration received on disposal and the fair value of any retained interest and (ii) the share of the former subsidiary's net assets cumulatively calculated from the acquisition date according to the original proportion of ownership interest is recognised as investment income in the period in which control is lost. Other comprehensive income associated with investment in the former subsidiary is reclassified to investment income in the period in which control is lost.

7. Recognition criteria of cash and cash equivalents Cash comprises cash on hand and deposits that can be readily withdrawn on demand. Cash equivalents are the Group's short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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8. Transactions denominated in foreign currencies 8.1 Transactions denominated in foreign currencies

A foreign currency transaction is recorded, on initial recognition, by applying the spot exchange rate on the date of the transaction.

At the balance sheet date, foreign currency monetary items are translated into RMB using the spot exchange rates at the balance sheet date. Exchange differences arising from the differences between the spot exchange rates prevailing at the balance sheet date and those on initial recognition or at the previous balance sheet date are recognised in profit or loss for the period, except that (1) exchange differences related to a specific-purpose borrowing denominated in foreign currency that qualify for capitalisation are capitalised as part of the cost of the qualifying asset during the capitalisation period; (2) exchange differences related to hedging instruments for the purpose of hedging against foreign currency risks are accounted for using hedge accounting; (3) exchange differences arising from available-for-sale non-monetary items (such as shares) denominated in foreign currencies and changes in the carrying amounts (other than the amortised cost) of available-for-sale monetary items are recognised as other comprehensive income. Foreign currency non-monetary items measured at historical cost are translated to the amounts in functional currency at the spot exchange rates on the dates of the transactions and the amounts in functional currency remain unchanged. Foreign currency non-monetary items measured at fair value are re-translated at the spot exchange rate on the date the fair value is determined. Difference between the re-translated functional currency amount and the original functional currency amount is treated as changes in fair value (including changes of exchange rate) and is recognised in profit and loss or as other comprehensive income included in capital reserve. 8.2 Translation of financial statements denominated in foreign currencies

For the purpose of preparing the consolidated financial statements, financial statements of a foreign operation are translated from the foreign currency into RMB using the following method: assets and liabilities on the balance sheet are translated at the spot exchange rate prevailing at the balance sheet date; shareholders' equity items except for retained earnings are translated at the spot exchange rates at the dates on which such items arose; all items in the income statement as well as items reflecting the distribution of profits are translated at exchange rates that approximate the actual spot exchange rates on the dates of the transactions; the opening balance of retained earnings is the translated closing balance of the previous year's retained earnings; the closing balance of retained earnings is calculated and presented on the basis of each translated income statement and profit distribution item. The difference between the translated assets and the aggregate of liabilities and shareholders' equity items is separately presented as other comprehensive income under the shareholders' equity in the balance sheet.

Cash flows arising from a transaction in foreign currency and the cash flows of a foreign subsidiary are translated at an exchange rate which approximates the spot exchange rate on the date of the cash flows. The effect of exchange rate changes on cash and cash equivalents is regarded as a reconciling item and presented separately in the cash flow statement as "effect of exchange rate changes on cash and cash equivalents". The opening balances and the comparative figures of previous year are presented at the translated amounts in the previous year's financial statements. On disposal of the Group's entire interest in a foreign operation, or upon a loss of control over a foreign operation due to disposal of certain interest in it or other reasons, the Group transfers the accumulated exchange differences arising on translation of financial statements of this foreign operation attributable to the owners' equity of the Company and presented under owners' equity, to profit or loss in the period in which the disposal occurs.

In case of a disposal or other reason that does not result in the Group losing control over a foreign operation, the proportionate share of accumulated exchange differences arising on translation of financial statements are reattributed to minority interests and are not recognised in profit and loss. For partial disposals of equity interests in foreign operations which are associates or joint ventures, the proportionate share of the accumulated exchange differences arising on translation of financial statements of foreign operations is reclassified to profit or loss.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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9. Financial instruments Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. For financial assets and financial liabilities at fair value through profit or loss, transaction costs are immediately recognised in profit or loss. For other financial assets and financial liabilities, transaction costs are included in their initial recognised amounts.

9.1 Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or a group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period, using the effective interest rate. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset or financial liability or, where appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial asset or financial liability (without considering future credit losses), and also considers all fees paid or received between the parties to the contract giving rise to the financial asset and financial liability that are an integral part of the effective interest rate, transaction costs, and premiums or discounts, etc. 9.2 Classification, recognition and measurement of financial assets On initial recognition, the Group’s financial assets are classified into one of the four categories, including financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables, and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. 9.2.1. Financial Assets at Fair Value through Profit or Loss ("FVTPL") Financial assets at FVTPL include financial assets held for trading and those designated as at fair value through profit or loss. A financial asset is classified as held for trading if one of the following conditions is satisfied: (1) It has been acquired principally for the purpose of selling in the near term; or (2) On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and there is objective evidence that the Group has a recent actual pattern of short-term profit-taking; or (3) It is a derivative that is not designated and effective as a 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 in an active market) whose fair value cannot be reliably measured. A financial asset may be designated as at FVTPL upon initial recognition only when one of the following conditions is satisfied: (1) Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise result from measuring assets or recognising the gains or losses on them on different bases; or (2) The financial asset forms part of a group of financial assets or a group of financial assets and financial liabilities, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is reported to key management personnel on that basis; or (3) it is a qualifying hybrid instrument containing embedded derivatives. Financial assets at FVTPL are subsequently measured at fair value. Any gains or losses arising from changes in the fair value and any dividend or interest income earned on the financial assets are recognised in profit or loss.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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9. Financial instruments – continued 9.2 Classification, recognition and measurement of financial assets – continued 9.2.2. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group's management has the positive intention and ability to hold to maturity. Held-to-maturity investments are subsequently measured at amortised cost using the effective interest method. Gain or loss arising from derecognition, impairment or amortisation is recognised in profit or loss. 9.2.3. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets classified as loans and receivables by the Group include notes receivable, accounts receivable, dividends receivable, and other receivables. Loans and receivables are subsequently measured at amortised cost using the effective interest method. Gain or loss arising from derecognition, impairment or amortisation is recognised in profit or loss. 9.2.4. Available-for-sale financial assets Available-for-sale financial assets include non-derivative financial assets that are designated on initial recognition as available for sale, and financial assets that are not classified as financial assets at fair value through profit or loss, loans and receivables or held-to-maturity investments. Available-for-sale financial assets are subsequently measured at fair value, and gains or losses arising from changes in the fair value are recognised as other comprehensive income and included in the capital reserve, except that impairment losses and exchange differences related to amortised cost of monetary financial assets denominated in foreign currencies are recognised in profit or loss, until the financial assets are derecognised, at which time the gains or losses are released and recognised in profit or loss. Interests obtained and the dividends declared by the investee during the period in which the available-for-sale financial assets are held, are recognised in investment gains. For investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, and derivative financial assets that are linked to and must be settled by delivery of such unquoted equity instruments, they are measured at cost. 9.3 Impairment of financial assets The Group assesses at each balance sheet date the carrying amounts of financial assets other than those at fair value through profit or loss. If there is objective evidence that a financial asset is impaired, the Group determines the amount of any impairment loss. Objective evidence that a financial asset is impaired is evidence that, arising from one or more events that occurred after the initial recognition of the asset, the estimated future cash flows of the financial asset, which can be reliably measured, have been affected.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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9. Financial instruments - continued 9.3 Impairment of financial assets - continued Objective evidence that a financial asset is impaired includes the following observable events: (1) Significant financial difficulty of the issuer or obligor; (2) A breach of contract by the borrower, such as a default or delinquency in interest or principal payments; (3) The Group, for economic or legal reasons relating to the borrower’s financial difficulty, granting a concession to the borrower; (4) It becoming probable that the borrower will enter bankruptcy or other financial reorganisations; (5) The disappearance of an active market for that financial asset because of financial difficulties of the issuer; (6) Upon an overall assessment of a group of financial assets, observable data indicates that there is a measurable decrease in the estimated future cash flows from the Group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the Group. Such observable data includes: - Adverse changes in the payment status of borrower in the Group of assets; - Economic conditions in the country or region of the borrower which may lead to a failure to pay the Group of assets; (7) Significant adverse changes in the technological, market, economic or legal environment in which the issuer operates, indicating that the cost of the investment in the equity instrument may not be recovered by the investor; (8) A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost; (9) Other objective evidence indicating there is an impairment of a financial asset. - Impairment of financial assets measured at amortised cost If financial assets carried at amortised cost are impaired, the carrying amounts of the financial assets are reduced to the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The amount of reduction is recognised as an impairment loss in profit or loss. If, subsequent to the recognition of an impairment loss on financial assets carried at amortised cost, there is objective evidence of a recovery in value of the financial assets which can be related objectively to an event occurring after the impairment is recognised, the previously recognised impairment loss is reversed. However, the reversal is made to the extent that the carrying amount of the financial asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. For a financial asset that is individually significant, the Group assesses the asset individually for impairment. For a financial asset that is not individually significant, the Group assesses the asset individually for impairment or includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset (whether significant or not), it includes the asset in a group of financial assets with similar credit risk characteristics and collectively reassesses them for impairment. Assets for which an impairment loss is individually recognised are not included in a collective assessment of impairment. - Impairment of available-for-sale financial assets When an available-for-sale financial asset is impaired, the cumulative loss arising from decline in fair value previously recognised directly in capital reserve is reclassified from the capital reserve to profit or loss. The amount of the cumulative loss that is reclassified from capital reserve to profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss. If, subsequent to the recognition of an impairment loss on available-for-sale financial assets, there is objective evidence of a recovery in value of the financial assets which can be related objectively to an event occurring after the impairment is recognised, the previously recognised impairment loss is reversed. The amount of reversal of impairment loss on available-for-sale equity instruments is recognised as other comprehensive income and included in the capital reserve, while the amount of reversal of impairment loss on available-for-sale debt instruments is recognised in profit or loss.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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9. Financial instruments - continued 9.3 Impairment of financial assets - continued - Impairment of financial assets measured at cost If an impairment loss has been incurred on an investment in unquoted equity instrument (without a quoted price in an active market) whose fair value cannot be reliably measured, or on a derivative financial asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the carrying amount of the financial asset is reduced to the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. The amount of reduction is recognised as an impairment loss in profit or loss. The impairment loss on such financial asset is not reversed once it is recognised. 9.4 Transfer of financial assets The Group derecognises a financial asset if one of the following conditions is satisfied: (1) the contractual rights to the cash flows from the financial asset expire; or (2) the financial asset has been transferred and substantially all the risks and rewards of ownership of the financial asset is transferred to the transferee; or (3) although the financial asset has been transferred, the Group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset but has not retained control of the financial asset. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, and it retains control of the financial asset, it recognises the financial asset to the extent of its continuing involvement in the transferred financial asset and recognises an associated liability. The extent of the Group’s continuing involvement in the transferred asset is the extent to which it is exposed to changes in the value of the transferred asset. For a transfer of a financial asset in its entirety that satisfies the derecognition criteria, the difference between (1) the carrying amount of the financial asset transferred; and (2) the sum of the consideration received from the transfer and any cumulative gain or loss that has been recognised in other comprehensive income, is recognised in profit or loss. If a part of the transferred financial asset qualifies for derecognition, the carrying amount of the transferred financial asset is allocated between the part that continues to be recognised and the part that is derecognised, based on the respective fair values of those parts. The difference between (1) the carrying amount allocated to the part derecognised; and (2) the sum of the consideration received for the part derecognised and any cumulative gain or loss allocated to the part derecognised which has been previously recognised in other comprehensive income, is recognised in profit or loss. 9.5 Classification, recognition and measurement of financial liabilities Debt and equity instruments issued by the Group are classified into financial liabilities or equity on the basis of the substance of the contractual arrangements and definitions of financial liability and equity instrument. On initial recognition, financial liabilities are classified into financial liabilities at fair value through profit or loss and other financial liabilities.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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9. Financial instruments - continued

9.5 Classification, recognition and measurement of financial liabilities - continued

9.5.1. Financial liabilities at fair value through profit or loss Financial liabilities at FVTPL consist of financial liabilities held for trading and those designated as at FVTPL on initial recognition. A financial liability is classified as held for trading if one of the following conditions is satisfied: (1) It has been acquired principally for the purpose of repurchasing in the near term; or (2) On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and there is objective evidence that the Group has a recent actual pattern of short-term profit-taking; or (3) It is a derivative, except for a derivative that is a 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 in an active market) whose fair value cannot be reliably measured. A financial liability may be designated as at FVTPL upon initial recognition only when one of the following conditions is satisfied: (1) Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise result from measuring liabilities or recognising the gains or losses on them on different bases; or (2) The financial liability forms part of a group of financial liabilities or a group of financial assets and financial liabilities, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is reported to key management personnel on that basis; or (3) it is a qualifying hybrid instrument containing embedded derivatives. Financial liabilities at FVTPL are subsequently measured at fair value. Any gains or losses arising from changes in the fair value or any dividend or interest expenses related to the financial liabilities are recognised in profit or loss.

9.5.2. Other financial liabilities For a derivative liability that is linked to and must be settled by delivery of an unquoted equity instrument (without a quoted price in an active market) whose fair value cannot be reliably measured, it is subsequently measured at cost. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with gain or loss arising from derecognition or amortisation recognised in profit or loss.

9.5.3. Financial guarantee contracts A financial guarantee contract is a contract by which the guarantor and the lender agree that the guarantor would settle the debts or bear obligations in accordance with terms of the contract in case the borrower fails to settle the debts. Financial guarantee contracts that are not designated as financial liabilities at fair value through profit or loss, are initially measured at their fair values less the directly attributable transaction costs. Subsequent to initial recognition, they are measured at the higher of: (i) the amount determined in accordance with Accounting Standard for Business Enterprises No. 13 – Contingencies; and (ii) the amount initially recognised less cumulative amortisation recognised in accordance with the principles set out in Accounting Standard for Business Enterprises No. 14 – Revenue.

9.6 Derecognition of Financial Liabilities The Group derecognises a financial liability (or part of it) only when the underlying present obligation (or part of it) is discharged. An agreement between the Group (an existing borrower) and an existing lender to replace the original financial liability with a new financial liability with substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.

When the Group derecognises a financial liability or a part of it, it recognises the difference between the carrying amount of the financial liability (or part of the financial liability) derecognised and the consideration paid (including any non-cash assets transferred or new financial liabilities assumed) in profit or loss.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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9. Financial instruments - continued 9.7 Derivatives derivatives Derivative financial instruments include forward exchange contracts, and forward interest rate contracts. Derivatives are initially measured at fair value at the date when the derivative contracts are entered into and are subsequently re-measured at fair value. The resulting gain or loss is recognised in profit or loss. 9.8 Offsetting financial assets and financial liabilities Where the Group has a legal right that is currently enforceable to set off the recognised financial assets and financial liabilities, and intends either to settle on a net basis, or to realise the financial asset and settle the financial liability simultaneously, a financial asset and a financial liability shall be offset and the net amount is presented in the balance sheet. Except for the above circumstances, financial assets and financial liabilities shall be presented separately in the balance sheet and shall not be offset.

9.9 Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued (including refinanced), repurchased, sold or cancelled by the Group are treated as changes in equity. Changes in the fair value of equity instruments are not recognized. Transaction costs related to equity transactions are deducted from equity. The Group's distribution to holders of equity instruments are treated as a distribution of profits, payment of stock dividends does not affect total shareholders' equity. 10. Receivables 10.1 Receivables for which bad debt provision is individually assessed 10.1.1. Receivables that are individually significant and for which bad debt provision is individually assessed

Basis or monetary criteria for determining an individually significant receivable:

A receivable that exceeds RMB 5 million is deemed as an individually significant receivable by the Group.

Method of determining provision for receivables that are individually significant and for which bad debt provision is individually assessed:

For receivables that are individually significant, the Group assesses the receivables individually for impairment. For a financial asset that is not impaired individually, the Group includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Receivables for which an impairment loss is individually recognised are not included in a collective assessment of impairment.

10.1.2. Accounts receivable that are not individually significant but for which bad debt provision is individually assessed:

Reasons for making individual bad debt provision

There is objective evidence that accounts receivable are impaired.

Bad debt provision methods The difference between expected recoverable amount and the carrying amount is recognised in bad debt provision.

10.2 Other receivables for which bad debt provision has been assessed individually For other receivables, no matter the amount is significant or not, impairment has been tested individually.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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10. Receivables - continued 10.3 Receivables for which bad debt provision is collectively assessed on a portfolio basis according to credit risk characteristics:

Bad debt provision method for a portfolio according to credit risk characteristics Receivables except 10.1 and 10.2 Aging analysis

Portfolios that aging analysis is used for bad debt provision:

Debt aging analysis Aging Rate for Accounts receivable (%)Within 6 month 0More than 6 month but not exceeding 1year 2More than 1year but not exceeding 2 years 20More than 2 years but not exceeding 3 years 40More than 3 years but not exceeding 5 years 70More than 5 years 95

11. Inventories

11.1 Categories of inventories

The Group's inventories mainly include raw materials, turnover materials, work in progress, merchandise in stock and materials sent out for processing. Inventories are initially measured at cost. Cost of inventories comprises all costs of purchase, costs of conversion and other expenditures incurred in bringing the inventories to their present location and condition. 11.2 Valuation method of inventories upon delivery The actual cost of inventories transferred out is assigned by using weighted average method.

