IMPORTANT
IMPORTANT: If you are in any doubt about this prospectus, you should consult your stockbroker, bank manager, solicitor, professional accountant or other professional advisor.
Advanced Semiconductor Manufacturing Corporation Limited
(a foreign invested joint stock limited company incorporated in the People’s Republic of China with limited liability) GLOBAL OFFERING
Number of Offer Shares under : 406,662,000 H Shares (subject to adjustment the Global Offering and the Over-allotment Option) Number of Hong Kong Offer Shares : 40,668,000 New H Shares (subject to adjustment) Number of International : 365,994,000 H Shares, comprising Placing Shares 329,025,000 New H Shares and 36,969,000 Sale H Shares (subject to adjustment and the Over-allotment Option) Maximum Offer Price : HK$1.85 per H Share (payable in full on application in Hong Kong dollars subject to refund, plus a 1% brokerage, an SFC transaction levy of 0.005% and a Hong Kong Stock Exchange trading fee of 0.005%) Nominal Value : RMB1.00 each Stock Code : 3355
Joint Global Coordinators and Joint Bookrunners
Joint Sponsors and Joint Lead Managers
The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this prospectus, 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 prospectus. A copy of this prospectus, having attached thereto the documents specified in the paragraph headed ‘‘Documents Delivered to the Registrar of Companies’’ in ‘‘Appendix IX — Document Delivered to the Registrar of Companies and Available for Inspection,’’ has been registered by the Registrar of Companies in Hong Kong as required by section 342C of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong). The Securities and Futures Commission and the Registrar of Companies in Hong Kong take no responsibility for the contents of this prospectus or any other document referred to above. The Offer Price is expected to be fixed by agreement between the Joint Global Coordinators (on behalf of the Underwriters) and us on the Price Determination Date. The Price Determination Date is expected to be on or around March 31, 2006 and, in any event, not later than April 4, 2006. The Offer Price will be not more than HK$1.85 and is currently expected to be not less than HK$1.36. Applicants for Hong Kong Offer Shares are required to pay, on application, the maximum offer price of HK$1.85 for each H Share, together with a brokerage fee of 1%, SFC transaction levy of 0.005% and Stock Exchange trading fee of 0.005%, subject to refund if the Offer Price should be lower than such maximum offer price. The Joint Global Coordinators (on behalf of the Underwriters) may, with our consent, reduce the indicative offer price range and/or the number of Offer Shares below that stated in this prospectus at any time on or prior to the morning of the last day for lodging applications under the Hong Kong Public Offering. Insucha case, a notice of the reduction in the indicative offer price range and/or the number of Offer Shares will be published in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese) not later than the morning of the day which is the last day for lodging applications under the Hong Kong Public Offering. If applications for the Hong Kong Offer Shares have been submitted prior to the day which is the last day for lodging applications under the Hong Kong Public Offering, then even if the indicative offer price range and/or the number of Offer Shares is so reduced, such applications cannot be subsequently withdrawn. We are incorporated, and our businesses are located, in the PRC. Potential investors should be aware of the differences in the legal, regulatory, economic and financial systems between the PRC and Hong Kong, and that there are different risks in making an investment in PRC-incorporated companies. Such risks and differences are set out in the sections headed ‘‘Risk Factors’’ and ‘‘Appendix VI — Summary of Principal Legal and Regulatory Provisions.’’ The obligations of the Hong Kong Underwriters under the Hong Kong Underwriting Agreement are subject to termination by the Joint Global Coordinators (on behalf of the Underwriters) if certain grounds arise prior to 8: 00 a.m. on the day that trading in the Offer Shares commences on the Stock Exchange. Such grounds are set out in the section headed ‘‘Underwriting.’’ It is important that you refer to that section for further details.
March 27, 2006 EXPECTED TIMETABLE(1)
Latest time to lodge WHITE and YELLOW ApplicationForms...... 12noononThursday,March30,2006
Latest time to give electronic application instructions toHKSCC ...... 12noononThursday,March30,2006
Application lists open(2) ...... 11:45a.m.onThursday,March30,2006
Applicationlistsclose...... 12noononThursday,March30,2006
ExpectedPriceDeterminationDate...... Friday,March31,2006
Announcement of . the Offer Price; . the indication of level of interest in the International Placing; . the results of applications in the Hong Kong Public Offering; and . the basis of allotment of the Hong Kong Offer Shares to be published in the South China Morning Post (in English) and Hong Kong Economic Times (in Chinese) on or before ...... Thursday, April 6, 2006
Despatch of H Share certificates and refund cheques on or before(3) ...... Thursday,April6,2006
Dealings in H Shares on the Stock Exchange expected tocommenceon...... Friday,April7,2006
(1) All times refer to Hong Kong local time.
(2) If there is a tropical cyclone warning signal number 8 or above or a ‘‘black’’ rainstorm warning on Thursday, March 30, 2006, the application lists will not open on that day. See the section headed ‘‘How to Apply for Hong Kong Offer Shares — Effect of bad weather on the opening of the application lists.’’
(3) Certificates of H Shares will only become valid certificates of title if the Hong Kong Public Offering has become unconditional and neither of the Underwriting Agreements has been terminated in accordance with its terms, which is expected to be at around 8: 00 a.m. on Friday, April 7, 2006. Investors who trade H Shares on the basis of publicly available allocation details prior to the receipt of share certificates or prior to the share certificates becoming valid certificates of title do so entirely at their own risk.
For details of the structure of the Global Offering, including its conditions, see the section headed ‘‘Structure of the Global Offering.’’
—i— CONTENTS
You should rely only on the information contained in this prospectus and the Application Forms to make your investment decision. We have not authorized anyone to provide you with information that is different from what is contained in this prospectus. Any information or representation not made in this prospectus must not be relied on by you as having been authorized by us, the Selling Shareholder, our Directors, the Joint Global Coordinators, the Joint Sponsors, the Underwriters, any of the directors of any of them, or any other person or party involved in the Global Offering.
Page
Expected Timetable ...... i
Summary ...... 1
Definitions ...... 12
Glossary ...... 23
Risk Factors ...... 26
Information about this prospectus and the Global Offering ...... 45
Directors and Supervisors ...... 53
Parties Involved in the Global Offering ...... 56
Corporate Information ...... 58
Industry Overview ...... 60
History, Corporate Structure and Reorganization ...... 68
Business ...... 72
Relationship with our Shareholders ...... 93
Regulations ...... 108
Directors, Supervisors, Senior Management and Employees ...... 113
Share Capital ...... 126
Our Promoters and our Selling Shareholder ...... 130
Financial Information ...... 134
Future Plans, Use of Proceeds and Dividend Policy ...... 163
Underwriting ...... 166
Structure of the Global Offering ...... 171
—ii— CONTENTS
Page
How to Apply for Hong Kong Offer Shares ...... 177
Appendix I — Accountants’ Report ...... I-1
Appendix II — Unaudited Pro Forma Financial Information ...... II-1
Appendix III — Forecast ...... III-1
Appendix IV — Property Valuation ...... IV-1
Appendix V — Taxation and Foreign Exchange ...... V-1
Appendix VI — Summary of Principal Legal and Regulatory Provisions ...... VI-1
Appendix VII — Summary of Articles of Association ...... VII-1
Appendix VIII — Statutory and General Information ...... VIII-1
Appendix IX — Documents Delivered to the Registrar of Companies and Available for Inspection ...... IX-1
— iii — SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all the information that you should consider before investing in the Offer Shares. You should read the entire prospectus, including the section headed ‘‘Risk Factors’’ and the financial statements and related notes to those statements as set forth in ‘‘Appendix I — Accountants’ Report,’’ before you decide to invest in the Offer Shares.
OVERVIEW
We are a leading dedicated analog foundry focusing primarily on the manufacturing of analog semiconductors and higher bipolar content-based mixed-signal semiconductors. According to IC Insights, we were one of the top ten foundries (digital and analog) in the world in 2004 by sales. Our customers include some of the world’s leading IDMs and fabless semiconductor companies. We produce both standard and application-specific semiconductors, designed by our customers for use in various end-market applications, including computing, communications and consumer electronics. We serve a diversified portfolio of customers, such as Semtech, the Philips Group, Datang Microelectronics, Texas Instruments, Fairchild Semiconductor, National Semiconductor, AOS, California Micro Devices and Monolithic Power Systems.
We offer our customers a broad range of process technologies including:
. bipolar, BiCMOS and HVMOS process technologies for analog semiconductors; and
. non-volatile memory technology for producing smart identification cards.
Through our flexible and customized manufacturing model in handling a variety of process technologies, we are able to support our customers’ specific manufacturing requirements.
We operate two wafer fabrication facilities in Shanghai, China: one which manufactures 5-inch and 6-inch wafers and the other 8-inch wafers. As at December 31, 2005, we had a monthly production capacity of approximately 28,000 5-inch wafers, 51,000 6-inch wafers and 12,000 8-inch wafers. We intend to continue strategically expanding our 8-inch manufacturing facilities. We believe our strategies will enable us to strengthen our position in the global dedicated analog foundry industry and also help us penetrate the market for national identification cards in China.
OUR COMPETITIVE STRENGTHS
We believe that we have developed the following principal competitive strengths:
. focused analog foundry model;
. flexible and customized manufacturing processes;
. cost-effective manufacturing;
. quality customer services and management; and
. strong and diverse customer relationships.
—1— SUMMARY
OUR STRATEGY
Our objective is to maintain and strengthen our position as a leading dedicated analog foundry in the world as well as to penetrate the market for national identification cards for Chinese citizens in the PRC. The key elements of our strategy are as follows:
. remain dedicated to our analog foundry model;
. pursue strategic capacity expansion while maintaining overall profitability;
. penetrate the market for national identification cards for Chinese citizens;
. continue to strengthen our operating leverage;
. continue to strengthen and diversify our customer base and provide high quality services; and
. capitalize on our presence in the PRC to address growing domestic demand.
RISK FACTORS
There are certain risks involved in our business and operations and in connection with this Global Offering. These risks can be categorized into: (i) risks relating to our industry, business and operations; (ii) risks relating to the PRC and (iii) risks relating to the Global Offering.
Risks Relating to Our Industry, Business and Operations
. If we fail to comply with any of the financial covenants under our US$100 million club term loan facility, our debt repayments may be accelerated and our property and equipment may be foreclosed on by our lenders, our ability to finance expansion of our operations could be jeopardized and we could become insolvent.
. Our current liabilities exceed our current assets, and if we are unable to refinance or repay our short-term indebtedness, which comprises a large proportion of our current liabilities, when it becomes due, we could become insolvent.
. In limited special circumstances, we may deviate from our intended use of proceeds.
. Due to the cyclical nature of the semiconductor industry and the markets served by our customers, our operating results may fluctuate significantly from period to period, making it difficult to predict our future performance.
. A change in the demand for, or the selling prices of, the end applications of our semiconductors could adversely affect the demand for our semiconductors and reduce or eliminate our profits.
. If the growth in demand for our semiconductors fails to match the growth in our capacity, our return on investments may be adversely affected.
. Some parts of the semiconductor business can be seasonal in nature, and such seasonality could adversely affect our business and operating results.
—2— SUMMARY
. If we are unable to manage the expansion and modification of our production facilities effectively, our growth prospects may be limited and our future profitability may be affected.
. If we are unable to obtain additional financing which we may require to implement our capital expenditure plans, our ability to satisfy any increase in demand for our wafers could be limited, which would, in turn, limit our growth prospects.
. If our major customers enforce the capacity commitment obligations under some of our wafer manufacturing agreements with them, our relationships with certain other customers may be adversely affected.
. Any significant decrease in sales to one or more of our major customers may decrease our revenue and profits.
. Our profitability is dependent on our ability to meet our customers’ technological needs, and to maintain our manufacturing yields and high capacity utilization rates.
. We operate in a highly competitive industry, and if we are unable to compete effectively, our profit margin and profits may decrease.
. We currently do not develop any technology on our own.
. We may be subject to claims for infringement of intellectual property rights.
. Exchange rate fluctuations could increase our costs, which could adversely affect our operating results.
. The variety and complexity of our manufacturing processes and the susceptibility of our equipment to impurities and contaminants may have an adverse effect on the quality and reliability of our products.
. Our production may be interrupted if we cannot maintain sufficient supplies of electricity and fresh water.
. If we are unable to obtain raw materials, spare parts and equipment in a timely manner and at reasonable cost, our production schedules could be delayed and we may lose customers.
. We may be subject to the risk of loss due to fire because the materials and equipment we use in our manufacturing processes are highly flammable and our insurance coverage may not be sufficient to cover all of our potential losses.
. If the semiconductors we produce are defective as a result of our manufacturing process and are used in end products by consumers or our customers, we may be subject to product liability risks and our reputation could be adversely affected.
. Our operation may be interrupted and our business could suffer as a result of steps we may be required to take to comply with environmental regulations.
. We depend on key personnel, and we may not be able to retain, hire or integrate sufficient qualified personnel to maintain and expand our business.
—3— SUMMARY
. Components of our past financial statements have changed in the past and may not remain the same for future financial periods.
Risks Relating to the PRC
. The PRC’s economic, political and social conditions, as well as government policies, could affect our business.
. Our business is subject to extensive government regulation, and changes in these regulations could lead to uncertainties in our business and operating results.
. Changes in the favorable taxation treatment we enjoy may adversely affect our profitability.
. Export and import restrictions could have an adverse impact on our business.
. Government controls over currency conversion may adversely affect our financial condition and results of operations as well as affect our ability to pay dividends in foreign currencies.
. Lowered tariff levels as a result of the PRC’s accession to the WTO may increase competition and affect our future profitability.
. The PRC legal system is not fully developed and embodies uncertainties that could affect our operating results and limit the legal protection to our shareholders.
. Holders of our H Shares may have difficulty enforcing their rights.
. The effect of amendments to the PRC Securities Law and the PRC Company Law may be uncertain.
Risks Relating to the Global Offering
. There has been no prior market for our Shares and the Offer Price may not be indicative of prices that will prevail in the market.
. Sales, or perceived sales, of substantial amounts of H Shares in the public market after the Global Offering could decrease the value of your investment.
. The market prices of our H Shares following the Global Offering may be volatile.
. Some of our current shareholders, who will remain our substantial shareholders following the Global Offering, may have different interest from that of our public shareholders, and will have influence on the adoption of shareholder resolutions after the Global Offering.
. Forward-looking statements contained in this prospectus are subject to risks and uncertainties.
. We strongly caution you not to place any reliance on any information contained in press articles or other media regarding our Company and/or the Global Offering.
—4— SUMMARY
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following tables present our summary financial information. The summary income statement data for each of the years ended December 31, 2003, 2004 and 2005, the summary balance sheet data included in the following tables as at December 31, 2003, 2004 and 2005, as well as the summary historical operating data for each of the years ended December 31, 2003, 2004 and 2005, are derived from, and should be read in conjunction with, our audited financial statements included in ‘‘Appendix I — Accountants’ Report’’ which have been prepared and presented by Ernst & Young, Certified Public Accountants, Hong Kong in accordance with IFRS.
Summary Income Statement Data
Year ended December 31, 2003 2004 2005 (RMB’000) (RMB’000) (RMB’000)
Revenue ...... 784,428 1,147,367 931,583
Cost of sales ...... (526,144) (827,247) (860,626)
Gross profit ...... 258,284 320,120 70,957
Selling and marketing expenses...... (10,467) (11,128) (7,377) General and administrative expenses ...... (60,062) (78,164) (77,640) Research and development costs...... (49,870) (52,041) (74,931)
Profit/(loss) from operating activities ...... 137,885 178,787 (88,991)
Otherincome...... 7,993 6,632 37,397 Financecosts...... (748) (4,934) (33,427)
Profit/(loss) before income tax ...... 145,130 180,485 (85,021) Income tax (expense)/refund, net ...... (12,025) 2,165 9,991
Net profit/(loss) attributable to shareholders...... 133,105 182,650 (75,030)
Dividends ...... — 35,109 —
Earnings/(loss) per share (RMB) ...... 0.12 0.16 (0.07)
—5— SUMMARY
Summary Balance Sheet Data
December 31, 2003 2004 2005 (RMB’000) (RMB’000) (RMB’000)
Non-current assets Property, plant and equipment ...... 1,121,160 1,429,036 1,964,885 Constructioninprogress...... 125,482 207,704 175,937 Landuserights...... — 38,161 37,392 Deferredtaxassets...... 2,953 1,766 6,821
Totalnon-currentassets...... 1,249,595 1,676,667 2,185,035
Current assets Cashandcashequivalents...... 31,180 45,936 105,886 Accountsandnotesreceivable...... 56,325 55,404 124,264 Inventories...... 124,909 134,220 171,799 Prepayments, deposits and other receivables ...... 35,545 18,410 22,974 Duefromrelatedcompanies...... 6,425 18,760 31,945 Prepaidtax...... — 2,505 —
Totalcurrentassets...... 254,384 275,235 456,868
Totalassets...... 1,503,979 1,951,902 2,641,903
Current liabilities Interest-bearing loans and borrowings ...... 124,151 388,996 1,186,319 Accountspayable...... 177,823 222,721 196,200 Accrued liabilities and other payables ...... 82,628 76,578 64,745 Due to related companies ...... 8,370 8,268 14,330 Taxpayable...... 3,209 — —
Total current liabilities ...... 396,181 696,563 1,461,594
Net current liabilities ...... 141,797 421,328 1,004,726
Net assets ...... 1,107,798 1,255,339 1,180,309
Represented by: Paid-upcapital/sharecapital...... 718,247 1,109,080 1,109,080 Reserves...... 389,551 146,259 71,229
Owners’/shareholders’ equity ...... 1,107,798 1,255,339 1,180,309
—6— SUMMARY
Summary Historical Operating Data
The following table sets forth our revenue by type of wafer and the respective percentages of total revenue for the periods indicated:
Year ended December 31, 2003 2004 2005 Revenue %of Revenue %of Revenue %of (RMB’000) revenue (RMB’000) revenue (RMB’000) revenue
Products 5" wafers ...... 348,790 44.5 409,339 35.7 224,515 24.1 6" wafers ...... 409,682 52.2 584,011 50.9 482,708 51.8 8" wafers ...... 240 — 131,986 11.5 206,265 22.1 Others(1) ...... 25,716 3.3 22,031 1.9 18,095 2.0
Total ...... 784,428 100.0 1,147,367 100.0 931,583 100.0
Note:
(1) Consists of probing services and provision of masks.
The following table sets forth the number of wafers we sold by type of wafer for the periods indicated:
Year ended December 31, 2003 2004 2005
Products 5"wafers...... 346,308 387,862 212,241 6"wafers...... 260,032 396,252 352,717 8"wafers...... 40 26,764 37,625
Total...... 606,380 810,878 602,583
RECENT DEVELOPMENTS
Our order levels and capacity utilization rates have continued to improve since the beginning of 2006. For the two-month period ended February 28, 2006, our capacity utilization rates were 70%, 71% and 48% for our production of 5-inch, 6-inch and 8-inch wafers, respectively. During the same two-month period, we sold 39,696 5-inch, 74,548 6-inch and 14,636 8-inch wafers. As at February 28, 2006, we had in production 31,533 5-inch wafers, 54,913 6-inch wafers and 27,494 8-inch wafers.
—7— SUMMARY
FORECAST FOR THE SIX MONTHS ENDING JUNE 30, 2006
Forecast profit attributable to shareholders of our Company for the six months ending June 30, 2006(1) ...... notlessthanRMB0
Unaudited pro forma fully diluted forecast earnings per Share(2) ...... notlessthanRMB0
Notes:
(1) The bases and assumptions on which the forecast profit attributable to shareholders of our Company for the six months ending June 30, 2006 has been prepared are set out in ‘‘Appendix III — Forecast.’’
Our Directors have prepared a profit forecast only for the six months ending June 30, 2006, as the cyclical nature of the foundry industry and other factors described under the sections headed ‘‘Risk Factors — Risks Relating to Our Industry, Business and Operations’’ and ‘‘Financial Information — Factors That Impact Our Results of Operations’’ make any forecast for a longer period subject to too many uncertainties.
We have undertaken to the Stock Exchange that our interim financial report for the six months ending June 30, 2006 will be audited, pursuant to Rule 11.18 of the Hong Kong Listing Rules.
(2) The calculation of the forecast earnings per Share on a pro forma fully diluted basis is based on the forecast profit attributable to shareholders of our Company for the six months ending June 30, 2006, assuming that we had been listed since January 1, 2006 and a total of 1,478,773,000 Shares were issued and outstanding during the entire six- month period. This calculation assumes that the Over-allotment Option would not have been exercised and the H Shares issued pursuant to the Global Offering were issued on January 1, 2006.
OFFER STATISTICS(1)
BasedonanOfferPrice BasedonanOfferPrice of HK$1.36 of HK$1.85
Market capitalization of the H Shares(2) ...... HK$1.46 billion HK$1.98 billion
Adjusted net tangible asset value per Share(3). . . . HK$1.06 (RMB1.10) HK$1.18 (RMB1.22)
Notes:
(1) All statistics in this table assume no exercise of the Over-allotment Option.
(2) The calculation of market capitalization is based on 1,070,335,472 H Shares (including the Converted H Shares) expected to be in issue following completion of the Global Offering.
(3) The adjusted net tangible asset value per Share as at December 31, 2005 is calculated after making the adjustments referred to in ‘‘Appendix II — Unaudited Pro Forma Financial Information’’ and on the basis of a total of 1,478,773,000 Shares expected to be in issue following completion of the Global Offering.
—8— SUMMARY
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately HK$519.6 million (equivalent to approximately US$67.0 million) from the Global Offering, after deducting the underwriting commission and expenses payable by us in the Global Offering, assuming the Over-allotment Option is not exercised and an Offer Price of HK$1.61 per Share, being the midpoint of the Offer Pricerangestatedinthisprospectus.
We currently intend to apply these net proceeds in the following manner:
. approximately HK$271.5 million (equivalent to approximately US$35.0 million) will be used to repay a portion of our outstanding indebtedness. Specifically, we intend to pay down all amounts outstanding under three of our revolving working capital facilities as follows:
— US$10.0 million under a facility bearing interest at a rate equal to 6-month LIBOR plus 0.8%, which matures on August 16, 2006;
— US$15.0 million under a facility bearing interest at a rate equal to 3-month LIBOR plus 0.8%, which matures on December 27, 2006; and
— US$10.0 million under a facility bearing interest at a rate equal to 3-month LIBOR plus 0.8%, which matures on January 10, 2007; and
. approximately HK$248.1 million (equivalent to approximately US$32.0 million) will be used to fund our capital expenditure plans. Of this total, we intend to apply approximately HK$54.2 million (equivalent to approximately US$7.0 million) to increase our 8-inch production flexibility and yield and reduce our production cycle time by the acquisition and/or upgrade of certain production equipment, and we plan to apply approximately HK$193.9 million (equivalent to approximately US$25.0 million) to increase our overall 8- inch monthly production capacity from approximately 12,000 wafers as at December 31, 2005 to approximately 14,000 wafers as at December 31, 2007.
To the extent our net proceeds are either more or less than expected, we will adjust the amount of our net proceeds to be applied in our capital expenditure plans accordingly.
In the event the Over-allotment Option is exercised in full, we estimate we would receive additional net proceeds of approximately HK$84.8 million, assuming an Offer Price of HK$1.61 per Share, being the midpoint of the Offer Price range stated in this prospectus. We intend to repay our other outstanding indebtedness with these additional net proceeds.
To the extent that any of our net proceeds are not applied immediately, we intend to deposit them in interest bearing bank accounts with licensed banks and/or authorized financial institutions in Hong Kong.
—9— SUMMARY
We are currently subject to certain amended financial covenants under our US$100 million club term loan facility, including one as to our net debt to EBITDA ratio, to be tested on a quarterly basis during the term of the facility. Our planned use of proceeds to repay certain outstanding indebtedness as described above will have a significant positive effect on our net debt to EBITDA ratio on a stand-alone basis. Should we become in breach of these covenants, however, our lenders under our US$100 million club term loan facility, and our other lenders under our working capital facilities, may accelerate our repayment of the relevant outstanding principal amounts (which totalled US$147.0 million (equivalent to HK$1,140.4 million) as at December 31, 2005), together with any accrued interest thereon. In the event of an acceleration of our repayment obligations under these loans, we may deviate from our intended use of proceeds described above, and reallocate all or part of the net proceeds we receive from the Global Offering to repay these obligations. In the event that we decide to change our intended use of proceeds described above for this reason, we will issue a separate announcement in accordance with the relevant requirements of theHongKongListingRules.
We will not receive any of the proceeds from the sale of Shares by COAMC, the Selling Shareholder, including proceeds resulting from any exercise by the Joint Global Coordinators on behalf of the International Purchasers of the Over-allotment Option in respect of the Shares held by the Selling Shareholder. Assuming the Over-allotment Option is not exercised and assuming an Offer Price of HK$1.61 per H Share (being the midpoint of the Offer Price range stated in this prospectus), the Selling Shareholder will receive total net proceeds of HK$52.0 million. These proceeds will not form part of our shareholders’ capital. The Company shall, on behalf of the Selling Shareholder, remit these net proceeds to the national social security fund in accordance with the relevant PRC government requirements.
DIVIDEND POLICY
The holders of H Shares will share proportionately, on a per Share basis, all dividends and other distributions declared by our Board. For holders of H Shares, cash dividend payments, if any, will be declared by our Board in Renminbi and paid in Hong Kong dollars (translated from the Renminbi amount declared using the average selling PBOC Rate prevailing one week prior to the declaration of such dividends).
The declaration of dividends is subject to, among other things, the full discretion of our Board and approval at a general meeting of our shareholders. The amounts of dividends actually declared and paid to holders of H Shares will depend upon the following factors:
. our financial results;
. the interests of our shareholders; and
. other factors our Board may deem relevant.
—10— SUMMARY
In particular, under a US$100 million club term loan facility we obtained from a group of banks, we are subject to a restrictive covenant such that, after completion of the Global Offering, we may only declare, make or distribute dividends of not more than 25% of our net profits (after tax) in any given financial year.
Other than the special dividend in the amount of RMB35,109,000 we declared on May 28, 2004, representing approximately 26.4% of the profit attributable to our shareholders for the year ended December 31, 2003, we have not declared or paid any dividends since our incorporation. This special dividend was paid to our shareholders in cash in August 2004. No portion of this special dividend will be paid to subscribers and purchasers of Shares in the Global Offering. Our Directors have no current intention to distribute any dividends, and will re-evaluate our dividend policy from time to time.
—11— DEFINITIONS
In this prospectus, unless the context otherwise requires, the following terms shall have the meanings set out below. Certain other terms are explained in the section headed ‘‘Glossary.’’
‘‘AOS’’ Alpha & Omega Semiconductors, Ltd., a Sunnyvale, California- based company that specializes in all areas of power semiconductor technology and business operations, including design of a wide range of power MOSFET and power IC products
‘‘Application Form(s)’’ WHITE application form(s) and YELLOW application form(s) or, where the context so requires, any of them
‘‘Applied Materials’’ Applied Materials Inc., a supplier of products and services to the global semiconductor industry, which is quoted on the Nasdaq Stock Market
‘‘Articles of Association’’ our articles of association, adopted on February 1, 2005 pursuant to or ‘‘Articles’’ an extraordinary general meeting of our shareholders and as amended from time to time
‘‘ASMC Compensation a trust established on December 19, 2002 by designees of Philips Trust’’ China, COAMC, SCIPI and Shanghai Belling pursuant to a declaration of trust dated December 19, 2002 for the benefit of certain of our Supervisors, Directors, senior management and employees
‘‘ASML’’ ASML Holding NV, a provider of lithography systems for the semiconductor industry, which is traded on the Euronext Amsterdam and quoted on the Nasdaq Stock Market
‘‘associate(s)’’ has the meaning given to it under the Hong Kong Listing Rules
‘‘Atos Origin’’ Atos Origin S.A., an international business and technology integrator providing integrated design, building and operating IT solutions, and is currently listed on Euronext Paris
‘‘Board of Directors’’ our board of directors or ‘‘Board’’
‘‘Business Day’’ a day that is not a Saturday, Sunday or public holiday in Hong Kong
‘‘California Micro Devices’’ California Micro Devices Corporation, a supplier of application specific analog semiconductor products for the mobile handset, personal computer and digital consumer electronics markets, which is listed on the Nasdaq Stock Market
‘‘CCASS’’ the Central Clearing and Settlement System established and operated by HKSCC
‘‘CCASS Broker Participant’’ a person admitted to participate in CCASS as a broker participant
‘‘CCASS Custodian a person admitted to participate in CCASS as a custodian Participant’’ participant
—12— DEFINITIONS
‘‘CCASS Investor a person admitted to participate in CCASS as an investor participant Participant’’ who may be an individual or joint individuals or a corporation
‘‘CCASS Participant’’ a CCASS Broker Participant or a CCASS Custodian Participant or a CCASS Investor Participant
‘‘Chartered Semiconductor’’ Chartered Semiconductor Manufacturing, a dedicated semiconductor foundry and a company quoted on the Nasdaq Stock Market and listed on the Singapore Exchange Securities Trading Ltd.
