UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of October, 2018

Commission File Number: 001-31994

Semiconductor Manufacturing International Corporation

(Translation of registrant’s name into English)

18 Zhangjiang Road

Pudong New Area, Shanghai 201203

People’s Republic of China

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

☒  Form 20-F    ☐  Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

☐  Yes    ☒  No

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): n/a

 

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

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If you are in any doubt as to any aspect of this circular, you should consult a stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Semiconductor Manufacturing International Corporation (the ‘‘Company’’), you should at once hand this circular and the accompanying form of proxy to the purchaser(s) or the transferee(s) or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility    for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or  any part of the contents of  this circular.

 

Semiconductor Manufacturing International Corporation

中 芯 國 際 集 成 電 路 製 造 有 限 公 司 *

(Incorporated in the Cayman Islands with limited liability)

(Stock  Code: 981)

(1) CONTINUING CONNECTED TRANSACTIONS IN RELATION TO FRAMEWORK AGREEMENT

AND

(2) CONTINUING CONNECTED TRANSACTIONS IN RELATION TO CENTRALISED FUND MANAGEMENT AGREEMENT

AND

(3) CONNECTED TRANSACTION IN RELATION TO PROPOSED GRANT OF RESTRICTED SHARE UNITS TO A FORMER INDEPENDENT NON-EXECUTIVE DIRECTOR, A NON-EXECUTIVE DIRECTOR AND AN INDEPENDENT NON- EXECUTIVE DIRECTOR

AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

Independent Financial Adviser  to

the Independent Board Committee and the Independent Shareholders

 

A letter from the Independent Board Committee to the Independent Shareholders is set out on pages 46 to 47 of this circular. A letter from Messis Capital Limited, the Independent Financial Adviser, containing its advice to the Independent Board Committee and the Independent Shareholders, is set out on pages 48 to 99 of this circular.

The notice convening the EGM to be held at 5 Floor SO1 Building,18 Zhangjiang Road, Pu  Dong  New  Area,  Shanghai, People’s Republic of China on 7 November 2018 at 1 : 30 p.m. (the ‘‘EGM’’) is contained in this circular. Shareholders are advised to read the notice and to complete and return the enclosed form of proxy for use at  the EGM  in accordance with the instructions printed thereon.

Whether you are able to attend the EGM or not, please complete and return the enclosed form of proxy to the branch share registrar of the Company, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. The completion and delivery of a form of proxy will not preclude you from attending and voting at the EGM in person should you wish. All persons who are registered holders of the Shares on 7 November 2018 will be entitled to attend and vote at the EGM.

* For identification purpose only

22 October 2018

 

 

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CONTENTS

 

 

 

 

 

 

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DEFINITIONS

 

In this circular, the following expressions have the following meanings unless the context requires otherwise:

 

 

 

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DEFINITIONS

 

 

 

 

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DEFINITIONS

 

 

 

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DEFINITIONS

 

 

 

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DEFINITIONS

 

 

 

 

*For identification purpose only

 

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LETTER FROM THE BOARD

 

 

Semiconductor Manufacturing International Corporation

中 芯 國 際 集 成 電 路 製 造 有 限 公 司 *

(Incorporated in the Cayman Islands with limited liability)

(Stock  Code: 981)

 

 

 

 

To the Shareholders

Dear Sir or Madam,

INTRODUCTION

The purpose of this circular is to provide you with, among other things:

 

 

 

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LETTER FROM THE BOARD

 

 

Reference is made to the Company’s announcement dated 13 July 2018 (as supplemented on 19 September 2018) pursuant to which it was announced that  the  Company and SMSC had entered into the Framework Agreement. Details  of  the  Framework Agreement are set out below:

 

 

Principal Terms of the Framework Agreement

 

The Company and SMSC had agreed to enter into one or more of the following types of transactions with each other including the supply of goods, rendering of or receiving services, leasing of assets, transfer of assets, provision of technical authorisation or licensing and provision of guarantee:

 

 

 

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LETTER FROM THE BOARD

 

 

 

 

 

 

Pricing

 

The price of the Framework Agreement CCT will be determined in accordance with the following general principles, in ascending order:

 

 

 

 

 

 

Where general pricing principles (2) to (5) apply, where possible each of Group A and SMSC will obtain at least two pricing and other terms from independent third parties in relation to transactions with similar nature and size before agreeing upon the applicable price.

 

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LETTER FROM THE BOARD

 

 

As to the price prescribed by the state or local price control department, state- prescribed fees apply to water and electricity, which are relevant to the cost of such services and are determined by prices published from time to time by the relevant PRC government authority. Under the Pricing Law of the PRC, the PRC government may implement a state- prescribed or guidance price for specific goods and services if necessary, and such price will be promulgated in accordance with the requirements of relevant laws, regulations or administrative rules from time to time. If any state-prescribed price or guidance price becomes available to the Framework Agreement CCT in the future, the parties will execute such price first in accordance with pricing principle (1) above.

 

Based on the above general principles and the actual circumstances when entering into the Framework Agreement, the parties further agree to the following specific pricing  policies for the Framework Agreement CCT. If any particular Framework Agreement CCT  is not covered by the following policies, or any of the following policies is no longer applicable, the parties will use the above general principles to determine the price for the relevant transaction.

 

Group A as the seller of spare parts, raw materials and photomasks (general principle (3) above): The personnel in the Corporate Supply Planning Management (‘‘SPM’’) department of Group A are responsible for setting the price of the goods. 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 price quoted by 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 the purchaser of spare parts, raw materials and finished products (general principle (3) above): In respect of acquisition of spare parts and raw materials, the personnel in the SPM of Group A will carry out the same procedure as above based on the same policy to ensure the purchasing prices are not less favourable to Group A.

 

In respect of buying finished products from SMSC, the transaction involves Group A passing through customers’ orders it receives to SMSC. It is a one-way sale of finished product from SMSC to Group A. The sales team of Group A is responsible for negotiation with the customers to ensure the prices are at market value and favourable to the Group as     a whole. Once a customer’s order is identified as appropriate for  production by  SMSC  based on the customer’s request, technology nodes, type of applications and  fab  availability, the system of Group A will generate a purchase  order  from  Group  A  to  SMSC based on the same price, terms and conditions of the purchase order of the customer. According to the arrangement between Group A and SMSC, there is no difference between the sales prices from Group A to the customers and the transaction price from SMSC to Group A with respect to finished products, since SMSC will ultimately undertake all risks associated with the product liability and/or any legal claims arising from the products and will fully cover all potential losses suffered by Group A due to the products supplied by SMSC. Upon receiving the payment from customers by Group A, the finance  and  accounting team of Group A arranges to pay SMSC for the finished products. If  the  customer requires further backend services such as bumping and testing, Group A will perform the services or outsource to other service providers. Group A charges its customers for the total of product costs and services performed.

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LETTER FROM THE BOARD

 

 

 

 

Each of Group A and SMSC is subject to the following general control procedures:

 

 

 

 

 

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LETTER FROM THE BOARD

 

 

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LETTER FROM THE BOARD

 

 

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LETTER FROM THE BOARD

 

 

 

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LETTER FROM THE BOARD

 

 

 

 

 

 

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LETTER FROM THE BOARD

 

 

 

 

 

 

Internal Control Measures

 

The Company has in place a series of internal control measures to ensure that the terms of the Framework Agreement and the Centralised Fund Management Agreement are fair and reasonable and that the Framework Agreement CCT and the Centralised Fund Management Agreement CCT will be conducted on normal commercial terms. As the Framework Agreement CCT and the Centralised Fund Management Agreement CCT also constitute related party transactions for the Company, they will be subject to the related party transaction policy of the Group, which is further explained below:

 

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LETTER FROM THE BOARD

 

 

 

 

 

 

 

In accordance with the Listing Rules, the independent non-executive Directors and the auditors of the Company will also perform an annual review of the terms of the Framework Agreement CCT and the Centralised Fund Management Agreement CCT to ensure that the pricing policy and the annual caps remain fair and reasonable and that appropriate internal control procedures are in place, and will confirm so each year in the  annual  report  published by the Company.

 

Considering the general principles and the detailed pricing policies, the Directors (including the independent non-executive Directors) are of the view that the methods and procedures are sufficient to ensure that the Framework Agreement CCT and the Centralised Fund Management Agreement CCT will be conducted on normal commercial  terms  or better and not prejudicial to the interests of the Company and its minority Shareholders.

 

Payment

 

The consideration for the Framework Agreement CCT will be paid in accordance with the separate agreement for each specific transaction contemplated under the Framework Agreement and will be funded by the relevant parties’ internal resources. The Company will monitor closely as an ongoing process the relevant transactions to ensure the respective Framework Agreement Annual Caps for each type of the  Framework Agreement CCT  is  not exceeded. It is expected that the payment for most of the Framework Agreement CCT would be settled within 30 days of, or other reasonable period of time after, the specific transaction taking place.

 

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LETTER FROM THE BOARD

 

 

Other Terms

 

The terms of the Framework Agreement are subject to applicable laws and regulations including the requirements of any regulatory authorities (including but not limited to the Stock Exchange and the New York Stock Exchange, Inc.).

 

THE FRAMEWORK AGREEMENT ANNUAL CAPS AND BASIS OF DETERMINATION

 

Historical Transaction Amounts

 

The historical transaction amounts between Group A and SMSC for the transactions contemplated under the Framework Agreement in the year ended 31 December 2017 and the nine months ended 30 September 2018 are as follows:

 

 

Notes:

 

 

 

 

Framework Agreement Annual Caps

 

The Framework Agreement Annual Caps are set out below:

 

 

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LETTER FROM THE BOARD

 

 

In arriving at the Framework Agreement Annual Caps as set out in this circular, the Company has considered reasonable factors such as the expected occurrences of the Framework Agreement CCT in light of current market conditions of the semiconductor industry and the technological capability and future business plans of the Company and SMSC.

SMSC is expected to establish and build up large-scale manufacturing capacity  focusing on 14-nanometer and below process and manufacturing technologies. The 14- nanometer technology can be applied on mainstream mobile platforms, automotive and  cloud computing. It is expected that the 16/14-nanometer products’ market  share  by  revenue in the global pure play foundry market will grow from approximately 6% in 2016 to 22% in 2019 and the demand for 14-nanometer products will reach 260,000 pieces per  month by 2019 and 290,000 pieces per month by 2021 by independent third parties. SMSC has started construction of its production plant in 2018 and aims to allocate equipment into the plant in 2019 in order to reach a manufacturing capacity of 3,000 to 5,000 wafers per month. SMSC will continue increasing its manufacturing capacity, utilisation rate and profitability. In anticipation of the surge in market demand for  advanced  process,  the Group will allocate some of its advanced node manufacturing to SMSC to meet the future wafer production needs. The overall investment for SMSC to complete its whole expansion plan is estimated to be up to US$10.24 billion. The Group’s overall plan for SMSC to focus on developing 14-nanometer and below manufacturing capacity will improve the overall equipment utilisation of the Group and increase production efficiency given the better consolidation of resources within the Group. The Group considers the development of 14- nanometer manufacturing capability a strategic decision to strengthen its leading marking position in terms of advanced nodes products manufacturing.

 

The Company has also considered the historical transaction amounts between the Company and SMSC, the Company’s historical revenues as well as other reasonable factors including the following:

 

 

The SMSC production plant is still under construction in 2018 and  trial  production will begin in 2019. The Company expects that SMSC will sell most     of its finished products to Group A for the two years ending 31 December 2019  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 SMSC. The Company has also included a buffer to cater for any potential increase in product demand which cannot 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 SMSC, the expected increasing sales between Group A and SMSC and the  reasonable  buffer  for  future Type I CCT, the Company considers that the Framework  Agreement  Annual Caps for Type I CCT fair and reasonable.

 

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LETTER FROM THE BOARD

 

 

 

 

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LETTER FROM THE BOARD

 

 

 

 

 

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LETTER FROM THE BOARD

 

 

 

 

REASONS FOR AND BENEFITS OF THE FRAMEWORK AGREEMENT

 

The Company considers that the entry into the Framework Agreement and the transactions contemplated thereunder will enable the Company to utilise an effective and complete wafer production to meet its needs.

 

SMSC operates a 12-inch wafer fab with advanced process capability. As the market demand for advanced process continues to surge, the Company will allocate some of its advanced node manufacturing to SMSC to ensure future wafer production needs of the Company are met.

 

The business partnership between the Company and SMSC will help to eliminate some duplicated efforts in introducing and manufacturing advanced nodes for IC design houses, thereby reducing the time to market and some overhead expenses for both parties. With the expansion of its capacity and continuous innovation, the Company believes that it will be able to enhance its position in the industry and benefit from the increase in its economies of scale.

 

The Directors (including the independent non-executive Directors) are of the view that it is in the best interests of the Company and the Shareholders as a whole to enter into the Framework Agreement and the transactions contemplated thereunder, the terms of the Framework Agreement including the proposed annual caps are fair and reasonable, and the entering into of  the Framework Agreement and the transactions contemplated thereunder  are on normal commercial terms or better, in the ordinary and usual course of  business of  the Group and in the interests of the Company and the Shareholders as a whole.

 

IMPLICATIONS UNDER THE LISTING RULES

 

As at the Latest Practicable Date, China IC Fund held approximately 15.77% equity interest in the Company through its wholly-owned subsidiary, Xinxin (Hongkong) Capital Co., Limited. Accordingly, China IC Fund is a connected person of the Company at the issuer level pursuant to the Listing Rules. As at the Latest Practicable Date, the registered capital of SMSC was held as to approximately 54.40% and 24.71% by the Group and China IC Fund, respectively. SMSC is therefore a connected subsidiary of the Company as defined under Rule 14A.16 of the Listing Rules and thus a connected person of the Company under the Listing Rules.

 

In relation to the transactions contemplated under the Framework Agreement, as one or more of the applicable percentage ratios in respect of the Framework Agreement Annual Caps for Type IV CCT, Type V CCT and Type VI CCT are 5% or more but less than 25%, the transactions constitute continuing connected transaction subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules. As the applicable percentage ratios in respect of each of the Framework Agreement Annual Caps for Type I CCT, Type II CCT and Type III CCT are more than 0.1%

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LETTER FROM THE BOARD

 

 

but less than 5%, the transactions are subject to the reporting, announcement and annual review requirements but  exempt from  the  Independent Shareholders’ approval requirement under Chapter 14A of the Listing Rules.

 

In accordance with the Listing Rules, the Independent Board Committee comprising Mr. William Tudor Brown, Dr. Chiang Shang-yi, Mr. Cong Jingsheng Jason, Mr Lau Lawrence Juen-Yee and Mr. Fan Ren Da Anthony, all being the independent non-executive Directors, has been established to advise and provide recommendation to the Independent Shareholders on the Framework Agreement (including the Framework Agreement CCT and the Framework Agreement Annual Caps) and to advise the Independent Shareholders on how to vote.

