Final results and notice of AGM



LED INTERNATIONAL HOLDINGS LIMITED

("LED" or the "Company")

Final Results for the year ended 30 June 2012 and Annual General Meeting ("AGM")

The board of directors of LED (the "Board") is pleased to present the Company's annual report and audited financial statements for the year ended 30 June 2012 (the "Accounts").

In addition, the Board also gives notice that its AGM will be held at Room 606-608, Excellence Tower, No. 98 Fuhua 1st Road, Futian District, Shenzhen, the People's Republic of China at 5:00pm (local time) on 6 February 2013.

The Accounts and Notice of AGM are currently being sent to shareholders and will shortly be available for download from the Company's website, www.led-intl.com, in accordance with AIM Rule 20.

 **Ends**

For further information:

Notes to Editors:

LED International Holdings Limited and its subsidiaries specialize in the development, manufacture and sale of low-powered LED screens, outdoor signs, lamps, lighting and building illumination; and high-powered/medium-powered LED energy efficient indoor and outdoor lighting products.

Under EMC contracts, LED fits energy saving products to the customer's premises, including lighting and reactance filtering equipment supplied by LED, and subsequent savings made by the customer in its electricity bills are then shared between LED and the customer thereby enabling the LED to generate recurring revenue rather than one-off sales revenue.

For more information, please visit: http://www.led-intl.com 

FINANCIAL HIGHLIGHTS

CHAIRMAN'S STATEMENT

LED International Holdings Limited (AIM: LED) (the "Company") and its subsidiaries (together the "Group") specialize in the provision of energy management contract services ("EMC contracts") or energy performance contracting services under which the Group installs energy saving products in its customers' premises, including lighting and reactance filtering equipment supplied by the Group, and the subsequent savings made by customers in their electricity charges are then shared between the Group and the customers thereby enabling the Group to generate recurring revenue rather than one-off sales revenue. Historically, the Group's business has been the development, manufacture and sale of low-powered light-emitting diode ("LED") display screens and modules. The Board of Directors (the "Board") is pleased to report on the final results of the Group for the year ended 30 June 2012.

The shareholders should note that BDO Limited, replacing PKF as our independent auditor, has qualified certain balances of the consolidated financial statements for the year ended 30 June 2012.

QUALIFICATION OF INDEPENDENT AUDITOR'S REPORT

Going concern

The financial statements have been prepared on a going concern basis, the validity of which depends upon the successful execution of the measures, including to secure further profitable contracts, negotiate with certain Directors to obtain their undertakings not to demand repayments and negotiate with its banker to renew bank facilities of the Group, so that the Group will have sufficient working capital to finance its operations and/or settle or arrange its financial obligations. Due to this limitation on its scope of work, our independent auditor is unable to obtain sufficient appropriate audit evidence to assess whether the Group has the ability to settle liabilities that are due for repayment, and therefore whether it is appropriate to use the going concern basis in preparing the consolidated financial statements. There were no other satisfactory audit procedures that our independent auditor could adopt in this regard.

Should the use of the going concern basis in preparing the consolidated financial statements be determined to be inappropriate, adjustments might have to be made to reduce the value of assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities.

Deconsolidation of a subsidiary

There were no other satisfactory audit procedures that our independent auditor could adopt to satisfy itself that the control of Shenzhen China-LED Photo-Technology Limited ("Shenzhen LED") has been lost and therefore, as to the deconsolidation of Shenzhen LED, our independent auditor was unable to determine whether any adjustment might be necessary to consolidate Shenzhen LED as part of the Group as at 1 July 2010, 30 June 2011 and 30 June 2012. Any adjustment considered necessary to the consolidation of Shenzhen LED would have a consequential effect on the Group's consolidated statement of financial position as at 1 July 2010, 30 June 2011 and 30 June 2012, its loss and total comprehensive income for the years ended 30 June 2011 and 30 June 2012, and the elements making up the consolidated statement of changes in equity and consolidated statement of cash flows.

In addition, due to the limitation as explained above, our independent auditor has also been unable to carry out any audit procedures to satisfy itself as to the existence and correctness of the amounts of contingent liabilities attributable to Shenzhen LED as set out in note 39 to the consolidated financial statements.

Acquisition of a subsidiary

The management of Shenzhen Strongbase New Opto-Electronics Technology Company Limited ("Strongbase New") who were responsible for the preparation of these management accounts were not available and as such the Group's management had not been able to provide our independent auditor with all the underlying supporting information and documentary evidence which our independent auditor considered necessary for its audit purpose in relation to Strongbase New's management accounts as at the acquisition date. Accordingly, our independent auditor was unable i) to satisfy itself as to the ownership, existence and accuracy of the assets and liabilities of Strongbase New (except for the current account balances due to the Company and LED International Green Energy Corporation Limited ("LED Green")), ii) to determine whether all identifiable assets and liabilities of Strongbase New had been stated at their fair values in accordance with International Financial Reporting Standard 3 (Revised) Business Combinations and iii) to determine whether the goodwill of HK$12,794,000 (approximately £1,023,000) arising from the acquisition of Strongbase New, and its subsequent impairment loss recognized during the year of HK$12,794,000 (approximately £1,023,000), have been fairly stated. Any adjustment considered necessary to the carrying amounts of the assets and liabilities of Strongbase New so acquired as at 14 November 2011 would have a consequential effect on the Group's consolidated statement of financial position as at 30 June 2012, its loss and total comprehensive income for the year ended 30 June 2012 and the elements making up the consolidated statement of cash flows.