‘‘COAMC’’ (China Orient Asset Management Corporation), a state-owned financial enterprise established under the laws of the PRC on October 15, 1999, being one of our Promoters
‘‘Company,’’ ‘‘our Company,’’ Advanced Semiconductor Manufacturing Corporation Limited ‘‘our,’’ ‘‘we’’ and ‘‘us’’ ( ), a foreign invested joint stock limited company re-registered and incorporated in the PRC with limited liability on March 2, 2004 under the PRC Company Law and formerly Advanced Semiconductor Manufacturing Corporation of Shanghai and its predecessor
‘‘connected person(s)’’ has the meaning given to it under the Hong Kong Listing Rules
‘‘Converted H Shares’’ the H Shares held by Philips China and SCIP (HK), which were converted into H Shares pursuant to the approval from the CSRC obtained on January 11, 2005 and which may not be transferred (a) until the expiry of the Existing Shareholders Lock Up Period one year after the Listing Date and (b) except with approval from the Ministry of Commerce
‘‘CSRC’’ (China Securities Regulatory Commission), a regulatory body responsible for the supervision and regulation of the PRC national securities market
‘‘Datang Microelectronics’’ Datang Microelectronics Technology Co., Ltd., a subsidiary of Datang Telecom Technology Co., Ltd., one of the largest integrated circuit design companies in China and one of the suppliers approved by PRC Ministry of Public Security to provide contactless memory chips for the country’s second-generation identity card project launched in 2004
‘‘Design Services’’ the design services we offer to manufacturers of identification cards in the PRC based on the EEPROM process technology licensed to us by Royal Philips under the Philips Identification Licensing Agreement
‘‘Director(s)’’ our director(s)
—13— DEFINITIONS
‘‘Domestic Shares’’ ordinary shares issued by us, with a nominal value of RMB1.00 each, which are subscribed for in Renminbi by PRC nationals and/or PRC incorporated entities
‘‘Episil’’ Episil Technologies Inc., a Taiwan-based provider of foundry services for power and analog semiconductors and listed on the Taiwan Stock Exchange
‘‘Existing Shareholders Lock the one year period pursuant to the PRC Company Law Up Period’’ commencing from the Listing Date, during which, except for the Sale H Shares, our Promoters are prohibited from transferring any Shares
‘‘Fairchild Semiconductor’’ Fairchild Semiconductor International, a supplier of high performance semiconductors in the power, interface, analog, mixed-signal, logic, optoelectronic, and configurable products markets, which is listed on the New York Stock Exchange
‘‘Foreign Investment Joint (Provisional Stock Company Regulations Concerning Several Issues on the Establishment of Provisional Regulations’’ Foreign Investment Joint Stock Limited Companies), promulgated by the former Ministry of Foreign Trade and Economic Cooperation on January 10, 1995
‘‘GDP’’ gross domestic product (all references to GDP growth rates are to real as opposed to nominal rates of GDP growth)
‘‘Global Offering’’ the Hong Kong Public Offering and the International Placing
‘‘H Shares’’ overseas listed foreign invested shares in our ordinary share capital, with a nominal value of RMB1.00 each, which are subscribed for and traded in Hong Kong dollars, and include the Converted H Shares
‘‘HK$’’ or ‘‘HK dollars’’ Hong Kong dollars, the lawful currency of Hong Kong
‘‘HKSCC’’ Hong Kong Securities Clearing Company Limited
‘‘HKSCC Nominees’’ HKSCC Nominees Limited
‘‘Hong Kong’’ the Hong Kong Special Administrative Region of the PRC
‘‘Hong Kong Companies the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) Ordinance’’
‘‘Hong Kong Listing Rules’’ the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (as amended from time to time)
‘‘Hong Kong Offer Shares’’ the 40,668,000 New H Shares (subject to adjustment) being offered by us for subscription pursuant to the Hong Kong Public Offering
—14— DEFINITIONS
‘‘Hong Kong Public Offering’’ the offer of Hong Kong Offer Shares for subscription by the public in Hong Kong for cash at the Offer Price (plus brokerage fee of 1%, SFC transaction levy of 0.005% and Stock Exchange trading fee of 0.005%), on and subject to the terms and conditions described in this prospectus and the Application Forms
‘‘Hong Kong Takeovers the Codes on Takeovers and Mergers and Share Repurchases (as Codes’’ amended from time to time)
‘‘Hong Kong Underwriters’’ the underwriters of the Hong Kong Public Offering listed in the section headed ‘‘Underwriting — Hong Kong Underwriters’’
‘‘Hong Kong Underwriting the underwriting agreement dated March 24, 2006 relating to the Agreement’’ Hong Kong Public Offering entered into among the Hong Kong Underwriters, the Joint Global Coordinators, the Joint Sponsors and us
‘‘IBM’’ International Business Machines Corporation, an information technology company and a business and technology services provider which is listed on the New York Stock Exchange
‘‘IC Insights’’ a provider of market research and analysis reports and services for the integrated circuit industry, based in Scottsdale, Arizona, United States
‘‘IC Product Enterprises’’ Integrated Circuit Production Enterprises
‘‘ICBC’’ Industrial and Commercial Bank of China, a state-owned bank in the PRC
‘‘Identification Products’’ products manufactured using the non-volatile memory process technology, including identification cards
‘‘IFRS’’ International Financial Reporting Standards
‘‘International Placing’’ the conditional placing by the International Purchasers of the International Placing Shares with institutional and professional investors and other investors expected to have a sizeable demand for the H Shares as further described in the section headed ‘‘Structure of the Global Offering’’
‘‘International Placing the 329,025,000 New H Shares and the 36,969,000 Sale H Shares Shares’’ expected to be offered by us and the Selling Shareholder, respectively, for subscription and/or purchase under the International Placing together, where relevant, with any additional H Shares to be issued and/or sold pursuant to the exercise of the Over-allotment Option
—15— DEFINITIONS
‘‘International Purchase the purchase agreement relating to the International Placing and Agreement’’ expected to be entered into among the International Purchasers, the Joint Global Coordinators, the Selling Shareholder and us on or around March 31, 2006
‘‘International Purchasers’’ the group of underwriters of the International Placing expected to enter into the International Purchase Agreement to underwrite the International Placing
‘‘IT Services’’ information technology related services provided to us by our connected persons. See the section headed ‘‘Relationship with our Shareholders — Connected Transactions’’
‘‘Jazz Semiconductor’’ Jazz Semiconductor Inc., a semiconductor wafer foundry that is incorporated under the laws of the State of Delaware
‘‘Joint Global Coordinators,’’ Goldman Sachs (Asia) L.L.C. and BOCI Asia Limited ‘‘Joint Bookrunners,’’ ‘‘Joint Lead Managers’’ or ‘‘Joint Sponsors’’
‘‘Lam Research’’ Lam Research Corporation, a supplier of wafer-fabrication equipment to the worldwide semiconductor industry, which is quoted on the Nasdaq Stock Market
‘‘Lanmax’’ Lanmax International Limited, a company incorporated in Hong Kong on July 8, 2002 and one of our Promoters
‘‘Lanmax Unlisted Foreign the Unlisted Foreign Shares held by Lanmax, which had undertaken Shares’’ to return such Shares to Philips China, COAMC, SCIPI and Shanghai Belling shortly after the expiry of the Existing Shareholders Lock Up Period
‘‘Latest Practicable Date’’ February 28, 2006, being the latest practicable date prior to the date of this prospectus for the purpose of ascertaining certain information in this prospectus
‘‘Listing Date’’ the date, expected to be on or about April 7, 2006, on which our H Shares are listed and from which dealings therein are permitted to take place on the Stock Exchange
‘‘Mandatory Provisions’’ (the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas), prescribing provisions for inclusion in the articles of association of companies incorporated in the PRC to be listed overseas, which were promulgated by the former PRC Securities Commission of the State Council and the former State Commission for Restructuring the Economic Systems of the PRC on August 27, 1994, as amended and supplemented from time to time
—16— DEFINITIONS
‘‘Ministry of Commerce’’ (the PRC Ministry of Commerce), (formerly the Ministry of Foreign Trade and Economic Cooperation of the PRC) the newly- established PRC government agency responsible for the administration of domestic and international trade, foreign investment and international economic cooperation
‘‘Ministry of Finance’’ (the PRC Ministry of Finance), the ministry responsible for the administration of State revenues and expenditures, financial and taxation policies and overall supervision of financial institutions
‘‘Monolithic Power Systems’’ Monolithic Power Systems, Inc., a company that develops and markets proprietary, advanced analog and mixed-signal semiconductors used extensively in computing, communications and consumer electronics products, which is listed on the Nasdaq Stock Market
‘‘National People’s (the National People’s Congress of Congress’’ or ‘‘NPC’’ the PRC)
‘‘National Semiconductor’’ National Semiconductor Corporation, a company which produces analog semiconductors, including stand-alone devices and sub- systems in the areas of power management, imaging, display drivers, audio, amplifiers and data conversion, which is listed on the New York Stock Exchange
‘‘New H Shares’’ the 369,693,000 H Shares we are offering initially for subscription at the Offer Price under the Global Offering, including, where relevant, any additional H Shares which may be issued pursuant to any exercise of the Over-allotment Option and subject to any adjustment as mentioned in the section headed ‘‘Structure of the Global Offering’’
‘‘Novellus Systems’’ Novellus Systems, Inc., a manufacturer of industrial chemical products, which is listed on the New York Stock Exchange
‘‘Offer Price’’ the final Hong Kong dollar price per H Share (exclusive of brokerage fee, SFC transaction levy and Stock Exchange trading fee) at which the H Shares are to be subscribed for pursuant to the Hong Kong Public Offering
‘‘Offer Shares’’ the Hong Kong Offer Shares and the International Placing Shares together, where relevant, with any additional H Shares issued and/ or sold pursuant to the exercise of the Over-allotment Option
—17— DEFINITIONS
‘‘Over-allotment Option’’ the option expected to be granted by the Selling Shareholder and us to the International Purchasers, exercisable by the Joint Global Coordinators on behalf of the International Purchasers, within 30 days of the last day for the lodging of applications under the Hong Kong Public Offering, to require the Selling Shareholder to sell up to an aggregate of 5,544,000 additional H shares and us to allot and issue up to an aggregate of 55,454,000 additional H Shares, representing in aggregate 60,998,000 additional H Shares (representing approximately 15% of the initial number of Offer Shares), at the Offer Price, solely to cover over-allocations in the International Placing, if any
‘‘PBOC Rate’’ the exchange rate for foreign exchange transactions set daily by the People’s Bank of China based on the previous day’s PRC interbank foreign exchange rates and with reference to current exchange rates on the world financial markets
‘‘People’s Bank of China’’ or (the People’s Bank of China), the central bank of the ‘‘PBOC’’ PRC
‘‘Philips China’’ Philips Electronics China B.V., a private company incorporated with limited liability on September 12, 1946 under the laws of the Kingdom of The Netherlands (formerly Philips Electronics South- East Asia Holding B.V.) and a direct subsidiary of Royal Philips, being one of our Promoters
‘‘Philips Cooperation the cooperation agreement dated May 29, 2002 between Philips Agreement’’ Semiconductors and us relating to the manufacture and sale of Identification Products as well as the provision of support and advice by Philips Semiconductors to the Company in connection with the Design Services
‘‘Philips Foundry Services the Philips Foundry Services Agreement entered into in 1995 and Agreement’’ subsequently renewed on January 1, 2002, between Philips Semiconductors and us for the manufacture and sale of Philips Licensed Products
‘‘Philips Group’’ Royal Philips and all corporations, companies and/or legal entities controlled directly or indirectly by Royal Philips
‘‘Philips Identification the identification licensing agreement dated May 29, 2002 between Licensing Agreement’’ Royal Philips and us, pursuant to which Royal Philips granted us a non-exclusive and non-transferable license over certain intellectual property rights relating to non-volatile memory for use in manufacturing and selling Identification Products
—18— DEFINITIONS
‘‘Philips Licensed Products’’ in respect of (a) wafers, integrated circuits and other products manufactured by us for sale to the Philips Group, produced under the Philips Foundry Services Agreement and which comply with stated specifications, and (b) wafers, integrated circuits and other products manufactured by us for sale to our other customers, the products manufactured using certain relevant technology, information and know-how furnished to us by the Philips Group
‘‘Philips Semiconductors’’ Philips Semiconductors B.V., an indirect wholly-owned subsidiary of Royal Philips
‘‘Philips Semiconductors Philips Semiconductors International B.V., a direct wholly-owned International’’ subsidiary of Royal Philips
‘‘Plan’’ the incentive plan we established on December 21, 2002 to reward our selected Supervisors, Directors, senior management and employees for their contributions to our Company, details of which are set out in the section headed ‘‘Our Promoters and our Selling Shareholder — Lanmax’’
‘‘PRC’’ or ‘‘China’’ the People’s Republic of China, but for the purposes of this prospectus only (unless otherwise indicated), such term shall exclude Hong Kong, Macau and Taiwan
‘‘PRC Company Law’’ (the Company Law of the PRC), as enacted by the Standing Committee of the Eighth National People’s Congress on December 29, 1993 and effective on July 1, 1994, as amended, supplemented or otherwise modified from time to time
‘‘PRC GAAP’’ accounting rules and regulations in the PRC
‘‘PRC Securities Law’’ (the Securities Law of the PRC), as enacted by the Standing Committee of the Ninth National People’s Congress on December 29, 1998 and effective on July 1, 1999, as amended, supplemented or otherwise modified from time to time
‘‘Price Determination Date’’ the date, expected to be on or about March 31, 2006 but no later than April 4, 2006, on which the Offer Price is determined for the purposes of the Global Offering
‘‘Promoters’’ Philips China, SCIP (HK), COAMC, SCIPI, Shanghai Belling and Lanmax, our initial promoters who re-registered our Company as a foreign invested joint stock limited company on March 2, 2004
‘‘Promoters Agreement’’ the promoters agreement dated December 4, 2003 between the Promoters relating to our promotion as a foreign invested joint stock limited company and amended by an amendment agreement dated February 6, 2004 between the Promoters
‘‘qualified institutional has the meaning given under Rule 144A buyers’’
—19— DEFINITIONS
‘‘Regulation S’’ Regulation S under the US Securities Act
‘‘Reorganization’’ our re-registration from a Sino-foreign joint venture into a foreign invested joint stock limited company, which was completed on March 2, 2004
‘‘RMB’’ or ‘‘Renminbi’’ Renminbi yuan, the lawful currency of the PRC
‘‘Royal Philips’’ Koninklijke Philips Electronics N.V., the ultimate holding company of Philips China
‘‘Rule 144A’’ Rule 144A under the US Securities Act
‘‘SAFE’’ (the PRC State Administration of Foreign Exchange), the PRC government agency responsible for matters relating to foreign exchange administration
‘‘SAIC’’ (the PRC State Administration of Industry and Commerce), the PRC government agency responsible for the supervision and administration of the market and the enforcement of the relevant administrative laws
‘‘Sale H Shares’’ the 36,969,000 H Shares to be converted from an equal number of Domestic Shares to be offered for sale by the Selling Shareholder as part of the International Placing Shares, including, where relevant, any additional H Shares to be sold by the Selling Shareholder pursuant to any exercise of the Over-allotment Option and subject to any adjustment as mentioned in ‘‘Structure of the Global Offering’’
‘‘SASAC’’ (the State-owned Assets Supervision and Administration Commission of the State Council), the PRC governmental agency responsible for the supervision and administration of state-owned assets.
‘‘SAT’’ (the PRC State Administration of Taxation), the PRC central government tax authority
‘‘SCIP (HK)’’ SCIP (HK) Limited ( ), a company incorporated in Hong Kong on July 3, 2002 which is wholly-owned by SCIPI, being one of our Promoters
‘‘SCIPI’’ (Shanghai Chemical Industrial Park Investment Enterprise Company Limited), a company established under the laws of the PRC on September 29, 2000, being one of our Promoters
‘‘Securities and Futures the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Ordinance’’ Kong)
‘‘Selling Shareholder’’ COAMC
—20— DEFINITIONS
‘‘Semtech’’ Semtech Corporation, a supplier of analog and mixed-signal semiconductors for use in communications, portable devices, computers, and industrial equipment, which is quoted on the Nasdaq Stock Market
‘‘SFC’’ the Securities and Futures Commission of Hong Kong
‘‘Shanghai Belling’’ (Shanghai Belling Co. Ltd.), a joint stock limited company established in September 1988, which is listed on the Shanghai Stock Exchange, being one of our Promoters
‘‘Shares’’ ordinary shares of our Company with a nominal value of RMB1.00 each, comprising Domestic Shares, Unlisted Foreign Shares and H Shares
‘‘Special Regulations’’ (the Special Regulations of the State Council on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies), promulgated by the State Council on August 4, 1994, as amended, supplemented or otherwise modified from time to time
‘‘State,’’ ‘‘state,’’ the central government of the PRC including all political subdivisions ‘‘PRC Government,’’ (including provincial, municipal and other regional or local ‘‘PRC government’’ or government entities) and instrumentalities thereof ‘‘Chinese government’’
‘‘State Council’’ (the State Council of the PRC)
‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited
‘‘Supervisor(s)’’ our supervisor(s)
‘‘Taiwan Semiconductor Taiwan Semiconductor Manufacturing Corporation Limited, a Manufacturing dedicated semiconductor foundry in Taiwan, which is listed on Corporation’’ both the Taiwan Stock Exchange and the New York Stock Exchange
‘‘Technology Transfer and the technology transfer and cooperation agreement dated June 28, Cooperation Agreement’’ 1988 and subsequently extended, modified and renewed on November 28, 1994 between Philips Semiconductors International and us pursuant to which Philips Semiconductors International agreed to provide us with certain information, technology and technical assistance and granted us a license over the intellectual property rights and know-how relating to such information and technology
‘‘Texas Instruments’’ Texas Instruments, Inc., a provider of digital signal processing and analog technologies, which is listed on the New York Stock Exchange
‘‘Underwriters’’ the Hong Kong Underwriters and the International Purchasers
—21— DEFINITIONS
‘‘Underwriting Agreements’’ the Hong Kong Underwriting Agreement and the International Purchase Agreement
‘‘United Microelectronics United Microelectronics Corporation, a dedicated semiconductor Corporation’’ foundry, which is listed on both the Taiwan Stock Exchange and the New York Stock Exchange
‘‘United States’’ or ‘‘US’’ the United States of America, including its territories and possessions and all areas subject to its jurisdiction
‘‘Unlisted Foreign Shares’’ ordinary shares issued by our Company, with a nominal value of RMB1.00 each, which are subscribed for in a currency other than Renminbi and are held by Philips China, SCIP (HK) and Lanmax, being persons other than PRC nationals or PRC incorporated entities, and are not listed on any stock exchange
‘‘US$’’ or ‘‘US dollars’’ United States dollars, the lawful currency of the United States
‘‘US Securities Act’’ the US Securities Act of 1933, as amended
‘‘WTO’’ the World Trade Organization
‘‘X-Fab’’ X-Fab Semiconductor Foundries AG, formed as a limited liability company in Germany in 1992 and transformed into a stock corporation in 2001
—22— GLOSSARY
The glossary contains explanations of certain terms used in this prospectus in connection with our Company and our business. The terms and their meanings may not correspond to standard industry meaning or usage of these terms.
‘‘analog’’ a continuous signal, measuring features that are difficult to break into digital components, such as pressure, temperature, voltage, current and air and water-flow. Analog circuits are used in products that involve sound (radios, TVs) and pressure (automotive air bags, anti- lock brakes)
‘‘BiCMOS’’ Bipolar Complementary Metal Oxide Semiconductor: an integrated circuit that combines both bipolar transistors and CMOS transistors in order to achieve optimal balance between available output current and power consumption
‘‘bipolar’’ current controlled semiconductor transistors and diodes whose operation is based on the motion of both electrons and holes in the devices. Bipolar process is the semiconductor technology used to fabricate both vertical and lateral bipolar devices
‘‘capacity utilization rate’’ the actual number of processing steps measured by a number of masks used for semiconductor wafers shipped as a percentage of the total number of processing steps a fab has the capacity to provide during a period (based on continuing operation after adjustment of downtime period for ordinary maintenance and other normal interruptions), it is possible that the capacity utilization rate exceeds 100% if downtime period is significantly reduced. Factors potentially affecting capacity utilization rates at a fab include, but are not limited to, the complexity and mix of wafers produced, overall industry conditions, operating efficiencies, and/or level of customer orders, mechanical failure frequencies, number of operation disruptions due to the expansion of operations and/or relocation of equipment and fire or natural disasters
‘‘cleanroom’’ an area within a fab in which the wafer fabrication process takes place. The classification of a cleanroom relates to the maximum number of particles of contaminants per cubic foot within that room. For example, a class 10 cleanroom contains less than 10 particles of contaminants per cubic foot
‘‘CMOS’’ Complementary Metal Oxide Semiconductor: an integrated circuit that incorporates negative channel (n-channel) and positive channel (p- channel) CMOS transistors within the same circuit design
‘‘die’’ one individual chip cut from a wafer before being packaged
‘‘digital’’ the method of representing information as numbers with discrete (non- continuous) values, usually expressed as a sequence of binary digits (ones and zeros)
—23— GLOSSARY
‘‘EEPROM’’ Electrically Erasable Programmable Read-Only Memory, an integrated circuit that can be electrically erased and electrically programmed with user-defined information
‘‘fab’’ wafer fabrication facility
‘‘fabless’’ a semiconductor company with no wafer fabrication facility
‘‘foundry’’ a wafer production and processing plant
‘‘high voltage an integrated circuit that can drive relatively high voltage potential to semiconductor’’ systems that require higher voltage of between five volts and several hundred volts
‘‘HVMOS’’ High Voltage Metal Oxide Semiconductor: CMOS technology that fabricates both forms of normal voltage (or low voltage) operation CMOS and high-voltage CMOS on the same chip in one process flow
‘‘IDM’’ an integrated device manufacturer which has its own wafer fabrication facilities but may, from time to time, supplement its own capabilities by engaging foundry services
‘‘integrated circuit’’ or ‘‘IC’’ an electronic circuit where all the elements of the circuit are integrated together on a single semiconductor substrate
‘‘interconnect’’ conductive materials such as aluminum, doped polysilicon or copper that form the wiring circuitry to carry electrical signals to different parts of an integrated circuit
‘‘lead time’’ the length of time required from the receipt of orders to the shipment of a wafer product
‘‘linewidth’’ the minimum physical dimensions of a transistor on integrated circuits
‘‘manufacturing yields’’ in respect of the wafer manufacturing process, the number of wafers completed through the wafer fabrication process, divided by the number of wafers started in the wafer manufacturing process multiplied by 100, and in respect of individual dies, the actual number of good dies on a semiconductor wafer as a percentage of the total number of dies on the wafer
‘‘mask’’ a glass plate with a pattern of transparent and opaque areas used to create patterns on substrates. ‘‘Mask’’ is commonly used to refer to a plate that has a pattern large enough to pattern a whole substrate at one time, as compared to a reticle, where a glass plate can contain the pattern for one or more dies but is not large enough to transfer a wafer- sized pattern all at once
‘‘memory’’ a device that can store information for later retrieval
—24— GLOSSARY
‘‘micron’’ a term for micrometer, which is a unit of linear measure that equals one one-millionth (1/1,000,000) of a meter. There are 25.4 microns in one one-thousandth (1/1,000) of an inch
‘‘mixed-signal’’ the combination of analog and digital circuitry in a single semiconductor
‘‘MOS’’ Metal Oxide Semiconductor: a type of semiconductor device fabricated with a conducting layer and a semiconducting layer separated by an insulating layer
‘‘MOSFET’’ Metal Oxide Semiconductor Field Effect Transistor: a common type of transistor in which charge carriers (such as electrons) flow along its conducting channel. The width of the channel, which determines how well the device conducts, is controlled by an electrode called the gate. The gate is insulated or separated from the channel by a thin layer of oxide insulation. This insulation keeps current from flowing between the gate and the channel
‘‘non-volatile memory’’ memory device that maintains its content when the power supply is or ‘‘NVM’’ switched off
‘‘semiconductor’’ an element with an electrical resistivity within the range of an insulator and a conductor. A semiconductor can conduct or block the flow of electric current depending on the direction and magnitude of applied electrical biases
‘‘Standard Mechanical a mechanical interface adopted by the semiconductor industry to move Interface’’ wafers between tools in the fab
‘‘substrate’’ or ‘‘raw wafer’’ the body or base layer of an integrated circuit, onto which other layers are deposited to form the circuit
‘‘transistor’’ an individual circuit that can amplify or switch electric current. This is the building block of all integrated circuits
‘‘wafer’’ a finished substrate typically five to eight inches in diameter on which arrays of integrated circuits or discrete devices are fabricated during the manufacturing process
—25— RISK FACTORS
You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our H Shares. You should pay particular attention to the fact that we are a PRC company and are governed by a legal and regulatory framework which in some respects may differ from that which prevails in other countries. Our business, results of operations or financial condition could be materially adversely affected by any of the risks and uncertainties described below. The trading price of our H Shares could decline due to any of these risks and uncertainties and you may lose all or part of your investment. For more information concerning the PRC and certain related matters discussed below, see ‘‘Appendix VI — Summary of Principal Legal and Regulatory Provisions’’ and ‘‘Appendix VII — Summary of Articles of Association.’’
There are certain risks involved in our business and operations and in connection with this Global Offering. These risks can be categorized into: (i) risks relating to our industry, business and operations; (ii) risks relating to the PRC and (iii) risks relating to the Global Offering.
RISKS RELATING TO OUR INDUSTRY, BUSINESS AND OPERATIONS
If we fail to comply with any of the financial covenants under our US$100 million club term loan facility, our debt repayments may be accelerated and our property and equipment may be foreclosed on by our lenders, our ability to finance expansion of our operations could be jeopardized and we could become insolvent.
The US$100 million club term loan facility we have with a group of banks requires us to comply with certain financial covenants, which are tested on a quarterly basis. One of these financial covenants specifies that our net debt to earnings before interest, tax, depreciation and amortization (or EBITDA) ratio must not exceed specified thresholds which decline over time, originally starting with 2.30x as at June 30, 2005 and as at September 30, 2005. We were in breach of the net debt to EBITDA ratio covenant as at June 30, 2005 and as at September 30, 2005, with our actual ratio being 3.13x and 4.52x on each respective date, because our revenues were lower than we had expected prior to entering into the US$100 million club term loan facility. This revenue shortfall was primarily a result of the general slowdown in the foundry industry which began in the fourth quarter of 2004 and continued into the second half of 2005, and the resulting adverse effect on our product sales. However, our lenders did not accelerate repayment under the US$100 million club term loan facility or any of our other borrowings. Furthermore, the lenders under our US$100 million club term loan facility issued a letter to us dated February 9, 2006, agreeing to waive our covenant breaches as at June 30, 2005 and as at September 30, 2005 and to reset the net debt to EBITDA ratio covenant to a less stringent sliding schedule beginningwitha5.50xratiotobetestedasat December 31, 2005. We achieved a 4.67x ratio as at December 31, 2005. We plan to use approximately HK$271.5 million (equivalent to approximately US$35.0 million) of the net proceeds we expect to receive from the Global Offering to repay a portion of our outstanding short-term indebtedness, which will have a significant positive effect on our net debt to EBITDA ratio on a stand-alone basis.
Save for the breaches of the net debt to EBITDA threshold ratio covenant as at June 30, 2005 and as at September 30, 2005 described above, we are not, and have not been, in breach of any other financial covenant under the US$100 million club term loan facility.
—26— RISK FACTORS
In addition, our breaches under the US$100 million club term loan facility triggered cross defaults in three of our working capital facilities. As at December 31, 2005, the aggregate outstanding principal amount under these working capital facilities was US$55.0 million, but we obtained waivers of these cross defaults on February 21, 2006. However, if we breach any financial covenant under our US$100 million club term loan facility after the Global Offering, such breach may trigger other cross defaults in our other credit facilities.
If we are unable to comply with the amended financial covenants going forward, our lenders under the US$100 million club term loan facility may accelerate our repayment of the outstanding principal amount, which, as at December 31, 2005, stood at US$92.0 million, together with all accrued interest thereon, and our lenders under our working capital facilities, the outstanding balance of which as at December 31, 2005 totalled US$55.0 million, may also accelerate their loans. If we are unable to refinance our debt, we would have to use cash on hand to repay the loans. This cash would then be unavailable for our planned capital expenditures or for financing our operations, which could restrict our growth and prospects. Moreover, as the aggregate outstanding principal amount of our loans together with our other current liabilities are considerable and we have generally maintained a low level of free cash in the past, it is possible, depending on our cash position at the time, that we would be unable to repay our debt upon any acceleration and our other current liabilities when due and we would become insolvent, in which case we could be forced into bankruptcy by our creditors and you could lose some or all of your investment.
In addition, our obligations under the US$100 million club term loan facility are secured by our property, plant and equipment and our land use rights. If we breach the covenants or otherwise default on our obligations under the facility, our lenders could foreclose on some or all of this mortgaged property, which may materially restrict our operations and could force us to liquidate our business.
The factors that could affect our ability to meet the net debt to EBITDA ratio covenant in our US$100 million club term loan facility comprise a wide variety of things that could reduce our EBITDA, many of which are beyond our control, including, among others:
. a cyclical downturn in the semiconductor industry;
. a change in demand for the end applications of our semiconductors;
. a deterioration in our relationships with our major customers;
. an interruption in our operations due to a force majeure event; and
. a shortage of raw materials or an interruption in our supply.
Our current liabilities exceed our current assets, and if we are unable to refinance or repay our short-term indebtedness, which comprises a large proportion of our current liabilities, when it becomes due, we could become insolvent.
We had net cash inflow from operating activities for each of the three years ended December 31, 2003, 2004 and 2005 of RMB325.8 million, RMB397.2 million and RMB56.0 million, respectively, and our cash and cash equivalents rose from RMB31.2 million as at December 31, 2003 to RMB105.9 million as at December 31, 2005. However, as at December 31, 2003, 2004 and 2005, we had net current liabilities amounting to RMB141.8 million, RMB421.3 million and RMB1,004.7 million, respectively. The principal reason for our net current liabilities has been our relatively high
—27— RISK FACTORS level of short term interest-bearing borrowings, which as at December 31, 2003, 2004 and 2005 amounted to RMB124.2 million, RMB389.0 million and RMB1,186.3 million, respectively. In particular, the increase in our net current liabilities as at December 31, 2005 from December 31, 2004 was primarily a result of the accounting treatment of our US$92 million (equivalent to RMB742.5 million) drawdown under our US$100 million club term loan facility as a current liability as at December 31, 2005, in light of our breaches of a financial covenant under the facility that would have entitled our lenders under the facility to accelerate our repayment of the amounts outstanding if they had chosen to do so. In addition, our breaches under the facility triggered cross defaults in three of our other credit facilities, which would have entitled our lenders under those facilities to accelerate our repayment of their loans as well.
If we breach a financial covenant under our US$100 million club term loan facility and other relevant facilities in the future, our lenders may accelerate our repayment obligations thereunder, and we may be required to divert funds originally allocated for our operations to repay outstanding amounts under our loans. Furthermore, as our US$100 million club term loan facility is secured by our property, plant and equipment and our land use rights, a breach of any covenant thereunder may trigger a foreclosure on our operating assets, which may materially restrict our operations or force us to liquidate our business. For further information on our breaches of financial covenants under our US$100 million club term loan facility, please see the risk factor headed ‘‘If we fail to comply with any of the financial covenants under our US$100 million club term loan facility, our debt repayments may be accelerated and our property and equipment may be foreclosed on by our lenders, our ability to finance expansion of our operations could be jeopardized and we could become insolvent’’ in this section.
On February 9, 2006, we obtained a letter from the lenders under our US$100 million club term loan facility unconditionally waiving our breaches of the financial covenants under the facility, and revising certain other terms thereof, and on February 21, 2006, our other lenders also waived our cross defaults under their respective facilities. Accordingly, as at February 9, 2006, we reclassified our repayment obligations under our US$100 million club term loan facility as a non-current liability, which has reduced our current liabilities and our net current liabilities correspondingly. In addition, we plan to use HK$271.5 million (equivalent to US$35.0 million) of the net proceeds we expect to receive from the Global Offering to repay a portion of our outstanding short-term indebtedness, which will have a significant positive effect on our net debt to EBITDA ratio on a stand-alone basis. However, despite this reclassification and the planned reduction in our outstanding indebtedness, our current liabilities continue to exceed our current assets, as they did as at December 31, 2003, 2004 and 2005. Moreover, we are subject to certain covenants under our US$100 million club term loan facility, including a restriction against our incurring additional borrowing (save for certain exceptions) and a negative pledge with respect to our grant of further security over our property, assets and cashflow. These covenants will restrict our ability to obtain additional borrowing to repay our short-term indebtedness when due. If we are unable to refinance or repay our short-term indebtedness, which comprises a large proportion of our current liabilities, when it becomes due, we could become insolvent.
In limited special circumstances, we may deviate from our intended use of proceeds.
Our intended use of proceeds described in the section headed ‘‘Future Plans, Use of Proceeds and Dividend Policy’’ is based on assumptions of future events which are subject to uncertainty, and we cannot assure you that our future plans and intended use of proceeds will materialize as intended. In particular, if there is an acceleration of our payment obligations under our US$100 million club term loan facility in the circumstances described in the risk factor headed ‘‘If we fail to comply with any of the financial covenants under our US$100 million club term loan facility, our debt
—28— RISK FACTORS repayments may be accelerated and our property and equipment may be foreclosed on by our lenders, our ability to finance expansion of our operations could be jeopardized and we could become insolvent,’’ we may reallocate all or part of the net proceeds we secure from the Global Offering to repay these obligations. Therefore, the intended use of proceeds from the Global Offering may differ from those described under the section headed ‘‘Future Plans, Use of Proceeds and Dividend Policy.’’
Due to the cyclical nature of the semiconductor industry and the markets served by our customers, our operating results may fluctuate significantly from period to period, making it difficult to predict our future performance.
The semiconductor industry is highly cyclical and has in the past experienced significant, and sometimes prolonged, downturns, resulting in variations in order levels from our customers. Therefore, our revenue and results of operations are subject to fluctuations from period to period due to a number of factors, many of which are beyond our control. Our business and operations have, at times in the past, been negatively affected by some of, and will continue to be subject to, among others, the following factors:
. changes in the macro-economic, political and social conditions where our customers and their markets are located;
. fluctuations in the demand for our customers’ end products;
. our customers’ inventory levels;
. shifts by IDMs between internal and outsourced production;
. the rescheduling or cancellation of large orders;
. the rescheduling or cancellation of planned capital expenditures; and
. technological changes.
For instance, we incurred a net loss of RMB75.0 million for the year ended December 31, 2005, primarily due to reduced orders when compared to the year ended December 31, 2004 from a number of our IDM customers shifting their outsourced orders with us to their own internal production facilities, as a result of the foundry industry-wide cyclical slowdown, which started in the fourth quarter of 2004 and continued into the second half of 2005. Inventory correction and rescheduling of orders from our customers also reduced our wafer shipments during this period. The lower than expected demand in, and shipment of, our 8-inch wafers contributed to our overall unfavorable financial performance for the year ended December 31, 2005.
Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on historical period to period comparisons to predict our future performance. Adverse changes in any of the above factors and downturns in the semiconductor and microelectronics industries may affect our customers’ businesses and may lead to reduced demand for our services. While these downturns are to be expected, their timing, length, severity and recovery cannot be predicted accurately. If we fail to manage adverse changes to any of the above factors or downturns in the markets in which our customers operate, our business, financial condition and results of operations may be seriously harmed.
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A change in the demand for, or the selling prices of, the end applications of our semiconductors could adversely affect the demand for our semiconductors and reduce or eliminate our profits.
The semiconductors we produce are used by our customers in a wide variety of end applications in the communications, consumer electronics and personal computer markets. The markets in which our customers operate are highly competitive. We may face pressure from our customers to reduce the selling prices of our semiconductors, which could adversely affect our revenue and our profitability. In addition, changes in end market demand such as inventory corrections and market downturns may result in reduced demand for the semiconductors we produce. As some of our costs of production are fixed, a reduction in the demand for our products would lead to under-utilization of our production capacity, which could in turn reduce or eliminate our profits.
If the growth in demand for our semiconductors fails to match the growth in our capacity, our return on investment may be adversely affected.
The demand for foundry services by IDMs and fabless semiconductor companies has been increasing in recent years. A reversal of, or slowdown in, this trend may result in a lower rate of return on our investment than we have anticipated. In light of the increasing trend for IDMs to outsource their manufacturing process, more new fabs are planned to be established, particularly in the PRC. If growth in demand fails to match the potential growth in our capacity, our capacity utilization rate and the selling prices of our semiconductors may be adversely affected. As a result, we may experience a lower rate of return on our investment than we initially anticipated.
Some parts of the semiconductor business can be seasonal in nature, and such seasonality could adversely affect our business and operating results.
Some parts of the semiconductor business can be seasonal in nature, mainly due to the impact of the year-end holiday period on the demand for consumer electronics products. In these businesses, the second and third quarters of the year tend to experience higher sales than the fourth and first quarters. We have not identified significant seasonality in our sales in the past because, we believe, of the cyclicality of the foundry industry, our product migration and other significant factors affecting our revenue changes historically. It is possible, however, that seasonality in demand for our products might have a material effect on our sales in the future. Since much of our costs of production are fixed, any such seasonal declines in sales could also reduce our profitability.
If we are unable to manage the expansion and modification of our production facilities effectively, our growth prospects may be limited and our future profitability may be affected.
Our growth prospects and our future profitability depend, to a large extent, on our ability to increase our production capacity, either generally or with respect to demand from customers for any given product type. In the past, we have suffered delays in product delivery due to constraints on our production capacity, which in turn adversely affected the volume of orders we received from our customers.
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To successfully expand our production capacity we will need to purchase additional equipment, hire and train personnel necessary to operate such additional equipment and successfully increase our production capacity, expand our existing facilities, and construct new facilities, all of which will be affected by numerous factors, including:
. shortages or delays in the delivery of manufacturing equipment;
. delays or difficulties which may arise in the installation, commissioning and qualification of our manufacturing equipment;
. implementation of new fabrication processes and recalibration and requalification of existing processes;
. inability to achieve required manufacturing yield levels;
. labor disputes; and
. future changes to the design or construction of our fabs as well as the layout of our manufacturing equipment in our fabs.
These factors could affect our timely expansion, and we may choose not to undertake our expansion plans at all. As a result of the above factors, we cannot assure you that our expansion plans, if implemented, will be operationally or financially successful. Failure to expand our production capacity on a timely basis could cause delays in product delivery, which may result in the loss of customers and revenue, which in turn could prevent us from recouping our investments in a timely manner or at all. Further, if we do not expand or if our expansion is unsuccessful, we may experience a loss of revenue, which would adversely affect our business and operating results.
If we are unable to obtain additional financing which we may require to implement our capital expenditure plans, our ability to satisfy any increase in demand for our wafers could be limited, which would, in turn, limit our growth prospects.
To increase our production flexibility, we will require additional manufacturing equipment. We intend to fund such capacity expansion by using cash generated from our operations and from the proceeds of the Global Offering. Nevertheless, we may require additional financing to purchase such equipment. We obtained a US$100 million five-year club term loan facility from a group of banks on March 31, 2005. However, there can be no assurance that we will be able to obtain any necessary additional financing on reasonable terms or at all, due to various factors such as the general market conditions for financing activities by semiconductor companies, the prevailing economic and political conditions and our future financial position. If we are unable to finance the purchase of such equipment and as a result we fail to acquire such equipment, we may not be able to expand our capacity or increase our production flexibility to satisfy the demand from our customers. As a result, our growth prospects would be limited.
If our major customers enforce the capacity commitment obligations under some of our wafer manufacturing agreements with them, our relationship with certain other customers may be adversely affected.
Under our wafer manufacturing agreements with certain of our major customers, we have agreed to provide them with a specified capacity at our fabs. Under such arrangements, we typically accommodate a minimum production capacity for a specified period for a specific customer.
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In practice, our customers provide us with a monthly rolling estimate to allow us to determine and adjust, in advance, the capacities we are required to provide for a particular period. None of our customers have, in the past, enforced the capacity commitment provisions in the wafer manufacturing agreements, and we have never prejudiced any of our other customers or lost any customers as a result of providing any preferential capacity commitment to our major customers. Nevertheless, we cannot assure you that our customers will not, in the future, enforce the capacity commitment provisions in the wafer manufacturing agreements. If the capacity commitment provisions are enforced and we are unable to fulfil such obligations without reducing the capacity available for our other customers, our relationships with customers who are prejudiced by such preferential treatment will be adversely affected, which in turn, may harm our business and operating results as well as our reputation.
Any significant decrease in sales to one or more of our major customers may decrease our revenue and profits.
Our top five customers for each of the three years ended December 31, 2003, 2004 and 2005, in aggregate, accounted for 72.1%, 60.0% and 62.3% of our revenue, respectively. Our largest customer accounted for 19.8%, 15.8% and 16.3% of our revenue for each of the three years ended December 31, 2003, 2004 and 2005, respectively. The loss of one or more of our key customers, or any significant reduction in their purchases from us for any reason, could cause us to under-utilize our production capacity which in turn would materially reduce our revenue and affect our profits. While we have not experienced any loss of our key customers during the three years ended December 31, 2005, for instance, principally as a result of the foundry industry-wide cyclical slowdown beginning in the fourth quarter of 2004 and continuing into the second half of 2005, two of our major IDM customers, who were our third and fourth largest customers for the year ended December 31, 2004, became our fifth and eighth largest customers, respectively, for the year ended December 31, 2005. In particular, our aggregate sales to these two major IDM customers, which constituted approximately 22.7% of our revenue for the year ended December 31, 2004, declined to an aggregate of approximately 12.7% of our revenue for the year ended December 31, 2005. Sales to some of our other top customers in the year ended December 31, 2005 increased, while we experienced relatively small declines for others, but the decline in respect of these two major IDM customers was more substantial, as they reduced their outsourced orders with us and shifted these orders to their own internal production facilities. In addition, any such loss may also give a negative impression that we are unable to retain our current customers which may in turn adversely affect our ability to attract new customers.
Our profitability is dependent on our ability to meet our customers’ technological needs, and to maintain our manufacturing yields and high capacity utilization rates.
We primarily produce semiconductors for our customers’ end-market applications, and we offer, through our flexible manufacturing foundry model, to customize our semiconductors to meet our customers’ needs. In our business, we often receive orders from a customer, together with specified design technologies for use in our manufacturing processes. Accordingly, our success is heavily dependent on our technological capability of meeting these design specifications.
Our profitability also depends on our ability to maintain our manufacturing yield, which is the ratio of functional die to total die in a wafer. We also need to improve our capacity utilization rate for each of our fabs, being the number of wafers we can manufacture in comparison with our production capacity at any given time, in order to maintain our profit margin. If we are unable to optimize our manufacturing yield or capacity utilization rates, our profits or profit margins may decline.
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We operate in a highly competitive industry, and if we are unable to compete effectively, our profit margin and profits may decrease.
The markets in which we operate are highly competitive. Since a significant part of our revenue is derived from IDMs who have internal production capacity but outsource part of their manufacturing processes to us, we may compete with such internal production capacity. If IDMs reduce or cease outsourcing their manufacturing processes to us and choose to rely on their internal production capacity, our revenue will be adversely affected. Further, we currently face competition from a number of international analog and mixed-signal semiconductors manufacturers, such as Episil in Taiwan and X-Fab in Germany, and we also compete in certain product segments with other existing and new semiconductor manufacturers in the PRC.
Unlike other foundries, which tend to focus on producing semiconductors for digital applications, we focus on producing analog semiconductors. However, as we continue to expand our 8-inch wafer capacity and our production of analog semiconductors with higher bipolar content, we may also compete with foundries focusing on producing semiconductors for digital applications who have allocated a portion of their wafer capacities to produce analog semiconductors with higher CMOS content.
In addition, our ability to compete with other foundries may be affected by our costs of production, our production cycle time and our ability to maintain and improve our manufacturing yields. If we are unable to compete effectively in our markets, we may need to decrease our average selling prices, which in turn would erode our profit margin and weaken our profits.
