One of the 2006 Annual General Meeting Documents

2006 Annual Report on the Work of the Board of Directors

Dear Shareholders:

In 2006, despite adverse factors such as substantial increases in the prices of raw materials, fuels, and energy, the company focused on restructuring its product mix, vigorously pursued technological innovation and energy conservation and consumption reduction, and aggressively expanded into both domestic and international markets, thereby maintaining a steady growth trajectory. The company had planned to achieve main-business revenue of RMB 160 million in 2006, but actually recorded RMB 160.209 million, up 6.03% year on year; it had also targeted total profit of RMB 15 million, which was ultimately realized at RMB 15.674 million, representing a 9.38% increase over the same period last year. Through concerted efforts, the company successfully met most of its key operational targets.

I. Review of the Company’s Operating Performance

1. Overview of the Company’s Overall Operating Performance for the Reporting Year

(1) Principal Business

In 2006, the company achieved notable success in vigorously expanding into such areas as industrial refrigeration, deep processing of agricultural products, low-temperature logistics, and food distribution. At the same time, it undertook and successfully implemented a number of complex, time-sensitive, and high-standard turnkey projects, with key projects including Shanxi Guotou Zhonglu, Wuhan Dongxihu, Zhanjiang Guolian Aquatic Products, and large-scale seawater heat pump systems.

In 2006, the company prioritized research and development of vacuum freeze-drying equipment, centrifugal seawater heat pumps, and a new series of variable-speed screw compressor units, completing 22 new product development and technological innovation projects. Notably, the vacuum freeze-drying equipment project represents a further extension and expansion of the company’s deep-processing agricultural product value chain and is expected to become a new driver of the company’s economic growth in the coming years.

In 2006, the company fully leveraged national policies aimed at revitalizing the old industrial bases in Northeast China and encouraging independent innovation, undertaking extensive technological upgrades in projects such as complete sets of equipment for the deep processing of agricultural products, large-scale screw compressors specialized for the petrochemical industry, and high-efficiency, energy-saving heat pump units. These efforts elevated the company’s overall manufacturing capabilities to a new level.

In 2006, the company comprehensively implemented lean manufacturing across nearly 20 departments spanning technology, production, and management systems, achieving excellent results. By developing and deploying a distinctive online lean manufacturing kanban system, the company realized dynamic management of its production processes and strengthened interdepartmental collaboration.

In 2006, the company was awarded the National Mechanical Industry Quality Management Award. Its JZ2VLG 16C screw refrigeration compressor passed CE certification, securing access to developed-country markets. The “Bingshan” brand was recognized by the Ministry of Commerce as the “Most Competitive Brand of the Year” for 2006.

In 2006, Wuhan New World Refrigeration Industry Co., Ltd. leveraged the advantages brought about by enterprise reform, restructuring, and joint ventures and partnerships to simultaneously pursue relocation and upgrading as well as market sales. Through continuous, rigorous management and aggressive market expansion, the company achieved another record high in economic performance.

(2) Sino-foreign joint ventures

At the end of 2006, the total assets of the company’s Sino-foreign joint ventures amounted to RMB 457,008 million, representing a year-on-year increase of 9.86%; net assets totaled RMB 201,195 million, up 7.99% from the previous year.

In 2006, the company’s group of Sino-foreign joint ventures recorded sales revenue of RMB 615,067 million, up 15.55% year on year, of which export product sales revenue amounted to RMB 165,183 million, down 7.23% year on year. The company also earned investment income of RMB 97.63 million from its Sino-foreign joint ventures, a decrease of 5.20% year on year.

During the reporting period, four Sino-foreign joint ventures accounted for more than 10% of the company’s net profit: Dalian Sanyo Air Conditioning Co., Ltd., Dalian Sanyo Compressor Co., Ltd., Dalian Sanyo Cold Chain Co., Ltd., and Dalian Sanyo Refrigeration Co., Ltd.

During the reporting period, among the company’s Sino-foreign joint ventures, eight recorded main-business revenue exceeding RMB 100 million, with four surpassing RMB 500 million and three exceeding RMB 1 billion; five reported net profits exceeding RMB 10 million, including two with net profits over RMB 50 million.

In 2006, Dalian Sanyo Air Conditioning, already enjoying a strong foothold in the telecommunications market, secured the air-conditioning and ventilation contracts for Guangzhou Metro Lines 4 and 5, thereby effectively breaking into the Chinese metro market. Throughout the year, the company developed a total of 11 new products in response to market trends and customer needs.

In 2006, Dalian Sanyo Compressor adopted a sales model characterized by “technology first, business support” to establish a scientific and rational market layout, implement tailored sales strategies for different customer segments, and steadily increase its market share. In June 2006, the Dalian Sanyo Compressor R&D Center was officially launched, marking the beginning of the company’s transformation from a manufacturing hub into an R&D center.