11.3 Basis for determining net realisable value of inventories and provision methods for decline in value of inventories At the balance sheet date, inventories are measured at the lower of cost and net realisable value. If the net realisable value is below the cost of inventories, a provision for decline in value of inventories is made. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion, the estimated costs necessary to make the sale and relevant taxes. Net realisable value is determined on the basis of clear evidence obtained, and takes into consideration the purposes of holding inventories and effect of post balance sheet events. For large quantity and low value items of inventories, provision for decline in value of other inventories is made based on the excess of cost of inventory over its net realisable value on an item-by-item basis. After the provision for decline in value of inventories is made, if the circumstances that previously caused inventories to be written down below cost no longer exist so that the net realisable value of inventories is higher than their cost, the original provision for decline in value is reversed and the reversal is included in profit or loss for the period. 11.4 Inventory count system The perpetual inventory system is maintained for stock system. 11.5 Amortisation method for low cost and short-lived consumable items and packaging materials Packaging materials and low cost and short-lived consumable items are amortised using the immediate write-off method.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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12. Long-term equity investments 12.1 Basis for determining joint control and significant influence over the invsestee Control exists when the investor has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power over the investee to affect its returns. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities 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. When determining whether an investing enterprise is able to exercise control or significant influence over an investee, the effects of potential voting rights of the investee (for example, warrants and convertible debts) held by the investing enterprises or other parties that are currently exercisable or convertible have been considered. 12.2 Determination of investment cost For a long-term equity investment acquired through a business combination involving enterprises under common control, the initial investment cost of the long-term equity investment is the attributable share of the carrying amount of the shareholders' equity of the acquiree at the date of combination in the consolidated financial statements of the ultimate controlling party. The difference between the initial investment cost and the carrying amount of cash paid, non-cash assets transferred and liabilities assumed is adjusted to capital reserve. If the balance of capital reserve is not sufficient, any excess is adjusted to retained earnings. If the consideration of the combination is satisfied by the issue of equity securities, the initial investment cost of the long-term equity investment is the attributable share of the carrying amount of the shareholders' equity of the acquiree in the consolidated financial statements of the ultimate controlling party. The aggregate face value of the shares issued is accounted for as share capital. The difference between the initial investment cost and the aggregate face value of the shares issued is adjusted to capital reserve. If the balance of capital reserve is not sufficient, any excess is adjusted to retained earnings. For equity investments held prior to the date of combination, amounts recognised in other comprehensive income under the equity method or for available-for-sale financial assets are not subject to accounting treatment temporarily. For a long-term equity investment acquired through business combination not involving enterprises under common control, the initial investment cost of the long-term equity investment is the cost of acquisition at the date of combination. Where equity interests in an acquiree are acquired in stages through multiple transactions ultimately constituting a business combination not involving entities under common control, the acquirer shall determine if these transactions are considered to be "a bundled transaction". If yes, these transactions are accounted for as a single transaction where control is obtained. If no, the sum of carrying amount of equity investments previously held in the acquiree and the new investment cost are deemed as the initial investment cost of long-term equity investments that was changed to be accounted under the cost method. [If the equity previously held was accounted for using the equity method, the corresponding other comprehensive income is not subject to accounting treatment temporarily. The intermediary fees incurred by the absorbing party or acquirer such as audit, legal, valuation and consulting fees, etc. and other related administrative expenses attributable to the business combination are recognised in profit or loss when they are incurred. The long-term equity investment acquired otherwise than through a business combination is initially measured at its cost. When the entity is able to exercise significant influence or joint control (but not control) over an investee due to additional investment, the cost of long-term equity investments is the sum of the fair value of previously-held equity investments determined in accordance with Accounting Standard for Business Enterprises No.22–Financial Instruments: Recognition and Measurement (CAS 22) and the additional investment cost.

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III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

12. Long-term equity investments - continued 12.3 Subsequent measurement and recognition of profit or loss 12.3.1. Long-term equity investment accounted for using the cost method Long-term equity investments in subsidiaries are accounted for using the cost method in the Company's separate financial statements. A subsidiary is an investee that is controlled by the Group. Under the cost method, a long-term equity investment is measured at initial investment cost. When additional investment is made or the investment is recouped, the cost of the long-term equity investment is adjusted accordingly. Investment income is recognised in the period in accordance with the attributable share of cash dividends or profit distributions declared by the investee. 12.3.2. Long-term equity investment accounted for using the equity method The Group accounts for investment in associates and joint ventures using the equity method. An associate is an entity over which the Group has significant influence and a joint venture is an entity over which the Group exercises joint control along with other investors. Under the equity method, where the initial investment cost of a long-term equity investment exceeds the Group’s share of the fair value of the investee’s identifiable net assets at the time of acquisition, no adjustment is made to the initial investment cost. Where the initial investment cost is less than the Group’s share of the fair value of the investee’s identifiable net assets at the time of acquisition, the difference is recognised in profit or loss for the period, and the cost of the long-term equity investment is adjusted accordingly.

Under the equity method, the Group recognises its share of the net profit or loss and other comprehensive income made by the investee as investment income and other comprehensive income respectively, and adjust the carrying amount of the long-term equity investment accordingly; The carrying amount of the investment is reduced by the portion of any profit distributions or cash dividends declared by the investee that is distributed to the Group; the share of the changes in owners' equity of the investee other than those arising from net profit or loss, other comprehensive income and profit distribution are recognized in the capital reserve and the carrying amount of the long-term equity investment is adjusted accordingly. The Group recognises its share of the investee's net profit or loss after making appropriate adjustments based on the fair value of the investee’s individual separately identifiable assets, etc. at the acquisition date. Where the accounting policies and accounting period adopted by the investee are not consistent with those of the Group, the Group shall adjust the financial statements of the investee to conform to its own accounting policies and accounting period, and recognise investment income and other comprehensive income based on the adjusted financial statements. For the Group's transactions with its associates and joint ventures where assets contributed or sold does not constitute a business, unrealised intra-group profits or losses are recognised as investment income or loss to the extent that those attributable to the Group's proportionate share of interest are eliminated. However, unrealised losses resulting from the Group's transactions with its associates and joint ventures which represent impairment losses on the transferred assets are not eliminated. The Group discontinues recognising its share of net losses of the investee after the carrying amount of the long-term equity investment together with any long-term interests that in substance form part of its net investment in the investee is reduced to zero. If the Group has incurred obligations to assume additional losses of the investee, a provision is recognised according to the expected obligation, and recorded as investment loss for the period. Where net profits are subsequently made by the investee, the Group resumes recognising its share of those profits only after its share of the profits exceeds the share of losses previously not recognised. 12.4 Disposal of long-term equity investments On disposal of a long term equity investment, the difference between the proceeds actually received and the carrying amount is recognised in profit or loss for the period.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

13. Investment properties Investment property is property held to earn rentals or for capital appreciation or both. It includes a land use right that is leased out; and a building that is leased out. An investment property is measured initially at cost. Subsequent expenditures incurred for such investment property are included in the cost of the investment property if it is probable that economic benefits associated with an investment property will flow to the Group and the subsequent expenditures can be measured reliably. Other subsequent expenditures are recognised in profit or loss in the period in which they are incurred. The Group uses the cost model for subsequent measurement of investment property, and adopts a depreciation or amortisation policy for the investment property which is consistent with that for buildings or land use rights. When an investment property is sold, transferred, retired or damaged, the Group recognises the amount of any proceeds on disposal net of the carrying amount and related taxes in profit or loss for the period. 14. Fixed assets 14.1 Recognition criteria for fixed assets Fixed assets are tangible assets that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and have useful lives of more than one accounting year. A fixed asset is recognised only when it is probable that economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. Fixed assets are initially measured at cost. Subsequent expenditures incurred for the fixed asset are included in the cost of the fixed asset and if it is probable that economic benefits associated with the asset will flow to the Group and the subsequent expenditures can be measured reliably. Meanwhile the carrying amount of the replaced part is derecognised. Other subsequent expenditures are recognised in profit or loss in the period in which they are incurred. 14.2 Depreciation of fixed assets A fixed asset is depreciated over its useful life using the straight-line method since the month subsequent to the one in which it is ready for intended use. The useful lives, estimated net residual values rate and annual depreciation rate of each catergory of fixed assets are as follows:

Category Depreciation Depreciation period

(years) Residual value

rate Annual

depreciation rateBuildings The straight-line method 20 4~10% 4.5%~4.8%Machinery The straight-line method 5-10 4~10% 9%-19.2%Motor vehicles The straight-line method 5 4~10% 18%-19.2%Furniture & fixtures The straight-line method 5-10 4~10% 9%-19.2%

Estimated net residual value of a fixed asset is the estimated amount that the Group would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. 14.3 Other explanations If a fixed asset is upon disposal or no future economic benefits are expected to be generated from its use or disposal, the fixed asset is derecognised. When a fixed asset is sold, transferred, retired or damaged, the amount of any proceeds on disposal of the asset net of the carrying amount and related taxes is recognised in profit or loss for the period. The Group reviews the useful life and estimated net residual value of a fixed asset and the depreciation method applied at least once at each financial year-end, and account for any change as a change in an accounting estimate.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

15. Construction in progress Construction in progress is measured at its actual costs. The actual costs include various construction expenditures during the construction period, borrowing costs capitalised before it is ready for intended use and other relevant costs. Construction in progress is not depreciated. Construction in progress is transferred to a fixed asset when it is ready for intended use. 16. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying asset are capitalised when expenditures for such asset and borrowing costs are incurred and 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. Capitalisation of borrowing costs ceases when the qualifying asset being acquired, constructed or produced becomes ready for its intended use or sale. Capitalisation of borrowing costs is suspended during periods in which the acquisition, construction or production of a qualifying asset is suspended abnormally and when the suspension is for a continuous period of more than 3 months. Capitalisation is suspended until the acquisition, construction or production of the asset is resumed. Other borrowing costs are recognised as an expense in the period in which they are incurred. Where funds are borrowed under a specific-purpose borrowing, the amount of interest to be capitalised is the actual interest expense incurred on that borrowing for the period less any bank interest earned from depositing the borrowed funds before being used on the asset or any investment income on the temporary investment of those funds. Where funds are borrowed under general-purpose borrowings, the Group determines the amount of interest to be capitalised on such borrowings by applying a capitalisation rate to the weighted average of the excess of cumulative expenditures on the asset over the amounts of specific-purpose borrowings. The capitalisation rate is the weighted average of the interest rates applicable to the general-purpose borrowings. 17. Intangible assets 17.1 Intangible assets Intangible assets include land use rights, know-how and software use right, etc.

An intangible asset is measured initially at cost. When an intangible asset with a finite useful life is available for use, its original cost less net residual value and any accumulated impairment losses is amortised over its estimated useful life using the straight-line method. An intangible asset with an indefinite useful life is not amortised. The useful lives, annual depreciation rate of each catergory of intangible assets are as follows:

Category Method of depreciation Depreciation period

(yrs.) Annual depreciation

rate Land use rights The straight-line method 46-50 2%-2.17%Know-how and others The straight-line method 3-7 14.29%-33.33%Software use right The straight-line method 5 20%

For an intangible asset with a finite useful life, the Group reviews the useful life and amortisation method at the end of the period, and makes adjustments when necessary.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

17. Intangible assets - continued 17.2 Research and development expenditure Expenditure during the research phase is recognised as an expense in the period in which it is incurred. Expenditure during the development phase that meets all of the following conditions at the same time is recognised as intangible asset. Expenditure during development phase that does not meet the following conditions is recognised in profit or loss for the period. (1) it is technically feasible to complete the intangible asset so that it will be available for use or sale; (2) the Group has the intention to complete the intangible asset and use or sell it; (3) the Group can demonstrate the ways in which the intangible asset will generate economic benefits, including

the evidence of the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, 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 expenditure attributable to the intangible asset during its development phase can be reliably measured. If the expenditures cannot be distinguished between the research phase and development phase, the Group recognises all of them in profit or loss for the period. The research and development expenditure is capitalized for the period from the start of samples designing to the end of quality verification on products from trial production in accordance with formal technical document, if large volume of sales and economic profits are reasonably expected. 18. Impairment of long-term assets The Group reviews the long-term equity investments, investment properties, fixed assets, construction in progress, intangible assets with finite useful life and long-term deferred assets, at each balance sheet date to determine whether there is any indication that they have suffered an impairment loss. If an impairment indication exists, the recoverable amount is estimated. Intangible assets with indefinite useful life and intangible assets not yet available for use are tested for impairment annually, irrespective of whether there is any indication that the assets may be impaired. Recoverable amount is estimated on individual basis. If it is not practical to estimate the recoverable amount of an individual asset, the recoverable amount of the asset group to which the asset belongs will be estimated. The recoverable amount of an asset or asset group is the higher of its fair value less costs of disposal and the present value of the future cash flows expected to be derived from the asset or asset group. If such recoverable amount is less than its carrying amount, a provision for impairment losses in respect of the deficit is recognized in profit or loss for the period. For the purpose of impairment testing, goodwill is considered together with the related assets groups, i.e., goodwill is reasonably allocated to the related assets groups or each of assets groups expected to benefit from the synergies of the combination. An impairment loss is recognized if the recoverable amount of the assets group or sets of assets groups (including goodwill) is less than its carrying amount. The impairment loss is firstly allocated to reduce the carrying amount of any goodwill allocated to such assets group or sets of assets groups, and then to the other assets of the group pro-rata on the basis of the carrying amount of each asset (other than goodwill) in the group. Once an impairment loss is recognized for above mentioned assets, it will not be reversed in any subsequent period.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

19. Long-term prepaid expenses Long-term prepaid expenses represent expenses incurred that should be borne and amortised over the current and subsequent periods (together of more than one year). Long-term prepaid expenses are amortised using the straight-line method over the expected periods in which benefits are derived. 20. Employee benefits 20.1 Accounting policies short-term employee benefits

In the accounting period in which an employee has rendered services except for compensation to employees for termination of employment relationship, the Group recognises the employee benefits for those services as a liability. Expenditures related to payments for employees' social welfare system established by the state, including pensions, medical insurance, housing funds and other social welfare contributions, are included in the cost of related assets or profit or loss for the period in which they are incurred.

20.2 Accounting policies for post-employment benefits Post-employment benefits are all defined contribution plan. During the accounting period in which the employees rendered services for the group, based on the defined contribution plan, liabilities, expenses and costs are recognized.

20.3 Accounting policies for termination benefits

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, if the Group has a formal plan for termination of employment relationship or has made an offer for voluntary redundancy which will be implemented immediately, and at the same time the Group cannot unilaterally withdraw from the termination plan or the redundancy offer, a provision is recognized for the compensation arising from termination of employment relationship with employees, with a corresponding charge to the profit or loss for the current period. 21. Provisions Provisions are recognised when the Group has a present obligation related to a contingency such as products quality assurance, it is probable that an outflow of economic benefits will be required to settle the obligation, and the amount of the obligation can be measured reliably. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account factors pertaining to a contingency such as the risks, uncertainties and time value of money. Where the effect of the time value of money is material, the amount of the provision is determined by discounting the related future cash outflows. 22. Revenue 22.1 Revenue from sale of goods Revenue is recognized when the Group has delivered products to the location specified in the sales contracts and the distributor has confirmed the acceptance of the products. The Company remains no effective control over the goods after the consignment and the economic benefits associated with the transaction will flow to the Group, the relevant revenue can be reliably measured and specific revenue recognisation criteria have been met.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

22. Revenue - continued 22.2 Revenue from rendering of services Where 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 upon the basis of the percentage of completion method. The stage of completion of a transaction involving the rendering of services is determined according to the proportion of services performed to date to the total services to be performed. Where the outcome of a transaction involving the rendering of services cannot be estimated reliably, revenue is recognized to the extent of costs incurred that are expected to be recoverable and the service costs incurred are recognized as expenses for the current period; where the costs incurred are not expected to be recoverable, no service revenue is recognized. 23. Government grants Government grants are the transfer of monetary assets or non-monetary assets from the Government to the Group at no consideration. A government grant shall be recognized only when the Group can comply with the conditions attaching to the grant and the Group will receive the grant. If a government grant is in the form of a transfer of a monetary asset, the item is measured at the amount received or receivable. 23.1 Definition and accounting policies of the government grant related to an assert The Group's government grants are mainly related to the transformation of the production line, which are related to asserts. A government grant related to an asset is recognised as deferred income, and evenly amortised to profit or loss over the useful life of the related asset. 23.2 Definition and accounting policies of the government grant related to income The Group's government grants are mainly related to support enterprise development fund, which are related to income. For a government grant related to income, if the grant is a compensation for related expenses or losses to be incurred in subsequent periods, the grant is recognised as deferred income, and recognised in profit or loss over the periods in which the related costs are recognised. If the grant is a compensation for related expenses or losses already incurred, the grant is recognised immediately in profit or loss for the period. 24. Deferred tax assets/ deferred tax liabilities The income tax expenses include current income tax and deferred income tax. 24.1 Current income tax At the balance sheet date, 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.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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II. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

24. Deferred tax assets/ deferred tax liabilities - continued 24.2 Deferred tax assets and deferred tax liabilities For temporary differences between the carrying amounts of certain assets or liabilities and their tax base, or between the nil carrying amount of those items that are not recognised as assets or liabilities and their tax base that can be determined according to tax laws, deferred tax assets and liabilities are recognised using the balance sheet liability method.

Deferred tax is generally recognised for all temporary differences. Deferred tax assets for deductible temporary differences are recognised to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilised. However, for temporary differences associated with the initial recognition of goodwill and the initial recognition of an asset or liability arising from a transaction (not a business combination) that affects neither the accounting profit nor taxable profits (or deductible losses) at the time of transaction, no deferred tax asset or liability is recognised. For deductible losses and tax credits that can be carried forward, deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the deductible losses and tax credits can be utilised. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. At the balance sheet date, deferred tax assets and liabilities are measured at the tax rates, according to tax laws, that are expected to apply in the period in which the asset is realised or the liability is settled. Current and deferred tax expenses or income are recognised in profit or loss for the period, except when they arise from transactions or events that are directly recognised in other comprehensive income or in shareholders' equity, in which case they are recognised in other comprehensive income or in shareholders' equity; and when they arise from business combinations, in which case they adjust the carrying amount of goodwill. At the balance sheet date, the carrying amount of deferred tax assets is reviewed and reduced if it is no longer probable that sufficient taxable profits will be available in the future to allow the benefit of deferred tax assets to be utilised. Such reduction in amount is reversed when it becomes probable that sufficient taxable profits will be available. 24.3 Offset of income tax When the Group has a legal right to settle on a net basis and intends either to settle on a net basis or to realise the assets and settle the liabilities simultaneously, current tax assets and current tax liabilities are offset and presented on a net basis. When the Group has a legal right to settle current tax assets and liabilities on a net basis, and deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax assets and liabilities on a net basis or to realise the assets and liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be reversed, deferred tax assets and deferred tax liabilities are offset and presented on a net basis.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES - continued

25. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. 25.1 The Group as lessee under operating leases Operating lease payments are recognised on a straight-line basis over the term of the relevant lease, and are either included in the cost of related asset or charged to profit or loss for the period. Initial direct costs incurred are charged to profit or loss for the period. Contingent rents are charged to profit or loss in the period in which they are actually incurred. 25.2 The Group as lessor under operating leases Rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of the relevant lease. Initial direct costs with more than an insignificant amount are capitalised when incurred, and are recognised in profit or loss on the same basis as rental income over the lease term. Other initial direct costs with an insignificant amount are charged to profit or loss in the period in which they are incurred. Contingent rents are charged to profit or loss in the period in which they actually arise. 26. Basis for determining significant accounting policies and the key assumptions and uncertainties adopted in accounting estimates