We currently do not develop any technology on our own.
We currently obtain a significant portion of our technology through our technology transfer and cooperation arrangement with the Philips Group, technology arrangements under the wafer manufacturing agreements with our customers and technologies jointly developed with our customers. See the section headed ‘‘Business — Our Process Technologies’’ for further details. We cannot assure you that our existing technology transfer and cooperation arrangement with the Philips Group, the technology arrangements under the wafer manufacturing agreements with our customers or the joint development of technologies with our customers will continue, or that we will be able to obtain technologies by entering into new relationships with other partners or customers. In particular, our Technology Transfer and Cooperation Agreement with Philips Semiconductors International dated January 12, 2005, which has a term of ten years from March 2, 2004 and which shall be automatically renewed for further ten-year periods (subject, in each case, to continuing compliance with the Hong Kong Listing Rules), may be terminated if either party gives written notice of no less than two years, or if either party is in breach of the terms of the agreement. If our technological partnerships cease or the Philips Group discontinues licensing its rights to us, we would need to develop our own technologies internally or seek to procure technologies externally which could have a negative impact on our costs and operations. In addition, if we fail to internally develop our technologies successfully, or seek to procure technologies externally in a cost-effective manner, our ability to compete with our competitors and provide quality products to our customers at competitive prices, and our business and operating results may be adversely affected.
We may be subject to claims for infringement of intellectual property rights.
The semiconductor industry is characterized by frequent litigation involving claims for infringement of patents and other intellectual property rights. Save as disclosed in the section headed ‘‘Business — Intellectual Property’’ as to two claims for infringement of intellectual property rights against us which are outstanding, we are not currently party to any material litigation involving
—33— RISK FACTORS infringement of intellectual property rights and we are not aware of any pending or threatened material claims for infringement of intellectual property rights against us. However, we could become subject to further intellectual property claims in the future. Third parties may also assert intellectual property rights that cover certain of the technologies we use in our manufacturing process. In this regard, we have no practical means of ascertaining what patent applications have been filed until they are granted. Furthermore, we may not be aware of the intellectual property rights of others or be familiar with the laws governing such rights in some of the countries in which our products are or may be sold by our customers. As the number of patents, copyrights and other intellectual property rights in our industry increases, we believe that companies in our industry could face more frequent infringement claims. In the event that any claim is made against us, we could be required, among other things, to:
. stop using some of our manufacturing processes;
. cease manufacturing, using, importing or selling infringing products or technologies;
. pay substantial damages;
. develop non-infringing technologies; or
. attempt to acquire licenses to use such technology.
If any claims made against us are successful in the future, our business and operating results may be adversely affected. Further, if we are required to seek licenses from or enter into agreements with third parties covering the intellectual property that we may be infringing, there can be no assurance that we could obtain any such licenses on acceptable terms, if at all, which in turn would materially and negatively impact our business and operating results.
Exchange rate fluctuations could increase our costs, which could adversely affect our operating results.
Our financial statements are prepared in Renminbi. However, we receive a majority of our revenue in US dollars. We only receive a portion of our revenue in Renminbi, which is not freely convertible into other currencies. For each of the years ended December 31, 2003, 2004 and 2005, 5.7%, 6.8% and 16.3% of our revenue, respectively, was denominated in Renminbi. We pay for our raw materials, spare parts and equipment mainly in US dollars and Renminbi and, to a lesser extent, in Euro and Japanese Yen. See the section headed ‘‘Financial Information — Qualitative and Quantitative Disclosures about Market Risk — Foreign Exchange Rate Fluctuation Risk’’ for further details.
Historically, the official exchange rate for the conversion of the Renminbi to US dollars has been stable. However, since July 21, 2005, the Renminbi has been pegged against a basket of currencies determined by the People’s Bank of China from time to time, as opposed to US dollars only, and the value of the Renminbi is allowed to appreciate or depreciate by up to 0.3% each day against the new peg. Depending on factors such as the nature and value of the said basket of currencies as determined by the People’s Bank of China from time to time, it is possible that the value of the Renminbi may appreciate in value against the US dollar or other currencies in the long term. This may result in our exported semiconductors becoming more costly and less attractive in pricing terms, particularly when compared with other wafer manufacturers whose products are not exported out of the PRC, and we may need to lower our selling prices in order to remain competitive. This may harm our business and affect our profitability.
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While we have, in the past, purchased equipment and spare parts mainly using US dollars or Renminbi, historically we have not hedged our foreign exchange expenses given the majority of our revenue has been in US dollars and the relative stability of the official exchange rate for the conversion of the Renminbi to US dollars before July 21, 2005. However, we anticipate that our purchases of equipment and spare parts denominated in Euro and Japanese Yen may increase in the future. Therefore, we may enter into foreign currency forward exchange contracts designed to hedge the exchange rate fluctuations between the Renminbi and each of the Euro and Japanese Yen. Nevertheless, such hedging arrangements may not fully hedge our foreign exchange risks. Therefore, we may be affected by fluctuations in exchange rates between the Renminbi and each of the Euro and Japanese Yen.
Furthermore, our results of operations and financial condition may be affected by changes in the value of the Renminbi and other currencies in which our obligations are denominated. As our business continues to develop, our exposure to foreign currency risks may increase. Any significant fluctuations among these currencies may lead to an increase in our costs, which could adversely affect our operating results. In addition, any appreciation of the Renminbi may adversely affect the value of dividends, if any, payable on our Shares in foreign currency terms, since we receive the majority of our revenue in US dollars.
The variety and complexity of our manufacturing processes and the susceptibility of our equipment to impurities and contaminants may have an adverse effect on the quality and reliability of our products.
The process technology we use for manufacturing semiconductors is highly complex, requires advanced and costly equipment, and is continuously being modified in an effort to improve the quality, reliability and performance of our products. Impurities such as dust and other contaminants, difficulties in the fabrication process or defects in the equipment or masks used to manufacture a particular device can cause a percentage of the wafers to be rejected or individual dies on wafers to be non-functional. In addition, since our manufacturing process is customized to meet our customers’ different demands and may involve a variety of process technologies, cross contamination between these varying process technologies may arise. These factors may impact on the quality, reliability as well as performance of our products, and the level of acceptance of our products according to agreed specifications which, in turn, can lead to an increase in our costs of production, thereby adversely affecting our operating and financial results. We cannot assure you that we will not experience problems in achieving acceptable manufacturing yields or product delivery delays in the future as a result of such defects in our manufacturing process, any of which could increase our costs and delay shipments to our customers.
Our production may be interrupted if we cannot maintain sufficient supplies of electricity and fresh water.
The semiconductor manufacturing process requires a stable supply of electricity and extensive amounts of fresh water. Droughts, pipeline interruptions, power interruptions, electricity shortages or government intervention, particularly in the form of rationing, are factors that could restrict our access to these utilities in the area in which our fabs are located. Areas in the PRC, including Shanghai, have experienced power outages as a result of the increasing demand for electricity in that area. In 2003, we were subjected to a short power outage. Since 2004, we have leased diesel- powered electricity generators in order to reduce our exposure to power outage. However, if these generators are inadequate in the event of an outage, then any future power outage, even of very limited duration, could result in a loss of wafers in production and a deterioration in our manufacturing yields.
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Although we have not previously experienced any shortage of fresh water supply, we cannot assure you that as we continue to increase our capacity, such a shortage will not occur in the future. If there is an insufficient supply of fresh water or electricity to satisfy our requirements, we may need to limit or delay our production, which could adversely affect our business and operating results.
If we are unable to obtain raw materials, spare parts and equipment in a timely manner and at reasonable cost, our production schedules could be delayed and we may lose customers.
We depend on our suppliers for raw materials, including silicon wafers, chemicals and gases. We must obtain from our suppliers, in a timely manner, sufficient quantities of raw materials at acceptable prices to maintain our competitiveness. We source most of our raw materials from more than one supplier so that problems in quality control and delivery performance with any one supplier do not adversely affect our manufacturing process. However, we do not maintain long-term contracts with most of our suppliers. Furthermore, we have, in the past, experienced interruptions in our supply, with some of our suppliers limiting the supply of raw materials to us because of their capacity constraints. If we are unable to obtain raw materials at a reasonable cost and in sufficient quantities to sustain our operations, our costs could increase significantly and we may not be able to meet an increase in demand from our customers, hence adversely affecting our profitability.
From time to time we also reject materials that do not meet our specifications. Such rejection of materials affects our manufacturing schedule, which may result in delays in product deliveries which may adversely affect our customer relationships.
We depend on the supply of spare parts for our production equipment. Our equipment from time to time requires repair and maintenance as a result of break down or wear and tear from continuous usage, in which case we will be required to obtain spare parts in order to maintain our production. If we are unable to obtain spare parts at a reasonable cost and in a timely manner, our operations may be adversely affected.
We also depend on the supply of refurbished equipment to a large extent to equip our fabs. We may not be able to purchase refurbished equipment of the quality we require in a timely manner. Further, our refurbishment efforts may not be successful and the time required to ramp up such refurbished equipment may be longer than we initially anticipated. If there are delays in the delivery of equipment or if there are significant increases in the cost of equipment, we may not be able to fulfill our customers’ orders or our costs may significantly increase.
Wemaybesubjecttotheriskoflossduetofirebecausethematerialsandequipmentweuse in our manufacturing processes are highly flammable and our insurance coverage may not be sufficient to cover all of our potential losses.
Semiconductor manufacturing involves high temperature and high voltage processes and highly flammable materials such as silane and hydrogen. Although we have been and are in compliance with applicable fire safety regulations, the risk of fire associated with these equipment and materials cannot be completely eliminated. In 2002, we had a fire on our premises, further details of which are set out under the section headed ‘‘Business — Insurance.’’ We received insurance proceeds of US$741,572 in 2003 for our insurance claim for losses amounting to under US$1.0 million incurred as a result of the fire. We maintain insurance policies such as business interruption, fire and property insurance. Our insurance coverage is limited and would not be sufficient to cover all of our potential losses. If any one or more of our fabs are seriously damaged or cease operations as a result of a fire, the time it may take to repair or rebuild such fabs would significantly reduce our manufacturing capacity, cause substantial delays to our manufacturing
—36— RISK FACTORS schedules and may result in the loss of important customers. Further, if we make any material insurance claims, our insurance premiums may increase significantly, thereby increasing our operating costs. These factors would in turn, adversely affect our business and results of operations. We have not made any material claims under our insurance policies since 2002.
If the semiconductors we produce are defective as a result of our manufacturing process and are used in end products by consumers or our customers, we may be subject to product liability risks and our reputation could be adversely affected.
We offer customized semiconductors for specific use by our customers in their end products. If, due to any defects in our manufacturing process, the semiconductors we produce result in defective or malfunctioning end products, we could be sued for damages, especially if the defect or malfunction in the end product causes physical harm to people or damage to property. The occurrence of a problem could result in product liability claims as well as a recall of, or safety alert or advisory notice relating to, the end product. In addition, we have, in some of the agreements we entered into with our customers, agreed to indemnify our customers for any damages resulting from our manufacturing process. The product liability insurance we maintain is limited and may not be sufficient to satisfy successful claims made against us in the future. In addition, we cannot assure you that we will be able to obtain product liability insurance in the future at satisfactory rates or in adequate amounts, or at all. Although in the past we have not experienced any product liability claims or product recalls, if such product liability claims or product recalls occur in the future, they could, regardless of their ultimate outcome, have a material adverse effect on our business, financial condition, reputation and ability to retain and attract customers.
Our product liability insurance policy is terminable by the insurer at any time upon 90 days’ prior notice. We cannot assure you that in the event the insurer gives notice of its intention to terminate the policy, we will be able to obtain alternative product liability insurance cover in time. If we fail to obtain alternative product liability insurance in time, our product liability risks may not be covered at all.
Our operation may be interrupted and our business could suffer as a result of steps we may be required to take to comply with environmental regulations.
We are subject to a variety of PRC regulations relating to the use, storage, discharge and disposal of chemicals and gases used in our manufacturing process. We have not suffered material environmental claims in the past and have been certified as ISO 14001 compliant in 1998. We also believe our activities conform to current applicable environmental regulations in all material respects. Nevertheless, environmental claims or the failure to comply with current or future regulations could result in (a) an assessment of damages or imposition of fines against us, (b) a suspension of production or (c) a cessation of operations, each of which would adversely affect our public image and cause delays to our production and capacity expansion plans. New regulations could also require us to acquire costly environment protection related equipment or to incur other significant expenses. Any failure by us to control the use of, or adequately restrict the discharge of, hazardous substances could subject us to future liabilities.
We depend on certain key personnel, and we may not be able to retain, hire or integrate sufficient qualified personnel to maintain and expand our business.
Two of our Directors, namely Mr Tony Yuhai Liu and Ms Jianyu Cheng, hold executive positions in our Company, while the other nine Directors are non-executive Directors of our Company. Mr Liu is our President and Ms Cheng is our Vice President and Chief Financial Officer.
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In addition, Mr Zhoumiao Gao is our Vice President of Operations, and Mr Zhen Sun is our Vice President of Sales and Marketing. Our success depends to a significant extent upon the expertise of our executive Directors and members of our senior management, as well as our ability to continue to attract, retain and integrate qualified personnel, particularly engineers. The competition for the services of these employees is intense and will continue to become more so due to the establishment of new fabs in the PRC by our competitors. We cannot assure you that we will be able to secure the services of sufficient qualified personnel, or do so at a reasonable cost and assimilate them into our business. If we are unable to retain our existing personnel or attract, assimilate and retain new experienced personnel in the future, our operations could become disrupted and the growth of our business could be delayed or restricted.
Components of our past financial statements have changed in the past and may not remain the same for future financial periods.
During the financial year ended December 31, 2003, when we were a Sino-foreign equity joint venture, we did not pay emoluments to our Directors. This is because all of our Directors were appointed by our shareholders and their remuneration was borne by the shareholder they each represented. However, since our re-registration as a foreign invested joint stock limited company on March 2, 2004, we have paid, and we intend to continue to pay in the future, emoluments to our Directors and Supervisors. For each of the years ended December 31, 2004 and 2005, we paid emoluments to our Directors and Supervisors amounting to RMB6.8 million (equivalent to HK$6.5 million) and RMB8.6 million (equivalent to HK$8.3 million), respectively.
We declared and paid a dividend of approximately RMB35.1 million (equivalent to approximately HK$33.7 million) in respect of the year ended December 31, 2003. Our Directors did not declare or pay any dividend in respect of the two financial years ended December 31, 2004 and 2005, and have no current intention to distribute dividends. In any event, the amount of any dividends that we may declare and pay will be subject to, among other things, the full discretion of our Board and approval at a general meeting of our shareholders, taking into consideration relevant factors including the amount of our earnings, financial position and cash requirements. In particular, under the US$100 million club term loan facility obtained on March 31, 2005, we are subject to a restrictive covenant such that, after completion of the Global Offering, we may only declare, make or distribute up to (but not including) 25% of our net profits (after tax) in any given financial year as dividends. Our historical dividend distribution (or the lack thereof) should not be used as a reference or basis to determine the level of dividends which we may declare and pay in the future.
RISKS RELATING TO THE PRC
All of our assets are located in the PRC and all of our revenue is derived from our operations in the PRC. Accordingly, our results of operations and growth prospects are subject, to a significant extent, to economic, political and legal developments in the PRC.
The PRC’s economic, political and social conditions, as well as government policies, could affect our business.
The PRC economy differs from the economies of most developed countries in many respects, including, the:
. amount of government involvement;
. level of development;
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. growth rate;
. control of foreign exchange; and
. allocation of resources.
While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
Our business is subject to extensive government regulation, and changes in these regulations could lead to uncertainties in our business and operating results.
The PRC government has broad discretion and authority to regulate the technology industry in the PRC. The PRC government has also implemented policies from time to time to regulate economic expansion in the PRC. The economy of the PRC has been transitioning from a planned economy to a market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industrial development. It also exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. The PRC government has recently called for effective measures in macro-economic control in order to ensure steady and fast national economic growth. Following this, measures were put in place to restrict lending to specific sectors of the economy in the PRC, with particular emphasis on industrial commodities such as steel and cement. Although no specific cooling measures on the semiconductor industry have been put in place or announced by the PRC government, there is no assurance that any of the macro-economic control measures would have no effect, direct or indirect, on our operations. New regulations or the readjustment of previously implemented regulations could require us to change our business plan, increase our costs or limit our ability to sell products and conduct activities in the PRC, which could adversely affect our business and operating results.
Changes in the favorable taxation treatment we enjoy may adversely affect our profitability.
The PRC government and local governments have provided, and may continue to provide, various taxation incentives to domestic companies in the semiconductor industry, including us, in order to encourage development of the industry. Such incentives include tax rebates, reduced tax rates, favorable lending policies and other measures. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any such reduction or elimination of incentives currently provided to us could adversely affect our business and operating results.
In 2003, the State Taxation Bureau and the Ministry of Finance reduced the export tax refund rate for integrated circuit products from 17% to 13%. The new export tax refund rate was implemented on January 1, 2004. Since the value-added tax rate for our sales is 17%, it follows that
—39— RISK FACTORS the effective value-added tax rate for our exports of integrated circuit products was 4% for most of 2004. At the end of 2004, the State Taxation Bureau and Ministry of Finance issued a notice to restore the 17% export tax refund rate for integrated circuit products, which came into effect in November 2004. We understand that the export tax refund rate will fluctuate from time to time depending on the taxation policies existing in a particular year. Since the majority of our revenue involves exporting to our international customers, the reduction of the export tax refund rate and the uncertainties regarding future taxation policy trends may have a negative impact on our profit. Further, under existing PRC tax laws, regulations and rules, different tax systems apply to domestic enterprises and foreign invested enterprises. In relation to preferential tax policies, productive foreign invested enterprises are generally entitled to various preferential tax policies. Enterprises that satisfy other conditions stipulated by the PRC laws, regulations and rules may also be entitled to further preferential tax treatment. In recent years, the PRC legislative authority has been reconsidering the tax policies on domestic and foreign invested enterprises, which may lead to the cancellation or reduction of the preferential treatment currently applied to foreign invested enterprises. If such policies are implemented, our operating results may be adversely affected.
In addition, we cannot assure you that any other future disputes between the PRC and other members of the WTO will not adversely affect existing incentives provided to us by the PRC government. In the event that existing incentives granted to us are reduced or abolished, our profitability and our competitiveness may be adversely affected.
Export and import restrictions could have an adverse impact on our business.
Our business depends heavily on the import of raw materials, equipment, spare parts and technologies essential for the semiconductor manufacturing process and the export of products to customers.
Licenses are required for import and exports of certain raw materials and products to and from various countries, in particular, the United States. We or our suppliers may not be able to obtain the requisite licenses in a timely manner, which could delay our production schedules and affect our ability to satisfy our customers’ needs. Our business and operating results could also be affected by a change in the export license regulatory regime relating to the countries from which we purchase our raw materials and export our products.
The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies (the ‘‘Wassenaar Arrangement’’) ratified in July 1996 by 33 countries could have a negative impact on our business. The Wassenaar Arrangement is a worldwide arrangement to restrict the transfer of conventional arms and dual-use goods and technologies. Certain exports to the PRC, including technology, equipment and spare parts, are restricted under the Wassenaar Arrangement. Although at present, we have not experienced any restrictions under the Wassenaar Arrangement, we cannot assure you that as we move towards manufacturing products using more advanced technologies, the Wassenaar Arrangement will not apply to us. If such restricted exports are required for our manufacturing process, our business could be adversely affected.
Government controls over currency conversion may adversely affect our financial condition and results of operations as well as affect our ability to pay dividends in foreign currencies.
Foreign exchange transactions under our capital account, including principal payments in respect of foreign currency denominated obligations, continue to be subject to foreign exchange controls. Payments of current account items, including dividend payments, interest payments and trade expenditures, may be made in foreign currencies without government approval, apart from
—40— RISK FACTORS certain procedural requirements. Any changes to the PRC government’s policy to restrict access to foreign currencies for current account transactions could limit our ability to convert Renminbi proceeds into foreign currencies. We might not be able to meet our foreign currency payment obligations.
Under the PRC’s existing foreign exchange regulations, following the completion of the Global Offering, we will be able to pay dividends in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, the PRC government may take measures at its discretion in the future to restrict access to foreign currencies for current account transactions if foreign currencies become scarce in the PRC. We may not be able to pay dividends in foreign currencies to our shareholders if the PRC government restricts access to foreign currencies for current account transactions.
Lowered tariff levels as a result of the PRC’s accession to the WTO may increase competition and affect our future profitability.
In 2003, the PRC reduced its average rate of import tariffs to 11.5% and such tariff levels will be further lowered to 10% by 2008 as a result of the PRC’s accession to the WTO in December 2001. Certain information technology-related products are no longer subject to import tariffs. The reduction or elimination of tariffs may encourage international competitors, thereby introducing strong competition in the PRC from foreign countries. As we continue to increase our domestic sales, we may not be able to compete effectively with these foreign companies, especially in terms of product pricing. This could adversely affect our business and operating results.
The PRC legal system is not fully developed and embodies uncertainties that could affect our operating results and limit the legal protection to our shareholders.
The PRC legal system has inherent uncertainties and is not yet complete. The PRC legal system is based on written statutes and their interpretation by the Supreme People’s Court. Prior court decisions have little precedent value and may be cited merely for reference. The PRC government has introduced new laws and regulations relating to areas such as foreign investment, commerce, taxation and trade. However, the limited availability of published cases, the non-binding nature of prior decisions together with the relative inexperience of PRC’s judiciary give rise to uncertainties in the interpretation and enforcement of these new laws and regulations. Such uncertainties may undermine the ability of our shareholders to enjoy the protection given to them as shareholders under PRC laws and regulations.
Our activities in the PRC are and will continue to be subject to administrative review and require approval from various national and local agencies of the PRC government. Changes to PRC laws and regulations and rules on the foreign inverted enterprise preferential tax policies may affect our ability to secure the requisite governmental approval for our activities. This could be detrimental to our business and operating results.
Holders of our H Shares may have difficulty enforcing their rights.
As a company incorporated in the PRC that is offering its H Shares for listing on the Stock Exchange, we are subject to the Special Regulations and the Mandatory Provisions, as well as to the PRC Company Law and our Articles of Association. Upon listing of our H Shares on the Stock Exchange, the Hong Kong Listing Rules and the Hong Kong Takeovers Codes will become an additional basis for protection of our shareholders’ rights. Although we will be subject to the Hong Kong Listing Rules and the Hong Kong Takeovers Codes, holders of our H Shares will not be able to
—41— RISK FACTORS bring actions on the basis of violations of the Hong Kong Listing Rules or the Hong Kong Takeovers Codes, and must rely on the Stock Exchange and the SFC to enforce the Hong Kong Listing Rules or the Hong Kong Takeovers Codes, as the case may be.
The direct enforcement by our shareholders of any rights of shareholders in respect of violations of corporate governance procedures may be limited. In this regard, our Articles of Association and the Hong Kong Listing Rules provide that most disputes between holders of H Shares and our Company, Directors, Supervisors, officers or holders of legal person shares, arising out of our Articles of Association or the PRC Company Law and related regulations concerning the affairs of our Company, including the transfer of our shares, are to be resolved through arbitration by an arbitration tribunal in Hong Kong or the PRC, rather than by a court of law. See ‘‘Appendix VII — Summary of Articles of Association’’ for more information. Awards that are made by PRC arbitration authorities recognized under the Arbitration Ordinance (Chapter 341 of the Laws of Hong Kong) can be enforced in Hong Kong. Hong Kong arbitral awards are also enforceable in the PRC. However, to our knowledge, no action has been brought in the PRC by any holder of H shares of other companies to enforce an arbitral award, and we are uncertain as to the outcome of any action brought in China to enforce an arbitral award made in favor of holders of H shares.
The effect of amendments to the PRC Securities Law and the PRC Company Law may be uncertain.
Substantial amendments to the PRC Securities Law and the PRC Company Law came into effect on January 1, 2006. As a result, the State Council and the CSRC may revise the Special Regulations and the Mandatory Provisions and adopt new regulations and rules, to implement and take into account the amendments to the PRC Securities Law and the PRC Company Law. There can be no assurance that the revision of existing regulations and rules, and the adoption of new regulations and rules by the State Council and the CSRC, will not have a material adverse effect on the rights of holders of H Shares.
RISKS RELATING TO THE GLOBAL OFFERING
There has been no prior market for our Shares andtheOfferPricemaynotbeindicativeof prices that will prevail in the market.
There was no public market for our Shares prior to the Global Offering. The initial offer price range to the public for our Shares was the result of negotiations among us and the Joint Global Coordinators (on behalf of the Underwriters). The Offer Price may therefore differ significantly from the market price for the Shares following the Global Offering. However, the listing on the Stock Exchange does not guarantee that an active or liquid trading market for our Shares will develop following the Global Offering. You may not be able to resell your Shares at or above the Offer Price.
Sales, or perceived sales, of substantial amounts of H Shares in the public market after the Global Offering could decrease the value of your investment.
Before the Global Offering, there was no public market for our Shares. Immediately after completion of the Global Offering, we will have 1,478,773,000 Shares outstanding, of which 406,662,000 Shares, or approximately 27.5% (assuming the Over-allotment Option is not exercised), will be held by investors who subscribe for or purchase Shares in the Global Offering, while 1,072,111,000 Shares, or approximately 72.5% (assuming the Over-allotment Option is not exercised), will be held by our Promoters.
—42— RISK FACTORS
Pursuant to amendments to the PRC Company Law which came into effect on January 1, 2006, the Shares held by our Promoters may not be transferred until one year after the Listing Date. Thereafter, under our Articles, all of our Domestic Shares (including the Lanmax Unlisted Foreign Shares which will be converted into Domestic Shares upon the return by Lanmax to COAMC, SCIPI and Shanghai Belling upon expiry of the Existing Shareholders Lock Up Period, further details of which are set out in the section headed ‘‘Share Capital’’) may be converted into H Shares and become listed and tradable, subject to approval from the State Council or the State Council’s authorized approval authority and consent from the Stock Exchange. In addition, on January 11, 2005, the CSRC has approved the conversion of the Unlisted Foreign Shares held by Philips China and SCIP (HK) into Converted H Shares and we expect the Stock Exchange to approve their listing prior to the Listing Date, and therefore they may be freely transferred upon expiry of the Existing Shareholders Lock Up Period (being one year after the Listing Date), subject only to approval from the Ministry of Commerce.
If, upon satisfaction of the regulatory requirements described above, there are sales, or perceived sales, by our Promoters of substantial amounts of these H Shares in the public market, the prevailing market prices of our H Shares may be adversely affected. Furthermore, a drop in the trading price of our H Shares may weaken our ability to raise equity financing in the international capital markets.
Please refer to the section headed ‘‘Share Capital’’ for a more detailed discussion.
The market prices of our H Shares following the Global Offering may be volatile.
The price and trading volume of our Shares following the Global Offering may be affected by factors directly related to our business, such as variations in our revenue, profit, cash flows or announcements of new investments or strategic alliances. Market factors beyond our control such as sudden economic, political and social changes, natural disasters, terrorist attacks and epidemic outbreaks, may also adversely affect the price at which our Shares will trade. The price and trading volume of our H Shares may be highly volatile and may not be directly related to our financial or business performance.
Some of our current shareholders, who will remain our substantial shareholders following the Global Offering, may have different interests from that of our public shareholders, and will have influence on the adoption of shareholder resolutions after the Global Offering.
Each of Philips China, SCIPI, SCIP (HK) and COAMC, who are our current substantial shareholders, will, following the completion of the Global Offering (assuming the Over-allotment Option is not exercised), remain our substantial shareholders holding 27.65%, 24.74% (including our Shares held indirectly through SCIP(HK)), 17.24% and 12.05% of our Shares, respectively. These shareholders have each nominated Directors to our Board and as such, they will continue to have certain influence on the outcome of any corporate transaction or other matter submitted to our shareholders for approval, including mergers, consolidations, and the sale of all or substantially all of our assets. The interests of these shareholders could conflict with the interests of our other shareholders and, accordingly, any of them may take actions that favor its own interests and which may not be in the best interests of our other shareholders.
—43— RISK FACTORS
Forward-looking statements contained in this prospectus are subject to risks and uncertainties.
This prospectus contains certain statements that are ‘‘forward-looking’’ and uses forward- looking terminology such as ‘‘anticipate,’’ ‘‘believe,’’ ‘‘expect,’’ ‘‘estimate,’’ ‘‘may,’’ ‘‘ought to,’’ ‘‘should’’ or ‘‘will.’’ Those statements include, among other things, the discussion of our growth strategy and expectations concerning our future operations, liquidity and capital resources. Purchasers of our Shares are cautioned that reliance on any forward-looking statement involves risk and uncertainties and that, although we believe the assumptions on which the forward-looking statements are based are reasonable, any or all of those assumptions could prove to be inaccurate and as a result, the forward-looking statements based on those assumptions could also be incorrect. The risks and uncertainties in this regard include those identified in the risk factors discussed above. In light of these and other risks and uncertainties, the inclusion of forward-looking statements in this prospectus should not be regarded as representations by us that our plans and objectives will be achieved.
We strongly caution you not to place any reliance on any information contained in press articles or other media regarding our Company and/or the Global Offering.
There have been reports in certain news publications about the Company and/or the Global Offering, including the news articles in South China Morning Post, Hong Kong Economic Times, Sing Pao, Wen Wei Po and Apple Daily on March 10, 2006, in Hong Kong Economic Times and the Standard on March 16, 2006, and in Hong Kong Economic Times on March 17, 2006, which contained certain information about our Company and/or the Global Offering, including projections and other forward-looking information. We wish to emphasize to potential investors that we do not accept any responsibility for the accuracy or completeness of any media articles or reports as such articles or reports were not prepared or approved by us. We make no representation as to the appropriateness, accuracy, completeness or reliability of any of the projections or other forward- looking information, or of any assumptions underlying such projections or other forward-looking information. To the extent that any such statements are inconsistent with, or conflict with, the information contained in this prospectus, we disclaim them. Potential investors are cautioned to make their investment decisions on the basis of the information contained in this prospectus only and not to place any reliance on any other information.
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DIRECTORS’ RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS
This prospectus contains particulars given in compliance with the Hong Kong Companies Ordinance, the Securities and Futures (Stock Market Listing) Rules and the Hong Kong Listing Rules for the purpose of giving information to the public with regard to us. Our Directors collectively and individually accept full responsibility for the accuracy of the information contained in this prospectus and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement in this prospectus misleading.
UNDERWRITING
This prospectus is published solely in connection with the Hong Kong Public Offering, which forms part of the Global Offering. For applicants under the Hong Kong Public Offering, this prospectus and the Application Forms set out the terms and conditions of the Hong Kong Public Offering.
The listing of our H Shares on the Stock Exchange is sponsored by the Joint Sponsors, Goldman Sachs (Asia) L.L.C. and BOCI Asia Limited, both of whom are our independent sponsors under Rule 3A.07 of the Hong Kong Listing Rules.
The Hong Kong Public Offering is fully underwritten by the Hong Kong Underwriters in accordance with the terms of the Hong Kong Underwriting Agreement, subject to agreement on the Offer Price between the Joint Global Coordinators (on behalf of the Underwriters) and us on the Price Determination Date. The Global Offering is managed by the Joint Global Coordinators. For further details about the Underwriters and the underwriting arrangements, see the section headed ‘‘Underwriting.’’
CSRC APPROVAL
The CSRC granted its approval on January 11, 2005 for the conversion of the Shares held by Philips China and SCIP (HK) into the Converted H Shares, the Global Offering and the making of an application to list our H Shares on the Stock Exchange. In giving such approval, the CSRC accepts no responsibility for our financial soundness nor the accuracy of any of the statements made or opinions expressed in this prospectus or in the Application Forms.
HONG KONG LISTING ELIGIBILITY
We have satisfied the listing requirements under Rule 8.05(2) of the Hong Kong Listing Rules as set out below:
. we have a trading record of not less than three financial years;
. we have management continuity for at least the three preceding financial years, being the three years ended December 31, 2005. Please refer to the section headed ‘‘Directors, Supervisors, Senior Management and Employees — Management Continuity of our Company’’ for further details;
. we have ownership continuity and control for at least the most recent audited financial year, being the year ended December 31, 2005;
—45— INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
. assuming an Offer Price of HK$1.36 per H Share (being the lowest point of the Offer Price range stated in this prospectus) and without taking into account the exercise of the Over-allotment Option, our Company’s market capitalization will exceed HK$2.0 billion;
. our revenue for the year ended December 31, 2005 was approximately RMB931.6 million, which is higher than the HK$500.0 million (equivalent to RMB520.2 million) requirement; and
. our positive cashflow from operating activities for the three preceding financial years, being the three years ended December 31, 2005, in aggregate was approximately RMB779.0 million, which exceeds substantially the HK$100.0 million (equivalent to RMB104.0 million) requirement.
APPLICATION FOR LISTING ON THE STOCK EXCHANGE
We have applied to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Offer Shares to be issued or sold pursuant to the Global Offering (including any additional Offer Shares which may be issued or sold pursuant to the exercise of the Over-allotment Option) and the Converted H Shares. Dealings in our H Shares on the Stock Exchange are expected to commence on April 7, 2006. Save as disclosed in this prospectus, no part of our share or loan capital is listed on or dealt in on any other stock exchange and no such listing or permission to list is being or proposed to be sought in the near future.
HONG KONG H SHARE REGISTER AND STAMP DUTY
All H Shares issued or sold pursuant to applications made in the Hong Kong Public Offering and the International Placing will be registered on our H Share register of members to be maintained in Hong Kong. Our principal register of members will be maintained by us at our headquarters in the PRC.
Dealings in our H Shares registered in our H Share register will be subject to Hong Kong stamp duty. See ‘‘Appendix V — Taxation and Foreign Exchange.’’
PROFESSIONAL TAX ADVICE RECOMMENDED
Potential investors in the Global Offering are recommended to consult their professional advisors if they are in any doubt as to the taxation implications of subscribing for, purchasing, holding and dealing in our H Shares. None of our Company, the Selling Shareholder, the Joint Global Coordinators, the Joint Sponsors, the Underwriters, any of their respective directors or any other person or party involved in the Global Offering accepts responsibility for any tax effects on, or liabilities of, any person resulting from the subscription, purchase, holding or disposition of our H Shares.
—46— INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
REGISTRATION OF SUBSCRIPTIONS, PURCHASE AND TRANSFER OF H SHARES
We have instructed Computershare Hong Kong Investor Services Limited, our H Share registrar, and it has agreed, not to register the subscription, purchase or transfer of any H Shares in the name of any particular holder unless and until the holder delivers a signed form to the share registrar in respect of those H Shares bearing statements to the effect that the holder:
(i) agrees with us and each of our shareholders, and we agree with each shareholder, to observe and comply with the PRC Company Law, the Special Regulations and our Articles;
(ii) agrees with us, each of our shareholders, Directors, Supervisors and other members of senior management (a) to refer all differences and claims arising from the Articles of Association or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning the affairs of our Company to arbitration in accordance with our Articles, and (b) that any reference to arbitration shall be deemed to authorize the arbitration tribunal to conduct hearings in open session and to publish its award, which shall be final and conclusive. See ‘‘Appendix VI — Summary of Principal Legal and Regulatory Provisions;’’
(iii) agrees with us and each of our shareholders that (save for the Converted H Shares prior to expiry of the Existing Shareholders Lock Up Period unless approval for their transfer is obtained from the Ministry of Commerce) the H Shares in our Company are freely transferable by the holders thereof; and
(iv) authorizes us to enter into a contract on his behalf with each of our Directors and other members of senior management whereby such Directors and other members of senior management undertake to observe and comply with their obligations to shareholders as stipulated in our Articles.
A person applying for or purchasing the H Shares under the Global Offering is deemed, by his making an application or purchase, to have represented that he is not an associate (as such term is defined in the Hong Kong Listing Rules) of any of our Directors or our Promoters or a nominee of any of the foregoing.
RESTRICTIONS ON OFFER AND SALE OF H SHARES
Each person acquiring the Hong Kong Offer Shares will be required to, or be deemed by his acquisition of the Hong Kong Offer Shares to, confirm that he is aware of the restrictions on the offer and sale of the H Shares described in this prospectus.
No action has been taken to permit an offering of the Hong Kong Offer Shares or the distribution of this prospectus in any jurisdiction other than Hong Kong. Accordingly, this prospectus may not be used for the purpose of, and does not constitute, an offer or invitation in any jurisdiction or in any circumstances in which such an offer or invitation is not authorized or to any person to whom it is unlawful to make such an offer or invitation.
