Report of Foreign Issuer (6-k)

Share Name	Share Symbol	Market	Type
Semiconductor Manufacturing International Corp. Adr	NYSE:SMI	NYSE	Ordinary Share

	Price Change	% Change	Share Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	5.41				0.00	01:00:00

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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 January, 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

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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.


	Semiconductor Manufacturing International Corporation

Date: January 18, 2018	By:	/s/ Dr. Gao Yonggang
		Name:	Dr. Gao Yonggang
		Title:	Executive Director, Chief Financial Officer and Joint Company Secretary

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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) DISCLOSEABLE AND CONTINUING CONNECTED TRANSACTIONS IN RELATION TO FRAMEWORK AGREEMENT

AND

(2) 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 35 to 36 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 37 to 78 of this circular.

The notice convening the EGM to be held at 18 Zhangjiang Road, Pu Dong New Area, Shanghai, People’s Republic of China on 8 February 2018 at 12 : 00 noon (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. Only Shareholders of record on 8 February 2018 are entitled to attend and vote at the EGM.

* For identification purpose only

18 January 2018

CONTENTS

		Page
Definitions		1

Letter from the Board		5

Letter from the Independent Board Committee		35

Letter from Messis Capital

Appendix I — General Information

Notice of Extraordinary General Meeting

DEFINI TIONS

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

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

‘‘Annual Caps’’		the proposed annual caps for the period ending 31 December, 2018, 2019 and 2020 in relation to each type of Continuing Connected Transaction which are more fully set out in the section headed ‘‘The Annual Caps and Basis of Determination — Annual Caps’’ in this circular

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

‘‘Board’’		the board of Directors

‘‘Capital Contribution’’		the US$636 million cash contribution by China IC Fund into the registered capital of SMNC and the corresponding deemed disposal of equity interest of the Company and SMIC Beijing in SMNC pursuant to an amendment joint venture agreement entered in between the Company, SMIC Beijing, China IC Fund and other third parties on 10 May 2016

‘‘China IC Fund’’		國家集成電路產業投資基金股份有限公司 (China Integrated Circuit Industry Investment Fund Co., Ltd.*), a company established under the laws of the PRC

‘‘Company’’		Semiconductor Manufacturing International Corporation ( 中芯國際集成電路製造有限公司 *), a company incorporated in the Cayman Islands with limited liability, the shares of which are listed on the main board of the Stock Exchange and the American depositary shares of which are listed on the New York Stock Exchange, Inc.

‘‘connected person(s)’’		has the same meaning as ascribed to it under the Listing Rules

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

DEFINITIONS

‘‘Director(s)’’		the director(s) of the Company

‘‘E-Town Capital’’		北京亦莊國際投資發展有限公司 (Beijing E-Town International Investment & Development Co., Ltd.*), a limited liability company established under the laws of the PRC

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

‘‘Framework Agreement’’		the framework agreement entered into between the Company and SMNC on 6 December 2017 in relation to Continuing Connected Transactions

‘‘Group’’		the Company and its subsidiaries

‘‘Group A’’		the Company and/or its subsidiaries (other than SMNC and its subsidiaries)

‘‘Group B’’		SMNC and/or its subsidiaries

‘‘HK$’’		Hong Kong dollars, the lawful currency of Hong Kong

‘‘Hong Kong’’		Hong Kong Special Administrative Region of the PRC

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

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

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

DEFINITIONS

‘‘Independent Shareholders’’		the Shareholders who are not required under the Listing Rules to abstain from voting at the EGM to approve the Framework Agreement and the Specific Non-Exempt CCT and their Annual Caps, which shall include Shareholders other than Xinxin (Hongkong) Capital Co., Limited and other associates of China IC Fund (as defined in the Listing Rules) in relation to the Framework Agreement
‘‘Latest Practicable Date’’		30 November 2017, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein

‘‘Listing Rules’’		the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

‘‘Ordinary Share(s)’’		the ordinary Share(s) of US$0.004 each in the share capital of the Company