 

Messis Capital Limited has been appointed by the Company as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the Framework Agreement (including the Framework Agreement CCT and the Framework Agreement Annual Caps).

 

INFORMATION ABOUT THE PARTIES

 

Information on the Company and SMIC Beijing

 

The Company is one of the leading foundries in the world and is Mainland China’s largest foundry in scale, broadest in technology coverage, and most comprehensive in semiconductor manufacturing services. The Company provides integrated circuit (IC) foundry and technology services on process nodes from 0.35 micron to 28 nanometer. Headquartered in Shanghai, China, the Company has an international manufacturing and service base. In China, the Company has a 300mm wafer fabrication facility (fab) and a 200mm fab in Shanghai; a 300mm fab and a majority-owned 300mm fab for advanced nodes in Beijing; 200mm fabs in Tianjin and Shenzhen; and a majority-owned joint-venture  300mm bumping facility in Jiangyin; additionally, in Italy the Company has a majority- owned 200mm fab. SMIC also has marketing and customer service offices in the U.S., Europe, Japan, and Taiwan, and a  representative office in Hong Kong. SMIC Holdings, as    a multinational company’s regional headquarters, was formed in 2015 and is a wholly- owned subsidiary of the Company. SMIC Beijing is wholly foreign-owned enterprise established in the PRC and a wholly-owned subsidiary of the Company.

 

Information on SMSC

 

SMSC is a Chinese foreign joint venture which carries out the development and establishment of a 300mm fab for advance nodes.

 

 

Reference is made to the Company’s announcement dated 13 July 2018 (as supplemented on 19 September 2018) relating to the Company and its subsidiaries, SMIC Beijing and SMSC’s entering into of the Centralised Fund Management Agreement in relation to: (i) the Company procuring its wholly-owned subsidiary SMIC Beijing to carry out centralised management of the Company’s RMB fund and foreign exchange in accordance with the relevant PRC laws and regulations; and (ii) SMSC and its Controlled Subsidiaries participating in the Company’s centralised fund management system, which  will be managed by SMIC Beijing in accordance with the relevant PRC laws  and regulations.

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LETTER FROM THE BOARD

 

 

 

Principal Terms of the Centralised Fund Management Agreement

 

The Centralised Fund Management Agreement CCT will include the following:

 

 

SMIC Beijing will provide deposit services and pay interest to SMSC.

 

 

SMIC Beijing will serve as the platform for centralised collection and payment activities and foreign exchange activities within the Group. SMSC may carry out such activities by itself or through SMIC Beijing. By providing foreign exchange services, SMIC Beijing will convert funds deposited with it by SMSC into different currency with a third- party bank or financial institution. As SMIC Beijing will be able to convert the centralised funds deposited with it by the Group, it will be able to benefit from a more favourable exchange rate offered by the third-party bank or financial institution based on the larger amount of funds to be converted and the stronger bargaining power.

 

 

SMIC Beijing will provide internal loan services to SMSC in accordance with PRC laws, regulations and policies.

 

 

Letter of Credit Services will be utilised as a settlement instrument through which the Company will utilise its credit facilities to provide letter(s) of credit for SMSC to facilitate the purchase of equipment in accordance with PRC laws, regulations and policies.

 

 

SMIC Beijing will provide other financial services to SMSC in accordance with PRC laws, regulations and policies.

 

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LETTER FROM THE BOARD

 

 

Pricing

 

The price of the services provided by SMIC Beijing to SMSC contemplated under the Centralised Fund Management Agreement will be fair in the context of connected transactions and determined according to the market principle on an arm’s length basis, and will be subject to compliance with regulatory requirements of the Stock Exchange and relevant requirements for connected transactions that are applicable to the parties.

 

Under the Group’s existing centralised fund management system, SMIC Beijing collectively procures certain fund management services from third-party banks or financial institutions (banks or financial institutions qualified to provide financial services to the Group that do not hold any shares of the entities within the  Group  and  whose  shares are not owned by any entities within the Group, such as Industrial and Commercial Bank of China Limited and Bank of China Limited in the PRC). SMIC Beijing will charge its subsidiaries with reference to terms offered by third-party banks or financial institutions for such fund management services.

 

1.Internal Deposit Services

 

The terms (including interest rates) in respect of the Internal Deposit Services provided by SMIC Beijing to SMSC will be on normal commercial terms or better, in the ordinary   and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole, subject to the relevant provisions of PRC laws and regulations, including but not limited to the Notice regarding the Administrative Regulations on the Centralised Foreign Exchange Fund Management for Multinational Corporations issued by the State Administration of Foreign Exchange (Huifa [2015] No. 36); the Notice regarding the Implementing Regulations on the Centralised Foreign Exchange Fund Management for Multinational Corporations in Beijing issued by the Beijing office of the State Administration of Foreign Exchange (Jinghui [2015] No 231); and the Notice on Further Facilitating Multinational Enterprise Groups in Operation of the Cross-Border Bilateral RMB Cash Pooling Business issued by the People’s Bank of China (‘‘PBOC’’) (Yinfa [2015] No. 279) (the ‘‘Relevant PRC Laws and Regulations’’). The interest rate applicable to SMSC’s deposits with SMIC Beijing will be determined based on arm’s length negotiations by the parties. SMSC will obtain two or more written quotes from third-party commercial banks in the PRC for providing deposit services of the same type during the same period to SMSC. The interest rate for SMSC’s deposits with SMIC Beijing will be the same as or lower than lowest of the quoted interest rates. The  PBOC  publishes benchmark interest  rates for RMB deposits from time to time which serve as a guidance price for reference only for the commercial banks in  the PRC. The Company understands that when determining   the interest rates quoted to SMSC, the third-party commercial banks will refer  to  such PBOC benchmark interest rate for RMB deposits of a similar type and make adjustment based on the bank’s credit assessment of SMSC.

 

 

The terms (including fees charged by SMIC Beijing and exchange rates) in respect of the Collection and Payment Services and Foreign Exchange Services provided by SMIC Beijing to SMSC will be on normal commercial terms or better, in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders    as a whole, subject to the Relevant PRC Laws and Regulations. The fees charged by SMIC Beijing to SMSC for providing such services will be determined based on arm’s length negotiations by the parties which will not be less favourable to SMIC Beijing than (1) fees charged by SMIC Beijing to other subsidiaries which are not connected persons under the Listing Rules; and (2) fees charged to SMIC Beijing by other third-party commercial banks or financial institutions providing fund management services to SMIC Beijing for services of the same type during the same period. SMIC Beijing will obtain services of the same type from third-party commercial banks or financial institutions first and then use the fees charged to it to determine fees to be charged to SMSC as described

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LETTER FROM THE BOARD

 

 

above. In particular, SMIC Beijing will make reference to the quotes offered by independent third-party commercial banks or financial institutions which take into account the specific market conditions and other specific considerations such as the credit of the customers and the size of the transaction.

 

 

The terms (including interest rates) in respect of the  Internal Loan  Services provided by SMIC Beijing to SMSC will be on normal commercial terms or better, in the ordinary   and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole, subject to the Relevant PRC Laws and Regulations. The interest rate applicable to loans granted to SMSC by SMIC Beijing will be based on arm’s length negotiation by the parties. SMSC will obtain two or more written quotes from third-party commercial banks in the PRC for providing loan services of the same type during the same period to SMSC. The interest rate for SMSC’s loans with SMIC Beijing will be the same as or higher than the highest of the quoted interest rates. The PBOC publishes benchmark interest rates for RMB loans from time to time which serve as a guidance price for reference only for the commercial banks in the PRC. The Company understands that when  determining the interest rates quoted to SMSC, the third-party commercial banks will refer  to such PBOC benchmark interest rate for RMB loan of a similar type and make adjustment based on the bank’s credit assessment of SMSC.

 

 

The terms (including fees charged by the Company) in respect of the Provision of Letter of Credit Services provided by the Company to SMSC will be on normal commercial terms or better, in the ordinary and usual course of business of the Group and  in  the interests of the Company and the Shareholders as a whole, subject to the Relevant PRC  Laws and Regulations. The fees charged by the Company to SMSC for providing such services will be determined based on arm’s length negotiations by the parties which will not be less favourable to SMIC Beijing than (1) fees charged by SMIC Beijing to other subsidiaries which are not connected persons under the Listing Rules; and (2) fees charged  to SMIC Beijing by other third-party commercial banks or financial institutions providing fund management services to SMIC Beijing for services of the same type during the same period. SMIC Beijing will obtain services of the same type from third-party commercial banks or financial institutions first and then use the fees charged to it to determine fees to   be charged to SMSC as described above. In particular, third-party commercial banks or financial institutions will charge SMIC Beijing an issuance fee according to the key terms of the credit facility, which is subject to the issuer’s credit and financial profile. The final fee charged to SMSC will be determined by the face amount of letter of credit multiplied with the issuance fee rate and the time length of the letter.

 

 

The terms (including fees charged by SMIC Beijing) in respect of Other Financial Services provided by SMIC Beijing to SMSC will be on normal commercial terms or better, in the ordinary and usual course of business of the Group and in the interests of  the Company and the Shareholders as a whole, subject to the Relevant PRC Laws and Regulations. The fees charged by SMIC Beijing to SMSC for providing such services will be determined based on arm’s length negotiations by the parties which will not be less favourable to SMIC Beijing than (1) fees charged by SMIC Beijing to other subsidiaries which are not connected persons under the Listing Rules; and (2) fees charged to SMIC Beijing by other third-party commercial banks or financial institutions providing fund management services to SMIC Beijing for services of the same type during the same period. SMIC Beijing will obtain services of the same type from third-party commercial banks or financial institutions first and then use the fees charged to it to determine fees to be charged to SMSC as described above.

 

Internal Control Measures

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LETTER FROM THE BOARD

 

 

 

For internal control measures adopted by the Company in respect of the Centralised Fund Management Agreement CCT, please refer to the sub-section headed  ‘‘Internal  Control Measures’’ on page 17 of this circular.

 

Payment

 

The consideration for the transactions contemplated under the Centralised Fund Management Agreement will be paid in accordance with the  separate agreements entered into between SMIC Beijing and SMSC, the terms of which will be on normal commercial terms or better.

 

Termination

 

SMSC may terminate the Centralised Fund Management Agreement by three months’ prior written notice to the Company. Two months before the expiry date of the Centralised Fund Management Agreement, the parties will negotiate whether to renew or terminate the Centralised Fund Management Agreement.

 

Other Terms

 

The terms of the Centralised Fund Management Agreement are subject to applicable laws and regulations including the requirements of any regulatory authorities (including but not limited to the Stock Exchange and the New York Stock Exchange, Inc.).

 

SMSC’s participation in the centralised fund management system of the Company does not alter its existing rights to its own funds. The rights to own, use, approve and benefit from SMSC’s funds remains with SMSC.

 

THE CENTRALISED FUND MANAGEMENT AGREEMENT ANNUAL CAPS AND BASIS OF DETERMINATION

 

Historical Transaction Amounts

 

The historical transaction amounts among the Company, SMIC Beijing and SMSC for the transactions contemplated under the Centralised Fund Management Agreement in the year ended 31 December 2017 and the nine months ended 30 September 2018 are as follows:

 

 

Notes:

 

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LETTER FROM THE BOARD

 

 

 

 

 

 

Centralised Fund Management Agreement Annual Caps

 

 

The Centralised Fund Management Agreement Annual Caps are determined based on the assumptions and factors as explained below:

 

 

– 27 –

 

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LETTER FROM THE BOARD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Centralised Fund Management Agreement Annual Caps for each type of Centralised Fund Management Agreement  CCT  are  determined  based  on  SMSC’s planned capital expenditures for the three years from 2018 to  2020 totalling more than  US$3 billion according to the investment schedule in respect of SMSC. Reference is also made to the Company’s announcement dated 30 January 2018 in relation to capital contribution into SMSC.

 

As the investment schedule towards SMSC will be adjusted according to the changing market conditions and financial conditions of the Group,  the  Centralised  Fund Management Agreement Annual Caps are set based on the aggregate three-year capital expenditure plans to maintain flexibility for the Group to expedite or slow down performance of its planned capital expenditures. As cash investment will be made towards SMSC to meet its planned capital expenditure and SMSC will be able to utilise the Internal Deposit Services, Collection and Payment Services and Foreign Exchange Services for such investment, the Centralised Fund Management Agreement Annual Caps  for  Internal  Deposit Services and Collection and Payment Services and Foreign Exchange Services are set based on the aggregate three-year capital expenditure plans of SMSC. By the end of  2018, SMSC is expected to receive capital contribution, being 60% of its registered capital  of US$3.5 billion amounting to approximately US$2 billion, and all such sum would be deposited by SMSC with SMIC Beijing. As such, capital contribution being the Centralised Fund Management Agreement Annual Caps for Internal Deposit Services are set at US$2 billion. The expected capital expenditure of over US$3

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LETTER FROM THE BOARD

 

 

billion for the three years from 2018 to 2020 has taken into account unforeseen factors, including but not limited to, (i) the investment schedule of SMSC which is dependent on the investment plans of other projects,(ii) the capital contribution from shareholders which is subject to their internal approval procedures and necessary external approval procedures, and (iii) the progress of research  and development which directly influences the ramp-up progress of SMSC. In addition, though around half of the capital contribution of SMSC is denominated in RMB,  a substantial part of the SMSC’s capital expenditure will be denominated in US$, Japanese Yen and Euro. Thus settlement and foreign exchange services will be needed. In addition, due to the control of foreign currency risk exposure, SMSC may need to convert the funding of capital expenditure into various currencies (which may be further converted into other currencies, if necessary). As such, the Centralised Fund Management Agreement Annual Caps for Collection and Payment Services and Foreign Exchange Services are set at US$2 billion, which correspond with SMSC’s expected capital expenditure amount denominated  in the foreign currencies of US$, Japanese Yen and Euro. As at the Latest Practicable Date, SMSC has received approximately US$1 billion of capital contribution, being 30% of its registered capital of US$3.5 billion. Though a substantial  portion of  capital  expenditure will be spent in 2019 and 2020, some suppliers of SMSC will request for purchase orders to be placed and down payments to be made in advance prior to the production of equipment and tools and SMSC may require loan services from the Group in 2018 in order to settle   such payment requests. Furthermore, to improve earnings from cash deposit, capital contribution from shareholders will be deposited as fixed deposit. SMSC will incur loss of interests if the fixed deposits were withdrawn before the due date. Therefore, although SMSC has received capital contribution from shareholders, it still requires loans from the Group. As such, the Centralised Fund Management Agreement Annual Caps for Internal Loan Services are set at US$2 billion, which represent the difference between the total capital expenditure of US$3 billion for the three years from 2018 to 2020 and the approximate US$1 billion of capital contribution SMSC has received. It is  expected that over 80% of the three-year capital expenditure plan of SMSC, which will be over US$2 billion, will be used to purchase equipment and tools. The Group will utilise its credit facilities to provide letter(s) of credit for SMSC to facilitate the purchase of equipment, whether or not SMSC finances the required capital expenditures internally or externally.  This will enable SMSC to take advantage of the high credibility of the Group. As majority   of SMSC’s planned capital expenditures will be used to purchase equipment through Provision of Letter of Credit Services, the Centralised Fund Management  Agreement Annual Caps for Provision of Letter of Credit Services are also set with reference to the aggregate   three-year   capital    expenditure   plans    of    SMSC.    The    Centralised  Fund Management Agreement Annual Caps for Other Financial Services are set at 2.5% of the other annual caps to reflect the expected financial expenses in SMSC’s future capital expenditure.