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United States
The Offer Shares have not been and will not be registered under the US Securities Act and may not be offered, sold, pledged or transferred within the United States, except to qualified institutional buyers in accordance with Rule 144A, or outside the United States in accordance with Rule 903 or Rule 904 of Regulation S.
The Offer Shares are being offered and sold outside the United States in reliance on Regulation S and within the United States to qualified institutional buyers in reliance on Rule 144A. In addition, until 40 days after the later of the commencement of the Global Offering and the completion of the distribution of the Offer Shares, an offer or sale of Offer Shares within the United States by any dealer (whether or not participating in the Global Offering) may violate the registration requirements of the US Securities Act if such offer or sale is made otherwise than in accordance with an exemption from, or in a transaction not subject to, such requirements or in accordance with Rule 144A.
The Offer Shares have not been approved or disapproved by the US Securities and Exchange Commission, any state securities commission in the United States or any other US regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the Global Offering or the accuracy or adequacy of this prospectus or the offering circular relating to the International Placing. Any representation to the contrary is a criminal offence in the United States.
Canada
The Offer Shares may not be offered or sold, directly or indirectly, in any province or territory of Canada or to or for the benefit of any resident of any province or territory of Canada, except pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made and therein only by persons permitted under applicable laws to sell the Offer Shares.
United Kingdom
This prospectus is directed only at persons who (i) are outside the United Kingdom or (ii) have professional experience in matters relating to investments, or (iii) are persons falling within Article 49(2)(a) to (d) (‘‘high net worth companies, unincorporated associates, etc.’’) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons together being referred to as ‘‘relevant persons’’). This prospectus must not be acted on or relied on by persons in the United Kingdom who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. All sales of the Offer Shares will comply with all applicable provisions of the Financial Services and Markets Act 2000 (the ‘‘FSMA’’) with respect to anything done in relation to the Global Offering and the Offer Shares in, from, or otherwise involving the United Kingdom. No person may communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Offer Shares in circumstances in which Section 21(1) of the FSMA applies.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Offer Shares may not be circulated or
—48— INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING distributed, nor may the Offer Shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the ‘‘SFA’’), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the Offer Shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the Offer Shares under Section 275 of the SFA except:
(1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
PRC
This prospectus does not constitute a public offer of the Offer Shares, whether by way of sale or subscription, in the PRC. The Offer Shares are not being offered or sold and may not be offered or sold directly or indirectly in the PRC or to or for the benefit of, legal or natural persons of the PRC. According to the laws and regulatory requirements of the PRC, the Offer Shares shall only be offered or sold to natural or legal persons in Taiwan, Hong Kong or Macau or any country other than the PRC by means of this prospectus or otherwise.
European Economic Area
In relation to each member state of the European Economic Area (the ‘‘EEA’’) which has implemented the Prospectus Directive 2003/71/EC (each, a ‘‘Relevant Member State’’), with effect from and including the date on which the Prospectus Directive 2003/71/EC is implemented in that Relevant Member State (the ‘‘Relevant Implementation Date’’), no offer of the Offer Shares may be made to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Offer Shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive 2003/71/EC, except offers of the Offer Shares may be made, with effect from and including the Relevant Implementation Date, to the public in that Relevant Member State at any time: (a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized
—49— INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING or regulated, whose corporate purpose is solely to invest in securities; (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43.0 million and (3) an annual net turnover of more than 50.0 million, as shown in its last annual or consolidated accounts; or (c) in any other circumstances which do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive 2003/71/EC.
Japan
The Offer Shares have not been and will not be registered under the Securities and Exchange Law of Japan. Accordingly, the Offer Shares may not be offered or sold, directly or indirectly, in Japan or to or for the benefit of any resident of Japan, except pursuant to an exemption from the registration requirements of, otherwise in compliance with, the Securities and Exchange Law of Japan, and otherwise in compliance with any other applicable requirements of Japanese law. As used in this paragraph, a ‘‘resident of Japan’’ means any person residing in Japan, any corporation or other entity organized under the laws of Japan except for its branches or other offices located outside Japan and, with respect to any corporation or other legal entity organized under a law other than Japanese law, its branches and offices located in Japan.
United Arab Emirates
The information contained in this prospectus does not constitute a public offer of securities in the United Arab Emirates in accordance with the Commercial Companies Law (Federal Law No. 8 of 1984 (as amended)) or otherwise and is not intended to be a public offer and is addressed only to persons who are sophisticated investors.
Australia
No prospectus or other disclosure document has been lodged with, or registered by, the Australian Securities and Investments Commission (‘‘ASIC’’) in relation to the Global Offering. This prospectus does not constitute a prospectus or other disclosure document under the Corporations Act 2001 (Cth) (‘‘Corporations Act’’) and does not purport to include the information required for a disclosure document under the Corporations Act.
Any offer in Australia of the Offer Shares under this prospectus may only be made to persons (‘‘Exempt Investors’’) who are ‘‘sophisticated investors’’ (within the meaning of section 708(8) of the Corporations Act), to ‘‘professional investors’’ (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions in section 708 of the Corporations Act so that it is lawful to offer the Offer Shares without disclosure to investors under Chapter 6D of the Corporations Act.
Offer Shares applied for by Exempt Investors in Australia must not be offered for sale in Australia for 12 months from the date of issue by the Company under the Global Offering or sale (as applicable), except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the sale is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring Offer Shares must observe such Australian on-sale restrictions.
—50— INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
STABILIZATION
In connection with the Global Offering, Goldman Sachs (Asia) L.L.C. (the ‘‘Stabilizing Manager’’), or any person acting for it, on behalf of the Underwriters, may over-allocate or effect any other transactions with a view to stabilizing or maintaining the market price of the H Shares at a level higher than that which might otherwise prevail in the open market for a limited period ending 30 days after the last day for lodging of applications under the Hong Kong Public Offering. However, there is no obligation on the Stabilizing Manager or any person acting for it to conduct any such stabilizing activity, which, if commenced, will be done at the discretion of the Stabilization Manager and may be discontinued at any time. Any such stabilizing activity is required to be brought to an end within 30 days of the last day for lodging of applications under the Hong Kong Public Offering. The number of H Shares which can be over-allocated will not exceed the number of H Shares which may be issued under the Over-allotment Option, namely 60,998,000 H Shares, which is approximately 15% of the H Shares initially available under the Global Offering.
Stabilizing action permitted in Hong Kong pursuant to the Securities and Futures (Price Stabilization) Rules includes (a) primary stabilization, including purchasing, or agreeing to purchase, any of the H Shares or offer or attempt to do so for the purpose of preventing or minimizing any reduction in the market price of the H Shares, and (b) ancillary stabilization in connection with any primary stabilizing action, including (i) over-allocation for the purpose of preventing or minimizing any reduction in the market price, (ii) selling or agreeing to sell Shares so as to establish a short position in them for the purpose of preventing or minimizing any reduction in the market price, (iii) purchasing or subscribing, or agreeing to purchase or subscribe for shares pursuant to the Over-allotment Option in order to close out any position established under (i) or (ii) above, (iv) selling or agreeing to sell Shares to liquidate a long position held as a result of those purchases or subscriptions and (v) offering or attempting to do anything described in (ii), (iii) or (iv). The Stabilizing Manager may take any one or more of the stabilization actions described above.
The Stabilizing Manager, or any person acting for it, may, in connection with the stabilizing action, maintain a long position in the H Shares. There is no certainty regarding the extent to which and the time period for which the Stabilizing Manager, or any person acting for it, will maintain any such position as such actions are at the discretion of the Stabilizing Manager or any person acting for it. In the event of any liquidation of any such long position, there may be an impact on the market price of the H Shares. Stabilizing action cannot be taken to support the price of any H Shares for longer than the stabilizing period, which begins on the commencement of trading of the H Shares and ends 30 days from the last day for lodging of applications under the Hong Kong Public Offering. The stabilizing period is expected to expire on April 29, 2006 and after this date demand for the H Shares and, therefore, their price could fall. Investors should be aware that the price of the H Shares cannot be assured to stay at or above the Offer Price by the taking of any stabilizing action. Stabilizing bids may be made or transactions effected in the course of stabilizing action at any price below the Offer Price. Such transactions may be effected in all jurisdictions where it is permissible to do so, in each case in compliance with all applicable laws and regulatory requirements.
Stabilization is a practice used by underwriters in some markets to facilitate the distribution of securities. To stabilize, underwriters may bid for, or purchase, the newly issued securities in the secondary market, during a specified period of time, to retard and, if possible, prevent a decline in the initial public offer price of the securities. In Hong Kong and certain other jurisdictions, the price at which stabilization is effected is not permitted to exceed the Offer Price.
—51— INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
EXCHANGE RATE CONVERSION
Solely for your convenience, this prospectus contains translations of certain Renminbi amounts into Hong Kong dollars and US dollars at specified rates. You should not construe these translations as representations that the Renminbi amounts could actually be converted into Hong Kong dollar or US dollar amounts at the rates indicated or at all.
In this prospectus, all translations of Renminbi into Hong Kong dollars and of Renminbi into US dollars have been made at the rate of RMB1.0403 to HK$1 and RMB8.0702 to US$1, being the PBOC Rate prevailing on December 31, 2005, with the exception of the financial information as at February 28, 2006, the Latest Practicable Date, the translation of Renminbi into US dollars of which has been made at the rate of RMB8.0415 to US$1, being the PBOC Rate prevailing on February 28, 2006.
Further information on exchange rates is set out in ‘‘Appendix V — Taxation and Foreign Exchange.’’
ROUNDING
Any discrepancies in any table between totals and sums of amounts listed therein are due to rounding.
—52— DIRECTORS AND SUPERVISORS
DIRECTORS
Name Address Nationality
Executive Directors
LIU Tony Yuhai ( ) 6H American President ...... 1270 Hongqiao Road Shanghai PRC
CHENG Jianyu ( ) No.8,Lane79 Chinese Vice President, Chief financial Yueyang Road officer...... Shanghai PRC
Non-executive Directors
RUAN Yanhua ( ) Room 3102, No. 32, Lane 255 Chinese Chairman of the Board...... South Wanping Road Shanghai PRC
LEAR Anthony 16A, Tower 2, No. 41 Hengshan Road British Vice Chairman of the Board .. Shanghai PRC
ZHU Peiyi ( ) Room 2905, No. 1, Lane 500 Chinese Vice Chairman of the Board .. Tianyaoqiao Road Shanghai PRC
ZHU Jian ( )...... 7B,Block3,No.800AnyuanRoad Chinese Shanghai PRC
ZHOU Weiping ( )...... Room 401, No. 19, Lane 300 Chinese West Xianxia Road Changning District Shanghai PRC
VAN BOMMEL Petrus Antonius Villapark 29 Dutch Maria...... Geldrop The Netherlands
—53— DIRECTORS AND SUPERVISORS
Name Address Nationality
Independent non-executive Directors
BECZAK Thaddeus Thomas . . . Flat 302 Bowen Mansion American 7C Bowen Road Mid-Levels Hong Kong
SHEN Weijia ( ) ...... Room 804, No. 14, Lane 118 Chinese Central Yanji Road Shanghai PRC
WATKINS James Arthur ...... 63 Royal Castle British 23 Pik Sha Road Clearwater Bay Sai Kung New Territories Hong Kong
SUPERVISORS
Name Address Nationality
CHANG Yueh ( ) No. 57, Lane 99 Chinese Chairman of the Supervisory Lianmin Road Committee ...... Qingpu District Shanghai PRC
HUANG Jihua ( ) ...... Room 17-902 Chinese 71 East Chang Li Road Shanghai PRC
MANOCHAAjit...... 3308ViuSantoLane American San Jose CA 95148 USA
SHEN Qitang ( ) ...... Room 1101, No. 5, Lane 768 Chinese Dingxi Road Shanghai PRC
—54— DIRECTORS AND SUPERVISORS
Name Address Nationality
WANG Xiangqun ( ) No. 122, Lane 265 Chinese Zhenning Road Shanghai PRC
XU Songneng ( ) Room 1608, Building No. 1 Chinese No. 111 Zhongcao Road Shanghai PRC
YANG Yanhui ( ) Room 1701, No. 4, Lane 288 Chinese Wending Road Shanghai PRC
COMMITTEES
Members of the WATKINS James Arthur (Chairman) Audit Committee BECZAK Thaddeus Thomas LEAR Anthony SHEN Weijia ZHU Peiyi
Members of the Remuneration RUAN Yanhua (Chairman) Committee SHEN Weijia WATKINS James Arthur
—55— PARTIES INVOLVED IN THE GLOBAL OFFERING
Joint Global Coordinators, Goldman Sachs (Asia) L.L.C. Joint Bookrunners, Joint 68th Floor, Cheung Kong Center Lead Managers and Joint 2 Queen’s Road Central Sponsors Hong Kong
BOCI Asia Limited 26th Floor, Bank of China Tower 1 Garden Road Central Hong Kong
Auditors and Reporting Ernst & Young Accountants Certified Public Accountants, Hong Kong 18th Floor, Two International Finance Centre 8 Finance Street Central Hong Kong
Legal Advisors to our as to Hong Kong law and United States law: Company Freshfields Bruckhaus Deringer 11th Floor Two Exchange Square Central Hong Kong
as to PRC law:
Jingtian & Gongcheng 15th Floor, The Union Plaza 20 Chaoyangmenwai Dajie Beijing 100020 PRC
Legal Advisors to as to Hong Kong law and United States law: the Underwriters Linklaters 10th Floor, Alexandra House Chater Road Central Hong Kong
as to PRC law:
Haiwen & Partners Room 1711, Beijing Silver Tower 2 Dong San Huan North Road Chaoyang District Beijing 100027 PRC
—56— PARTIES INVOLVED IN THE GLOBAL OFFERING
Property Valuer Sallmanns (Far East) Limited 22nd Floor, Siu On Centre 188 Lockhart Road Wanchai, Hong Kong
Receiving Banker Bank of China (Hong Kong) Limited 1 Garden Road Central Hong Kong
Compliance Advisor GoldBond Capital (Asia) Limited 39th Floor, Tower 1 Lippo Centre 89 Queensway Hong Kong
—57— CORPORATE INFORMATION
Address in the PRC 385 Hongcao Road Shanghai 200233 PRC
Place of Business 8th Floor in Hong Kong Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong
Joint Company Secretaries LU Qiuhan (holder of PRC Lawyer Qualification Certificate) SUEN Pui Yee, Samantha FCS, FCIS, FTIHK
Qualified Accountant QIAO Xin AICPA
Authorized Representatives CHENG Jianyu No.8,Lane79 Yueyang Road Shanghai PRC
LU Qiuhan Room 301 No. 12, Lane 300 Zonglu Road Shanghai PRC
Alternate Authorized SUEN Pui Yee, Samantha Representatives 8th Floor Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong
WATKINS James Arthur 63 Royal Castle 23 Pik Sha Road Clearwater Bay Sai Kung New Territories Hong Kong
Hong Kong Share Registrar Computershare Hong Kong Investor Services Limited and Transfer Office Rooms 1712–1716 17th Floor, Hopewell Centre 183 Queen’s Road East Hong Kong
—58— CORPORATE INFORMATION
Principal Bankers Credit Agricole Indosuez, Calyon Shanghai Branch 36th Floor, China Merchants Tower 161 Lujiazui Road East Pudong New Area Shanghai 200120 PRC
Bank of China, Shanghai Branch, Xu Hui Sub-Branch 509 Cao Bao Road Shanghai 200233 PRC
Bank of Communications, Shanghai Branch 200 Jiangxizhong Road Shanghai 200002 PRC
DBS Bank Ltd, Shanghai Branch 28th Floor, Azia Center 133 Yin Cheng Bei Road Pudong, Shanghai 200120 PRC
ABN AMRO Bank N.V. Shanghai Branch 29th Floor, Jin Mao Tower No. 88 Shiji Dadao (Century Boulevard) Pudong New Area Shanghai 200121 PRC
—59— INDUSTRY OVERVIEW
SEMICONDUCTORS
Semiconductors are the building blocks used in a broad range of electronic products for applications in computing, communications, consumer electronics, as well as automotive, medical and industrial markets. Semiconductors have the distinct features of being neither highly resistant to electricity conduction, nor highly conductive of electricity. They are therefore used to control the electricity flow in electronic devices. The development in semiconductor technologies over the years has allowed for the production of semiconductors with greater performance levels, functionality and features at lowered costs. Semiconductors are generally classified as either discrete devices, which are individual transistors, or integrated circuits (or ICs), in which a number of transistors are combined to form a more complicated electronic circuit.
Semiconductors are used to process two types of signals, namely, digital and analog. The main types of semiconductors include:
. digital semiconductors, which process digital signals, including micro-processors, micro- controllers, memory and other logic devices. Digital signals represent the sequence of binary digits ‘‘1’’ and ‘‘0’’ (or ‘‘on’’ and ‘‘off’’);
. analog semiconductors, which process analog signals, including amplifiers, data converters, regulators and interface circuits. Analog signals are real world phenomena such as sound, light, pressure, motion, temperature, electrical currents and radio waves, and vary over a range of values. Analog semiconductors have the ability to convert signals back and forth between the analog and digital environments, and therefore act as an interface between the real world and digital processes; and
. mixed signal semiconductors, which contain both analog and digital circuitry on the same die to process a mixture of analog and digital signals.
According to IC Insights, the top ten foundries (digital and analog) in the world in 2004, by sales, were (in order): Taiwan Semiconductor Manufacturing Corporation, United Microelectronics Corporation, Chartered Semiconductor, Semiconductor Manufacturing International Corporation, Vanguard International Semiconductor Corporation, DongbuAnam Semiconductor Inc., Shanghai Huahong NEC Electronics Co. Ltd., Systems on Silicon Manufacturing Co. Pte. Ltd., Jazz Semiconductor and the Company.
Analog versus Digital Semiconductors
Most electronic products make use of both digital and analog semiconductors, and the percentage content of analog and digital semiconductors will depend on the functionality a particular product requires. As analog semiconductors act as an interface with signals from the real world, they form an integral and indispensable part of any electronic product which requires translation of digitally processed signals.
Analog and digital semiconductors serve vastly different purposes and cannot be replaced by each other. In most applications, the use of both analog and digital semiconductors is necessary.
Digital semiconductors cannot process or perform calculations from analog input signals. Any electronic device that requires human interaction needs analog semiconductors. In order for digital semiconductors to process any real-world input (e.g. sound and light), the analog input signal must first be converted to a digital signal by an analog semiconductor.
—60— INDUSTRY OVERVIEW
The converted digital signal can then be fed into the digital semiconductor for processing. The output from the digital semiconductor must also be converted back to an analog signal through the use of analog semiconductors before it can be deciphered by humans.
For example, when a person conducts a call through a cellular phone, his voice (a sound wave) is first processed by analog semiconductors and converted into a stream of digital signals. The digital signal is then processed by a series of digital semiconductors and transmitted to the other party’s mobile phone via the operator’s network. Once the other party’s mobile phone receives the stream of digital signal, the digital signal is processed and eventually converted back into a sound wave by the use of analog semiconductors. The sound wave is then reproduced on the speaker so the other party can hear the voice of the caller.
Due to their distinct functionalities, the technical designs and manufacturing requirements of analog and digital semiconductors are vastly different. Digital semiconductors need to process large amounts of complex mathematics quickly. The increasing demand from ever more advanced software applications with greater functionalities has continually driven the demand for faster digital semiconductors with greater computing power. Thus, the digital semiconductor industry is characterized by high capital expenditures and high investment in research and development and advanced manufacturing capabilities that enable the production of fast digital semiconductors.
The technical requirements for analog semiconductors, however, do not change as quickly as those for digital semiconductors, and thus, analog semiconductor designs typically enjoy a much longer design life. While it is possible to manufacture analog devices with the most advanced technologies, it is often not necessary nor desirable to do so as they can be produced more cost- effectively using less advanced technologies. Thus, the analog semiconductor industry has a lower capital expenditure requirement compared to its digital counterpart, and is typically less cyclical.
MANUFACTURING SEMICONDUCTORS
The semiconductor manufacturing process creates finished dies on a silicon wafer. The key raw material for a semiconductor foundry is a ‘‘raw wafer,’’ which is a circular silicon plate. Raw wafers are available in different diameters (for example 5-inch, 6-inch or 8-inch). Different wafer sizes are needed to cater for end products with varying specifications and cost considerations. Different equipment capabilities are necessary to process different size wafers. A single wafer may have several hundred copies of the same semiconductor design on it, each of which is referred to as a ‘‘die.’’ A raw wafer with a larger diameter has a greater surface area and is capable of fitting a greater number of dies. Given the same design and process technology, the unit cost falls as the size of the wafer used increases.
Process technology
Functionality, speed and size are the main competitive characteristics of semiconductors. The greater the number of transistors and other devices that can be built onto a chip, the more functions it can perform. Manufacturers and developers therefore seek ways to increase the number of transistors and other electronic components that can be built onto chips by reducing their sizes. Linewidths used in manufacturing ICs are measured in microns or nanometers in the case below 0.1 micron. The linewidth of the circuitry of each semiconductor is used to describe how advanced the related process technology is. By shrinking linewidth sizes, the number of transistors per die increases, resulting in improved performance per die and increasing the number of dies on a given wafer, thereby boosting the performance of each wafer.
—61— INDUSTRY OVERVIEW
The choice of process technologies used in the semiconductor manufacturing process is critical. Process technologies are the set of design rules, electrical specifications and parameters and process steps implemented for manufacturing the critical dimensions of the patterned features of the circuitry of semiconductors. Producing analog semiconductors normally require a platform of bipolar or BiCMOS process technologies, while producing power products normally requires HVMOS or MOSFET technologies.
Foundry customers define the process technology and wafer size that they will use based on their technology needs, capabilities, and cost considerations. Although it is possible to use the most advanced technology on a small wafer, it is not cost-effective as the unit cost is too high. Thus, small linewidths are often associated with large wafer sizes as the lower unit cost from producing more dies on the same wafer would allow the unit cost to be kept at a level that makes the product commercially viable.
Therefore, equipment manufacturers often design machines that can handle smaller linewidths and greater wafer sizes at the same time. Currently, 5-inch wafers are typically used for designs with linewidth of 0.8 micron and above, 6-inch wafers are typically used for designs with linewidth of 0.6 micron, and 8-inch wafers are typically used for designs with 0.35 micron or below.
At present, the largest wafer size used in manufacturing is 12-inch. However, such a large wafer size is currently only used in digital semiconductor production. Due to different technical requirements, analog semiconductor manufacturing requires less advanced technology compared to digital semiconductor manufacturing. The manufacturing technologies used in analog semiconductor manufacturing is often one or more generations behind that used in digital semiconductor manufacturing. Currently, the largest wafer size used in analog semiconductor production is 8-inch.
While 8-inch is the largest wafer size in use, there are continuing demands for 5-inch and 6- inch wafers in analog production. Many older analog semiconductor designs continue to find applications in new electronic equipment and producing them using existing and simpler technology is not only technically sufficient, but more cost-effective.
Types of Analog Semiconductors
Analog semiconductors integrate multiple discrete functions into a single chip. According to the Semiconductor Industry Association, these can be classified as standard linear ICs and application specific standard products.
Standard linear ICs are multimarket products with general applications. They are used in most electronic products with a diverse range of applications. Standard linear ICs include fundamental analog building blocks, such as amplifiers, data converters, voltage regulators, references and interface circuits. Compared to application specific standard products, we believe that standard linear ICs tend to have longer life cycles of up to ten years. Manufacturing standard linear ICs typically use less sophisticated process technologies.
Application specific standard products are designed for specific applications. Since the application of an application specific standard product is determined at the time of its design, application specific standard products usually have customized specifications and have higher levels of integration compared to standard linear integrated circuits. Generally, application specific standard products are developed for high volume electronic systems and demand greater engineering skills and integration. It follows that manufacturing application specific standard
—62— INDUSTRY OVERVIEW products require higher production volumes to justify the greater capital investments involved. Application specific standard products normally have life cycles that mirror the product life cycles of the end product. Typically, an application specific standard product will not be used outside the end application for which it is designed. Application specific standard products are often mixed-signal semiconductors and are produced based on more sophisticated geometric manufacturing processes.
The following diagram illustrates the market size of standard linear ICs and application specific standard products and their respective year-on-year growth rates.
Analog Semiconductor Revenue Projections
Source: Semiconductor Industry Association, November 2005
THE ANALOG SEMICONDUCTOR MARKET
According to the Semiconductor Industry Association, analog semiconductor sales worldwide was estimated to be US$31.7 billion in 2005, representing approximately 13.9% of the overall semiconductor market. While the overall semiconductor market recorded a compounded annual growth rate in sales of only 4.4% between 1995 and 2004, sales of analog semiconductors grew considerably faster than the overall semiconductor market, recording a compound annual growth rate of 7.3% between 1995 and 2004.
We believe that growth in the analog semiconductors market is largely due to the increased content of analog semiconductors in electronic products. For example, the continuing development of digital electronic products are increasingly relying on analog semiconductors to manage power
—63— INDUSTRY OVERVIEW and to connect with the real world. According to the Semiconductor Industry Association, the analog semiconductor market, in terms of sales, is projected to grow at a compound annual growth rate of 10.5% between 2004 and 2008.
The analog semiconductor market is characterized by lower cyclicality and greater price stability compared to the digital semiconductor market. As shown in the diagram below, the analog semiconductor market has enjoyed greater stability than the overall semiconductor market since the mid-1990s. In particular, growth of the analog semiconductor market in terms of sales ranged from negative 24.0% to 38.2% between 1995 and 2004 while growth in sales of the overall semiconductor market during the same period ranged from negative 32.0% to 36.8%.
The following diagram illustrates the size of the analog semiconductor and total semiconductor markets in terms of revenue, along with their respective year-on-year growth rates.
Analog and Total Semiconductor Market Revenues
Source: Semiconductor Industry Association, November 2005
Characteristics of the Analog Semiconductor Industry
We believe that the following factors characterize the analog semiconductor market:
Relative scarcity of design engineers and importance of individual contributions: Relative to digital circuits, designing analog semiconductors requires greater customization and fine-tuning to achieve the targeted performance specifications. While digital semiconductor designs are widely taught in colleges and universities, analog semiconductor design knowledge tends to be acquired through years of ‘‘on-the-job’’ practical experience and training. Consequently, there tends to be a limited supply of skilled analog semiconductor design engineers, which creates high barriers of entry to potential new industry entrants. In general, analog semiconductor design requires greater variety and less repetition of circuit
—64— INDUSTRY OVERVIEW elements compared to digital semiconductor design. Hence, computer-aided design tools may not achieve the accuracy necessary in modeling analog semiconductors. As a result, compared to designing digital semiconductors, designing analog semiconductors relies more heavily on the knowledge and skills of a relatively smaller number of analog semiconductor design engineers.
Market diversity and niche focus: The analog semiconductor market is comprised of fragmented market segments, offering a diverse range of products for a variety of widely different applications. For each application, different customers may have unique design requirements such as specific resolution, accuracy, linearity, speed and power. Therefore, analog semiconductor suppliers often offer a wider range of device types in smaller quantities to a more diverse group of customers and are less dependent upon a particular product or customer compared to digital semiconductor manufacturers. In addition, unlike digital semiconductors, which are easily substituted, analog semiconductors have distinctive design features. We believe that such uniqueness eliminates any opportunities for substitution of analog semiconductors.
Longer product life cycles: Analog semiconductors are usually tailor-made to perform specific functions in an end product. As a customer’s choice of analog semiconductors is dependent on the design of the end product, manufacturing analog semiconductors requires greater customization, integration and precision than their digital counterparts. In addition, the performance characteristics of analog semiconductors are less predictable than the digital semiconductors. Therefore, when a customer makes its choice of analog semiconductors it will generally use the same analog semiconductors for a long period of time. Customers are also likely to commit to subsequent generations of the same analog semiconductor. As a result, analog semiconductors usually have longer product life cycles.
Relatively lower capital requirements: Digital semiconductor manufacturers compete by shrinking linewidths, increasing wafer sizes (from 6-inch to 8-inch to 12-inch) and increasing circuit densities to maximize performance and functionality and to reduce costs. Digital semiconductor manufacturers therefore require ‘‘cutting-edge’’ process technologies and state-of-the-art wafer fabrication equipment which may require significant capital investments. In contrast, analog semiconductors use process technologies based on larger linewidths and rely on less sophisticated manufacturing facilities which could be purchased at a fraction of the original cost. It follows that foundries producing analog semiconductor can achieve higher profitability at relatively lower utilization rates compared to digital facilities due to the lower capital expenditures and depreciation costs.
Relatively stable pricing and higher gross margins: The significant barriers-to-entry created by the scarcity of analog semiconductor design engineers, the need for greater customization and precision in designing and manufacturing analog semiconductors, the diversity and niche focus of the analog semiconductor market and the longer life cycles of analog semiconductors help maintain a relatively stable pricing environment for analog semiconductors. The combination of relatively stable pricing trends and lower manufacturing costs generally lead to higher gross margins across the analog semiconductor market.
—65— INDUSTRY OVERVIEW
Emergence of Dedicated Foundries Producing Analog Semiconductors and Its Impact on Analog Semiconductor Manufacturing
The semiconductor industry has historically been comprised primarily of IDMs that design, manufacture, test, package and market their own semiconductor products. Save for 2001, when the global semiconductor industry suffered steep decline, foundry sales have registered growth rates since 1998.
Most foundry sales are to IDMs and fabless semiconductor companies. Fabless semiconductor companies focus on the design of semiconductors and rely on the manufacturing capacities of dedicated foundries to produce their finished products. In contrast, IDMs have their own manufacturing facilities but are shifting more of their manufacturing processes to dedicated foundries. IDMs which produce analog semiconductors have been benefiting from the emergence of dedicated foundries producing analog semiconductors.
The emergence of dedicated analog foundries producing analog semiconductors has allowed suppliers to expand their analog semiconductor product lines without having to add manufacturing capacity. In particular, since the cost of establishing a fab has increased significantly over the years, IDMs and fabless semiconductor companies are able to reduce their internal capital investments by using foundry services to substantially minimize their capital risks.
Dedicated foundries producing analog semiconductors have also enabled suppliers to increase their choice of available analog semiconductors. Semiconductor companies are increasingly relying on dedicated foundries as key sources of new technology development. Since dedicated foundries tend to focus their investments on enhancing manufacturing processes and technologies and smaller semiconductor companies cannot afford to research, develop and implement the next generation of process technology on their own, they are utilizing dedicated foundries to give them ready access to advanced manufacturing process technologies and production capacities which they do not necessarily possess. We believe that by utilizing dedicated foundries, smaller semiconductor companies can more efficiently allocate capital, research and development and management resources.
In order to compete successfully, semiconductor companies need to reduce the time it takes to bring a product to market and increase their manufacturing yields. While IDMs build fabs for their own use, dedicated foundries can utilize capacity more efficiently than IDMs by focusing on manufacturing for a broader range of customers. Further, we believe that other foundries which focus their investments on manufacturing techniques, quality and capabilities, can generally achieve higher manufacturing yields. It follows that by outsourcing the manufacturing process to dedicated foundries, IDMs can generate higher margins, minimize the lead times and achieve lower costs. Therefore, IDMs are increasingly using dedicated foundries as an extension of their own manufacturing infrastructure and to better manage their capacity.
Fabless semiconductor companies are relying on dedicated foundries, rather than IDMs, to produce their application-specific standard products. We believe that competing IDMs and fabless semiconductor companies may be reluctant to work with and provide confidential information to IDMs that manufacture products which may compete with each other. Hence, we believe that there are significant growth prospects for dedicated foundries producing analog semiconductors with a diverse portfolio of specialty process technologies and product application expertise.
—66— INDUSTRY OVERVIEW
THE SEMICONDUCTOR INDUSTRY IN THE PRC AND ITS EMERGENCE AS A GLOBAL ELECTRONICS MANUFACTURING CENTER
The growth in the PRC’s annual per capita disposable income has fuelled growth in the domestic sales of electronic products. For example, according to CCID Consulting,thedomestic market for electronic information products in terms of sales grew by 40% to over US$320 billion in 2004, making PRC the world’s largest household electronic products manufacturer in the world.
Rapid growth of the domestic information industry along with the shift of the global electronic manufacturing capacity into China continues to fuel the growth in domestic semiconductor sales. According to CCID Consulting, overall sales of the PRC integrated circuit market reached over US$35 billion in 2004, representing a compound annual growth rate of 32.4% since 2000. Citing the industry-wide cyclical slowdown in 2005, CCID Consulting predicts that the PRC semiconductor market will grow at a lower growth rate of 17.2% in 2005 compared with that in 2004; however, the market is expected to turn around in 2006 with a projected growth rate of 25.2%. By 2009, the overall sales of the integrated circuit market in China is expected to reach US$116 billion, representing a compound annual growth rate of 26.6% since 2004.
Further, PRC’s domestic production capacity of integrated circuit remains relatively small, representing only 3.7% of worldwide integrated circuit market in 2004, with over 80% of the PRC’s semiconductor demand being met by imports. The disparity between the PRC’s increasing demand for semiconductor products and the domestic supply of these products suggests that there is still room for developing the PRC’s domestic semiconductor manufacturing capacity to satisfy the PRC’s domestic needs.
The PRC is emerging as a global manufacturing center for electronic products that are sold both within the PRC and abroad. We believe this trend will continue due to its well-educated labor force, significantly lower costs of operations, large domestic market for semiconductors and geographical proximity to Japan, Hong Kong, Taiwan, Singapore and Korea. There are presently over 470 domestic integrated circuit design companies based in the PRC. We believe these integrated circuit design companies will become a source for increased demand for foundry services in the PRC.
—67— HISTORY, CORPORATE STRUCTURE AND REORGANIZATION
OUR HISTORY
We were initially incorporated in October 1988 as a Sino-foreign equity joint venture. Our former name was Philips Semiconductor Corporation of Shanghai, and we were a joint venture between N.V. Philips’ Gloeilampen Fabrieken (‘‘NV Philips’’) and (Shanghai No. 7 Radio Factory), who effectively held shares in our Company on behalf of itself and (Shanghai Jiushi Company), (Shanghai No. 5 Components Factory), (Shanghai No. 19 Radio Factory) (in the proportions of 14.7%, 14.7%, 14.7% and 4.9% respectively) and later, 24.5% on behalf of (Bank of China Shanghai Trust Consulting Company). We were initially established to exclusively supply analog semiconductors to the Philips Group. As part of this partnership, the Philips Group entered into various technology transfers and cooperation arrangements with us to allow us to manufacture, sell and develop analog semiconductors to international quality standards and which are competitive in price. In 1995, Northern Telecom Ltd (‘‘Nortel’’) of Canada (now renamed Nortel Network Limited) became our joint venture partner and we changed our name to (Advanced Semiconductor Manufacturing Corporation of Shanghai). Following Nortel’s investment in us, we transformed into a dedicated analog foundry, providing foundry services to the Philips Group as well as other independent third party customers.
From 1992, until the Reorganization in 2003, our shareholding went through a number of changes:
. In 1992, Shanghai No. 19 Radio Factory and Shanghai No. 5 Components Factory transferred their entire respective shareholdings in our Company, being 4.9% and 14.7%, and Shanghai No. 7 Radio Factory transferred part of its shareholding in our Company, being 4.9% to Bank of China Shanghai Trust Consulting Company, a subsidiary of Bank of China, Shanghai Branch.
. In 1994, Shanghai Jiushi Company and Shanghai Trust Consulting Company cancelled their arrangements for Shanghai No. 7 Radio Factory to hold shares on their behalf. In 1994, following an increase in the registered share capital in our Company through shareholder participation, Bank of China Shanghai Trust Consulting Company, Shanghai Jiushi Company and Shanghai No. 7 Radio Factory each held 18%, 8% and 2% of shares in our Company, respectively.
. In 1996, Bank of China Shanghai Trust Consulting Company was wound up and Bank of China, Shanghai Branch acquired its assets and liabilities, including Bank of China Shanghai Trust Consulting Company’s 8% shareholding in our Company.
. In 2000, Nortel transferred its entire interest in the Company to Shanghai Belling, as Nortel had decided to exit the semiconductor business to focus on communication network equipments.
. On November 21, 2002, Bank of China, Shanghai Branch and Shanghai No. 7 Radio Factory transferred their respective shareholdings, being 18% and 2%, in the Company to COAMC, while Shanghai Jiushi Company transferred its 8% interest in the Company to SCIPI. COAMC’s participation in our Company resulted from a capital injection from its parent, the Ministry of Finance, as part of COAMC’s initial registered capital.
