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.
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).
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. Only Shareholders of record on 8 February 2018 are entitled to attend and vote at the EGM.
The purpose of this circular is to provide you with information on the businesses to be transacted at the EGM in respect of 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, between the Company and SMNC and any transactions contemplated hereunder.
The Company and SMNC 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, leasing of assets, transfer of assets, provision of technical authorisation or licensing and provision of guarantee:
The price of the Continuing Connected Transactions will be determined in accordance with the following general principles in ascending order:
Each of Group A and Group B is subject to the following general control procedures:
LETTER FROM THE BOARD
Type
of
transaction
|
|
Pricing
policy
|
|
|
|
1. Leasing of Group A’s plant and office premises by Group B
|
|
The plant and office premises lease agreement entered into between Group A and Group B for leasing of plant and office premises from Group A to Group B is renewable annually. The agreement was negotiated on arm’s length basis. When determining the price Group A made references to the prevailing prices of comparable plants and offices in the same district during the same period (general principle (3) above). As the plant has a built-in clean room, a unique feature of a wafer fab, an additional reasonable charge of 8% of the rental price is charged to Group B to ensure the rental is fair and reasonable and not less favourable to Group A.
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2. Mutual leasing of equipment
|
|
With respect to mutual leasing of equipment,
the rental charge will be determined by reference to the nature of lease, current market conditions and will be on comparable terms with the quotes from independent third parties providing services of a similar nature and comparable scale (general principle (3) above). In terms of leasing of equipment by Group B to Group A, the finance and accounting department of Group A will seek quotation from two or more comparable independent third parties to ensure the rental charged by Group B is not less favourable than those submitted by the independent third parties. In terms of leasing of equipment by Group A to Group B, the finance and accounting department of Group B will seek quotation from two or more comparable independent third parties to ensure the rental charged to Group B is not less favourable than those submitted by the independent third parties.
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17
LETTER FROM THE BOARD
Type
of
transaction
|
|
Pricing
policy
|
|
|
|
Mutual acquisition and disposal of equipment
|
|
Group A as seller of equipment (general principle
(3)
above):
In
respect
of
selling equipment,
the
personnel
in
the SPM
of
Group
A
are
responsible
for
setting
the
price
of
equipment.
Based
on the
Group’s
‘‘Intercompany
Transfer
of
Goods’’
policy,
the
transfer price
for
material, parts,
and
equipment
must
be
based
on
market price which
is
determined
by
comparing against independent third
parties
for
comparable product
at
the same
time
and
in the same
region.
As
the
prices
of
second-hand
tools
and
equipment
in
the
semiconductor industry
vary
depending
on
timing
and
market supply status, Group
A
also engages
two
to
three independent brokers,
as
appropriate
depending
on
the
circumstances,
to
provide
quotation based
on
the
specific
configurations
of
a tool or
equipment,
the
selling price
is
based
on
the
prices provided
by
these brokers
and
is
not
less favourable
to
Group
A.
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Group A as buyer of equipment (general principle
(3) above): In respect of buying equipment, the personnel in the SPM of Group A carry out the same procedure as above based on the same policy to ensure purchasing prices are not less favourable to Group A.
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18
LETTER FROM THE BOARD
|
V.
|
Provision
of
technical authorisation
or
licensing
|
Type of transaction
|
|
Pricing policy
|
|
|
|
1. Provision of technical authorization or licensing by Group A to Group B
|
|
The fee for any technical authorisation or licensing will be based on comparable local market price (general principle (3) above). Group B will engage a qualified valuer (as agreed by Group A and Group B) to perform a fair value assessment of the fees relating to the Group A’s provision of technical authorisation or licensing to Group B.
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2. Sharing of research and development costs in relation to 28-nanometer technologies
|
|
The costs are agreed upon by both parties on the condition that the relevant costs are identifiable and are allocated to each party involved on a fair and equitable basis (general principle (5) above). The Company and SMNC entered into a technical authorisation and licensing agreement on 22 December 2014, which specifies that the research and development costs during each calendar year will be proportionally shared by the parties based on the percentage calculated by comparing the number of 28-nanometer nodes that each of them plans to produce during the relevant calendar year against the total number of 28-nanometer nodes both parties plan to produce during the same period. Furthermore, Group B will engage an external auditor (as agreed by Group A and Group B) to provide an independent auditor’s report regarding the recognition of the sharing of costs to ensure that it is a fair representation of the incurred costs. Furthermore, the Board of the Company and the Board of SMNC conduct an annual review separately of each of their production plans and the consequential proportion of costs to be shared.
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19
LETTER FROM THE BOARD
|
VI.
|
Provision
of
guarantee
for
financing
activities
|
Type
of
transaction
|
|
Pricing
policy
|
|
|
|
Guarantee provided
by
Group A
for
Group
B’s
financing
activities
|
|
With respect
to
provision
of
guarantee
by
Group A
in
respect
of
Group
B’s
financing
activities,
the
service
fee for such
guarantee
will
be
determined
by
reference
to
the
market conditions
and
quotes
from
independent
third
parties providing services
of
a similar
nature
and
comparable scale (general pricing
principle
(3) above).
The
finance
and
accounting
department
of
Group A
will
seek
quotation
from
two
or
more
comparable independent
third
parties
to
ensure
the
service
fee
is
fair
and
reasonable
and
not
less
favourable
to
Group
A.
|
The
Continuing Connected Transactions
will
be
settled
in
accordance
with the
relevant
agreement
for each
transaction.
The
Company
has
in
place
a
series
of
internal
control
measures
to
ensure
that the
terms
of
the
Framework Agreement
are fair and
reasonable
and
that
the
Continuing Connected Transactions
will be
conducted
on
normal commercial terms.
As
the
Continuing Connected Transactions
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.
|
1.
|
SMNC has
established
a
related party transaction review committee, which
is
comprised
of
four non-executive directors
of SMNC
of
which
two
of
them,
namely
Dr.
Zhao HaiJun,
the
executive Director
and
Co-Chief Executive Officer
of
the
Company
and Dr. Gao
Yonggang,
the
executive Director, Chief Financial Officer
and
Joint Company Secretary
of the
Company,
were
appointed
by the
Company
and the
other
two
were appointed
by
each
of
China
IC
Fund
and ZDG. The
related party transaction review committee
is
responsible
for
reviewing
and
approving
the
framework agreement
and
pricing policy
of
connected transactions entered
into by the SMNC and the
Company,
with the
assistance
from the
related
party transaction office
of
SMNC.
The
committee
has
meeting
at
least once annually
to
monitor
and
review related party transactions between
SMNC and
the Company;
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2.
|
The
Company
has also
established
a
related party transaction review
team,
consisting
of
members
from the
finance, legal
and
other related departments
of the
Company, which reviews
the
terms
of
specific connected
transaction
agreements
and
reports
its
findings
to the
related party transaction
review committee;
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3.
|
Group
A
and
Group
B
each employs
and
maintains separate business,
operation
and
accounting personnel
of
its own.
There
is
clear segregation
of
approval authority
and duty
between
the two
entities.
In
general,
for each type
of
the
Continuing Connected Transactions under
the
Framework Agreement, either
the
Company
or SMNC
would propose
the
transaction price after
the
review
and
approval
by
the
relevant department(s), such
as the
manufacturing
department,
business administration department,
the
finance
and
accounting
department,
depending on the type of the transaction. The counter party of the relevant department(s) will then, also review and
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20
LETTER FROM THE BOARD
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|
approve the pricing of the transaction before acceptance. As the Company and SMNC maintains separate business units and separate personnel, the relevant department(s) that proposes the transaction price and the relevant department(s) of the counter party that accepts such transaction price would be different persons and under different departmental management;
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4.
|
The
Company’s compliance office
will
perform quarterly check
on
transactions entered under
the
Framework Agreement
to
ensure compliance with
pricing
policies
and
annual
caps
are
not
exceeded;
and
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5.
|
The
Company’s external auditors will conduct
an
annual review
of
the
transactions entered
into
under
the
Framework Agreements
to
ensure
the
transaction amounts
are
within
the
annual caps
and the
transactions
are
in
accordance
with
the
terms
set
out
in
the
Framework
Agreements.
|
|
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
Continuing Connected Transactions
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,
as
well
as
the
internal control procedures
in
place,
the
Directors (excluding
the
independent non- executive Directors)
are
of
the view that the
methods
and
procedures
are
sufficient
to
ensure that
the
Continuing Connected Transactions
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
of
the
Continuing Connected Transactions
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 party’s internal resources.