 

REASONS FOR AND BENEFITS OF THE CENTRALISED FUND MANAGEMENT AGREEMENT

 

The Company considers that the entry into of the Centralised Fund Management Agreement and the transactions contemplated thereunder will have the following benefits:

 

 

 

 

 

SMSC operates a 12-inch wafer fab with advanced process capability. As the market demand for advanced process continues to surge, the Company will allocate some of its advanced node manufacturing to SMSC to ensure future wafer production needs of the Company are met.

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LETTER FROM THE BOARD

 

 

 

The business partnership between the Company and SMSC will help to eliminate some duplicated efforts in introducing and manufacturing advanced nodes for IC design houses, thereby reducing the time to market and some overhead expenses for both parties. With the expansion of its capacity and continuous innovation, the Company believes that it will be able to enhance its position in the industry and benefit from the increase in its economies of scale.

 

The Directors (including the independent non-executive Directors) are of the view that it is in the best interests of the Company and the Shareholders as a whole to enter into the Centralised Fund Management Agreement and the  transactions contemplated thereunder,  the terms of the Centralised Fund Management Agreement including the proposed annual caps are fair and reasonable, and the entering into of the Centralised Fund Management Agreement and the transactions contemplated thereunder are on normal commercial terms   or better, in the ordinary and usual course of business of the Group and in the interests of  the Company and the Shareholders as a whole.

 

IMPLICATIONS UNDER THE LISTING RULES

 

As at the Latest Practicable Date, China IC Fund held approximately 15.77% equity interest in the Company through its wholly-owned subsidiary, Xinxin (Hongkong) Capital Co., Limited. Accordingly, China IC Fund is a connected person of the Company at the issuer level pursuant to the Listing Rules. As at the Latest Practicable Date, the registered capital of SMSC was held as to approximately 54.40% and 24.71% by the Group and China IC Fund, respectively. SMSC is therefore a connected subsidiary of the Company as defined under Rule 14A.16 of the Listing Rules and thus a connected person of the Company under the Listing Rules.

 

In relation to the transactions contemplated under the Centralised Fund Management Agreement, as one or more of  the applicable percentage ratios (other than the profit ratio)   in respect of each of the Centralised Fund Management Agreement Annual Caps (other    than the annual caps for Other Financial Services) exceeds 5%, the transactions constitute continuing connected transactions subject to the reporting, announcement and the Independent Shareholders’ approval requirements under Chapter  14A  of  the  Listing  Rules. As one or more of the applicable percentage ratios (other than the profit ratio) in respect of the annual caps for Other Financial Services are more than 0.1% but  less than  5%, the transaction is subject to the reporting, announcement and annual review requirements but exempt from the independent shareholders’ approval requirement under Chapter 14A of the Listing Rules.

 

In accordance with the Listing Rules, the Independent Board Committee comprising Mr. William Tudor Brown, Dr. Chiang Shang-yi, Mr. Cong Jingsheng Jason, Mr. Lau Lawrence Juen-Yee and Mr. Fan Ren Da Anthony, all being the independent non-executive Directors, has been established to advise and provide recommendation to the Independent Shareholders on the Centralised Fund Management Agreement (including the Centralised Fund Management Agreement CCT and the Centralised Fund Management Agreement Annual Caps) and to advise the Independent Shareholders on how to vote.

 

Messis Capital Limited has been appointed by the Company as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the Centralised Fund Management Agreement (including the Centralised Fund Management Agreement CCT and the Centralised Fund Management Agreement Annual Caps).

 

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LETTER FROM THE BOARD

 

 

INFORMATION ABOUT THE PARTIES

 

Please refer to sub-section headed ‘‘Information About the Parties’’ on page 26 of this circular.

 

 

Reference is made to the Company’s announcement dated 23 May 2018 pursuant to which it was resolved at a meeting held on 7 February 2018 to grant 337,500 Restricted Share Units under the 2014 Equity Incentive Plan, subject to the Independent Shareholders’ approval at the EGM. Reference is also made to the Company’s announcement dated 22  June 2018 in relation to, among others, the retirement of Mr. Tan.

 

Pursuant to the 2014 Equity Incentive Plan, the Compensation Committee is entrusted full power and authority to determine the terms and conditions of  the annual additional  grant of share options and Restricted Share Units (the ‘‘Annual Additional Grant’’). Under the 2014 Equity Incentive Plan, the Annual Additional Grant shall vest upon the Annual Additional Grant holder’s continued service with or to the Company. If an  Annual Additional Grant holder resigns before the vesting of the Annual Additional Grant granted under the 2014 Equity Incentive Plan, the unvested Annual Additional Grant will be subject to forfeiture and no apportionment will be applied. As such, the Annual Additional Grant  will only be available for those Directors who remain in office as at 31 December of the relevant year and as at the date of the relevant proposed grant. The grant of 125,000 Restricted Share Units to Mr. Tan was resolved by the Compensation Committee at  a meeting held on 7 February 2018. Reference is made to the Company’s circular dated 21 May 2018 pursuant to which it was disclosed that Mr. Tan would not offer himself for re-election as a Director. As a result of Mr. Tan’s retirement on 22 June 2018 : (1) 62,500 Restricted Share Units in recognition for Mr. Tan’s service for the year ending 31 December 2018, which were intended to vest on 1 January 2019, have been forfeited in full on 22 June 2018, and (2) 62,500 Restricted Share Units in recognition for Mr. Tan’s service for the year ended 31 December 2017, which were intended to vest immediately on 7 February 2018, are granted to Mr. Tan subject to the Independent Shareholders’ approval.

 

Accordingly, subject to the Independent Shareholders’ approval at the EGM, 275,000 Restricted Share Units are to be granted, among which, (i) 62,500 Restricted Share Units, 62,500 Restricted Share Units and 25,000 Restricted Share Units will be  granted to  Mr.  Tan, Dr. Chen and Mr. Brown, respectively, in  recognition for their service in the year  ended 31 December 2017 and it is intended that such Restricted Share Units will vest immediately upon their grant, and (ii) 62,500 Restricted Share Units and 62,500 Restricted Share Units will be granted to Dr. Chen and Mr. Brown, respectively, in  recognition for  their service in the year ending 31 December 2018 and it is intended that such Restricted Share Units will vest on 1 January 2019. Each of the Restricted Share Units to be granted to Mr. Tan, Dr. Chen and Mr. Brown represents the right to receive a  Share on the date it  vests.

 

In accordance with the terms of the 2014 Equity Incentive Plan, the Proposed RSU Grants will be made for no consideration, other than the minimum payment required by the applicable law in the Cayman Islands (which is the par value of the Shares to be issued pursuant thereto).

 

– 31 –

 

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LETTER FROM THE BOARD

 

 

As at the Latest Practicable Date, Mr. Tan holds 177,939 Shares and is interested in 653,926 share options granted to him by the Company pursuant to the 2004 Stock Option Plan and the 2014 Stock Option Plan and is interested in 62,500 Restricted Share Units granted to him by the Company pursuant to the 2014 Equity Incentive Plan, representing in aggregate approximately 0.0166% of the total issued share capital of the  Company. Dr.  Chen is interested in 602,187 share options granted to him by the Company pursuant to the 2004 Stock Option Plan and the 2014 Stock Option Plan and is interested in 287,656 Restricted Share Units granted to him by the Company pursuant to the 2014  Equity  Incentive Plan, representing in aggregate approximately 0.0166% of the total issued share capital of the Company. Mr. Brown is interested in 87,500 share options granted to him by the Company pursuant to the 2004 Stock Option Plan and the 2014 Stock Option Plan and is interested in 87,500 Restricted Share Units granted to him by the Company pursuant to the 2014 Equity Incentive Plan, representing in aggregate approximately 0.0033% of the  total issued share capital of the Company.

 

Subject to the Independent Shareholders’ approval of the Proposed RSU Grants at the EGM and assuming that no further Shares will be issued or repurchased by the Company prior to the date of the EGM, the maximum number of Shares that may be issued to  Mr.  Tan, Dr. Chen and Mr. Brown in accordance with and subject to the terms of the 2014  Equity Incentive Plan would be 62,500, 125,000 and 87,500 respectively, representing approximately 0.0012%, 0.0025% and 0.0017% respectively of the total issued share capital of the Company as at the Latest Practicable Date and 0.0012%, 0.0025% and 0.0017% respectively of the enlarged total issued share capital of the Company. The total interests of Mr. Tan, Dr. Chen and Mr. Brown in the underlying shares of the Company under the 2004 Stock Option Plan, 2014 Stock Option Plan and the 2014 Equity Incentive Plan would represent approximately 0.0177%, 0.0176% and 0.0035%, respectively of the total issued share capital of the Company as at the Latest Practicable Date and 0.0177%, 0.0176% and 0.0035% of the enlarged total issued share capital of the Company.

 

Based on the closing price of HK$6.9 per Share as quoted on the  Stock Exchange on  the Latest Practicable Date, the market value of the Restricted Share Units under the Proposed RSU Grants amounts to approximately HK$1,897,500.

 

REASONS FOR AND BENEFITS OF THE PROPOSED RSU GRANTS

 

The Proposed RSU Grants are part of the Company’s remuneration system,  the  purpose of which is to closely align the interests and benefits of and risk sharing among the Shareholders, the Company and the employees in order to maximise the motivation of the Directors.

 

The Proposed RSU Grants aim to provide sufficient incentives to attract, retain and motivate Dr. Chen and Mr. Brown to participate in the continuing operation and long-term development of the Company and to recognise Dr. Chen and Mr. Brown’s contributions to the growth of the Company. Dr. Chen serves as the chairman of the strategic advisory committee, which is responsible for (i) evaluating and considering any strategic alternative, (ii) contributing and participating in discussions with potential strategic partners with  respect to any strategic alternative, and (iii) making recommendations to the Board and the management of the Company with respect to any strategic alternative, with such strategic alternative essential to the Group’s business development. Mr. Brown serves  as  the chairman of the compensation committee and is a member of the audit committee, the nomination committee and the strategic advisory committee.

 

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LETTER FROM THE BOARD

 

 

The Proposed RSU Grants also aim to recognise Mr. Tan’s past contributions to the Group. Before his retirement as an independent non-executive Director, Mr. Tan was the chairman of the audit committee and a member of the compensation committee, the nomination committee and the strategic advisory committee. Reference is made to the announcement of the Company dated 22 June 2018 in relation to the retirement of Mr. Tan. As the Proposed RSU Grants to Mr. Tan was made in recognition of his contribution for the year ended 31 December 2017 to the Company as an independent non-executive  Director, Mr. Tan remains entitled to the Proposed RSU Grants subject to shareholder approval.

 

Furthermore, there will not be substantial cash outflow by the Company under the Proposed RSU Grants. In this regard, the Directors (excluding Dr. Chen and Mr. Brown, who have reserved their view on the Proposed RSU Grants to themselves) consider that the terms of the Proposed RSU Grants are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Based on Dr. Chen and Mr. Brown’s contributions to the Company in the years 2017 and 2018 and Mr. Tan’s past contributions to the Company in the year ended 31 December 2017, the Compensation Committee (excluding Mr. Brown, who has reserved his view on the Proposed RSU Grants to himself) is also of the view that the terms of the Proposed RSU Grants to Mr. Tan, Dr. Chen and Mr. Brown are fair and reasonable, on normal commercial terms or better and in the interest of the Company and the Shareholders as a whole.

 

Reference is made to the circulars of the Company dated 7 June 2016 and 18 November 2016 respectively, relating to its revised Board policy (the ‘‘Revised Board Policy’’) which was resolved at a Board meeting on 12 May 2016, pursuant to which the details of  the Annual Additional Grant to existing Directors at the time of the Annual Additional Grant  and the method of calculation of the grant of Restricted Share Units to eligible Directors    are set out. The Annual Additional Grant to the existing non-executive Directors (including the independent non-executive Directors) is considered and approved annually at a meeting and will only be available for those Directors who remain in office as at 31 December of the relevant year and as at  the date of  the relevant proposed grant. The Annual Additional  Grant is fixed in accordance with a percentage of 25% of a fixed sum, being the most recent on-board grant prior to the Revised Board Policy which was made to an independent non- executive Director. The amounts of the Proposed RSU Grants have been calculated using   the relevant methods of calculation set out above and then divided by 10 to reflect the Company’s 10-to-1 share consolidation, which became effective on 7 December 2016, after the implementation of the Revised Board Policy.

 

 

 

As the Annual Additional Grant comprises a combination of 50% share options and  50% Restricted Share Units, the Proposed RSU Grants applicable to Mr. Tan is 50% of 125,000 shares under the Annual Additional Grant, that is, 62,500 Restricted Share Units granted in recognition of Mr. Tan’s service in the year ended 31 December 2017 which will vest immediately upon their grant.

 

 

 

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LETTER FROM THE BOARD

 

 

As the Annual Additional Grant comprises a combination of 50% share options and  50% Restricted Share Units, the Proposed RSU Grants applicable to Dr. Chen is 50% of 250,000 shares under the Annual Additional Grant, that is, 125,000 Restricted Share Units, of which 62,500 Restricted Share Units granted in recognition of Dr. Chen’s service in the year ended 31 December 2017 will vest immediately upon their grant and 62,500 Restricted Share Units granted in recognition of Dr. Chen’s service in the year ending 31 December 2018 will vest on 1 January 2019.

 

 

 

As the Annual Additional Grant comprises a combination of 50% share options and  50% Restricted Share Units, the Proposed RSU Grants applicable to Mr. Brown is 50% of 175,000 shares under the Annual Additional Grant, that is,  87,500 Restricted Share Units,  of which 25,000 Restricted Share Units granted in recognition of Mr. Brown’s service in the year ended 31 December 2017 will vest immediately upon their grant and 62,500 Restricted Share Units granted in recognition of Mr. Brown’s service in the year ending 31 December 2018 will vest on 1 January 2019.