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

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

‘‘Shareholders’’		holder(s) of issued Shares

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

‘‘SMIC Beijing’’		中芯國際集成電路製造（北京）有限公司 (Semiconductor Manufacturing International (Beijing) Corporation*), a wholly foreign-owned enterprise established under the laws of the PRC and a wholly-owned subsidiary of the Company

‘‘SMIC Holdings’’		中芯國際控股有限公司 (SMIC Holdings Corporation*), a limited liability company established under the laws of the PRC and a wholly-owned subsidiary of the Company;

‘‘SMNC’’		中芯北方集成電路製造（北京）有限公司 (Semiconductor Manufacturing North China (Beijing) Corporation*), a company established under the laws of the PRC pursuant to the joint venture agreement dated 3 June 2013

‘‘Specific Non-Exempt CCT’’		Type I CCT, Type II CCT, Type III CCT, Type IV CCT and Type VI CCT

‘‘Stock Exchange’’		The Stock Exchange of Hong Kong Limited

DEFINITIONS

‘‘Type I CCT’’		the transactions contemplated under the Framework Agreement in relation to purchase and sale of goods

‘‘Type II CCT’’		the transactions contemplated under the Framework Agreement in relation to rendering of or receiving services

‘‘Type III CCT’’		the transactions contemplated under the Framework Agreement in relation to leasing of assets

‘‘Type IV CCT’’		the transactions contemplated under the Framework Agreement in relation to transfer of assets

‘‘Type V CCT’’		the transactions contemplated under the Framework Agreement in relation to provision of technical authorisation or licensing

‘‘Type VI CCT’’		the transactions contemplated under the Framework Agreement in relation to provision of guarantee

‘‘U.S.’’ or ‘‘United States’’		the United States of America, its territories, its possessions and all areas subject to its jurisdiction

‘‘US$’’		United States dollar, the lawful currency of the United States of America

‘‘Xun Xin’’		巽鑫（上海）投資有限公司 (Xun Xin (Shanghai) Investment Co. Ltd.*), a limited liability company established under the laws of the PRC and a wholly-owned subsidiary of China IC Fund

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

‘‘%’’		per cent.

* For identification purpose only

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)

Executive Directors: Zhou Zixue (Chairman) Zhao HaiJun (Co-Chief Executive Officer) Liang Mong Song (Co-Chief Executive Officer) Gao Yonggang (Chief Financial Officer and Joint Company Secretary)		Registered Office: PO Box 309, Ugland House Grand Cayman, KY1-1104 Cayman Islands

Non-executive Directors: Tzu-Yin Chiu (Vice Chairman) Chen Shanzhi Zhou Jie Ren Kai Lu Jun Tong Guohua		Principal Place of Business: 18 Zhangjiang Road PuDong New Area Shanghai 201203 People’s Republic of China

Independent non-executive Directors: Lip-Bu Tan William Tudor Brown Carman I-Hua Chang Shang-yi Chiang Jason Jingsheng Cong

18 January 2018

To the Shareholders

Dear Sir or Madam,

INTRODUCTION

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.

For identification purpose only

LETTER FROM THE BOARD

FRAMEWORK AGREEMENT

THE FRAMEWORK AGREEMENT

Reference is made to (i) the Company’s announcement dated 3 June 2013 in relation to the establishment of SMNC in the PRC pursuant to a joint venture agreement dated 3 June 2013 entered into among the Company and its wholly-owned subsidiary SMIC Beijing, IDIMC and ZDG (the ‘‘2013 Joint Venture Agreement’’); (ii) the Company’s announcement dated 10 May 2016, the circular dated 7 June 2016 and the extraordinary general meeting poll results announcement dated 24 June 2016 of the Company in relation to the Capital Contribution, which was completed on 30 June 2016. Following the completion of the Capital Contribution, China IC Fund acquired 26.5% equity interest in the registered capital of SMNC. As China IC Fund is a connected person of the Company at the issuer level under the Listing Rules, following the completion of the Capital Contribution, SMNC became 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. The transactions between the Company and SMNC have, since 30 June 2016, become connected transactions. As at the date of this circular, the registered capital of SMNC is held as to approximately 51% and 32% by the Group and China IC Fund, respectively.