The preparation of financial statements requires management to make judgements and estimates, these judgments and estimates will affect the amount of revenus, expenses, assets and liabilities and the reporting of contingent liabilities on balance sheet date. However, the uncertainties in these estimates may cause major adjustment to the carrying amount of any assets or liabilities affected in the future. 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: Bad debt provision The Group recognizes bad debts provision based on the collectability of receivables. When there are signs of receivables uncollectible, it is need to recognize bad debts provision. The recognition of bad debts provision needs judgment and estimation. If the re-estimation and the current results are different, the difference will influence the carrying amount of receivables during the estimation changes. Policies on the provision for bad debts are shown in note (III) 10. Estimated useful life and estimated residual value of fixed assets The Group determines the useful life and residual value of fixed assets. The estimation is based on the historical experience of the actual useful life and residual value of the fixed assets with similar nature and function, which may significantly change due to technological innovations and other factors. When estimated useful life and estimated residual value of fixed assets is less than previous estimation, the group will change the estimated useful life and estimated residual value, which is as a change in accounting estimates. The group did not occur these changes within the reporting period. Deferred tax assets As at 31 December 2014 and 2013, the Group has recognized deferred tax assets of RMB 54,846 thousand, RMB 31,552 thousand respectively and presented it in the consolidated balance sheet. The total of unrecognized deductible temporary difference and deductible tax loss are RMB 218,712thousand and RMB 136,805 thousand respectively. The realization of deferred tax assets mainly depends on the actual profit and tax rate used for temporary difference in the future. If the actual profits generated or the tax rate used is less than expected, the recognized deferred tax assets will be reversed, and recognized in consolidated income statement of the reversed period.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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IV. CHANGES IN ACCOUNTING POLICIES

The Group has applied new standards of Accounting Standard for Business Enterprises No. 39– Fair Value Measurement (CAS 39), Accounting Standard for Business Enterprises No.40–Joint Arrangements (CAS 40), Accounting Standard for Business Enterprises No. 41– Disclosure of Interests in Other Entities (CAS 41) and amendments to Accounting Standard for Business Enterprises No.2–Long-term Equity Investments (CAS 2), Accounting Standard for Business Enterprises No.9–Employee Benefits (CAS 9), Accounting Standard for Business Enterprises No. 30– Presentation of Financial Statements (CAS 30) and Accounting Standard for Business Enterprises No.33–Consolidated Financial Statements (CAS 33) issued by the Ministry of Finance in 2014 from 1 July 2014; moreover, the Group has applied Accounting Standard for Business Enterprises No. 37– Presentation of Financial Instruments (CAS 37) revised by the Ministry of Finance for the first time in 2014 annual financial statements. Long-term equity investments Before the implementation of Accounting Standard for Business Enterprises No.2–Long-term Equity Investments (Revised), the equity investments that the Group had no joint control or significant influence over the investee and were not quoted in an active market , also whose fair value could not be reliably measured were accounted for as long-term equity investments under the cost method. After the implementation of Accounting Standard for Business Enterprises No.2–Long-term Equity Investments (Revised), the equity investments that the Group have no joint control or significant influence over the investee and are not quoted in an active market, also whose fair value cannot be reliably measured are accounted for as available-for-sale financial assets. It is believes that adopting such accounting policy has no material impact on the Group's financial statements. Employee benefits Before the implementation of Accounting Standard for Business Enterprises No.9–Employee Benefits (Revised), as to the accounting treatment of termination benefits, for termination of employment before the end of employment contract or compensation offers made to encourage employees to accept voluntary redundancy, if the Group had developed a formal termination plan or made an offer to encourage voluntary redundancy which was about to be implemented , and at the same time the Group could not unilaterally withdraw such termination plan or redundancy offer, provisions for the expected compensation for termination of employment would be recognised, with a corresponding charge to the profit or loss for the current period. After the implementation of Accounting Standard for Business Enterprises No.9–Employee Benefits (Revised), details of accounting policies for termination benefits are set out in Note III 20. It is believes that adopting such accounting policy has no material impact on the Group's financial statements. Consolidated financial statements Accounting Standard for Business Enterprises No.33–Consolidated Financial Statements (Revised) changes the definition of control such that an investor has control over an investee when a) it has power over the investee, b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns; it also clarifies the accounting treatments for special transactions. Management of the Group believes that adopting CAS 40 has no material impact on the Group's financial statements.

Presentation of financial instruments

Accounting Standard for Business Enterprises No. 37– Presentation of Financial Instruments (Revised) adds the requirements regarding offsetting and disclosures, the disclosure requirements on the transfer of financial assets, and revised disclosure requirements on the maturity analysis for financial assets and financial liabilities. The financial statements have been prepared in accordance with CAS 37, and the disclosure in the notes to the comparative financial statements had been adjusted accordingly.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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IV. CHANGES IN ACCOUNTING POLICIES - continued

Presentation of financial statements

Under Accounting Standard for Business Enterprises No. 30– Presentation of Financial Statements (Revised), items of other comprehensive income are grouped into the following two categories: (1) items that will not be reclassified subsequently to profit or loss; (2) items that may be reclassified subsequently to profit or loss when specific conditions are met. CAS 30 also sets out the presentation requirements for other items (e.g. those held for sale). The financial statements have been prepared in accordance with CAS 30, and the presentation of comparative financial statements have been adjusted accordingly. Fair value measurement Accounting Standard for Business Enterprises No. 39– Fair Value Measurement prescribes the measurements of fair value and disclosures about fair value measurements. Adopting CAS 39 has no material impact on the measurement of financial statement items, but will result in more extensive disclosures about fair value in the notes to the financial statements. Required disclosures have been made in the financial statements in accordance with CAS 39. Disclosure of interests in other entities Accounting Standard for Business Enterprises No. 41– Disclosure of Interests in Other Entities applies to the disclosure of an entity's interest in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Adopting CAS 41 results in more extensive disclosure in the notes to the entity's financial statements. Required disclosures have been made in the financial statements in accordance with CAS 41, and the notes to the comparative financial statements had been adjusted accordingly. For changes in accounting policies described above, the Group has adjusted the opening balances of the financial statements or the comparative figures for the prior year retrospectively and restated the comparative financial statements. The impact of the above changes in accounting policies on assets, liabilities and shareholders' equity as at 1 January and 31 December 2013 is presented as follows: 31/12/2013 12/31/2013 (Before restatement) Adjustments (After restatement) RMB RMB RMB Held-for-trading financial assets 326,615.23 (326,615.23) - Designated as at fair value through P&L - 229,330.00 229,330.00 Derivative financial assets - 97,285.23 97,285.23 Held-for-trading financial liabilities 57,831.00 (57,831.00) - Derivative financial liabilities - 57,831.00 57,831.00 Capital reserve 834,205,223.72 (16,736,183.77) 817,469,039.95 Translation differences arising on translation of financial statements denominated in foreign currencies (11,221,923.84) 11,221,923.84 - Other comprehensive income - 5,514,259.93 5,514,259.93 31/12/2013 12/31/2013 (Before restatement) Adjustments (After restatement) RMB RMB RMB Held-for-trading financial assets 312,940.00 (312,940.00) - Designated as at fair value through P&L - 312,940.00 312,940.00 Capital reserve 834,528,093.89 (17,059,053.94) 817,469,039.95 Other comprehensive income - 17,059,053.94 17,059,053.94 There is no impact of the above changes in accounting policies on total shareholders' equity and net profit as at 1 January and 31 December 2013.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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V. TAXES

1. Major categories of taxes and tax rates

Category of tax Basis of tax computation Tax rate VAT Invoiced value of sales and rendering of servics 17% Business tax Taxable income 5% Corporate income tax Taxable profit 25% (Explained below) City maintenance and construction tax Turnover taxes paid 1% or 7% Educational surcharge Turnover taxes paid 3%

2. Tax incentive and approval (1)In 2011, the subsidiaries Shanghai Hitachi Electrical Appliance Co., Ltd., Shanghai Hailite Special Compressor Co. Ltd. and the associate Shanghai Highly Nakano Refrigerator Co., Ltd. received "High-Tech Enterprise Certificate" jointly issued by relevant competent departments. The certification is valid for 3 years.

In 2014, Shanghai Hitachi Electrical Appliance Co., Ltd., Shanghai Hailite Special Compressor Co. Ltd. and Shanghai Highly Nakano Refrigerator Co., Ltd. passed the review for High-Tech Enterprise qualification, and have 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 certificate of Shanghai Hitachi Electrical Appliance Co., Ltd. is numbered GR201431000860, dated September 4, 2014, and valid for 3 years. The certificate of Shanghai Hailite Special Compressor Co. Ltd. is numbered GR201431000566, dated September 4, 2014, and valid for 3 years. The certificate of Shanghai Highly Nakano Refrigerator Co., Ltd. is numbered GR201431000935, dated October 23, 2014, and valid for 3 years. According to the tax policies relating to high‐tech enterprises, companies enjoy preferential policies related to high-tech enterprises within three consecutive years since 2014, and the applicable corporate income tax rate for the companies is 15%. (2) In 2013, the subsidiary Nanchang Highly Electric Machinery Co., Ltd. received "High‐tech Enterprise Certificate" jointly issued by Jiangxi Provincial Department of Science and Technology, Jiangxi Provincial Finance Department, Jiangxi National Taxation Bureau, Jiangxi Local Taxation Bureau on 7 November, 2012. The certification is valid for 3 years. According to the tax policies relating to high‐tech enterprises, the applicable enterprise income tax rate for the company is 15% within three years (2012-2014) after the certification is obtained. (3)According to Indian taxation, the subsidiary Highly Electrial Appliances India Pvt. Ltd., which is located in Ahmedabad of India is subject to applicable income tax rate of 30.90% (2013: 32.45%). (4)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.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Cash and bank balances

Unit: RMB

Item Closing balance Opening balance

Foreign Currency

Exchange Rate

RMB Foreign CurrencyExchange

Rate RMB

Cash: RMB - - 193,599.10 - - 104,097.85US Dollar 8,164.03 6.1190 49,869.60 23,791.56 6.0969 145,054.76Japanese Dollar 616,283.00 0.0514 31,658.46 66,042.46 0.0578 3,815.34Euro 1,417.00 7.2477 10,525.15 17,585.94 8.4189 148,054.27Rupee 374,868.00 0.0966 36,219.75 213,304.00 0.0985 21,010.44Bank balances: RMB - - 359,729,162.06 - - 290,463,550.69US Dollar 22,328,799.89 6.1190 136,629,926.52 2,673,683.69 6.0969 16,301,182.09Japanese Dollar - 0.0514 - 75,111,851.03 0.0578 4,339,286.75Euro 16,686.10 7.2477 124,404.89 88,607.94 8.4189 745,978.95Rupee 123,092,027.27 0.0966 11,893,151.10 109,190,461.02 0.0985 10,755,260.41Other Currency Funds:

RMB - - 15,393,349.03 - - 11,564,035.08Rupee 44,135,033.00 0.0966 4,264,326.89 36,250,033.00 0.0985 3,570,628.25Euro 48,400.00 7.2477 360,851.04 - 8.4189 -Total 528,717,043.59 338,161,954.88

Details of restricted bank balance are as follow:

Unit: RMB Item Closing balance Opening balance

Other currency funds - Deposit of notes 14,410,019.17 11,499,879.17- Deposit of letters of guarantee 4,625,177.93 3,570,628.25Total 19,035,197.10 15,070,507.42

2. Financial assets at fair value through profit or loss

Unit: RMB Item Closing fair value Opening fair value

Held-for-trading financial assets - 229,330.00Including: investments in equity instruments - 229,330.00

3. Derivative financial assets

Unit: RMB

Item Closing fair value Closing fair value

Forward exchange contracts - 97,285.23

The Group's derivative financial assets are the fair value at the end of the year of undue forward contracts

4. Notes receivable (1) Categories of Notes receivable

Unit: RMB Category Closing balance Opening balance

Bank acceptances 1,884,371,689.20 1,652,435,981.42Total 1,884,371,689.20 1,652,435,981.42

(2) As at 31 December 2014, bank acceptances have been endorsed or discounted but have not expired

Unit: RMB Category The amount of notes receivable

derecognised at the end of the year The amount of notes receivable not derecognised at the end of the year

Bank acceptances 717,229,762.55 -

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

4. Notes receivable - continued (3)Others During the year, the Group discounted to banks commercial acceptances totaling RMB 1,847,221,821.22. The Group derecognised the discounted commercial acceptances prior to their maturities, which amounted to RMB 119,093,559.49. During the year, the Group endorsed to banks commercial acceptances totaling RMB 2,201,065,876.88. The Group derecognised the endorsed commercial acceptances prior to their maturities, which amounted to RMB 598,136,203.06. 5. Accounts receivable

(1) Disclosure of accounts receivable by categories:

Unit: RMB

Category

Closing balance Opening balance Carrying amount Bad Debt Provision Carrying amount Bad Debt Provision

Amount Proportion

(%) Amount

Proportion (%)

Amount Proportion

(%) Amount

Proportion (%)

Accounts receivable that are individually significant and for which bad debt provision has been assessed individually

- - - - - - - -

Accounts receivable that are not individually significant but for which bad debt provision has been assessed individually

133,244.55 0.01 133,244.55 2.48 133,244.55 0.01 133,244.55 3.32

Accounts receivable portfolios for which bad debt provision has been assessed using the percentage of total receivables outstanding approach

1,472,216,475.30 99.99 5,248,084.46 97.52 1,470,022,886.94 99.99 3,878,108.02 96.68

Total 1,472,349,719.85 100.00 5,381,329.01 100.00 1,470,156,131.49 100.00 4,011,352.57 100.00

The aging of accounts receivable is as follows:

Unit: RMB

Aging

Closing balance Opening balance

Amount Proportion

(%) Bad Debt Provision

Carrying amount Amount Proportion

(%) Bad Debt Provision

Carrying amount

Within 6 months 1,450,857,431.11 98.55 - 1,450,857,431.11 1,447,830,381.29 98.49 - 1,447,830,381.29

More than 6 months but not exceeding 1 year

9,274,667.00 0.63 185,493.34 9,089,173.66 11,763,344.50 0.80 235,266.89 11,528,077.61

More than 1 year but not exceeding 2 years

6,242,248.98 0.42 1,269,080.81 4,973,168.17 5,559,406.54 0.38 1,111,881.31 4,447,525.23

More than 2 years but not exceeding 3 years

1,925,610.00 0.13 794,043.86 1,131,566.14 2,926,229.01 0.20 1,170,491.60 1,755,737.41

More than 3 years

3,916,518.21 0.27 2,999,466.45 917,051.76 1,943,525.60 0.13 1,360,468.22 583,057.38

Total 1,472,216,475.30 100.00 5,248,084.46 1,466,968,390.84 1,470,022,886.94 100.00 3,878,108.02 1,466,144,778.92

Explanations of basis for portfolios: The group management believes the aging of accounts receivable can reflect the credit risk and therefore bad debt provision has been assessed using the aging analysis approach. (2) Provisions, reversals and collections during the current period:

The bad debt provisions of RMB1,513,169.78 have been made this year by the Group, and reversals or collections of bad debt provision are amounted to RMB154,202.04 during the reporting period

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

5. Accounts receivable – continued

(3) Accounts receivable written off during the current period:

None

(4) Top five entities with the largest balances of accounts receivable

The total accounts receivable of top five entities with the largest balances of accounts receivable are RMB829,986,565.46 for which no provision for bad debts has been made during the current period, and the proportion of the amount to the total accounts receivables is 56.37%.

6. Other receivables

(1) Disclosure of other receivables by categories:

Unit: RMB

Category

Closing balance Opening balance Carrying amount Bad Debt Provision Carrying amount Bad Debt Provision

Amount Proportion

(%) Amount

Proportion (%)

Amount Proportion

(%) Amount

Proportion (%)

Other receivables that are individually significant and for which bad debt provision has been assessed individually

27,770,209.76 42.67 - - 27,052,061.32 49.22 - -

Other receivables that are not individually significant but for which bad debt provision has been assessed individually

37,304,048.86 57.33 255,192.27 100.00 27,904,498.57 50.78 255,192.27 100.00

Total 65,074,258.62 100.00 255,192.27 100.00 54,956,559.89 100.00 255,192.27 100.00

Other receivables that are individually significant and for which bad debt provision has been assessed individually:

Unit: RMB

Items Closing balance

Carrying amount Bad Debt Provision Proportion (%) Company I 10,889,998.00 - - Company II 9,880,211.76 - - Company III 7,000,000.00 - - Total 27,770,209.76 - -

(2) Provisions, reversals and collections during the current period:

None (3) Other receivables written off in the reporting period: None (4) Disclosure of other receivables by properties:

Unit: RMB The properties of other receivables Closing balance Opening balance

VAT refund for export 34,599,773.51 35,740,097.63

Deposit 12,998,510.00 2,036,600.00

Advances and others 17,220,782.84 16,924,669.99

Total 64,819,066.35 54,701,367.62

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

6. Other receivables - continued

(5) Top five entities with the largest balances of other receivables

The total other receivables of top five entities with the largest balances of other receivables are RMB44,970,314.12 within 1 year, and the proportion of the amount to the total other receivables is 69.11%. No provision for bad debts has been made during the current period. Most of those are the VAT refund for export.

7. Prepayments

(1) Aging analysis of prepayments is as follows:

Unit: RMB

Aging Closing balance Opening balance

Amount Proportion(%) Amount Proportion (%)Within 1 year 78,328,215.01 99.26 148,336,191.35 98.97More than 1 year but not exceeding 2 years

586,363.63 0.73 1,040,548.97 0.69

More than 2 years but not exceeding 3 years

2,121.00 0.01 506,928.10 0.34

Total 78,916,699.64 100.00 149,883,668.42 100.00

There is no significant prepayment more than 1 year without timely settlement in the reporting period.

(2) Top five entities with the largest balances of prepayments

The total prepayments of top five entities with the largest balances of prepayments are RMB53,955,066.06, and the proportion of the amount to the total prepayments is 68.37%. 8. Inventories (1)Categories of inventories

Unit: RMB

Item

Closing balance Opening balance

Gross carrying amount

Provision for decline in value of inventories

Net carrying amountGross carrying

amount

Provision for decline in value of inventories

Net carrying amount

Raw Materials 215,308,664.99 36,042,498.78 179,266,166.21 200,925,964.92 31,006,371.66 169,919,593.26

Work-in- process 83,884,798.98 716,276.35 83,168,522.63 74,548,775.56 737,687.18 73,811,088.38

Turnover materials 3,026,374.62 - 3,026,374.62 8,652,563.21 - 8,652,563.21

Finished goods 629,191,391.89 6,174,577.82 623,016,814.07 577,304,555.96 3,300,763.05 574,003,792.91

Materials sent out for processing

5,680,865.60 - 5,680,865.60 5,734,786.25 - 5,734,786.25

Total 937,092,096.08 42,933,352.95 894,158,743.13 867,166,645.90 35,044,821.89 832,121,824.01

(2)Provision for decline in value of inventories

Unit: RMB Category of inventories Opening Balance Increase in the current period Reversals Closing Balance

Raw Materials 31,006,371.66 5,036,127.12 - 36,042,498.78

Work-in- process 737,687.18 716,276.35 (737,687.18) 716,276.35

Finished goods 3,300,763.05 6,137,646.21 (3,263,831.44) 6,174,577.82

Total 35,044,821.89 11,890,049.68 (4,001,518.62) 42,933,352.95

The main reason for reversal of decline in value of inventories for the period is that prices of finished goods increase.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

9. Available-for-sale financial assets

(1)Available-for-sale financial assets

Unit: RMB Item Closing fair value Opening fair value

Available-for-sale equity instruments 41,774,327.80 27,997,892.20Total 41,774,327.80 27,997,892.20

(2)Available-for-sale financial assets measured at fair value:

Unit: RMB Categories of available-for-sale financial assets Available-for-sale equity instruments

Cost of equity instruments 5,682,980.51 Closing fair value 41,774,327.80Changes in fair value recognized in other comprehensive income 36,091,347.29Provision for impairment losses -

The fair value of available-for-sale equity instruments agreed with closing price by Shanghai Stock Exchange at the end of the reporting period.