 

Notes:

 

 

 

 

 

 

 

 

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LETTER FROM THE BOARD

 

 

IMPACT ON THE SHAREHOLDING STRUCTURE OF THE COMPANY

 

The following table shows the changes in the shareholding structure of the Company as at the Latest Practicable Date and the shareholding structure of the Company immediately upon the completion of the Proposed RSU Grant:

 

 

 

 

Notes:

 

 

 

 

 

 

SPECIFIC MANDATE TO ISSUE NEW SHARES

 

The new Shares to be issued under the Proposed RSU Grants will be issued under the specific mandate granted to the Directors by the Shareholders at the annual general meeting of the Company held on 13 June 2013 for the issue of Shares under the 2014 Equity  Incentive Plan. The Listing Committee of the Stock Exchange has previously granted its approval for the listing of, and permission to deal in, Shares to be issued under the 2014 Equity Incentive Plan, subject to the fulfilment of all other conditions of the 2014 Equity Incentive Plan. In the context of the grant of Restricted Share Units and issue of Shares pursuant thereto under

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LETTER FROM THE BOARD

 

 

the 2014 Equity Incentive Plan to  a  director or  a  former director as a connected person, the requirements under Chapter 14A of the Listing Rules would be required to be satisfied, including the obtaining of the approval of the Independent Shareholders. The total number of such new Shares which may be issued under the 2014 Equity Incentive Plan will not exceed 80,184,428. As at the Latest Practicable Date, 3,101,659 Shares remain issuable under the 2014 Equity Incentive Plan.

 

IMPLICATIONS UNDER THE LISTING RULES

 

Mr. Tan is a  former independent non-executive Director of the Company who retired  on 22 June 2018. He will remain a connected person of the Company for a period of 12 months after the date of his resignation. Dr. Chen is a non-executive Director of the Company and Mr. Brown is an independent non-executive Director of the Company. As such, each of Mr. Tan, Dr. Chen and Mr.  Brown is  a  connected person of  the Company. The Proposed RSU Grants (including the allotment and issue of  any  new  Shares thereunder) constitutes connected transactions of the Company under Chapter 14A of the Listing Rules and are thus subject to reporting, announcement and the Independent Shareholders’ approval requirements.

 

The Company has established the Independent Board Committee (excluding  Mr.  Brown in respect of the portion of the Proposed RSU Grants relating to himself) to advise  the Independent Shareholders in respect of the Proposed RSU Grants. The Company has appointed Messis Capital Limited as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect  of  the  Proposed RSU Grants.

 

The letter from the Independent Board Committee to the Independent Shareholders is set out on pages 46 to 47 of this circular. The letter from Messis Capital Limited to the Independent Board Committee and the Independent Shareholders is set out on pages 48  to  99 of this circular.

 

INFORMATION ABOUT THE COMPANY

 

Please refer to sub-section headed ‘‘Information on the Company and SMIC Beijing’’  on page 26 of this circular.

 

 

At the EGM, ordinary resolutions will be proposed to the Independent Shareholders to approve, among others, the Framework Agreement (including the Framework Agreement CCT and the Framework Agreement Annual Caps), the Centralised Fund Management Agreement (including the Centralised Fund Management Agreement CCT and the Centralised Fund Management Agreement Annual Caps) and the Proposed RSU Grants.

 

As China IC Fund is a connected person of the Company, its wholly-owned subsidiary Xinxin (Hongkong) Capital Co., Limited and its other associates (as defined in the Listing Rules) will abstain from voting on the ordinary resolutions to approve the Framework Agreement (including the Framework Agreement CCT and the Framework Agreement Annual Caps) and the Centralised Fund Management Agreement (including the Centralised Fund Management Agreement CCT and the Centralised Fund Management Agreement Annual Caps). Apart from Xinxin (Hongkong) Capital Co., Limited and other associates of China IC Fund, no other Shareholder will be required to abstain from voting on the aforementioned resolutions at the EGM. As at the Latest Practicable Date, Xinxin (Hongkong) Capital Co., Limited was holding 797,054,907 Shares and representing approximately 15.77% of the total issued share capital of the Company.

 

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LETTER FROM THE BOARD

 

 

Pursuant to Chapter 14A of the Listing Rules, each of Mr. Tan, Dr. Chen and Mr.  Brown and their associates are required to abstain from voting on the relevant ordinary resolutions to approve the Proposed RSU Grants to Mr. Tan, Dr. Chen and Mr. Brown (as  the case may be). As at the Latest Practicable Date, Mr. Tan was holding 177,939 Shares, representing approximately 0.0035% of the total issued share capital of the Company.

 

Save as aforementioned, no other Shareholder will be required to abstain from voting  on the resolutions at the EGM.

 

No Director was considered to have a  material interest in the Framework Agreement   or the Centralised Fund Management Agreement on the date of the Board meeting authorising the Framework Agreement and the Centralised Fund Management Agreement which would have required the Director to abstain from voting at the relevant Board  meeting. Each of Mr. Tan, a former independent non-executive Director of the Company,  Dr. Chen, a non-executive Director of the Company, and Mr. Brown, an independent non- executive Director of the Company, has abstained from voting on any relevant board resolutions in respect of the portion of the Proposed RSU Grants relating to himself.

 

Your attention is drawn to the general information set out in Appendix I to this circular.

 

 

The Board, including the independent non-executive Directors (excluding Mr. Brown  in respect of the  portion of  the Proposed RSU Grants relating to himself), considers that  it is in the best interests of the Company and the Shareholders as a whole to enter into the Framework Agreement, the Centralised Fund Management Agreement and approve the Proposed RSU Grants; the terms of the Framework Agreement, the Centralised Fund Management Agreement and the Proposed RSU Grants are fair and reasonable; and the entering into of the Framework Agreement, the Centralised Fund Management Agreement and transactions contemplated thereunder and the implementation of the Proposed RSU Grants are on normal commercial terms or better, in the ordinary and usual course  of business of the Group and in the interests of the Company and the Shareholders as a whole.

 

Accordingly, the Independent Board Committee (excluding Mr. Brown in respect of the portion of the Proposed RSU Grants relating to himself) recommends the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Framework Agreement (including the Framework Agreement CCT and the Framework Agreement Annual Caps), the Centralised Fund Management Agreement (including the Centralised Fund Management Agreement CCT and the Centralised Fund Management Agreement Annual Caps) and the Proposed RSU Grants.

 

 

The voting at the EGM will be taken by a poll. The Company will make an announcement of the poll results in accordance with the relevant requirements under the Listing Rules as soon as possible.

 

To the best knowledge, information and belief of the Directors, having made all reasonable enquiries, there is (i) no voting trust or other agreement or arrangement or understanding entered into by or binding upon any Shareholders; and (ii) no obligation or entitlement of any Shareholder as at the Latest Practicable Date, whereby it/he has or may have temporarily or permanently passed control over the exercise of the voting right in respect of its/his Shares to a third party, either generally or on a case-by-case basis.

 

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LETTER FROM THE BOARD

 

 

A form of proxy for the EGM is enclosed with this circular. Whether or not you intend to be present at the EGM, you are requested to complete the form of proxy and return it to the branch share registrar of the Company, Computershare Hong Kong Investor Services Limited, at Hopewell Centre, 17M Floor, 183 Queen’s Road East, Wanchai, Hong Kong in accordance with the instructions printed thereon not less than 48 hours before the time fixed for the EGM. The completion of a form of proxy will not preclude you from attending and voting at the EGM in person.

 

For determining the entitlement to attend and vote at the EGM, the register  of  members of the Company will be closed from 2 November 2018 to 7 November 2018 (both days inclusive), during which period no transfer of shares in the Company will be registered. In order to qualify for attending and voting at the EGM, all properly completed transfer forms, accompanied by the relevant certificates, must be lodged with the branch share registrar of the Company, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong by no later than 4 : 30 p.m. on 1 November 2018. All persons who are registered holders of the Shares on 7 November 2018, the record date for the EGM, will be entitled to  attend and  vote at the EGM.

 

By Order of the Board

Semiconductor Manufacturing International Corporation Gao Yonggang

Executive Director, Chief Financial Officer and Joint Company Secretary

 

Shanghai, 22 October 2018

 

 

– 38 –

 

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

 

Set out below is the text of the  letter of  recommendation, prepared for incorporation in  this circular, from the Independent Board Committee to the Independent Shareholders.

 

 

Semiconductor Manufacturing International Corporation

中 芯 國 際 集 成 電 路 製 造 有 限 公 司 *

(Incorporated in the Cayman Islands with limited liability)

(Stock  Code: 981)

 

22 October 2018

 

To the Independent Shareholders

 

Dear Sir or Madam,

 

CONTINUING CONNECTED TRANSACTIONS IN RELATION TO FRAMEWORK AGREEMENT

AND

CONTINUING CONNECTED TRANSACTIONS IN RELATION TO CENTRALISED FUND MANAGEMENT AGREEMENT

AND

CONNECTED TRANSACTION IN RELATION TO PROPOSED GRANT OF RESTRICTED SHARE UNITS TO A FORMER INDEPENDENT NON-EXECUTIVE DIRECTOR, A NON-EXECUTIVE DIRECTOR AND AN INDEPENDENT NON- EXECUTIVE DIRECTOR

 

We refer to the circular dated 22 October 2018 (the ‘‘Circular’’) issued by the Company to the Shareholders of which this letter forms part. Unless the context otherwise requires, terms used in this letter shall have the same meanings given to them in the Circular.

 

We (excluding Mr. Brown in respect of the portion of the Proposed RSU  Grants relating to himself) have been appointed by the Board to advise the Independent Shareholders as to whether the  terms  of  the  Framework  Agreement,  the  Centralised  Fund Management Agreement and the Proposed RSU Grants are fair and reasonable, and whether the entering into of the Framework Agreement, the Centralised Fund Management Agreement and the implementation of the Proposed RSU Grants are on normal commercial terms or better, in the ordinary and usual course of business of the Company and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote, taking into account the recommendations of Messis Capital Limited.

 

 

 

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

 

 

Messis Capital Limited has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders as to whether  the terms of the Framework Agreement, the Centralised Fund Management Agreement and the Proposed RSU Grants are fair and reasonable, and whether the entering into of Framework Agreement, the Centralised Fund Management Agreement and the implementation of  the Proposed RSU  Grants are on  normal commercial terms or  better,   in the ordinary and usual course of business of the Company and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote on the relevant resolutions. Details of its advice, together with the principal factors and reasons taken into consideration in arriving at such advice, are set out on pages  48 to 99 of the Circular.

 

We (excluding Mr. Brown in respect of the portion of the Proposed RSU  Grants relating to himself), having taken into account the advice of Messis Capital Limited,  consider that the terms of the Framework Agreement, the Centralised Fund Management Agreement and the Proposed RSU Grants are fair and reasonable, and the entering into of  the Framework Agreement, the Centralised Fund Management Agreement and the implementation of  the Proposed RSU Grants are on  normal commercial terms or  better,    in the ordinary and usual course of business of the Company and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of all the ordinary resolutions to be proposed at the EGM. Your attention is also drawn to the letter from the Board set out on pages 6 to 45 of the Circular and the additional information set out in the Appendix I to the Circular.

 

 

 

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

The following is the full text of the letter from the Independent Financial Adviser which  sets out its advice to the Independent Board Committee and the Independent Shareholders for inclusion in this circular.

 

 

 

 

 

22 October 2018

 

The Independent Board Committee and the Independent Shareholders of Semiconductor Manufacturing International Corporation

 

Dear Sir/Madam,

 

NON-EXECUTIVE DIRECTOR, A NON-EXECUTIVE DIRECTOR AND AN INDEPENDENT NON-EXECUTIVE DIRECTOR

 

INTRODUCTION

 

We refer to our appointment as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in relation to (i) the Centralised Fund Management Agreement; (ii) the Framework Agreement; and (iii) the Proposed RSU Grants, details of which are set out in the letter from the Board (the ‘‘Letter from the Board’’) contained in the circular of the Company dated 22 October 2018 issued to the Shareholders (the ‘‘Circular’’), of which this letter forms part. Terms used in this letter shall have the same meanings as those defined in the Circular, unless otherwise specified.

 

Reference is made to the Company’s announcement dated 13 July 2018 (as supplemented by the Company’s announcement on 19 September 2018), that on 1  June  2017, the Company and its subsidiaries, SMIC Beijing and SMSC entered into the Centralised Fund Management Agreement, pursuant to which: (i) the  Company  will  procure its wholly-owned subsidiary SMIC Beijing to carry out centralised management of the Company’s RMB fund and foreign exchange in accordance with the relevant PRC laws and regulations; and (ii) SMSC and its Controlled Subsidiaries will participate in the Company’s centralised fund management system, which will be managed by SMIC Beijing in accordance with the relevant PRC laws and regulations. The Centralised Fund Management Agreement is with a term commenced on 1 June 2017 and ending on 31 December 2020. In addition, on 11 June 2018, the Company and its subsidiaries, and SMSC entered into the Framework Agreement in relation to the supply of goods, rendering of or receiving services, leasing of assets, transfer of assets, provision of technical authorisation or licensing and provision of guarantee. The Framework Agreement is with a term commenced on 26 April 2018 and ending on 31 December 2019.

 

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

The Centralised Fund Management Agreement and the Framework Agreement were entered into by the parties at a time when SMSC was not a connected person. Due to the completion of the Contribution by China IC Fund (which indirectly holds approximately 15.77% equity interest in the Company as at the Latest Practicable Date and is therefore a connected person of the Company at the issuer level) in approximately 24.71% equity interest in SMSC as disclosed in the Company’s announcement dated 30 January 2018, SMSC has therefore become a connected subsidiary of the Company as defined under Rule 14A.16 of the Listing Rules, and is thus a connected person of the Company. The  Centralised Fund Management Agreement and the Framework Agreement are therefore, subject to the requirements under Chapter 14A of the Listing Rules.

 

In relation to the transactions contemplated under the Centralised Fund Management Agreement, as one or more of  the applicable percentage ratios (other than the profit ratio)   in respect of each of the Centralised Fund Management Agreement Annual Caps (other    than the annual caps for Other Financial Services) exceeds 5%, the transactions constitute continuing connected transactions subject to the reporting, announcement and the Independent Shareholders’ approval requirements under Chapter  14A  of  the  Listing  Rules. As one or more of the applicable percentage ratios (other than the profit ratio) in respect of the annual caps for Other Financial Services are more than 0.1% but  less than  5%, the transaction is subject to the reporting, announcement and annual review requirements but exempt from  the  Independent  Shareholders’  approval  requirement  under Chapter 14A of the Listing Rules.

 

In relation to the transactions contemplated under the Framework Agreement, as one or more of the applicable percentage ratios in respect of the Framework Agreement Annual Caps for Type IV CCT, Type V CCT and Type VI CCT are 5% or more but less than 25%, the transactions constitute continuing connected transaction subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules. As the applicable percentage ratios in respect of each of the Framework Agreement Annual Caps for Type I CCT, Type II CCT and Type III CCT are more than 0.1% but less than 5%, the transactions are subject to the reporting, announcement and annual review requirements but  exempt from  the  Independent Shareholders’ approval requirement under Chapter 14A of the Listing Rules.