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. On January 22, 2003, Philips China, COAMC, SCIPI and Shanghai Belling together transferred an aggregate of 3% of shares in the Company to Lanmax, which was originally incorporated to implement the ASMC Compensation Trust (as to which, see the section headed ‘‘Our Promoters and our Selling Shareholder’’). SCIPI also transferred 6% of its shareholding to SCIP(HK), its subsidiary.
. On August 28, 2003, Shanghai Belling transferred 8.24% and 16.98% of the shares in the Company to SCIPI and SCIP(HK) respectively, and ceased to be our controlling shareholder for the purpose of the Hong Kong Listing Rules.
As a result of the above transfers, the shareholding in the Company was held by Philips China, SCIP(HK), COAMC, SCIPI, Shanghai Belling and Lanmax in the following proportions: 36.86%, 22.98%, 19.4%, 10%, 7.76% and 3% as at August 28, 2003, and both the identity of our shareholders and the size of their respective shareholdings have remained unchanged since.
Since our incorporation, our share capital has undergone various changes as a result of further injections of capital and transfers of equity by our investors. Further details relating to the changes to our share capital are set out in ‘‘Appendix VIII — Statutory and General Information — 1. Further Information about our Company — (B) Changes in share capital.’’
Construction of our first fab, our 5-inch wafer production facility (fab 1), began in 1990. Production began in fab 1 in 1992. Since then, we have established a 6-inch wafer production facility (fab 2) in 1997 and began production in our 8-inch wafer production facility (fab 3) in October 2003. We completed our combination of the management and operations of fab 1 and fab 2 into one fab, fab 1/2, by March 2005, to enhance our efficiency.
OUR REORGANIZATION AND CORPORATE STRUCTURE
On December 2, 2003, our Board resolved to convert us into a foreign invested joint stock limited company by way of promotion in accordance with PRC Company Law and the Foreign Investment Joint Stock Company Provisional Regulations. To effect the Reorganization, on December 4, 2003, the Promoters entered into a termination agreement in respect of the joint venture contract and articles of association of Advanced Semiconductor Manufacturing Corporation of Shanghai (the ‘‘Termination Agreement’’), the Promoters Agreement and our Articles. Supplementary agreements in relation to the Termination Agreement, the Promoters Agreement and our Articles were subsequently entered into on February 6, 2004.
Under the Promoters Agreement, the Promoters agreed and undertook to reorganize and convert us into a foreign invested joint stock limited company by way of promotion in accordance with the relevant PRC laws. The Promoters further acknowledged that, subsequent to our re- registration as a foreign invested joint stock limited company, we would apply to the CSRC and other relevant PRC government authorities to issue and list our H Shares on the Stock Exchange. Each Promoter agreed that it would, in full cooperation with each other, take any and all actions reasonably necessary for us to become listed on the Stock Exchange. For further details of certain undertakings made by the Promoters to us which survive the Global Offering, see the section headed ‘‘Relationship With Our Shareholders — The Promoters Agreement.’’
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On February 12, 2004, the Ministry of Commerce approved our conversion into a foreign invested joint stock limited company and issued an approval letter to us . An approval certificate was subsequently issued to us on February 16, 2004 by the Ministry of Commerce.
On March 2, 2004, we re-registered from a Sino-foreign equity joint venture to a foreign invested joint stock limited company under PRC law, with Philips China, SCIP (HK), COAMC, SCIPI, Shanghai Belling and Lanmax as our Promoters, and our new business license was issued by the Shanghai Administration of Industry and Commerce. On the same day, we completed the Reorganization in preparation for the Global Offering.
The following diagram sets out our corporate structure following completion of the Reorganization and immediately prior to the Global Offering. As mentioned above, our shareholding structure has remained unchanged since August 28, 2003.
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The chart below illustrates our corporate structure immediately after completion of the Global Offering (assuming that the Over-allotment Option is not exercised).
Notes:
(1) Shares held by COAMC are State-owned shares. COAMC, a State-owned financial enterprise established under the laws of the PRC on October 15, 1999, was primarily established to acquire and manage the non-performing assets of Bank of China and other state-owned banks, reorganize loans and enterprises, securitize assets, make direct investments, issue debentures, provide commercial loans, assist in debt recovery, value assets and other projects, assist enterprises in auditing and liquidation and other businesses authorized by the relevant financial regulatory authorities. 20% of our equity interests was transferred to COAMC in November 2002 from Bank of China, Shanghai Branch and Shanghai No. 7 Radio Factory. This was as a result of a capital injection from COAMC’s parent, the Ministry of Finance, as part of COAMC’s initial registered capital.
(2) Shares held by Shanghai Belling are Domestic Shares. Shanghai Belling, a joint stock limited company listed on the Shanghai Stock Exchange, was established in September 1988 and is owned as to approximately 27.8% and 18.7% by Shanghai Hua Hong (Group) Company Limited and Alcatel Shanghai Bell Company Limited, respectively. PRC domestic shareholders hold approximately 41% of Shanghai Belling’s issued share capital.
(3) Shares held by Philips China are Unlisted Foreign Shares. Philips China is a wholly-owned subsidiary of Royal Philips. The CSRC has approved the conversion of the Shares held by Philips China into Converted H Shares. For the purpose of the Hong Kong Listing Rules, Philips China is also our controlling shareholder immediately prior to the Global Offering.
(4) Shares held by SCIPI are Domestic Shares and Shares held by SCIP (HK) are Unlisted Foreign Shares. SCIP (HK) is owned as to 100% by SCIPI, one of our Promoters. The CSRC has approved the conversion of the Shares held by SCIP (HK) into Converted H Shares. For the purpose of the Hong Kong Listing Rules, SCIPI, by virtue of its 100% shareholding in SCIP (HK), is also our controlling shareholder immediately prior to the Global Offering.
(5) Shares held by Lanmax are Unlisted Foreign Shares. Lanmax is a company incorporated in Hong Kong on July 8, 2002. Pursuant to an equity transfer agreement dated December 21, 2002, Philips China, COAMC, SCIPI and Shanghai Belling, our then shareholders transferred approximately 3% in aggregate of their then equity interests in us on a pro-rata basis to Lanmax. Lanmax was originally incorporated to implement the ASMC Compensation Trust, as to which, see the section headed ‘‘Our Promoters and our Selling Shareholder.’’
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OVERVIEW
We are a leading dedicated analog foundry focusing primarily on the manufacturing of analog semiconductors and higher bipolar content-based mixed-signal semiconductors. According to IC Insights, we were one of the top ten foundries (digital and analog) in the world in 2004 by sales. Our customers include some of the world’s leading IDMs and fabless semiconductor companies. We produce both standard and application-specific semiconductors, designed by our customers for use in various end-market applications, including computing, communications and consumer electronics. We serve a diversified portfolio of customers, such as Semtech, the Philips Group, Datang Microelectronics, Texas Instruments, Fairchild Semiconductor, National Semiconductor, AOS, California Micro Devices and Monolithic Power Systems.
We offer our customers a broad range of process technologies including:
. bipolar, BiCMOS and HVMOS process technologies for analog semiconductors; and
. non-volatile memory technology for producing smart identification cards.
Through our flexible and customized manufacturing model in handling a variety of process technologies, we are able to support our customers’ specific manufacturing requirements.
We operate two wafer fabrication facilities in Shanghai, China: one which manufactures 5-inch and 6-inch wafers and the other 8-inch wafers. As at December 31, 2005, we had a monthly production capacity of approximately 28,000 5-inch wafers, 51,000 6-inch wafers and 12,000 8-inch wafers. We intend to continue strategically expanding our 8-inch manufacturing facilities. We believe our strategies will enable us to strengthen our position in the global dedicated analog foundry industry and also help us penetrate the market for national identification cards in China.
OUR COMPETITIVE STRENGTHS
We believe that we have developed the following principal competitive strengths.
Focused analog foundry model
We are a dedicated analog foundry and our business model is to focus on addressing analog semiconductor customers’ growing demand for access to flexible manufacturing processes that can be customized to meet their specific needs. As a dedicated analog foundry, we do not produce our own end products. As the analog semiconductor market continues to grow, we believe that both fabless semiconductor companies, who outsource their entire manufacturing process, and IDMs, who use manufacturing partners as part of their flexible manufacturing strategy, will increase their reliance on analog foundries capable of providing customized solutions.
Our focused analog foundry model for producing analog semiconductors differentiates us from other foundries which offer standardized CMOS process technologies for digital applications. While IDMs that produce analog semiconductors have their own capacity for manufacturing analog semiconductors, they use this capacity primarily to produce semiconductors for their own products. We believe that IDMs are reluctant to rely on other IDMs for outsourcing their manufacturing process and tend to rely on dedicated foundries as many of the products produced by IDMs compete directly with each other. By focusing on the outsourcing needs of IDMs which produce analog semiconductors and fabless semiconductor companies, we can better serve the specific and unique needs of our customers.
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Flexible and customized manufacturing processes
Unlike CMOS-based process technologies primarily for digital applications, the manufacturing of analog and higher bipolar content-based mixed-signal semiconductors requires flexible and customized process technologies in order to satisfy the multiple end market product requirements and specifications. Customers in the analog semiconductor industry often require very specialized and customized manufacturing solutions that meet the specific needs of their end products. The need to meet this requirement differentiates us from other foundries, which offer standardized CMOS and higher CMOS content-based mixed-signal process technologies primarily for digital applications. We believe that through the years of experience accumulated by our engineers in providing specialized and often customized process technologies and manufacturing solutions, our flexible manufacturing model, and our ability to offer 5-inch, 6-inch and 8-inch wafer manufacturing capacity, we are able to offer customers flexible but comprehensive services that directly address their unique needs.
Cost-effective manufacturing
Our experienced management and engineering team is committed to providing cost-effective manufacturing solutions to our customers. We reduce our capital expenditures and control our depreciation costs in part, by employing refurbished equipment to expand our manufacturing capacity. In addition, our strategic location in the PRC has allowed us to lower our costs of operations, as the PRC has a high concentration of engineers at relatively lower cost as well as lower costs for water and electricity.
Quality customer services and management
We have a firmly established customer-oriented culture. We provide our customers with high quality services through our flexible scheduling, capacity availability, on-time delivery, customized manufacturing processes and competitive lead time. We believe our ability to provide high quality manufacturing services at competitive prices is a key factor in our ability to attract and maintain a strong customer base consisting of leading IDMs and fabless semiconductor companies.
We maintain international standards in management. We achieved ISO 9002 certification in 1995 and QS 9000 certification in 1997. We were one of the first semiconductor foundries in the PRC to achieve ISO 14001 certification in 1998 in respect of environmental management, one of the first semiconductor foundries in the world to achieve ISO 9001/TS 16949 certification in 2003, and one of the first semiconductor foundries in the world to achieve BS7799 certification in 2004 in respect of security management.
Strong and diverse customer relationships
We have entered into medium to long term wafer manufacturing agreements with the majority of our customers. Many of these customers are IDMs who wish to adopt a flexible or ‘‘fab-light’’ manufacturing strategy by outsourcing their manufacturing processes to us or fabless semiconductor companies seeking manufacturing capacity. We believe our commitment to provide our customers with high quality, flexible, reliable, and cost-effective manufacturing services and the relative difficulty for analog semiconductor customers to move from foundry to foundry due to the precision and customization involved in manufacturing analog semiconductors allow us to attract customers and maintain our strong customer base. Our ability to attract and maintain our strong customer base is, to some extent, due to the implementation of procedures in our manufacturing process to protect the intellectual property provided or licensed to us by our
—73— BUSINESS customers and the Philips Group. Some of these procedures include creating code names for our customers’ process technologies to ensure confidentiality, allowing only designated employees to access information to our customers’ designs and products, starting production of wafers only upon customers’ instructions, and immediate disposal of wafers that are not delivered to customers under the relevant customer’s supervision. We believe that, by implementing these procedures, we have been able to establish a strong reputation among foundries producing analog semiconductors and compete more effectively against our competitors.
For the financial year ended December 31, 2005, our top five customers accounted for 62.3% of our revenue, compared to 60.0% of our revenue for the same period in 2004 and 72.1% of our revenue in 2003.
OUR STRATEGY
Our objective is to maintain and strengthen our position as a leading global dedicated analog foundry as well as to penetrate further the market for national identification cards for Chinese citizens in the PRC. The key elements of our strategy are as follows:
Remain dedicated to our analog foundry model
We will continue our focus as an analog foundry offering flexible and customized manufacturing solutions to our customers. We believe our focus on being a dedicated analog foundry allows us to offer high quality, reliable, flexible, and cost-effective manufacturing solutions to our customers. These factors will enable us to position ourselves as a leader among other analog foundries. Unlike IDMs, we do not produce our own designs of semiconductors. We believe that IDMs are reluctant to outsource their manufacturing process to other IDMs as many of their products compete directly with each other. Our dedicated analog foundry model does not pose any competitive threat to our customers.
Pursue strategic capacity expansion while maintaining overall profitability
We aim to offer our customers adequate 5-inch, 6-inch and 8-inch wafer manufacturing capacity. While maintaining our overall profitability with our existing 5-inch and 6-inch wafer manufacturing capacity, we will primarily focus on the expansion of our 8-inch wafer capacity.
To serve our customers’ increasing demands for 8-inch wafer manufacturing capacity, we began construction of our fab 3 in April 2002. As at December 31, 2005, our fab 3 had a monthly capacity of 12,000 8-inch wafers. Since our aim is to achieve higher utilization rates at our fab 3, further expansion of our 8-inch wafer capacity will be determined by our estimate of demand from our existing and future customers. Instead, our capital expenditures in 2006 will be directed to increasing our production flexibility, minimizing processing time and improving production yield.
We intend to capitalize on our manufacturing expertise acquired through years of experience in manufacturing 5-inch and 6-inch wafers. Our platform of technical and management skills is crucial to our ability to increase our 8-inch wafer capacity and improving our 8-inch profitability.
By employing refurbished equipment and maintaining such equipment by ourselves, we are able to achieve lower capital expenditures and lower depreciation costs which in turn allows us to improve our return on investment.
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Penetrate the market for national identification cards for Chinese citizens
With our recently expanded 8-inch production capacity and our platform of EEPROM process technology, we aim to penetrate the market for national identification cards for Chinese citizens. We provide Design Services for use in producing national identification cards. In addition, we are currently one of only two semiconductor manufacturers authorized by the PRC government to provide manufacturing services to designers of national identification cards. By offering 8-inch capacity and EEPROM process technology as well as through our strategic partnerships with manufacturers of identification cards, we believe we will be able to penetrate the market for national identification cards for Chinese citizens.
Continue to strengthen our operating leverage
We aim to maintain relatively low operating expenses which do not increase proportionately with the increase in our revenue. We will continue to rely on our customers to partially fund our research and development efforts and the talented local pool of engineers in Shanghai to help us contain our research and development costs. We also benefit from our location in Shanghai which has a pool of highly qualified management personnel at relatively lower cost. We have minimal investments in sales and marketing since we use overseas agents to assist our overseas sales and marketing efforts rather than establishing overseas sales representative offices. As we expand our operations, we believe we can leverage on these advantages to increase our overall profitability.
Continue to strengthen and diversify our customer base and provide high quality services
Our customer base consists of some of the world’s leading IDMs and fabless semiconductor companies such as Semtech, the Philips Group, Datang Microelectronics, Texas Instruments, Fairchild Semiconductor, National Semiconductor, AOS, California Micro Devices and Monolithic Power Systems. We believe that our ability to offer quality services and products at competitive prices and our focus on addressing our customers’ specific needs and unique requirements have enabled us to attract and maintain these players in the global semiconductor industry.
Through our experience serving these leading IDMs and fabless semiconductor companies, we have acquired the necessary skills in providing high quality services to attract new customers to further diversify our customer base. We aim to further diversify the mix of customers in terms of end market applications to achieve greater balance in revenue contribution by our customers.
Capitalize on our presence in the PRC to address growing domestic demand
The growing demand for semiconductors in the PRC is highlighted by its strong economic growth and its emergence as the global manufacturing center for electronic products that are sold in the PRC and abroad. Our location in the PRC allows us to directly benefit from this strong demand for semiconductors. For instance, we are one of only two semiconductor manufacturers in the PRC authorized by the PRC government to provide manufacturing services to designers of national identification cards for Chinese citizens. We have also established strategic manufacturing relationships with world-renowned semiconductor companies which aim to penetrate the increasing demand for semiconductors in the PRC. We believe these strategic relationships will help our customers to meet such increasing demands and allow us to increase our sales to PRC- based semiconductor companies.
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By leveraging on our ability to provide flexible, customized and quality services at competitive prices, we are well-positioned to continue capitalizing on the strong and increasing demand for semiconductors in the PRC.
MANUFACTURING, SERVICE AND CAPACITY
Our services
Semiconductors are used to process two types of signals, namely, digital and analog. The main types of semiconductors include digital semiconductors, analog semiconductors and mixed signal semiconductors. Please refer to the section headed ‘‘Industry Overview’’ for a description of the semiconductor industry, the analog and digital industry segments and the analog semiconductor industry in particular.
We primarily focus on the manufacturing of analog semiconductors and higher analog content- based mixed-signal semiconductors. Most of our major customers have entered into wafer manufacturing agreements with us, a majority of which are medium to long term. These wafer manufacturing agreements provide for, among other things:
. thetypeofproductstobemanufactured;
. the process technologies to be used;
. the pricing mechanism for manufacturing the relevant products; and
. the production planning and estimates for the manufacture and delivery of the relevant products.
The choice of process technologies used in the semiconductor manufacturing process is critical. Customers define the process technologies and wafer size which they will use on the basis of end-market requirements and cost-effectiveness. Process technology continues to advance primarily through the shrinking of linewidth, which enables higher performance through a reduced die size. However, more advanced process technology is typically more costly to manufacture. Because of this, a larger wafer size will typically be used in conjunction with more advanced process technologies of a finer linewidth to achieve a higher number of die per wafer, hence reducing the effective unit cost of production per die and increasing the financial viability of more advanced products.
For a given end market application, there would be a specific performance requirement. As a customer will have available to it a range of process technologies and wafer sizes, it will likely seek the most cost-effective solution by choosing the appropriate combination of wafer size and process technology to achieve its performance requirement. Thus, the competitiveness of different wafer sizes will be dictated by the specific end market application requirements. For example, for an end market application that does not require high performance using more advanced process technology, a 5-inch or 6-inch wafer may be preferred because of its relatively lower cost. For an end market application that requires higher performance, an 8-inch or 12-inch wafer combined with more advanced process technologies may be required.
8-inch is currently the largest wafer size used in analog semiconductor production as compared to the migration trend in digital semiconductor production to 12-inch wafers, the most advanced manufacturing capability in the semiconductor industry. 6-inch wafers remain the
—76— BUSINESS mainstream production capability for analog semiconductors, while there remains some continuing demand for 5-inch wafers. This is due to the different needs of end market products, and because analog designs continue to find new applications and new methods of production, which enable such analog designs to be produced in a cost-effective manner.
We produce semiconductors which are silicon wafers with finished dies. We offer wafers of various sizes using processing technologies of a variety of linewidths ranging from 0.25 micron to 3.0 microns, including 5-inch wafers with a minimum of 1.5 micron linewidth processing technology, 6-inch wafers with a minimum of 0.6 micron linewidth processing technology and 8-inch wafers with a minimum of 0.25 micron linewidth processing technology. We believe we are able to address our customers’ end product needs comprehensively.
We are not involved in our customers’ product design process. Under our wafer manufacturing agreements, we agree to provide manufacturing solutions to our major customers to manufacture their own designs using either their specific proprietary processes, the processes licensed to us by the Philips Group or, to a limited extent, the processes we jointly developed with our customers. Normally, our customers agree to furnish us with all the requisite technical support and assistance in starting up the wafer manufacturing process for aparticularproduct.Wealsodonotprovide assembly and final testing services, which are provided by our customers’ designated contractors, who are independent of us.
Our customers usually place orders with us up to three months in advance. In order to demonstrate our competitiveness among other foundry service providers, we may also agree with our customers the specific lead time, performance standards and the manufacturing yields to be achieved for each product. Other customers will normally provide, at their own expense, all requisite masks, which must match our equipment specifications. We sometimes also purchase masks from third parties and provide them to our customers for their convenience, usually based on database tapes or designs and other necessary information provided by the relevant customer. In addition, we offer our customers probing services based either on our own standard electrical tests and electrical parameters for the relevant process or based on the test packages and test programs provided by our customers in accordance with the terms of the relevant wafer manufacturing agreement. The probing process also enables us to obtain data on our manufacturing yield rates.
Our customers normally issue a purchase order specifying the number of lots needed and the scheduled delivery times for each lot. In order to maintain our scale of production, we may request our customers to make orders for a minimum of 49 wafers per 5-inch lot, 25 wafers per 6-inch lot or 25 wafers per 8-inch lot. We reserve the right to levy additional charges if wafer lot sizes are less than the specified number.
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Our facilities
We currently operate two wafer fabrication facilities, all of which are located in Caohejing High- Tech Park in Shanghai, PRC. Fab 1/2 was originally managed and operated independently as fab 1 and fab 2 to manufacture 5-inch and 6-inch wafers, respectively. However, we consolidated the management and operations of fab 1 and fab 2 in February 2005 to increase efficiency as we continue to convert our existing 5-inch wafer capacity was 6-inch wafer capacity. The table below sets out a summary of our current organization of fabs in operation:
Fab Fab 1/2 Fab 3
Cleanroom class...... Cleanroom 1: Class 10 Class 1 Cleanroom 2: Class 1 Production began ...... Cleanroom 1: 1992 2003 Cleanroom 2: 1996 Cleanroom size (sq meters)...... 4,531 6,000 Wafersize...... 5-inch/6-inch 8-inch Smallest linewidth...... 0.6 micron 0.25 micron Process technologies used in Bipolar, BiCMOS, BiCMOS, EEPROM, manufacturing...... EEPROM, HVMOS HVMOS
Under our current organization, fab 1/2 consists of two cleanrooms, cleanroom 1 (originally fab 1) and cleanroom 2 (originally fab 2). Cleanroom 1 is a class 10 wafer fab and, as at December 31, 2005, was equipped to produce approximately 28,000 5-inch wafers and 15,000 6-inch wafers per month, based primarily on the bipolar process technology with a minimum linewidth of 1.5 microns. Cleanroom 2 is a class 1 wafer fab and, as at December 31, 2005, was equipped to produce 36,000 6-inch wafers per month, based primarily on BiCMOS and EEPROM technologies with a minimum linewidth of 0.6 micron. The cleanroom in fab 3 is a class 1 wafer fab with designed capacity of 30,000 8-inch wafers per month, and is capable of producing wafers with a minimum linewidth of 0.25 micron, based primarily on BiCMOS and EEPROM technologies. As at December 31, 2005, fab 3 had a monthly capacity of 12,000 8-inch wafers.
In order to satisfy our customers’ needs for 6-inch wafers, we began converting part of our 5- inch wafer capacity in cleanroom 1 in our fab 1/2 to produce 6-inch wafers since December 2003, and we may further convert our 5-inch wafer capacity to produce 6-inch wafers in the future depending on customer demand. The following table sets out the historical approximate output capacities in terms of wafers per month as at each of December 31, 2003, 2004 and 2005:
December 31, Fab(1) 2003 2004 2005
Fab 1/2(2) 5-inchwafers...... 36,000 42,000(3) 28,000 6-inchwafers...... 27,000 35,000 51,000 Fab 3 (8-inch wafers only) 8-inchwafers...... N/A(4) 5,000 12,000
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Note:
(1) We estimated the capacities of our 5-inch, 6-inch and 8-inch wafers on the basis of 9, 10 and 22 mask steps per wafer, respectively.
(2) Cleanroom 1 in our fab 1/2 only produced 5-inch wafers in 2003. We began converting part of our 5-inch wafer production facilities in our fab 1/2 to produce 6-inch wafers in December 2003.
(3) For the purpose of calculating the historical output capacities as at December 31, 2004, we have assumed the capacity of cleanroom 1 of fab 1/2 was for 5-inch wafers only.
(4) Production of 8-inch wafers began in late 2003, and capacity figures are therefore only meaningful starting from 2004.
The following table sets out the historical capacity utilization rates for our production of each type of wafers for the periods indicated below:
Year ended December 31, Fab 2003 2004 2005
Fab 1/2 5-inchwafers...... 83% 91%(1) 70% 6-inchwafers...... 90% 98% 69% Fab 3 8-inchwafers...... N/A(2) N/A(2) 44%
Notes:
(1) For the purpose of calculating the historical capacity utilization rate of our 5-inch wafer production for the year ended December 31, 2004, we have assumed cleanroom 1 of fab 1/2 produced 5-inch wafers only.
(2) We commenced production of our 8-inch wafers in late 2003. However, our 8-inch wafers production capacity remained low throughout 2004. Capacity utilization rates calculated for the years ended December 31, 2003 and 2004 are therefore not meaningful indications of our operations on a stable and on-going basis, and they do not present a fair and useful comparison with the rate for the year ended December 31, 2005.
Cleanrooms
Semiconductor manufacturing is a complex process that requires wafer fabrication in a controlled cleanroom environment. In each of our fabs, we have in place measures to ensure our production processes can be monitored. Cleanroom 1 in our fab 1/2, in which we primarily produce 5-inch wafers, and part of the capacity of which is being converted to produce 6-inch wafers, is organized into bays grouped by function. Cleanroom 2 in our fab 1/2, in which we produce 6-inch wafers, uses the ‘‘mini-environment’’ approach in which the manufacturing steps are performed in a class 1 clean ‘‘mini-environment.’’ Our fab 3, in which we produce 8-inch wafers, uses the Standard Mechanical Interface approach, which we believe produces higher quality products since it is more efficient and involves minimum interface between human and machine.
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Manufacturing Equipment
In order to remain cost competitive, we equipped most of our fab 1/2 by employing quality refurbished equipment. We are pursuing the same strategy for our fab 3. In the past, we have been able to negotiate a warranty period ranging from three months to one year with the suppliers of our refurbished equipment.
We believe our policy of employing refurbished equipment has a number of advantages. Semiconductor manufacturing equipment is highly specialized equipment and new semiconductor manufacturing equipment is expensive. It is more cost-effective, we believe, to purchase quality refurbished semiconductor manufacturing equipment. In addition, in our experience, the quality of products produced with refurbished equipment is not inferior to the quality of products produced by brand new equipment. We believe that our policy of employing refurbished equipment has allowed us to reduce our costs without sacrificing the quality of our products. Consequently, we are able to price our products more competitively and also achieve higher profit margins. Most of the equipment we source was originally manufactured by international vendors including ASML, Applied Materials, Novellus Systems, and Lam Research.
Inventories
Our manufacturing process requires inventories such as raw materials, spare parts and consumables, work in progress and other finished goods. Our provision policy for our inventories is with specific reference to their age, durability and condition. Inventories are stated at the lower of cost and net realizable value.
Our manufacturing process uses a variety of raw materials, primarily silicon wafers, chemicals and gases. Raw material costs represented 28.8%, 29.4% and 35.0% of our revenue for each of the years ended December 31, 2003, 2004 and 2005, respectively. The largest components of raw material costs, silicon wafers, accounted for 59.6% for the year ended December 31, 2003, 53.5% for the year ended December 31, 2004 and 47.0% for the year ended December 31, 2005, of our raw material costs in each respective period. We source our raw materials from several suppliers, a majority of whom are based outside the PRC. We select our raw materials suppliers based on a number of criteria, including the quality control and reliability of the raw materials supplied, the existing customer base of the supplier, the delivery time of the supplier, pricing of the raw materials and the financial status of the supplier. We source our raw materials from a number of suppliers so that any problems with the quality and delivery performance of any one supplier will not materially adversely affect our operations.
We assess our raw materials needs based on our rolling sales estimates. In the past, we have experienced temporary difficulties in obtaining adequate supplies of raw materials due to capacity constraints of some of our suppliers, but these difficulties were not materially adverse to our operations due to our policy of sourcing from multiple suppliers. We generally do not have any long- term supply contracts with our suppliers but instead, we purchase all of our raw materials on a per order basis.
For the three years ended December 31, 2003, 2004 and 2005, the percentage of our purchases of raw materials attributable to our largest supplier was 9.6%, 9.7% and 13.7%, respectively. During the same periods, the percentage of our purchases of raw materials attributable to our five largest suppliers on a combined basis was 30.4%, 30.4% and 36.4%, respectively, of our overall purchases of raw materials. Almost all of our materials are imported free of value-added tax and import duties due to concessions granted to our industry in the PRC.
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We review the detailed documentation accompanying deliveries of materials from our suppliers before accepting receipt. Our inventories are then stored and insured. In the event we are not satisfied with the inventories supplied, we have procedures in place with our suppliers for their return. We carry out a counting exercise of our raw materials on a monthly basis. We also review our total stock of inventories on an item-by-item basis each year.
We typically have payment terms with our suppliers which range from 30 to 90 days. Settlement is usually by way of bank transfers and letters of credit.
We have performed a specific review (based on physical inspection and by reference to sales contracts) on work in progress and finished goods as at December 31, 2005. We have written off inventories that were damaged/substandard and/or not saleable, and we have performed ageing analysis and made general provisions for the remaining inventories in accordance with our policies of provision for obsolete and slow-moving inventories, which are considered prudent and reasonable.
Stock Control
In order to ensure the smooth operation of our manufacturing process, our policy is to maintain a minimum stock level of 5-inch, 6-inch and 8-inch raw wafer materials to meet our production demand. We assess our required stock level by the time required for purchase of our stock, the supply price which we expect to pay our suppliers, and our projected sales requirements. At the same time, in controlling our stock we also take into account the anticipated pricing of our raw materials and the volume of inventories which we expect we will require, and our projected production requirements.
Electricity
We use substantial amounts of electricity supplied by the Shanghai Municipal Electric Power Company in our manufacturing process. Due to the economic growth and the growth of the semiconductor manufacturers in Shanghai, we have concerns as to the future stability of our electricity supply. We have, in 2003, experienced one incident of power outage for a very limited duration. We rented three and four diesel-powered electricity generators respectively in 2004 and 2005, and if needed, will do so again in 2006. Each generator shall be capable of providing 720,000 kwh of electricity per month. We currently use approximately 11,000,000 kwh of electricity per month. Our production may be interrupted if we cannot maintain sufficient sources of electricity. See the section headed ‘‘Risk Factors — Risks Relating to Our Industry, Business and Operations.’’
OUR PROCESS TECHNOLOGIES
Process technologies are the set of design rules, electrical specifications and parameters and process steps that we implement for manufacturing the patterned features of the circuitry of semiconductors. The major process technologies that form our technology platform include bipolar, BiCMOS, EEPROM and HVMOS.
As a result of the highly customized process technologies we adopt for our customers’ products and the precision required in implementing such process technologies, it is less cost- effective for our customers to move their designs from one foundry to another. As a result, we are able to maintain our customer base.
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We currently do not develop any technology of our own. Instead, we rely on third parties for our process technology. See the section headed ‘‘Risk Factors — Risks Relating to Our Industry, Business and Operations.’’
We obtain our process technologies from three major sources, namely:
. technology transfer and cooperation arrangements with the Philips Group;
. technology arrangements under the wafer manufacturing agreements with our customers; and
. technologies jointly developed with our customers.
We describe below our technology transfer and cooperation arrangements:
Technology transfer and cooperation arrangement with the Philips Group. An important source of our technology is our technology transfer and cooperation arrangements with the Philips Group, whose ultimate holding company is Royal Philips. Royal Philips is one of the largest electronics manufacturers and suppliers in the world and possesses extensive know-how and experience in relation to the manufacturing processes and services necessary to a semiconductor foundry.
As part of our establishment as an equity joint venture between Philips China and certain Chinese investors, the Philips Group agreed to be our technological and commercial partner. Under the Philips Foundry Services Agreement, we are furnished with information and process technologies required to manufacture Philips Licensed Products for the Philips Group. Pursuant to the Technology Transfer and Cooperation Agreement, to the extent that such information and process technologies are covered by any present or future patents or other rights registered in the name of the Philips Group, the Philips Group also granted us a non-exclusive and non-transferable license to use such rights in the manufacturing in the PRC of Philips Licensed Products for other customers. Under the Technology Transfer and Cooperation Agreement, we are also provided with technical assistance for the manufacturing, testing and assembly of semiconductors.
Pursuant to the Philips Identification Licensing Agreement, as part of our strategy to produce 8-inch wafers, Royal Philips granted us a license under certain intellectual property rights relating to non-volatile memory (being the EEPROM process technology) for use in manufacturing Identification Products. Further, as part of the Philips Cooperation Agreement and the Philips Identification Licensing Agreement, Philips Semiconductors supports and advises us in offering Design Services to authorized PRC-based manufacturers of national identification cards for Chinese citizens. In addition, we are one of only two semiconductor manufacturers authorized by the PRC government to provide manufacturing services to designers of national identification cards for Chinese citizens.
See the section headed ‘‘Relationship With Our Shareholders — Connected Transactions’’ for further details on the above arrangements.
Technology arrangements under the wafer manufacturing agreements with our customers. Another important source of our process technologies is the arrangements under our wafer manufacturing agreements with some of our customers. In order to manufacture our customers’ products in accordance with their proprietary processes and designs, these customers agreed to provide us with the process technologies required to manufacture their products. To the
—82— BUSINESS extent that such process technologies are covered by patents, copyrights or other intellectual property rights, our customers typically grant us a non-transferable and non-exclusive license to use such rights for the sole purpose of manufacturing the relevant customer’s products.
Customers who have entered into such arrangements with us include Fairchild Semiconductor, National Semiconductor, the Philips Group and Texas Instruments. We believe that by leveraging the manufacturing and process technologies provided to us by our customers for the manufacturing of their products, we are able to minimize our investments on research and development.
Jointly developed technologies. Some of our technologies are jointly developed with our customers for manufacturing their products. Under some of our manufacturing agreements, where any new improvements or additions are developed from the proprietary processes and designs licensed to us by our customers for the manufacturing of their products, we may either jointly own such improvements with our customers or our customers may give us the right to patent the improvements so long as we grant exclusive royalty-free licenses of such patents to the relevant customer.
CUSTOMERS AND MARKETS
We focus on the manufacture of analog and mixed signal semiconductors. As analog semiconductors act as an interface with signals from the real world, they are required for the conversion of digitally processed information and are therefore essential in the operation of electronic products.
We offer analog and mixed signal semiconductors, the specifications of which are tailored in accordance with our customers’ specific needs. As the design of end products may have different technological capabilities and cost concerns, our range of 5-inch, 6-inch and 8-inch wafers enables us to meet the requirements of a broad spectrum of end products produced by our customers.
Our primary customers include IDMs and fabless semiconductor companies. The following table sets forth the breakdown of our revenue by customer type for the periods indicated:
Year ended December 31, 2003 2004 2005 Revenue %of Revenue %of Revenue %of (RMB’000) revenue (RMB’000) revenue (RMB’000) revenue
Customer Type IDMs ...... 428,585 54.6 547,388 47.7 331,180 35.6 Fabless semiconductor companies(1) ...... 355,843 45.4 599,979 52.3 600,403 64.4
Total ...... 784,428 100.0 1,147,367 100.0 931,583 100.0
Note:
(1) We have categorized revenue derived from the orders placed with us by Jazz Semiconductor, our direct customer, based on what we know to be the nature of the ultimate end users for such orders.
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The following table sets forth the geographical distribution of our revenue and percentage of our revenue for the periods indicated. We categorize our revenue geographically based on the location of the headquarters of the customer that issues the purchase order:
Year ended December 31, 2003 2004 2005 Revenue %of Revenue %of Revenue %of (RMB’000) revenue (RMB’000) revenue (RMB’000) revenue
United States of America 597,519 76.2 862,161 75.2 542,143 58.2 Europe ...... 114,506 14.6 149,524 13.0 169,556 18.2 Asia ...... 67,417 8.6 126,551 11.0 219,238 23.5 Other geographical areas 4,986 0.6 9,131 0.8 646 0.1
Total ...... 784,428 100.0 1,147,367 100.0 931,583 100.0
Our customer base includes some of the world’s leading IDMs, namely the Philips Group, Texas Instruments, Fairchild Semiconductor and National Semiconductor, and fabless semiconductor companies, namely Semtech and Datang Microelectronics. The foregoing is not intended to identify our top customers, but rather to provide a representative sampling of our customer-base. Although we are not dependent on any single customer, a significant portion of our revenue is attributable to a relatively small number of our customers. The following table sets forth the percentage of revenues attributable to our top five customers and our single largest customer for the periods indicated:
Year ended December 31, 2003 2004 2005 % of revenue % of revenue % of revenue
Topfivecustomers...... 72.1 60.0 62.3 Singlelargestcustomer...... 19.8 15.8 16.3
Pricing of our products and credit terms with our customers
Our pricing policy for our products affects our profitability. We review our pricing strategies for each of our product lines on a regular basis, mainly based on our past order volumes, our current and projected customer demands, the payment terms we have with our customers, external business conditions, our production costs, prices of our competitors and our relationships with our customers. In particular, we take into consideration any technological partnership we have with a customer, and we assess the extent to which such co-operation matches with our technological development and roadmap. Given we manufacture wafers for our customers’ end product needs, our sale prices will also be affected by any change in the demand for such end products.