(3)The movement of Provision for impairment losses of available-for-sale financial assets None

10. Investments in Joint venture and Associates

Unit: RMB Investee

Opening balance

Net profit or loss under equity method

Cash dividends for the period Closing balance Provision for impairment

loss Joint Ventures None Associates Shanghai Highly Nakano Refrigerator Co., Ltd. 74,280,628.27 2,391,514.56 1,090,895.70 75,581,247.13 -

Hitachi & Highly Auto Component (Shanghai) Co., Ltd.

39,357,449.94 583,450.76 - 39,940,900.70 -

Anhui Highly Foundry Co., Ltd. 50,707,577.48 8,680,291.24 - 59,387,868.72 -

Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

9,449,237.13 (557,374.16) - 8,891,862.97 -

Subtotal in Associates 173,794,892.82 11,097,882.40 1,090,895.70 183,801,879.52 - Total 173,794,892.82 11,097,882.40 1,090,895.70 183,801,879.52 -

11. Investment properties (1) Investment properties measured at cost

Unit: RMB Item Buildings Land use rights Total

1.Total costs Opening and Closing balance 24,588,415.37 5,784,788.23 30,373,203.602.Total accumulated depreciation and amortisation Opening balance 21,011,741.80 1,311,218.55 22,322,960.35Increase in the current period 262,568.51 115,695.72 378,264.23 (1) Depreciation 262,568.51 115,695.72 378,264.23Closing balance 21,274,310.31 1,426,914.27 22,701,224.583.Total accumulated provision for impairment losses of investment properties

Opening and Closing balance - - -4.Total carrying amount Closing carrying amount 3,314,105.06 4,357,873.96 7,671,979.02Opening carrying amount 3,576,673.57 4,473,569.68 8,050,243.25

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

12. Fixed assets (1)Fixed assets

Unit: RMB Item Buildings Machinery&equipment Transportation vehicles Furniture&fixtures Total

1.Total costs

Opening balance 966,953,117.32 4,506,239,418.39 56,585,191.16 446,988,037.10 5,976,765,763.97

Increase in the current period 40,134,813.34 395,352,594.88 2,546,288.49 19,391,572.07 457,425,268.78

(1)Purchase 12,060,402.50 45,849,615.42 1,955,892.64 16,985,571.96 76,851,482.52

(2)Transfer from Construction in progress

28,074,410.84 260,925,299.11 - 185,903.41 289,185,613.36

(3)Addition from acquisition of subsidiaries (note VII)

- 88,577,680.35 590,395.85 2,220,096.70 91,388,172.90

Decrease in the current period 578,448.72 213,037,811.08 4,439,225.91 4,566,253.66 222,621,739.37

(1)Disposals 578,448.72 102,639,279.59 4,439,225.91 4,566,253.66 112,223,207.88(2)transfer to Construction in progress (note VI、13) - 110,398,531.49 - - 110,398,531.49

Closing balance 1,006,509,481.94 4,688,554,202.19 54,692,253.74 461,813,355.51 6,211,569,293.38

2. Total accumulated depreciation

Opening balance 387,184,899.33 2,560,578,090.82 38,345,869.58 303,152,482.87 3,289,261,342.60

Increase in the current period 46,309,198.80 260,107,566.18 4,074,252.41 25,915,473.68 336,406,491.07

(1) Purchase 46,309,198.80 260,107,566.18 4,074,252.41 25,915,473.68 336,406,491.07

Decrease in the current period 368,761.01 122,408,237.20 3,674,093.96 3,930,059.65 130,381,151.82

(1) Disposals 368,761.01 90,043,092.98 3,674,093.96 3,930,059.65 98,016,007.60

(2) transfer to Construction in progress (note VI、13) - 32,365,144.22 - - 32,365,144.22

Closing balance 433,125,337.12 2,698,277,419.80 38,746,028.03 325,137,896.90 3,495,286,681.85

3.Total provision for impairment losses

Opening balance - 400,365.85 - 13,965.26 414,331.11

Decrease in the current period - 101,723.73 - - 101,723.73

(1) Disposals - 101,723.73 - - 101,723.73

Closing balance - 298,642.12 - 13,965.26 312,607.38

4.Total carrying amount of fixed assets

Closing carrying amount 573,384,144.82 1,989,978,140.27 15,946,225.71 136,661,493.35 2,715,970,004.15

Opening carrying amount 579,768,217.99 1,945,260,961.72 18,239,321.58 143,821,588.97 2,687,090,090.26

(2) Temporary idle fixed assets

Unit: RMB Item Original Carrying

amount Accumulated depreciation

Provision for impairment losses

Net carrying amount

Note

Closing Balance: 739,807.51 509,573.54 230,233.97 -

Machinery&equipment 722,507.51 506,238.80 216,268.71 - Equipment replacement

Furniture&fixtures 17,300.00 3,334.74 13,965.26 - Equipment replacement

(3) The Group has no fixed assets leased under finance leases. (4) The Group has no fixed assets leased out under operating leases.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

12. Fixed assets - continued (5) Fixed assets of which certificates of title have not been obtained: As at 31 December 2014, properties without certificates are as follows:

Unit: RMB Item Amount Reasons why certificates of title have not been obtained

Nanchang canteen 37,328,303.80 In progress

13. Construction in progress

(1)Details of construction in progress are as follows: Unit: RMB

Items Closing balance Opening balance

Carrying amountProvision for

impairment lossesNet carrying

amount Carrying amount Provision for

Impairment lossesNet carrying

amount India Project II 61,022,791.57 - 61,022,791.57 - - -Compressor intelligent transformation project

54,295,520.19 - 54,295,520.19 33,684,516.03 - 33,684,516.03

No. 2555 Changyang Road, comprehensive renovation project

50,470,301.70 - 50,470,301.70 5,073,188.80 - 5,073,188.80

Nanchang technology research and development center Project I

13,166,406.46 - 13,166,406.46 - - -

ATD transformation projects 2,380,800.78 - 2,380,800.78 5,731,568.49 - 5,731,568.49India Project I - - - 140,806,383.85 - 140,806,383.85Others 10,655,749.72 - 10,655,749.72 17,085,222.82 - 17,085,222.82Total 191,991,570.42 - 191,991,570.42 202,380,879.99 - 202,380,879.99

(2)Changes in significant construction in progress:

Unit: RMB

Item name Budget amount Opening balance Increase in the current period

Transfer to fixed assets

Closing balanceAmount of

accumulated capitalized (%)

Construction Progress(%)

Accumulated capitalized

interest

Capitalized interest for this

period

Interest capitalization rate for this period(%)

Source of funds

India Project II 81,000,000.00 - 61,022,791.57 - 61,022,791.57 75.34 75.34 - - - Own funds

India Project I USD

30,950,000.00 140,806,383.85 - 140,806,383.85 - 80.00 100.00 - - - Own funds

Compressor intelligent transformation project

90,000,000.00 33,684,516.03 47,660,175.29 27,049,171.13 54,295,520.19 90.38 90.38 - - - Own funds

Nanchang technology research and development center Project I

26,000,000.00 - 13,166,406.46 - 13,166,406.46 50.64 50.64 - - - Own funds

ATD transformation projects 12,075,000.00 5,731,568.49 4,713,316.98 8,064,084.69 2,380,800.78 86.50 86.50 - - - Own funds

No. 2555 Changyang Road, comprehensive renovation project

156,560,000.00 5,073,188.80 45,397,112.90 - 50,470,301.70 32.24 32.24 - - - Own funds

Mianyang D series renovation project (note)

94,632,130.95 - 94,632,130.95 94,632,130.95 - 100.00 100.00 - - - Own funds

Note: In January 2014, the Group started a technical update on the production lines of the subsidiary Mianyang Highly Electric Machinery Co., Ltd. and transferred fixed assets amounted RMB78,033,387.27 to construction in progress. The project finished in 2014 August. Details refer to Note (VI).12. (3)Provision for impairment losses for construction in progress

None

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

14. Intangible assets (1) Intangible assets

Unit: RMB Item Land Use Right Software Know-how and others Total

I.Original carrying amount

Opening balance 311,195,813.90 1,807,642.83 7,167,440.87 320,170,897.60

Increase in the current period - 1,416,944.52 14,993,777.95 16,410,722.47

(1)Purchase - 1,339,622.63 593,372.69 1,932,995.32

(2)Internal research and development - - 14,400,405.26 14,400,405.26

(3) Addition from acquisition of subsidiaries (note VII)

- 77,321.89 - 77,321.89

Closing balance 311,195,813.90 3,224,587.35 22,161,218.82 336,581,620.07

2.Total accumulated depreciation

Opening balance 78,346,778.98 780,806.49 6,167,098.71 85,294,684.18

Increase in the current period 6,132,239.40 606,529.32 760,245.54 7,499,014.26

(1)accrual 6,132,239.40 606,529.32 760,245.54 7,499,014.26

Closing balance 84,479,018.38 1,387,335.81 6,927,344.25 92,793,698.44

4.Total carrying amount of fixed assets

Closing carrying amount 226,716,795.52 1,837,251.54 15,233,874.57 243,787,921.63

Opening carrying amount 232,849,034.92 1,026,836.34 1,000,342.16 234,876,213.42

The proportion of intangible assets generated by the Group's internal research and development to the closing carrying amount of intangible assets is 5.91%. (2) Land Use Right of which certificates of title have not been obtained: None 15. Development expenditure

Unit: RMB

Item Opening balance Increase in the current periodRecognised as

intangible assets Closing balance

Project 1 13,810,895.69 29,891,703.40 - 43,702,599.09Project 2 5,808,518.01 5,725,778.70 11,534,296.71 - Project 3 3,682,393.90 2,990,541.14 - 6,672,935.04 Project 4 2,362,325.25 2,642,834.06 - 5,005,159.31 Project 5 1,927,926.73 1,937,004.88 - 3,864,931.61 Others 4,325,515.20 3,606,176.63 2,866,108.55 5,065,583.28 Total 31,917,574.78 46,794,038.81 14,400,405.26 64,311,208.33

The point and the specific basis of capitalization of development expenditure are explained in note (III).17.2. At the end of this year, the progress of these development projects ranged from 80% to 90%.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

16. Long-term prepaid expenses

Unit: RMB

Item Opening balance Increase in the period Amortisation for the

period Closing balance

Moulds 41,054,093.60 23,100,163.11 28,255,330.13 35,898,926.58

Decoration fee 995,692.82 735,897.44 341,285.97 1,390,304.29

Total 42,049,786.42 23,836,060.55 28,596,616.10 37,289,230.87 17. Deferred tax assets/Deferred tax liabilities (1) Deferred tax assets that are not presented at the net amount after offset

Unit: RMB

Item Closing balance Opening balance

Deductible temporary differences

Deferred tax assets

Deductible temporary differences

Deferred tax assets

Provision for impairment losses of assets

47,485,985.57 7,412,110.69 39,464,906.27 6,048,476.90

Early retirement benefits 1,111,759.50 166,763.93 1,427,766.00 214,164.90Quality warranty 25,031,630.37 3,778,646.82 29,727,904.16 4,459,185.62Trademark use expanse 196,938.95 29,540.85 209,567.65 31,435.15Employee benefits payable 16,108,851.55 3,424,655.01 32,261,472.95 5,332,952.43Government subsidy 98,978,710.58 15,275,139.94 96,678,785.68 14,702,797.92Unrealized gain of Inner group transaction

2,353,772.04 588,443.00 5,088,917.47 763,337.62

Changes in the fair value 1,304,945.10 195,741.77 - -Deductible losses 122,507,830.80 32,196,873.32 - -Total 315,080,424.46 63,067,915.33 204,859,320.18 31,552,350.54

(2) Deferred tax liabilities that are not presented at the net amount after offset

Unit: RMB

Item Closing balance Opening balance

taxable temporary differences

Deferred tax liabilities

taxable temporary differences

Deferred tax liabilities

Changes in the fair value of available-for-sale financial assets recognized in other comprehensive income

36,091,347.28 9,022,836.82 22,314,911.69 5,578,727.92

Temporary differences caused by the depreciation of fixed assets

26,608,739.32 8,222,100.45 208,119.41 67,534.75

Total 62,700,086.60 17,244,937.27 22,523,031.10 5,646,262.67

(3) Deferred tax assets and deferred tax liabilities that are presented at the net amount after offset

Unit: RMB

Item The amount of offset at the end of the reporting

period

Deferred tax assets or liabilities after offset at the end of the reporting

period

The amount of offset at the beginning of the

reporting period

Deferred tax assets or liabilities after offset at the beginning of the reporting

period Deferred tax assets

8,222,100.45 54,845,814.88 - 31,552,350.54

Deferred tax liabilities

8,222,100.45 9,022,836.82 - 5,646,262.67

According to the Company and the subsidiaries' future 5-year profit forecast, the Company and the subsidiaries determine it probable that sufficient taxable profits will be available in future periods to offset the deductible temporary differences and deductible losses. Therefore, the related deferred tax assets are recognised.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

17. Deferred tax assets/Deferred tax liabilities - continued (4) Details of unrecognized deferred tax assets

Unit: RMB Item Closing balance Opening balance

Deductible temporary differences 7,622,705.09 1,177,325.77Deductible losses 211,089,558.53 135,627,642.57

Total 218,712,263.62 136,804,968.34 (5) Deductible losses, for which no deferred tax assets are recognized, will expire in the following years

Unit: RMB

Year Closing balance Opening balance 2015 31,247,160.15 31,247,160.152016 41,562,560.49 41,562,560.492017 35,546,754.00 35,546,754.002018 19,508,216.42 24,452,500.03After 2019 83,224,867.47 2,818,667.90 Total 211,089,558.53 135,627,642.57

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 47

V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

(6) Other non-current assets

Unit: RMB Item Closing balance Opening balance

Entrusted loan (Note (XI) 5(2)) 192,000,000.00 192,000,000.00Total 192,000,000.00 192,000,000.00

(7) Short-term borrowings (1) Categories of short-term borrowings:

Unit: RMB Item Closing balance Opening balance

Unsecured and non-guaranteed loans 910,794,529.90 651,880,281.68Total 910,794,529.90 651,880,281.68 Note: The interest rate of these short-term borrowings range from 1.52% to 4.70% at the end of the year. (2) Short-term borrowings overdue but not yet repaid:

None (8) Derivative financial liabilities

Unit: RMB Item Closing fair value Opening fair value

Forward exchange contracts 1,134,000.00 57,831.00Forward interest rate contracts 170,945.10 -Total 1,304,945.10 57,831.00

The Group's Derivative financial liabilities are the fair value of undue forward contracts at the end of the year.

(9) Notes payable

Unit: RMB Category Closing balance Opening balance Commercial acceptances 9,531,710.03 -Bank acceptances 1,956,615,679.48 1,396,534,340.33Total 1,966,147,389.51 1,396,534,340.33 There is no notes payable overdue but not yet paid. (10) Accounts payable (1)Details of accounts payable are as follow:

Unit: RMB Item Closing balance Opening balance

Accounts payable for purchase 984,598,553.35 1,404,039,935.31

(2) Description of significant accounts payable aged more than one year None

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 48

VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

(11) Receipts in advance (1) Details of receipts in advance are as follows:

Unit: RMB Item Closing balance Opening balance

Advance payments from customers 30,866,094.34 38,224,426.68 (2) Description of significant receipts in advance aged more than one year.

None

(12) Employee benefits payable

(1) Employee benefits payable are as follows: Unit: RMB

Item Opening balance Increase in the current period

Decrease in the current period

Closing balance

I. Short-term benefits 43,944,824.32 666,782,118.44 681,005,373.69 29,721,569.07

II. Welfare after departure - defined contribution plan

1,731,579.80 64,137,098.96 64,140,707.27 1,727,971.49

III. Termination benefits 8,500,175.66 223,644.57 2,225,523.24 6,498,296.99

Total 54,176,579.78 731,142,861.97 747,371,604.20 37,947,837.55

(2) Short-term benefits are as follows:

Unit: RMB

Item Opening balance Increase in the current period

Decrease in the current period

Closing balance

1. Wages or salaries, bonuses, allowances and subsidies

32,160,302.71 586,068,689.50 601,937,147.69 16,291,844.52

2. Staff welfare 2,797,459.04 12,544,794.83 13,115,976.81 2,226,277.06

3. Staff and workers' bonus and welfare fund

4,331,585.57 7,625,653.97 6,586,957.68 5,370,281.86

4. Social security contributions 46,220.90 33,486,955.55 33,457,109.38 76,067.07

Includes: Medical insurance 21,066.40 29,020,151.67 28,998,471.69 42,746.38

Work-related injury insurance 23,300.10 1,828,484.74 1,822,408.31 29,376.53

Maternity insurance 1,854.40 2,638,319.14 2,636,229.38 3,944.16

5. Housing funds - 19,290,631.14 19,265,222.86 25,408.28

6. Labor union fees and employee education expenses

4,609,256.10 7,765,393.45 6,642,959.27 5,731,690.28

Total 43,944,824.32 666,782,118.44 681,005,373.69 29,721,569.07

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 49

VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

24. Employee benefits payable - continued

(3) Defined contribution plan are as follows:

Unit: RMB

Item Opening balance Increase in the current period

Decrease in the current period

Closing balance

1. Basic pension insurance 1,728,798.20 59,919,942.36 59,927,395.69 1,721,344.87

2. Unemployment insurance 2,781.60 4,217,156.60 4,213,311.58 6,626.62

Total 1,731,579.80 64,137,098.96 64,140,707.27 1,727,971.49

The Group participates in the pension and unemployment insurance plans set up by governmental agencies. According to the local government authorities' rules, the Group makes the contribution calculated based on a certain percentage of social insurance contribution base (pension insurance plan: 10-21%, unemployment insurance plan: 1%-2%). Except for the expenses above, there is no more payment duty to the Group. Expenditure is recorded in the current profit and loss or cost of assets.