Assets and liabilities of Strongbase New

As explained in the paragraph above the management of Strongbase New who were responsible for the preparation of the management accounts of Strongbase New were not available during the course of our independent auditor's audit. There were no other satisfactory audit procedures that our independent auditor could adopt in order to satisfy itself as to the existence, completeness and valuation of inventories of approximately HK$6,978,000 (approximately £558,000), trade and other receivables of approximately HK$2,235,000 (approximately £178,000), and trade and other payables of approximately HK$9,058,000 (approximately £724,000) attributable to Strongbase New included in the consolidated statement of financial position of the Group as at 30 June 2012. Any adjustments which might have been found necessary in respect of these items would have a consequential effect on the Group's consolidated statement of financial position as at 30 June 2012, its loss and total comprehensive income for the year then ended and the elements making up the consolidated statement of cash flows.

In addition to the above, the scope of our independent auditor's audit on asset impairment assessment has been limited. The Group's management have assessed that the goodwill arising from the acquisition of Strongbase New has been fully impaired as at 30 June 2012. However the Group's management have not provided our independent auditor with their impairment assessment and our independent auditor was unable to review whether their assessment has been properly performed in accordance with the requirements in International Accounting Standard 36 Impairment of Assets. There were no other alternative audit procedures which our independent auditor could adopt to satisfy itself as to the appropriate amount of the impairment loss and hence the carrying amount of this goodwill after the impairment loss as set out in note 16 to the consolidated financial statements.

Sales of Strongbase New

As explained in the paragraph above the management of Strongbase New who were responsible for the preparation of the management accounts of Strongbase New were not available during the course of our independent auditor's audit. There were no other satisfactory audit procedures that our independent auditor could adopt in order to satisfy itself as to the completeness of sales of approximately HK$370,000 (approximately £29,000) attributable to Strongbase New included in the consolidated statement of comprehensive income of the Group for the year ended 30 June 2012. Any adjustments which might have been found necessary in respect of Strongbase New's sales and trade receivables would have a consequential effect on the Group's loss and total comprehensive income for the year ended 30 June 2012, consolidated statement of financial position as at 30 June 2012 and the elements making up the consolidated statement of cash flows.

Disclaimer of audit opinion

Because of the significance of the matters above, our independent auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and, accordingly, our independent auditor does not express an opinion on the consolidated financial statements of the Company, and whether the financial statements have been properly prepared in accordance with the Hong Kong Companies Ordinance.

MARKET REVIEW

LEDs present many advantages over incandescent light sources including lower energy consumption, longer lifetime, improved robustness, smaller size, and faster switching. LEDs powerful enough for indoor and outdoor lighting are relatively expensive and require more precise current and heat management than compact fluorescent lampsand other lamp sources of comparable output.

LEDs are one of the energy efficiency solutions that the Group proposes as part of its EMC offering to the market within the People's Republic of China (the "PRC"). On 2 April 2010 the State Council of the PRC (the "State Council") first approved the development of energy servicescompaniesor EMC companies (collectively, "EMCOs") supplemented by tax concessions and government subsidies and, in view of the large potential opportunity of the EMC market within the PRC, the Group is re-orientating its business from manufacturing and distribution to an EMC business model. Under this model, the Group provides energy efficiency solutions, including LED lighting, reactance filtering energy saving and other energy efficiency solutions.Specifically, the Group overhauls its customers' existing lighting and power consumption systems (which are based on traditional lighting technology and power generation equipment) with proprietary LED lighting products, reactance filtering equipment and other solutions provided by the Group. These energy efficiency products are installed in customers' premises. The Group bears all the upfront costs associated with the supply and installation of the energy efficiency solutions and these costs are then recouped by sharing in the monthly energy savings generated by the customers' use of the energy efficiency solutions over the period of the contracts. The Group receives revenue from customers on several different payment terms including on a pre-payment, monthly or quarterly basis. The Board believes that these EMC contracts are also capable of generating tradable carbon credits but as yet the Group has not earned any revenue from this.

Against the background of the Chinese government's introduction of a series of policies and regulations designed to promote, encourage and regulate energy conservation within the PRC (as stated in the 12th Five-Year Plan), the Group aims to become one of the leading energy management service providers in the PRC.

OPERATING REVIEW

Internationally, the business environment remains challenging following the global financial crisis and the sovereign debt crisis especially in the Euro-zone and the US. Domestically, our operation was also impacted by rising inflation and slowing economic growth within the PRC throughout the year under review. The Group has been transforming its operating business to providing EMC contracts in the PRC andthe EMCO is being run through Strongbase New, a specialist in LED and LED related products, accessories and appliances. During the financial year, the Group successfully revised the terms of a significant EMC contract with Hotel Novotel Shenzhen Bauhinia and Golden Gala Restaurant (collectively, "Hotel Novotel") based in Shenzhen, the PRC. This led to a 14.5% increase in the projected revenue under the contract with Hotel Novotel. After the financial year end, the Group also secured a further EMC contract with Li Xian Hua Xiang Yin Sheng Textiles Limited ("Hua Xiang Yin Sheng") and a key supply contract for reactance filtering equipment to be installed in and used by China National Petroleum Corporation in Karamay, Xinjiang Province, the PRC, a major Chinese state-owned enterprise. These contracts support the Group's strategy and mark the commencement of the successful implementation of its energy efficiency solution offering under the EMC business model.