It
is
expected
that the
payment
for
most
of
the
Continuing Connected Transactions would
be
settled within
30
days
of,
or
other reasonable period
of
time
after,
the
specific
transaction
taking
place.
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.).
21
LETTER FROM THE BOARD
THE ANNUAL CAPS AND BASIS OF DETERMINATION
Historical Transaction Amounts
The historical transaction amounts between Group A and Group B for the transactions contemplated under the 2016 Framework Agreement in 2016 and 2017 are as follows:
Nature of Continuing
Connected
Transactions
|
|
Continuing
Connected
Transactions For
the Year Ended
31 December
2016
(1)
|
|
Transactions For the
Year Ended 31
December
2016
(2)
|
|
From 1 January
2017 to the
Latest Practicable
Date
(3)
|
|
|
(US$
million)
|
|
(US$
million)
|
|
(US$
million)
|
|
|
|
|
|
|
|
|
|
|
Type I CCT
|
|
|
168.7
|
|
|
249.8
|
|
|
452.3
|
Type II CCT
|
|
|
23.8
|
|
|
87.6
|
|
|
40.0
|
Type III CCT
|
|
|
0.4
|
|
|
0.9
|
|
|
0.6
|
Type IV CCT
|
|
|
—
|
|
|
—
|
|
|
—
|
Type V CCT
|
|
|
69.1
|
|
|
69.1
|
|
|
76.7
|
Notes:
|
(1)
|
Representing
the
amounts
of
transactions constituting continuing connected transactions
(as
defined
in
the
Listing
Rules)
upon
the
completion
of
Capital
Contribution
on
30
June
2016.
|
|
|
(2)
|
Representing
the
amounts
of
all
transactions between Group
A
and
Group
B
for the year
ended
31
December
2016.
|
|
Guarantees Provided by the Company to SMNC
The
Company
has
also provided guarantees
in
respect
of
certain rental payable
by
SMNC with
respect
to
its
operating lease
of
equipment
to
support SMNC’s daily
operation
and
business development.
As at 31
December
2016 and the
Latest Practicable Date,
the
total amount
of
financial liabilities
of
SMNC
in
respect
of
which
the
Company
provided
guarantee
was
approximately
US$59.4
million
and
US$218
million,
respectively.
22
LETTER FROM THE BOARD
Annual Caps
The
breakdown
for the
proposed Annual Caps
for the
Continuing
Connected
Transactions
is
set out
below.
Nature
of
Continuing
|
|
|
For the Year
Ending
31
December
|
Connected Transactions
|
|
2018
(US$ million)
|
|
2019
(US$ million)
|
|
2020
(US$ million)
|
Type I CCT
|
|
|
900
|
|
|
1,100
|
|
|
1,500
|
Type II CCT
|
|
|
100
|
|
|
150
|
|
|
200
|
Type III CCT
|
|
|
200
|
|
|
200
|
|
|
200
|
Type IV CCT
|
|
|
200
|
|
|
200
|
|
|
200
|
Type V CCT
|
|
|
100
|
|
|
100
|
|
|
100
|
Type VI CCT
|
|
|
1,000
|
|
|
1,000
|
|
|
1,000
|
In
arriving
at
the
proposed Annual Caps
as
set out
in
this circular,
the
Company
has
considered various factors including that since
its
establishment
in
June
2013,
SMNC
had
grown
and
expanded
its
business operations significantly.
It is
expected that
SMNC
will
continue
to
increase
its
manufacturing capacity
as
well
as
work closely
with its
existing
customers
of
28nm
and
40nm products
and
develop
new
client
and
products.
The
Company
has also
considered
the
historical transaction amounts between
the
Company
and
SMNC,
and
reasonable factors such
as
the
expected occurrences
of
Continuing Connected Transactions
in
light
of
current market conditions
of
the
semiconductor industry
and the
technological capability
and
future business plans
of
the
Company
and
SMNC,
as
follows:
|
1.
|
With regards
to
Type
I
CCT, the
Annual
Caps for the
years ending
31
December 2018,
2019 and 2020
is
US$900 million, US$1,100 million
and
US$1,500
million,
respectively. Such Annual Caps have been determined based
on
various factors, including
the
historical
and
estimated transaction amounts
and the
future
business plan
of
the
Group
and
SMNC.
The
historical transaction amounts between Group
A
and
Group
B
with
respect
to
the
purchase
and sale
of
goods
were
US$249.8 million
in
2016
and
US$452.3 million
for the 11
months ended
30
November 2017.
The
estimated amount
of
such
transactions between
1
December
2017
to 31
December 2017
is
US$58.1 million
and thus the
estimated
annual
transaction amount
in
2017
is
US$510.4 million, representing
an
annual
growth
rate
of
104.3% from 2016
to
2017.
It is
expected
that
in
2018,
SMNC will
expand
the
production capacity
of
its
first
fab and
commence
the
production
of
its
second
fab,
which expects
to
increase
the
annual production capacity
and
product sales
of SMNC
thereafter.
The
Company believes that
in
light
of the
investment plan
and
the
expedited development
of
SMNC,
it is
reasonable
to
estimate
that
the
production capacity
of
SMNC will
increase
of
approximately 124.1%
from
2017
to
2020.
For
further details concerning
the
expansion plan
of
SMNC, please refer
to
the
section headed
‘‘Letter
from the
Board
—
Reasons
For and
Benefits
of
the
Continuing Connected Transactions
—
Expansion
Plan
of
SMNC’’
in
this circular.
The
Company expects
that SMNC will sell most
of
its
finished
products
to
Group
A
for
the
three
years
ending
31
December
2020
and
thus
the
Company assumes
the
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|
23
LETTER FROM THE BOARD
|
|
growth
for the
transaction amounts
of
Type
I
CCT for the
relevant periods
will
be
similar
to
that
of
the
production capacity
of
SMNC.
The
Company
also
considers
a
buffer
to
cater
for the
potential surge
in
product demand
due
to
different factors which
can
hardly
be
foreseen
or
controlled
by the
Company,
such
as
the
popularity
of
certain electronic devices which
may
result
in
rapid
development
and
change
of
semiconductor industry. After considering
the
expansion plan,
the
expected production capacity
of
SMNC,
the
expected
increasing sales between Group
A
and
Group
B
and the
reasonable buffer
for
future
Type
I
CCT, the
Company considers that
the
Annual Caps
for
Type
I
CCT
fair and
reasonable.
|
|
|
2.
|
With regards
to
Type
II CCT, the
Annual
Caps for the
years ending
31
December 2018,
2019 and 2020
is
US$100 million, US$150 million
and
US$200
million,
respectively. Such Annual Caps have been determined based
on
various factors, including, among others,
the
historical
and
estimated transaction amounts
and
the
future cooperation between Group
A
and
Group
B.
The
historical
transaction
amounts between Group
A
and
Group
B
with respect
to the
rendering
of
or
receiving services
were
US$87.6 million
in
2016
and
US$40.0 million
for the
11
months ended
30
November 2017.
The
downward trend
in
the
transaction
amounts
from 2016
to
2017
was
primarily
due
to
the
development
and
maturity
of
certain service systems
and
functions
of
SMNC
in
2017. However,
it is
expected
that the
demand
of
supporting services,
in
particular,
the
processing
and
testing
services
from
Group
B
will
rebound
and
gradually increase
from 2018
to
2020
in
anticipation
of
the
expected expanding production capacity
and
sales
of
SMNC
during
the
same periods, which
is
estimated
to
increase
of
approximately
124.1%
from
2017
to
2020.
In
particular,
the
demand
for
processing
and
testing service
of SMNC fabs will
be
particularly strong
at
their early stage, primarily because that
in
order
to
achieve better cost efficiency,
new
fabs will usually procure certain
key
equipment
in
the
first place
and
request
for
processing
and
testing service
from
other fabs
of
the
Group.
It is
expected that
the
second
fab of
SMNC will commence operation
in
2018
and will
require large amount
of
processing
and
testing service from Group
A.
Taking into account that
the
target
manufacturing
capacity
of
the
second
fab
of
SMNC
is same
with
that
of
the
first
fab
of
SMNC,
the
Company believes
it
would
be
reasonable
to
estimate that
the
demand
of
processing
and
testing service
by
the
second
fab
in
its
first-year operation
will
be
at
the
same level
of
the
first
fab
in
2016, being
its
first
year
of
operation,
which
means that after pro-rata calculation,
SMNC
will requires additional
processing
and
testing service
in
the
amount
of
US$48 million
in
2018
on
the
basis
of the
historical transaction amount
in
2016.