The expense of the basic pension insurance for year 2014 is RMB59,919,942.36 and the expense of unemployment insurance for year 2014 is RMB4,217,156.60. 25. Taxes payable

Unit: RMB Item Closing balance Opening balance

Enterprise Income tax 4,492,461.20 (6,682,334.41)Business tax 1,302,409.60 2,126,873.60Value added tax (50,917,062.48) (52,198,493.94)City construction and maintenance tax 1,822,859.04 750,454.99Tax on buildings 1,336,213.01 593,530.76Tenure tax 664,782.86 288,251.08Individual income tax 2,370,350.56 864,614.65Stamp tax 6,161,975.62 3,496,016.11Education surcharges 1,403,167.08 723,003.41Channel maintenance and management fees 32,187.85 44,335.57Others 42,705.21 183,031.64Total (31,287,950.45) (49,810,716.54)

26. Interest payable

Unit: RMB Items Closing balance Opening balance

Interest payable on long-term borrowings 228,210.13 224,772.38Interest payable on bonds payable 40,416,666.70 40,416,666.68Total 40,644,876.83 40,641,439.06

No interest expenses for overdued loans is amounted 27. Dividends payable

Unit: RMB Items Closing balance Opening balance

Shareholders of tradable shares 2,183,696.66 2,183,569.64

The reasons for unpaid dividends payable are that the investors have not collected yet.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

28. Other payables (1) Natures of other payables:

Unit: RMB Item Closing balance Opening balance

Interests of US dollar loans 3,138,971.81 2,800,552.99Cleaning fee 3,167,653.40 1,534,932.90Temporary borrowing 11,313,339.58 -Payables to purchase equipments 35,693,924.88 30,369,324.21Deposit 38,946,863.87 18,583,879.43Others 44,733,480.43 43,744,695.24Total 136,994,233.97 97,033,384.77

(2) Description of significant other payable aged more than one year:

None

29. Non-current liabilities due within one year Unit: RMB

Item Closing balance Opening balance Long-term borrowings due within one year(note (VI) 30) 111,190,000.00 60,969,000.00

Long-term payables due within one year(note (VI) 32) 11,700,000.00 -

Total 122,890,000.00 60,969,000.00

30. Long-term borrowings Unit: RMB

Item Closing balance Opening balance Unsecured loans and non-guaranteed loans(Note) 164,904,000.00 158,519, 400.00Less: Long-term borrowings due within one year 111,190,000.00 60,969,000.00Total 53,714,000.00 97,550,400.00 Note: As at 31 December 2014, Nanchang Highly Electric Machinery Co., Ltd. borrowed bank loans from the Export‐Import Bank of China amounting to USD 16,000,000.00, equivalent to RMB97,904,000.00, which is guaranteed by Shanghai Hitachi Electrical Appliance Co., Ltd. The interest rates of loans ranged from 4.20% to 5.20% at end of this year.

31. Bonds payable

(1) Bonds payable

Unit: RMB Item Closing balance Opening balance

Corporate bonds 993,464,000.11 991,534,688.09

(2) The changes of bonds payable

Unit: RMB

Name of bond Par

value Issue date Term of the bond Issue amount Opening balance

Issue for the period

Accrued interest for the period

Amortization of premium or discount

Closing balance

2013 corporate bonds of Shanghai Highly (Group) Co., Ltd..

100.00 2013-2-28 5 years(Note) 990,000,000.00 991,534,688.09 - 40,416,666.70 1,929,312.02 993,464,000.11

Note: The bonds are five -year and fixed rate bonds, whose listed name is "12 Shanghai Highly" and coupon rate is 4.85%. The Company pays interest once a year and repays the cost outright. Issuer can increase coupon rate and investors own put option at the end of third year.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 51

VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

32. Long-term payables

(1) Natures of Long-term payables Unit: RMB

Item Closing balance Opening balanceTemporary borrowing 27,615,041.55 -Less: Long-term payables due within one year 11,700,000.00 -Total 15,915,041.55 -

The Group's subsidiary Mianyang Highly Electric Machinery Co., Ltd. borrowed the interest free loans from its investor Mianyang Hongfa Mechanical Equipment Manufacture Co., Ltd.. According to the contract, the loans will be repaid in 2015 and 2016. 33. Provisions

Unit: RMB

Item Opening balance Closing balance

Quality warranties 25,090,840.03 29,820,595.12

34. Other non-current liabilities/ Other current liabilities Unit: RMB

Item Opening balance

Increase in the current period

Decrease in the current period Closing balance

Underlying causes

Deferred income 239,248,645.54 10,125,859.71 13,691,352.60 235,683,152.65

Including: Pending exchange gain 61,228,220.90 - - 61,228,220.90

The reform of exchange rate policy

Government grants 178,020,424.64 10,125,859.71 13,691,352.60 174,454,931.75

Receive government grants

Including: Compensation for removal

20,624,734.58 - 13,152.00 20,611,582.58 Receive government grants

Government grants related to assets

157,395,690.06 10,125,859.71 13,678,200.60 153,843,349.17 Receive government grants

Total 239,248,645.54 10,125,859.71 13,691,352.60 235,683,152.65

Less: Other current liabilities-deferred income due within 1 year

12,986,279.58 13,830,454.94

Other non-current liabilities-deferred income due within 1 year

226,262,365.96 221,852,697.71

Government grants:

Unit: RMB

Item Opening balanceIncrease in the current period

Amount included in non-operating income for the period Closing balance

Related to assets/ related to income

Project support funds related to the equipment procurement

96,678,785.68 - 6,905,627.24 89,773,158.44 Assets

Compensation for removal 20,624,734.58 - 13,152.00 20,611,582.58 Assets Small energy-efficient fluorine-free special projects

22,099,999.96 - 2,600,000.04 19,499,999.92 Assets

Jiangxi industrial revitalization and transformation projects

17,575,000.00 - 1,900,000.00 15,675,000.00 Assets

Mianyang transformation projects (note)

- 4,450,000.00 166,666.67 4,283,333.33 Assets

Others 21,041,904.42 5,675,859.71 2,105,906.65 24,611,857.48 Assets

Total 178,020,424.64 10,125,859.71 13,691,352.60 174,454,931.75

Note: Government grants increased by RMB4,450,000.00 for the acquisition of the subsidiary Mianyang Highly Electric Machinery Co., Ltd.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 52

VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

35. Share capital Unit: RMB

Opening and Closing balance

I. Restricted tradable shares

State-owned shares 65,000,000

Subtotal 65,000,000

II. Tradable shares

Ordinary shares denominated in RMB 318,574,507

Foreign-owned shares listed domestically 284,169,608

Subtotal 602,744,115

III. Total shares 667,744,115

36. Capital reserve Unit: RMB

Item Opening and Closing balance Capital premium 658,530,496.87Other capital reserve 158,938,543.08Total 817,469,039.95

37. Other comprehensive income

Unit: RMB

Item Opening balance

Changes in the period

Closing balanceAmount recognised in

the current period before

tax

Less: amount included in other comprehensive income in the

prior periods that is transferred to profit or loss for

the period

Less: Income tax expense

Attributable to owners of the

Company after tax

Attributable to minority

interests after tax

I. Other comprehensive income that will transfer to profit or loss after the period

5,514,259.93 7,211,303.95 - 3,444,108.90 5,387,253.53 (1,620,058.48) 10,901,513.46

Including: gain or loss on changes in fair value of available-for-sale financial assets

16,736,183.77 13,776,435.60 - 3,444,108.90 10,332,326.70 - 27,068,510.47

Translation differences of financial statements denominated in foreign currencies

(11,221,923.84) (6,565,131.65) - - (4,945,073.17) (1,620,058.48 ) (16,166,997.01)

Total 5,514,259.93 7,211,303.95 - 3,444,108.90 5,387,253.53 (1,620,058.48) 10,901,513.46

38. Surplus reserves

Unit: RMB Items Opening balance Increase in the period Closing balance

Statutory surplus reserve 223,092,621.93 6,383,481.87 229,476,103.80

Discretionary surplus reserve - - -

Total 223,092,621.93 6,383,481.87 229,476,103.80

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.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 53

VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

39. Unappropriated profits

Unit: RMB Item Closing balance Opening balance

Unappropriated profits at the beginning of the period 656,243,117.03 651,016,899.08Add: Net profit attributable to owners of the Company for the period

93,518,544.32 104,129,188.62

Less: Appropriation to statutory surplus reserve 6,383,481.87 11,360,477.86Appropriation to employee bonus and welfare fund 5,719,240.48 7,413,199.01 Declaration of dividends on ordinary shares (note 1) 66,774,411.50 80,129,293.80

Unappropriated profits at the end of the period (note 2) 670,884,527.50 656,243,117.03 Note 1: According to the resolution of the shareholder meeting on the distribution of profit on June 19, 2014, the Company will distribute cash dividend RMB1.00 per 10 shares based on the total shares at the end of 2013 to all shareholders. As the total share at the end of 2013 is 667,744,115, the total cash dividend distributed is RMB 66,774,411.50. Note 2: As at 31 December 2013, the balance of the Group's unappropriated profits include appropriation to surplus reserve by subsidiaries amounting to RMB 280,395,022.39 (31 December 2013: RMB 256,525,185.95).

40. Operating income and Operating cost

Unit: RMB

Item Amount recognised in the current period Amount recognised in the prior period

Income Cost Income Cost Principal operation 6,520,498,306.01 5,709,743,793.84 6,385,165,621.06 5,614,820,605.88

Other operation 287,948,865.29 243,526,790.06 236,453,933.24 172,445,825.39

Total 6,808,447,171.30 5,953,270,583.90 6,621,619,554.30 5,787,266,431.27

41. Business tax and levies

Unit; RMB

Item Amount recognised in the

current period Amount recognised in the

prior period Business tax 3,285,254.05 2,652,813.59City maintenance and construction tax 7,860,723.20 5,584,412.19Channel maintenance and management fees 242,240.43 383,206.42Educational surcharges 1,705,939.52 1,463,128.95Total 13,094,157.20 10,083,561.15

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 54

VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

42. Selling expenses

Unit: RMB

Item Amount recognised in the

current period Amount recognised in

the prior period Transportation fee 99,699,456.27 90,509,721.22Salary and welfare 28,708,110.21 23,708,760.61Ads. expense 4,799,193.85 6,706,076.27Quality warranty 4,860,532.93 4,434,987.58Sales services fee 2,281,681.50 2,043,383.22Rent fee 9,297,704.13 8,442,282.81Entertainment fee 2,134,553.89 2,104,858.62Travelling expense 9,053,593.01 7,762,262.05Insurance fee 1,787,308.27 1,630,971.16Sales commission 2,161,369.31 3,700,892.35Others 1,476,090.25 4,925,168.05Total 166,259,593.62 155,969,363.94

43. Administrative expenses

Unit: RMB

Item Amount recognised in the

current period Amount recognised in

the prior period Salary and welfare 93,399,147.86 86,859,606.31R&D 204,691,521.11 204,438,064.27Depreciation fee 39,614,288.37 36,330,541.56Transportation fee 11,689,942.99 17,497,477.06Travelling expense 13,267,578.13 11,102,497.16Taxs 10,711,521.90 13,326,512.08Landscaping and sanitary 9,549,290.89 7,192,739.87Union running costs and employee education costs 6,589,120.90 7,072,263.31Entertainment fee 3,640,780.76 4,357,818.20Intangible assets amortization 3,371,199.96 6,738,543.96Others 60,451,401.98 42,949,525.95Total 456,975,794.85 437,865,589.73

44. Financial expenses

Unit: RMB Item Amount recognised in

the current period Amount recognised in

the prior period Interest expense 108,969,267.63 124,109,017.25Less: Interest income 5,282,012.08 4,942,785.80Exchange differences (11,674,110.05) (3,178,583.95)Others 12,953,582.15 7,968,733.20Total 104,966,727.65 123,956,380.70

45. Impairment losses on assets

Unit: RMB

Item Amount recognised in the

current period Amount recognised in the

prior period I. Bad debt losses 1,358,967.74 1,347,187.81II. Written-down of inventories 7,888,531.06 2,539,959.33III. Impairment on fixed assets - 101,723.73Total 9,247,498.80 3,988,870.87

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

46. Gain arising from change in fair value

Unit: RMB

Source resulting in gains from changes in fair values Amount recognised in the current period

Amount recognised in the prior period

Financial assets at fair value through profit or loss 302,230.00 (83,610.00)Derivative financial assets (97,285.23) 97,285.23Derivative financial liabilities (1,247,114.10) (57,831.00)Total (1,042,169.33) (44,155.77)

47. Investment income (1)Details of investment income:

Unit: RMB Item Amount recognised

in the current period Amount recognised in the prior period

Income from long-term equity investments under equity method 11,097,882.40 5,824,482.77Investment income on disposal of long-term equity investments - 1,940,820.26Investment income from holding financial assets at fair value through profit or loss

4,577.00 6,370.00

Investment income from holding available-for-sale financial assets 537,205.00 848,660.00Investment income on disposal of available-for-sale financial assets - 10,479,011.93Investment income on disposal of financial assets at fair value through profit or loss

(156,305.54) -

Investment income from mature derivative financial instruments 325,208.33 -Interest income from entrusted loan 10,512,000.00 5,454,900.00Total 22,320,567.19 24,554,244.96

48. Non-operating income (1) Non-operating income are as follows:

Unit: RMB

Item Amount recognised in the current period

Amount recognised in the

prior period

Amount included in

non-recurring profit or loss for the period

Total gains on disposal of non-current assets 321,888.40 835,818.36 321,888.40Including: Gains on disposal of fixed assets 321,888.40 835,818.36 321,888.40Government grants 26,325,843.78 38,440,970.05 26,325,843.78Fines 6,630,717.06 2,144,354.93 6,630,717.06 Income from acquisition of subsidiary (note (VII) 1) 7,361,613.51 - 7,361,613.51 Others 4,539,284.49 4,101,719.20 4,539,284.49Total 45,179,347.24 45,522,862.54 45,179,347.24

(2) Details of government grants included in profit or loss for the period:

Unit: RMB

Items Amount recognised in the

current period Amount recognised in

the prior period Related to assets

/ related to income Support enterprise development funds

9,128,410.00 12,480,000.00 Related to income

Financial discount - 3,000,000.00 Related to income Allowance for employee training 187,720.00 389,558.00 Related to income Amortization of deferred income (Note (VI) 34)

13,691,352.60 13,100,960.85 Related to assets

Others 3,318,361.18 9,470,451.20 Related to income Total 26,325,843.78 38,440,970.05

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

49. Non-operating expenses

Unit: RMB

Item Amount incurred

in the current period

Amount incurred in the

prior period

Amount included in

non-recurring profit or loss for the period

Total losses on disposal of non-current assets 2,665,810.25 3,661,789.05 2,665,810.25

Including: Losses on disposal of fixed assets 2,665,810.25 3,573,602.60 2,665,810.25 Losses on disposal of investment properties - 88,186.45 -Donations to thirds parties 860,000.00 600,000.00 860,000.00 Fines 304,347.27 17,317.80 304,347.27 Others 1,601,544.58 282,310.92 1,601,544.58 Total 5,431,702.10 4,561,417.77 5,431,702.10

50. Income tax expense

Unit: RMB

Item Amount incurred in the current period

Amount incurred in the prior period

Current tax expense calculated according to tax laws and relevant requirements

21,508,246.13 17,871,622.88

Adjustments to deferred tax 6,739,806.93 18,026,466.18Additional tax paid (refund) in respect of the prior year 9,817.32 (9,269,258.97)Total 28,257,870.38 26,628,830.09 Reconciliation of income tax expenses to the accounting profit is as follows:

Unit: RMB

Amount incurred in the current period

Amount incurred in the prior period

Accounting profit/loss 165,658,858.28 167,960,890.60Income tax expenses calculated at 25% (2013: 25%) 41,414,714.57 41,990,222.65Effect of different tax rates used by some subsidiaries (20,292,952.87) (4,272,034.41)R & D additional deduction (7,627,896.65) (7,179,259.56)Adjustments to current tax of previous periods 9,817.32 (9,269,258.97)Effect of tax-free income (2,896,591.47) (1,669,878.19)Expenses not deductible for tax 1,601,729.08 430,443.89Effect of capital expenditure deductible before tax (note) (4,258,463.60) -Effect of using previously unrecognised deductible losses and deductible temporary differences (230,000.00) (1,012,108.15)

Effect of unrecognised deductible losses and deductible temporary differences 20,537,514.00 7,610,702.83

Total 28,257,870.38 26,628,830.09 Note: according to the Indian tax regulations, the 25% of capital expenditure of the subsidiary Highly Electrical Appliances India Pvt. Ltd. shall be deducted before tax.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

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VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

51. Notes to items in the cash flow statement (1) Other cash receipts relating to operating activities

Unit: RMB

Item Amount for current

period Amount for prior

period Government Grant 12,571,339.18 25,340,009.20Interest income 5,282,012.08 4,942,785.80Fines income 6,630,717.06 2,144,354.93Temporary receipts 20,000,000.00 -Others 949,746.75 3,986,480.95Total 45,433,815.07 36,413,630.88 (2) Other cash payments relating to operating activities

Unit: RMB

Item Amount for current

period Amount for prior

period Transportation fee 111,389,399.26 106,693,685.60 R&D and cost of raw materials 88,800,289.89 102,981,229.20 Travel expense 22,321,171.14 18,864,759.21 Financial institution charges 15,666,915.80 7,968,733.20 Quality warranty 9,556,806.72 10,959,766.34 The sanitation and afforestation fees 9,549,290.89 7,192,739.87 Lease expense 9,297,704.13 8,428,102.81 Entertainment fee 5,775,334.65 6,462,676.82 Advertisement fee 4,799,193.85 6,706,076.27 Sales commissions 2,873,028.83 5,744,275.57 The insurance premium 1,787,308.27 1,630,971.16 Advisory fees 1,768,843.59 679,161.57 Others 59,602,623.51 95,000,264.63 Total 343,187,910.53 379,312,442.25

(3) Other cash receipts relating to investing activities Unit: RMB

Items Amount for current

period Amount for prior

period Project deposits 1,000,000.00 -Government grants related to assets 5,675,859.71 7,000,000.00Total 6,675,859.71 7,000,000.00 (4) Other cash payments relating to investing activities None

(5) Other cash receipts relating to financing activities Unit: RMB

Items Amount for current

period Amount for prior

period Temporary borrowing 10,000,000.00 -Total 10,000,000.00 -

(6) Other cash payments relating to financing activities None

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 58

VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

52. Supplementary information to the cash flow statement (1) Supplementary information to the cash flow statement

Unit: RMB Supplementary information Current period Prior period

I. Reconciliation of net profit to cash flow from operating activities: Net profit 137,400,987.90 141,332,060.51Add: Provision for impairment losses of assets 9,247,498.80 3,988,870.87

Depreciation of fixed assets 335,714,422.97 321,403,319.68Amortisation of intangible assets 7,499,014.26 6,520,338.99Depreciation of investment properties 378,264.23 378,264.31Amortisation of long-term prepaid expenses 28,596,616.10 35,202,927.42