As announced on 21 July 2011, the Company supplied a giant LED display screen (the "LED Screen") at Harbour Grand Hotel, North Point, Hong Kong (the "Harbour Grand Hotel"). Unfortunately, the Board noted media reports on 23 April 2012 that a fire at the Harbour Grand Hotel might have started at the LED Screen. The Company understands that the cause is currently under investigation and will contribute fully to this to the extent required. The LED Screen was handed over to the developer on 13 June 2011 under a warranty provided by the Company. Under this circumstance, the Group has not made any provision in relation to any potentialclaim, damage or loss for the financial year.

The slowing growth in the domestic market and rising costs in the PRC continue to pose the major challenge to the Group's continuing manufacture of LED element products during the financial year, and this was exacerbated by further wage rises and Renminbi ("RMB") appreciation. These factors have impacted on the Group's gross margin and resulted in an operating loss for the year ended 30 June 2012.

In responding to the above, the Board is continuing to gradually drive the Group to secure meaningful revenue from the growing domestic EMC market, as well as implementing measures to reduce overhead expenditure and assessingthe future of its manufacturing operations. The Board remains convinced that the Group's overall operations remain sound.

FINANCIAL REVIEW

Revenue and total comprehensive loss attributable to shareholders of the Company for the year ended 30 June 2012 amounted to HK$19,832,000 (approximately £1,586,000) (2011: HK$27,517,000) and HK$34,217,000 (approximately £2,737,000) (2011: HK$26,618,000) respectively. During the year ended 30 June 2012, the Group recorded a reduction in operating revenue by HK$7,685,000 (approximately £614,000) over 2011. The drop in operating revenue was caused mainly by the slowing growth in the domestic market in the PRC. Furthermore, the Group incurred a gross loss in the amount of HK$587,000 (approximately £46,000) forthe year as a result of reduction of operating revenue and rising manufacturing and production costs compounded by wage rises and RMB appreciation.

Operating revenue for the year generated from LED element products mainly supplied to major home appliance manufacturers in the PRC, decreased by HK$7,741,000 (approximately £619,000) from the same period in 2011. The Group strengthened its product quality controls and customer relationships with existing major customers and attempted to diversify these sources of revenue and customers during the financial year. The Group generated operating revenue from EMC contracts of HK$56,000 (approximately £4,000) during the year.

An operating gross loss for LED element products of approximately 3.1% was attainedduring the financial year, 11.3% lower than 2011, due to rising manufacturing and production costs. The operating gross margin of EMC contracts was approximately 57.1% (2011: Nil) for the year.

During the financial year under review, the Group's administrative expenses and other operating expenses were HK$15,902,000 (approximately £1,272,000) and HK$23,557,000 (approximately £1,884,000) respectively (2011: HK$19,248,000 and HK$12,348,000 respectively). Such expenses mainly comprised (i) employee benefits expense in the sum of HK$7,954,000 (approximately £636,000) (2011: HK$8,784,000); (ii) depreciation in the sum of HK$413,000 (approximately £33,000) (2011: HK$430,000); (iii) operating lease rental in the sum of HK$1,169,000 (approximately £93,000) (2011: HK$792,000); and impairment losses in the sum of HK$21,504,000 (approximately £1,720,000) (2011: HK$11,098,000).

The aggregate amount of approximately HK$7,796,000 (approximately £623,000) (2011: HK$8,471,000) relating to the employee benefits expense, depreciation and operating lease rental were included in cost of sales for the year.

The Group continued to strengthen its controls on continuing operating expenditures during the financial year.

CORPORATE RESTRUCTURING

1. Acquisition of subsidiary

On 29 July 2008, under the previous management of the Group, the Company entered into an agreement to acquire a 100 per cent equity interest in Strongbase New. The acquisition was only finally completed on 14 November 2011, further details of which have been announced previously.

Since completion of the acquisition, the Group has sought to undertake several measures to integrateStrongbase New's pre-acquisition operation and new business model including replacing its board members and expanding its businessscope to include LED lighting solutions, reactance filtering equipment etc. At the same time, the Group has also sought to changeStrongbase New's name to Green Pearl Energy Management Services (Shenzhen) Company Limited ("Green Pearl"). However, the Board has determined that it hasnot managed to achieveeffective business integration with Strongbase New. As explained in our independent auditor's report, the previous management of Strongbase New did not provide with all the underlying supporting information and documentary evidence in relation to Strongbase New's assets and liabilities. Therefore, the Board is currently considering whether the Group should continue to apply for an EMCO registration for Strongbase New, which if granted, wouldenable it to take advantage of certain favorable policies and terms for the EMCindustry within the PRC. If the business integration ofStrongbase New cannot be successfully achieved,the Board will form a new operating company to replace Strongbase New. Under such circumstance, the Group will transfer Strongbase New's business assets, including patents and intellectual property rights, inventories, EMC contracts etc. intothenew operating companyand continue to pursue its EMC business model within the PRC. 

2. EMCO

The Group has continued to develop its EMC business modelwith Mr. So Hing Chung ("Mr. So"), to develop and expand its existing business in developing LED lighting energy efficiency solutions in the PRC, further details of which have been announced previously.

During the period under review the Group has worked with Mr. So to develop this EMCOfurther and to identify a way from which the Group will be able to leverage Mr. So's knowledge, experience and contacts. This EMCO is being run through Strongbase New.