 

Reference is also made to the Company’s announcement dated 23 May 2018 pursuant  to which it was resolved at a meeting held on 7 February 2018 to grant 337,500 Restricted Share Units under the 2014 Equity Incentive Plan, subject to the Independent Shareholders’ approval at the EGM. Reference is also made to the Company’s announcement dated 22  June 2018 in relation to, among others, the retirement of Mr. Tan. As a result of the retirement of Mr. Tan, the 62,500 Restricted Share Units granted to Mr. Tan at a meeting held on 7 February 2018, and which were intended to vest on 1 January 2019, have been forfeited in full on 22 June 2018 according to the terms of the 2014 Equity Incentive Plan.

 

Dr. Chen is a non-executive Director of the Company and Mr.  Brown  is  an independent non-executive Director of the Company. Mr. Tan is a former independent non- executive Director of the Company who retired on 22 June 2018. He will remain a connected person of the Company for a period of 12 months after the date of his resignation. As such, each of Dr. Chen, Mr. Tan and Mr. Brown is a connected person of the Company. The Proposed RSU Grants (including the allotment and issue of any new Shares thereunder) constitutes connected transactions of the Company under Chapter 14A of the Listing Rules and are thus subject to reporting, announcement and the Independent  Shareholders’  approval requirements.

 

The Independent Board Committee has been established to advise and provide recommendation to the Independent Shareholders on (i) the Centralised Fund Management Agreement and its annual caps; (ii) the Framework Agreement and its annual caps; and (iii) the Proposed RSU Grants and any transactions contemplated thereunder (including the allotment and issue of any new Shares thereunder) and to advise the Independent Shareholders on how to vote. We, Messis Capital limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of (i) the Centralised Fund Management Agreement and its annual caps; (ii) the Framework Agreement and its annual caps; and (iii) the Proposed RSU Grants and any transactions contemplated thereunder (including the allotment and issue of any new Shares thereunder) are on normal commercial terms and in the ordinary and usual course of business of the Group; fair and reasonable so far as the Independent Shareholders are concerned and is in the interests of the Company and the shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

OUR INDEPENDENCE

 

As at the Latest Practicable Date, we did not have any relationship with or interest in the Company or any other parties that could reasonably be regarded as relevant to our independence. In the last two years, we have acted as the independent financial adviser to the independent board committee and the independent shareholders of the Company for the following transactions:

 

 

Apart from normal professional fees paid or payable to us in connection with the previous appointments mentioned above as well as this appointment as the Independent Financial Adviser, no arrangement exist whereby we have received or will receive any fees or benefits from the Company or any other parties that could reasonably be regarded as relevant to our independence. Accordingly, we consider that the aforementioned previous appointment would not affect our independence, and that we are independent pursuant to Rule 13.84 of the Listing Rules.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

BASIS OF OUR OPINION

 

In formulating our opinion and recommendation, we have considered, among other things, (i) the Centralised Fund Management Agreement; (ii) the Framework Agreement; (iii) the Company’s annual report for the year ended 31 December 2017 (the ‘‘Annual Report 2017’’), and the interim report for the six months ended 30 June 2018 (the ‘‘Interim Report 2018’’); and (iv) other information as set out in the Circular. We have also relied on all relevant information, opinions and facts supplied and represented by the Company and the management of the Company. We have assumed that all such information, opinions, facts and representations contained or referred to in the Circular, for which the Company is fully responsible, were true and accurate in all material respects as at the date hereof and may be relied upon. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Company, and the Company has confirmed that no material facts have been withheld or omitted from the information provided and referred to in the Circular, which would make any statement therein misleading.

 

We consider that we have reviewed sufficient information currently available to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried out independent verification of the information provided by the management and the representatives of  the Company, nor have we  conducted any form      of in-depth investigation into the businesses, affairs, operations, financial position or future prospects of the Company or any of its subsidiaries.

 

PRINCIPAL FACTORS AND REASONS CONCERNED

 

In considering whether the terms of (i) the Centralised Fund Management Agreement and its annual caps; (ii) the Framework Agreement and its annual caps; and (iii) the  Proposed RSU Grants are fair and reasonable in so far as the Independent Shareholders are concerned, we have taken into account the principal factors and reasons set out below:

 

 

Background of the Centralised Fund Management Agreement

 

Reference is made to the Company’s announcement dated 13 July 2018 (as supplemented by the Company’s announcement dated 19 September 2018) that on 1 June 2017, the Company and its subsidiaries, SMIC Beijing and SMSC entered into the Centralised Fund Management Agreement, pursuant to which: (i) the Company will procure its wholly-owned subsidiary SMIC Beijing to carry out centralised management of the Company’s RMB fund and foreign exchange in accordance with the relevant PRC laws and regulations; and (ii) SMSC and its Controlled Subsidiaries will participate in the Company’s centralised fund management system, which will be managed by SMIC  Beijing  in  accordance with the relevant PRC laws and regulations. The Centralised Fund Management Agreement is with a term commenced on 1 June 2017 and ending on 31 December 2020.

 

The Centralised Fund Management Agreement CCT will include the following:

 

 

SMIC Beijing provides deposit services and pays interest to SMSC.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

SMIC Beijing serves as the platform for centralised collection and payment activities and foreign exchange activities of the Group. SMSC may carry out such activities by itself or through SMIC Beijing.

 

 

SMIC Beijing provides internal loan services to SMSC in accordance with PRC laws, regulations and policies.

 

 

Letter of Credit Services will be utilised as a settlement instrument through which the Company will utilise its overseas credit lines to provide letter of credit on behalf of SMSC for importing equipment in accordance  with PRC laws, regulations and policies.

 

 

SMIC Beijing provides other financial services to SMSC in accordance with PRC laws, regulations and policies.

 

Reasons for and benefit of the Centralised Fund Management Agreement

 

As stated in the Letter from the Board, SMSC operates a 12-inch wafer fab with advanced process capability. As the market demand for advanced process continues to surge, the Company will allocate some of its advanced node manufacturing to SMSC to ensure future wafer production needs of the Company are met.

 

As set out in the Letter from the  Board, the Company considers that  the  entry into of the Centralised Fund Management Agreement and the transactions contemplated thereunder will have the benefits of reducing the Group’s overall debt levels and increasing efficient fund usage, reducing the Group’s interest expense and obtaining favourable exchange rate for the Group.

 

Based on our discussions with the management of the Company, SMIC Beijing is one of the operating subsidiaries of the Group and has taken the centralised fund management function for the Group members. We were given to understand that SMIC Beijing, by leveraging in the economies of  scale achieved by the centralisation of the Group’s financial resources, is able to obtain better terms from independent banks and financial institutions in respect of different financial services, such as relatively more favourable interest rate, exchange rate and credit term, than individual Group companies negotiating its own terms.

 

In addition, by centralising the internal treasury function, the management of the Company considers that the Group can reduce unused loan and the  overall  debt levels. The internal loan and provision of letter of credit services provided by SMIC Beijing will allow more efficient utilisation of available financial resources of the Group, such as combing the borrowing needs of individual Group  companies into a single banking facility. Therefore, the Group can better monitor its treasury and working capital and increase efficient fund usage.

 

In light of the abovementioned, we consider that  entering  into  the Centralised Fund Management Agreement is  in  the  interest  of  the  Company  and the Shareholders as a whole.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

Pricing policies of the Centralised Fund Management Agreement

 

As stated in the Letter from the Board, the price of the services provided by SMIC Beijing to SMSC contemplated under the Centralised Fund Management Agreement will be fair under the context of connected  transactions  and determined according to  the market principle on  an  arm’s length basis, subject   to compliance with requirements for connected transactions of the Stock  Exchange. Under the Group’s existing centralised fund management system,  SMIC Beijing collectively procures certain fund management services from third- party banks or financial institutions. SMIC Beijing will charge its subsidiaries  with reference to terms offered by third-party banks or financial institutions for such fund management services.

 

Based on our discussion with the management of the Company and the information provided, in relation to the internal deposit  and  internal  loan  services, we understand that SMIC Beijing will obtain two or more written quotes from third-party commercial banks in the PRC for providing deposit and loan services of the same type during the same period to SMSC. For internal deposit services, the interest rate adopted for SMSC’s deposits with SMIC Beijing will be the same as or lower than the lowest of the interest rates quoted. For internal loan services, the adopted interest rate for SMSC’s loans from SMIC Beijing will be the same as or higher than the highest of the interest rates quoted. The Company understands that the third-party commercial banks will make reference to, and generally seek to be in line with the benchmark interest rates specified by the PBOC for RMB deposits or RMB loans of a similar type. For the purpose of clarification, such benchmark interest rates are guidance rates published by the PBOC from time to time for reference only and will not be adopted even if (in the case of the internal deposit services) it is lower than the lowest of the interest rates quoted by third-party commercial banks in the PRC or (in the case of the internal loan services) it is higher than the highest of the interest rates quoted by third- party commercial banks in the PRC. The PBOC  publishes benchmark interest  rates for RMB deposits and RMB loans from time to time which serve as a guidance price for reference only for the commercial banks in the PRC. The Company understands that when determining the interest rates quoted to SMSC, the third-party commercial banks will refer to such PBOC benchmark interest rate for RMB deposits or RMB loans of a similar type and make adjustment based on the bank’s credit assessment of SMSC. Given that SMIC Beijing will obtain two   or more written quotes from third-party commercial banks in the PRC for  providing deposit services and loan services of the same type during the same period to SMSC which is consistent with the Group’s existing centralised fund management system for deposit service, we consider that the pricing policy for internal deposit and internal loan services is fair and reasonable.

 

On the other hand, the terms in respect of the collection and payment services and foreign exchange services, and provision of letter of credit services will be determined based on arm’s length negotiations by the parties which will not be   less favourable to SMIC Beijing than (i) fees charged by SMIC Beijing to other subsidiaries which are not connected persons under the Listing Rules; and (ii) fees charged to SMIC Beijing by other third-party commercial banks or financial institutions providing fund management services to SMIC Beijing for services of the same type during the same period. SMIC Beijing will obtain services of the same type from third-party commercial banks or financial institutions first and  then use the fees charged to it to determine fees to be charged to SMSC as described above. As advised by the management of the Company, in determining such terms offered to SMSC, SMIC Beijing will make reference to the terms offered by the independent banks and financial institutions, and will not be less favourable to SMIC Beijing than that offered to other wholly-owned subsidiaries.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

Taking into account (i) SMIC Beijing will obtain two or more written quotes from third-party commercial banks in the PRC for providing deposit services and loan services of the same type during the same period to SMSC which is consistent with the Group’s approach to its subsidiaries which are not connected person of  the Company under its existing centralised fund management system; and (ii) SMIC Beijing will make reference to the terms offered by the independent banks and financial institutions in respect of the collection and payment services and foreign exchange services and provision of letter of credit services, we are of the view that the pricing of the fund management services under the Centralised Fund Management  Agreement  based on  quotes  obtained  from  third-party commercial banks or financial institutions could reflect the market rate for such services, and are not less favourable to SMIC Beijing than that offered to other wholly-owned subsidiaries having compared SMIC Beijing’s treatment to the wholly-owned subsidiaries of the Company under the Group’s existing centralised fund management system, and that the terms of the Centralised Fund Management Agreement are fair and reasonable and in the interests of the Company and its Shareholders as a whole.

 

Historical transactions amounts

 

The historical transaction amounts between the Company and SMSC for the transactions contemplated under the Centralised Fund  Management  Agreement are as follows:

 

 

Notes:

 

 

 

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

The Annual Cap

 

The annual caps under the Centralised Fund Management Agreement are set out below:

 

 

As stated in the Letter from the Board, the aforementioned annual caps are determined based on factors such as the expected increase of total assets over the effective period of the Centralised Fund Management Agreement; the operating cash flow and the financial and practical needs in respect of the business  expansion and the future development plan of each of SMSC and the Group. Reference is made to the Company’s circular dated 6 March 2018, the total investment for SMSC, is estimated to be US$10.24 billion. SMSC is expected to establish and build up large-scale manufacturing capacity focusing on  14  and more advanced nanometre technologies and aims to reach a manufacturing  capacity of 35,000 wafers per month after the completion of the first phase of development. As discussed with the Company, the estimated capital expenditure for the first phase of development of SMSC would be approximately half of the estimated total investment of US$10.24 billion and the investment in the first  phase has already initiated. We are

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

given to understand that the Centralised Fund Management Agreement Annual Caps are mainly based  on  such  development plan of SMSC, where details of our analysis of the annual caps are set out below.

 

We note that for the year ended 31 December 2017 and from 1 January 2018  to 30 September 2018, in respect of the Centralised Fund Management Agreement CCT, SMSC had mainly utilised the Internal Deposit Services only, which amount to approximately US$53 million and US$979 million, respectively. As understood from the Company, the relatively low utilisation of the services under the Centralised Fund Management Agreement for the year ended 31 December 2017 was due to the capital investment plans and operation of SMSC had not yet commenced in 2017. Reference is made to the Company’s circular dated 6 March 2018 in relation to the proposed capital contribution and deemed  disposal  of equity interest in SMSC. SMIC Holdings, SMIC Shanghai, China IC Fund and Shanghai IC Fund had agreed to contribute aggregately US$3.5 billion in the registered capital of SMSC. As advised by the Company, as at 30 September 2018, SMSC had aggregately received approximately US$1.15 billion cash in respect of the registered capital contribution, and is expected to receive an aggregate of approximately US$2.15 billion at the end of 2018. As advised by the Company,  the rest of the registered capital contribution of approximately US$1.35 billion is expected to be received in 2019. Since the investment schedule of SMSC will be adjusted according to the changing market conditions and financial conditions of the Group, the annual caps for the Internal Deposit Services are set at  US$2  billion for each of the year ending 31 December 2018, 2019 and 2020 to provide greater short-term cash management flexibility.

 

As understood from the Company, in respect of the registered capital contribution, China IC Fund and Shanghai IC Fund will contribute the RMB equivalent of their capital contribution obligations, which together amount to US$1,746.5 million. SMSC could utilise the Collection and Payment Services and Foreign Exchange Services to exchange the RMB into US$ or other currencies for its operation when required. In addition, as stated in the Letter from the Board, as a matter of foreign currency risk control, SMSC may need to convert the funding of capital expenditure into various currencies (which may be further converted into other currencies, if necessary). We have discussed with the management of the Company and understood that the Group’s consolidated financial statements are presented in US$, and in controlling the Group’s foreign currency risk exposure as a whole, other subsidiaries of the Group will also utilise such service when required. Moreover, as mentioned earlier, the Company estimated that the investment amount for the first phase of development of SMSC approximates to half of the total investment of US$10.24 billion, and currently, the planned capital expenditures for the three years ending 31 December 2020 is over US$3 billion in aggregate. As discussed with the Company, since the suppliers of equipment are mainly overseas companies, the payments will be settled in currencies such as  US$, Japanese Yen and Euro, which will require the Collection and Payment Services and Foreign Exchange Services from the Company. Based on the foregoing, an annual cap of US$2 billion is set for each of the three years ending  31 December 2020 for the Collection and Payment and Foreign Exchange Cap to cater for the RMB registered capital received, foreign currency risk control and  the settlement of the capital expenditures, which we consider fair and reasonable.