For
further details concerning
the
expansion plan
of
SMNC, please refer
to
the
section headed
‘‘Letter
from
the
Board
—
Reasons
For and
Benefits
of the
Continuing Connected Transactions
—
Expansion Plan
of
SMNC’’
in
this
circular.
The
Company further considers that
to
provide processing
and
testing service
to
Group
B
by
using
the
processing
and
testing equipment
of
Group
A
will
result
in
higher equipment utilisation rates
and
improve
the
Group’s overall efficiency. After considering
the
historical
transaction amount
and the
expected growing demands
of
various types
of
services under Type
II
CCT, the
Company considers
the
Annual Caps
for
Type
II CCT fair and
reasonable.
|
|
24
LETTER FROM THE BOARD
|
3.
|
With regards
to
Type
III CCT, the
Annual Caps
for
each year ending
31
December 2018,
2019 and
2020
is
US$200 million, which have
been
primarily
determined based
on
the
investment
and
expansion
plan
of
SMNC.
Notwithstanding
that the
historical transaction amount
for Type III CCT
was
relatively
low
in
2016
and for the 11
months ended
30
November 2017,
it
is
expected
that
in
addition
to
the
capital contribution
of
US$2.4 billion provided
by
shareholders
of
SMNC
in
June
2017, approximately US$1.21 billion
(the
‘‘SMNC
Investment’’)
investment
for the
second
fab
of
SMNC
will need
to be
funded
by
the
internal
cash flow
of
and debt
financing
by
SMNC.
The SMNC
Investment
will,
depending
on
various factors, lead
to
SMNC’s increasing demand
of
equipment leasing since
more than 90%
of
the
total investment
for the
second
fab
would
be used
to
acquire
or
lease production equipment, which could
be
partially
satisfied
by
inter-Group leasing
of
equipment. Although
no
equipment
leasing
arrangement
has been
entered into between Group
A
and
Group
B
in 2016
and
for the 11
months ended
30
November 2017, taking into account Group
B’s
demand
for
finance lease
for
production equipment
and
SMNC’s historical finance lease with
an
independent third party,
the
Company considers
it
is
necessary
to
set
up
reasonable annual caps
for
potential leasing arrangements between Group
A
and
Group
B
in
the
future.
The
production equipment
of
the
second
fab
of
SMNC
cost
as
much
as
US$60 million
to
US$80 million
each
and
the
lease
of
such equipment usually
has
a
term
ranging
from
three
to
five years.
The
relatively high
unit
price
of
the
production equipment requires
a
reasonably
ample annual
cap for the
equipment leasing transactions between Group
A
and
Group
B.
In
March 2016,
SMNC had made
a
finance lease
from
an
independent
third party
for
certain production equipment
to
be
used
in
the
first
fab
in
a
total
amount
of
US$200 million with
a
term
of
five
years.
It
is
expected that
the
second
fab may
have
a
similar level
of
demand
for
finance lease
for
production equipment
and the
inter-Group leasing
of
equipment
will help
to
reduce
the
overall finance
cost of the
Group, reduce
the
uncertainty
of
the
transactions
and
improve
the
efficiency
of
equipment utilisation
of the
Group.
For
further details
concerning
the
expansion
plan
of
SMNC, please refer
to
the
section headed
‘‘Letter
from
the
Board
—
Reasons
For and
Benefits
of the
Continuing Connected Transactions
—
Expansion Plan
of
SMNC’’
in
this
circular. After considering
the
potential
equipment leasing arrangements,
the unit
cost
of
such
leasing arrangements
and
the
historical equipment lease
of
SMNC,
the
Company considers
the
Annual
Cap for
Type
III
CCT
fair
and
reasonable.
|
|
|
4.
|
With regards
to
Type
IV
CCT,
the
Annual
Caps for
each year ending
31
December 2018,
2019 and 2020
is
US$200 million.
For the year
ended
31
December 2016
and the
11
months ended
30
November 2017,
the
Company
and
SMNC had not
completed
any
acquisition
or
disposal
of
equipment
with
each
other.
In
determining
the
Annual Caps
for Type
IV
CCT for the
years ending
31
December 2018, 2019
and
2020,
the
Company
has
primarily considered
the
investment
and
expansion
plan
of
SMNC. SMNC
will need
to
use
approximately
US$3.3 billion
to
acquire
or
lease production equipment
for the
construction
and
operations
of
its
second fab.
Part
of
the
universal production equipment
required
by
the
second fab, which includes, among others, immersion scanner, clean
tool,
rapid thermal processing equipment, plasma etching system
and
wafer surface inspection
system,
can
be
acquired
from
Group
A.
As
at
the
Latest
Practicable Date,
the
Company identified
that
certain frequently-used universal
production
equipment could
be
acquired
by
Group
B
from
|
|
25
LETTER FROM THE BOARD
|
|
Group
A
in
2018, which
had
an
aggregate value
of
approximately US$214 million. Given
the
expected
continuous
expansion
of
SMNC, additional production equipment
may
be
regarded
as
appropriate
to be
transferred from Group
A
to
Group
B
in
2019
and
2020
to
meet
the
demand
of
production equipment
of
Group
B
and
improve
the
overall equipment utilisation
of
the
Group.
The
Company expects that, depending
on
various factors, including
the
frequency
of use
of
the
relevant equipment
by
Group
A
and the
actual demand
of
Group
B,
the
aforementioned additional universal production equipment
that
might
be
transferred from Group
A
to
Group
B
in
2019
and
2020 will remain
at
the
similar level
as
that
in
2018.
In
view
of
this, Group
B
will
need
a
reasonable annual
cap for the
potential
inter-Group
transfer
of
universal production equipment
in
2018, 2019
and
2020.
The
Company
considers
that
to
transfer equipment between Group
A
and
Group
B
will
provide
an
alternative
of
satisfying
such
development
plan
with certain degree
of
flexibility, improve
the
efficiency
of
equipment utilisation
of
the
Group,
better
consolidate
the
resources
of the
Group
and
improve
the
transaction efficiency
of
the
Group.
For
further details concerning
the
expansion
plan of
SMNC, please refer
to
the
section headed
‘‘Letter
from the
Board
—
Reasons
For and
Benefits
of the
Continuing Connected Transactions
—
Expansion Plan
of
SMNC’’
in
this circular. After considering
the
expansion plan
and the
corresponding
increasing
demand
of
production equipment procurement
of
SMNC,
the
Company considers
the
Annual
Caps
for
Type
IV
CCT
fair
and
reasonable.
|
|
|
5.
|
With regards
to
Type
V
CCT, the
Annual Caps
for each year
ending
31
December 2018, 2019
and 2020
is
US$100 million, which
is
primarily determined based
on
the
historical transaction amounts
and the
estimated technological
development
of
the
Group.
The
historical transaction amounts between Group
A
and
Group
B
with
respect
to
technical authorisation
or
licensing (including
the
sharing
of
research
and
development costs) were US$69.1 million
in
2016
and
US$76.7
million
for the 11
months ended
30
November 2017.
The
sharing
of
costs
is
estimated
to be
US$76.7 million
for the year
ending
31
December 2017, based
on
the
pricing policies
of
the
provision
of
technical authorisation
or
licensing
as
described
in
the
sub-section headed
‘‘The
Framework Agreement
—
Pricing
of
the
Continuing Connected Transactions
—
V.
Provision
of
technical authorisation
or licensing’’
in
this
circular. After considering
the
historical amount
of
Type
V
CCT
and the
expected growth
in
the
production capacity
of
12-inch wafers
of
Group
B
for the
years ending
31
December 2018, 2019
and
2020,
the
Company considers
the
Annual
Caps
for
Type
V
CCT
fair
and
reasonable.
|
|
26
LETTER FROM THE BOARD
|
6.
|
With regards
to
Type
VI
CCT,
the
Annual
Caps for
each year ending
31
December 2018,
2019 and 2020
is
US$1,000 million.
Such
Annual
Caps are
split
into (i)
US$990 million
for the
maximum amount
of
the
financial liabilities
of SMNC
in
respect
of
which guarantee
can
be
provided
by the
Company
or
its
subsidiaries
(the
‘‘Balance
Cap’’);
and (ii)
US$10 million
for the fee
payable
by
SMNC
in
consideration
for
such
guarantee
(the
‘‘Guarantee
Fee
Cap’’):
|
|
|
a.
|
the
Balance
Cap of
US$990 million
is
primarily determined based
on
the
historical amounts
of
guarantee provided
by
Company
to SMNC and
the
financing needs
of
SMNC for the
years ending
31
December 2018,
2019
and
2020. During
the
11
months ended
30
November 2017,
the
maximum amount
of
daily balance
of
the
guarantee provided
by
the
Company
for
SMNC’s
financing activities
was
approximately US$235.1 million.