Losses on disposal of fixed assets, intangible assets and other long-term assets

2,343,921.85 2,825,970.69

Losses on changes in fair values 1,042,169.33 44,155.77 Financial expenses 102,143,765.77 116,131,990.94 Gains arising from investments (22,320,567.19) (24,554,244.96) Decrease in deferred tax assets 6,806,707.47 17,953,185.83 Increase in deferred tax liabilities (decrease) (67,534.75) 67,534.75 Decrease in inventories (67,850,578.76) (132,761,710.07) Increase in receivables from operating activities (78,445,540.33) (135,303,056.27) Increase in payables from operating activities (decrease) 603,745.83 65,324,159.25

Net cash flow from operating activities 463,092,893.48 418,553,767.71II. Net changes in cash and cash equivalents:

Closing balance of cash 509,681,846.49 323,091,447.46Less: Opening balance of cash 323,091,447.46 240,559,125.66Net increase in cash and cash equivalents 186,590,399.03 82,532,321.80

(2) Net cash inflow on acquisition of subsidiaries during the period

Unit: RMB Item Amount for the current period

Cash and cash equivalents paid to acquire subsidiaries during the period

1.00

Including: Mianyang Highly Electric Machinery Co., Ltd. 1.00

Less: Cash and cash equivalents held by subsidiaries on the date of acquisition

4,146,885.48

Including: Mianyang Highly Electric Machinery Co., Ltd. 4,146,885.48

Net cash inflow on acquisition of subsidiaries 4,146,884.48

(3) Composition of cash and cash equivalents

Unit: RMB Item Closing balance Opening balance

Cash 321,872.06 422,032.66Bank deposits 508,376,644.57 322,605,258.89Other monetary funds 983,329.86 64,155.91Closing balance of cash and cash equivalent 509,681,846.49 323,091,447.46

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 59

VI. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

53. Assets with restrictions on ownership and usage rights

Unit: RMB Item Closing balance Reasons for restrictions

Other Currency Funds

- Security Deposit 14,410,019.17 Guarantee

- Guarantee deposit 4,625,177.93 Guarantee

合计 19,035,197.10

54. Foreign currency monetary items

(1) Foreign currency monetary items

Unit: RMB Item Foreign Currency Exchange Rate RMB

Cash and bank balances Including: US Dollar 22,336,963.92 6.1190 136,679,796.12

Japanese Yen 616,283.00 0.0514 31,658.46

Euro 66,503.10 7.2477 495,781.08

Rupee 406,330.27 0.0966 39,259.06

Accounts receivable

Including: US Dollar 39,948,209.40 6.1190 244,443,093.32

Euro 4,132,245.67 7.2477 29,949,276.94

Prepayments

Including: US Dollar 1,670,811.18 6.1190 10,223,693.60

Japanese Yen 63,736,868.00 0.0514 3,274,226.65

Other receivables

Including: US Dollar 35,868.67 6.1190 219,480.39

Japanese Yen 48,000.00 0.0514 2,465.81

Short-term borrowings

Including: US Dollar 100,106,915.59 6.1190 612,554,216.50

Japanese Yen 1,174,801,525.00 0.0514 60,350,729.14

Euro 5,000,000.00 7.2477 36,238,500.00

Accounts payable

Including: US Dollar 29,879,520.12 6.1190 182,832,783.61

Japanese Yen 6,696,009.00 0.0514 343,980.68

Other payables

Including: US Dollar 2,171,339.21 6.1190 13,286,424.63

Japanese Yen 6,271,550.00 0.0514 322,175.80

Euro 53,514.58 7.2477 387,857.62

Long-term borrowings and non-current liabilities due within one year

Including: US Dollar 16,000,000.00 6.1190 97,904,000.00

(2) The offshore subsidiaries Highly Electrical Appliances India Pvt. Ltd. and Highly High-tech corporation(Japan) determined Rupee and Japanese Dollar as their functional currency respectively according to the currency in the place of incorporation.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 60

VII. CHANGES IN THE SCOPE OF CONSOLIDATION

1. Business combinations not involving enterprises under common control

(1) Business combinations not involving enterprises under common control occurred in the current period

Unit: RMB

Acquiree Ownership

transfer date

Cost of

equity

Proportion of the company's equity held by

the parent（%）

The method to

acquire equity

Acquisition date

Basis for determini

ng acquisitio

n date

Income from the acquisition date to the closing of the

current period

Net profit from the acquisition date to the closing of the

current period

Mianyang Highly Electric

Machinery Co., Ltd.

2014-1-16RMB1.00

51 Cash

payments 2014-1-16

The transfer

of control275,663,427.88 46,579,964.39

(2) cost of combination and goodwill Unit: RMB

Cost of combination Mianyang Highly Electric Machinery Co., Ltd. Cash 1.00Total of cost of combination 1.00Less: the acquirer’s interest in the fair value of the acquiree’s identifiable net assets

7,361,614.51

Non-operating income 7,361,613.51

(3) The acquiree’s identifiable net assets and liabilities at acquisition date

Unit: RMB

Cost of combination Mianyang Highly Electric Machinery Co., Ltd. the fair value at acquisition date

the carrying value at acquisition date

Assets: Cash and bank balances 4,146,885.48 4,146,885.48Other current assets 3,463,900.89 3,463,900.89Fixed assets 91,388,172.90 91,388,172.90Intangible assets 77,321.89 77,321.89Deferred tax assets 30,100,171.81 30,100,171.81Other non-current assets 150,000.00 150,000.00 Liabilities: Short-term borrowings 7,772,900.47 7,772,900.47 Notes payable 3,977,943.74 3,977,943.74 Accounts payable 23,041,595.29 23,041,595.29 Taxes payable (21,517,005.37) (21,517,005.37)Other payables 57,633,788.21 57,633,788.21 Other current liabilities 2,532,692.38 2,532,692.38 Long-term borrowings 37,000,000.00 37,000,000.00 Other non-current liabilities 4,450,000.00 4,450,000.00

Net assets 14,434,538.25 14,434,538.25Less: minority interests 7,072,923.74 7,072,923.74Assets acquired 7,361,614.51 7,361,614.51

The fair value at acquisition date of Mianyang Highly Electric Machinery Co., Ltd. was determined in accordance with the evaluation report Hu Dong Zhou Zi Ping Bao Zi (2013) No. 0824166 issued by Orient Appraisal Co., Ltd., which evaluated the fair value of identifiable assets and liabilities of Mianyang Highly Electric Machinery Co., Ltd. according to the cost method.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 61

VIII. EQUITIES IN OTHER COMPANIES

1. Equities in subsidiaries

(1) The composition of the Group

Unit: RMB

Full name of subsidiary Place of

incorporation Registered Address

Nature of business

Proportion of ownership interest (%) The method to acquire

Direct Indirect Shanghai Hitachi Electric Appliance Co., Ltd.

Shanghai Shanghai Manufacturing 75% 0% Establishment

Shanghai Highly Realnen Environmental Technology Co.Ltd

Shanghai Shanghai Commercial &

Service 100% 0% Establishment

Shanghai Jinxuan Property Management Co., Ltd. Shanghai Shanghai Property

management 100% 0% Establishment

Shanghai Highly Foundry Co., Ltd. Shanghai Shanghai Manufacturing 80% 0% Establishment

Shanghai Hailite Special Compressor Co. Ltd. Shanghai Shanghai Manufacturing 70% 0% Establishment

Highly International Trading (Shanghai) Co., Ltd. Shanghai Shanghai Commercial 80% 0% Establishment

Nanchang Highly Electric Machinery Co., Ltd. Jiang Xi Jiang Xi Manufacturing 0% 75% Establishment

Highly Electrial Appliances India Pvt. Ltd. India India Manufacturing 0% 75% Establishment

Mianyang Highly Electric Machinery Co., Ltd. Si Chuan Si Chuan Manufacturing 0% 51% Business combinations not involving enterprises under common control

Nanchang Highly Cooling And Heating Technology Co., Ltd.

Jiang Xi Jiang Xi Manufacturing 0% 75% Establishment

Highly High-tech corporation(Japan) Japan Japan Commercial 0% 80% Establishment

Shanghai Refrigerating Machine Works CO., LTD. Shanghai Shanghai Manufacturing 0% 70% Business combinations involving enterprises

under common control

(2) The important non-wholly owned subsidiary

Unit: RMB

Full name of subsidiary

Proportion of minority interest

(%)

Profit or loss attributable to minority interests Cash dividends to minority Minority interests

Amount for current period

Amount for prior period

Amount for current period

Amount for prior period

Closing balance Beginning balance

Shanghai Hitachi Electric Appliance Co., Ltd.

25% 41,606,587.53 36,866,012.80 22,250,000.00 37,066,000.00 684,711,094.02 661,723,156.84

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 62

VIII. CHANGES IN THE SCOPE OF CONSOLIDATION - continued

1. Business combinations not involving enterprises under common control - continued

(3) Key financial information of the important non-wholly owned subsidiary

Unit: RMB

Items Closing balance Beginning balance

Current assets Non-current assets Total assets Current liabilities Non-current

liabilities Total liabilities Current assets

Non-current assets

Total assets Current liabilities Non-current

liabilities Total liabilities

Shanghai Hitachi Electric Appliance Co., Ltd.

4,514,084,385.15 3,116,745,805.84 7,630,830,190.99 4,074,528,089.26 862,901,787.05 4,937,429,876.31 3,935,737,790.81 3,093,294,667.65 7,029,032,458.46 3,482,191,355.18 899,948,470.29 4,382,139,825.47

Unit: RMB

Items Amount for current period Amount for prior period

Operating income Net profit Total comprehensive

income Net Cash Flow from Operating Activities

Operating income Net profit Total comprehensive

income Net Cash Flow from Operating Activities

Shanghai Hitachi Electric Appliance Co., Ltd.

6,379,270,610.25 142,201,054.24 136,060,411.92 514,234,847.85 6,179,643,904.23 147,464,051.11 132,866,366.14 480,917,865.85

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 63

VIII. CHANGES IN THE SCOPE OF CONSOLIDATION - continued

2. Equities in associates

(1) The important associates Unit: RMB

Full name of associates Place of

incorporationRegistered Address

Nature of business

Proportion of ownership interest

(%)

Accounting method to

invest in Joint ventures Direct Indirect

Hitachi & Highly Auto component (Shanghai) Co., Ltd.

Shanghai Shanghai Manufacturing 33.33% 0% Equity method

Shanghai Highly Nakano Refrigerator Co., Ltd.

Shanghai Shanghai Manufacturing 43% 0% Equity method

Anhui Highly Foundry Co., Ltd. Anhui Anhui Manufacturing 40% 0% Equity method

Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

Shanghai Shanghai Manufacturing 33.33% 0% Equity method

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 64

VIII. CHANGES IN THE SCOPE OF CONSOLIDATION - continued

2. Equities in associates - continued

(2) Key financial information of the important associates

Unit: RMB

Closing balance / Amount for current period Beginning balance / Amount for prior period Hitachi & Highly Auto component (Shanghai)

Co., Ltd.

Shanghai Highly Nakano Refrigerator

Co., Ltd.

Anhui Highly Foundry Co., Ltd.

Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

Hitachi & Highly Auto component (Shanghai) Co.,

Ltd.

Shanghai Highly Nakano Refrigerator Co., Ltd.

Anhui Highly Foundry Co., Ltd.

Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

Current assets 170,981,090.81 202,499,225.95 200,750,552.67 72,638,476.68 172,888,965.14 192,333,743.37 177,330,972.45 74,227,164.52 Non-current assets 61,397,178.56 38,969,095.08 273,717,184.82 23,274,434.21 78,833,501.52 44,520,905.93 236,757,292.55 21,719,568.35

Total assets 232,378,269.37 241,468,321.03 474,467,737.49 95,912,910.89 251,722,466.66 236,854,649.30 414,088,265.00 95,946,732.87

Current liabilities 112,555,567.26 65,363,078.76 116,488,065.70 69,237,322.00 133,650,116.84 63,696,249.16 75,789,321.30 67,599,021.49 Non-current

liabilities - 334,900.13 209,510,000.00 - - 412,753.02 211,530,000.00 -

Total liabilities 112,555,567.26 65,697,978.89 325,998,065.70 69,237,322.00 133,650,116.84 64,109,002.18 287,319,321.30 67,599,021.49

Shareholders' equity 119,822,702.11 175,770,342.14 148,469,671.79 26,675,588.89 118,072,349.82 172,745,647.12 126,768,943.70 28,347,711.38

The net assets calculated according to shareholding ratio

39,940,900.70 75,581,247.13 59,387,868.72 8,891,862.97 39,357,449.94 74,280,628.27 50,707,577.48 9,449,237.13

Carrying value of the investment of

associates

39,940,900.70 75,581,247.13 59,387,868.72 8,891,862.97 39,357,449.94 74,280,628.27 50,707,577.48 9,449,237.13

Operating income 418,958,004.30 161,409,032.42 399,618,075.36 192,383,661.07 423,974,419.41 158,202,505.84 256,020,237.87 186,717,298.72

Net profit 1,750,352.29 5,561,661.77 21,700,728.09 (1,672,122.49) 5,869,617.32 2,984,666.76 3,666,339.82 3,354,003.06 Other

comprehensive income

- - - - - - - -

Total comprehensive

income

1,750,352.29 5,561,661.77 21,700,728.09 (1,672,122.49) 5,869,617.32 2,984,666.76 3,666,339.82 3,354,003.06

The dividend

received from the associates

- 1,090,895.70 - - - 4,495,596.54 - -

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 65

IX. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

The Group's major financial instruments include cash and bank balances, equity and debt investments, derivative financial instruments, notes receivable, account receivables, other receivables, held-for-trading financial assets, borrowings, notes payable, account payables, interest payable, other payables, bonds payable etc. Details of these financial instruments are disclosed in Note (VI). The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure the risks are monitored at a certain level. 1. Risk management objectives and policies

The Group's risk management objectives are to achieve a proper balance between risks and yield, minimise the adverse impacts of risks on the Group's operation performance, and maximise the benefits of the shareholders and other stakeholders. Based on these risk management objectives, the Group's basic risk management strategy is to identify and analyse the Group's exposure to various risks, establish an appropriate maximum tolerance to risk, implement risk management, and monitors regularly and effectively these exposures to ensure the risks are monitored at a certain level. 1.1 Market risk

1.1.1. Currency risk Currency risk is the risk that losses will occur because of changes in foreign exchange rates. The Group's exposure to the currency risk is primarily associated with USD, EUR and JPY. Several of the Group's subsidiaries have purchases and sales denominated in USD, EUR and JPY while the Group's other principal activities are denominated and settled in RMB. As at 31 December 2014, the balance of the Group's assets and liabilities are both denominated in RMB except that the assets and liabilities set out below are denominated in USD, EUR and JPY. Currency risk arising from the assets and liabilities denominated in foreign currencies may have impact on the Group's performance.

Unit:RMB Item Closing balance Opening balance USD:

Cash and cash equivalents 136,679,796.12 16,301,182.09

Accounts receivable 244,443,093.32 217,233,806.99

Prepayments 10,223,693.60 8,185,380.41

Other receivables 219,480.39 5,021,389.71

Short-term borrowings 612,554,216.50 261,010,822.81

Accounts payable 182,832,783.61 182,049,288.84

Other payables 13,286,424.63 83,678.73

long-term borrowings 97,904,000.00 158,519,400.00

JPY:

Cash and cash equivalents 31,658.46 4,339,286.75

Prepayments 3,274,226.65 1,029,873.22

Other receivables 2,465.81 -

Short-term borrowings 60,350,729.14 -

Accounts payable 343,980.68 2,037,757.58

Other payables 322,175.80 410,257.35

EUR:

Cash and cash equivalents 495,781.08 745,978.95

Accounts receivable 29,949,276.94 1,066,695.68

Other payables 387,857.62 -

Short-term borrowings 36,238,500.00 -

Net financial assets and liability in foreign currency (578,901,195.61) (350,187,611.51)

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 66

IX. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS - continued

1. Risk management objectives and policies - continued 1.1 Market risk - continued

1.1.1. Currency risk - continued The amount of subject of the Group's forward foreign exchange contracts is USD 15,000,000.00 and the forward foreign exchange is 6.2288. Forward foreign exchange contracts are shown in note VI 20 and 46. The Group closely monitors the effects of changes in the foreign exchange rates on the Group's currency risk exposures. The sensitivity analysis on currency risk On the basis of the above assumption, where all other variables are held constant, the reasonably possible changes in the foreign exchange rate may have the following pre-tax effect on the profit or loss for the period and shareholders' equity:

Unit:RMB

Item Change in exchange rate Current year Prior year

Effect on profit Effect on shareholders'

equity Effect on profit

Effect on shareholders' equity

USD 1% increase against RMB 5,149,586.99 5,149,586.99 3,193,024.40 3,193,024.40

USD 1% decrease against RMB (5,149,586.99) (5,149,586.99) (3,193,024.40) (3,193,024.40)

Unit:RMB

Item Change in exchange rate Current year Prior year

Effect on profit Effect on shareholders'

equity Effect on profit

Effect on shareholders' equity

JPY 1% increase against RMB 577,085.34 577,085.34 29,249.60 29,249.60

JPY 1% decrease against RMB (577,085.34) (577,085.34) (29,249.60) (29,249.60)

Unit:RMB

Item Change in exchange rate Current year Prior year

Effect on profit Effect on shareholders'

equity Effect on profit

Effect on shareholders' equity

EUR 1% increase against RMB 61,950.86 61,950.86 142,210.83 142,210.83

EUR 1% decrease against RMB (61,950.86) (61,950.86) (142,210.83) (142,210.83)

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 67

IX. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS - continued

1. Risk management objectives and policies - continued 1.1 Market risk - continued 1.1.2. Interest rate risk - risk of changes in cash flows The Group's cash flow interest rate risk of financial instruments relates primarily to variable-rate bank borrowings (see Note VI.30 for details). It is the Group's policy to keep its borrowings at floating rate of interests so as to eliminate the fair value interest rate risk. The amount of subject of the Group's forward interest contracts is USD 15,000,000.00. Forward interest contracts are shown in note VI 20 and 46. The Group closely monitors the effects of changes in the interest rates on the Group's interest rate risk exposures. The sensitivity analysis on interest rate risk The sensitivity analysis on interest rate risk is based on the following assumptions: • Changes in the market interest rate may influence the interest income or expense of the variable rate financial instruments; • Changes in the fair value of derivative financial instruments and other financial assets and liabilities are calculated at the market interest rate as at the balance sheet date, using the method of discounted cash flow analysis. The Group's cash flow interest rate risk of financial instruments relates primarily to variable-rate bank borrowings. The variable-rate bank borrowings are USD16,000,000.00 (amount to RMB97,904,000.00) and RMB67,000,000.00. For variable-rate bank borrowings, presume that the liabilities unrepaid at balance sheet date are not repaid in the whole year, and if the interest rate on a loan changes by 0.25% but all other variables are held constant, the net profit and the shareholders' equity will change RMB412,260.00 this year. 1.1.3. Other price risk The Group's available-for-sale financial assets and held-for-trading financial assets are measured at fair value at each balance sheet date. Therefore, the Group is exposed to the risks of changes in the security prices. The Group minimizes the equity security price risks by holding a portfolio of equity securities with different risks. 1.2 Credit risk

As at 31 December 2014, the Group's maximum exposure to credit risk which will cause a financial loss to the Group due to failure to discharge an obligation by the counterparties and financial guarantees issued by the Group is arising from: the carrying amount of the respective recognised financial assets as stated in the consolidated balance sheet. For financial instruments measured at fair value, the carrying amount reflects the exposure to risks but not the maximum exposure to risks. The maximum exposure to risks would vary according to the future changes in fair value. In order to minimise the credit risk, the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the management of the Group considers that the Group's credit risk is significantly reduced. The Group has adopted a policy to ensure that all sales customers have good credit records. The Group has no other significant concentration of credit risk except for the top five entities with the largest balances of accounts receivable shown in note (VI) 5(4). The credit risk on liquid funds is limited because they are deposited with banks with high credit ratings.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 68

IX. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS - continued

1. Risk management objectives and policies - continued 1.3 Liquidity risk In the management of the liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Group's operations and mitigate the effects of fluctuations in cash flows. The management monitors the utilisation of bank borrowings and ensures compliance with loan covenants. The following is the maturity analysis for financial assets and financial liabilities held by the Group which is based on undiscounted remaining contractual obligations:

Unit: RMB   Within 1 year 1 to 5 years Over 5 years Total Non-derivative financial assets and liabilities: Short-term borrowings 916,417,325.93 - - 916,417,325.93Notes payable 1,966,147,389.51 - - 1,966,147,389.51Accounts payable 984,598,553.35 - - 984,598,553.35Dividends payable 2,183,696.66 - - 2,183,696.66 Other payables 136,994,233.97 - - 136,994,233.97 Long-term borrowings 126,250,568.17 72,964,073.48 - 199,214,641.65Bonds payable - 1,153,583,333.33 - 1,153,583,333.33Derivative financial assets and liabilities: Derivative financial liabilities

95,394,072.00 - - 95,394,072.00

The table is prepared based on the undiscounted cash flow of the Group's financial liabilities' earliest possible repayment date, and it takes into account the cash flow of principal and interest. If the cash flow of the interest is based on a variable-rate, the undiscounted amount is produced by the rate at the end of the reporting date, and the expiration date of the contract is based on the Group's earliest required repayment date.