In 2006, Dalian Sanyo Cold Chain expanded into new product categories while building on its existing portfolio, resulting in a steady increase in market share. The company’s market shares for supermarket refrigeration displays and commercial kitchen refrigeration cabinets both exceeded or approached 40%. During the year, the company also served as the principal drafting body for the development of six national standards, including “Refrigerated Display Cabinets.”

In 2006, Dalian Sanyo Refrigeration launched a “steam-driven lithium bromide absorption chiller–chiller,” breaking the traditional steam-driven lithium bromide chiller’s limitation to single cooling operation and ushering in a new era of heating with steam-driven units. In July 2006, the company signed a technology-transfer agreement with Kobe Steel of Japan for screw-type chillers, marking another major step forward toward becoming a comprehensive air-conditioning equipment manufacturer.

In 2006, Shenzhen Dalingwang’s main business revenue declined by 38% year on year, and its net profit fell by approximately 80% year on year. Shenzhen Dalingwang is a joint venture in which the company holds a 25% equity stake; the venture manufactures refrigerated truck air-conditioning units and bus air-conditioning systems. Rising raw-material prices, intensifying market competition, and downward pressure on product prices all contributed to a substantial decline in the company’s key operating metrics.

2. Analysis of the Company’s Principal Business

(1) Product and Geographical Segments of the Principal Business

All of the company’s main business revenue is derived from refrigeration and air-conditioning products.

The company’s products are manufactured in Dalian and Wuhan and are bestsellers across the country. Overseas sales account for approximately 8% of the company’s main business revenue during the same period.

(2) Information on Major Suppliers and Major Customers

The company’s total procurement from its top five suppliers amounted to RMB 346.07 million, accounting for 28.51% of the annual total procurement.

The combined sales to the company’s top five customers totaled RMB 195.95 million, accounting for 12.23% of the company’s total sales.

3. Company Financial Condition and Operating Results

(1) Asset Composition (Unit: RMB 10,000)

Explanation:

① Construction-in-progress has changed significantly year on year, primarily due to the increase in relocation and renovation projects undertaken by subsidiaries.

② Short-term borrowings changed significantly year on year, primarily due to the subsidiary’s repayment of bank loans.

(2) Expenses and Income Tax Situation (Unit: RMB 10,000)

Explanation:

① Operating expenses changed significantly year on year, primarily due to increases in payroll and related employer contributions, transportation costs, and agency fees.

② Financial expenses changed significantly year on year, primarily due to an increase in interest income.

③ The year-on-year change in income tax was substantial, primarily due to the 2006 deduction of technology development expenses from taxable income, a reduction in provisions for asset impairment, and a decrease in additional tax liabilities arising from the recovery of investment income.

(3) Composition of Cash Flows (Unit: RMB 10,000)

Explanation:

① The net cash flow from operating activities changed significantly year over year, primarily because the company received relocation compensation in 2005 but did not record such a cash inflow in 2006.

② The net cash flow from investing activities changed significantly year on year, primarily due to increased fixed asset investments resulting from the company’s relocation and renovation project, as well as the establishment of a new joint venture.

③ The net cash flow from financing activities changed significantly year over year, primarily due to a decrease in the amount of bank loans repaid.

4. Operating Conditions and Performance of Major Holding Companies and Equity-Participated Companies

(1) Major Holding Companies

① Dalian Bingshan Group Refrigeration and Air-Conditioning Installation Company

Our company holds 100% equity in this entity. The company’s registered capital is RMB 20.04 million, and its principal business is the installation and commissioning of complete sets of refrigeration equipment. In 2006, its total assets amounted to RMB 66.83 million, with sales revenue reaching RMB 129.79 million and total profit of RMB 550,000.

② Dalian Bingshan Group Sales Co., Ltd.

Our company holds a 90% equity interest in the entity. The company’s registered capital is RMB 18 million, and its primary business is the sales of products manufactured by subsidiaries of the Dalian BingShan Group. In 2006, its total assets amounted to RMB 27.06 million, with sales revenue reaching RMB 67.37 million and total profit totaling RMB 80,000.

③ Dalian Bingshan Air-Conditioning Equipment Co., Ltd.

Our company holds a 70% equity stake in the entity. The company has a registered capital of JPY 700 million and primarily engages in the manufacturing and sales of air-conditioning terminal equipment, including fan coil units and air handling units. In 2006, its total assets amounted to JPY 135.36 million, with sales revenue reaching JPY 126.08 million and total profit totaling JPY 5.43 million.