It is
expected
that
the
SMNC Investment will
need
to be
funded
by the
internal
cash flow
and
debt financing
of
SMNC
and the
maximum amounts
of
principal
of
new
borrowings
to be
incurred
by
SMNC
for the
construction
of
its
second
fab
for the
three years ending
31
December 2018,
2019 and 2020 will
amount
to
approximately US$1.21 billion, aggregately.
The
Company expects that
for up
to
80%
of
such borrowings external guarantee will
be
required
by
Group
B,
and the rest
of
which
may not
necessarily require
the
guarantee.
Taking
into
consideration
of
the
above factors,
the
Company further considers that
it is
fair and
reasonable
to
set
up
a
Balance
Cap of
US$990 million
for
the
years
ended
31
December
2018,
2019
and
2020.
|
|
|
b.
|
the
Guarantee
Fee Cap
of
US$10 million
for each year
during
the
three
years
ending
31
December 2018, 2019
and
2020
is
determined based
on the
Balance
Cap
of
US$990 million
and
a
guarantee
fee
charge rate
up to
1.0%.
Such
charge rate
was
determined based
on
the fee
quotes provided
by
commercial banks
who are
independent third parties. After considering
the
maximum
amount
of
guarantee which
may be
required
by
Group
B
and the fee
quotes from independent third parties commercial banks,
the
Company considers
the
Guarantee
Fee Cap fair and
reasonable
for the
years ended
31
December 2018, 2019
and
2020.
|
|
REASONS FOR AND BENEFITS OF THE CONTINUING CONNECTED TRANSACTIONS
The Continuing Connected Transactions (save as Type VI CCT) under the Framework Agreement is in substance a continuation of the transactions carried out under the 2016 Framework Agreement.
SMNC
operates
a
12-inch wafer
fab with
advanced process capability.
As
the
market
demand
for
advanced process continue
to
surge,
the
Company
has
been allocating
and
will
continue
to
allocate majority
of
its
advanced
node
manufacturing
to
SMNC
to
ensure
future
wafer
production
needs
of
the
Company
are
met.
27
LETTER FROM THE BOARD
The
Company believes that advancement
in
technology
is
one of the key
growth
factors. With respect
to
advanced nodes
of
28nm
and
40nm, which
is one
of
the
development
focuses
of
the
Group,
the
Group
recorded
a
revenue
growth
of
more
than
90%
in
2016
as
compared
to
the
year
of
2015,
and more
than
30%
during
the
first three quarters
of
2017
as
compared
to
the
corresponding period
in
2016.
The
continuous cooperation
with
SMNC, throughout
the
various steps
in
production
as
reflected
in
the
Continuing Connected Transactions, helps
the
Company
to
meet
demand from
its
customers
and
to
attain
higher
profitability,
especially
for
the
advanced
nodes.
The
business partnership between
the
Company
and SMNC has
helped
to
eliminate
some duplicated efforts
on
introducing
and
manufacturing advanced nodes
for
IC
design
houses, therefore 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.
As
SMNC had
been continuously expanding
its
manufacturing capacity,
the
Company
can
therefore leverage SMNC’s manufacturing capacity
to
expand
the
Company
capacity
based
on
its
advanced technology
in a
capital-efficient manner.
For
detailed
information
concerning
the
expansion plan
of
SMNC, please refer
to
the
section headed
‘‘Reasons
For
and
Benefits
of the
Continuing Connected Transactions
—
Expansion
Plan
of SMNC’’
in
this
circular.
The
Directors (excluding
the
independent non-executive Directors whose view
will be
given after taking into account
the
advice from
the
Independent Financial Adviser)
are of the
view that
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
Continuing Connected 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.
Expansion Plan of SMNC
SMNC
is
developing
and
constructing
its
second
fab with an
expected
manufacturing
capacity
of
35,000 wafers
per
month (the
‘‘Expansion
Plan’’).
Reference
is
made
to
the
Company’s announcement dated
10
August 2017,
the
circular
(the ‘‘2017
Capital
Contribution
Circular’’)
dated
13
September
2017 and the
extraordinary general meeting poll results announcement dated
29
September 2017 relating
to
the
Company,
SMIC
Beijing, China
IC
Fund, Beijing
Semi
Fund, IDIMC, ZDG, SMIC Holdings
and
ETown
Capital agreeing
to
amend
the
previous joint venture agreement through
an
amendment
JV
agreement
(the ‘‘Amendment
JV
Agreement’’) and a
capital increase agreement
(the
‘‘Capital
Increase
Agreement’’),
pursuant
to
which, among others,
the
aforesaid contracting parties
have
agreed
to
contribute US$2.4 billion
in
total
in
the form
of
registered capital
injection
(the ‘‘2017
Capital
Injection’’).
As
disclosed
in
the
Company’s announcements dated
10 May
2016
and
circular dated
7 June
2016
and the
table
on
page
11
of
the
Capital
Contribution
Circular, before entering into
the
Amendment
JV
Agreement
on 10
August 2017,
the
total
investment
in
SMNC was
US$3.59 billion (comprising US$2.4 billion
in
the form
of
registered capital
and
US$1.19 billion funded through SMNC’s internal
cash flow and
debt
financing). Such investment
has been
used
for
development, expansion
and
related needs
for
equipment
of
SMNC’s first
fab. SMNC has
successfully commenced
the
operation
of
its
first
fab and has been
improving
its
manufacturing capacity
of
40nm
and
28nm wafers
used
for
communications
and
consumer
related
applications
towards
the
first
fab’s
target
28
LETTER FROM THE BOARD
manufacturing capacity
of
35,000 12-inch wafers
per
month.
With the
operation
of
the
first
fab,
as
at
the end
of 30
June 2017,
the
monthly manufacturing capacity
of SMNC was
23,000 12-inch wafers. SMNC aims
to
reach
a
production capacity
of
29,000 wafers
per
month
by
the
end
of
2017.
The
reason
for the
Expansion Plan
and the
investment
is
in
line
with
the
strategy
of
the
Group.
In
terms
of the
strategy
of
the
Group,
as
the
Group derives approximately
one
fourth
of
its
wafer revenue from 28nm
and
40nm wafers
in
2016
and the
first
half
of
2017,
the
continuing development
in
manufacturing capacity
of
28nm wafers
is an
important strategic component
of
the
sustainable growth
of
the
Group, particularly considering
the
revenue contribution
from
28nm wafers
had
increased from approximately 1.6%
in
2016
to
approximately
5.8%
in
the
first
half
of
2017
in
terms
of
wafer revenue
and the
migration
of
various technologies towards 28nm technology
due
to
its
technological performance
and
price competitiveness.
The
manufacturing capacity
of
28nm
and
40nm wafers
is
also
interchangeable
to
a
certain extent, allowing
a
flexibility
to
satisfy customers’
demand.
After completing
the
first phase development,
SMNC
is
expected
to
commence
its
second
phase development
by
constructing
a
second
fab
which
is
expected
to
have a
manufacturing
capacity
of
35,000 12-inch wafers
per
month.
The
construction
of the
second
fab will
enable
SMNC
to
achieve
its
overall development plan, being
a
production
line
comprising
two
fabs
with
target
manufacturing
capacity
of
70,000
12-inch
wafers
per
month.
In
terms
of
the
identified opportunities
of
the
Expansion Plan,
the
business strategy
of SMNC
is to
continue increasing
its
manufacturing capacity, utilisation
rate
and
profitability
as
well
as
work closely
with its
existing
28nm and 40nm
customers
and
develop
new
clients
and
products.
The
capital contributions under
the
Amendment
JV
Agreement
and the
Capital Contribution Agreement
will
be
used
to
develop
its
second
fab
by
improving
its
scale, utilisation rate, product
mix and
production yields, leading
to
an
increase
in its
profitability over time. Through adopting
the
joint venture structure,
SMNC
is
funded through
a
balanced
mix
of
capital contributions from joint venture partners, operating
cash
flow
and debt
financing, with
an
intention
to
capture
more
opportunities
and
build
up
scale
production
for
better
long-run
profitability.
The
Group also intends
to
cater
for the
market demands
and
increase
its
market share
for
advanced nodes products.
As
disclosed
in
page
44
of
the
Capital Contribution
Circular,
according
to a
press release published
by
TrendForce during
the
first
half
of
2017,
the
most
advanced
node
currently available among
the PRC
firms
is
the
28nm technology, which
is
SMNC’s focus.