Reference is also made to the Company’s announcement dated 15 July 2016 regarding the arrangement between the Company and SMNC in relation to the supply of goods and services, leasing of assets, acquisition and disposal of equipment and provision of technical authorisation or licensing, as well as the expectation that the Company and SMNC will enter into a framework agreement in relation to the aforementioned transactions.

Reference is also 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 between the Company (on behalf of itself and its subsidiaries, other than SMNC) and SMNC (on behalf of itself and its subsidiaries).

Reference is also made to the Company’s announcement dated 7 December 2017 in relation to the Company (on behalf of itself and its subsidiaries, other than SMNC) and SMNC (on behalf of itself and its subsidiaries) entering 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 with a term for three years commencing on 1 January 2018 and ending on 31 December 2020 and subject to the terms and conditions provided therein.

LETTER FROM THE BOARD

Summary of Principal Terms of the Framework Agreement

Execution date:		6 December 2017

Effective period:		Commencing on 1 January 2018 and ending on 31 December 2020. Two months before the expiry date of the Framework Agreement, the parties will consider whether to renew the Framework Agreement.

Parties:		(i) Group A; and

		(ii) Group B

Continuing Connected Transactions

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:

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

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

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

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

LETTER FROM THE BOARD

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

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

Pricing of the Continuing Connected Transactions

The price of the Continuing Connected Transactions 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 (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)

(5)

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

Where general pricing principles (2) to (5) apply, where possible each of the Group A and Group B 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.

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 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 Continuing Connected Transactions 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 Continuing Connected Transactions. If any particular Continuing Connected Transaction 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.

LETTER FROM THE BOARD

Purchase and sale of goods

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 buying of spare parts and raw materials, 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.

In respect of buying finished products from Group B, the transaction involves Group A passing through customers’ orders it receives to Group B. It is a one-way sale of finished product from Group B 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 Group B 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 Group B based on the same price, terms and conditions of the purchase order of the customer. According to the arrangement between Group A and Group B, there is no difference between the sales prices from Group A to the customers and the transaction price from Group B to Group A with respect to finished products, since Group B 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 Group B. Upon receiving the payment from customers by Group A, the finance and accounting team of Group A arranges to pay Group B for the finished products. If the customer requires further backend services such as bumping and testing, Group A would perform the services or outsource to other service providers. Group A charges its customers for the total of product costs and services performed.

LETTER FROM THE BOARD

II.

Rendering of or receiving services

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

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

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

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

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

Type of transaction

Pricing policy

1. Processing and testing service

Group A as the service provider (general principle

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

LETTER FROM THE BOARD

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

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

LETTER FROM THE BOARD

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

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

LETTER FROM THE BOARD

4. Procurement service provided by Group A to Group B

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

LETTER FROM THE BOARD

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

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

LETTER FROM THE BOARD

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

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

LETTER FROM THE BOARD

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

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

LETTER FROM THE BOARD

III.

Leasing of assets

Type of transaction		Pricing policy

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

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

LETTER FROM THE BOARD

IV.

Transfer of assets

Type of transaction		Pricing policy

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

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

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Provision of technical authorisation or licensing

Type of transaction		Pricing policy

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

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

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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.

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;

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;

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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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;

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

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.).

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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.

(3)

Unaudited.

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.

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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:

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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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.

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.

LETTER FROM THE BOARD

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.

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

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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.

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.

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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’’):

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.

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.

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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

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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.

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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.

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.

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.

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.

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

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

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

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.

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.

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.

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.

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.

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.

LETTER FROM MESSIS CAPITAL

Types of transactions

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.

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.

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)

(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.

