Semiconductor Manufacturing International Corporation

Date: January 18, 2018

By:

/s/ Dr. Gao Yonggang

Name:

Dr. Gao Yonggang

Title:

Executive Director, Chief Financial Officer and Joint Company Secretary

Page

Definitions

1

Letter from the Board

5

Letter from the Independent  Board Committee

35

Letter  from Messis Capital

Appendix I    —    General Information

Notice of Extraordinary  General Meeting

‘‘2016 Framework Agreement’’

the framework agreement entered into between the Company and SMNC on 30 September 2016 in relation to the supply of goods, rendering of or receiving services, leasing of assets, acquisition and disposal of equipment and provision of technical authorisation or licensing and subject to the terms and conditions provided therein

‘‘Annual Caps’’

the proposed annual caps for the period ending 31

December, 2018, 2019 and 2020 in relation to each type of Continuing Connected Transaction which are more fully set out in the section headed ‘‘The Annual Caps and Basis of Determination — Annual Caps’’ in this circular

‘‘Beijing Semi Fund’’

北京集成電路製造和裝備股權投資中心（有限合夥）  (Beijing Semiconductor Manufacturing and Equipment Equity Investment Center (Limited Partnership)*), a company established under the laws of the PRC

‘‘Board’’

the board of Directors

‘‘Capital Contribution’’

the US$636 million cash contribution by China IC Fund

into the registered capital of SMNC and the corresponding deemed disposal of equity interest of the Company and  SMIC Beijing in SMNC pursuant to an amendment joint venture agreement entered in between the Company, SMIC Beijing, China IC Fund and other third parties on 10 May 2016

‘‘China IC Fund’’

國家集成電路產業投資基金股份有限公司 (China Integrated

Circuit Industry Investment Fund Co., Ltd.*), a company

established under the laws of the PRC

‘‘Company’’

Semiconductor  Manufacturing  International  Corporation

(中芯國際集成電路製造有限公司*), a company incorporated in the Cayman Islands with limited liability, the shares of

which are listed on the main board of the Stock Exchange  and the American depositary shares of which are listed on  the New York Stock Exchange, Inc.

‘‘connected person(s)’’

has the same meaning as ascribed to it under the Listing Rules

‘‘Continuing Connected Transactions’’

the non-exempt continuing transactions contemplated under the Framework Agreement, which include Type  I  CCT, Type II CCT, Type III CCT, Type IV  CCT, Type V  CCT  and Type VI CCT

‘‘Director(s)’’

the director(s) of the Company

‘‘E-Town Capital’’

北京亦莊國際投資發展有限公司 (Beijing E-Town

International   Investment   &   Development   Co.,   Ltd.*), a

limited liability company established under the laws of the PRC

‘‘EGM’’

the extraordinary general meeting of the Company proposed to be held to approve, among other things, the Framework Agreement and the Specific Non-Exempt CCT

‘‘Framework Agreement’’

the framework agreement entered into between the

Company and SMNC on 6 December 2017 in relation to Continuing Connected Transactions

‘‘Group’’

the Company and its subsidiaries

‘‘Group A’’

the Company and/or its subsidiaries (other than SMNC and its subsidiaries)

‘‘Group B’’

SMNC and/or its subsidiaries

‘‘HK$’’

Hong Kong dollars, the lawful currency of Hong Kong

‘‘Hong Kong’’

Hong Kong Special Administrative Region of the PRC

‘‘IDIMC’’

北京工業發展投資管理有限公司 (Beijing Industrial Developing Investment Management Co., Ltd.*), a company established under the laws of the PRC

‘‘Independent Board Committee’’

the independent committee of the Board that consists of all independent non-executive Directors who have no direct or indirect interest in the Framework Agreement, other than, where applicable, being a Shareholder

‘‘Independent Financial Adviser’’or ‘‘Messis Capital’’

Messis Capital Limited, a licensed corporation to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and being the independent financial adviser appointed by the Company to advise the Independent Board Committee and the Independent Shareholders in respect of the Framework Agreement, the Continuing Connected Transactions  and  their Annual Caps

‘‘Independent Shareholders’’

the Shareholders who are not required under the Listing

Rules to abstain from voting at the EGM to approve the Framework Agreement and the Specific Non-Exempt CCT and their Annual Caps, which shall include Shareholders other than Xinxin (Hongkong) Capital Co., Limited and  other associates of China IC Fund (as defined in the Listing Rules) in relation to the Framework Agreement

‘‘Latest Practicable Date’’

30 November 2017, being the latest practicable date prior to

the printing of this circular for ascertaining certain information contained herein