The
Company, despite being
one of the
companies
with the
most
advanced
28nm technology among
the PRC
firms,
the
Group’s global market share
of
the
28nm technology
only
represented
less
than 0.1%
and less than
1% in
2015
and
2016, respectively, according
to
market
data
of
IHS-iSuppli. According
to
the
feasibility report
(the
‘‘Feasibility
Report’’)
of the
second
fab
construction
and
based
on
the
forecast
of
IHS- iSuppli, technological products such
as
smartphones
and
Internet
of
Things would
be
among
the
main drivers
for the
growth
of the
integrated circuit market
in
the
next decade.
The
28nm technology could
be
applied
on
technological products
such as
smartphones
and
Internet
of
Things, which
the
Company
aims
to
increase
the
market
share.
In
terms
of
the
expected budget
for the
Expansion Plan,
the
expected total investment
for the
construction
of
the
second
fab will
be
approximately US$3.61 billion.
In
addition
to
the 2017
Capital Injection
in
the
total amount
of
US$2.4 billion,
SMNC will also need
to
use
internal
cash flow and
debt financing
to
raise
for
US$1.21 billion
for the
development
of its
second
fab.
29
LETTER FROM THE BOARD
As to
the
basis
of
the
expected amount
of
investment
of
the
Expansion Plan, approximately US$3.3 billion
of the
total investment will
be used for the
procurement
of
production equipment,
and
US$0.2 billion will
be
used for the
relevant construction
works.
The
amount
of
approximately US$3.3 billion
of
the
production equipment
is
the sum of
the
estimated costs
for
purchasing
the list of the
required equipment with
a
total manufacturing capacity
of
35,000 12-inch equivalent wafers
per
month.
The list
of
the
required equipment
is
prepared based
on
the
number
of
equipment needed
for
each
of the
production
departments based
on
past experience
if
the
total production capacity
is to
increase
from
35,000
to
70,000 12-inch equivalent wafers
per
month.
The
estimated
cost
of
each
of
the
equipment
was
based
on
the
latest data
of
recently purchased equipment
and
quotations from suppliers, including
but not
limited
to the
cost
of
the
machines, transportation cost
and
installation cost,
at
the time when the
Feasibility Report
was
prepared.
It
is
expected
that the
second
fab of
SMNC will
have
1,500 staff
in
total
and have
buildings
with
an
aggregate gross floor area
of
89,555 square meters. Messis Capital Limited, being
the
independent financial adviser
to
advise
the
independent board committee
and
the
independent shareholders, among others,
the
Amendment
JV
Agreement, after further considering
the
total investment
of
the
first
fab
of
SMNC and
other factors,
had the
view
that the
expected investment amount
for the
second
fab
of
SMNC
is
needed
for the
production capacity
to
increase
to
the
planned level
and
there
is a
commercial need
for the
capital injection under
the
Amendment
JV
Agreement
and the
Capital Increase
Agreement.
Please refer
to
the
sections headed
‘‘Letter
From
the
Board
—
Part
I —
Amendment
JV
Agreement
and
Capital Increase Agreement
—
Reasons
For and
Benefits
of
The
Amendment
JV
Agreement
and The
Capital Increase
Agreement’’ and
‘‘Letter
from
Messis Capital
—
Principal Factors
and
Reasons Concerned
—
(1) The
Amendment
JV
Agreement
and the
Capital Increase Agreement
—
Background
of
the
Amendment
JV
Agreement,
the
Capital Increase Agreement
and the
Parties
—
Reasons
for and
benefit
of the
Amendment
JV
Agreement
and the
Capital Increase
Agreement’’
in
the
Capital
Contribution Circular
for
further
details.
IMPLICATIONS OF THE CONTINUING CONNECTED TRANSACTIONS UNDER THE LISTING RULES
As at
the
Latest Practicable Date, China
IC
Fund held
approximately 15.85%
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
SMNC
was
held
as to
approximately
51% and 32% by the
Group
and
China
IC
Fund, respectively.
SMNC
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.
As
one
or
more
of
the
applicable percentage ratios
in
respect
of the
Annual Caps
for
Type
I
CCT,
Type
II
CCT, Type
III CCT,
Type
IV
CCT and Type
VI
CCT
(collectively,
the
‘‘Specific
Non-Exempt
CCT’’)
exceeds
5%, such
transactions
will
constitute
non-exempt
continuing connected transactions under Chapter
14A of the
Listing Rules. Accordingly,
the
Framework Agreement
and the
Specific Non-Exempt
CCT are
subject
to
the
reporting,
announcement
and
Independent
Shareholders’
approval
requirements.
30
LETTER FROM THE BOARD
As
the
applicable percentage ratios
in
respect
of the
Annual
Caps for
Type
V
CCT
are
more than 0.1% but less
than
5%, such
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.
As the applicable percentage ratios in respect of the Annual Caps for Type IV CCT are more than 5% but less than 25%, the Type IV CCT also constitute discloseable transactions of the Company and are subject to the reporting and announcement requirements under Chapter 14 of the Listing Rules.
In
accordance
with the
Listing Rules,
the
Independent Board Committee
has
been
established
to
advise
and
provide recommendation
to
the
Independent Shareholders
on
the
Framework Agreement
and the
Specific Non-Exempt
CCT
(including
the
Annual Caps)
and
to
advise
the
Independent
Shareholders
on
how
to
vote.
Messis Capital
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
and the
Continuing Connected Transactions (including
the
Annual
Caps).
INFORMATION ABOUT
THE
PARTIES
Information on the Company
The
Company
is
one of the
leading semiconductor foundries
in
the
world
and the
largest
and
most advanced foundry
in
mainland China. SMIC provides integrated
circuit
(IC)
foundry
and
technology services
on
process nodes from 0.35 micron
to 28
nanometer.
Headquartered
in
Shanghai, China, SMIC
has
an
international manufacturing
and
service base.
In
China, SMIC
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
SMIC 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.
Information on SMNC
SMNC
is
a
joint venture company established
in
the PRC
pursuant
to
the
joint venture agreement dated
3
June 2013,
the
equity capital
of
which
is
owned
as to
12.5%
by
SMIC
Beijing,
13%
by
the
Company, 25.5%
by SMIC
Holdings,
32%
by
China
IC
Fund.
The
remaining equity capital
of
SMNC
is
owned
by
ZDG,
IDIMC, Beijing
Semi Fund and
E-
Town Capital
and
none
of
them
owns 10%
or
more equity capital
of
SMNC.
SMNC is
primarily
engaged
in
manufacturing
and
trading
of
semiconductor
products.
31
LETTER FROM THE BOARD
GENERAL INFORMATION
At the EGM, ordinary resolution will be proposed to the Independent Shareholders to approve, among others, the proposed Framework Agreement and the Specific Non-Exempt CCT and their Annual Caps).
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 resolution
to
approve
the
Framework
Agreement
and any
transactions contemplated thereunder.
As at
the
Latest
Practicable
Date, Xinxin (Hongkong) Capital
Co.,
Limited
was
holding 740,000,000 Shares
and
representing
approximately
15.85%
of
the
total
issued
share
capital
of
the
Company.
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 resolution at the EGM.
No
Director
was
considered
to
have
a
material interest
in
the
Framework
Agreement
on
the
date
of
the
Board meeting authorising
the
Framework Agreement which would have required
the
Director
to
abstain
from
voting
at
the
relevant
Board
meeting.
Your attention is drawn to the general information set out in Appendix I to this circular.
32
LETTER FROM THE BOARD
RECOMMENDATION
The
Board (including
the
independent non-executive Directors) considers 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
are fair and
reasonable;
and the
entering into
of
the
Framework
Agreement
and
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.
Accordingly,
the
Independent Board Committee recommends
the
Independent Shareholders
to
vote
in
favour
of
the
ordinary resolutions
to be
proposed
at
the EGM
to
approve
the
Framework
Agreement
and
the
Specific
Non-Exempt
CCT.
33
LETTER FROM THE BOARD
EXTRAORDINARY GENERAL MEETING
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.
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
5
February 2018
to
8
February 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
transfers, 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
2
February 2018.
All
persons
who are
registered holders
of
the
Shares
on
8
February
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, 18 January 2018
34
LETTER FROM THE INDEPE
NDENT 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)
18 January 2018
To the Independent Shareholders
Dear Sir or Madam,
DISCLOSEABLE AND
CONTINUING CONNECTED TRANSACTIONS
IN RELATION TO FRAMEWORK AGREEMENT
We
refer
to
the
circular dated
18
January
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
have been appointed
by
the
Board
to
advise
the
Independent Shareholders
as
to
whether
the
terms
of
the
Framework Agreement
are fair and
reasonable,
and
whether
the
entering
into
of
the
Framework Agreement
is
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.