3. Partial disposal of Kepu Electronic Technology (Shenzhen) Company Limited ("Kepu")

As announced on 17 May 2012, the Company sold 40% of its shareholding in LED International (Far East) Limited (the immediate parent company of Kepu) to Mr. Weng Xiao Yong ("Weng"), further details of the terms of which were announced on 17 May 2012. The consideration for the disposal was the forfeiture by Weng of his rights of certain consideration shares. Apart from the disposal, the Group entered into a separate licensing agreement in relation to the daily operations and management of Kepu (the manufacture of LED display screens and modules) for the sum of approximately HK$732,000 (RMB600,000 or approximately £60,000) per annum, receivable in advance in two equal installments (the "Licensing Agreement"). Under the terms of the Licensing Agreement, Weng assumed all responsibility for the management and operations of Kepu and is responsible for all expenses and operating costs incurred by Kepu.

The partialdisposal of Kepu followed the Board's determination that the activities of Kepu present considerable, but different, opportunities from the Group's primary focus on its EMC business model. As currently structured, the Group does not have the resources to take full advantage of the opportunities available to Kepu. For this reason, the Group has taken the decision to dispose of part of its interest in Kepu and to license out Kepu's operations. The Board is also currently considering whether to dispose of more of the Group's interest in Kepu so as to provide resources and allow the Group to promote and focus on its EMC business model.

STRATEGIC ALLIANCE

As announced on 5 January 2012, the Company signed a letter of intent ("LOI") with Guodian East China New Energy Investment Company Limited and Shanghai Tong Sheng Opto-Electronics Technology Company Limited to form a joint venture company in Shanghai (the "Shanghai Joint Venture") to enter into the domestic EMC market. The Shanghai Joint Venture has yet to be formed since signing the LOI.

UPDATE ON WPI INTERNATIONAL (HONG KONG) LIMITED ("WPI") LEGAL PROCEEDING

As announced on 23 May 2011, LED Green, in which the Group has a 60 per cent equity interest, was served with a writ in the District Court of Hong Kong by WPI for a sum of approximately HK$860,000 (US$110,260 or approximately £68,000) and damages in relation to an alleged breach of contract for the purchase of 3,000,000 pieces of electronic components. In order to avoid further distraction of management time, the Group reached a settlement agreement with WPI on 29 March 2012.

DEBT FINANCING

1. Loan facility with Ping An Bank Company Limited

As announced on 20 February 2012, Ping An Bank Company Limited granted a new loan facility of approximately HK$3,750,000 (RMB3,000,000 or approximately £300,000) (the "New Loan") to Kepu. The New Loan was granted on identical terms to the original loan granted in the previous year, further details of which were announced on 24 February 2011 (the "Original Loan"), and used to augment Kepu's working capital position and facilitate its organic growth plans. The Original Loan was repaid in full in accordance with its terms.

The New Loan expires twelve months from drawdown and attracts interest at 10 per cent above the prevailing lending rate per annum determined by the People's Bank of China. Kepu is required to repay the New Loan by monthly installments of approximately HK$62,000 (RMB50,000 or approximately £5,000) commencing six months from drawdown with the remaining balance (plus accrued interest) payable at the end of the New Loan facility. The New Loan is secured by a charge over office property currently occupied and used by Strongbase New, but owned by the family of Mr. Thomas Li ("Mr. Li"), a former Executive Director and Chairman of the Board.

2. Loan agreement with Director

As announced on 26 April 2012, Mr. Stephen Chan ("Mr. Chan"), the Company's Chief Executive Officer, provided a loan to Green Pearl Energy Conservation Holdings Limited ("Green Pearl Holdings") in the amount of approximately HK$10,000,000 (USD1,282,000 or approximately £795,000) (the "Director Loan"). The proceeds of the Director Loan were used primarily to capitalize Strongbase New as well as for general working capital purposes. The Director Loan enabled Strongbase New to be sufficiently capitalized in order to service demand for Strongbase New's energy efficiency solutions.

The Director Loan matures in one year (or on such other date as Green Pearl Holdings and Mr. Chan agree) and bears interest at 9.0 per cent per annum. The interest payable by Green Pearl Holdings under the Director Loan will be satisfied in arrears in one year's time by the allotment and issue to Mr. Chan of 9,000,000 ordinary shares of HK$0.1 each in the Company ("Ordinary Shares") at HK$0.1 (approximately 0.8 pence) representing a premium of approximately 132 per cent over the closing mid-market price of approximately HK$0.0431 (0.345 pence) on 25 April 2012. The Director Loan is secured by a charge over Green Pearl Holdings' entire shareholding in its subsidiaries, Carten International Limited and Yanford Limited.

DIRECTORS' DEALINGS

On 2 May 2012, Mr. Li disposed of 88,483,355 Ordinary Shares at a price of HK$0.0471 (approximately 0.375p) per Ordinary Share, representing 24.16 per cent of the Company's issued share capital. Mr. Chan purchased 87,286,540 of these Ordinary Shares. Further details of this transaction were announced on 2 May 2012.

BOARD CHANGES

Mr. Stephen Weatherseed ("Mr. Weatherseed") was appointed as an additional Non-Executive Director of the Company on 1 March 2012.

The Company further revised the composition of the Board and a number of key appointments on 10 October 2012, as highlighted below.