2. Transfer of the financial assets

2.1 The transferred financial assets which is derecognized but the transferor continued involvement in it

During the year, the Group discounted to banks bank acceptances totaling RMB 1,847,221,821.22 (2013: RMB 3,229,259,003.83). Because the main risks and rewards, such as interest rate risk, related to these bank acceptances have transferred to bank, the Group derecognised the discounted bank acceptances prior to their maturities. According to the discount agreement, if the bank acceptances expire but are not accepted, the bank owns the right to require the Group to pay off the balance outstanding. So the Group continues involvement in the discounted bank acceptances. The discounted bank acceptances prior to their maturities amounted to RMB 119,093,559.49 (2013: RMB 675,305,547.35). During the year, the Group endorsed to third parties bank acceptances totaling RMB 2,201,065,876.88 (2013: RMB 2,715,869,956.70). Because the main risks and rewards, such as interest rate risk, related to these bank acceptances have transferred to supplier, the Group derecognised the discounted bank acceptances prior to their maturities. If the bank acceptances expire but are not accepted, the third parties owns the right to require the Group to pay off the balance outstanding. So the Group continues involvement in the endorsed bank acceptances. The discounted bank acceptances prior to their maturities amounted to RMB 598,136,203.06 (2013: RMB 313,729,733.31).

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 69

X. DISCLOSURE OF FAIR VALUE

1. Assets and liabilities measured at fair value Unit: RMB

Level 1 Level 2 Level 3 Total I. Assets measured at fair value continuously Held-for-trading financial assets

(1) Equity instruments 41,774,327.80 - - 41,774,327.80II. Liabilities measured at fair value continuously Derivative financial liabilities - 1,304,945.10 - 1,304,945.10

2. Basis of determining market price of level 1 measured at fair value continuously

Fair value of held-for-trading equity instruments referred to the Shanghai stock exchange's closing price at the end of this year. 3. The qualitative and quantitative information of the valuation technique and important parameters used to

determine level 2 measured at fair value continuously Unit: RMB

fair value on December 31, 2014 valuation technique input value

Forward foreign exchange contracts

1,134,000.00 Discounted cash

flow analysis

Forward foreign exchange The discount rate reflecting credit risk of counterparty

Forward interest rate contracts

170,945.10 Discounted cash

flow analysis

Forward interest rate The discount rate reflecting credit risk of counterparty

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 70

XI. RELATED PARTY RELATIONSHIPS AND TRANSACTIONS

1. Parent(s) of the Company Unit: RMB('000)

Name of the parent Place of incorporation Nature of business Registered capital

Proportion of the Company's ownership

interest held by the parent (%)

Proportion of the Company's voting power

held by the parent (%)

Shanghai Electric (Group) Corporation

110, Sichuan Road. Middle., Shanghai

Manufacturing 6,829,770 32.70% 32.70%

The Company's ultimate controlling party is Shanghai Electric (Group) Corporation.

2. Subsidiaries of the Group Please see Note (VIII) for details of subsidiaries of the entity.

3. Associates and joint ventures of the Group

Please see Note (VIII) for details of associates and joint ventures of the entity.

4. Other related parties of the Company

Name of other related party Relationship between other related parties and the Company

Finance Company for Shanghai Electric Subsidiary of ultimate holding company

Shanghai Crane Works Co., Ltd. Subsidiary of ultimate holding company

Shanghai Machine Tool Works Co., Ltd. Subsidiary of ultimate holding company

Shanghai Electric Wind Power Equipment Co., Ltd. Subsidiary of ultimate holding company

Shanghai Biaowu High Tensile Fasteners Company Subsidiary of ultimate holding company

Shanghai Mechanical Manufacturing Technology Research Institute Co., Ltd. Subsidiary of ultimate holding company

Shanghai Electric Lingang Heavy Machinery Co., Ltd. Subsidiary of ultimate holding company

Shanghai Heavy Machinery Plant Co., Ltd. Subsidiary of ultimate holding company

Shanghai Electrical Automation R&D Institute Ltd Inc Subsidiary of ultimate holding company

Shanghai Electric Network Technology Co., Ltd. Subsidiary of ultimate holding company

Hitachi Appliances, Inc Co-investor

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 71

XI. RELATED PARTY RELATIONSHIPS AND TRANSACTIONS - continued

5. Related party transactions (1) Sales and purchases of goods, provision and receipt of services

Purchase of goods/receipt of services

Unit:RMB

Related party Details of related party transaction

Amount for the current period

Amount for the prior period

Amount Amount

Anhui Highly Foundry Co., Ltd. Purchase 286,708,228.30 208,508,278.95

Shanghai Electrical Automation R&D Institute Ltd Inc

Purchase 22,125,476.70 20,621,083.71

Shanghai Biaowu High Tensile Fasteners Company

Purchase 3,900,573.01 3,372,266.93

Hitachi & Highly Auto component (Shanghai) Co., Ltd.

Purchase - 1,068,438.13

Hitachi Appliances, Inc Purchase 672,898.90 -

Shanghai Electric Network Technology Co., Ltd.

Purchase 460,757.19 559,349.23

Shanghai Mechanical Manufacturing Technology Research Institute Co., Ltd.

Purchase 67,030.20 211,757.49

Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

Purchase - 21,121,878.84

Total 313,934,964.30 255,463,053.28

Sales of goods/provision of services Unit: RMB

Related party Details of related party transaction

Amount for the current period

Amount for the prior period

Amount Amount Hitachi Appliances, Inc Sales 61,470,674.38 35,680,666.70Shanghai Electric Wind Power Equipment Co., Ltd.

Sales 35,681,522.96 18,756,481.68

Anhui Highly Foundry Co., Ltd. Sales 23,258,246.96 70,245,581.11Hitachi & Highly Auto component (Shanghai) Co., Ltd.

Sales 18,197,571.06 12,637,294.29

Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

Sales 163,848.73 151,945.49

Shanghai Electrical Automation R&D Institute Ltd Inc

Sales 74,358.97 9,230.77

Shanghai Crane Works Co., Ltd. Sales 68,803.40 602,222.23

Shanghai Machine Tool Works Co., Ltd. Sales 111,324.78 237,948.72

Total 139,026,351.24 138,321,370.99

(2) Entrusted loan with related parties

Unit: RMB Related party Amount of

loan Inception date

Maturity date

Amount at the end of the current period

Remarks (interest)

Anhui Highly Foundry Co., Ltd.

192,000,000.00 2013-03-11 2016-2-25 192,000,000.00 5.4%

(3) Compensation for key management personnel

Unit: RMB Amount for the current period Amount for the prior period Compensation for key management personnel

8,417,138.40 6,262,053.00

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 72

VI. RELATED PARTY RELATIONSHIPS AND TRANSACTIONS - continued

5. Related party transactions - continued

(4) Notes receivable discounted to related parties

Unit: RMB Amount for the current period Amount for the prior period Discounted bank acceptances 879,330,849.87 1,373,775,274.95Financial expense of discounted bank acceptances

9,281,012.63 12,582,441.20

Note: Shanghai Hitachi Electric Appliance Co., Ltd. has discounted bank acceptance bills with an amount of RMB684,694,846.40 to Shanghai Electric Group Finance Company, the total financial expense related to the discount was RMB5,669,906.41 (2013: discounted bank acceptance bills RMB1,290,194,218.29, total financial expense RMB11,472,195.14). Shanghai Highly Foundry Co. Ltd has discounted bank acceptance bills with an amount of RMB155,565,134.47 to Shanghai Electric Group Finance Company, the total financial expense related to the discount was RMB2,655,202.74 (2013: discounted bank acceptance bills RMB68,569,692.05, total financial expense RMB901,353.79). Shanghai Hailite Special Compressor Co. Ltd. has discounted bank acceptance bills with an amount of RMB17,480,000.00to Shanghai Electric Group Finance Company, the total financial expense related to the discount was RMB478,416.76 (2013: discounted bank acceptance bills RMB3,000,000.00, total financial expense RMB39,375.00). Highly International Trading (Shanghai) Co., Ltd. has discounted bank acceptance bills with an amount of RMB21,590,869.00 to Shanghai Electric Group Finance Company, the total financial expense related to the discount was RMB477,486.72 (2013: discounted bank acceptance bills RMB12,011,364.61, total financial expense RMB169,517.27).

(5) Notes payable issued from related parties

Unit: RMB Amount for the current period Amount for the prior period Issued notes payable 179,304,579.08 -

Note: Shanghai Hitachi Electric Appliance Co., Ltd. has issued notes payable with an amount of RMB179,304,579.08 from Shanghai Electric Group Finance Company (2013: discounted bank acceptance bills RMB0.00).

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 73

XI. RELATED PARTY RELATIONSHIPS AND TRANSACTIONS - continued

6. Accounts due from/to related parties (1) Amounts due from related parties

Unit: RMB Item Related party Closing balance Opening balance

Carrying amount

Bad debt provision

Carrying amount

Bad debt provision

Accounts receivable Shanghai Electric Wind Power Equipment Co., Ltd.

14,675,763.60 - 15,420,706.32 -

Accounts receivable Shanghai Crane Works Co., Ltd. 275,407.81 - 544,907.81 -Accounts receivable Shanghai Machine Tool Works

Co., Ltd. 231,893.58 - 261,943.58 -

Accounts receivable Shanghai Electric Lingang Heavy Machinery Co., Ltd.

41,724.47 - 41,724.47 -

Accounts receivable Shanghai Heavy Machinery Plant Co., Ltd.

29,727.00 - 29,727.00 -

Accounts receivable Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

13,359.00 - 17,144.36 -

Accounts receivable Hitachi Appliances, Inc - - 5,374,735.61 Accounts receivable Anhui Highly Foundry Co., Ltd. - - 1,582,732.35 -subtotal 15,267,875.46 - 23,273,621.50 -Other receivable Anhui Highly Foundry Co., Ltd. 1,890,058.14 - 259,200.00 -Other receivable Hitachi & Highly Auto

component (Shanghai) Co., Ltd.199,378.00 - - -

Other receivable Shanghai Highly Nakano Refrigerator Co., Ltd.

81,137.43 - 11,598.24 -

Other receivable Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

56,700.00 - - -

subtotal 2,227,273.57 - 270,798.24 -

(2) Amounts due to related parties

Unit: RMB Item Related party Closing balance Opening balance

Accounts payable Anhui Highly Foundry Co., Ltd. 20,895,788.71 53,981,036.87Accounts payable Shanghai Biaowu High Tensile Fasteners Company 979,931.98 1,298,476.17

Accounts payable Shanghai Mechanical Manufacturing Technology Research Institute Co., Ltd.

15,765.00 29,477.00

Accounts payable Hitachi Highly Automotive Systems (Shanghai) Co., Ltd. - 71,780.90Accounts payable Shanghai Electrical Automation R&D Institute Ltd Inc - 2,426.60Subtotal 21,891,485.69 55,383,197.54Notes payable Anhui Highly Foundry Co., Ltd. 41,000,000.00 3,306,100.50Notes payable Shanghai Biaowu High Tensile Fasteners Company 1,046,750.61 380,120.33Subtotal 42,046,750.61 3,686,220.83Other payable Hitachi & Highly Auto component (Shanghai) Co., Ltd. 2,014,668.23 1,610,271.36Other payable Hitachi Highly Automotive Systems (Shanghai) Co., Ltd. 252,734.11 282,773.86Other payable Hitachi Appliances, Inc 196,938.95 209,567.65Subtotal 2,464,341.29 2,102,612.87Advance from customer

Hitachi & Highly Auto component (Shanghai) Co., Ltd. 23,398,748.99 15,967,389.08

Advance from customer

Anhui Highly Foundry Co., Ltd. - 3,195,813.30

Subtotal 23,398,748.99 19,163,202.38

(3) Cash deposits at the related parties Unit: RMB

Related Party Closing balance Opening balanceFinance Company for Shanghai Electric (Group) 21,826,365.93 11,277,774.34 During 2014, the annual interest rate for the above deposits was 0.35% (2013: 0.35%).

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 74

XII. COMMITMENTS AND CONTINGENCIES

1. Significant capital commitments

(1)Capital commitments

Unit: RMB '000 Closing balance Opening balance

Capital commitments that have been entered into but have not been recognised in the financial statements:

- Commitment for acquisition and construction of long-term assets

39,897.74 12,805.37

Capital commitments approved by the Group that have not been entered into and have not been recognised in the financial statements:

- Commitment for acquisition and construction of long-term assets

127,275.20 255,785.65

Total 167,172.94 268,591.02 (2). Operating lease commitments At the balance sheet date, the Group had the following commitments in respect of non-cancellable operating leases:

Unit: RMB’000 Closing balance Opening balance Minimum lease payments under non-cancellable operating leases: 1st year subsequent to the balance sheet date 3,917.47 3,843.322nd year subsequent to the balance sheet date 4,111.96 3,943.453rd year subsequent to the balance sheet date 4,303.80 4,101.16Subsequent periods 1,107.18 5,410.98Total 13,440.41 17,298.91

2. Contingencies The Group has no significant contingencies that need to be disclosed.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 75

XIII. EVENTS AFTER THE BALANCE SHEET DATE 1. Explanations of significant events after the balance sheet date (1) The Group is planning to issue shares to all the shareholders of Hangzhou Fusheng Electrical Appliance Co., Ltd., to buy their aggregate 100% shares and to not more than 10 specific investors who meet the requirements to raise the fund for related transaction expenditure. The relevant plan has been approved by the 6th sessions of 7th Board of Directors’ meeting on March 26, 2015 and the first extraordinary shareholders meeting on April 13, 2015. On April 9, 2015, the Company received the "the approval of the non-public offering of Shanghai Highly (Group) Co., Ltd." (Hu Gou Zi Wei Chan Quan [2015] No.94) issued by State-owned Assets Supervision and Administration Commission of Shanghai Municipal Government, agreeing on the above transaction in principle. On April 22, 2015, the Company received the "the acceptance notice of China Securities Regulatory Commission administrative license application" (No. 150797) issued by China Securities Regulatory Commission ("Securities Commission"). Securities Commission decided to accept the application for administrative license of "Shanghai Highly (Group) Co., Ltd.,'s issuance of shares to buy assets". The transaction is still pending for approval of Securities Commission.

(2) On November 26, 2014, the Company held the 4th session of 7th Board of Directors’ meeting. The meeting passed the proposal related to the equity integration between Anhui Highly Foundry Co., Ltd., and Shanghai Highly Foundry Co., Ltd., which is that the Company increases its ownership in Anhui Highly Foundry Co., Ltd. by transferring its 80% ownership of Shanghai Highly Foundry Co., Ltd. to the owners of Anhui Highly Foundry Co., Ltd., and meanwhile the other owners of Shanghai Highly Foundry Co., Ltd. increase their ownership of Anhui Highly Foundry Co., Ltd. by transferring their 20% ownership. According to the equity transfer agreement, after the capital increase, the ownership the Company hold of Anhui Highly Foundry Co., Ltd. will increase from 40% to 56.38%, and then the Company will become the controlling party of Anhui Highly Foundry Co., Ltd., and Shanghai Highly Foundry Co., Ltd. will become a wholly owned subsidiary of Anhui Highly Foundry Co., Ltd.. The capital increase of Anhui Highly Foundry Co., Ltd. and the relevant procedures completed in January, 2015.

2. Profit appropriation after the balance sheet date According to the resolution of the 7th Session of the 7th Board of Directors' meeting on the distribution of profit, the Group will distribute cash dividend RMB1.00 per 10 shares based on the total shares at the end of 2014 to all shareholders. As the total share at the end of 2014 is 667,744,115, the total cash dividend distributed is RMB 66,774,411.50(including tax), the remained RMB91,303,594.19 is left in unappropriated profits. The resolution will be approved by 2014 shareholder meeting.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 76

XIV. OTHER SIGNIFICANT EVENTS

1. Segment reporting

(1) Accounting policies and confirmation basis of the segment report:

Based on the Group's internal organisation structure, management requirements and internal reporting system, the operations of the Group are classified into two operating segments. The Group's management periodically evaluates the operating results of these reporting segments to make decisions about resources to be allocated to the segments and assess their performance. Based on operating segments, the Group identified two reporting segments, which are the compressor and related refrigerating equipment segment and the trade and lease segment. These reporting segments were determined on the basis of product and service type. Major products and services delivered or provided by each of the reporting segments are: 1. The compressor and related refrigerating equipment segment mainly produces and sells refrigerating compressors; 2. The trade and lease segment mainly imports and exports all kinds of commodities and technologies and sells compressor parts, vehicle parts, steel products and air‐conditioner, etc. as well as building lease business. Segment information is disclosed in accordance with the accounting policies and measurement criteria adopted by each segment when reporting to management. The measurement criteria are consistent with the accounting and measurement criteria in the preparation of the financial statements.