Messis Capital
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
are fair and
reasonable,
and
whether
the
entering
into of
Framework Agreement
is
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 resolution. Details
of
its
advice, together
with the
principal factors
and
reasons taken
into
consideration
in
arriving
at
such
advice,
are set out
on
pages
37 to 78 of
the Circular.
|
*
|
For
identification
purpose
only
|
35
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
We,
having taken
into
account
the
advice
of
Messis Capital, consider
that the
terms
of
the
Framework Agreement
are fair and
reasonable,
and the
entering into
of the
Framework
Agreement
is 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
5
to 34
of the
Circular
and the
additional
information
set
out
in
the
Appendix
I
to
the
Circular.
|
|
|
Yours faithfully,
Independent Board Committee Lip-Bu Tan, William Tudor Brown,
Carman I-Hua Chang,
Shang-yi Chiang, Jason Jingsheng Cong
Independent Non-Executive Directors
|
36
LETTER FROM ME
SSIS CAPITAL
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.
18 January 2018
The
Independent Board Committee
and the
Independent Shareholders
of
Semiconductor Manufacturing International
Corporation
Dear Sir/Madam,
DISCLOSEABLE AND
CONTINUING CONNECTED TRANSACTIONS
IN RELATION TO FRAMEWORK AGREEMENT
INTRODUCTION
We
refer
to
our
appointment
as the
Independent Financial Adviser
to
advise
the
Independent Board Committee
and the
Independent Shareholders
in
relation
to
the
Framework Agreement
and the
Continuing Connected Transactions, 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
18
January
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 30 September 2016, the circular dated 18 November 2016 and the extraordinary general meeting poll results announcement dated 6 December 2016 in relation to the execution of the 2016 Framework Agreement dated 30 September 2016 between the Company (on behalf of itself and its subsidiaries, other than SMNC) and SMNC (on behalf of itself and its subsidiaries) in relation to the supply of goods and services, leasing of assets, transfer of assets and provision of technical authorisation or licensing among the parties. Reference is also made to the Company’s announcement dated 7 December 2017, as the term of the 2016 Framework Agreement will end on 31 December 2017, the Company and SMNC had 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 has a term of three years commencing on 1 January 2018 and ending on 31 December 2020.
37
LETTER FROM MESSIS CAPITAL
As
at the
Latest Practicable Date,
as
China
IC
Fund
holds approximately 15.85% interest
in
the
Company through
its
wholly-owned subsidiary, Xinxin (Hongkong) Capital
Co.,
Limited,
it is a
connected person
of
the
Company
at
the
issuer level pursuant
to
the
Listing Rules.
The
registered capital
of
SMNC
is
held
as to
approximately
51% and 32% by the
Group
and
China
IC
Fund, respectively.
SMNC
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.
As
one
or
more
of
the
applicable percentage ratios
in
respect
of the
Annual Caps
for
the
Specific Non-Exempt
CCT
exceeds
5%, such
transactions
will
constitute
non-exempt
continuing connected transactions under Chapter
14A of the
Listing Rules. Accordingly,
the
Framework Agreement
and the
Specific Non-Exempt
CCT are
subject
to
the
reporting,
announcement
and
Independent Shareholders’ approval requirements
of
Chapter
14A of the
Listing
Rules.
As
the
applicable percentage ratios
in
respect
of the
Annual
Caps for
Type
V
CCT
are
more than 0.1% but less
than
5%, such
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.
As the applicable percentage ratios in respect of the Annual Caps for Type IV CCT are more than 5% but less than 25%, the Type IV CCT also constitute discloseable transactions of the Company and are subject to the reporting and announcement requirements under Chapter 14 of the Listing Rules.
The
Independent Board Committee
has
been established
to
advise
and
provide recommendation
to
the
Independent Shareholders
on the
Framework Agreement
and the
Specific Non-Exempt
CCT
(including
the
Annual Caps)
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
the
Framework Agreement,
the
Continuing Connected Transactions
and
their Annual Caps
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.
38
LETTER FROM MESSIS CAPITAL
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:
Date of the relevant circular/ announcement and/or
|
|
|
our
letter
of
advice
|
|
Nature
of
the
transactions
|
|
|
|
7
June
2016
|
|
(1)
Continuing connected transactions
in
relation
to
centralised
fund
management agreement;
(2)
discloseable transaction
and
connected transaction
in
relation
to
proposed capital contribution
and
deemed disposal
of
equity interest
in
a
joint venture
in
Beijing,
the PRC; and (3)
non-exempt connected
transactions
— proposed grant of restricted share units to directors and chief executive officer
|
|
|
|
26
July
2016
|
|
Major transaction
and
continuing
connected
transaction
in
relation
to
framework
agreement
|
|
|
|
18
November
2016
|
|
(1)
Continuing connected transactions
in
relation
to
framework agreement;
and (2)
non-exempt
connected
transactions — proposed grant
of
restricted share units
to
directors
and
chief executive
officer
|
|
|
|
24
May
2017
|
|
Non-exempt connected transactions — proposed grants of restricted share units to directors and former chief executive officer
|
|
|
|
31
July
2017
|
|
Connected transactions — provisions of guarantees
|
|
|
|
13
September
2017
|
|
(1) Major transaction and connected transaction
proposed capital contribution in a joint venture in Beijing, the PRC; (2) non-exempt connected transactions — proposed grant of restricted share units to former Chief Executive Officer; and (3) non- exempt connected transactions — proposed grant of restricted share units to Chief Executive Officer and Director
|
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.
39
LETTER FROM MESSIS CAPITAL
BASIS OF OUR OPINION
In formulating our opinion and recommendation, we have considered, among other things, (i) the Company’s reports on the unaudited results for the three months ended 30 September 2017 (the ‘‘3Q17 Report’’) and the annual report of the Company for the year ended 31 December 2016 (the ‘‘Annual Report 2016’’); (ii) the Framework Agreement; and
(iii)
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
the
Framework Agreement (including
the
Annual
Caps)
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:
|
(1)
|
The
Framework
Agreement
|
Background of the Framework Agreement
Reference
is
made
to
the
Company’s announcement dated
30
September
2016,
the
circular
dated
18
November
2016
and
the
extraordinary
general
meeting
poll
results announcement dated 6 December 2016
in
relation
to
the
execution
of
the
2016
Framework
Agreement
dated
30
September
2016
between
the
Company
(on
behalf
of
itself
and its
subsidiaries, other than SMNC)
and
SMNC
(on
behalf
of
itself
and its
subsidiaries)
in
relation
to
the
supply
of
goods
and
services, leasing
of
assets, transfer
of
assets
and
provision
of
technical authorisation
or
licensing among
the
parties. Reference
is
also made
to
the
Company’s
announcement dated 7 December 2017,
as the term
of
the 2016
Framework
Agreement will
end on
31
December 2017,
the
Company
and SMNC had
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 by the Company for financing activities to be undertaken by SMNC. The Framework Agreement has a term of three years commencing on 1 January 2018 and ending on 31 December 2020.
40
LETTER FROM MESSIS CAPITAL
The
terms
of
the
Framework Agreement
are
subject
to
compliance
with
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.).
Reasons for and benefit of the Framework Agreement
As
stated
in
the
Letter
from the
Board,
with
respect
to
advanced nodes
of
28nm
and
40nm, which
is
one
of
the
development focuses
of
the
Group,
the
Group
recorded
a
revenue growth
of
more
than 90%
in
2016
as
compared
to
the
year
of
2015,
and more than 30%
during
the
first three quarters
of
2017
as
compared
to
the
corresponding period
in
2016.
SMNC
operates
a
12-inch wafer
fab
with
advanced process capability.
As
the market
demand
for
advanced
process
continues
to
surge,
the
Company
has
been,
and will
continue
to
allocate
majority
of
its
advanced
node
manufacturing
to SMNC
to
ensure future
wafer
production needs
of the
Company
are met.
Furthermore,
with the
expansion
of
SMNC’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.
Apart from that,
the
Continuing Connected Transactions (save
as
Type
VI CCT)
under
the
Framework Agreement
is in
substance a continuation
of
the
transactions carried
out
under
the
2016 Framework Agreement.
As
SMNC
is
a subsidiary
of the
Group,
it is
normal commercial practice
for the
Company
and
SMNC
to
support
each
other.