·; Appointment of Mr. Bo Hao ("Mr. Hao") as Non-Executive Director

·; Appointment of Mr. Weatherseed as Non-Executive Chairman

·; Resignation of Mr. Li as Executive Director and Chairman

In order to provide the Company with valuable assistance and guidance as it seeks to develop its EMC business model in the PRC, the Company appointed Mr. Hao as a Non-Executive Director. The Board considers that Mr. Hao possesses significant knowledge, experience and contacts in the energy industry and the Company wishes to leverage Mr. Hao's expertise to capitalize on the market opportunities of its EMC business model in the PRC.

At the same time, Mr. Li decided to step down as Executive Director and Chairman of the Board to pursue other business opportunities. Mr. Li had been an integral part of the Board and had overseen the successful growth of the Company since its admission to the AIM Market. Mr. Weatherseed subsequently was appointed to the position of Non-Executive Chairman.

CHANGE OF REGISTERED OFFICE

As announced on 8 October 2012, the Company changed its registered office address to Unit A1, 6/F., One Capital Place, 18 Luard Road, Wan Chai, Hong Kong.

DIVIDENDS

The Directors do not recommend the payment of any dividend for the year and the Board is committed to an ongoing review of the Company's dividend policy.

CURRENT OUTLOOK AND PROSPECTS

In dealing with softening of the global economy, the Group adopts a conservative but proactive approach towards entering into the energy management market. In light of the Euro-zone debt crises and the new round of monetary policy supported by the United States Federal Reserve after the latest presidential election in the US, the Group intends to focus primarily on the growing domestic EMC market opportunities under the brand name of "Green Pearl" in the PRC. Notwithstanding the recent slowdown in China's national growth, the Board believes that the Chinese government will implement fiscal and monetary policies to stimulate economic growth in the PRC.

The energy saving and environmental protection industry ranks top among the seven strategic emerging industries outlined in the 12th Five-Year Plan. Following the gradual import and sale of incandescent lamps complemented by fiscal subsidies, this presents a tremendous market opportunity for green lighting. In view of rising national power consumption, the measures that the Chinese government has taken to reduce energy consumption and carbon emissions will lead to increasing opportunities for energy saving and carbon reduction products, services and solutions within the PRC.

In addition to the supply of LED lighting and reactance filtering equipment to the domestic PRC market, the Group is also considering the introduction of other energy saving and carbon reduction solutions.

The Board remains cautiously optimistic and confident in the Group's business, market and products as well as its long-term growth potential in the PRC. Furthermore, the Board considers that the overall operations of the Group remain sound and that the transformation of the Group into an energy management service provider in the PRC is the correct strategy. 

1. Total energy efficiency solution under the EMC business model

a. LED lighting

The Group is currently developing and expanding its existing business through the development of LED lighting solutions by offering a series of LED light bulbs, spot lights, candle lights, par lights, tubes, panels and street lights under its registered trademark of "Green Pearl". The Group is in negotiations with a number of additional potential customers to provide energy saving solutions under the EMC business model in the hotel, real estate, education and retail sectors, and also with state-owned enterprises to supply street lights on a joint basis in some major cities in the PRC.

Currently, the manufacture of the Group's LED lighting products is outsourced to an independent original equipment manufacturer ("OEM") whilst the Group still holds certain key patents and intellectual property rights on those lighting solutions and products. Quality solutions and products largely drive the success of the Group's EMC business model and in order to ensure quality lighting products, the Board is considering forming a strategic joint venture (through holding a minor equity stake) with the OEM manufacturer.

b. Reactance filtering equipment

The complete installation of reactance filtering equipment accepted by Hua Xiang Yin Sheng marked the Group's successful launch of its EMC business model in the PRC.

The reactance filtering equipment is manufactured and assembled in Taiwan. It is marketed and supplied by an exclusive distributor, which holds the relevant patents and intellectual property rights, of the product in the PRC. The Board believes that this energy saving solution is more energy efficient than LED lighting. Having launched this solution into the domestic EMC market, the Board believes that the Group has demonstrated its ability in this area and it will look to use this in order to drive further sales.

c. Total energy efficiency solution

After the successful application of the reactance filtering energy efficiency solution in our customer'spremises, the Group has integrated this with its existing LED lighting solutions to provide customers a total energy efficiency solution under the EMC business model. The complete installation of a total energy efficiency solution accepted by Hotel Novotel on 24 July 2012 marked the inaugural milestone of such a solution implemented by the Group. Following the success with Hotel Novotel, the Board has been pursuing other energy saving and environmental protection solutions in order to integrate these with the Group's existing solutions. By streamlining its business process, the Board firmly believes there are prominent opportunities for the Group to become one of the leading energy management service providers in the PRC, and this underpins the rationale for its strategic alliance, as described above.

2. Transformation into an energy management service provider

a. Gradual disposal of manufacturing plant

In past years, Kepu contributed to the Group by facilitating the manufacture and sale (mainly of LED display screens and modules) for its major customers' exports of air-conditioners, microwave ovens and refrigerators. These LED element products are lower value added but are otherwise highly competitive in the market in terms of price and quality. However, owing to the global slowdown of market demand, and accompanied by rising manufacturing costs, the Group had experienced operating losses in these product and market segments for the last three financial years. Continued gradual disposal of Kepu will allow the Group to focus on becoming an energy management service provider in the PRC.

b. EMCO registration with the National Development and Reform Commission ("NDRC")

In April 2010 the State Council announced the promotion of the development of well-established EMCOs by 2012 and the establishment of comprehensive EMC management systems to implement energy management services by 2015. Having registered with the NDRC, EMCOsenjoy tax concessions, government subsidies, bank finance and other benefits. The Group is currently preparing to apply for an EMCO registration after inheriting Strongbase New. The Board is also considering an alternative way of securing an EMCO registration for Green Pearl if business integration with Strongbase New is unsuccessful.

c. Financing arrangements

The Group's EMC business model is financed substantially by debt capital finance, mainly bank finance for the Group or equipment leasing finance for its customers. In order to launch its EMC business model more widely, the Group has been in negotiations with local Chinese banks to provide EMC finance and with domestic leasing companies to provide EMC customer finance. The Board is strongly convinced that equipment leasing finance will become one of the major sources of finance for EMC contracts in the foreseeable future. Further announcements on these arrangements will be made at the appropriate time.