‘‘Listing Rules’’

the Rules Governing the Listing of Securities on The Stock

Exchange of Hong Kong Limited

‘‘Ordinary Share(s)’’

the ordinary Share(s) of US$0.004 each in the share capital

of  the Company

‘‘PRC’’

the People’s Republic of China, but for the purposes of this circular only, excludes Hong Kong, Macau and Taiwan

‘‘SFO’’

the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

‘‘Shareholders’’

holder(s) of issued Shares

‘‘Shares’’

shares of all classes in the capital of the Company (including but not limited to Ordinary Shares  and  preferred  shares)  and warrants and other securities which carry a right to subscribe for or purchase shares of the Company

‘‘SMIC Beijing’’

中芯國際集成電路製造（北京）有限公司 (Semiconductor

Manufacturing  International  (Beijing)  Corporation*), a

wholly foreign-owned enterprise established under the laws of the PRC and a wholly-owned subsidiary of the Company

‘‘SMIC Holdings’’

中芯國際控股有限公司  (SMIC  Holdings  Corporation*),  a

limited liability company established under the laws of the

PRC and a wholly-owned subsidiary of the Company;

‘‘SMNC’’

中芯北方集成電路製造（北京）有限公司 (Semiconductor Manufacturing North China (Beijing) Corporation*), a

company established under the  laws  of  the  PRC  pursuant to the joint venture agreement dated 3 June 2013

‘‘Specific Non-Exempt CCT’’

Type I CCT, Type II CCT, Type III CCT, Type IV CCT and

Type  VI CCT

‘‘Stock Exchange’’

The Stock Exchange of Hong Kong Limited

‘‘Type I CCT’’

the transactions contemplated under the Framework

Agreement in relation to purchase and sale of goods

‘‘Type II CCT’’

the transactions contemplated under the Framework

Agreement in relation to rendering of or receiving services

‘‘Type III CCT’’

the transactions contemplated under the Framework

Agreement in relation to leasing of assets

‘‘Type IV CCT’’

the transactions contemplated under the Framework

Agreement in relation to transfer of assets

‘‘Type V CCT’’

the transactions contemplated under the Framework

Agreement in relation to provision of technical authorisation or licensing

‘‘Type VI CCT’’

the transactions contemplated under the Framework

Agreement in relation to provision of guarantee

‘‘U.S.’’ or ‘‘United States’’

the United States of America, its territories, its possessions

and all areas subject to its jurisdiction

‘‘US$’’

United States dollar, the lawful currency of  the  United States of America

‘‘Xun Xin’’

巽鑫（上海）投資有限公司(Xun Xin (Shanghai) Investment Co. Ltd.*), a limited liability company established under the

laws of the PRC and a wholly-owned subsidiary of China IC Fund

‘‘ZDG’’

中關村發展集團股份有限公司 (Zhongguancun Development Group*), a company incorporated in the PRC

‘‘%’’

per cent.

Executive Directors:

Zhou Zixue (Chairman)

Zhao HaiJun (Co-Chief  Executive  Officer) Liang Mong Song (Co-Chief Executive Officer) Gao Yonggang (Chief Financial Officer and

Joint Company Secretary)

Registered Office:

PO Box 309, Ugland House Grand Cayman, KY1-1104 Cayman Islands

Non-executive Directors:

Tzu-Yin Chiu (Vice Chairman)

Chen Shanzhi Zhou Jie

Ren Kai Lu Jun

Tong Guohua

Principal Place of Business: 18 Zhangjiang Road PuDong New Area Shanghai 201203

People’s Republic of China

Independent non-executive Directors:

Lip-Bu Tan

William Tudor Brown Carman I-Hua Chang Shang-yi  Chiang Jason Jingsheng Cong

*

For identification purpose only

Execution date:

6 December 2017

Effective period:

Commencing on 1 January 2018 and ending on 31 December

2020. Two months before the expiry date of the Framework Agreement, the parties will consider whether to renew the Framework Agreement.

Parties:

(i)   Group A; and

(ii)   Group B

1.

Purchase and sale of spare parts, raw materials, photomasks  and  finished  products: Group A and Group B will sell spare parts and raw materials to each  other to efficiently utilise each other’s resources from time to time. Group A will sell photomasks to Group B. Group B will sell finished products to Group  A,  which may resell such finished products to its clients directly or after reprocessing;

2.

Rendering of or receiving services including, without limitation: (a)  processing  and testing service; (b) sales service; (c) overseas market promotion and customer service; (d) procurement service; (e) research, development and experiment  support service; (f) comprehensive administration, logistics, production management, IT and other service; and (g) water, electricity, gas  and  heat provision service. Group A and Group B may both provide processing and testing service to the other, although it is expected that Group A would primarily be the service provider and that Group B  would primarily be  the service recipient. For  the other aforementioned categories of services, Group A would be the service provider and Group B would be the service recipient;

3.