 

We have discussed with the management of the Company and given to understand that the Internal Loan Cap and Provision of Letter of Credit Cap are based on the capital expenditure and business development plan for SMSC. As mentioned earlier, the Company estimated that the planned capital expenditures  for the three years ending 31 December 2020 is over US$3 billion in aggregate. The Company advised that the capital expenditure mainly consists of equipment and tools, which could be settled by letter of credit. For clarification, for the Provision of Letter of Credit Services, the Company provides the letter of  credit  on behalf of SMSC for importing equipment, and SMSC will be ultimately responsible for the settlement of the letter of credit. SMSC may use its own funds or utilise the Internal Loan Services to settle such letter of credit. In addition, SMSC could also utilise the Internal Loan Services for such capital expenditure,

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

depending on the market conditions and financial conditions of the Group. As advised by the Company, the suppliers of  equipment may require down payment  or deposit to be made, and since the investment in the first phase of development  of SMSC has already initiated, SMSC may also require the Internal Loan Service and Provision of Letter of Credit Service in the remaining months in 2018. In addition, as discussed with the management of the Company, though SMSC has already received capital contribution of approximately US$1.15 billion from shareholders as at 30 September 2018, in the case that if no further registered capital is injected due to unforeseeable reasons, SMSC would require the Internal Loan Services to satisfy its large capital expenditure and operation needs for its first phase of development. Further, the Company advises that  in  order  to improve earnings from the Group’s overall cash pool, the capital contribution received by SMSC will be deposited as fixed deposits. In case that SMSC requires cash before the maturity of the fixed deposits, SMSC could utilise the Internal Loan Service for better flexibility of the Group’s overall cash management. We have discussed with the management of the Company and are given to understand that it is also a common practice for other subsidiaries of the Group to utilise the Internal Loan  Service, depending on  the  individual subsidiary’s  cash  generating ability and payment needs to suppliers. We have discussed with the management  of the Company on the current expenditure plan, and understood that the  maximum capital expenditure of SMSC in a year is approximately US$2 billion. Therefore, the Centralised Fund Management Agreement Annual Caps  for  Internal Loan Services are set at US$2 billion, which also approximates to the difference between the aggregate capital expenditure of over US$3 billion for the three years ending 31 December 2020 and the capital contribution SMSC has received. Further, as advised by the Company, the investment schedule of the first phase of development of SMSC will be adjusted according to the changing market conditions and financial conditions of the Group, the annual caps for  each financial year are set with a buffer to maintain flexibility for the Group  to  expedite its planned capital expenditures, which we consider fair and reasonable.

 

Taking into account (i) the basis of annual caps under the Centralised Fund Management Agreement; (ii) the large capital expenditure of SMSC; and (iii) the uncertainty in future investment schedules, we are of the view that the annual caps under the Centralised Fund Management Agreement are fair and reasonable and   in the interest of the Company and Shareholders as a whole.

 

Internal Control Procedures

 

We have also considered and reviewed the general and Centralised Fund Management Agreement CCT internal control procedures between the Company and SMSC, please refer to the section headed ‘‘(2) The Framework Agreement — Internal Control Procedures’’ for details and our analysis.

 

Recommendation on the Centralised Fund Management Agreement

 

Having considered the principal factors and reasons described above, in particular (i) the Group is able to obtain better interest rates and exchange rates from independent banks and financial institutions in respect of different financial services through SMIC Beijing; (ii) the pricing of the Centralised Fund Management Agreement CCT based  on  quotes  obtained  from  independent banks or financial institutions could reflect the market terms, and are not less favourable to SMIC Beijing than that offered to the wholly-owned subsidiaries of the Company; and (iii) the basis of annual caps in relation to the Centralised Fund Management Agreement are fair and reasonable, we are of the opinion that the terms of the Centralised Fund Management Agreement including the annual caps are on normal commercial terms and are fair and reasonable as far as the interests of the Independent Shareholders are concerned, and in the interests of  the Company and its Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to approve the Centralised Fund Management Agreement and the related annual caps at the EGM.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

Background of the Framework Agreement

 

Reference is made to the Company’s announcement dated 13 July 2018 (as supplemented by the Company’s announcement dated 19 September 2018, that on 11 June 2018, the Company and SMSC entered into the Framework Agreement in relation to the supply of goods, rendering of or receiving services, leasing of assets, transfer of assets, provision of technical authorisation or licensing and provision of guarantee. The Framework Agreement is with a term commenced on 26 April 2018 and ending on 31 December 2019.

 

Reasons for and benefit of the Framework Agreement

 

As discussed with the Company, SMSC is principally engaged in wafer manufacturing, wafer probing and bumping, technology development, design service, mask manufacturing, assembly and final testing of integrated circuits and sales of self-manufactured products. SMSC is expected to establish and build up large-scale manufacturing capacity focusing on 14-nanometre and below process and manufacturing technologies and aims to reach a manufacturing capacity of 35,000 wafers per month after the completion of the first phase of development.  As stated in the Letter from the Board, as the market demand  for  advanced process continues to surge, the Company will allocate some of its advanced node manufacturing to SMSC to ensure future wafer production needs of the Company are met.

 

We have reviewed the feasibility report in relation to the development plan of SMSC (the ‘‘Feasibility Report’’). The Feasibility Report was prepared by a PRC based consulting company, which mainly engages in the engineering consulting, engineering design and main contracting business, and is involved in industries such as electronic, high-end manufacturing and infrastructure. We noted from the Feasibility Report that, the 14-nanometre technology could be applied on mainstream mobile platforms, automotive, Internet of Things and  cloud computing. Moreover, the 16/14-nanometre products’ market share  by  revenue   in the global pure play foundry market is expected to  grow from approximately  6% in 2016 to 22% in 2019. As stated in the Letter from the Board, with the expansion of SMSC’s capacity and continuous innovation, the Company believes that it will be able to enhance its position in the industry and benefit from economies of scale.

 

Furthermore, as SMSC is a subsidiary of the Group, it is normal commercial practice for the Company and SMSC to support each other. The Framework Agreement and the transactions contemplated thereunder could aid the Group’s overall business development as the Group will continue to allocate some of its advanced node manufacturing to SMSC.

 

Having considered the aforementioned factors in particular (i) the expected growth in 14-nanometre products; (ii) the expansion of SMSC’s capacity will be able to enhance the Group’s industry position and benefit from  economies of  scale; and (iii) SMSC is a subsidiary of the Company and it is normal commercial practice for the Company and SMSC to support each other, we consider that the transactions under the Framework Agreement are in the ordinary  and  usual  course of the Company’s business and the Company has commercial rationale to enter into the Framework Agreement and that entering into the Framework Agreement is in the interest of the Company and the Shareholders as a whole.

 

Types of transactions

 

The Company and SMSC agree to enter into one or more of the following types of transactions with each other including the supply of goods, rendering of or receiving services,

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

leasing of assets, transfer of assets, provision of technical authorisation or licensing and provision of guarantee:

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

Pricing policies and control procedures of the transactions under the Framework Agreement

 

We have reviewed the Framework Agreement and conducted discussions with the management of the Company regarding the major terms therein.  We understand from the management of the  Company  that  the  price  for  the  services provided by SMSC to the  Company  contemplated  under  the  Framework Agreement will be determined in accordance with the following general principles in ascending order:

 

 

 

 

 

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

Where general pricing principles (2) to (5) apply, where possible, each of the Company and SMSC will obtain at least two quotations or tenders from independent third parties before agreeing upon the applicable price.

 

We have conducted further analysis on the pricing policies for each type of  the transactions under the Framework Agreement based on the discussion with    the management of the Company as below:

 

 

The Company as the seller of goods:

 

In respect of selling of spare parts, raw materials and photomasks (general pricing principle (3) above), the personnel in the Corporate Supply Planning Management (‘‘SPM’’) department of the Company are responsible for setting the price of the goods. 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, the Company also engages two to three independent brokers to provide quotations based on the specific configurations of a tool or equipment, the selling price is based on the average prices provided by these brokers and is not less favourable to the Company.

 

The Company as the purchaser of goods:

 

In respect of purchasing spare parts and raw materials (general pricing principle (3) above), the personnel in the SPM of the Company carry out the same procedure as above based on the same policy to  ensure purchasing prices are not less favourable to the Company.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

The Company will not purchase photomasks from SMSC.

 

In respect of purchasing finished product from SMSC, the transaction is a pass through of customers’ orders received by the Company to SMSC. It is a one-way sale of finished product from SMSC to the Company. The sales team of the Company are responsible for negotiation with the customers to ensure the prices are at market value and favourable to the Group as a whole. Once a customer’s order is identified as appropriate for production by SMSC based on customers’ request, technology nodes, type of applications and fab availability, the system of the Company will generate a purchase order from the  Company to SMSC based on the same price, terms and conditions of the purchase order of the customer. According to the arrangement between the Company and SMSC, there is no difference between the sales prices from the Company to the customers and the transaction price from  SMSC to the Company with respect to finished products, since SMSC will ultimately undertake all risks associated with the product liability and/or any legal claims arising from the products and will fully cover all potential losses suffered by the Company due to the products supplied  by SMSC. Upon receiving the payment from customers  by  the Company, the finance and accounting team of  the  Company  arranges  to pay SMSC for the finished product. If the customer requires further backend services such as bumping and testing, the Company will  perform the services or outsource to other service providers. The Company charges its customers for the total of product  costs  and services performed.

 

 

Each of the Company and SMSC is subject to the following general control procedures:

 

 

 

 

 

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Historical transaction amounts

 

The historical transaction amounts among the Company and SMSC for the transactions contemplated under the Framework Agreement are as follows:

 

 

Notes:

 

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

For due diligence purpose, we have conducted analysis on the pricing policies for each type of the transactions under the Framework Agreement based on the discussion with the management of the Company and the review results of our work done, as below:

 

 

Pursuant to the Framework Agreement, the  pricing for  purchase and  sale of goods, either the Company as seller or purchaser is with reference to the aforementioned market price set out in general pricing principles (3). As advised by the management of the Company, the market price is determined by  comparing against independent third parties for  comparable product at  the same time and in the same region. We have discussed with the management of the Company and understood that the  Company  would  obtain quotations from two or more independent third parties or refer  to recent purchases or sales from/to independent third parties to determine the price of the goods under Type I CCT. The quotations or recent purchase/sale records will be of the same or similar to the product that is going to be transacted with SMSC. As the independent third parties quotations and  recent purchase/sales records provide a reference to the market price of the goods, we consider the pricing policy for the purchase and sales of goods is fair and reasonable.

 

 

 

As advised by the management of the Company, in respect of (a) processing and testing services and (e) research, development and experiment support service, the Company will refer to the price quoted by two or more independent service providers before providing such services to SMSC and the pricing will be not less favourable to the Company. As advised by the Company, in respect of (a) processing and testing services between the Company and SMSC, numerous sub-processes are involved, which may not have any direct independent third party comparable. Nevertheless, the Company and SMSC can identify the sales amount of end products given up for the relevant production capacity utilised for the provision of processing and testing services. The Company and SMSC can then make reference to the market price of such end products and derives the market price attributable to such  processing and testing services. As such, we consider that pricing policy for both of the services are determined based on  market price, and is fair and reasonable.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

 

 

Pursuant to the Framework Agreement, the pricing for leasing of plant and office premises and equipment is with reference to the aforementioned market price set out in general pricing principles (3). As advised by the Company, since the plant and office are still under construction, no rental agreement has been entered into between the Company and SMSC. Further,  as confirmed by the Company, there are no direct independent third party comparable for leasing of plant and office. To our best effort basis, we attempted to search on the websites of PRC properties agent for leasing of plants and offices with (i) manufacturing use; (ii) similar location; (iii) similar size; and (iv) open for rental in 2018, and did not identify any comparable  that fall within the criteria. As discussed with the Company, the rental of  plant and office to be leased to SMSC will be based on the cost of construction and the useful life of the plant and office, plus a reasonable markup of 5%. In assessing the fairness of the rental, we have reviewed a Shanghai property market report published in January 2018 by an international real estate service firm which operates in over 60 countries. From the Shanghai property market report, we notice that the yield of industrial properties in Shanghai by the end of 2017 is approximately 5%, which is in line with the markup charged by the Company. As such, we consider the pricing for leasing of plant and office represent the market price and is fair and reasonable. In respect of leasing of equipment, as discussed with the Company, the rental charge will be determined by reference to the nature of lease, the market conditions and will be on comparable terms with the quotes from independent third parties of a similar nature and comparable scale. The finance department of the Company will seek quotations from two or more comparable independent third parties to determine the rental of the equipment. As such, we are of the view that the pricing policy for leasing of equipment is with reference to the market price, fair and reasonable.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

Pursuant to the Framework Agreement, the pricing for acquisition and disposal of equipment is with reference to the  aforementioned market price set out in general pricing principles (3). The Company and SMSC are both wafers manufactures and therefore, the Company and SMSC can  use  the same equipment for production. Where necessary and if required,  both  parties can acquire and disposal equipment to one another in order to meet production needs and to optimise production efficiency of the Group. As advised by the management of the Company, before agreeing upon the applicable price both parties will consider the price of the asset through two  to three quotations from independent brokers, which we consider will be the market price and hence such policy is a fair and reasonable basis for the pricing of transfer of equipment.

 

 

Pursuant to the Framework Agreement, the pricing for provision of technical authorisation or licensing by the Company to SMSC is with reference to market price (see general pricing principle (3) above) and the pricing for sharing of research and development costs in relation to 14- nanometre technologies is based on the price determined by other reasonable means as agreed upon by both parties (see general pricing principle (5) above).

 

As advised by the Company, the use of 14-nanometre technologies by SMSC might be charged by a way of authorisation or licensing fee and/or by sharing of research and development costs, where the total fee charged under Type V CCT would be approximately US$300 million for 2018 to 2019 in aggregate. As advised by the Company, SMSC may engage a qualified and reputable valuer with the agreement of the Company to perform fair value assessment for the provision of technical authorisation or licensing by the Company to SMSC. We consider that the fair value assessed by qualified valuer represents the market price and the aforementioned pricing policy is fair and reasonable. With respect to the sharing of research and development costs in relation to 14-nanometre technologies, as advised by the Company, such sharing cost will be with reference to the total technical authorisation or licensing fee, which will be assessed by a fair value assessment and the amount should be mutually agreed between the Company and SMSC. Therefore, we consider such fair value assessment will provide a reasonable basis for the mutually agreed prices. As such, we consider the pricing policy of the sharing of research and development costs is fair and reasonable.