APPRECIATION

Finally, on behalf of the Board, I would like to thank all of our management team and staff members for their valuable contribution and dedication to the Group. I am delighted to welcome Mr. Hao who joined as a Non-Executive Director and brings us a wide spread of knowledge and network from the energy industry in China from his prior experience. I would also like to thank Mr. Li for his invaluable contribution to the Group during his tenure. I also express my gratitude to our customers, suppliers and government authorities for their continuous support.

Stephen Weatherseed

Non-Executive Director and Chairman

Hong Kong, 28 December 2012

INDEPENDENT AUDITOR'S REPORT

TO THE SHAREHOLDERS OF LED INTERNATIONAL HOLDINGS LIMITED

(incorporated in Hong Kong with limited liability)

Report on the financial statements

We were engaged to audit the consolidated financial statements of LED International Holdings Limited (the "Company") and its subsidiaries (together the "Group") set out on pages 34 to 85, which comprise the consolidated and the company statements of financial position as at 30 June 2012, and the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Directors' responsibility for the consolidated financial statements

The directors are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards and the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on the financial statements based on our audit. This report is made solely to you, as a body, in accordance with Section 141 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Except for the inability to obtain sufficient appropriate audit evidence as explained below, we conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. Because of the matters described in the Basis for Disclaimer of Opinion paragraphs, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.

Basis for Disclaimer of Opinion

Going Concern

The Group incurred a loss of approximately HK$39,482,000 for the year ended 30 June 2012 and, as of that date, the Group had net current liabilities and net liabilities of approximately HK$32,530,000 and HK$34,622,000 respectively. As at 30 June 2012, cash and cash equivalents and pledged deposits of the Group only amounted to approximately HK$994,000 and HK$10,077,000 respectively. As at 30 June 2012, trade and other payables of approximately HK$49,530,000 (note 24) were due for repayment within the next twelve months. These conditions indicate the existence of material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern, with a potential consequence that the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

As explained in note 3(b) to the consolidated financial statements, the management have taken certain measures ("Measures") including to secure further contracts, which the management have assessed to be profitable, negotiate with certain directors to obtain their undertakings not to demand repayments of amounts due to them until there are funds available for repayment and negotiate with its banker to renew bank facilities of the Group. The directors of the Company are of the opinion that the Measures have been successfully executed after 30 June 2012. The directors have prepared a cash flow forecast for the next twelve months (the "Forecast"), incorporating the cash flow effects of the aforementioned Measures. Based on the Forecast, the directors are of the opinion that it is appropriate to prepare the consolidated financial statements on a going concern basis.

The financial statements have been prepared on a going concern basis, the validity of which depends upon the successful execution of the Measures so that the Group will have sufficient working capital to finance its operations and/or settle or arrange its financial obligations. However, the Company's directors have not provided us with a cash flow forecast in sufficient details to satisfy ourselves that the Group has sufficient resources to satisfy the demand for repayment of liabilities. Due to this limitation on our scope of work, we are unable to obtain sufficient appropriate audit evidence to assess whether the Group has the ability to settle liabilities that are due for repayment, and therefore whether it is appropriate to use the going concern basis in preparing the consolidated financial statements. There were no other satisfactory audit procedures that we could adopt in this regard.

Should the use of the going concern basis in preparing the consolidated financial statements be determined to be inappropriate, adjustments might have to be made to reduce the value of assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities.

Deconsolidation of a subsidiary

As explained in note 3(c) to the consolidated financial statements, the directors of the Company considered that the Group's control over Shenzhen China-LED Photo-Technology Limited ("Shenzhen LED") had been lost and therefore, the Company had deconsolidated Shenzhen LED as from 17 April 2010, prior to our appointment as auditors. During the course of our audit, we were unable to obtain satisfactory documentary evidence from the Group's management regarding the loss of control. The Group's management represented to us that they no longer had possession of the accounting and other records of Shenzhen LED and had lost contact with the then management of Shenzhen LED which might have provided the necessary alternative evidence. Other than the representation, the Group's management have not provided to us other evidence regarding their loss of control. There were no other satisfactory audit procedures that we could adopt to satisfy ourselves that the control of Shenzhen LED has been lost and therefore, as to the deconsolidation of Shenzhen LED, we were unable to determine whether any adjustment might be necessary to consolidate Shenzhen LED as part of the Group as at 1 July 2010, 30 June 2011 and 30 June 2012. Any adjustment considered necessary to the consolidation of Shenzhen LED would have a consequential effect on the Group's consolidated statement of financial position as at 1 July 2010, 30 June 2011 and 30 June 2012, its loss and total comprehensive income for the years ended 30 June 2011 and 30 June 2012, and the elements making up the consolidated statement of changes in equity and consolidated statement of cash flows.