Credit arrangements with our customers
We have in place a system for credit evaluation and control of settlement terms for sales to our customers, which is separate from our sales function. For the majority of our domestic customers, all payments must be settled before we ship our products. In relation to a small number of our domestic customers, and all of our overseas customers, we grant to the majority of such customers credit terms ranging between 30 and 60 days, based on their historical level of orders with us, the
—84— BUSINESS sales performance of their end products, their credit record and the length of our business relationship with them. Payments from our customers are usually settled through bank transfers and letters of credit to us, while we accept cash for smaller orders.
We also grant credit limits to our overseas customers by reference to their trading records with us, and the history and estimates of their sales. We assess our accounts receivable from our customers on a regular basis, and, in particular, we review all of our key customers’ settlement patterns on a monthly basis. We conduct independent evaluations of our customers through a third party consultancy company on an annual basis. We monitor any actual or foreseeable default in payment by provision of bad and doubtful debts. We analyze the adequacy of our provision for each of our major debtors, on the basis of our evaluation of the age and collectability of the debts.
Marketing
Provision of foundry services is technologically intensive. Further, since our business involves providing specialized and customized manufacturing solutions to our customers, we need to have frequent and intensive contact with our customers to manage their unique needs. To facilitate our sales and marketing efforts, we have also established the iFab system which enables our customers to directly order or make enquiries with us through our website.
To facilitate our sales and marketing efforts, we have a business support team at our Shanghai headquarters to manage our customers’ requirements. We have also established relationships with our overseas agents to market our foundry services by developing direct relationships with our customers.
We entered into representative agreements with three overseas agents in the United States, namely United Vision Inc., Semisource, D L International Inc. (the ‘‘Agents’’) dated May 5, 2000, May 1, 2004 and July 8, 2004 respectively, each for a term of one year and to continue from year to year (until they are terminated in accordance with their provisions), pursuant to which we pay the Agents a commission rate for all production work we deliver to customers secured by the Agents. The Agents are authorized to act as our non-exclusive representatives to solicit manufacturing contracts with new and existing customers.
MANUFACTURING QUALITY AND RELIABILITY
We believe that our focus on providing high quality, reliable and cost-effective manufacturing services has been an important factor in attracting and maintaining our strong customer base, which consists of some of the world’s leading IDMs and fabless semiconductor companies. We frequently monitor our equipment and manufacturing processestoensurethatweachieveshortleadtimesand high manufacturing yields.
We seek to give our customers quality assurance under the wafer manufacturing agreements our customers enter into with us. Generally, we agree to manufacture the relevant products for our customers in accordance with a specific quality assurance process, which usually reflects the international standards established under the ISO 9001/TS 16949 certification system. We probe and monitor our products at various stages in the manufacturing process before shipment to customers. Quality assurance also includes ongoing production reliability audits and failure tracking to identify production problems at an early stage.
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An important part of our manufacturing process control measures for our fab 1/2 is our adoption of the (Open) ERIC manufacturing process control system. We adopted the original ERIC system in 1994 and it was subsequently updated and renamed (Open) ERIC in 1998. See the section headed ‘‘Relationship with our Shareholders — Connected Transactions’’ for further details of this system. In our fab 3, we have adopted the SiView System developed by IBM, which offers basic operational and technical application control functions, equipment automation as well as advanced functions such as single wafer control and version control.
RESEARCH AND DEVELOPMENT
We obtain our technologies through three major sources, namely, technology transfer and our cooperation arrangement with the Philips Group, technology arrangements under the wafer manufacturing agreements with our customers and technologies we jointly developed with our customers. See the section headed ‘‘Business — Our Process Technologies — Technology transfer and Cooperation Arrangement with the Philips Group’’ for further details.
Our research and development costs are relatively low since our customers partially fund our joint technology development activities with them. We invested approximately RMB49.9 million (equivalent to approximately HK$47.9 million), approximately RMB52.0 million (equivalent to approximately HK$49.9 million) and approximately RMB74.9 million (equivalent to approximately HK$72.0 million) in each of the years ended December 31, 2003, 2004 and 2005, respectively, on research and development, which represented 6.4%, 4.5% and 8.0% respectively, of our revenue for these periods.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our intellectual property rights and the intellectual property rights of our customers. We have applied for a number of patents and intend to continue to seek patents on our production process. As at December 31, 2005, we had filed seven patent applications in the PRC. To date, six of our patent applications have been accepted by the relevant authorities and are awaiting review and registration by the PRC patent authority. These are described under paragraph 3(B) of ‘‘Appendix VIII — Statutory and General Information.’’ Registration of these accepted applications shall take place after 18 months if the PRC patent authority believes that the application is in compliance with all applicable legal requirements.
We have entered into the Technology Transfer and Cooperation Agreement with Philips Semiconductors International pursuant to which we are furnished with the relevant information and process technologies required to manufacture products for the Philips Group. In addition, under some of the wafer manufacturing agreements we have entered into with our major customers, our customers agreed to provide us with the process technologies required to manufacture the relevant customer’s products. See the section headed ‘‘Business — Our Process Technologies — Technology transfer and cooperation arrangement with the Philips Group’’ for a detailed discussion of the arrangements we have entered into with the Philips Group and our customers.
We have implemented an intellectual property protection procedure in our manufacturing process. Some of our key intellectual property protection policies include creating code names for our customers’ process technologies to ensure confidentiality, allowing only designated employees to access information on our customer’s designs and products, starting production of wafers only upon a customer’s instructions, and immediate disposal of wafers that are not delivered to customers under the relevant customer’s supervision.
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Our customers generally indemnify us from any losses resulting from any suit or proceedings brought against us involving allegations of infringement of intellectual property rights on account of our use of their proprietary processes.
As is the case with many companies in the semiconductor industry, we have from time to time received communications from third parties asserting that our technologies, fabrication processes, design of semiconductors made by us or use by our customers of semiconductors made by us may infringe upon patents or other intellectual property rights of others. Irrespective of the validity of any claims, we could incur significant costs in the defense thereof or could suffer adverse effects on our operations. The following summarizes the correspondences we have received from third parties in relation to intellectual property.
On June 11, 2002, we received a letter from Stadheim & Grear Ltd., a law firm in Chicago, Illinois, United States, who represents the Wisconsin Alumni Research Foundation (‘‘WARF’’), exploring with us a license to use a portfolio of patents relating to semiconductors containing amorphous films such as titanium nitride and tantalum nitride. On October 20, 2003, Stadheim & Gear informed us that the litigation phase of WARF’s program to enforce U.S. Patent No. 4,630,094 (‘‘094 patent’’) relating to the use of an amorphous metal in semiconductor applications has begun and a suit for patent infringement was filed in the Federal District Court in Madison, Wisconsin, against two other parties. Stadheim & Grear has continued to send correspondence informing us that WARF has filed lawsuits against other companies or that WARF has executed licences with other companies. Presently, WARF has not filed any action against us nor has it made any allegations that we have infringed the 094 patent. We do not use any of the processes that in our view are covered by WARF’s patents in our production.
On September 6, 2002, we received a letter from Syndia Corporation which alleged that we have infringed the U.S. Patent No. 4,702,808 and U.S. Patent No. 5,131,941 both relating to inventions made by Jerome H. Lemelson. Both patents relate to certain plasma-enhanced processes. Syndia Corporation has not filed any actions against us to date and we have not received any further correspondence from Syndia Corporation.
On August 2, 2004, we received a letter from the law offices of Steven G. Lisa Ltd., who represents Dr. Uri Cohen, seeking to discuss with us various patents in relation to copper interconnects for integrated circuits filed by Dr. Cohen. Dr. Cohen has not filed any actions against us to date and he has not made any allegations that we have infringed his patents. We received a further letter from Steven G. Lisa Ltd. on October 7, 2004 seeking clarification on certain matters relating to our use of copper interconnects as well as whether we plan to do so in the near future. We currently do not use any copper interconnects in our manufacturing process and do not intend to do so in the near future.
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On March 8, 2005, we received a summons issued by the United States District Court, Northern District of California regarding the case called Monolithic Power Systems, Inc. v. O2 Micro International Limited, in which our Company was identified as one of the counter-defendants and was alleged, by virtue of our manufacture and sale of single stage, full-bridge configuration inverter controller integrated circuits to Monolithic Power Systems, without permission or license from O2 Micro International Limited (‘‘O2 Micro’’), to directly infringe, induce infringement and/or contribute to the infringement of United States Patent No. 6,396,722 (the ‘‘722 patent’’). We filed a motion to dismiss for lack of personal jurisdiction in this case on June 6, 2005.
On December 21, 2005, the court in California denied our motion to dismiss for lack of personal jurisdiction. We are advised by our US counsel that the trial date is likely to be in 2007.
On April 20, 2005, we received a summons issued by the United States District Court, Eastern District of Texas regarding the case called O2 Micro International Limited v. Monolithic Power Systems, Inc., in which our Company was identified as one of defendants and was alleged, by designing, manufacturing, and/or selling computer hardware, including DC-to-AC inverter controller circuits, liquid crystal displays, and notebook computers which embody, or when used, practice one or more claims of the Patent No. 6,804,129 (the ‘‘129 patent’’), without license or permission from O2 Micro, to directly infringe, induce infringement and/or contribute to the infringement of the 129 patent. The trial for the case is set on August 7, 2006. We filed a motion to dismiss for lack of personal jurisdiction in this case on June 10, 2005.
In the event that O2 Micro claims prevent us from manufacturing and/or selling wafers that used the allegedly infringed patents, it should not prevent us from manufacturing and/or selling other products for Monolithic Power Systems. We do not believe that this will have material adverse effect on our financial position or operational results. The revenue derived from the wafers that used the allegedly infringed patents accounted for less than 2% of our total revenue for each of the years ended December 31, 2003, 2004 and 2005. We believe we can, if necessary, replace our foundry capacity and/or orders related to the allegedly infringed products from Monolithic Power Systems with similar technology and order levels from our other customers (including Monolithic Power Systems).
COMPETITION
The worldwide semiconductor foundry industry is highly competitive, particularly during periods of overcapacity.
We view our main competitors to be the internal manufacturing capacities of our existing and potential IDM customers, who constantly review whether to manufacture their products internally or outsource their manufacturing process to foundries. We also compete internationally and domestically with foundries focused on producing analog and mixed-signal semiconductors, such as Episil in Taiwan and X-Fab in Germany. Further, we compete in certain product segments with other existing or newly established semiconductor manufacturers in the PRC. As we continue to expand our 8-inch wafer capacity and our production of analog semiconductors with higher bipolar content, we may also compete with foundries which focuses on producing semiconductors for digital application, who have allocated a portion of their manufacturing capacities to produce analog semiconductors with higher CMOS content.
We believe the principal elements of competition in the semiconductor foundry industry include technical competence, production speed and lead time, time-to-market, research and development quality, available capacity, manufacturing yields, customer service and price.
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A number of semiconductor manufacturers, including our competitors, have recently announced plans to increase their manufacturing capacity and, as a result, we expect that there will be a significant increase in worldwide semiconductor manufacturing capacity during the next few years. If growth in demand fails to match the growth in capacity, or occurs more slowly than anticipated, competition may intensify and pressure on the pricing of our services and under- utilization of our capacity may result. See the section headed ‘‘Risk Factors — Risks Relating to Our Industry, Business and Operations’’ for further details.
Our competitors and potential competitors include companies that have substantially greater financial and other resources than us. However, we believe that we currently enjoy competitive advantages in areas such as manufacturing quality, a strong and consistent customer base and our specialty process platform which allows us to customize manufacturing processes to meet our customers’ specific needs.
Interests of our Directors
The following persons are interested in businesses apart from our business, which compete or are likely to compete, either directly or indirectly, with our business, for the purpose of Rule 8.10 of theHongKongListingRules:
(a) Mr Anthony Lear is one of our non-executive Directors. He is also senior vice president and general manager of Philips Semiconductors China, chairman of Philips Jilin Semiconductor Company Limited in Jilin, the PRC, and an alternate director of Systems on Silicon Manufacturing Co. Pte. Ltd. in Singapore.
Philips Semiconductors China engages in the development, design, manufacturing, marketing and/or sales of semiconductor products and the provision of related after-sales services. We believe that Philips Semiconductors China may compete with our customers, but not directly with us.
Philips Jilin Semiconductor Company Limited is a joint venture which had been established by the Philips Group and Jilin Sino-Microelectronics Co. Ltd to develop, design and manufacture bipolar power products to be marketed and sold by its joint venture partners, and as such, as a captive foundry, the entire capacity of Philips Jilin Semiconductor Company is committed to them. Hence, we believe it does not directly compete with us.
Systems on Silicon Manufacturing Co. Pte. Ltd. (‘‘Systems on Silicon Manufacturing’’) is a captive foundry, established as a joint venture by the Philips Group, Taiwan Semiconductor Manufacturing Corporation and the Economic Development Board of Singapore, for the purpose of constructing an IC foundry in Singapore. We understand that Taiwan Semiconductor Manufacturing Corporation and the Philips Group (and their respective subsidiaries) have committed to purchase specific percentages of its production capacity. As such, we do not believe Systems on Silicon Manufacturing directly competes with us.
(b) Mr Petrus Antonius Maria van Bommel is one of our non-executive Directors. He is also a director and chief financial officer of Philips Semiconductors. In addition, Philips Semiconductors intends to nominate him as a director of Systems on Silicon Manufacturing, subject to shareholders’ approval at a general meeting of Systems on Silicon Manufacturing scheduled to be held in June 2006.
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Philips Semiconductors engages in, among other things, the development, design and manufacturing of semiconductor products. Fabs owned by Philips Semiconductors, such as Philips Semiconductors Nijmegen, currently dedicate their foundry capacity to the needs of the Philips Group alone. These fabs may compete with us as they supply wafers to the Philips Group, which has been one of our top five customers for each of the three years ended December 31, 2005. However, since they are dedicated to serve the Philips Group, they do not currently compete with our sales to our other customers.
As disclosed under paragraph (a) above, we do not believe Systems on Silicon Manufacturing directly competes with us.
(c) Mr Weiping Zhou is one of our non-executive Directors. He is also executive vice president of Shanghai Belling, and director of Shanghai Belling’s product management head office.
Shanghai Belling engages in the design and manufacture of integrated circuits, discrete part chips, pertinent modules and ancillary products of multi-media information systems, design and manufacture of electronic equipment and instruments, technical services and consultancy services. Shanghai Belling primarily manufactures its own IC products and can thus be classified as an IDM. Starting in 2005, Shanghai Belling allocated a portion of its excess processing capacity to provide foundry services to third-party customers, the majority being fabless semiconductor companies in the PRC. However, Shanghai Belling primarily offers its customers process technologies of higher linewidths that differ from the technical specifications required for most of our customers’ end products. As such, we have not experienced Shanghai Belling as, and do not believe it is, our significant direct competitor.
Shanghai Belling’s production management head office, a division of Shanghai Belling, engages in the research, development, application, investment, sale and domestic trading of integrated circuits and pertinent technology, and the consultancy services in respect of the abovementioned business. We believe that Shanghai Belling’s production management head office may compete with our customers, but not directly with us.
Accordingly, we believe we are capable of carrying on our business independently of, and at arms length from, Shanghai Belling.
Save as disclosed in this prospectus, none of our Directors currently has any interest which competes or is likely to compete, either directly or indirectly, with our business.
ENVIRONMENTAL MATTERS
The semiconductor production process generates gaseous wastes, liquid wastes, waste water and other industrial wastes in various stages of the manufacturing process. We have installed various types of anti-pollution equipment in our fabrication facilities to reduce and treat the wastes generated in our manufacturing process. Our operations are subject to regulation and periodic monitoring by the State Environmental Protection Bureau of the PRC, as well as local environmental protection authorities, including those under the Shanghai Municipal Government, which may in some cases establish stricter standards than those imposed by the State Environmental Protection Bureau. The PRC national and local environmental laws and regulations impose fees for the discharge of certain waste substances. If discharges exceed the prescribed levels, excess discharge fees are charged. The PRC national and local governments may at their own discretion
—90— BUSINESS assess fines, close or suspend the operations of any facility that fails to comply with orders requiring it to cease or remedy activities causing environmental damage. No such penalties have been imposed on us, and we believe that we have been in material compliance with applicable environmental regulations and standards.
We have adopted pollution control measures for the effective maintenance of environmental protection standards consistent with the requirements applicable to the semiconductor industry in the PRC. Waste generated from our operations, including acid waste, alkaline waste, flammable waster, toxic waste, oxide waste and self-combusting waste are properly disposed of. We have in many cases implemented waste reduction steps beyond the scope of current regulatory requirements.
In 1998, we were awarded one of the first ISO 14001 certificates for environmental management for semiconductor companies in the PRC. The ISO 14001 consists of a set of standards that provide guidance to the management of organizations in achieving an effective management system.
INSURANCE
We maintain insurance with respect to our facilities, equipment, products and inventories. The insurance for our fabs and our equipment covers, among other things, physical damage and business interruption up to their respective policy limits except for exclusions as defined in their respective policies. We also maintain public liability and product liability insurance for losses to others arising from our business operations.
A fire accident occurred on our premises on May 25, 2002, which damaged our exhaust pipe systems and manufacturing equipment and which resulted in a disruption in our production operations for seven days. As a result of the fire, we incurred losses of under US$1.0 million, for which we made an insurance claim and received US$741,572 in 2003 in compensation from our insurers, which amount was recorded in our other income account for accounting purposes. Our claim was made on the basis of our loss of projected profits during a period of actual business disruption of our operations.
In order to help prevent future fire accidents from occurring and affecting our operations, we have adopted the following measures:
. replacement of plastic exhaust ducts with stainless steel ducts, in order to reduce the risk of heat-related damage;
. use of protective tools for flammable equipment;
. installation of additional fire-detecting and extinguishing equipment, such as smoke detector systems and sprinkler systems; and
. regular testing of equipment which is material to our operations.
Other than the above, we have made no other material claims since 2002.
While we believe that our insurance coverage is consistent with semiconductor industry practice in the PRC, significant damage to any of our fabs, whether as a result of fire or other causes, could seriously harm our business.
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PROPERTY
Our corporate headquarters and our fabs in Shanghai occupy an aggregate area of approximately 39,010 square meters of land. Pursuant to a land use rights grant contract ( ) dated August 9, 2004, entered into between (Shanghai Housing and Land Resources Administration Bureau) and us, we were granted the land use rights to our land for a term of 50 years, commencing on August 9, 2004 and expiring on August 9, 2054 for industrial use. In accordance with the Land Grant Contract, we paid a land premium of RMB4,291,100 and obtained a valid land use rights certificate for our land. In addition, we entered into the agreement for the payment of land development costs ( ), dated July 30, 2004 with (Shanghai Hi- Tech Park United Development Co., Ltd.), the developer of our land whereby we agreed to pay a land development cost to the developer as part of our acquisition of the land use right for our land. According to our PRC counsel, during the term of our land grant contract, we enjoy the exclusive right to transfer, lease and charge to other third parties our land use right for our land.
We have obtained the Shanghai Certificate of Real Estate Ownership ( )(Hu Fang Di Xu Zi (2004) Di No. 029325) for all 12 buildings that house our fabs, with an aggregate gross floor area of approximately 41,976.77 square meters. Two warehouses and a workshop, with an aggregate gross floor area of approximately 1,935 square meters, were demolished in July 2004 and December 2004, respectively. A central utilities station, with a gross floor area of approximately 415.67 square meters is not included in the title certificate. The central utilities station is a temporary facility used to house our cooler and air compressor systems for the production of 8-inch wafers while a new, permanent structure was being built. Jingtian & Gongcheng, our legal advisors as to PRC law, have confirmed the central utilities station is lawful and does not require a building certificate. Our new, permanent six-storey central utilities building (including one basement storey) with a gross floor area of approximately 11,402 square meters was completed in October 2005, and we installed our new cooler and air compressor systems in August 2005 in advance of the completion of certain final construction work. We have obtained approval for the permanent central utilities building which is under application for Construction Completion Registration. We have subsequently completed the relocation of our existing systems from the temporary central utilities station to the central utilities building in November 2005. As such, we have completely demolished the temporary central utilities station in January 2006.
Sallmanns (Far East) Limited, an independent property valuer, valued our real property interests at RMB276.0 million as at February 28, 2006. The valuation certificate issued by Sallmanns (Far East) Limited in connection with its valuation are set out in ‘‘Appendix IV — Property Valuation.’’
COMPLIANCE AND LEGAL MATTERS
For the purpose of carrying on our business in the PRC, we have been advised by our PRC counsel that we have obtained all requisite licenses, certificates, permits and approvals, and that we have complied with all relevant rules and regulations.
As at the Latest Practicable Date, except for the matters set out under ‘‘Business — Intellectual Property,’’ we were not engaged in any litigation or arbitration of material importance, and no litigation or claim of material importance is known to our Directors to be pending or threatened by or against us, that would have a material adverse effect on the results of our operation or financial condition.
—92— RELATIONSHIP WITH OUR SHAREHOLDERS
THE PHILIPS GROUP
Existing relationship with the Philips Group
As part of our establishment as a Sino-foreign joint venture, the Philips Group became our technological and commercial partner through the Philips Foundry Services Agreement, the Philips Cooperation Agreement, the Technology Transfer and Cooperation Agreement and the Philips Identification Licensing Agreement. The Philips Group is one of the largest electronics companies in the world and possesses extensive know-how and experience in relation to the manufacturing processes and services necessary to a semiconductor foundry. Our technological and commercial partnership with the Philips Group is very important to our business and operations as well as our ability to maintain and develop our customer base.
Under the Philips Foundry Services Agreement, the Philips Group engages our foundry services for the manufacturing of certain of their products whereby we use the process technologies and information which the Philips Group furnishes and licensed to us on a non-exclusive basis for the sole purpose of manufacturing and selling Philips Licensed Products to the Philips Group. Under the Technology Transfer and Cooperation Agreement, the Philips Group furnishes us with the information and process technologies necessary to manufacture Philips Licensed Products for sale to both the Philips Group and to certain of our other customers and provide technical assistance to us. To the extent such information and process technologies are covered by any present or future patents or any other rights registered in the name of the Philips Group, the Philips Group also granted us a license to manufacture and sell Philips Licensed Products to our other customers under such rights.
In addition, pursuant to the Technology Transfer and Cooperation Agreement and the Philips Identification Licensing Agreement, as part of our strategy to produce 8-inch wafers, Royal Philips granted us a license under certain intellectual property rights relating to non-volatile memory, comprising mainly the EEPROM process technology, for use in manufacturing Identification Products. Further, pursuant to the Philips Cooperation Agreement and the Philips Identification Licensing Agreement, Philips Semiconductors supports and advises us in offering Design Services to authorized PRC-based manufacturers of identification cards. In addition, we are one of only two semiconductor manufacturers authorized by the PRC government to provide manufacturing services to designers of national identification cards for Chinese citizens.
Unlike our licensing arrangements with our other customers, the information and process technologies furnished or licensed to us by the Philips Group may be used to produce the products of customers other than the Philips Group. In consideration for this license, we pay the Philips Group a royalty equal to 3% of our net sales revenue from products we manufacture for both the Philips Group and our other customers. For the three years ended December 31, 2003, 2004 and 2005, the amount of royalties we paid to the Philips Group was approximately RMB4.0 million, RMB5.8 million and RMB13.8 million, respectively.
We also entered into various agreements with the Philips Group whereby the Philips Group provided to us certain information technology related services. See the section headed ‘‘Relationship with our Shareholders — Connected Transactions — A. Continuing connected transactions exempt from independent shareholders’ approval requirements — 1. Provision of IT Services to our Company by our connected persons.’’
—93— RELATIONSHIP WITH OUR SHAREHOLDERS
As at December 31, 2005, amounts due from subsidiaries or associated companies of Royal Philips totalled RMB31.9 million and amounts due to subsidiaries or associated companies of Royal Philips totalled RMB14.3 million. These transactions, such as our sale of goods to, or our purchase of raw materials from, related parties, are in the ordinary course of our business. These are conducted on an arm’s length basis and on normal commercial terms, and are expected to continue after the completion of the Global Offering.
THE PROMOTERS AGREEMENT
Our Promoters have entered into the Promoters Agreement as part of our re-registration from a Sino-foreign joint venture to a foreign invested joint stock limited company for the purpose of the Global Offering. Under the Promoters Agreement, the Promoters as a group have, and Philips China has given us the following undertakings, which will continue to be in force following the Global Offering.
The Promoters undertake:
(a) that each of them shall be prepared to assist us in its efforts to obtain loans in Renminbi or other foreign currencies;
(b) that where any relevant Promoter is our supplier of technology, no license fee shall be paid or payable by us, except for the royalty fees fixed under the Technology Transfer and Cooperation Agreement with Philips Semiconductors International;
(c) that royalties paid or payable by us to any one or more Promoters as suppliers of technology shall in total not exceed 3% of the revenue derived from the products manufactured and sold by us using such technology;
Philips China undertakes:
(a) that we shall be entitled to use services provided by its wholly-owned subsidiary, Philips (China) Investment Company Limited, to balance our foreign currency account;
(b) that we may send personnel to Philips China to participate in meetings on international market research and training. Philips China also agrees to assist us in handling customs and immigration formalities for such personnel, and arranging accommodation and other necessary facilities during training; and
(c) to assist us in procuring domestically produced raw materials to substitute for imported raw materials, provided that the quality, specifications and prices of such domestically produced raw materials are equal to or better than imported raw materials.
Further, Philips China agrees to meet with our representatives at least once a year to discuss market trends and product developments, and upon our reasonable request, to test from time to time, products manufactured by us in our factories. In addition, the Promoters agree that Philips China shall have the right to institute quality audits in our production facilities.
Since 1995, we have not sought any assistance from our Promoters in obtaining loans and we currently have no intention to seek such assistance from our Promoters. Further, we currently do not use and we do not intend to use any services from Philips (China) Investment Company Limited, to balance our foreign currency account.
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CONNECTED TRANSACTIONS
Upon the listing of our H Shares on the Stock Exchange, a number of transactions which we have entered (or propose to enter) into will constitute connected transactions within the meaning of the Hong Kong Listing Rules. Set out below is a summary of these transactions as well as the application for waivers from strict compliance with the relevant requirements of the Hong Kong Listing Rules in relation to these connected transactions.
Applicable Hong Nature of Transaction Kong Listing Rules Waiver Sought
A. Continuing connected transactions exempt from independent shareholders’ approval requirements
1. Provision of IT Services to our Company Rule 14A.34 Waiver from announcement by our connected persons requirements
2. Transfer and licensing of information and Rule 14A.34 Waiver from announcement technology to our Company by our requirements connected persons
B. Non-exempt continuing connected transactions
Sales of Philips Licensed Products and Rule 14A.35 Waiver from announcement and Identification Products by us to the Philips Group independent shareholders’ approval requirements
A. Continuing connected transactions exempt from independent shareholders’ approval requirements
1. Provision of IT Services to our Company by our connected persons
Background and reasons for the transactions. In the ordinary and usual course of business, we obtain certain information technology related services (‘‘IT Services’’) from Philips Semiconductors International, Philips International B.V. (‘‘Philips International’’) and Philips Semiconductors, each of which is a wholly-owned subsidiary of Royal Philips. Royal Philips holds 100% of Philips China’s share capital. Philips Semiconductors International, Philips International and Philips Semiconductors are therefore associates of Philips China and our connected persons. The background and reasons for each category of the IT Services are set out below:
(a) (Open) ERIC software license
Philips Semiconductors has, since 1994, licensed to us the use of the ERIC software. The ERIC software was subsequently upgraded and renamed (Open) ERIC (the ‘‘Software’’) in 1998. The Software was developed by Origin. Origin was initially a subsidiary of Royal Philips and, in 2000, was spun-off from Royal Philips and merged with Atos to form Atos Origin. Royal Philips retained ownership of the Software as part of this merger, and continues to retain ownership of the Software after the sale of its interest in Atos Origin in 2005. We use the Software in our fab 1/2 to monitor and control our manufacturing process. The Software allows us to trace all stages of our wafer manufacturing process, and accurately keep track of our manufacturing yields, lead times and other indicators of our product quality and our manufacturing reliability. This software also enables us to monitor the performance of our equipment.
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We entered into a software license agreement (the ‘‘Software License’’) with Philips Semiconductors on July 23, 1998 whereby Philips Semiconductors licensed to us the use of the Software for an annual fee of US$75,000. We may terminate the Software License at any time after December 31, 2000 by giving two months prior written notice.
(b) Service level agreement
In connection with the Software License, we had, in the past, entered into service level agreements with Atos Origin Nederland B.V., a wholly-owned subsidiary of Atos Origin, to maintain and service the Software. Since Atos Origin Nederland B.V. ceased to provide maintenance services for the Software in 2005, Philips Semiconductors, as the current registered owner of the Software, has agreed to provide us with the maintenance services previously provided by Atos Origin Nederland B.V. As we continue to use the Software, we will require the Software to be maintained and serviced so as to ensure that the Software can continue to assess and monitor accurately the quality of our products. Accordingly, we have entered into a service level agreement (the ‘‘Service Level Agreement’’) with Philips Semiconductors on January 27, 2006 to maintain and service the Software. Under the Service Level Agreement, Philips Semiconductors allocates the number of hours of support to be provided to us during the term of the agreement. If required, we may request additional support. We pay a fixed fee for the regular support services we receive, and are charged for the actual number of hours of additional support we use. The Service Level Agreement is effective for one year from January 1, 2006 to December 31, 2006.
(c) Corporate IT Services
We entered into an IT Services agreement (the ‘‘Corporate IT Services Agreement’’) on March 13, 2006 with Philips International, pursuant to which Philips International, acting through its corporate information technology departments, offers us certain IT Services including email services and application hosting, software upgrades and maintenance services, software distribution infrastructure and web hosting services, and intranet and internet services.
The fees for IT Services under the Corporate IT Services Agreement will be reviewed at least once per year and will be determined on arm’s length terms. The Corporate IT Services Agreement was initially effective from January 1, 2005 for one year. Following expiry of this one-year period, the Corporate IT Services Agreement was extended automatically for an additional year and will continue to extend automatically for additional periods of one year unless terminated by either party in accordance with its terms.
(d) dataPower software and maintenance services
We have received, since 2000, various IT Services including certain maintenance and support services in relation to the dataPower software (the ‘‘dataPower Software’’) from Philips Product Division Semiconductors, department Supply Chain Management and ICT (‘‘PSC’’), a wholly-owned subsidiary of Philips Semiconductors. We entered into the dataPower Services Agreement (the ‘‘dataPower Agreement’’) on March 15, 2006 with PSC which is effective from January 1, 2006 to December 31, 2006. Under the dataPower Agreement, PSC charges us a maintenance and support fee, based on the number of orders we make for licenses to upgrade the dataPower Software.
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The dataPower Software is important to our production processes. It is an engineering data analysis tool that enables us to analyze our manufacturing yields and the stability of our process technologies. This tool also allows us to assess our manufacturing efficiency in a timely manner and to determine whether improvements are required. We believe that the dataPower Software is the most appropriate tool available in the market at a reasonable price for analyzing our manufacturing processes.
In addition, there are frequent releases of upgrades to the dataPower Software. Therefore, we need to engage the maintenance and support services under the dataPower Agreement to have access to these upgrades.
Pricing. The fees paid by us to our connected persons for the provision of IT Services are determined on the same basis as fees charged by other service providers who provide similar services. Such fees are in line with market rates and are agreed with each of the connected persons from time to time.
Historical amounts and caps. For each of the years ended December 31, 2003, 2004 and 2005, fees paid by us to Philips Semiconductors, Atos Origin Nederland B.V., Philips International and PSC for the provision of IT Services to us amounted to RMB2.8 million (equivalent to HK$2.7 million), RMB2.1 million (equivalent to HK$2.0 million) and RMB2.6 million (equivalent to HK$2.5 million), respectively, or 0.4%, 0.2% and 0.3% of our total revenue for the same periods, respectively.
For the purposes of the Hong Kong Listing Rules, the Company has set the caps for the continuing connected transactions relating to the provision of IT Services for each of the three years ended December 31, 2006, 2007 and 2008 at approximately RMB4.6 million (equivalent to approximately HK$4.4 million), approximately RMB4.7 million (equivalent to approximately HK$4.5 million) and approximately RMB4.9 million (equivalent to approximately HK$4.7 million), respectively. In arriving at the caps for the three years ending December 31, 2008, in addition to the annual US$75,000 fixed license fees, we have taken the average rate of variable fees actually paid over the two years ended December 31, 2005 and have based this on our estimated usage of IT Services in respect of the three years ending December 31, 2008, in order to arrive at our estimated variable fees which will be payable during the same periods. We have prepared these caps independently of the Philips Group and we cannot assure you that these caps can be achieved during the periods stated.
The total fees for IT Services include both variable fees and a fixed fee. The fixed fee is the US$75,000 license fee in relation to the Software License. The fees for maintaining and servicing the Software under the Service Level Agreement, the provision of IT Services under the Corporate IT Services Agreement and the provision of the dataPower Software and related services under the dataPower Agreement will depend on the extent such services are used. The usage of such services will, to a large extent, depend on our production levels and our sales to customers. In our view, the fees charged by the Philips Group under the Software License and the Corporate IT Services Agreement have been determined on an arm’s length basis and are on normal commercial terms in line with market rates.
The term of the Software License. The term of the Software License shall be effective until we terminate it by giving two months’ prior written notice to Philips Semiconductors and it therefore may exceed the period of three years referred to in Rule 14A.35(1) of the Hong Kong Listing Rules. We have used the Software since 1994 and the manufacturing process control system of our fab 1/2 is based on the Software. The Software is therefore integral to the
—97— RELATIONSHIP WITH OUR SHAREHOLDERS operation of our fab 1/2. Our ability to provide quality products and reliable services to our customers depends, to a large extent, on our ability to benefit continually from the Software License without frequent disruption. We are, and the Joint Sponsors are also, of the view that it is normal business practice in the industry in which we operate for this type of manufacturing control software licenses to have a continuous duration.
The term of the license of the Corporate IT Services Agreement. The Corporate IT Services Agreement was automatically extended following its expiry on December 31, 2005. Therefore it may exceed the period of three years referred to in Rule 14A.35(1) of the Hong Kong Listing Rules. We have used the IT Services under the Corporate IT Services Agreement (and its predecessor agreements) since 1998. The IT Services under the Corporate IT Services Agreement facilitate as well as enhance the technology cooperation between the Philips Group and us. Such cooperation is crucial to the smooth running of our production processes, particularly since we do not develop any technology on our own. We are, and the Joint Sponsors are also, of the view that it is normal business practice in the industry in which we operate for the Company to enter into the Corporate IT Services Agreement for a continuous duration.
2. Transfer and licensing of information and technology to our Company by our connected persons
Background and reasons for the transactions. Since our incorporation as a Sino-foreign joint venture in October 1988, we have, in the ordinary and usual course of business, sourced our information and technology in manufacturing and developing analog semiconductors from the Philips Group. As part of our establishment as a Sino-foreign joint venture, the Philips Group became our technological and commercial partner through the Technology Transfer and Cooperation Agreement which we entered into with Philips Semiconductors International, a wholly-owned subsidiary of Royal Philips.
In 2002, as part of our strategy to produce 8-inch wafers, we entered into the Philips Identification Licensing Agreement whereby Royal Philips granted us a license to manufacture and sell semiconductors containing integrated circuits processed from non-volatile memory technology (which is the EEPROM process technology) for use in manufacturing Identification Products. Further, pursuant to the Philips Cooperation Agreement and the Philips Identification Licensing Agreement, Philips Semiconductors supports and advises us in offering Design Services to authorized PRC-based manufacturers of national identification cards for Chinese citizens. In addition, we are one of only two semiconductor manufacturers authorized by the PRC government to provide manufacturing services to designers of national identification cards for Chinese citizens.