 

 

As advised by the Company, in respect of provision of guarantee for financing activities, the Company will provide guarantee for, such as,  SMSC’s operating lease or financial lease of assets and banking facilities granted to SMSC. The Company will charge SMSC for its guarantee services in return.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

For our due diligence purpose, we have discussed with the management of the Company for the reasoning of the provision of guarantee. Reference is made to the circular dated 6 March 2018 in relation to the proposed capital contribution and deemed disposal of equity interest in SMSC. According to the Joint Venture Agreement, the total investment for SMSC, is estimated to be US$10.24 billion. While the parties are obliged to make cash contribution to the registered capital of SMSC in an aggregate amount of US$3.5 billion, the difference between the total investment of US$10.24 billion and enlarged registered capital of SMSC after the Capital Contribution is intended to be funded through SMSC’s internal cash flow,  shareholders’  further contribution to the registered capital of SMSC or  debt  financing. As  such, as advised by the management of the Company, the Company also wishes to assist SMSC’s debt financing by a way of provision of guarantee. As advised by the management of the Company, the provision of guarantee for SMSC’s financing activities will lower the funding cost of SMSC and enable SMSC to lease the relevant machinery to support its  normal  operations  and production, which would be beneficial to the Group as a whole.

 

In respect of guarantee fee charge to SMSC, pursuant to the Framework Agreement, the pricing for provision of guarantee for financing activities is with reference to the aforementioned market price set out in general pricing principles (3). As advised by the Company, in considering the market price of guarantee fee to be charged to SMSC, a few quotations from independent banks will be obtained. We consider that the quotations from banks provide the market price of such guarantee fee at the then time and the pricing policy is fair and reasonable.

 

In consideration of the practices for the relevant transactions that (i) at least two quotations or tenders from independent third parties  before  agreeing upon the applicable price; (ii) a proposed transaction with SMSC would only be approved if the terms and conditions provided by SMSC are equal to or more favourable than those submitted by such independent third party; (iii) the pricing of cost plus a fair and reasonable profit rate is line with the industry practice and within the range of profit markup practice with the Group as confirmed by the Company; and (iv) an independent valuation will be performed for a fair value assessment for the provision of technical authorisation or licensing, we are of the view that the terms of  the  Framework Agreement are fair and reasonable and in the interests of the Company and its Shareholders as a whole.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

The Annual Caps

 

The Annual Caps under the Framework Agreement are set out below:

 

 

 

In arriving at the annual caps, the Company has  considered  reasonable factors such as the expected occurrences of the Framework Agreement CCT in  light of current market conditions of the semiconductor industry and the technological capability and future business plans of  the  Company and SMSC    as follows:

 

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The Company as seller:

 

The annual cap under such type of transaction and the  Company acts as seller is US$1 million and US$12 million for the year ending 31 December 2018 and 2019, respectively. In general, the Company sells photomasks, spare parts and raw materials to SMSC.

 

As advised by the Company, the development plan of SMSC is still at the initial stage and it is expected that production would begin in late 2019. As the investment schedule towards SMSC will be adjusted according to the changing market conditions and financial conditions of the Group, the annual cap for the year ending 31 December 2018 of the Company acting as seller under Type I CCT is set at US$1 million as a buffer. As discussed with the Company, the annual cap of US$12 million for the year ending 31 December 2019 is mainly based on the planned number of photomasks to be sold to SMSC by the Company. Based on  the expected market price, the Company estimated that the photomasks alone would cost approximately US$7.5 million. Considering the aforementioned factors, we  consider the annual cap of  US$1 million  and US$12 million, which have taken into some buffer, for the year ending 31 December 2018 and 2019, respectively is fair and reasonable.

 

The Company as purchaser:

 

The annual cap under such type of transaction and the  Company acts as purchaser is nil and US$49 million for the year ending 31 December 2018 and 2019, respectively. In general, SMSC will sell most of its finished products to the Company, which the Company may sell to its client directly or after reprocessing. The Company expects that production would begin in late 2019. As advised by the Company, the annual cap of US$49 million is determined based on the expected production capacity of SMSC and the estimated selling price of wafers  in 2019. We have reviewed the Feasibility Report in relation to the development plan of SMSC. We notice the estimated selling price of wafers in 2019 is similar to that as estimated in the Feasibility Report. Considering SMSC is expected to start production in 2019, we consider that the annual caps of the Company as purchaser for the year ending 31 December 2018 and 2019 are fair and reasonable.

 

 

The annual cap under such type of transaction and the  Company acts as service provider is US$11 million and US$21 million for the year ending 31 December 2018 and 2019, respectively. While the annual cap for the Company acting as service recipient is nil and US$10 million for the year ending 31 December 2018 and 2019, respectively. In general, for most of the services under such type of transactions (except for processing and testing services both parties may mutually provide services to each other), the Company may act as a service provider to SMSC.

 

As discussed with Company, SMSC mostly requires comprehensive administration, logistics, production management and IT service for the year ending 31 December 2018, and mainly processing and testing services for the year ending 31 December 2019. The historical transaction of US$5.88 million for the year ended 31 December 2017  was wholly comprehensive administration, logistics, production management and IT service rendered by the Company. Given it is expected that SMSC would start production in 2019,  more administrative supporting services might be

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

required by SMSC. Moreover, as advised by the Company, the  Group  could  avoid duplicate purchase of machineries  by  increasing  utilisation  rate through mutual provision of processing  and  testing  services.  Hence, the Company and SMSC might both require processing and testing services from each other when production of SMSC starts. Considering the above, we consider that the annual caps for Type II CCT for the year ending 31 December 2018 and 2019 are fair and reasonable.

 

 

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

 

Maximum balance:

 

The annual cap of the maximum balance in respect of provision of guarantee for financing activities is determined based on the financing needs of SMSC. The maximum balance annual cap is US$495 million for each of the two years ending 31 December 2019. As mentioned in the section headed ‘‘(1) The Centralised Fund Management Agreement — The Annual Cap’’, the investment amount for the development plan of SMSC approximates to US$10.24 billion, and the estimated capital expenditure for the first phase of development of SMSC, would be approximately half of the estimated total investment of US$10.24  billion. Currently, the planned capital expenditures for 2018 to 2020 approximate to over US$3 billion in aggregate. As discussed with the Company, apart from SMSC’s internal cash flow, shareholders’ further contribution to the registered capital of SMSC, the capital expenditures might also be funded through debt financing. The Company expects that approximately one-third of the capital expenditure would be funded through external debt financing, which is over US$1 billion based on the three years capital expenditure plan of SMSC for 2018–2020. As the investment schedule towards SMSC will be adjusted according to the changing market conditions and financial conditions of the Group, the annual caps for 2018 and 2019 are set with a buffer to maintain  flexibility for the Group to expedite its planned capital expenditures. Therefore, we consider that the annual cap of US$495 million for the maximum guaranteed balance, which provides some buffer for each of the two years ending 31 December 2019 is fair and reasonable.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

Guarantee fee:

 

The annual cap of the guarantee fee charge to SMSC in respect of the provision of guarantee for SMSC’s financing activities is determined with reference to the amount of debt guaranteed by the Company under the maximum balance cap as discussed above. The annual cap for guarantee fee is US$5 million for each of the two years ending 31 December 2019. As advised by the Company, the expected fee charged is based on the quotations obtained from banks in respect of the guarantee fee under the Framework Agreement with SMNC, which in general is around 1% of the facility amount per annum. As such, considering the borrowing needs of SMSC, the maximum amount of guarantee which may be required by SMSC as discussed above, and the guarantee fee will be charged based on two or more quotations from banks, we  consider  the annual cap of US$5 million for each of the two years ending 31 December 2019 is fair and reasonable.

 

Taking into account (i) the basis of annual caps for each type of transactions for each of the two years ending 31 December 2019 as mentioned above; and (ii) the development plan and the expected capital expenditures for SMSC, we are of the view that the annual caps under the Framework Agreement are fair and reasonable and in the interest of the Company and Shareholders as a whole.

 

Internal Control Procedures

 

The Company has in place a series of internal control measures to ensure that the terms of the Centralised Fund Management Agreement and the Framework Agreement are fair and reasonable and that the Centralised Fund Management Agreement CCT and the Framework Agreement CCT will be conducted on normal commercial terms. As the Centralised Fund Management Agreement CCT and the Framework Agreement CCT also constitute related party transactions for the Company, they will be subject to the related party transaction policy of the Group, which is further explained below:

 

 

 

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We have reviewed the Group internal control policy regarding  the  Centralised Fund Management Agreement CCT and the Framework Agreement CCT which cover the above measures and noted resolutions of the Review Committee should be effective with the approval by half of the committee members. In addition, the Company will periodically review the pricing policy at least quarterly to ensure the the Centralised Fund Management Agreement CCT and the Framework Agreement CCT are in accordance with the respective pricing policies. Other than that, as advised by the Company, for both of the Centralised Fund Management Agreement CCT and the Framework Agreement CCT, the Company and SMSC maintains separate business units and therefore separate personnel to ensure segregation of duties, which we consider is effective in ensuring the transactions are conducted on normal commercial terms. We are of the view that the above internal control procedures are sufficient to  ensure that   the transactions conducted under the Centralised Fund Management Agreement and the Framework Agreement will be conducted on normal commercial terms or better, and will not be prejudicial to the interests of the Company and the Shareholders.

 

Recommendation on the Framework Agreement

 

Having considered the principal factors and reasons described above, in particular (i) at least two quotations or tenders from independent third parties before agreeing upon the applicable price; (ii) a proposed transaction with SMSC would only be approved if the terms and conditions provided by SMSC are equal  to or more favourable than those submitted by such independent third party; and (iii) the basis of annual caps in relation to the Framework Agreement are fair and reasonable, we are of the opinion that the transactions under the Framework Agreement are in the ordinary and usual course of the  Company’s business and  the terms of the Framework Agreement including the annual caps are on normal commercial terms and are fair and reasonable as far as the interests of the Independent Shareholders are concerned, and in the interests of the Company and its Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to approve the  Framework Agreement and the related annual caps at the EGM.

 

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Background of and reasons for the Proposed RSU Grants

 

Reference is made to the Company’s announcement dated 23 May 2018 pursuant to which it was resolved at a meeting held on 7 February 2018 to grant 337,500 Restricted Share Units under the 2014 Equity Incentive Plan, subject to  the Independent Shareholders’ approval at the EGM. Reference is also made  to  the Company’s announcement dated 22 June 2018 in relation to, among  others,  the retirement of Mr. Tan.

 

Pursuant to the 2014 Equity Incentive Plan, the Compensation Committee is entrusted full power and authority to determine the terms and conditions of the annual additional grant of share options and Restricted Share Units (the ‘‘Annual Additional Grant’’). Under the 2014 Equity Incentive Plan, the Annual Additional Grant shall vest upon the Annual Additional Grant holder’s continued service   with or to the Company. If an Annual Additional Grant holder resigns before the vesting of the Annual Additional Grant granted under the 2014 Equity Incentive Plan, the unvested Annual Additional Grant will be subject to forfeiture and no apportionment will be applied. As such, the Annual Additional Grant will only be available for those Directors who remain in office as at 31 December of the relevant year and as at the date of the relevant proposed grant. The grant of  125,000 Restricted Share Units to Mr. Tan was resolved by the Compensation Committee at a meeting held on 7 February 2018. At the time of  the  announcement dated 23 May 2018, Mr. Tan had not notified the Board nor the Compensation Committee of his retirement. As a  result of Mr. Tan’s retirement  on 22 June 2018 : (i) 62,500 Restricted Share Units in recognition for Mr. Tan’s service for the year ending 31 December 2018, which were intended to vest on 1 January 2019, have been forfeited in full on 22 June 2018, and (ii) 62,500 Restricted Share Units in recognition for Mr. Tan’s service for the year ended 31 December 2017, which were intended to vest immediately on 7 February 2018, are granted to Mr. Tan subject to the Independent Shareholders’ approval.

 

Accordingly, subject to the Independent Shareholders’ approval at the EGM, 275,000 Restricted Share Units are to be granted, among which, (i) 62,500 Restricted Share Units, 62,500 Restricted Share Units and 25,000 Restricted Share Units will be granted to Mr. Tan, Dr. Chen and Mr. Brown, respectively, in recognition for their service for the year ended 31 December 2017, and it is intended that such Restricted Share Units will vest immediately upon their grant, and (ii) 62,500 Restricted Share Units and 62,500 Restricted Share Units will be granted to Dr. Chen and Mr. Brown, respectively, in recognition for their service for the year ending 31 December 2018, and it is intended that such Restricted  Share Units will vest on 1 January 2019. Each of the Restricted Share Units to be granted to Mr. Tan, Dr. Chen and Mr. Brown represents the right to  receive a  Share on the date it vests.

 

Furthermore, the Company conditionally granted an aggregate of 337,500 share options under its 2014 Stock Option Plan to subscribe for Shares, subject to acceptance of the grantees and compliance with applicable laws and regulations. Among the share options granted, 125,000 share options were granted  to  Dr. Chen, 125,000 share options were granted to Mr. Tan, and 87,500 share options were granted to Mr. Brown. As a result of the retirement of Mr. Tan, the 62,500 share options granted to Mr. Tan on 23  May 2018, and which were intended to  vest on 1 January 2019, have been forfeited in full on 22 June 2018 according to the terms of the 2014 Equity Incentive Plan.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

As stated in the Letter from the Board, the Proposed RSU Grants are part of the Company’s remuneration system, the purpose of which is to closely align the interests and benefits of and risk sharing among the Shareholders, the Company and the employees in order to maximise the motivation of the Directors. The Proposed RSU Grants aim to provide sufficient incentives to attract, retain and motivate Dr. Chen and Mr. Brown to participate in the continuing operation and long-term development of the Company and to recognise Dr. Chen, Mr. Tan and Mr. Brown’s contributions to the growth of the Company. Furthermore, there will not be substantial cash outflow by the Company under the Proposed RSU Grants.

 

Reference is made to the circulars of the Company dated 7 June 2016 and 18 November 2016 respectively, relating to its revised Board policy (the ‘‘Revised Board Policy’’) which was resolved at a Board meeting on 12 May 2016, pursuant to which the details of the Annual Additional Grant of share options and RSUs to existing Directors at the time of the Annual Additional Grant and the method of calculation of  the  grant  of  RSUs  to  eligible Directors are  set out.  The   Annual Additional Grant to the existing non-executive Directors (including the independent non-executive Directors) is considered and approved annually at a meeting and will only be available for those Directors who remain in office as at  31 December of the relevant year and as at  the date of  the relevant proposed  grant. The Annual Additional Grant is fixed in accordance with a percentage of 25% of a fixed sum, being the most recent on-board grant prior to the Revised Board Policy which was made to an independent non-executive Director. The amounts of the Proposed RSU Grants have been calculated using the relevant methods of calculation set out above and then divided by 10 to reflect the Company’s 10-to-1 share consolidation, which became effective on 7 December 2016, after the implementation of the Revised Board Policy.