Leasing of assets such as plant, office premises and equipment between Group A and Group B. For the leasing of equipment, each party can either be the lessor or  the lessee depending on the business need at the relevant time, whereas for the leasing of plant and office premises, Group A will be the lessor and Group B will  be the lessee;

4.

Transfer of assets: Group A and Group B both engage in the manufacturing of wafers. For certain processes in wafer manufacturing, Group A and Group B can  use the same equipment for production. Where required, each party may acquire equipment from the other party or dispose of equipment  to  the  other  party in order to meet production needs and optimise production efficiency;

5.

Provision of technical authorisation or licensing by Group A to Group B for use of its technologies and manufacturing system in relation to 40–28 nanometer, as well as the sharing of research and development costs in relation to 28-nanometer technologies based on their respective plans on future production capacity; and

6.

Provision of guarantee: Group A will provide guarantee for Group B’s financing activities, including but not limited to bank loans, financial lease and operating leases.

(1)

the price prescribed or  approved by state or  local price control department (if  any);

(2)

a reasonable price in accordance with the industry guided price (if any);

(3)

the comparable local market price, which shall be determined after arm’s length negotiation between both parties with reference to (a) the market price charged by independent third parties for comparable product or services at the same time and  in the same region; and (b) the lowest quotation that the purchaser can obtain by way of public tender;

(4)

where there is no  comparable local market price, the price based on the principle  of cost plus a fair and reasonable profit rate, being the aggregate sum of (a) the actual reasonable cost; and (b) a fair and reasonable profit rate; and

(5)

where none of the above general pricing principles (1) to (4) are applicable, the price determined by other reasonable means as agreed upon by both parties on the condition that the relevant costs are identifiable and are allocated to each party involved on a fair and equitable basis.

I.

Purchase and sale of goods

II.

Rendering of or receiving services

1.

Entry into service contract must be in accordance with the Group’s regulation rules for intra-group related party transactions and the Framework Agreement;

2.

The main department of the service provider will obtain data about the services provided, calculate the amount of charges in accordance with the consideration provisions stipulated in the relevant service contract taking into  account of  the cost;

3.

The service provider will then request payment from the service recipient through the Group’s system; and

4.

The service recipient will, upon verification of the  relevant  information, request for payment to be made through the Group’s system.

Type of transaction

Pricing policy

1.     Processing  and testing service

Group A as the service provider (general principle

(3) above): The SMIC and SMNC Wafer Cost Valuation System can automatically fetch data from the production system and get the basic information of production steps for the services (including information about the type of machine, the process and  the  standard  cost). The manufacturing department of Group B will check such data and the calculation basis  together with the person in  charge  of  production costs, and send the service requests  to Group A after the review by related party transaction office from time to time. In accordance with the pricing policies under the Framework Agreement (general  pricing principle (3) above), officers of different levels of manufacturing department and factories of Group A will review the service requests and calculate the charges with reference to market price and charges to independent third party customers (bearing in mind the actual cost and profit margin involved).

Group A as the service recipient (general principle (3) above): The SMIC and SMNC Wafer Cost Valuation  System  can automatically fetch data from the production system and get the basic information of production steps for the services (including information about the type of machine, the process and the standard cost). The manufacturing department of Group A  will check such data and the calculation basis  together with the person in  charge  of  production costs, and send the service requests  to Group B. In accordance with the pricing policies under the Framework Agreement (general pricing principle (3) above), officers of different levels of manufacturing  department  and factories of Group B will review the service requests and calculate the charges with reference to market price and charges  to independent  third party customers (bearing in mind  the  actual cost and profit margin involved).

2.     Sales Service provided by Group A to Group B

The sales department of Group A will  provide the nature of the relevant sale service and the costs such as  labour costs and office expenses.  In accordance with the pricing policy of the Framework Agreement (general  pricing principle (4) above), the related  party  transaction team of Group A will calculate the charges based on allocation of the sales expenses according to the revenue from the sales plus a reasonable profit rate of 8%. After the review of finance and accounting department of Group A, Group A will then request for payment from Group B through the Group’s system. The business administration or other department(s) designated by the management of Group B will check the data together with the  sales  department of  Group  A  and  submit  the relevant payment requests to the related party transaction office for review and approval for payment. The officers of different levels of aforementioned departments of Group B  will also further check when transacting  the  payment.