In addition, due to the limitation as explained above, we have also been unable to carry out any audit procedures to satisfy ourselves as to the existence and correctness of the amounts of contingent liabilities attributable to Shenzhen LED as set out in note 39 to the consolidated financial statements.

Acquisition of a subsidiary

As set out in note 34 to the financial statements, during the year on 14 November 2011 the Group completed the acquisition of the entire equity interests in Shenzhen Strongbase New Opto-Electronics Technology Company Limited ("Strongbase New"). The fair values of the assets and liabilities of Strongbase New as at the acquisition date were based on the management accounts of Strongbase New, prepared by Strongbase New's management, as set out in note 34 to the consolidated financial statements. During the course of the audit, the management of Strongbase New who were responsible for the preparation of these management accounts were not available and as such the Group's management had not been able to provide us with all the underlying supporting information and documentary evidence which we considered necessary for our audit purpose in relation to Strongbase New's management accounts as at the acquisition date. Accordingly, we were unable i) to satisfy ourselves as to the ownership, existence and accuracy of the assets and liabilities of Strongbase New (except for the current account balances due to the Company and LED International Green Energy Corporation Limited), ii) to determine whether all identifiable assets and liabilities of Strongbase New had been stated at their fair values in accordance with International Financial Reporting Standard 3 (Revised) Business Combinations and iii) to determine whether the goodwill of HK$12,794,000 arising from the acquisition of Strongbase New, and its subsequent impairment loss recognised during the year of HK$12,794,000, have been fairly stated. Any adjustment considered necessary to the carrying amounts of the assets and liabilities of Strongbase New so acquired as at 14 November 2011 would have a consequential effect on the Group's consolidated statement of financial position as at 30 June 2012, its loss and total comprehensive income for the year ended 30 June 2012 and the elements making up the consolidated statement of cash flows.

Assets and liabilities of Strongbase New

Included in the consolidated statement of financial position of the Group as at 30 June 2012 are inventories of approximately HK$6,978,000, trade and other receivables of approximately HK$2,235,000, and trade and other payables of approximately HK$9,058,000 attributable to Strongbase New ("Strongbase New Balances"). As explained in the paragraph above the management of Strongbase New who were responsible for the preparation of the management accounts of Strongbase New were not available during the course of our audit. This imposed limitations on our audit as to the Strongbase New Balances because the current management accounts information of Strongbase New that was made available to us during the course of our audit was not in sufficient detail for the purpose of our carrying out certain audit procedures including circularization of trade receivables, circularization of trade payables and inventory pricing test. There were no other satisfactory audit procedures that we could adopt in order to satisfy ourselves as to the existence, completeness and valuation of these items. Any adjustments which might have been found necessary in respect of these items would have a consequential effect on the Group's consolidated statement of financial position as at 30 June 2012, its loss and total comprehensive income for the year then ended and the elements making up the consolidated statement of cash flows.

In addition to the above, the scope of our audit on asset impairment assessment has been limited. The Group's management have assessed that the goodwill arising from the acquisition of Strongbase New has been fully impaired as at 30 June 2012. However the Group's management have not provided us with their impairment assessment and we were unable to review whether their assessment has been properly performed in accordance with the requirements in International Accounting Standard 36 Impairment of Assets. There were no other alternative audit procedures which we could adopt to satisfy ourselves as to the appropriate amount of the impairment loss and hence the carrying amount of this goodwill after the impairment loss as set out in note 16 to the consolidated financial statements.

Sales of Strongbase New

Included in the consolidated statement of comprehensive income of the Group for the year ended 30 June 2012 is revenue of approximately HK$370,000 attributable to Strongbase New ("Strongbase New Sales"). As explained in the paragraph above the management of Strongbase New who were responsible for the preparation of the management accounts of Strongbase New were not available during the course of our audit. This imposed limitations on our audit as to the Strongbase New Sales because the current management accounts information of Strongbase New that was made available to us during the course of our audit was not in sufficient detail for the purpose of our carrying out certain audit procedures including procedures on the completeness of Strongbase New Sales. There were no other satisfactory audit procedures that we could adopt in order to satisfy ourselves as to the completeness of Strongbase New Sales. Any adjustments which might have been found necessary in respect of Strongbase New Sales and trade receivables would have a consequential effect on the Group's loss and total comprehensive income for the year ended 30 June 2012, consolidated statement of financial position as at 30 June 2012 and the elements making up the consolidated statement of cash flows.

Disclaimer of Opinion

Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraphs, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and, accordingly, we do not express an opinion on the consolidated financial statements of the Company, and whether the financial statements have been properly prepared in accordance with the Hong Kong Companies Ordinance.

Report on matter under section 141(4) and 141(6) of the Hong Kong Companies Ordinance 

In respect alone of the inability to obtain sufficient appropriate audit evidence about the matters described in the Basis for Disclaimer of Opinion paragraphs above:

- We have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and

- We were unable to determine whether proper books of account had been kept.

Hong Kong, 28 December 2012

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 2012

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2012

On behalf of the Board

STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2012

On behalf of the Board

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 2012

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

30 JUNE 2012

1. BASIS OF PREPARATION

(a) Compliance with IFRSs

These consolidated financial statements have been prepared in accordance with all applicable IFRSs, which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards ("IAS") and Interpretations issued by the IASB and the Hong Kong Companies Ordinance.