 

Below sets out the basis for determining the number of  Restricted Share  Units to be granted to Dr. Chen, Mr. Tan and Mr. Brown:

 

 

 

Due to the aforementioned combination applied to the Annual  Additional Grant, the portion of the Proposed RSU Grant relevant to Dr.  Chen is 50% of 250,000 shares under the Annual Additional Grant, that is, 125,000 Restricted Share Units, of which 62,500 Restricted Share Units granted in recognition of Dr. Chen’s service in the year ended 31 December 2017 will vest immediately upon their grant and 62,500 Restricted Share  Units granted in recognition of Dr. Chen’s service for the year ending 31 December 2018 will vest on 1 January 2019.

 

 

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Due to the aforementioned combination applied to the Annual  Additional Grant, the portion of the Proposed RSU Grant  relevant  to  Mr. Tan is 50% of 125,000 shares under the Annual Additional Grant, that is, 62,500 Restricted Share Units granted in recognition of Mr. Tan’s service in the year ended 31 December 2017 will vest immediately upon their grant.

 

 

 

Due to the aforementioned combination applied to the Annual  Additional Grant, the portion of the Proposed RSU Grant relevant to Mr. Brown is 50% of 175,000 shares under the Annual Additional Grant, that is, 87,500 Restricted Share Units, of which 25,000 Restricted Share Units granted in recognition of Mr. Brown’s service in the year ended 31 December 2017 will vest immediately upon their grant and 62,500 Restricted Share  Units granted in recognition of Mr. Brown’s service for the year ending 31 December 2018 will vest on 1 January 2019.

 

Notes:

 

 

 

 

 

 

 

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

Reference is made to the announcement of the Company dated 22 June 2018 in relation to Mr. Tan retired as an independent non-executive Director. As part of the Proposed RSU Grant to Mr. Tan was made in recognition of Mr. Tan’s past contribution of the Company for 2017, Mr. Tan remains entitled to the Proposed RSU Grant to Mr. Tan in relation to his service for 2017, subject to shareholder approval. As understood from the Company, if a Restricted Share Units holder resigns before the vesting of the Restricted Share Units granted under the 2014 Equity Incentive Plan, the unvested Restricted Share Units will be subject to forfeiture. Therefore we consider that such vesting mechanism of the grants could serve the purpose to retain the Directors over the vesting period by providing incentive to remain in the Group before the full vesting of the Restricted Share Units under the 2014 Equity Incentive Plan.

 

For our due diligence purpose, we have reviewed the background and duties  of Dr. Chen, Mr. Tan and Mr. Brown in the Group. Based on the information in  the Annual Report 2017, Dr. Chen has strong background in the advanced technology sectors with experience in, among other things, research and development and strategy management, and provides the Group with insights thereof which are important to the development of the Group. Similarly, Mr. Brown has a strong background in the semiconductor industry, and has solid experience in the research and development field. Mr. Tan has extensive management experience by serving in the boards of some of the world-leading technology corporations, and he has been an independent non-executive Director since 2001 which in our view allows him to have sound understanding of the Group’s operation and corporate governance system.

 

We notice that Dr. Chen is the chairman of the Strategic Advisory  Committee. As advised by the management of the Company, the responsibilities   of the Strategic Advisory Committee include (i) to evaluate and consider any strategic alternative; (ii) to contribute and participate in discussions with potential strategic partners with respect to any strategic alternative; and (iii) to make recommendations to the Board and the management of the Company  with respect to any strategic alternative, with such strategic alternative essential to the Group’s business development. Furthermore, Mr. Brown participates in  various  committees of the Group, serving as the chairman of the  Compensation  Committee and a member of each of the Audit Committee, the Nomination Committee and the Strategic Advisory Committee. Similarly, Mr. Tan, before his retirement as an independent non-executive Director of the Company, was the chairman of the Audit Committee and a member of each of the Compensation Committee, the  Nomination Committee and the Strategic Advisory Committee.  As such, we are of the opinion that it is justifiable to attract and retain Dr. Chen  and Mr. Brown and recognise Mr. Tan’s contributions to the growth of the Company through the Proposed RSU Grants.

 

Principal terms of the Proposed RSU Grants

 

The Restricted Share Units

 

Each of the Restricted Share Units to be granted to Dr. Chen, Mr. Tan and  Mr. Brown represents the right to receive a Share on the date it vests. In  accordance with the terms of the 2014 Equity Incentive Plan, the Proposed RSU Grants will be made for no consideration, other than the minimum payment required by the applicable law in the Cayman Islands (which is the par value of the Shares to be issued pursuant thereto).

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

Consideration of the Proposed RSU Grants

 

In accordance with the terms of the 2014 Equity Incentive Plan, the Proposed RSU Grants will be made for no consideration, other than the minimum payment required by the applicable law in the Cayman Islands. We understand that the Restricted Share Units are granted as compensation for service or performance to attract, retain and motivate employees and directors of, and other  service  providers to, the Company, and to allow them to participate in the growth and profits of the Company.

 

We intend to  quantify and analyse the remuneration of  each of  Dr. Chen,  Mr. Tan and Mr. Brown for their services provided for the financial years 2017  and 2018. As mentioned earlier, Mr. Tan retired as an independent non-executive Director of the Company in June 2018 and hence will not be entitled to the Proposed RSU Grants and share options in relation to his service for the year ending 31 December 2018. However, Mr. Tan will still be entitled to the Proposed RSU Grants and share options in relation to his service for the year ended 31 December 2017, where he had been an independent non-executive Director for the full financial year 2017. We have obtained estimations from the Company on the expenses (collectively known as the ‘‘Expenses’’) to be incurred for the grant/issue of the Restricted Share Units under the Proposed RSU Grants and the Share Options, which in our view reflects the value of such incentives to be provided. Based on the closing prices per Share as quoted on the Stock Exchange on the respective grant dates, the estimated Expenses relating to Dr. Chen, Mr. Tan and Mr. Brown were approximately US$269,000, US$134,000 and US$188,000 respectively. The Expenses are estimations only and are unaudited and do not represent the expenses to be recognised in the financial statements of  the Company. The aggregated remuneration (comprising the salaries and wages as set out in the Annual Report 2017 and the Expenses, (the ‘‘Aggregate Remuneration’’) of each of Dr. Chen, Mr. Tan and Mr. Brown for the year ended 31  December  2017 is set out below:

 

 

Set out below are the analysis on the Aggregated Remuneration of the Company as compared with the key financial figures of the Group. The ratio calculations of the Company are as follows:

 

 

= Aggregated Remuneration 7 Revenue for the year ended 31 December 2017

 

= (Salaries and wages + Estimated expenses for the Proposed RSU Grants and the share options) 7 Revenue for the year ended 31 December 2017

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

 

= Aggregated Remuneration 7 Profit after tax for the year ended 31 December 2017

 

= (Salaries and wages + Estimated expenses for the Proposed RSU Grants and the share options) 7 Profit after tax for the year ended 31 December 2017

 

 

= Aggregated Remuneration 7 Total equity as at 30 June 2018

 

= (Salaries and wages + Estimated expenses for the Proposed RSU Grants and the share options) 7 Total equity as at 30 June 2018

 

 

Notes:

 

 

 

As shown from the table above, the Aggregated Remuneration of each of Dr. Chen, Mr. Tan and Mr. Brown represents an insignificant amount of the revenue of the Group (only about or less than 0.01% of the revenue) for the year ended 31 December 2017, and also represents an insignificant amount of the net profit of the Group (only about or less than 0.3% of the net profit) for the year ended 31 December 2017, which we consider a commercially justifiable reward for their contribution to the financial performance of the Group.

 

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

 

 

We consider that the number of  Restricted Share Units granted to  each of  Dr. Chen, Mr. Tan and Mr. Brown are fair and reasonable, and that the Proposed RSU Grants at no consideration, other  than the  minimum payment required by  the applicable law in the Cayman Islands (which is the par value of the Shares to  be issued pursuant thereto), is acceptable. Having considered the principal terms  of the Proposed RSU Grants as highlighted above, we are of the opinion that the terms of the Proposed RSU Grants are fair and reasonable so far as the  Independent Shareholders are concerned.

 

Recommendation on the Proposed RSU Grants

 

Having taken into consideration the factors and reasons as stated above, we are of the opinion that (i) the terms of the Proposed RSU Grants to the relevant connected grantees are on normal commercial terms and are fair and reasonable    so far as the Independent Shareholders are concerned; and (ii) the Proposed RSU Grants are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolutions to be  proposed at  the EGM to approve the Proposed RSU Grants  and  the  transactions  contemplated thereunder and we recommend the Independent  Shareholders  to vote in favour of the resolutions in this regard.

 

 

 

 

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RESPONSIBILITY STATEMENT

 

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and  not  misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

 

DISCLOSURE OF INTERESTS

 

 

As at the Latest Practicable Date, the interests or short positions of the Directors and  the chief executive officer in the Shares, underlying Shares and debentures of the Company or any of its associated corporation (within the meaning of Part XV  of  the  SFO), which were notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to  have under such provisions of the SFO), and as recorded in the register required to be kept under section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers were as follows:

 

 

Notes:

 

 

 

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Save as disclosed below, the Directors are not aware that there was  any party who, as  at the Latest Practicable Date, had an interest or short position in  the  Shares  and  underlying Shares of the Company which would fall to be disclosed under Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company and its subsidiaries:

 

 

Notes:

 

 

 

 

 

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MATERIAL CHANGES

 

As at the Latest Practicable Date, the Directors were not aware of any material adverse changes in the financial and trading position of the Group since 31 December 2017, the date of the latest published audited accounts of the Group.

 

LITIGATION AND CLAIMS

 

As at the Latest Practicable Date, the Directors were not aware of any litigation or claims of material importance pending or threatened against any member of the Group.

 

DIRECTORS’ INTEREST IN SERVICE CONTRACTS

 

None of the Directors has entered into a service contract with any member of  the  Group (excluding contracts expiring or determinable within one year without payment of compensation (other than statutory compensation)).

 

OTHER INTERESTS OF THE DIRECTORS

 

As at the Latest Practicable Date:

 

 

 

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EXPERT AND CONSENT

 

The following is the qualification of the Independent Financial Adviser which has  given opinions or advice contained in this circular:

 

 

As at the Latest Practicable Date, Messis Capital Limited has given and has not withdrawn its written consent to the issue of this circular with the inclusion of  its  statements, letter, report and opinion (as the case may be) as set out in this circular and references to its name in the form and context in which they are included.

 

As at the Latest Practicable Date, Messis Capital Limited was not  beneficially interested in the share capital of any member of the Group and did not have any right, whether legally enforceable or not, to subscribe for or nominate persons to subscribe for securities of any member of the Group.

 

As at the Latest Practicable Date, Messis Capital Limited did not have any direct or indirect interest in any assets which have been, since 31 December 2017, the date of the latest published audited accounts of the Company, acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

 

The letter from Messis Capital Limited dated 22 October 2018 is set out on pages 48 to 99 for incorporation herein.

 

MISCELLANEOUS

 

The Company has two joint company secretaries, Dr. Gao Yonggang and Dr. Liu Wei.

 

Dr. Gao graduated from Nankai University with a PhD in management. He is the chief financial officer of the Company. Dr. Gao is also a Fellow of the Institute of Chartered Accountants in Australia, and a Founding Member and director of The Hong Kong Independent Non-Executive Director Association.

 

Dr. Liu graduated from the Northwest University of China, the Chinese University of Political Science and Law and the University of Cambridge with a bachelor in Chinese literature, a master degree in law and a PhD in law respectively. Dr. Liu has PRC lawyer qualification and is a solicitor qualified to practice law in Hong Kong and England and Wales.

 

The registered office of the Company is Cricket Square, Hutchins Drive, P.O. Box  2681, Grand Cayman KY1-1111, Cayman Islands and the head office of the Company is 18 Zhangjiang Road, Pu Dong New Area, Shanghai 201203, People’s Republic of China.

 

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DOCUMENTS AVAILABLE FOR INSPECTION

 

Copies of the following documents will be available for inspection at Suite 3003, 30th Floor, 9 Queen’s Road Central, Hong Kong during normal business hours on any weekday, excluding public holidays, from 24 October 2018 to 7 November 2018 (both days inclusive):

 

 

 

 

 

 

 

 

 

 

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NOTICE OF EXTRAORDINARY GENERAL MEETING

 

 

 

Semiconductor Manufacturing International Corporation

中 芯 國 際 集 成 電 路 製 造 有 限 公 司 *

(Incorporated in the Cayman Islands with limited liability)

(Stock  Code: 981)

 

NOTICE OF EXTRAORDINARY GENERAL MEETING

 

NOTICE IS HEREBY GIVEN THAT an extraordinary general meeting (‘‘EGM’’) of Semiconductor Manufacturing International Corporation (the ‘‘Company’’) will be held at 5 Floor SO1 Building, 18 Zhangjiang Road, Pu Dong New Area, Shanghai, People’s Republic of China on 7 November 2018 at 1 : 30 p.m. for the purpose of transacting the following businesses:

 

RESOLUTIONS

 

To consider and, if thought fit, to pass with or without modification the following ordinary resolutions:

 

 

 

 

 

 

 

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NOTICE OF EXTRAORDINARY GENERAL MEETING

 

 

 

 

 

 

 

 

 

 

 

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NOTICE OF EXTRAORDINARY GENERAL MEETING

 

 

By Order of the Board

Semiconductor Manufacturing International Corporation

Gao Yonggang

Executive Director, Chief Financial Officer and Joint Company Secretary

 

Shanghai, 22  October 2018

 

Principal place of  business:

18 Zhangjiang Road Pu Dong New Area Shanghai 201203

People’s Republic of China

 

Registered office:

Cricket Square, Hutchins Drive

P.O. Box 2681,

Grand Cayman KY1-1111

 

As at the date of this notice, the Board comprises four executive Directors, namely Dr. Zhou Zixue (Chairman), Dr. Zhao Haijun (Co-Chief Executive Officer), Dr. Liang Mong Song (Co-Chief Executive Officer) and Dr. Gao Yonggang (Chief Financial Officer and Joint Company Secretary); five non-executive Directors, namely Dr. Chen Shanzhi, Mr. Zhou Jie, Mr. Ren Kai, Mr. Lu Jun and Dr. Tong Guohua; and five independent non-executive Directors, namely Mr. William Tudor Brown, Dr. Chiang Shang-yi, Dr. Cong Jingsheng Jason, Professor Lau Lawrence Juen-Yee and Mr. Fan Ren Da Anthony.

 

Notes:

 

 

 

 

 

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NOTICE OF EXTRAORDINARY GENERAL MEETING

 

 

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