3.   Overseas market promotion and customer service provided by Group A to Group B

The overseas offices of Group A will provide the nature of the relevant sales service and the costs such as labour costs and office expenses. In accordance with the pricing policy of the Framework Agreement (general  pricing principle (4) above), the related  party  transaction team of Group A will calculate the charges based on allocation of the sales expenses according to the revenue from the sales plus a reasonable profit rate of  8%. After the review  by finance and accounting  department,  Group  A will then request for payment from Group B through the Group’s system. The business administration or other  department  designated by the management of Group B will check the data together with the relevant department(s) of Group A which provide overseas market promotion and customer  service  and  submit  the relevant payment requests to the related  party transaction office for review and approval for payment. The officers of different levels of the aforementioned departments  of Group  B will also further check when transacting the payment.

4.    Procurement service provided by Group A to Group B

The procurement service department  of  Group A will provide the nature of the relevant procurement service and the costs  such  as labour costs  and  office  expenses.  In accordance with the pricing policy of the Framework Agreement (general  pricing principle (4) above), the related  party  transaction team of Group A will calculate the charges based on allocation of procurement department expenses according to working  hours  or workload  plus  a  reasonable  profit rate of 5%. After the review by finance and accounting department, Group A will then request for payment  from  Group  B  through  the Group’s system. The  procurement department or other department designated  by the management of Group B will check the data together with the procurement department of Group A and submit the relevant payment requests to the related party transaction  office for review and approval for payment.  The officers of different levels  of the aforementioned department of Group B  will  also further check when transacting  the  payment.

5.     Research, development and experiment support service provided by Group A to Group B

The research and development department of Group A will provide the nature of the relevant service and the costs such as labour costs and office expenses. In accordance with the pricing policies under the Framework Agreement (general pricing principle (3) above), Group A will calculate the charges with reference to market price. The reliability laboratory  and/or the product department of Group B will check  the data together with the reliability laboratory and/or product department of Group A and submit the relevant payment requests to the related party transaction office for review and approval for payment. The officers of different levels of the aforementioned department of Group B will also further check  when transacting the payment  request.  Market  price is assessed using quotes obtained from two or more independent third party providers for similar services. Group A may subcontract certain orders to comparable independent third party providers from time to time as  needed.  The pricing of services provided by Group A to Group B is based on the quotes obtained from such third party providers. Group A will then request for payment from Group B through the Group’s system.

6.      Comprehensive administration, logistics, production management and IT, and other service provided by the Group A to Group B

The human resources department of Group  A will calculate the working hours spent on providing services to Group B by the various departments in Group A. In accordance with the pricing policies under the Framework  Agreement (general pricing principle  (4)  above), the related party transaction team of Group A will calculate the charges based on allocation of labour costs and relevant resources consumption according to the proportion of working hours or workload plus a reasonable profit rate of 5%. After the review by finance  and accounting department, Group A will then request for payment from Group B through the Group’s system. Group A may also refer to market prices assessed by obtaining quotes from independent third party providers in respect of similar services. The general affairs office, logistics function, manufacturing department  and other relevant department(s) (where applicable) of Group B will check the data together with the relevant department(s)  of Group A and submit the relevant payment requests to the related party transaction  office for review and approval for payment.  The officers of different levels  of the aforementioned department(s) of Group B will also further check when transacting  the  payment.

7.     Water, electricity, gas and heat provision service provided by Group A to Group B

The facilities department of Group A will record the monthly consumption of water, electricity, gas and heat. In accordance with the pricing policies under the Framework Agreement (general pricing principle (1) above), Group A will calculate the charges based on the price prescribed by Beijing Municipal Commission of Development and Reform published on its website from time to time or with reference to market price. Upon the review and approval by the officer(s) of the relevant business  department, Group A will then request for payment from Group B through the Group’s system. Group A may also use market prices assessed by obtaining at least two quotes from independent third party providers in respect of similar services. The request for payment shall  be reviewed and approved by the officers of the relevant departments of Group A. The facilities department of Group B will further check  the unit price of various types of service and the basis of consumption amount in the payment requests and upon the review by the department officer(s), submit to the  related  party transaction office for review and approval. The officers of different levels of the facilities department of Group B  will  also  need  to further check when transacting the payment.

III.

Leasing of assets

Type of transaction

Pricing policy

1.     Leasing of Group A’s plant and office premises by Group B

The plant and office premises lease agreement entered into between Group A and Group B for leasing of plant and office premises from Group A to Group B is renewable annually. The agreement was negotiated  on arm’s  length basis. When determining the price Group A  made references to the prevailing prices of comparable plants and offices in the  same district during the same  period  (general principle (3) above). As the plant has a built-in clean room, a unique feature of a wafer fab, an additional reasonable charge of 8% of the rental price is charged to Group B to ensure the rental  is fair and reasonable and not less favourable to Group A.