(a) The Technology Transfer and Cooperation Agreement. We entered into the Technology Transfer and Cooperation Agreement with Philips Semiconductors International on June 28, 1988, which was subsequently extended, modified and renewed on November 28, 1994 and January 12, 2005. The Technology Transfer and Cooperation Agreement sets out the terms and conditions of the cooperation between Philips Semiconductors International and our Company in relation to the provision of certain information, technology and technical assistance and the grant
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of a license over the patents, copyrights or other rights and know-how relating to such information and technology. Under the Technology Transfer and Cooperation Agreement, Philips Semiconductors International agreed to:
(i) transfer to us the relevant processes and/or associated volume production knowledge and experience relating to foundry manufacturing services (‘‘Know- how’’);
(ii) grant to us a non-exclusive, non-transferable and indivisible license to manufacture at our production facility in the PRC and sell Philips Licensed Products under any present and future patent rights or any other industrial property rights registered or applied in the name of Royal Philips or its subsidiaries (‘‘License’’);
(iii) provide us with technical assistance (‘‘Technical Assistance’’) for the manufacture, testing, and assembly of Philips Licensed Products; and
(iv) provide technical training (‘‘Technical Training’’) to our engineers.
In respect of the Know-how transferred to, the License granted to, and the Technical Assistance and Technical Training provided to us under the Technology Transfer and Cooperation Agreement, we agreed to pay Philips Semiconductors International a consideration equivalent to 3% of the net selling price of each Product we sell to both the Philips Group and to customers other than the Philips Group who use Philips Semiconductors International processes (the ‘‘Royalty Fee’’).
(b) Philips Identification Licensing Agreement. As part of the cooperation between us and Philips Semiconductors under the Philips Cooperation Agreement (which was entered into between us and Philips Semiconductors on May 29, 2002) and the Philips Identification Licensing Agreement (which was entered into between us and Royal Philips on May 29, 2002), Royal Philips granted to us a non-exclusive, non- transferable license under certain intellectual property rights relating to non-volatile memory, the EEPROM process technology, including design rules, parametric information, drawings, specifications, recipes, procedures and other technical information, for use in our manufacture of Identification Products. Through this cooperation arrangement, Philips Semiconductors supports our provision of Design Services to authorized PRC-based manufacturers of national identification cards for Chinese citizens.
Under the Philips Identification Licensing Agreement, Philips Semiconductors charges us a fee of 10% of the net selling price of each product we produce using the technology under this agreement (which fee includes the Royalty Fee) and we sell to our customers (including the Philips Group).
Pricing. In our view, the fees charged by the Philips Group were determined on an arm’s length basis and are on normal commercial terms in line with market rates.
Historical amounts and caps. For each of the years ended December 31, 2003, 2004 and 2005, the aggregate fees paid to the Philips Group under the Technology Transfer and Cooperation Agreement and the Philips Identification Licensing Agreement amounted to
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RMB4.0 million (equivalent to HK$3.8 million), RMB5.8 million (equivalent to HK$5.6 million) and RMB13.8 million (equivalent to HK$13.3 million), respectively, and accounted for 0.5%, 0.5% and 1.5% of our total revenue for the same periods, respectively.
For the purposes of the Hong Kong Listing Rules, the Company has set the caps for this continuing connected transaction for each of the three years ended December 31, 2006, 2007 and 2008 at approximately RMB25.0 million (equivalent to approximately HK$24.0 million), approximately RMB26.0 million (equivalent to approximately HK$25.0 million) and approximately RMB25.6 million (equivalent to approximately HK$24.6 million), respectively. In arriving at the caps for the three years ended December 31, 2008, we have taken the average rate of the fees we actually paid over the two years ended December 31, 2005, and have based this on our estimated volume of Philips Licensed Products to be sold in each of the three years ending December 31, 2008, taking into account, in particular, the expected substantial rise in demand for national identification cards for Chinese citizens, which we project will result in an increase in fees to be charged by the Philips Group under the Philips Identification Licensing Agreement. We have prepared these caps independently of the Philips Group and we cannot assure you that these caps can be achieved during the periods stated. As mentioned above, the fees we pay to the Philips Group depend on the volume of Philips Licensed Products, Identification Products and wafers manufactured using the Design Services and sold in each relevant year. Philips Licensed Products and Identification Products may be sold to the Philips Group or to our other customers. Design services can only be provided to authorized national identification card manufacturers in the PRC.
We estimate that, for the three years ended December 31, 2006, 2007 and 2008, sales of Philips Licensed Products to our other customers will increase with the introduction of new process technologies from the Philips Group. We also estimate that sales of wafers manufactured using the Design Services will also increase for the three years ended December 31, 2006, 2007 and 2008 due to an expected increase in the sale of national identification cards for Chinese citizens during this period.
The term of the Technology Transfer and Cooperation Agreement. The Technology Transfer and Cooperation Agreement was dated November 28, 1994 and was effective from February 23, 1995 for an initial period of ten years, continuing thereafter for a further period of ten years, unless and until it was terminated in accordance with its terms. On January 12, 2005, the Technology Transfer and Cooperation Agreement was further amended such that it has a ten-year period from March 2, 2004, being the date of our re-registration as a joint stock limited company, and shall be automatically renewed for further periods of ten years (subject, in each case, to continuing compliance with the Hong Kong Listing Rules), unless and until it is terminated by either party giving written notice of at least two years, or by either party being in breach of its terms. The term of the Technology Transfer and Cooperation Agreement exceeds the period of three years referred to in Rule 14A.35(1) of the Hong Kong Listing Rules.
These are three principal reasons as to why the Technology Transfer and Cooperation Agreement has a duration of ten years or more:
(i) Since our establishment as a Sino-foreign joint venture and as is consistent with the nature of joint a venture relationship, we have entered into a framework technology transfer and cooperation agreement with the Philips Group for a term equal to or longer than ten years. The parties, when entering into this framework technology transfer and cooperation agreement for such duration, were of the opinion that this
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agreement would strengthen their commercial and technological partnership, which has allowed us to build and maintain our own technology platform, and to achieve our position as one of the world’s leading dedicated analog foundries.
(ii) Although we have reduced our sourcing of information and technology from the Philips Group, the Philips Group continues to be one of our major sources of information and technology. Unlike arrangements with our other customers, the information and technology furnished to us by the Philips Group and the license granted to us over the present and future patents registered under the Philips Group’s name can be used to manufacture products of our other customers.
(iii) We and the Joint Sponsors are of the view that it is normal business practice in the industry in which we operate for such framework technology transfer and cooperation agreement to have a duration of ten years or more.
B. Non-exempt continuing connected transactions
Rule 14A.35 of the Hong Kong Listing Rules provides that a continuing connected transaction not falling under Rule 14A.33 must comply with the reporting, announcement and independent shareholders’ approval requirements contained in Chapter 14A of the Hong Kong Listing Rules, including the requirements under Rule 14A.35.
Sales of Philips Licensed Products and Identification Products by us to the Philips Group
Background. In the ordinary and usual course of business, we have, since our incorporation in October 1988 as a Sino-foreign equity joint venture, and, since 1995, pursuant to the Philips Foundry Services Agreement, manufactured and sold Philips Licensed Products to the Philips Group. Under the Philips Foundry Services Agreement between us and Philips Semiconductors renewed on January 1, 2002, we agreed to manufacture Philips Licensed Products for sale to the Philips Group using the manufacturing process (the ‘‘Process’’) and other design rules and proprietary information provided by Philips Semiconductors (‘‘Philips Information’’). Pursuant to the Philips Foundry Services Agreement, Philips Semiconductors would place purchase orders with us for itself and on behalf of members of the Philips Group as and when required, setting out the technical specifications and the quantity of Philips Licensed Products Philips Semiconductors wants to purchase, and we agree to use our best efforts to meet all of Philips Semiconductors’ quantity requirements for Philips Licensed Products. Members of the Philips Group may place purchase orders directly with us on the understanding that such purchase orders are made by Philips Semiconductors in accordance with the terms and conditions of the Philips Foundry Services Agreement. Such quantity shall be agreed between Philips Semiconductors and us on a case-by-case basis.
In addition, we have been manufacturing and selling Identification Products to the Philips Group since January 2002, pursuant to the Philips Cooperation Agreement with Philips Semiconductors.
Philips Semiconductors is a wholly-owned subsidiary of Royal Philips, which holds 100% of Philips China’s share capital. Therefore, Philips Semiconductors is an associate of Philips China and our connected person.
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Pricing. Our Directors have confirmed that prices of Philips Licensed Products sold under the Philips Foundry Services Agreement and Identification Products to be sold under the Philips Cooperation Agreement were and will be determined on an arm’s length basis and on the same basis as prices charged to our other independent party customers. Prices of Philips Licensed Products and Identification Products sold and to be sold include all materials, supply and process costs, but exclude costs of masks used. Costs of the masks used are agreed separately between the parties and the mask suppliers.
Reasons for such transactions.
(a) Sales Strategy. The Philips Group (through Philips Semiconductors under the Philips Foundry Services Agreement and the Philips Cooperation Agreement) has, since our incorporation as a Sino-foreign joint venture, engaged our services and purchased Philips Licensed Products and Identification Products from us. The Philips Group was one of our five largest customers for each of the years ended December 31, 2003, 2004 and 2005. Our Directors consider that future sales of Philips Licensed Products and Identification Products to the Philips Group form an important part of our sales strategy.
In particular, under the Philips Cooperation Agreement, Philips Semiconductors supports us in providing Design Services to authorized PRC-based manufacturers of national identification cards for Chinese citizens.
(b) Technology Strategy. The Philips Group is one of the world’s leaders in semiconductor technology with expertise in both designing and manufacturing integrated circuits. It is an important source of our technology and know-how.
In addition to the technology transfer and licensing arrangements under the Technology Transfer and Cooperation Agreement, pursuant to the Philips Foundry Services Agreement, in order to facilitate the manufacturing of Philips Licensed Products for sale to the Philips Group, the Philips Group granted us a worldwide, fully paid-up and non-exclusive license, without the right to grant sub-licenses, to use the Philips Information for the sole purpose of manufacturing and selling Philips Licensed Products to the Philips Group. As a result of such license, we have been able to develop improvements to the Process and the Philips Information. As required under the Philips Foundry Services Agreement, we granted the Philips Group a worldwide, fully paid-up and non-exclusive license, including the right to grant sub-licenses, to use any improvements to the Process made or developed by us in manufacturing the Philips Licensed Products. We further agreed to disclose to Philips Semiconductors all such improvements and transfer all technical information relating to such improvements upon Philips Semiconductors’ request.
Under the Philips Cooperation Agreement, Philips Semiconductors agreed to transfer to us all information relating to the manufacturing processes necessary for us to manufacture Philips Licensed Products.
The information and technology transfer relationship between the Philips Group and us has allowed us to manufacture, sell and develop analog semiconductors with international standards of quality which are competitive in price. In order for us to continue benefiting from the Philips Group’s technology and know-how, it is necessary for us to continue manufacturing and selling Philips Licensed Products and Identification Products to the Philips Group.
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We and Philips Semiconductors entered into the Philips Foundry Services Agreement on January 1, 2002, which sets out the terms and conditions on the manufacturing and selling Philips Licensed Products by us using the technology and know-how transferred to us by Philips Semiconductors. The Philips Foundry Services Agreement is a general framework agreement for all future foundry services we provide to the Philips Group. The Philips Foundry Services Agreement is effective from January 1, 2002 and shall continue until December 31, 2006, and shall thereafter be automatically extended for periods of one year unless terminated by either party in accordance with its terms.
We entered into the Philips Cooperation Agreement with Philips Semiconductors on May 29, 2002, which sets out the terms and conditions for manufacturing and selling Philips Licensed Products by us using the technology and know-how transferred to us by Philips Semiconductors. The Philips Cooperation Agreement is effective from January 1, 2002 and continued until December 31, 2005, and was thereafter automatically extended for periods of two years unless terminated by either party in accordance with its terms.
Philips Licensed Products sold by us to the Philips Group under the Philips Foundry Services Agreement include both finished semiconductor wafers and good dies (packaged and unpackaged). Prices for finished semiconductor wafers are initially stated in the Philips Foundry Services Agreement and are reviewed quarterly and adjusted by mutual agreement between the parties. Prices for good dies (packaged and unpackaged) are agreed separately between the parties. Prices for all Philips Licensed Products include all materials, supply and process costs but exclude costs of masks, which are agreed separately between the parties and the mask suppliers. These prices are calculated with reference to the international market rate for the provision of the relevant products. Prices for Identification Products to be manufactured and sold by us in the future to Philips Semiconductors under the Philips Cooperation Agreement are determined in accordance with the provisions of the Philips Foundry Services Agreement.
The terms of the Philips Foundry Services Agreement and the Philips Cooperation Agreement. The Philips Foundry Services Agreement has a term of five years from January 1, 2002 until December 31, 2006, and shall thereafter be automatically extended for periods of one year, unless it is terminated in accordance with its provisions. The Philips Cooperation Agreement has a term of under four years from May 29, 2002 until December 31, 2005, and shall thereafter be automatically extended for periods of two years, unless it is terminated in accordance with its provisions. The terms of both the Philips Foundry Services Agreement and the Philips Cooperation Agreement exceed the period of three years referred to in Rule 14A.35(1) of the Hong Kong Listing Rules.
There are three principal reasons as to why each of the Philips Foundry Services Agreement and the Philips Cooperation Agreement has a duration of over three years:
(i) Since our incorporation as a Sino-foreign equity joint venture in 1988, we have been manufacturing and selling Philips Licensed Products to the Philips Group. In 1995 we have continued this relationship pursuant to the Philips Foundry Services Agreement, under which we accept orders from Philips Semiconductors (for and on behalf of itself and members of the Philips Group), and license any improvements to the Process to the Philips Group. When entering into the Philips Foundry Services Agreement of this duration, the parties have considered it desirable for a long-term and stable relationship of
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cooperation and exchange of information to be in place, allowing us to manufacture and sell Philips Licensed Products at competitive prices, and enabling synergies to result from the technological developments of both the Philips Information and the Process.
(ii) We provide Design Services for the manufacture of national identification cards for Chinese citizens. In May 2002, in anticipation of the opportunities available to us in relation to the national identification cards industry in the PRC, we entered into the Philips Cooperation Agreement, under which Philips Semiconductors permits us to make use of certain intellectual property rights relating to the manufacture of such national identification cards. In view of the length of time required for sufficient development of the appropriate technologies, the parties to the Philips Cooperation Agreement were of the view that an agreement of a continuous term will enable us to fully develop our technological base. Furthermore, royalties are not payable by us to Philips Semiconductors until we have shipped the wafers which we have produced with the technological know-how granted under the Philips Cooperation Agreement.
(iii) We and the Joint Sponsors are of the view that it is normal business practice in the industry in which we operate for such sales and cooperation agreements to have a continuous duration.
Historical amounts and caps. For each of the years ended December 31, 2003, 2004 and 2005, revenue derived from the sale of Philips Licensed Products to the Philips Group amounted, in aggregate, to RMB114.3 million (equivalent to HK$109.9 million), RMB148.8 million (equivalent to HK$143.0 million) and RMB152.3 million (equivalent to HK$146.4 million) respectively, and accounted for 14.6% , 13.0% and 16.3% of our total revenue for the same periods, respectively.
For the purposes of the Hong Kong Listing Rules, we have set the caps for this continuing connected transaction for each of the three years ended December 31, 2006, 2007 and 2008 at approximately RMB409.3 million (equivalent to approximately HK$393.4 million), RMB424.8 million (equivalent to HK$408.3 million) and RMB441.9 million (equivalent to HK$424.8 million), respectively. In arriving at the caps for the three years ended December 31, 2008, we have taken the average rate of actual sales over the two years ended December 31, 2005, and have based this on the estimated volume of Philips Licensed Products we will sell in each of the three years ending December 31, 2008, taking into account, in particular, the expected substantial increase in our revenue from new products we will manufacture for the Philips Group using four new process technologies starting from 2006, and the expected increase in the outsourcing of foundry services to our Company from Philips China. We have prepared these caps independently of the Philips Group and we cannot assure you that these caps can be achieved during the periods stated.
Pricing. In the Company’s view, the Philips Foundry Services Agreement was entered into on an arm’s length basis and its terms are normal commercial terms.
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APPLICATION FOR WAIVERS FROM THE STOCK EXCHANGE
Following the completion of the Global Offering, we will continue to enter into or carry out the transactions described above. Such transactions will constitute continuing connected transactions for us under the Hong Kong Listing Rules once the H Shares are listed on the Stock Exchange. According to the Hong Kong Listing Rules, such transactions may, depending on the nature and value of the transactions, require full disclosure and prior approval by our independent shareholders.
Directors’ Opinion
Our Directors (including our independent non-executive Directors) expect that they will, as at the date of the prospectus, be of the opinion that the transactions described in paragraphs (A) and (B) above have been entered into, and will be carried out following the completion of the Global Offering, in our ordinary and usual course of business and on normal commercial terms which are fair and reasonable so far as the interests of our shareholders are concerned.
Waivers from compliance with announcement and/or independent shareholders’ approval requirements
Under the Hong Kong Listing Rules, the continuing connected transactions under paragraph (B) are considered to be non-exempt continuing connected transactions under Rule 14A.35 of the Hong Kong Listing Rules and would require compliance with the reporting and announcement requirements set out in Rules 14A.45 to 14A.47 of the Hong Kong Listing Rules and prior independent shareholders’ approval requirement set out in Rule 14A.48 of the Hong Kong Listing Rules on each occasion on which they arise.
In relation to the types of continuing connected transactions under paragraph (A), each of the percentage ratios (other than the profits ratios), where applicable, in relation to each of these categories is, on an annual basis, expected to be less than 2.5% under Rule 14A.34 of the Hong Kong Listing Rules. Accordingly, such transactions are exempt from the independent shareholders’ approval requirement but are subject to the reporting and announcement requirements set out in Rules 14A.45 to 14A.47 of the Hong Kong Listing Rules.
As the continuing connected transactions in paragraphs (A) and (B) (the ‘‘Continuing Connected Transactions’’) are expected to continue on a recurring basis after the listing of the H Shares on the Stock Exchange, our Directors consider that compliance with the announcement and/ or the independent shareholders’ approval requirements would be impractical and would be unduly burdensome to us. It would also add unnecessary administrative costs for us. Accordingly, we have applied to the Stock Exchange for a waiver pursuant to its discretion under Rule 14A.42(3) of the Hong Kong Listing Rules to exempt the transactions contemplated in paragraphs (A) and (B) above from compliance with the announcement and/or independent shareholders’ approval requirements under the Hong Kong Listing Rules.
In addition, we confirm that we will comply with Rules 14A.35(1), 14A.35(2), 14A.36, 14A.37, 14A.38, 14A.39 and 14A.40 of the Hong Kong Listing Rules in relation to the transactions contemplated in paragraphs (A) and (B).
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In respect of Rules 14A.35(2) and 14A.36(1) of the Hong Kong Listing Rules, the maximum aggregate annual values for the transactions in paragraphs (A) and (B) shall not exceed the applicable annual limits set out below:
Transaction Annual limit on aggregate value of transactions 2006 2007 2008 (RMB millions)
A1. Provision of IT Services to our Company by our connected persons 4.6 4.7 4.9 A2. Transfer and licensing of information and technology to our Company by our connected persons 25.0 26.0 25.6 B. Sales of Philips Licensed Products and Identification Products by us to the Philips Group 409.3 424.8 441.9
Each of the caps above have been prepared independently of the Philips Group, and we cannot assure that these caps can be or will be achieved.
Our Directors (including our independent non-executive Directors) confirm that the maximum aggregate annual values of these agreements or arrangements have been ascertained in accordance with Rule 14A.35(2) of the Hong Kong Listing Rules, and they are of the view that the maximum aggregate annual values are fair and reasonable and in the interests of our shareholders as a whole.
As at December 31, 2008, certain of the agreements in paragraphs (A) and (B) for which we are applying for waivers will remain in effect (unless, in the case of the Software License, the Corporate IT Services Agreement, the Technology Transfer and Cooperation Agreement, the Philips Foundry Services Agreement or the Philips Cooperation Agreement, it is terminated by a party thereto in accordance with its terms). In order to ensure the smooth continuation of each of the agreements in paragraphs (A) and (B), and to strengthen the long-term cooperation between us and the Philips Group as contemplated by these agreements or arrangements, we undertake to comply with the requirements set out under Chapter 14A of the Hong Kong Listing Rules.
We shall review the terms of the agreements under paragraphs (A) and (B), and we will set proposed new caps on these agreements for each year after 2008, which will be determined with reference to the performance of the obligations, and the conduct of the transactions by us and the relevant counterparties, under these agreements during the relevant year. With regard to the approval of the proposed caps on these agreements for each of the three years ending December 31, 2009, 2010 and 2011, we undertake to comply fully with the requirements of the Hong Kong Listing Rules, including but not limited to seeking approval of our independent shareholders by poll at general meeting. We consider this approval requirement provides our independent shareholders with an opportunity to review and reconsider the renewal of the proposed caps of these agreements upon expiry of the initial three-year term, and hence is fair and reasonable insofar as our shareholders are concerned. In the event we are unable to obtain our independent shareholders’ approval on the proposed caps, we shall review the terms of these agreements or arrangements, and may re-negotiate such terms with members of the Philips Group or with other third parties, and we undertake to use our best endeavors to obtain appropriate arrangements on terms no less satisfactory than that of the transactions under paragraphs (A) and (B), so as to ensure our Company’s operations will not be materially affected.
—106— RELATIONSHIP WITH OUR SHAREHOLDERS
We confirm that if any terms of the agreements referred to the above are altered (unless as provided for under the terms of the relevant agreement), or if we enter into any new agreements or arrangements with any connected persons (within the meaning of the Hong Kong Listing Rules) in the future, under which the aggregate consideration paid or payable by us in each year exceeds the caps referred to above, we will comply with the provisions of Chapter 14A of the Hong Kong Listing Rules dealing with connected transactions, unless we apply for and obtain separate waivers from the Stock Exchange.
In the event of any future amendments to the Hong Kong Listing Rules imposing requirements more stringent than those existing as at the date of this prospectus on transactions of the kind to which the connected transactions referred to in this prospectus belong, including, but not limited to, a requirement that these transactions be made conditional upon approval by our independent shareholders, we will take immediate steps to ensure compliance with such requirements within a reasonable time.
Joint Sponsors’ Opinion
The Joint Sponsors have participated in due diligence and discussions among us and our advisors to satisfy themselves of the reliability of the information provided in relation to the connected transactions described above. Based on the above, the Joint Sponsors are of the view that such continuing connected transactions are in our ordinary and usual course of business, on normal commercial terms and are fair and reasonable and in the interests of our shareholders as a whole, and that the terms of the continuing connected transactions and the annual caps set out above are fair and reasonable as far as our shareholders as a whole are concerned.
In addition, the Joint Sponsors confirm that in respect of certain continuing connected transactions which have durations of more than three years, we will comply with the relevant provisions of Chapter 14A of the Hong Kong Listing Rules following expiry of the three financial years ending December 31, 2008.
FUTURE INFORMATION AGREEMENT WITH ROYAL PHILIPS
Following the Listing, we intend to enter into an information agreement with Royal Philips whereby, subject to our own obligations under the Hong Kong Listing Rules, we will agree to provide certain financial information to Royal Philips to enable it to comply with its financial reporting obligations in connection with its listings in other jurisdictions. This agreement will constitute a continuing connected transaction subject to Chapter 14A of the Hong Kong Listing Rules. As the agreement will not involve the payment of any consideration, it will be exempt from the announcement and independent shareholders’ approval requirements of Chapter 14A but will still require approval by our Board in accordance with the Hong Kong Listing Rules before becoming effective.
—107— REGULATIONS
The integrated circuit industry in the PRC is subject to substantial regulation by the PRC government and other international organizations, such as the World Intellectual Property Organization. This section sets forth a summary of the most significant PRC regulations and the relevant international regulations that affect our business.
SCOPE OF REGULATION
The Several Policies to Encourage the Development of Software and Integrated Circuit Industry ( ), promulgated by the State Council on June 24, 2000 (the ‘‘Integrated Circuit Policies’’), form the basis for a series of laws and regulations that set out in detail the preferential policies relating to IC Production Enterprises. The Integrated Circuit Policies, together with other ancillary laws and regulations, regulate integrated circuit production enterprises. Such laws and regulations include:
. the Notice on Relevant Taxation Policy Issues Concerning the Further Development of the Software Industry and the Integrated Circuit Industry ( ), jointly issued by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs on September 22, 2000 (the ‘‘Integrated Circuit Notice’’);
. the Notice on Taxation Policies Concerning the Further Development of the Software and the Integrated Circuit Industry ( ), jointly issued by the Ministry of Finance and the State Administration of Taxation on October 10, 2002 (the ‘‘Further Development Taxation Notice’’);
. the Notice on Taxation Policies Concerning the Import of Raw Materials and Consumables Used for Production by Some Integrated Circuit Production Enterprises for Their Own Use ( ), issued by the Ministry of Finance on August 24, 2002 (the ‘‘Raw Materials Taxation Notice’’); and
. the Notice on Taxation Policies Concerning the Import of Construction Materials Specially used for Clean Rooms by Some Integrated Circuit Production Enterprises ( ), issued by the Ministry of Finance on September 26, 2002 (the ‘‘Construction Materials Taxation Notice’’).
PREFERENTIAL INDUSTRIAL POLICIES RELATING TO IC PRODUCTION ENTERPRISES
IC Production Enterprises that are duly accredited in accordance with relevant laws and regulations may qualify for preferential treatment under PRC industrial policies. Under the Integrated Circuit Policies, accreditation of IC Production Enterprises is determined by the competent examination and approval authorities, who are responsible for integrated circuit projects after consultation with relevant taxation authorities. Specific provisions and procedures for accreditation of IC Production Enterprises are not set forth in current laws and regulations, and actual accreditation of IC Production Enterprises is conducted on a case-by-case basis.
We have received accreditation as an IC Production Enterprise entitling us to the benefit of the preferential industrial policies described below.
—108— REGULATIONS
ENCOURAGEMENT OF FOREIGN INVESTMENT IN IC PRODUCTION ENTERPRISES
Pursuant to the Integrated Circuit Policies and the Guideline Catalogue of Foreign Investment Industries jointly promulgated by the former State Development and Planning Commission, the former State Economic and Trade Commission and the former Ministry of Foreign Trade and Economic Cooperation on March 11, 2002, the following foreign investment categories are encouraged:
. design and mass fabrication of integrated circuits with a linewidth of less than or equal to 0.35 micron;
. development and fabrication of semiconductors and special materials for semiconductors; and
. fabrication of mixed integrated circuits.
Foreign investment in such encouraged projects may enjoy preferential treatment as stipulated in PRC laws and regulations.
Preferential Taxation Policies
Preferential Value-added Tax Policy. The Further Development Taxation Notice provided that, from January 1, 2002 to the end of 2010, the domestic sale of integrated circuits (including monocrystalline silicon chips) was subject to a value-added tax levy of 17%. Under this notice, after the value-added tax was levied, the taxpayer was entitled to a refund for the portion of the tax exceeding 3% of the actual value-added tax burden. The tax refund was required to be used by the enterprise for the research and development of integrated circuits and to increase production. However, this preferential treatment was terminated with effect from April 1, 2005.
According to the Integrated Circuit Notice, value-added tax ‘‘immediate refund’’ measures were not applicable to export sales of integrated circuits, regardless of whether the export sales were conducted by the enterprise itself or by other export enterprises.
Export Tax Refund. According to the Notice Regarding the changes to Export Tax Refund issued by the Ministry of Finance and the State Taxation Bureau on October 13, 2003 ( ( )), the export tax refund rate for integrated circuit products was reduced from 17% to 13%. Since our value-added tax rate for our export sales is 17%, we were required to begin paying a value-added tax rate on our exports of integrated circuit products of 4% from 2004.
On December 10, 2004, the Ministry of Finance and the State Taxation Bureau issued a notice to restore the 17% export tax refund rate for integrated circuit products, with effect from November 1, 2004.
Preferential Enterprise Income Tax Policies. Under the Integrated Circuit Policies, the Integrated Circuit Notice and the Further Development Taxation Notice, IC Production Enterprises whose total investment exceeds RMB8.0 billion (US$991.3 million) or whose integrated circuits have a linewidth of equal to or less than 0.25 micron, are entitled to preferential tax treatment similar to that granted to foreign investment in the energy and communications industries. Under these notices, we are entitled to a reduction of our base tax rate to 7.5% from 2004 through 2008.
—109— REGULATIONS
Enterprises with foreign investment in the energy and communication industries enjoy, under (a) the Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises ( ) (the ‘‘Income Tax Law’’) and (b) the Implementation Rules for the Income Tax Law preferential treatment of and exemption from or reduction of foreign enterprise income tax (‘‘FEIT’’). Pursuant to the approval from the relevant Shanghai taxation authority, we became entitled to a full exemption from FEIT in our first and second profitable years (after offsetting accumulated tax losses, which can be carried forward for utilization for a maximum period of five years) and a 50% reduction (the application income tax being 7.5%) in our fifth to tenth profitable years. Our first profitable year was 1999 in which we were entitled to full exemption from FEIT.
In addition, as an integrated circuits manufacturer with total investments of over RMB8.0 billion or with wafers of linewidths equal to or below 0.25 micron and pursuant to an approval document from the relevant tax authorities dated June 17, 2004, we were granted an additional tax concession and the income tax we paid for the year ended December 31, 2003 (being an amount of RMB15.2 million, which was refunded to us in 2004). Therefore, we enjoyed full exemption from FEIT for our fifth profitable year.
From January 1, 2002 to the end of 2010, investors in IC Production Enterprises and integrated circuit packaging enterprises that reinvest their after-tax profits from IC Production Enterprises for the purpose of increasing the registered capital in the IC Production Enterprises, or to establish other IC Production Enterprises and integrated circuit packaging enterprises for a period of operation of not less than five years, are entitled to a refund of 40% of the total amount of enterprise income tax paid on the reinvested portion. If the investment is withdrawn before the period of operation reaches five years, the amount of enterprise income tax refunded shall be repaid.
Exemption of Customs Duties and Import-related Value-added Tax. Under the Integrated Circuit Policies and the Integrated Circuit Notice, IC Production Enterprises whose total investment exceeds RMB8.0 billion or whose integrated circuits have a linewidth of equal to or less than 0.25 micron are exempted from customs duties and import-related value-added tax on imported raw materials and consumables used for production.
The Raw Materials Taxation Notice further sets forth a detailed list of the raw materials and consumables used for production that are subject to the preferential tax treatment set forth above.
Under the Integrated Circuit Notice, integrated circuit technology, whole set production equipment, and equipment and instruments imported by a duly accredited IC Production Enterprise for use in fabricating integrated circuits are, with the exception of commodities listed in the Catalogue of Imported Commodities for Foreign Investment Projects Not Subject to Tax Exemptions and the Catalogue of Imported Commodities for Domestic Investment Projects Not Subject to Tax Exemptions ( ) as stipulated by the State Council, exempted from customs duties and import-related value-added tax.
Under the Construction Materials Taxation Notice, commencing January 1, 2001, the importation of construction materials, auxiliary equipment and spare parts for the production of integrated circuits, specifically for cleanrooms (as listed in the annex to the Construction Materials Taxation Notice), by IC Production Enterprises whose total investment exceeds RMB8.0 billion or whose integrated circuits have a linewidth equal to or less than 0.25 micron is exempted from customs duties and import-related value-added tax.
—110— REGULATIONS
According to the Comments Regarding Further Encouraging Foreign Investment , a foreign invested enterprise can seek a refund of all the value-added tax imposed and deduct its income tax payable if it purchased domestically-produced equipment within the tax-free category, so long as its total investment falls within the maximum threshold. In addition, such enterprises whose research and development costs increase more than 10% in a financial year shall be entitled to deduct 50% of their research and development costs from their taxable income.
Preferential Time Limit for Depreciation Periods. Under the Integrated Circuit Notice, in the case of foreign invested enterprises whose total investment exceeds US$30.0 million, upon approval by the State Administration of Taxation, and in the case of foreign invested enterprises whose total investment is less than US$30.0 million, upon approval by the relevant local or provincial taxation authorities, the time limit for depreciation of equipment used by an IC Production Enterprise for production purposes may be shortened to not less than three years.
LEGAL FRAMEWORK CONCERNING THE PROTECTION OF INTELLECTUAL PROPERTY RELATING TO INTEGRATED CIRCUITS
The PRC has formulated various laws and regulations on intellectual property protection in respect of integrated circuits including:
. the Patent Law of the People’s Republic of China ( ), adopted at the fourth meeting of the Standing Committee of the Sixth National People’s Congress on March 12, 1984, effective April 1, 1985 and its amendments;
. the Paris Convention for the Protection of Industrial Property ( )of the World Intellectual Property Organization, of which the PRC became a member state on March 19, 1985;
. the General Principles of the Civil Law of the People’s Republic of China ( ) adopted at the fourth session of the Sixth National People’s Congress on April 12, 1986 effective January 1, 1987. Under this legislation, intellectual property rights were defined in the PRC’s basic civil law for the first time as the civil rights of citizens and legal persons;
. the Copyright Law of the People’s Republic of China, adopted by the 15th meeting of the Seventh National People’s Congress Standing Committee on September 7, 1990, effective June 1, 1991 and its amendments;
. the Regulations for the Protection of the Layout Design of Integrated Circuits, ( ) or the Layout Design Regulations, adopted March 28, 2001 at the 36th session of the executive meeting of the State Council, effective October 1, 2001; and
. the World Intellectual Property Organization’s Washington Treaty on Intellectual Property in Respect of Integrated Circuits, under which the PRC was among the first signatory states in 1990.
—111— REGULATIONS
Compulsory Licenses for Exploitation of Patents in Respect of Semiconductor Technology
Under the Patent Law and the Implementing Regulations of the Patent Law, three years following the date of granting the patent rights, any person or enterprise which has made reasonable proposals in good faith to the holder of the patent of invention or utility model seeking a license to those rights, but has been unable to obtain such license after an extended period of time, may request the administrative department responsible for patents under the State Council to grant a compulsory license for the relevant patent. However, where a compulsory license involves semiconductor technology, the implementation of a compulsory license is restricted to public and non-commercial uses, or to uses that counteract anti-competitive actions, as determined by judicial or administrative procedures.
Environmental Regulation
We are subject to a variety of PRC environmental laws and regulations promulgated by the central and local governments concerning examination and acceptance of environmental protection measures in construction projects, the use, discharge and disposal of toxic and hazardous materials, the discharge and disposal of waste water, solid waste, and waste gases, control of industrial noise and fire prevention. These laws and regulations set out detailed procedures that must be implemented throughout a project’s construction and operation phases.
An environmental impact assessment report must be submitted to the relevant environmental protection authority for review and approval before construction begins. Upon completion of construction, and prior to commencement of operations, an additional examination and acceptance by the relevant environmental protection authority is required. Within one month after receiving approval of the environmental impact assessment report, a semiconductor manufacturer is required to apply to and register with competent environmental authority the types and quantities of liquid, solid and gaseous wastes it plans to discharge, and the manner of discharge or disposal, as well as industrial noise and other related issues. If the above wastes or noise are found by the authorities to be within regulatory levels, renewable discharge permits are then issued for a specified period of time. At present, in relation to our fab 1/2 we have received approval with respect to the relevant environmental impact assessment report and were granted a discharge permit on November 30, 2002, and we have also received all approvals from the relevant PRC environmental regulatory authorities to operate our fab 3.
From time to time during our operation and also prior to renewal of the necessary discharge permits, the relevant environmental protection authority will monitor and audit the level of environmental protection compliance of our fabs. Discharge of liquid, solid or gaseous waste over permitted levels may result in the imposition of fines, the imposition of a time period within which rectification must occur or even suspension of operations.
—112— DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
MANAGEMENT
Board of Directors
Our Board consists of 11 Directors, three of whom are independent non-executive Directors. Our Directors are elected at our shareholders’ meeting for a term of three years, renewable upon re- election and re-appointment. An independent Director cannot concurrently hold the position of a Supervisor, manager or financial controller. The functions and duties conferred on our Board include convening shareholders’ meetings and reporting its work to the shareholders’ meetings, implementing the resolutions of the shareholders’ meetings, determining our business plans and investment plans, formulating our final accounts, formulating our proposals for dividend and bonus distributions and for the increase or reduction of share capital as well as exercising other powers, functions and duties as conferred by our Articles. Six of our non-executive Directors are also directors or members of the senior management of our Promoters.
Supervisors
The PRC Company Law requires a joint stock company with limited liability to establish a supervisory committee and this requirement is reflected in our Articles. The supervisory committee is responsible for monitoring our financial matters and overseeing the actions of our Board and our management personnel. The supervisory committee consists of seven Supervisors, six of whom are shareholders’ representatives who are elected, and may be removed, by the shareholders in a general meeting, and one of whom is a representative of our employees and who is elected, and may be removed by our employees. The term of office of our Supervisors is three years, renewable upon re-election and re-appointment. The functions and powers conferred on the supervisory committee include attending board meetings, examining our financial affairs, examining balance sheets, profit and loss accounts, business reports, dividend distribution proposals and other financial information proposed at shareholders’ general meetings by our Directors from time to time and overseeing the actions of our Board and other senior management personnel of our Company in carrying out their duties. In the case of any conflict of interest between us and any of our Directors, our Supervisors are required to confer with, or initiate legal proceedings against, such Directors on our behalf. A resolution proposed at any meeting of the supervisory committee shall be adopted only if it is approved by two-thirds or more of the Supervisors.