(b) Basis of measurement

The financial statements have been prepared under the historical cost convention. The measurement bases are fully described in the accounting policies below.

The Group incurred a loss of approximately HK$39,482,000 for the year ended 30 June 2012 and, as of that date, the Group had net current liabilities and a capital deficiency of approximately HK$32,530,000 and HK$34,622,000 respectively. As at 30 June 2012, cash and cash equivalents and pledged deposits of the Group amounted to approximately HK$994,000 and HK$10,077,000 respectively. As at 30 June 2012, trade and other payables of approximately HK$49,530,000 were due for repayment within the next twelve months. These conditions indicate the existence of material uncertainty which may cast doubt on the Group's ability to continue as a going concern, with a potential consequence that the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

The management have taken certain measures ("Measures") including to secure further contracts, which the management have assessed to be profitable, negotiate with certain directors to obtain their undertakings not to demand repayments of amounts due to them until there are funds available for repayment and negotiate with its banker to renew bank facilities of the Group. In the opinion of the Directors, based on the successful execution of the Measures, the Group will have sufficient cash resources to satisfy its working capital and other financing requirements for the foreseeable future. Accordingly, the Directors are of the opinion that it is appropriate to prepare the consolidated financial statements on a going concern basis.

The financial statements have been prepared on a going concern basis, the validity of which depends upon the ongoing financial support from the Company's substantial shareholder and successful execution of the Group's business plan, attainment of profitable operations and securing of new financing. These include successful securing of further EMC contracts which the management have assessed to be profitable, obtaining of undertakings from certain Directors not to demand repayments of amounts due to them until there are funds available for the repayment and the renewal of bank facilities after the reporting date.

Should the use of the going concern basis in preparing the consolidated financial statements be determined to be inappropriate, adjustments might have to be made to reduce the value of assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities.

(c) Deconsolidation of a subsidiary, Shenzhen China-LED Photo-Technology Limited ("Shenzhen LED")

The Group entered into a preliminary sale and purchase agreement dated 11 February 2009 to dispose of its entire interest in a wholly-owned subsidiary, Shenzhen LED. The assets and liabilities of Shenzhen LED had been reclassified as held for sale as at 30 June 2009 and the results of Shenzhen LED were previously presented under discontinued operation in the consolidated financial statements for the year ended 30 June 2009. However, the disposal of Shenzhen LED did not proceed. The sale and purchase agreement dated 11 February 2009 was effectively terminated on 17 April 2010.

Notwithstanding that the Group owned the entire equity interests in Shenzhen LED, Shenzhen LED was no longer regarded as a subsidiary of the Group as the Directors of the Company are of the opinion that the control of Shenzhen LED had been lost in the prior years.

The Directors of Company consider that Shenzhen LED is not under control by the Company given (i) the Company was unable to obtain any books and records from Shenzhen LED; (ii) the Company had not been provided with any up-to-date financial reports of Shenzhen LED and thus had no information as to the current financial situation of Shenzhen LED and (iii) as the current management of the Group had lost contact with the then management of Shenzhen LED. As a result, the Company expressed a lack of confidence in its ability to properly control and manage Shenzhen LED. In light of this situation, the Directors of the Company resolved to deconsolidate Shenzhen LED with the effective date on 17 April 2010.

(d) Use of estimation and judgements

It should be noted that accounting estimates and assumptions are used in preparation of the financial statements. Although these estimates and assumptions are based on management's best knowledge and judgement of current events and actions, actual results may ultimately differ from those estimates and assumptions. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 5 to the financial statements.

2. SEGMENT INFORMATION

Operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance.

Segment information reported was analysed on the basis of the types of products sold by the Group's operating division (i.e. LED display screens, LED element products and EMC contracts). The Group's reportable segments are as follows:

Operations:

- LED display screens

- LED element products

- EMC contracts

Information regarding the above segments is presented below:

Segment revenues and results

The following is an analysis of the Group's revenue and results from operations by reportable segments.

Revenue reported above represents revenue generated from external customers. There were no inter-segment sales during the years ended 30 June 2012 and 2011.

The accounting policies of the reportable segments are the same as the Group's accounting policies described in note 4(s) to the financial statements.

Segment loss represents the loss incurred by each segment without allocation of certain administration costs including directors' salaries, finance costs and income tax expense. This is the measure reported to the chief operation decision maker for the purposes of resource allocation and assessment of segment performance.

Segment assets and liabilities

For the purposes of monitoring segment performance and allocating resources between segments:

·; all assets are allocated to reportable segments other than unallocated assets including deposit for acquisition of Strongbase New, certain bank balances and amount due from a director. Goodwill is allocated to respective reportable segments as described in note 16 to the financial statements. Assets used jointly by reportable segments are allocated on the basis of the revenue earned by individual reportable segments; and

·; all liabilities are allocated to reportable segments other than current tax liabilities and unallocated liabilities including interest payable, amounts due to directors and loans from directors. Liabilities for which reportable segments are jointly liable are allocated in proportion to segment assets.

Revenue from the Group's major products and services is disclosed in "segment revenue and results".

Geographical information

The Group operates in two principal geographical areas - Hong Kong and the PRC (place of domicile) excluding Hong Kong. The Group's revenue by geographical location is determined based on the shipment destination instructed by customers. The Group's non-current assets by geographical location are determined based on physical location of the assets. The Group's revenue from operations from external customers and information about its non-current assets by geographical location are detailed below.