2.     Mutual  leasing of equipment

With respect to mutual leasing of equipment,

the rental charge will be determined by reference to the nature of lease, current market conditions and will be on comparable terms with the quotes from independent third parties providing  services of a similar nature  and  comparable scale (general principle (3) above). In terms of leasing of equipment by Group B to Group A, the finance and  accounting  department  of Group A  will  seek  quotation  from  two  or more comparable independent third parties to ensure the rental charged by Group B is not less favourable than those submitted by the independent third parties. In  terms  of  leasing  of equipment by Group A to Group B, the finance and accounting department of Group B will seek quotation from two or more comparable independent third parties to ensure the rental charged to Group B is not less favourable than those submitted by the independent third parties.

IV.

Transfer of assets

Type of transaction

Pricing policy

Mutual acquisition and disposal of equipment

Group A as seller of equipment (general principle

(3) above): In respect of selling equipment, the personnel in the SPM of Group  A  are responsible for setting the price of equipment. Based on the Group’s ‘‘Intercompany  Transfer of Goods’’ policy, the transfer price  for  material, parts, and equipment must  be  based  on market price which is determined by comparing  against  independent  third  parties for comparable product at  the  same  time  and  in the same region. As the prices of second-hand tools and equipment in the semiconductor industry vary depending on timing and market supply status, Group A also engages two  to  three independent brokers, as appropriate depending on the circumstances, to provide quotation based on the  specific  configurations of a tool or equipment, the selling price is based on the prices provided by these brokers and is  not less favourable to Group A.

Group A as buyer of equipment (general principle

(3) above): In respect of buying equipment, the personnel in the SPM of Group A carry out the same procedure as above based on the same policy to ensure purchasing prices are not less favourable to Group A.

V.

Provision of technical authorisation or licensing

Type of transaction

Pricing policy

1.     Provision of technical authorization or licensing by Group A to Group B

The fee for any technical authorisation or licensing will be based on comparable local market price (general principle (3) above). Group B will engage a qualified valuer (as agreed by Group A and Group B) to perform a fair value assessment of the fees relating to the Group A’s provision of technical authorisation or licensing to Group B.

2.     Sharing of research and development costs in relation to 28-nanometer technologies

The costs are agreed upon by both parties on the condition that the relevant costs are identifiable and are allocated to each party involved  on  a fair and equitable basis (general principle (5) above). The Company and SMNC entered into a technical authorisation and licensing agreement on 22 December 2014, which specifies that the research and development costs during each calendar year will be proportionally shared by  the parties based on the  percentage  calculated by comparing the number of 28-nanometer nodes that each of  them  plans  to produce during the relevant calendar year against  the total number of 28-nanometer nodes  both  parties plan to produce  during  the  same  period. Furthermore, Group B will engage an external auditor (as agreed by Group A and Group B) to provide an independent auditor’s report regarding the  recognition of the sharing  of costs to ensure that it is a fair representation  of the incurred costs. Furthermore, the Board of the Company and the Board of SMNC  conduct an annual review separately of each of their production plans and the consequential proportion of costs to be shared.

VI.

Provision of guarantee for financing activities

Type of transaction

Pricing policy

Guarantee provided  by  Group  A for Group B’s financing activities

With respect to provision  of guarantee  by Group A in respect of Group B’s financing activities, the service fee for such guarantee will be determined by reference to the market conditions and quotes from independent third parties providing services of a  similar  nature and comparable scale (general pricing principle

(3) above). The finance and accounting department of Group A  will  seek  quotation from two or more comparable independent third parties to ensure the service fee is fair and reasonable and not less favourable to Group A.

1.

SMNC has established a related party transaction review committee, which is comprised of four non-executive directors of SMNC of which two of them, namely Dr. Zhao HaiJun, the executive Director and Co-Chief Executive Officer of the Company and Dr. Gao Yonggang, the executive Director, Chief Financial Officer and Joint Company Secretary of the Company, were appointed by the Company  and the other two were appointed by each of China IC Fund  and  ZDG.  The  related party transaction review committee is responsible for reviewing and approving the framework agreement and pricing policy of connected transactions entered into by the SMNC and the Company, with the assistance from the related party transaction office of SMNC. The committee has meeting at least once annually to monitor and review related party transactions between SMNC and the Company;

2.