The
Continuing Connected Transactions could
also
satisfy
the
Group’s overall business needs
as
the
Group
will
continue
to
allocate
majority
of
its
advanced
node
manufacturing
to
SMNC
as
stated
in the
Letter
from the
Board.
Having considered
the
aforementioned factors
in
particular
(i) the
growth
in
the
advanced nodes revenue
of
28nm
and
40nm products; (ii)
the
expansion
of
SMNC’s capacity will
be
able
to
enhance
the
Group’s industry position
and
benefit
from
economies
of
scale;
and
(iii)
SMNC
is
a subsidiary
of the
Company
and
it is
normal commercial practice
for the
Company
and SMNC
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.
41
LETTER FROM MESSIS CAPITAL
Types of transactions
The Company and SMNC 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, leasing of assets, transfer of assets, provision of technical authorisation or licensing and provision of guarantee:
Type of transactions
|
|
Role of the Company and SMNC
|
|
|
|
1. Purchase and sale of spare parts, raw materials, photomasks and finished products.
|
|
The Company as seller:
— The Company will sell spare parts, raw materials and photomasks to SMNC.
|
|
|
|
|
|
|
|
The Company as purchaser:
— The Company will purchase spare parts, raw materials and finished products from SMNC.
|
|
|
|
2.
Rendering of or receiving services including, without limitation, (a) processing and testing service; (b) sales service; (c) overseas market promotion and customer service; (d) procurement service; (e) research, development and experiment support service; (f) comprehensive administration, logistics, production management, IT and other services; and (g) water, electricity, gas and heat provision service.
|
|
Mutual rendering and receiving services:
— The Company and SMNC may both provide (a) processing and testing service to the other, although it is expected that the Company would primarily be the service provider and that SMNC would primarily be the service recipient.
The Company as service provider:
— For the other aforementioned categories of services (include (b) to (g)), the Company would be the service provider and SMNC would be the service recipient.
|
42
LETTER FROM MESSIS CAPITAL
Type
of
transactions
|
|
Role
of
the
Company
and
SMNC
|
|
|
|
3.
Mutual leasing of assets such as plant, office premises and equipment between the Company and SMNC.
|
|
The Company as lessor:
— The company may lease plant and office to SMNC.
Mutual leasing of equipment:
— Each party can either be the lessor or the lessee depending on the business needs at the relevant time.
|
|
|
4.Acquisition and disposal of equipment: The Company and SMNC both engage in the manufacturing of wafers. For certain processes in wafer manufacturing, the Company and SMNC can use the same equipment for production. Where required, each party may acquire equipment from the other party or dispose of equipment to the other party in order to meet production needs and optimise production efficiency.
|
|
— Each party can either be the vendor or purchaser of the equipment depending on the business needs at the relevant time.
|
|
|
|
5.
Provision
of
technical
authorisation
or
licensing
by
the
Company
to
SMNC
for use of its
technologies
and
manufacturing system
in
relation
to
40–28
nanometer,
as
well
as
the
sharing
of
research
and
development
costs
in
relation
to 28-
nanometer technologies based
on
their respective plans
on
future
production capacity.
|
|
— The
Company
may
provide
technical authorisation
or
licensing
to
SMNC.
— The
Company
and SMNC
will
share
the
research
and
development costs
in
relation
to
28-nanometer
technologies.
|
43
LETTER FROM MESSIS CAPITAL
Type
of
transactions
|
|
Role
of
the
Company
and
SMNC
|
|
|
|
6. Provision
of
guarantee
|
|
— The
Company will provide
guarantee
for
SMNC’s
financing
activities, including
but not
limited
to
bank loans, financial lease
and
operating
lease.
|
|
|
|
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
SMNC
to
the
Company contemplated under
the
Framework Agreement will
be
determined
in
accordance
with the
following
general principles
in
ascending
order:
|
(1)
|
the
price prescribed
or
approved
by
state
or
local price
control
department
(if
any);
|
|
|
(2)
|
a
reasonable price
in
accordance
with the
industry guided price
for
a
particular type
of
service
or
product issued
by
the
relevant
industry
association
(if
any);
|
|
|
(3)
|
the
comparable local market price, which shall
be
determined after arm’s length negotiation between
both
parties
with
reference
to
(a)
the
market price charged
by
independent third parties
for
comparable product
or
services
at
the
same
time and
in
the same
region;
and (b) the
lowest quotation that
the
purchaser
can
obtain
by
way of
public
tender;
|
|
|
(4)
|
where there
is
no
comparable local market price,
the
price based
on
the
principle
of
cost
plus
a
fair and
reasonable profit rate, being
the
aggregate
sum
of
(a) the
actual reasonable cost;
and (b)
a
fair
and
reasonable profit rate.
The
expected range
of
profit
is
from
5% to
8%;
which
is in
line with
the
industry
and not
lower than
the
profit rate charged
by the
Company
or
SMNC (as
applicable)
to
independent
third
parties
(to the
extent available);
or
|
|
|
(5)
|
where general pricing principles
(1)
to
(4) are not
applicable,
the
price determined
by
other reasonable means
as
agreed upon
by
both parties
on
the
condition that
the
relevant costs
are
identifiable
and are
allocated
to
each party involved
on
a
fair
and
equitable
basis.
|
|
Where general pricing principles
(2)
to
(5)
apply, where possible,
each
of
the
Company
and SMNC will
obtain
at
least
two
quotations
or
tenders
from
independent
third
parties
before
agreeing
upon
the
applicable
price.
44
LETTER FROM MESSIS CAPITAL
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
by
time
by
the
relevant
PRC
government authority. Under
the
Pricing
Law
of
the
PRC,
the
state
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
Continuing Connected Transactions
in
the
future,
the
parties
will
execute
such
price first
in
accordance
with
pricing principle
(1)
above.
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:
|
I.
|
Purchase
and sale
of
goods
|
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.
The Company will not purchase photomasks from SMNC.
In
respect
of
purchasing finished products from SMNC,
the
transaction
is a
pass
through
of
customers’ orders received
by
the
Company
to
SMNC.
It is a
one-way
sale
of
finished product
from
SMNC
to
the
Company.
The
sales
team of the
Company
is
responsible
for
negotiation
with the
customers
to
ensure
the
prices
are
at
market
value
and
favorable
to
the
Group
as
a
whole.
Once
a
customer’s
order
is
identified
as
appropriate
for
production
by
SMNC
based
on
the
customer’s request, technology nodes, type
of
applications
and
fab
availability,
the
system
of the
Company will generate
a
purchase
order
45
LETTER FROM MESSIS CAPITAL
from
the
Company
to
SMNC
based
on
the
same price, terms
and
conditions
of
the
purchase order
of
the
customer. According
to
the
arrangement between
the
Company
and
SMNC, there
is no
difference between
the
sales prices from
the
Company
to
the
customers
and the
transaction price
from SMNC
to
the
Company
with
respect
to
finished
products, since SMNC
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
SMNC.
Upon
receiving
the
payment
from
customers
by
the
Company,
the
finance
and
accounting team
of the
Company arranges
to
pay
SMNC
for the
finished products.
If
the
customer requires further backend services such
as
bumping
and
testing,
the
Company would perform
the
services
or
outsource
to
other
service
providers.
The
Company charges
its
customers
for the
total
of
product costs
and
services
performed.
|
II.
|
Rendering
of or
receiving
services
|
Each of the Company and SMNC is subject to the following general control procedures:
|
1.
|
Both
parties will enter
into
service contract
in
accordance
with
the
Group’s regulation rules
for
intra-group related party transactions
and the
Framework
Agreement;
|
|
|
2.
|
The main
department
of
the
service provider
will
obtain
the
service data, calculate
the
amount
of
charges
in
accordance
with
the
consideration provision stipulated
in
the
relevant service contract taking
into
account
of
the
cost
data;
|
|
|
3.
|
The
service provider
will
then apply through
the
Group’s system
to
charge
the
service recipient;
and
|
|
|
4.
|
The
service provider will,
upon
verification
of
the
above
data,
request
for
payment
to be
made through
the
Group’s
system.
|
|
46
LETTER FROM MESSIS CAPITAL
Type
of
transaction
Pricing policies
and
control
procedures
|
(a)
|
Processing
and
testing
service
|
The
Company
as
the
service provider
(general
principle
(3)
above):
The SMIC and
SMNC
Wafer Cost Valuation System
can
automatically
fetch data from
the
production system
and get the
basic information
of
production steps
for
the
processing services (including
information
about
the type
of
machine,
the
process
and
the
standard cost).
The
manufacturing department
of
SMNC will
check such
data and
the
calculation basis together
with the
person
in
charge
of
production costs,
and
send
the
service requests
to
the
Company after
the
review
by
related party transaction office from time
to
time.