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:

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

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:

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;

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;

The service provider will then apply through the Group’s system to charge the service recipient; and

The service provider will, upon verification of the above data, request for payment to be made through the Group’s system.

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.

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.

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.

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.

LETTER FROM MESSIS CAPITAL

Type of transaction Pricing policies and control procedures

(e)

Research,

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.

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.

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.

LETTER FROM MESSIS CAPITAL

III.

Leasing of assets

Type of transactions	Pricing basis	Review methods and basis of work done
1. Purchase and sale of goods	Market price	(i) The Company as seller of goods (ii) The Company as purchaser for finished goods
		Check samples of historical transactions and compare with similar transactions with independent third parties
		Reviewed ten sets of samples for each of (i) and (ii) above and the samples are considered representative according to the sampling basis as below:
		— cover finished goods and photomask, being the primary goods to be transacted
		— cover each historical financial period
		— transactions between the Company and SMNC and that of independent third parties are within similar time range

2.1 Rendering of or receiving services:	Market price	(i) processing and testing service
(a) processing and testing service and		1. Review the related party transaction policy in respect of the processing and testing service
(e) research, development and experiment support service		2. Review the automatically fetched data from the production system and obtained the basic information of production steps for the services (including information about the type of machine, the process and the standard cost), and the calculation to determine the charged price, and did not notice any unusual items.
		(ii) research,development and experiment support service
		No historical transaction is noted. According to the aforementioned pricing policy, the Company will refer to the market price quoted by two or more independent service providers before providing such services to SMNC and the pricing will be not less favourable to the Company. We consider that the market price with reference to the quotations provided by independent service providers represents the market price and hence, such policy is fair and reasonable.

Type of transactions	Pricing basis	Review methods and basis of work done

2.2 Rendering of or receiving services:	Cost plus a profit mark up
(b) sales service, (c) overseas market promotion and customer service; (d) procurement service and		1. As confirmed by the Company, it is the Group’s common practice to mark up 5% to 10% for transactions between group companies. We have compared the profit mark up with the Group’s common practice, and noted the profit mark up of 5% and 8% are within the range of such common practice.
(f) comprehensi ve administration, logistics, production management, IT and other services		2. No historical transactions of (b) sales service and (d) procurement service are noted, and according to the aforementioned pricing policy, the profit mark up of 8% and 5% of type (b) and (d) was within the range of common practice of the Group companies of 5% to 10% as confirmed by the Company.

2.3 Rendering of or receiving services: (g) water, electricity, gas and heat provision service	Price prescribed by the government/ market price	Check samples of historical transactions and compare the price with the latest published prices by the government Reviewed ten samples and the samples are considered representative according to the sampling basis as below: — cover each type of the historical occurred transactions — cover each historical financial period

3. Mutual leasing of assets	Market price	Check samples of historical transactions and compare with market comparables
		1. Reviewed the leasing contract in respect of the leasing of plant and office premises, and noted that the rental prices and terms are on normal commercial terms.
		2. We have researched on the market rentals which is with (i) manufacturing usage; (ii) open for rental during the rental period of the plant and office premises leased to SMNC by the Company; (iii) similar location of the leased plant or offices, and noted the price offered to SMNC is similar or higher than that of the market rentals which meet the aforementioned criteria, since the plant has a built-in clean room, a unique feature of a wafer fab and additional mark up was charged by the Company and thus the pricing is favourable to the Company as compared to the market rentals.

Type of transactions	Pricing basis	Review methods and basis of work done

4. Acquisition and disposal of equipment	Market price	Review on the pricing policy of acquisition and disposal of equipment
		No historical transaction is noted. 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 such price represents the market price and hence, such policy is fair and reasonable.