The Company has also established a related party transaction review team, consisting of members from the finance, legal and other related departments of the Company, which reviews the terms of specific connected transaction agreements and reports its findings to the related party transaction review committee;

3.

Group A and Group B each employs and maintains separate business, operation  and accounting personnel of its own. There is clear segregation of approval authority and duty between the two entities. In general, for each type of the Continuing Connected Transactions under the Framework Agreement, either the Company or SMNC would propose the transaction price after the review and approval by the relevant department(s), such as the manufacturing department, business administration department, the finance and accounting department, depending on the type of the transaction. The counter party of the relevant department(s) will then, also review and

approve the pricing of the transaction before acceptance. As the Company and SMNC maintains separate business units and separate personnel, the relevant department(s) that proposes the transaction price and the relevant department(s) of the counter party that accepts such transaction price would be different persons and under different departmental management;

4.

The Company’s compliance office will perform quarterly check on transactions entered under the Framework Agreement to ensure compliance with pricing policies and annual caps are not exceeded; and

5.

The Company’s external auditors will conduct an annual review of the transactions entered into under the Framework Agreements to ensure the transaction amounts are within the annual caps and the transactions are in accordance with the terms set out in the Framework Agreements.

Nature of Continuing

Connected

Transactions

Continuing

Connected

Transactions For

the Year Ended

31 December

2016⁽¹⁾

Transactions For the

Year Ended 31

December

2016⁽²⁾

From  1 January

2017 to the

Latest Practicable

Date⁽³⁾

(US$ million)

(US$ million)

(US$ million)

Type I CCT

168.7

249.8

452.3

Type II CCT

23.8

87.6

40.0

Type III CCT

0.4

0.9

0.6

Type IV CCT

—

—

—

Type V CCT

69.1

69.1

76.7

(1)

Representing the amounts of transactions constituting continuing  connected  transactions  (as defined in the Listing Rules) upon the completion of Capital Contribution on 30 June 2016.

(2)

Representing the amounts of all transactions between Group A and Group B for the year ended 31 December 2016.

(3)

Unaudited.

Nature of Continuing

For the Year Ending 31 December

Connected Transactions

2018

(US$ million)

2019

(US$ million)

2020

(US$ million)

Type I CCT

900

1,100

1,500

Type II CCT

100

150

200

Type III CCT

200

200

200

Type IV CCT

200

200

200

Type V CCT

100

100

100

Type VI CCT

1,000

1,000

1,000

1.

With regards to Type I CCT, the Annual Caps for the years ending 31 December 2018, 2019 and 2020 is US$900 million, US$1,100 million and US$1,500 million, respectively. Such Annual Caps have been determined based on various factors, including the historical and estimated  transaction  amounts  and  the  future business plan of the Group and SMNC. The historical  transaction  amounts  between Group A and Group B  with respect to  the purchase and sale of goods  were US$249.8 million in 2016 and US$452.3 million for the 11 months ended 30 November 2017. The estimated amount of such transactions between 1 December 2017 to 31 December 2017 is US$58.1 million and thus the estimated annual transaction amount in 2017 is US$510.4 million, representing an annual growth  rate of 104.3% from 2016 to 2017. It is expected that in 2018, SMNC will expand the production capacity of its first fab and commence the production of its second fab, which expects to increase the annual production capacity and product sales of SMNC thereafter. The Company believes that in light of the investment plan and  the expedited development of SMNC, it is reasonable to estimate that  the production capacity of SMNC will increase of  approximately 124.1% from  2017  to 2020. For further details concerning the expansion plan of SMNC, please refer   to the section headed ‘‘Letter from the Board — Reasons For and Benefits of the Continuing Connected Transactions — Expansion Plan  of SMNC’’  in this circular. The Company expects that SMNC will sell most of  its finished products  to Group A for the three years ending 31 December 2020 and thus the Company assumes the

growth for the transaction amounts of Type I CCT for the relevant periods will be similar to that of the production capacity of SMNC. The Company also considers a buffer to cater for the potential surge in product demand due to different factors which can hardly be foreseen or controlled by the Company, such as the popularity of certain electronic devices which may result in rapid development and change of semiconductor industry. After considering the expansion plan, the expected production capacity of SMNC, the expected  increasing sales between Group A and Group B and the  reasonable buffer for future Type I CCT, the Company considers that the Annual Caps for Type I CCT fair and reasonable.

2.