In
accordance
with the
pricing policies under
the
Framework Agreement
(general
pricing principle
(3)
above), officers
of
different levels
of
manufacturing
department
and
factories
of
the
Company
will
review
the
service requests
and
calculate
the
charges
with
reference
to
market price
and
charges
to
independent third party
customers.
The
Company
as
the
service recipient (general principle
(3)
above):
The SMIC and
SMNC
Wafer Cost Valuation System
can
automatically
fetch data from
the
production system
and get the
basic information
of
production steps
for
the
services (including information about
the type
of
machine,
the
process
and the
standard
cost).
The
manufacturing department
of the
Company will check
such data and
the
calculation basis together
with the
person
in
charge
of
production costs,
and
send
the
service requests
to
SMNC.
In
accordance
with
the
pricing policies under
the
Framework
Agreement (general pricing principle
(3)
above), officers
of
different levels
of
manufacturing department
and
factories
of SMNC will
review
the
service requests
and
calculate
the
charges with reference
to
market price
and
charges.
47
LETTER FROM MESSIS CAPITAL
Type
of
transaction
Pricing policies
and
control
procedures
|
(b)
|
Sales
service
provided
by
the
Company
to
SMNC
|
The
sales department
of
the
Company
will
provide
the
nature
of
the
relevant sale service
and the
costs
such
as
labour costs
and
office expenses.
In
accordance
with the
pricing
policies
of
the
Framework Agreement (general pricing principle
(4)
above),
the
related
party
transaction
team
of
the
Company will
calculate
the
charges based
on
allocation
of
the
sales expenses according
to
the
revenue
from the
sales plus
a
reasonable profit rate
of
8%.
After
the
review
of
finance
and
administration
department
of the
Company,
the
Company
will then
request
for
payment from
SMNC
through
the
Group’s system.
The
business
administration
or
other department(s) designated
by
the
management
of
SMNC
will
check
the data
together
with the
sales
department
of
the
Company
and
submit
the
relevant payment requests
to
the
related
party
transaction office
for
review
and
approval
for
payment.
The
officers
of
different levels
of
aforementioned departments
of
SMNC
will
also
further check
when
transacting
the payment.
48
LETTER FROM MESSIS CAPITAL
Type
of
transaction
Pricing policies
and
control
procedures
|
(c)
|
Overseas
market
promotion
and
customer
service
provided
by
the
Company
to
SMNC
|
The
overseas offices
of
the
Company will provide
the
nature
of
the
relevant sales service
and the
costs
such
as
labour costs
and
office expenses.
In
accordance
with the
pricing
policies
of
the
Framework Agreement (general pricing principle
(4)
above),
the
related
party
transaction
team
of
the
Company will
calculate
the
charges based
on
allocation
of
the
sales expenses according
to
the
revenue
from the
sales plus
a
reasonable profit rate
of
8%.
After
the
review
by
finance
and
accounting department,
the
Company
will then
request
for
payment
from
SMNC through
the
Group’s system.
The
business administration
or
other department designated
by
the
management
of
SMNC
will
check
the data
together with
the
relevant
department(s)
of
the
Company which
provide
overseas market promotion
and
customer
service
and
submit
the
relevant
payment
requests
to
the
related party transaction
office
for
review
and
approval
for
payment.
The
officers
of
different levels
of
the
aforementioned departments
of
SMNC
will
also
further check
when
transacting
the payment.
49
LETTER FROM MESSIS CAPITAL
Type
of
transaction
Pricing policies
and
control
procedures
|
(d)
|
Procurement
service
provided
by
the
Company
to
SMNC
|
The
procurement department
of
the
Company
will
provide
the
nature
of the
relevant procurement service
and the
costs
such
as
labour costs
and
office expenses.
In
accordance with
the
pricing policies
of
the
Framework Agreement (general
pricing
principle
(4)
above),
the
related
party
transaction team
of
the
Company will calculate
the
charges based
on
allocation
of
procurement department expenses according
to
working hours
or
workload plus
a
reasonable profit
rate
of
5%.
After
the
review
by
finance
and
accounting department,
the
Company
will
then
request
for
payment
from SMNC
through
the
Group’s system.
The
procurement
department
or
other department designated
by
the
management
of
SMNC will
check
the
data
together
with the
procurement department
of
the
Company
and
submit
the
relevant
payment
requests
to
the
related party transaction
office
for
review
and
approval
for
payment.
The
officers
of
different levels
of
the
aforementioned department
of
SMNC
will
also
further
check
when
transacting
the
payment.
50
LETTER FROM MESSIS CAPITAL
Type
of
transaction
Pricing policies
and
control
procedures
development and experiment support service provided by the Company to SMNC
The
research
and
development department
of the
Company
will
provide
the
nature
of
the
relevant service
and the
costs such
as
labour
costs
and
office expenses.
In
accordance
with
the
pricing policies under
the
Framework
Agreement (general pricing principle
(3)
above),
the
Company will calculate
the
charges
with
reference
to
market price.
The
reliability
laboratory and/or
the
product department
of
SMNC will
check
the
data together with
the
reliability laboratory and/or
product
department
of
the
Company
and
submit
the
relevant payment requests
to
the
related
party
transaction office
for
review
and
approval
for
payment.
The
officers
of
different levels
of
the
aforementioned department
of
SMNC
will
also
further check when transacting
the
payment
request. Market price
is
assessed using
quotes
obtained from
two
or
more independent
third
party providers
for
similar services.
The
Company
and its
subsidiaries
may
subcontract
certain orders
to
comparable independent
third
party providers
from
time
to
time
as
needed.
The
pricing
of
services provided
by
the
Company
to
SMNC
is
based
on
the
quotes
obtained from such third party providers.
The
Company
will then
request
for
payment
from
SMNC
through
the
Group’s
system.
51
LETTER FROM MESSIS CAPITAL
Type
of
transaction
Pricing policies
and
control
procedures
|
(f)
|
Comprehensive administration,
logistics,
production
management,
IT
and
other services provided
by
the
Company
to
SMNC
|
The
human resources department
of
the
Company will calculate
the
working hours
of
spent
on
providing services
to SMNC
by
the
various departments
in
the
Company.
In
accordance
with the
pricing policies under
the
Framework Agreement (general
pricing
principle
(4)
above),
the
related
party
transaction team
of
the
Company will calculate
the
charges based
on
allocation
of
labour costs
and
relevant resources consumption according
to the
proportion
of
working hours
or
workload plus
a
reasonable profit
rate
of
5%.
After
the
review
by
finance
and
accounting department,
the
Company
will
then
request
for
payment
from SMNC
through
the
Group’s system.
The
general affairs
office,
logistic function, manufacturing
department
and
other relevant department(s)
(where
applicable)
of
SMNC
will check
the
data
together
with the
relevant department(s)
of
the
Company
and
submit
the
relevant
payment
requests
to
the
related party transaction
office
for
review
and
approval
for
payment.
The
officers
of
different levels
of
the
aforementioned department(s)
of
SMNC
will
also
further check
when
transacting
the payment.
52
LETTER FROM MESSIS CAPITAL
Type
of
transaction
Pricing policies
and
control
procedures
|
(g)
|
Water, electricity,
gas
and heat
provision
service provided
by the
Company
to SMNC
|
The
facilities department
of the
Company
will
record
the
monthly consumption
of
water, electricity,
gas and
heat.
In
accordance
with
the
pricing policies under
the
Framework
Agreement (general pricing principle
(1)
above),
the
Company will calculate
the
charges based
on
the
price prescribed
by
Beijing
Municipal Commission
of
Development
and
Reform published
on
its
website from
time
to
time
or
with
reference
to
market price.
Upon
the
review
and
approval
by
the
officer(s)
of
the
relevant business department,
the
Company
will
then
request
for
payment
from SMNC
through
the
Group’s system.
The
Company
may
also
use
market prices assessed
by
obtaining
at
least
two
quotes from independent third party providers
in
respect
of
similar services.
The
request
for
payment shall
be
reviewed
and
approved
by
the
officers
of the
relevant departments
of
the
Company.
The
facilities department
of
SMNC
will
further check
the
unit price
of
various types
of
service
and the
basis
of
consumption amount
in
the
payment requests
and
upon
the
review
by the
department officer(s), submit
to
the
related
party transaction office
for
review
and
approval.
The
officers
of
different levels
of
the
facilities department
of
SMNC will
also need
to
further
check
when
transacting
the
payment.
53
LETTER FROM MESSIS CAPITAL