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 77

XIV. OTHER SIGNIFICANT EVENTS - continued

1. Segment reporting - continued (2) Segment information

Unit:RMB

Compressor & related Refrigerating equipment Trade & Lease Inter-segment eliminations Unallocated items Total

Current year Prior year Current year Prior year Current year Prior year Current year Prior year Current year Prior year

Operating income

External revenue 6,625,856,156.21 6,432,694,735.12 182,591,015.09 188,924,819.18 - - - - 6,808,447,171.30 6,621,619,554.30

Inter-segment revenue

20,819,337.79 16,402,680.00 387,819,191.13 124,171,272.30 (408,638,528.92) (140,573,952.30) - - - -

Total segment operating income

243,174,564.07 260,102,654.12 6,172,624.00 7,304,527.99 - - (83,688,329.79) (99,446,291.51) 165,658,858.28 167,960,890.60

Income tax expenses 26,630,000.45 24,984,607.29 1,627,869.93 1,644,222.80 - - - - 28,257,870.38 26,628,830.09

Net profit 216,544,563.62 235,118,046.83 4,544,754.07 5,660,305.19 - - (83,688,329.79) (99,446,291.51) 137,400,987.90 141,332,060.51

Total segment assets 8,269,136,909.90 7,803,551,887.93 302,950,159.98 154,623,936.20 (208,785,501.73) (74,411,703.99) 287,900,228.22 241,721,994.04 8,651,395,569.37 8,125,486,114.18

Total segment liabilities

4,530,739,829.02 4,308,218,827.05 270,471,389.26 120,657,312.26 (208,785,501.73) (74,411,703.99) 943,548,361.37 705,266,227.81 5,535,974,077.92 5,059,730,663.13

Supplementary information:

Depreciation and Amortisation

373,456,136.66 363,200,973.75 116,317.10 303,876.65 - - - - 373,572,453.76 363,504,850.40

Impairment losses recognised in the current period

9,247,498.80 3,988,870.87 - - - - - - 9,247,498.80 3,988,870.87

Investment income from long-term equity investment under equity method

- - - - - - 11,097,882.40 5,824,482.77 11,097,882.40 5,824,482.77

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 78

XIV. OTHER SIGNIFICANT EVENTS - continued

1. Segment reporting - continued

(3) Segment revenue arising from external transactions by product or business Unit:RMB

(4) External revenue by geographical area of source and non-current assets by geographical location

Unit:RMB

Unit:RMB

Item Amount at the end of

period Amount at the beginning

of period Non-current assets located in local country 3,545,873,033.98 3,491,001,183.67Non-current assets located in foreign countries 187,570,902.64 140,708,740.01Sub-total 3,733,443,936.62 3,631,709,923.68

(5) Degree of reliance on major customers

Operating revenue of RMB1,958,925,922.97 (2013: RMB2,000,526,578.91) is generated from the sales to the top one customer from refrigerating compressors segment (including all the entities known to be under the control of the customer), accounting for 28.77% of the Group's operating income for 2014. (2013: 30.21%)).

Item Amount recognised in

the current period Amount recognised in the prior period

Compressor & related refrigerating equipment 6,337,907,290.92 6,196,240,801.88Trade & Lease 182,591,015.09 188,924,819.18Other operating income 287,948,865.29 236,453,933.24Total 6,808,447,171.30 6,621,619,554.30

Item Amount recognised in the current period

Amount recognised in the prior period

External revenue from local customers 5,779,735,206.35 5,541,337,606.29External revenue from foreign customers 1,028,711,964.95 1,080,281,948.01Sub-total 6,808,447,171.30 6,621,619,554.30

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 79

XV. NOTES TO KEY ITEMS IN THE COMPANY’S FINANCIAL STATEMENTS

1. Accounts receivable (1) Disclosure of accounts receivable by categories:

Unit: RMB

Category

Closing balance Opening balance Carrying amount Bad Debt Provision Carrying amount Bad Debt Provision

Amount Proportion

(%) Amount

Proportion (%)

Amount Proportion

(%) Amount

Proportion (%)

Accounts receivable that are individually significant and for which bad debt provision has been assessed individually

- - - - - - - -

Accounts receivable that are not individually significant but for which bad debt provision has been assessed individually

- - - - - - - -

Accounts receivable portfolios for which bad debt provision has been assessed using the percentage of total receivables outstanding approach

3,624,757.77 100.00 - - 57,001,238.12 100.00 - -

Total 3,624,757.77 100.00 - - 57,001,238.12 100.00 - -

The aging of accounts receivable is as follows:

Unit: RMB

Aging

Closing balance Opening balance

Amount Proportion

(%) Bad Debt Provision

Carrying amount

Amount Proportion

(%) Bad Debt Provision

Carrying amount

Within 1 year 3,624,757.77 100.00 - 3,624,757.77 57,001,238.12 100.00 - 57,001,238.12

(2) Top five entities with the largest balances of accounts receivable The total accounts receivable of top five entities with the largest balances of accounts receivable are RMB3,624,757.77 for which no provision for bad debts has been made during the current period, and the proportion of the amount to the total accounts receivables is 100%. 2. Other receivables

(1)Disclosure of other receivable by client categories is as follows:

Unit: RMB

Category

Closing balance Opening balance Carrying amount Bad Debt Provision Carrying amount Bad Debt Provision

Amount Proportion

(%) Amount

Proportion (%)

Amount Proportion

(%) Amount

Proportion (%)

Other receivables that are individually significant and for which bad debt provision has been assessed individually

11,800,000.00 54.13 - - 27,052,061.32 85.10 - -

Other receivables that are not individually significant but for which bad debt provision has been assessed individually

10,001,295.87 45.87 - - 4,737,444.50 14.90 - -

Total 21,801,295.87 100.00 - - 31,789,505.82 100.00 - - Other receivables that are individually significant and for which bad debt provision has been assessed individually:

Unit: RMB

Other receivables Closing balance

Carrying amount Bad Debt Provision Proportion (%) Company I 6,800,000.00 - -Company II 5,000,000.00 - -Total 11,800,000.00 - -

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 80

XV. NOTES TO KEY ITEMS IN THE COMPANY’S FINANCIAL STATEMENTS - continued

2. Other receivables - continued (2) Natures of other receivables Unit: RMB

Natures of other receivables Closing balance Opening balance Advances 17,043,886.19 4,212,559.50VAT refund for export 3,801,593.88 27,052,061.32Others 955,815.80 524,885.00Total 21,801,295.87 31,789,505.82

(3) Top five entities with the largest balances of other receivables The total other receivables of top five entities with the largest balances of other receivables are RMB19,439,335.37 within 1 year, and the proportion of the amount to the total other receivables is 89.17%. No provision for bad debts has been made during the current period. Most of those are VAT refund for export. 3. Long-term equity investments

Unit: RMB

Investee Opening balance

Income under equity method

Cash dividends for the period

Closing balance

Proportion of ownership interest in the investee(%)

Proportion of voting power in the

investee (%)

Provision for

impairment loss

Associates Shanghai Highly Nakano Refrigerator Co., Ltd.

74,280,628.27 2,391,514.56 (1,090,895.70) 75,581,247.13 43 43 -

Hitachi & Highly Auto component (Shanghai) Co., Ltd.

39,357,449.94 583,450.76 - 39,940,900.70 33 33 -

Anhui Highly Foundry Co., Ltd

50,707,577.48 8,680,291.24 - 59,387,868.72 40 40 -

Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

9,449,237.13 (557,374.16) - 8,891,862.97 33 33 -

Subtotal in Associates 173,794,892.82 11,097,882.40 (1,090,895.70) 183,801,879.52 -Shanghai Hitachi Electrical Appliances Co., Ltd.

1,470,419,310.68 - - 1,470,419,310.68 75 75 -

Shanghai Jinxuan Property Management Co., Ltd.

6,000,000.00 - - 6,000,000.00 100 100 -

Shanghai Highly Foundry Co., Ltd.

32,560,000.00 - - 32,560,000.00 80 80 -

Shanghai Hailite Special Compressor Co. Ltd.

28,058,225.34 - - 28,058,225.34 70 70 -

Highly International Trading (Shanghai) Co., Ltd.

16,000,000.00 - - 16,000,000.00 80 80 -

Shanghai Highly Realnen Environmental Technology Co.Ltd

30,000,000.00 - - 30,000,000.00 100 100 -

Subtotal in subsidiaries 1,583,037,536.02 - - 1,583,037,536.02 - Total 1,756,832,428.84 11,097,882.40 (1,090,895.70) 1,766,839,415.54 -

4. Construction in progress

(1)Details of construction in progress are as follows:

Unit: RMB

Items

Closing balance Opening balance

Carrying amountProvision for

impairment lossesNet carrying

amount Carrying amount

Provision for Impairment

losses Net carrying

amount No. 2555 Changyang Road, comprehensive renovation

50,470,301.70 - 50,470,301.70 5,073,188.80 - 5,073,188.80

project Compressor intelligent transformation project

4,580,595.62 - 4,580,595.62 787,008.54 - 787,008.54

Total 55,050,897.32 - 55,050,897.32 5,860,197.34 - 5,860,197.34

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 81

XV. NOTES TO KEY ITEMS IN THE COMPANY’S FINANCIAL STATEMENTS – continued

4. Construction in progress - continued (2)Changes in significant construction in progress:

Unit: RMB

Item name Budget amount Opening balance Increase in the current period

Transfer to fixed assets

Closing balancePercentage of accumulated

capitalized (%)

Construction Progress(%)

Accumulated capitalized

interest

Capitalized interest for this

period

Interest capitalization rate for this period(%)

Source of funds

No. 2555 Changyang Road, comprehensive renovation project

156,560,000.00 5,073,188.80 45,397,112.90 - 50,470,301.70 32.24 32.24 - - - Own funds

5. Other non-current assets

Unit: RMB Item Closing balance Opening balance

Entrusted loan 990,000,000.00 990,000,000.00Total 990,000,000.00 990,000,000.00

6. Operating income and Operating cost

Unit: RMB

Item Amount recognised in the current period Amount recognised in the prior period

Income Cost Income Cost Principal operation 190,642,720.97 189,058,978.54 443,712,053.66 432,721,465.26

Other operation 21,724,372.85 20,020,770.12 25,036,234.40 18,353,353.13

Total 212,367,093.82 209,079,748.66 468,748,288.06 451,074,818.39

7. Investment income

Details of investment income:

Unit: RMB Item Amount

recognised in the current period

Amount recognised in the prior period

Income from long-term equity investments under cost method 75,178,898.79 119,763,621.38Income from long-term equity investments under equity method 11,097,882.40 5,824,482.77Investment income from holding financial assets at fair value through profit or loss

4,577.00 6,370.00

Investment income from holding available-for-sale financial assets

537,205.00 848,660.00

Investment income on disposal of financial assets at fair value through profit or loss

(156,305.54) -

Investment income on disposal of available-for-sale financial assets

- 10,479,011.93

Interest income from entrusted loan 52,584,333.33 39,353,988.91Investment income from mature derivative financial instruments 235,383.00 -Total 139,481,973.98 176,276,134.99

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 82

XV. NOTES TO KEY ITEMS IN THE COMPANY’S FINANCIAL STATEMENTS - continued

8. Supplementary information to the cash flow statement Unit: RMB

Supplementary information Current period Prior period I. Reconciliation of net profit to cash flow from operating activities:

Net profit 63,834,818.70 113,604,778.61Add: Depreciation of fixed assets 259,106.03 300,664.01

Amortisation of intangible assets 582,133.22 352,733.96Depreciation of investment properties 860,215.27 860,215.31Losses on disposal of fixed assets, intangible assets and other long-term assets

8,073.84 41,462.14

Losses or gains on changes in fair values (360,061.00) 141,441.00Financial expenses 48,500,000.02 47,585,864.70Losses arising from investments (139,481,973.98) (176,276,134.99)Decrease in inventories 584,277.58 163,008.78Decrease in receivables from operating activities 69,849,402.57 165,810,054.56Decrease in payables from operating activities (107,787,666.97) (177,999,595.68)

Net cash flow from operating activities (63,151,674.72) (25,415,507.60)II. Net changes in cash and cash equivalents:

Closing balance of cash 44,465,093.01 142,941,903.49Less: Opening balance of cash 142,941,903.49 103,315,860.94Add: Closing balance of cash equivalents - -Less: Opening balance of cash equivalents - -Net increase in cash and cash equivalents (98,476,810.48) 39,626,042.55

9. Related party transactions (1) The basic information about the related parties please refer to Note (XI)

(2) Sales and purchases Purchases of goods/provision of services Unit: RMB

Related party Details of related party

transaction

Pricing and decision-making procedures of

related party transactions

Amount for the current period

Amount for the prior period

Amount Amount Shanghai Hitachi Electrical Appliances Co., Ltd. Purchase Compressor Contract price 176,869,427.43 407,896,540.39Shanghai Electrical Automation R&D Institute Ltd Inc

Purchase production equipment

Contract price 22,125,476.70 20,621,083.71

Highly International Trading (Shanghai) Co., Ltd.

Purchase auto parts Contract price 6,031,851.12 9,623,804.80

Shanghai Highly Realnen Environmental Technology Co.Ltd

Purchase Heat pump Contract price - 465,811.97

Total 205,026,755.25 438,607,240.87

Sales of goods/other assets

Unit: RMB

Related party Details of related party

transaction

Pricing and decision-making procedures of

related party transactions

Amount for the current period

Amount for the prior period

Amount Amount Shanghai Hitachi Electrical Appliances Co., Ltd. Sale raw materials Contract price 4,642,331.39 14,189,453.04

Shanghai Hitachi Electrical Appliances Co., Ltd. Sales service fee Contract price 486,746.17 -Shanghai Jinxuan Property Management Co., Ltd.

Lease Contract price 1,800,000.00 1,800,000.00

Highly International Trading (Shanghai) Co., Ltd.

Sale goods Contract price 104,268.18 -

Shanghai Hitachi Electrical Appliances Co., Ltd. Sale construction in

progress Contract price 18,331,889.62 16,837,849.30

Total 25,365,235.36 32,827,302.34

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 83

XV. NOTES TO KEY ITEMS IN THE COMPANY’S FINANCIAL STATEMENTS - continued

9. Related party transactions - continued (3) Entrusted loan with related parties

Unit: RMB

Related party Amount of

loan Inception

date Maturity

date Amount at the end of the

current period Remarks (interest)

Shanghai Hitachi Electrical Appliances Co., Ltd.

574,000,000.00 2013-03-11 2016-02-25 574,000,000.00 5.2%

Shanghai Highly Foundry Co., Ltd. 190,000,000.00 2013-03-11 2016-02-25 190,000,000.00 5.2% Shanghai Hailite Special Compressor Co. Ltd.

22,000,000.00 2013-03-11 2016-02-25 22,000,000.00 5.2%

Highly International Trading (Shanghai) Co., Ltd.

12,000,000.00 2013-03-11 2016-02-25 12,000,000.00 5.2%

Anhui Highly Foundry Co., Ltd. 192,000,000.00 2013-03-11 2016-02-25 192,000,000.00 5.4% Total 990,000,000.00 990,000,000.00

(4) Guarantees provided by related party

Unit: RMB

Guarantor Guarantee Amount Beginning Date Due Date Perform

Completed(yes/no) Shanghai Highly(Group) Co., Ltd.

Shanghai Hailite Special Compressor Co. Ltd.

3,200,000.00 2014-10-13 2015-05-08 No

Shanghai Highly(Group) Co., Ltd.

Highly International Trading (Shanghai) Co., Ltd.

15,593,808.79 2014-07-17 2015-05-15 No

Shanghai Highly(Group) Co., Ltd.

Shanghai Hitachi Electrical Appliances Co., Ltd.

246,304,579.08 2014-06-18 2015-06-25 No

(5) Accounts due from/to related parties

(a) Amounts due from related parties

Unit: RMB

Item Related party Closing balance Opening balance

Carrying amount Bad debt provision

Carrying amount Bad debt provision

Accounts receivable

Shanghai Hitachi Electrical Appliances Co., Ltd.-

-99,243.20

-

Subtotal - - 99,243.20 -

Other receivable

Shanghai Hitachi Electrical Appliances Co., Ltd.7,629,111.14

-746,200.00

-

Other receivable

Shanghai Hailite Special Compressor Co. Ltd. 6,947,683.35 -

2,886,203.94 -

Other receivable

Anhui Highly Foundry Co., Ltd. 1,890,058.14

-259,200.00 -

Other receivable

Shanghai Highly Foundry Co., Ltd. 301,888.89

-301,888.89 -

Other receivable

Hitachi & Highly Auto component (Shanghai) Co., Ltd.

199,378.00 -

- -

Other receivable

Shanghai Highly Nakano Refrigerator Co., Ltd. 81,137.43

-11,598.24 -

Other receivable

Hitachi Highly Automotive Systems (Shanghai) Co., Ltd.

56,700.00 -

- -

Other receivable

Highly International Trading (Shanghai) Co., Ltd. 19,066.67

-19,066.67 -

Subtotal

17,125,023.62 -

4,224,157.74 -

Prepayments Highly International Trading (Shanghai) Co., Ltd.

839,305.82 -

-

Subtotal 839,305.82 - - -

SHANGHAI HIGHLY (GROUP) CO., LTD. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Page 84

XV. NOTES TO KEY ITEMS IN THE COMPANY’S FINANCIAL STATEMENTS - continued

9. Related party transactions - continued

(5) Accounts due from/to related parties - continued

(b) Amounts due to related parties

Unit: RMB Item related parties Current amount Prior amount

Accounts payable Shanghai Hitachi Electrical Appliances Co., Ltd. - 60,370,682.35Accounts payable Shanghai Electrical Automation R&D Institute Ltd Inc - 2,426.60Subtotal - 60,373,108.95Other payable Hitachi & Highly Auto component (Shanghai) Co., Ltd. 1,664,582.23 1,610,271.36Other payable Hitachi Highly Automotive Systems (Shanghai) Co.,

Ltd. 252,734.11 282,773.86

Subtotal 1,917,316.34 1,893,045.22Receipts in advance Shanghai Hitachi Electrical Appliances Co., Ltd. 5,359,296.87 -Subtotal 5,359,296.87 -

XVI. APPROVAL OF FINANCIAL STATEMENTS The Company's and consolidated financial statements have been approved by the Board of the Company on 24 April 2015.

* * END OF FINANCIAL STATEMENTS * *