With regards to Type II CCT, the Annual Caps for the years ending 31 December 2018, 2019 and 2020 is US$100 million, US$150 million and US$200 million, respectively. Such Annual Caps have been determined based on various factors, including, among others, the historical and estimated transaction amounts and the future cooperation between Group A and Group B. The historical transaction amounts between Group A and Group B with respect to the rendering of or  receiving services were US$87.6 million in 2016 and US$40.0 million for the 11 months ended 30 November 2017. The downward trend in the  transaction  amounts from 2016 to 2017 was primarily due to the development and maturity of certain service systems and functions of SMNC in 2017. However, it is expected that the demand of supporting services, in particular, the processing and testing services from Group B will rebound and gradually increase from 2018 to 2020 in anticipation of the expected expanding production capacity and sales of SMNC during the same periods, which is estimated to increase of approximately 124.1% from 2017 to 2020. In particular, the demand for processing and testing service of SMNC fabs will be particularly strong at  their early stage, primarily because that  in order to achieve better cost efficiency, new fabs will usually procure certain key equipment in the first place and request for processing and testing service from other fabs of the Group. It is expected that the second fab of SMNC  will  commence operation in 2018 and will require large amount of processing and testing service from Group A. Taking into account that the target manufacturing capacity of the second fab of SMNC is same with that of the first fab of SMNC,   the Company believes it would be reasonable to estimate that the demand of processing and testing service by the second fab in its first-year operation will be   at the same level of the first fab in 2016, being its first year of operation, which means that after pro-rata calculation, SMNC will requires additional processing  and testing service in the amount of US$48 million in 2018 on the basis of the historical transaction amount in 2016. For further details  concerning  the  expansion plan of SMNC, please refer to the section headed ‘‘Letter from the  Board — Reasons For and Benefits of the Continuing Connected Transactions — Expansion Plan of  SMNC’’  in  this circular. The Company further considers that  to provide processing and testing service to Group B by using the processing and testing equipment of Group A will result in higher equipment utilisation rates and improve the Group’s overall efficiency. After considering  the  historical transaction amount and the expected growing demands of  various  types  of  services under Type II CCT, the Company considers the Annual Caps for Type II CCT fair and reasonable.

3.

With regards to Type III CCT, the Annual Caps for each year  ending  31  December 2018, 2019 and 2020 is US$200 million, which have been primarily determined based on the investment and expansion plan of SMNC. Notwithstanding that the historical transaction amount for Type III CCT was relatively low in 2016 and for the 11 months ended 30 November 2017, it is expected that in addition to the capital contribution of US$2.4 billion provided by shareholders of SMNC in June 2017, approximately US$1.21 billion (the ‘‘SMNC Investment’’) investment for the second fab of SMNC will need to be funded by the internal cash flow of and debt financing by SMNC. The SMNC Investment will, depending on various factors, lead to SMNC’s increasing demand of equipment leasing since more than 90% of the total investment for the second fab would be used to acquire or  lease production equipment, which could be partially satisfied  by inter-Group leasing of equipment. Although  no  equipment  leasing  arrangement has  been entered into between Group A  and Group B  in 2016 and   for the 11 months ended 30 November 2017, taking into account Group B’s  demand for finance lease for production equipment and  SMNC’s  historical  finance lease with an independent third party, the Company considers it is  necessary to set up reasonable annual caps for potential leasing arrangements between Group A and Group B in the future. The production equipment of the second fab of SMNC cost as much as US$60 million to  US$80 million each and  the lease of such equipment usually has a  term ranging from three to five years.  The relatively high unit price of the production equipment requires a reasonably ample annual cap for the equipment leasing transactions between Group A and Group B. In March 2016, SMNC had made a finance lease from an independent third party for certain production equipment to be used in the first fab in a total amount of US$200 million with a term of five years. It is expected that the second fab may have a similar level of demand for finance lease for production equipment and the inter-Group leasing of equipment will help to reduce the overall finance  cost of the Group, reduce the uncertainty of the transactions and improve the efficiency of  equipment utilisation of the  Group. For further details concerning  the expansion plan of SMNC, please refer to the section headed ‘‘Letter from the Board — Reasons For and Benefits of the Continuing Connected Transactions — Expansion Plan of SMNC’’ in this circular. After considering the potential equipment leasing arrangements, the unit cost of  such leasing arrangements and  the historical equipment lease of SMNC, the Company considers the Annual Cap for Type III CCT fair and reasonable.

4.