5.1 Provision of technical authorisation or licensing — Provision of technical authorisation or licensing by the Company to SMNC	Market price	1. Review the technical authorisation or licensing agreement. 2. Research on the availability of the market comparables of similar type of technical authorisation, but no direct market comparables can be identified. 3. No historical transaction is noted. However, according to the aforementioned pricing policy, SMNC will engage a valuer which is agreed by the Company to perform a fair value assessment of the fees relating to the Company’s provision of technical authorisation or licensing to SMNC. As such, we consider such independent fair value assessment by an external qualified valuer represents the market price and hence, such policy is fair and reasonable.

5.2 Provision of technical authorisation or licensing — Sharing of research and development costs in relation to 28- nanometer technologies	Mutually agreed price	1. Review the technical authorisation or licensing agreement. 2. According to the aforementioned pricing policy, SMNC will engage an external auditor which is agreed by the Company to provide an independent auditor’s report regarding the recognition of the sharing of costs. We have reviewed the audit report regarding the recognition of the sharing costs and noted the auditor is of the view that the recognition fairly represented the occurred costs. As such, we consider that such audit provides a fair and reasonable basis for the sharing of such costs, and such policy is fair and reasonable.

			Number of Ordinary Shares held	Derivatives Share Options	Other	Total Interests	Percentage of aggregate interests to total issued share capital of the Company
Name of Director	Long/Short Position	Nature of Interests	(Note 22)	(Note 22)	(Note 22)	(Note 22)	(Note 1)
Co-Chief Executive Officer
Zhao HaiJun	Long Position	Beneficial Owner	49,311	1,875,733 (Note 2)	1,687,500 (Note 3)	3,612,544	0.077%
Liang Mong Song	—	—	—	—	—	—	—
Executive Directors
Zhou Zixue	Long Position	Beneficial Owner	—	2,521,163 (Note 4)	1,080,498 (Note 5)	3,601,661	0.077%
Gao Yonggang	Long Position	Beneficial Owner	—	1,964,003 (Note 6)	85,505 (Note 7)	2,049,508	0.044%
Non-executive Directors
Tzu-Yin Chiu	Long Position	Beneficial Owner	3,519,361	11,103,588 (Note 8)	3,351,477 (Note 9)	17,974,426	0.385%
Chen Shanzhi	Long Position	Beneficial Owner	—	477,187 (Note 10)	162,656 (Note 11)	639,843	0.014%
Zhou Jie	—	—	—	—	—	—	—
Ren Kai	—	—	—	—	—	—	—
Lu Jun	—	—	—	—	—	—	—
Tong Guo Hua	Long Position	Beneficial Owner	—	187,500 (Note 12)	187,500 (Note 13)	375,000	0.008%
Independent Non- executive Directors
Lip-Bu Tan	Long Position	Beneficial Owner	115,439	591,426	62,500	769,365	0.016%
				(Note 14)	(Note 15)
William Tudor Brown	Long Position	Beneficial Owner	—	449,229	—	449,229	0.010%
				(Note 16)
Carmen I-Hua Chang	Long Position	Beneficial Owner	—	488,730	—	488,730	0.010%
				(Note 17)
Shang-yi Chiang	Long Position	Beneficial Owner	—	187,500	187,500	375,000	0.008%
				(Note 18)	(Note 19)
Jason Jingsheng Cong	Long Position	Beneficial Owner	—	187,500	187,500	375,000	0.008%
Notes:				(Note 20)	(Note 21)

			Number of Ordinary Shares held	Percentage of Ordinary Shares Held to Total Issued Share Capital of the Company	Derivatives	Total Interests	Percentage of Total Interests to Total Issued Share Capital of the Company
Name of Shareholder Nature of interest Long/Short Position			(Note 5)	(Note 5)	(Note 5)	(Note 5)	(Note 1)
Datang Telecom Technology & Industry Holdings Co., Ltd.	Interest of corporation controlled	Long Position	797,996,122 (Note 2)	17.09%	—	797,996,122	17.09%
China Integrated Circuit Industry Investment Fund Co., Ltd.	Interest of corporation controlled	Long Position	740,000,000 (Note 3)	15.85%	—	740,000,000	15.85%

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SMI Semiconductor Manufacturing International Corp. Adr