④ Dalian Bingshan Lingse Quick-Freezing Equipment Co., Ltd.

Our company holds a 70% equity stake in the entity. The company’s registered capital is USD 1 million, and its primary business is the manufacture of various quick-freezing equipment. In 2006, its total assets amounted to RMB 17.75 million, with sales revenue reaching RMB 21.53 million and total profit recording a loss of RMB 550,000.

⑤ Dalian Bingshan Metal Processing Co., Ltd.

The Company holds a 64.3% equity interest in this entity. The entity’s registered capital is USD 2.35 million, and it primarily engages in the production of sheet metal and stamped parts as supporting operations for established joint ventures and for the Company itself. In 2006, its total assets amounted to RMB 37.97 million, with sales revenue reaching RMB 38.50 million and total profit recording a loss of RMB 230,000.

⑥ Dalian Bingshan JiaDe Automation Co., Ltd.

Our company holds a 60% equity stake in the entity. The company’s registered capital is GBP 210,000, and its primary business is automatic control for the refrigeration and related industries. In 2006, its total assets amounted to RMB 7.51 million, with sales revenue of RMB 13.58 million and total profit of RMB 1.67 million.

⑦ Wuhan New World Refrigeration Industry Co., Ltd.

Our company holds a 51% equity stake in the entity. The company’s registered capital is RMB 30 million, and it primarily manufactures and sells screw-type refrigeration compressors. In 2006, its total assets amounted to RMB 223.22 million, with sales revenue reaching RMB 237.41 million and total profit totaling RMB 35.52 million.

(2) Major Equity-Linked Companies

II. Company Investment Situation

During the reporting period, the Company invested its own funds to establish Dalian Sanyo High-Efficiency Refrigeration Systems Co., Ltd. The company has a registered capital of RMB 80 million, with the Company contributing RMB 20 million and holding a 25% equity stake. The new entity consolidates the heat-exchanger manufacturing divisions of Dalian Sanyo Cold Chain, Dalian Sanyo Air-Conditioning Equipment, and Dalian Sanyo Refrigeration, and will achieve unified procurement and production to manufacture high-efficiency heat exchangers.

III. Daily Operations of the Board of Directors

1. Meetings of the Board of Directors and Resolutions Adopted During the Reporting Period

(1) The 7th Meeting of the 4th Board of Directors

The Fourth Board of Directors of the Company convened its seventh meeting on April 25, 2006, in the Company’s Sixth-Floor Conference Room. The announcement of the resolutions adopted at this board meeting was published in the China Securities Journal and the Wen Wei Po on April 27, 2006.

(2) Eighth Meeting of the Fourth Board of Directors

On August 17, 2006, the Fourth Board of Directors of the Company convened its eighth meeting in the Company’s Sixth-Floor Conference Room. The announcement of the resolutions passed at this board meeting was published in the China Securities Journal and the Wenhui Daily on August 21, 2006.

(3) Ninth Meeting of the Fourth Board of Directors

On October 24, 2006, the Fourth Board of Directors of the Company convened its ninth meeting in the Company’s Sixth-Floor Conference Room. The announcement of the resolutions adopted at this board meeting was published in the China Securities Journal and the Wenhui Daily on October 26, 2006.

2. Implementation of Resolutions Adopted by the Shareholders’ Meeting by the Board of Directors

The Company’s Board of Directors has effectively implemented all resolutions passed at the 2005 Annual General Meeting.

The Company’s 2005 dividend distribution plan was fully implemented by the Board of Directors in July 2006.

IV. 2007 Business Plan

2007 Corporate Business Plan Targets:

Sales revenue: RMB 160,000 million;

Total profit: RMB 166 million.

1. Continue to vigorously develop both domestic and international markets to ensure the achievement of the annual business objectives. Seize the favorable opportunities presented by agricultural industrialization and the construction of a new countryside, and vigorously expand the production of equipment for freeze-drying, quick freezing, food freezing and refrigeration, and advanced food processing. At the same time, make strong efforts to tap into market segments for large-scale water-source heat pumps, ice-storage cooling systems, and marine air-conditioning units.

2. Taking technological innovation as the central focus, accelerate product structure adjustment, technological upgrading, and joint ventures and cooperation. Give priority to the relocation and renovation of companies such as Wuxin Refrigeration, Bingshan Lingshi, and Bingshan Metal Processing.

3. With a focus on enhancing the quality and efficiency of the enterprise’s economic operations, comprehensively strengthen management innovation efforts. Continue to fully and thoroughly promote “lean manufacturing” throughout the company.

4. Ensure the company’s sound and rapid development by leveraging the construction of the “Harmonious Iceberg.”

Please review the above report.

May 22, 2007