With regards to Type IV CCT, the Annual Caps for each year  ending  31  December 2018, 2019 and 2020 is US$200 million. For the year ended 31 December 2016 and the 11 months ended 30 November 2017, the Company and SMNC had not completed any acquisition or disposal of equipment  with  each other. In determining the Annual Caps for Type IV CCT for the years ending 31 December 2018, 2019 and 2020, the Company has primarily considered the investment and expansion plan of SMNC. SMNC will need to use approximately US$3.3 billion to acquire or lease production equipment for the construction and operations of its second fab. Part of the universal production equipment required   by the second fab, which includes, among others, immersion scanner, clean tool, rapid thermal processing equipment, plasma etching system and wafer surface inspection system, can be acquired from Group A. As at the Latest Practicable Date, the Company identified that certain frequently-used universal production equipment could be acquired by Group B from

Group A in 2018, which had an aggregate value of approximately US$214 million. Given the expected continuous expansion of SMNC, additional production equipment may be regarded as appropriate to be transferred from Group A to Group B in 2019 and 2020 to meet the demand of production equipment of Group B and improve the  overall equipment utilisation of the Group. The Company expects that, depending on various factors, including the frequency of use of the relevant  equipment  by Group A and the actual demand of Group B, the aforementioned additional universal production equipment that might be transferred  from  Group  A  to  Group B in 2019 and 2020 will remain at the similar level as that in 2018. In view of this, Group B will need a reasonable annual cap for the potential inter-Group transfer of universal production equipment in 2018, 2019 and 2020. The Company considers that to transfer equipment between Group A and Group B  will provide  an alternative of satisfying such development plan with certain degree  of  flexibility, improve the efficiency of equipment utilisation of the Group, better consolidate the resources of the Group and improve the transaction efficiency of the Group. For further details concerning the expansion plan of SMNC, please   refer to the section headed ‘‘Letter from the Board — Reasons For and Benefits of the Continuing Connected Transactions — Expansion Plan of SMNC’’ in this circular. After considering the expansion plan and the corresponding increasing demand of production equipment procurement of SMNC, the Company considers the Annual Caps for Type IV CCT fair and reasonable.

5.

With regards to Type V CCT, the Annual Caps for each year ending 31 December 2018, 2019 and 2020 is US$100 million, which is primarily determined based on the historical transaction amounts and the estimated technological development     of the Group. The historical transaction amounts between Group A and Group B with respect to technical authorisation or licensing (including the sharing of research and development costs) were US$69.1 million in 2016 and US$76.7 million for the 11 months ended 30 November 2017. The sharing of costs is estimated to be US$76.7 million for the year ending 31 December 2017, based on the pricing policies of the provision of technical authorisation or licensing as described in the sub-section headed ‘‘The Framework Agreement — Pricing of the Continuing Connected Transactions — V. Provision of technical authorisation or licensing’’ in this circular. After considering the historical amount of Type V CCT and the expected growth in the production capacity of 12-inch wafers of Group B for the years ending 31 December 2018, 2019 and 2020, the Company considers   the Annual Caps for Type V CCT fair and reasonable.

6.

With regards to Type VI CCT, the Annual Caps for each year  ending  31  December 2018, 2019 and 2020 is US$1,000 million. Such Annual Caps are split into (i) US$990 million for the maximum amount of the financial liabilities of SMNC in respect of which guarantee can be provided by the Company or its subsidiaries (the ‘‘Balance Cap’’); and (ii) US$10 million for the fee payable by SMNC in consideration for such guarantee (the ‘‘Guarantee Fee Cap’’):

a.

the Balance Cap of US$990 million is primarily determined based on the historical amounts of guarantee provided by Company to SMNC and the financing needs of SMNC for the years ending 31 December 2018, 2019 and 2020. During the 11 months ended 30 November 2017, the maximum amount of daily balance of the guarantee provided by the Company for SMNC’s financing activities was approximately US$235.1 million. It is expected that the SMNC Investment will need to be funded by the internal cash flow and debt financing of SMNC and the maximum amounts of principal of new borrowings to be  incurred by SMNC for the construction of  its  second fab  for the three years ending 31 December 2018, 2019 and 2020 will amount to approximately US$1.21 billion, aggregately. The Company expects that for   up to 80% of such borrowings external guarantee will be required by  Group  B, and the rest of which may not  necessarily require the  guarantee. Taking into  consideration of  the  above factors, the  Company further considers that  it is fair and reasonable to set up a Balance Cap of US$990 million for the years ended 31 December 2018, 2019 and 2020.

b.

the Guarantee Fee Cap of US$10 million for each year during the three years ending 31 December 2018, 2019 and 2020 is determined based on the Balance Cap of US$990 million and a guarantee fee charge rate up to 1.0%. Such charge rate was determined based on the fee quotes provided by commercial banks who are independent third parties. After considering the maximum amount of guarantee which may be required by Group B and the fee quotes from independent third parties commercial  banks,  the  Company  considers the Guarantee Fee Cap fair and reasonable for the years ended 31 December 2018, 2019 and 2020.