—113— DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
GENERAL
The following table sets forth certain information concerning our Directors and Supervisors. All our Directors were elected on February 18, 2004 and April 8, 2004 at our shareholders’ meetings, with the exception of Mr Weiping Zhou and Mr Petrus Antonius Maria van Bommel, our non- executive Directors, who were elected by our shareholders on April 11, 2005 and March 15, 2006, respectively. All our Directors (including our executive Directors) serve terms until March 1, 2007 and may serve consecutive terms. Our Supervisors serve terms until March 1, 2007. As at the date of this prospectus, none of our Directors, Supervisors or executive officers is a beneficial owner of any of our Shares.
Name Age Position
LIU Tony Yuhai ( ) ...... 51 Executive Director, President CHENG Jianyu ( )...... 48 Executive Director, Vice President and Chief Financial Officer RUAN Yanhua ( ) ...... 59 Non-executive Director, Chairman LEAR Anthony ...... 59 Non-executive Director, Vice-Chairman ZHU Peiyi ( ) ...... 41 Non-executive Director, Vice-Chairman ZHU Jian ( ) ...... 31 Non-executive Director ZHOU Weiping ( )...... 39 Non-executive Director VAN BOMMEL Petrus Antonius 49 Non-executive Director Maria...... WATKINS James Arthur ...... 60 Independent Non-executive Director BECZAK Thaddeus Thomas . . . 55 Independent Non-executive Director SHEN Weijia ( ) ...... 52 Independent Non-executive Director SHEN Qitang ( ) ...... 54 Supervisor YANG Yanhui ( ) ...... 43 Supervisor CHANG Yueh ( ) ...... 57 Supervisor, Chairman of Supervisory Committee MANOCHAAjit...... 56 Supervisor WANG Xiangqun ( ) . . . . . 36 Supervisor HUANG Jihua ( ) ...... 43 Supervisor XU Songneng ( )...... 59 Supervisor
MANAGEMENT CONTINUITY OF OUR COMPANY
Prior to our Company’s re-registration, our Company had existed as a Sino-foreign equity joint venture. Each of our joint venture partners, that is, each of our shareholders, had the right to appoint representatives to sit on our board of Directors. Since March 2, 2004, we have continued to adopt a shareholder-based approach towards our board of Directors and Supervisors. With the exception of our executive Directors, our independent non-executive Directors and an employee-nominated Supervisor, all of our Directors and Supervisors are nominated by our shareholders.
Under Rule 8.05(2) of the Hong Kong Listing Rules, we are required to demonstrate management continuity for at least the three preceding financial years, which, in our Company’s case, refers to the three years ended December 31, 2005 and through the date of this prospectus.
—114— DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
Until March 2, 2004, we were a Sino-foreign equity joint venture. During this period, our board of Directors comprised representatives of our shareholders, in approximate proportion to the equity interest held by each respective shareholder at the time, which was in accordance with our articles of association and the provisions of the Sino-foreign Equity Joint Venture Law of the PRC.
Throughout the three years ended December 31, 2005 and through the date of this prospectus, our day-to-day business affairs and essential operations have been actually managed by our core senior management team (the ‘‘Core Management Team’’). The Core Management Team has been headed by our President, Mr Tony Yuhai Liu. It also comprises, among others, Ms Jianyu Cheng as Vice President and Chief Financial Officer, and Mr Gao Zhoumiao as Vice President of Operations.
PRC laws and regulations do not differentiate between the roles of executive and non- executive directors of a Sino-foreign equity joint venture. During the period when we were a Sino- foreign equity joint venture, in accordance with our articles of association and the Sino-foreign Equity Joint Venture Law of the PRC, our Board of Directors was conferred the power to decide on all major issues, and was responsible for our strategic policies and development plans. However, none of such Directors was an executive manager of our Company, and instead held responsibilities within the designating shareholder. These Directors exercised non-executive functions in practice, and entrusted the management of our actual operations to the Core Management Team. At all formal meetings of the Directors, they had endorsed all recommendations of the Core Management Team unanimously (including matters which did not require unanimity under our articles of association), and had neither sought to interfere with, nor to object to, any management and operational decision of the Core Management Team. Furthermore, at no time during this period did the Directors exercise their power to remove any of the Core Management Team members.
Upon our re-registration on March 2, 2004, the individuals who had been members of our board of Directors immediately prior to March 2, 2004 were retained to serve on our current boards of Directors and Supervisors. In addition, Mr Tony Yuhai Liu and Ms Jianyu Cheng were appointed as our only two executive Directors. The Core Management Team has remained unchanged, and continues to be actually responsible for, and to have control over, the day-to-day management of our business affairs and operations.
We consider that the Core Management Team, in which our executive function resides, was in actual management control, and had been most relevant persons responsible for our track record results throughout the Relevant Period. We expect the Core Management Team to remain our core management at the time of, and after, the completion of the Global Offering.
DIRECTORS
Executive Directors
Mr Tony Yuhai Liu ( ), age 51, is our executive Director and President. He held various positions at Advanced Micro Devices, Inc. from 1984 to 1994 and he was the Chairman of the Chinese American Semiconductor Professional Association from 1990 to 1992. Mr Liu was the vice president of our operations department from 1994 to 1997. He was appointed general manager for quality management at the Philips Electronics China Group from 1997 to 1998. He was subsequently appointed the senior vice president for our sales and marketing department from 1998 to 1999. Mr. Liu has been our president since 2000, and has been our executive Director since March 2, 2004. Mr Liu graduated with a doctorate degree in chemical engineering from the University of California, Berkeley in 1982.
—115— DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
Ms Jianyu Cheng ( ), age 48, is our executive Director, our Vice President and our Chief Financial Officer. She has been a PRC qualified accountant since 1991. Ms Cheng was the manager of the finance department of Shanghai No.19 Radio Factory from 1983 to 1988 and she was the financial controller at Philips Semiconductor Corporation of Shanghai from 1988 to 1994. Ms Cheng has been our Vice President and Chief Financial Officer since 1995, and has been our executive Director as from the date on which our Articles of Association take effect, i.e. February 1, 2005. She received an executive master of business administration degree from China European International Business School in 1998.
Non-executive Directors
Mr Yanhua Ruan ( ), age 59, is one of our non-executive Directors and the Chairman of our Board. He is a senior engineer. Mr Ruan was a deputy director of Shanghai Pudong New Area Administrative Commission from 1992 to 2000 and he was also the chairman of the board and general manager of Shanghai Waigaoqiao Free Trade Zone United Development Co. Ltd. from 1993 to 1998. In addition, he was the executive vice chairman of Shanghai Waigaoqiao Free Trade Zone Administrative Commission from 1998 to 2000. Mr Ruan served as deputy director of the general office of Shanghai Chemical Industry Park Steering Group and as president of Shanghai Chemical Industrial Park Development Company Limited since 2000. He is also the chairman of Shanghai Chemical Industry Park Administrative Commission since 2001. He also served as the vice chairman of China Development Zone Association since 1994 and the chairman of Shanghai Industrial Development Zone Association since 2002. He was appointed as our non-executive Director as from March 2, 2004 following the nomination by SCIPI, our shareholder, in accordance with our Articles of Association.
Mr Jian Zhu ( ), age 31, is one of our non-executive Directors. Mr Zhu has previously worked at Shanghai Waigaoqiao Free Trade Zone United Development Co. Ltd. Mr Zhu has also previously served as secretary to the chairman at the Shanghai Waigaoqiao Free Trade Zone Administrative Commission and as secretary to the president at the Shanghai Chemical Industry Park Development Company Limited. He has served as the deputy general manager of SCIPI since 2001 and has served as director and general manager of SCIP (HK) since 2002. Mr Zhu has also served as secretary of the board of directors of Shanghai Chemical Industry Park Development Company Limited since 2003. He was appointed as our non-executive Director as from March 2, 2004 following the nomination by SCIP(HK), our shareholder, in accordance with our Articles of Association. Mr Zhu graduated from the accounting department of Shanghai University of Finance and Economics in 1996.
Mr Anthony Lear, age 59, is one of our non-executive Directors and the Vice Chairman of our Board. Mr Lear began his career in 1968 with Texas Instruments where he held a number of technical and managerial positions during his 16 years of service. He subsequently served as chief technology officer of Integrated Power Semiconductors Limited and later as the managing director of Seagate Microelectronics Ltd. Mr Lear joined Philips Semiconductors Hamburg, Germany in 1996 as senior vice president and general manager. He served as the chief executive officer of Systems on Silicon Manufacturing Co. Pte Ltd. from 2001. He was appointed senior vice president and general manager of Philips Semiconductors China in 2003. Mr Lear was a founding board member of the National Microelectronics Institute in the United Kingdom. He was appointed as our non- executive Director as from March 2, 2004 following the nomination by Philips China, our shareholder, in accordance with our Articles of Association. He is a chartered engineer and a member of the Institute of Electrical Engineers. He graduated with a bachelor degree in physics from the University of Leeds, England in 1968.
—116— DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
Mr Peiyi Zhu ( ), age 41, is one of our non-executive Directors and the Vice Chairman of our Board. Mr Zhu worked for the Bank of China for 13 years from 1987 and was the manager of the trust and advisory department of Bank of China, Shanghai Branch from 1999 to 2000. He has worked for COAMC Shanghai Office from 2000 and was appointed as the manager of second asset management department in 2004. He was appointed as our non-executive Director as from March 2, 2004 following the nomination by COAMC, our shareholder, in accordance with our Articles of Association. Mr Zhu graduated with a bachelor of economics degree from Fudan University in 1987. He received a master of business administration degree from Macau University of Science and Technology in 2004.
Mr Weiping Zhou ( ), age 39, is one of our non-executive Directors. Mr Zhou has been with Shanghai Belling since 1990, when he joined its wafer production unit. Mr Zhou held a number of positions in this unit until 1998, when he was promoted to chief supervisor for production, and manager of the testing unit. Mr Zhou was vice-president of Shanghai Belling, and as general manager of its manufacturing business, between 2003 and 2004. In January 2004, Mr Zhou served as executive vice-president of Shanghai Belling. Mr Zhou was our Director appointed by Shanghai Belling until August 2003. He was appointed as our non-executive Director as from April 11, 2005, following the nomination by Shanghai Belling, our shareholder, in accordance with our Articles of Association. He was educated at the East China Normal University, where he obtained a bachelor degree in Solidified Electronics in 1990. In 1997, Mr Zhou also studied for a management course at the Central European International Management School in Belgium. He further obtained a master degree in Business Administration at Fudan University in 2000.
Mr Petrus Antonius Maria van Bommel, age 49, is one of our non-executive Directors. Mr van Bommel started his career in the Philips Group in 1979, initially serving a number of finance and control positions within the Machine Factories, Home Information Systems and Components divisions of Royal Philips for 13 years. Between 1992 and 1995, he served as head of financial planning in Philips Hongkong and China Ltd., with primary responsibilities for overseeing the financial planning and accounting functions of various Philips manufacturing entities in Hong Kong. He was chief financial officer of the Passive Components and Advanced Components business within the Components division, and of the Consumer business within the Semiconductors division of Royal Philips from 1995 to 2002. Mr van Bommel then returned to Hong Kong in 2002 to serve as the chief financial officer of LG.Philips Displays group of companies (the ‘‘LPD Group’’), a joint venture between Royal Philips, LG Electronics Wales Ltd. and LG Electronics Inc., and was appointed deputy chief executive officer of the LPD Group in 2004. Since September 1, 2005, he has been a director and chief financial officer of Philips Semiconductors, and a member of its executive management team, with primary responsibilities for its finance and accounting, information technology and purchasing decisions around the world. Mr van Bommel was appointed as a non-executive Director as from March 15, 2006, following the nomination by Philips China, our shareholder, in accordance with our Articles of Association. He received a master degree in Business Administration at Erasmus University in Rotterdam, the Netherlands in 1988.
Between 2002 and 2005, Mr van Bommel, when serving as deputy chief executive officer and chief financial officer of the LPD Group, was also a director of two companies in the LPD Group which are private limited companies incorporated in Eindhoven, namely LG.Philips Displays Holding B.V. (‘‘LPD Holding’’) from April 1, 2004 to August 1, 2005, and LG.Philips Displays Investments B.V. (‘‘LPD Investments’’) from October 16, 2002 to August 1, 2005. LPD Holding was the holding company of the LPD Group, and also wholly owned LPD Investments. On August 1, 2005, Mr van Bommel resigned as a director of these two companies due to an internal personnel movement within the Philips Group, and was promoted to serve as chief financial officer of the Philips Semiconductors group worldwide from September 2005 onwards.
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We understand that the LPD Group initiated a strategic review of the viability of the LPD Group in September 2005, and subsequently concluded that it should be voluntarily liquidated. As such, bankruptcy proceedings commenced on January 30, 2006 in respect of LPD Holding, and on February 28, 2006 in respect of LPD Investments. The amounts involved in respect of the bankruptcy of the LPD Group were approximately US$1 billion. As at the date of this prospectus, we understand that the bankruptcy proceedings in respect of LPD Holding and LPD Investments are still ongoing.
Independent non-executive Directors
Mr James Arthur Watkins, age 60, is one of our independent non-executive Directors. Mr Watkins is a qualified solicitor in England and in Hong Kong. Mr Watkins started his career in 1967 as a solicitor at Linklaters, an international law firm. He became a partner in the firm’s London office in 1975 and was subsequently the senior partner of the firm’s Hong Kong office from 1986 to 1994. From 1994 to 1996, Mr Watkins was the legal director of Trafalgar House plc, London. He was group legal director at Schroders plc, London from 1996 to 1997. Mr Watkins was general counsel and a director of the Jardine Matheson Group in Hong Kong from 1994 to 2003, during which time he served as a director of Jardine Matheson Holdings Ltd and Dairy Farm International Holdings Ltd. He is currently general counsel and a partner of Asia Mezzanine Capital Group in Hong Kong. He also holds office as a non-executive director of Mandarin Oriental International Limited, Jardine Cycle & Carriage Limited, MCL Land Limited and Global Sources Limited. Mr Watkins has been our independent non-executive Director as from February 1, 2005. He graduated with a bachelor of laws degree from the University of Leeds in England in 1966.
Mr Thaddeus Thomas Beczak, age 55, is one of our independent non-executive Directors. Mr Beczak has over 20 years of business experience in Asia. From 1997 to 2002, Mr Beczak was chairman of the Listing Committee of the Stock Exchange, and he was a member of the board of directors of the Stock Exchange from 1998 until 2001. He is currently a member of the Advisory Committee of the SFC in Hong Kong. As chairman of the Listing Committee of the Stock Exchange and as a member of the Advisory Committee of the SFC, Mr Beczak has had extensive experience in, among other things, analyzing and scrutinizing financial statements of public companies in Hong Kong, and reviewing and implementing a variety of corporate governance issues. Mr Beczak joined J.P. Morgan Inc. in 1974. He was appointed as managing director of J.P. Morgan Inc. and president of J.P. Morgan Securities Asia from 1990 until 1997. From 1997 until 2003, he was a director of Kerry Holdings Limited where his duties included a variety of corporate finance, management and treasury activities. In particular, he was primarily responsible for its treasury and finance functions, and oversaw the activities of all the financial officers of the listed subsidiaries of the Kerry group. At various times, he also held the positions of deputy chairman of Shangri-La Asia Limited, director of Kerry Properties Limited and deputy chairman of SCMP Holdings Limited, and in these roles, all the chief financial officers had a direct reporting line to him. He is currently a senior advisor to Nomura International (Hong Kong) Limited, an independent non-executive director and member of the audit committee of Nam Tai Electronic and Electrical Products Limited, a company listed on the Stock Exchange, as well as an independent non-executive director of Arnhold Holdings Limited. He has been our independent non-executive Director as from February 1, 2005. He is a graduate of Georgetown University (B.S.F.S.) and Columbia University (M.B.A.).
Mr Beczak is the independent non-executive Director who has appropriate accounting or related financial management expertise for the purposes of Rule 3.10(2) of the Hong Kong Listing Rules. Based on Mr Beczak’s education and experience, in particular his experience and track record as a director of listed companies and in the financial industry, the Board is of the view that Mr Beczak is suitable for the position referred to in Rule 3.10(2) of the Hong Kong Listing Rules.
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Mr Weijia Shen ( ), age 52, is one of our independent non-executive Directors. He commenced his career as an academic at Fudan University in 1977. From 1997 to 2000, Mr Shen was a director of the board and general manager of Shanghai Waigaoqiao Free Trade Zone 3U Development Co. Ltd., and was a director and executive vice president of Shanghai Sunway Biotech Co. Ltd from 2000 to 2002. Mr Shen was a director of SIIC Medical Science and Technology (Group) Ltd. until 2003 and a director of Shanghai Bright Dairy & Food Co., Ltd. and Shanghai Jahwa United Co., Ltd. until 2004. He is currently an executive director of GITI Tire China Investment Co. Ltd. He has been our independent non-executive Director as from February 1, 2005. Mr Shen received a master of business administration degree from Leuven University, Belgium in 1987, and a doctorate degree from Fudan University, Shanghai in 2000.
SUPERVISORS
Mr Qitang Shen ( ), age 54, is one of our Supervisors. He was the deputy head of the finance department of Shanghai Chemical Industry Bureau from 1983 to 1993 and the chief accountant of Shanghai Chemical Industry Company from 1992 to 1998. Mr Shen has been the chief accountant of Shanghai Chemical Industry Park Development Company Limited since 1997 and the general manager of SCIPI since 2001. Mr Shen graduated with a bachelor of economics degree from the accounting department of Shanghai University of Finance and Economics in 1983. He has been a senior accountant since 1993. He was appointed as our Supervisor as from March 2, 2004 following the nomination by SCIPI, our shareholder, in accordance with our articles of association.
Mr Yanhui Yang ( ), age 43, is one of our Supervisors. Mr Yang was deputy head of the finance and accounting department of Sinopec Shanghai Jinshan Engineering Company from 1995 to 1998 and was promoted to become head of the department from 1999 to 2000. He was the chief accountant of Shanghai Jinshan Petrochemical Construction Company from 1998 to 1999. Mr Yang served as the manager of the finance and accounting department of Shanghai Chemical Industry Park Development Company Limited since 2000. He majored in finance and accounting in the department of enterprise management at the Shanghai Building Material Industry College (now incorporated into Tongji University) from 1980 to 1983. He was appointed as our Supervisor as from March 2, 2004 following the nomination by SCIP (HK), our shareholder, in accordance with our articles of association.
Mr Yueh Chang ( ), age 57, is one of our Supervisors and the chairman of our Supervisory Committee. He joined the Philips Group in 1979 and was appointed as the chief executive officer of Philips Electronics China Group in January 2002. Before joining the Philips Group, Mr Chang worked at Taiwan Zenith Company on product development and manufacturing area. Mr Chang has held various positions in sales, marketing and management within the Philips Group. In July 1993, he was appointed as the general manager of the Philips Group’s display components business group in the Asia Pacific region. In April 1999, he was appointed as the president of Philips Group’s components division in the Asia Pacific region. Currently, Mr Chang is also serving as director and/ or chairman of the boards of various entities invested by the Philips Groups in China. Mr Chang graduated from the National Chiao-Tung University in Taiwan in 1970 with a bachelor degree in electronic engineering. He was appointed as our Supervisor as from March 2, 2004 following the nomination by Philips China, our shareholder, in accordance with our articles of association.
Mr Ajit Manocha, age 56, is one of our Supervisors. He has over 27 years of professional experience and has worked in Asia, Europe, and the United States. Mr Manocha previously worked in AT&T Microelectronics in various areas including research, applied development, manufacturing (in the United States and Spain), business development, strategic alliances and mergers and
—119— DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES acquisitions activities. From 1995 to 2000, he served at two large wafer fabs of Philips Semiconductors in the Netherlands. He previously served as head of global sales operations and e-Business, and head of the foundries operations of Philips Semiconductors in the American region. Mr Manocha is currently the executive vice president and Chief Manufacturing Officer of Philips Semiconductor. He was appointed as our Supervisor as from March 2, 2004 following the nomination by Philips China, our shareholder, in accordance with our articles of association.
Ms Xiangqun Wang ( ), age 36, is one of our Supervisors. Ms Wang worked in the corporate banking department of the Bank of China’s Shanghai Branch from 1988 to 2000 and became deputy director of that department in 1998. She served as the vice manager of the first asset management department of COAMC’s Shanghai Office since 2000. She graduated with a master of business administration degree from Macau University of Science and Technology in 2004. She was appointed as our Supervisor as from March 2, 2004 following the nomination by COAMC, our shareholder, in accordance with our articles of association.
Mr Jihua Huang ( ), age 43, is one of our Supervisors. Mr Huang was the fab director at Shanghai No. 29 Radio Factory prior to joining Shanghai Belling Microelectronic Manufacturing Co. Ltd. as technique engineer in 1993. He was subsequently promoted to become manager in 1995. He was the compensation and benefits supervisor at Shanghai Belling from 1997 to 1999 and has been its human resource manager since 2000. Mr Huang graduated from the Shanghai Science and Technology University with a degree in bachelor of semiconductor physics and chemistry in 1984. He obtained a master of business administration degree from Touro University International in 2003. He was appointed as our Supervisor as from March 2, 2004 following the nomination by Shanghai Belling, our shareholder, in accordance with our articles of association.
Mr Songneng Xu ( ), age 59, is one of our Supervisors. Mr Xu worked in various management positions at the Shanghai Semiconductor Device Research Institute from 1973 to 1983 and served at Shanghai Semiconductor Device Industry Company from 1983 to 1984. He was the vice general manager at Sai Si Industrial Co., Ltd. of Zhuhai Economic Zone from 1984 to 1985 and was the trade division section chief of Shanghai Instrument Industry Bureau from 1985 to 1989. Mr Xu has been the chairman of Trade Union, and general secretary of the Chinese Communist Party Branch of our Company since 1989. He was appointed as our Supervisor as from March 2, 2004 following his election by our employees.
SENIOR MANAGEMENT
Mr Zhoumiao Gao ( ), age 38, has been our Vice President of Operations since 1997. Mr Gao joined us in 1989 as an engineer and he was our manufacturing manager from 1994 to 1997. Mr Gao graduated with a bachelor of science degree from the Physics Department of Fudan University in 1989, and received an executive master of business administration degree from China European International Business School in 1998.
Mr Zhen Sun ( ), age 37, has been our Vice President of Sales and Marketing since August 2005. From 1997 to 1999, he worked as a customer engineer at the Chartered. Mr Sun was our customer engineering manager from 1999 to 2000, and was our international sales and marketing manager from 2000 to 2001. Mr Sun was appointed as our director of sales and marketing in 2001, and has recently been promoted to be our Vice President of Sales and Marketing in August 2005. Mr Sun graduated with a bachelor degree from the Department of Electrical Engineering, Fudan University, in 1991.
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Mr Xin Qiao ( ), age 33, has been our senior business control manager since 2004. Mr Qiao has been employed on a full-time basis. He began his career in 1994 at China Artex Shanghai Import & Export Corp., where he served as regional sales manager until 1996. From 1998 to 2000, he worked in the United States at BDO Seidman, LLP where he served as senior financial auditor. At BDO Seidman, LLP, he led field work for audits and financial reviews, prepared financial statements in line with requirements of the US Securities and Exchange Commission, and participated in SEC filings. From 2000 to 2002, Mr Qiao worked at the corporate internal audit department, North America region of Philips Electronics North America Corp., where he served as senior internal auditor and was responsible for performing operational audits, financial audits and process reviews. Since 2002, he worked at the corporate internal audit department, Greater China cluster of Philips Electronics China Group in Shanghai, as internal audit senior manager. While at Philips, he conducted and supervised field work for operational audits, financial reviews and Sarbanes-Oxley compliance reviews. He also acted as project leader in various engagements covering 43 business units in the PRC, Hong Kong, Taiwan, Japan and Korea. In addition, he was responsible for performing internal control assessments, and for preparing financial reports in accordance with both US GAAP and IFRS.
Since joining our Company in 2004, Mr Qiao has been involved in the preparation of, and is responsible for the review of, our financial reports. He became a regular member of the American Institute of Certified Public Accountants (the ‘‘AICPA’’) in 2004, and is familiar with the generally accepted accounting principles in the US. Although an AICPA member, he is also familiar with the International Financial Reporting Standards (being the financial reporting standards and interpretation we adopt in preparing our financial statements). Mr Qiao graduated in 1994 from Shanghai Jiao Tong University with a bachelor of economics degree. He graduated in 1998 from California State University in San Jose with a master of business administration degree. Mr Qiao is our ‘‘Qualified Accountant’’ for the purposes of Rule 3.24 of the Hong Kong Listing Rules.
JOINT COMPANY SECRETARIES
Mr Qiuhan Lu ( ), age 32, is our joint company secretary and our legal counsel. Mr Lu joined Philips Electronics China Group as an in-house legal counsel in November 2001 while concurrently serving as our company secretary on a part-time basis. He was appointed as our company secretary and legal counsel in March 2003. Mr Lu graduated summa cum laude from the University of Groningen of the Netherlands with a master of laws degree in 2001 and was awarded the Lawyer Qualification Certificate by the PRC Ministry of Justice in 2000.
Ms Pui Yee, Samantha Suen ( ), age 50, is our joint company secretary. Ms Suen specializes in professional corporate secretarial services with more than 20 years of experience in corporate governance, administration and management. Currently, she is the Managing Director of KCS Limited, one of Asia’s independent and integrated corporate services providers. Ms Suen is currently a Council Member, the Chairman of Professional Services Panel and the Vice Chairman of China Affairs Committee of the Hong Kong Institute of Chartered Secretaries (‘‘HKICS’’) and also a member of the Hong Kong Inland Revenue Department Users’ Committee. She was the President of HKICS in 2003. Ms Suen is a fellow of HKICS, the Institute of Chartered Secretaries and Administrators in the UK, the Taxation Institute of Hong Kong and the Institute of Directors and has an MBA degree jointly from the Kellogg School of Management of Northwestern University and the School of Business and Management of Hong Kong University of Science and Technology. Ms Suen also acts as a joint company secretary for ZTE Corporation and Xiamen International Port Co., Ltd., two PRC joint stock limited companies, whose H shares are listed on the Stock Exchange of Hong Kong Limited.
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Waiver from Rule 8.17 and Rule 19A.16 of the Hong Kong Listing Rules
As Mr Qiuhan Lu does not possess the qualifications required under Rule 8.17(2) of the Hong Kong Listing Rules, he does not meet all the requirements under Rule 8.17.
We understand that the company secretary plays an important role in the corporate governance of a listed issuer, particularly in assisting the listed issuer as well as its directors in complying with the Hong Kong Listing Rules and the applicable company law. We also understand that since we do not currently conduct any business operations in Hong Kong and our management does not reside in Hong Kong, it is particularly important that its company secretary should possess sufficient knowledge and experience in discharging his functions as company secretary. In view of this, we have proposed the following:
. We have engaged Ms Pui Yee, Samantha Suen, who meets all the requirements under Rule 8.17 of the Hong Kong Listing Rules, as a joint company secretary to assist Mr Lu so as to enable him to acquire the relevant experience (required under Rule 8.17(3) of the Hong Kong Listing Rules) to discharge the functions as our company secretary.
. Ms Suen has been engaged as our joint company secretary for an initial period of three years from the Listing Date (the ‘‘engagement period’’).
We have applied to the Stock Exchange for, and have been granted, a waiver from strict compliance with the requirements of Rule 8.17 and Rule 19A.16 of the Listing Rules. Upon expiry of the engagement period, we will further evaluate the qualifications and experience of Mr Lu as company secretary and the need for on-going assistance and will then determine whether the appointment of Mr Lu as our company secretary will satisfy the requirements as stipulated in Rule 8.17 of the Hong Kong Listing Rules.
MANAGEMENT PRESENCE IN HONG KONG
Under Rule 8.12 and Rule 19A.15 of the Hong Kong Listing Rules, an issuer must have sufficient management presence in Hong Kong including that normally at least two of the issuer’s executive directors must be ordinary residents in Hong Kong. As our operation is incorporated and headquartered in the PRC, we do not and, for the foreseeable future, will not have a management presence in Hong Kong. Currently, substantially all of our Directors reside in the PRC.
We have made internal arrangements to maintain an effective channel of communication between us and the Stock Exchange. Accordingly, we have applied to the Stock Exchange for, and the Stock Exchange has granted, a waiver from strict compliance with the requirements of Rule 8.12 and Rule 19A.15 of the Hong Kong Listing Rules. In particular, we have appointed Ms Pui Yee, Samantha Suen, a joint company secretary of our Company, and Mr James Arthur Watkins, an independent non-executive Director, to be alternates to our authorized representatives, Ms Jianyu Cheng and Mr Qiuhan Lu, respectively, to act at all times as a channel of communication with the Stock Exchange. The authorized representatives and their alternates would be readily contactable by the Stock Exchange. Although Ms Cheng and Mr Lu reside in Shanghai, they possess multiple- entry permits into Hong Kong and can easily make themselves available in Hong Kong whenever necessary to deal promptly with enquiries from the Stock Exchange. Ms Suen and Mr Watkins are both Hong Kong residents. We believe that Ms Suen will be in a position to act as an alternate authorized representative and represent our Company, as she has agreed to act as its joint company secretary. As joint company secretary of the Company, Ms Suen will have to familiarize herself with the affairs of our Company in order to comply with the obligations imposed on her under
—122— DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES the Hong Kong Listing Rules. We will also take all reasonably necessary steps to ensure Ms Suen will be in a position to represent our Company, and that she will have sufficient knowledge in our Company in order to discharge her responsibilities as an alternate authorized representative. In addition, we expect to retain GoldBond Capital (Asia) Limited as compliance advisor to act as our alternative channel of communication with the Stock Exchange following the Listing Date until the date on which our Company complies with Rule 13.46 of the Hong Kong Listing Rules in respect of our financial results for the first full financial year commencing after the Listing Date, pursuant to Rule 3A.19 of the Hong Kong Listing Rules.
AUDIT COMMITTEE
We established an audit committee on May 28, 2004 with written terms of reference. We have adopted terms of reference as suggested under the Code on Corporate Governance Practices set out in Appendix 14 of the Hong Kong Listing Rules on February 22, 2005. The primary duties of the audit committee are to review and supervise our financial reporting process and internal control system, nominate and monitor external auditors and provide advice and comments to our Board. Mr James Arthur Watkins is chairman of the audit committee and the other current members are Mr Thaddeus Thomas Beczak (who is the independent non-executive Director who possesses appropriate accounting or related financial management expertise for the purpose of Rule 3.10(2) of the Hong Kong Listing Rules), Mr Anthony Lear, Mr Weijia Shen and Mr Peiyi Zhu.
REMUNERATION COMMITTEE
We established a remuneration committee on May 28, 2004 with written terms of reference. We have adopted terms of reference as suggested under the Code on Corporate Governance Practices set out in Appendix 14 of the Hong Kong Listing Rules on February 22, 2005. The primary functions of our remuneration committee include determining the policies in relation to human resources management, reviewing our remuneration policies, determining the remuneration packages of our Directors, Supervisors, senior executives and managers, recommending and establishing annual and long-term performance criteria and targets as well as reviewing and supervising the implementation of all executive remuneration packages and employee benefits plans. Our remuneration committee consists of three non-executive Directors with a majority of two independent non-executive Directors. Mr Yanhua Ruan is chairman of the remuneration committee and the other members are Mr Weijia Shen and Mr James Arthur Watkins.
COMPENSATION OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
We did not pay any fees, salaries, housing allowances, other allowances and benefits in kind (including pension contributions, and bonuses which are not discretionary in nature) to our Directors during the year ended December 31, 2003, since all of our Directors during these periods were appointed by our shareholders in accordance with our joint venture contract and our articles of association, and were wholly remunerated by them. We did not have any Supervisors during the year ended December 31, 2003.
The aggregate amount of salaries, housing allowances, other allowances and benefits in kind (including pension contributions, and bonuses which are not discretionary in nature) paid to our five highest paid individuals during the year ended December 31, 2003 was approximately RMB10.2 million. Approximately RMB655,000 was paid by us as pension contributions in respect of these five individuals during the same period.
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Upon our re-registration as a foreign invested joint stock limited company on March 2, 2004, we paid and granted to the Directors and the Supervisors remuneration, fees and benefits in kind. During the years ended December 31, 2004 and 2005, the aggregate of such remuneration and fees paid, and such benefits in kind granted, to the Directors and the Supervisors, were RMB6.8 million and RMB8.6 million, respectively.
The aggregate amount of salaries, fees, housing allowances, other allowances and benefits in kind (including pension contributions, and bonuses which are not discretionary in nature) paid to our five highest paid individuals during the years ended December 31, 2004 and 2005 were RMB11.6 million and RMB9.2 million, respectively. Such five highest paid individuals of the Company included one executive Director. Approximately RMB805,000 and RMB65,869 were paid by us as pension contributions in respect of these five individuals during the same respective periods.
Save as disclosed above, no other payments have been paid by us to, or are receivable by, the Directors, the Supervisors and the five highest paid individuals in respect of the three years ended December 31, 2003, 2004 and 2005.
We estimate the aggregate remuneration payable to, and benefits in kind receivable by, the Directors and the Supervisors, to be approximately RMB8.4 million and RMB1.8 million, respectively, in respect of the year ending December 31, 2006 under the arrangements currently in force.
The following table sets forth the aggregate amount of remuneration payable to, and benefits in kind receivable (including pension contributions, and bonuses which are not discretionary) by, each of our Directors for the year ending December 31, 2006 under the arrangements currently in force:
Year ending December 31, 2006 (in HK$)
Executive Directors(1) LIU Tony Yuhai ( ) ...... 4,162,712 CHENG Jianyu ( )...... 2,021,939 Non-executive Directors RUAN Yanhua ( )...... 200,000 ZHU Jian ( )...... 200,000 LEAR Anthony ...... 200,000 ZHU Peiyi ( )...... 200,000 ZHOU Weiping ( )...... 200,000 VANBOMMELPetrusAntoniusMaria...... 158,333 Independent non-executive Directors WATKINSJamesArthur...... 250,000 BECZAK Thaddeus Thomas ...... 250,000 SHEN Weijia ( )...... 250,000
Note:
(1) The amounts stated include a performance-related bonus and assumes that all performance milestones will be achieved.
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EMPLOYEES
As at December 31, 2005, we had 1,492 employees. The table below sets out the number of these employees by operational division:
Percentage Operational division Employees of total
Operations...... 1,393 93.4% Humanresources...... 24 1.6% Salesandmarketing...... 44 2.9% Finance ...... 22 1.5% General management ...... 3 0.2% Others...... 6 0.4%
Total...... 1,492 100.0%
Housing Benefits
We follow the regulations on employee general housing benefits promulgated by the State and Shanghai local government. We are required to make annual contributions to the housing fund equivalent to a certain percentage of each employee’s salary. Our contribution to the housing fund for each of the years ended December 31, 2003, 2004 and 2005 amounted to approximately RMB2.0 million, RMB2.5 million and RMB3.1 million, respectively.
Mandatory Social Insurance
Our employees participate in various mandatory social insurance plans organized by the government under which we are required to make monthly defined contributions to these plans. We have implemented the social mandatory insurance plan which includes retirement pension insurance, unemployment insurance, medical and maternity insurance for female employees. We have not implemented employee injury insurance since it has not been implemented in Shanghai. Our contribution to the various mandatory social insurance schemes for each of the years ended December 31, 2003, 2004 and 2005 amounted to approximately RMB10.8 million, RMB13.8 million and RMB16.9 million, respectively.
Each of our employees has entered into an individual labor contract. We have not experienced any strikes, work stoppages, labor disputes or actions which affected the operation of any of our business and we consider our relationship with our employees to be good.
As at December 31, 2005, approximately 16.3% of our employees have bachelors degrees, approximately 4.0% of our employees have masters degrees and approximately 0.2% of our employees have doctorate degrees.
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OUR SHARE CAPITAL
The following table sets forth details of our share capital in issue and to be issued as fully paid or credited as fully paid immediately before and after the completion of the Global Offering.
Before the Global Offering After the Global Offering Assuming no exercise of Assuming full exercise of the Over-allotment Option the Over-allotment Option Number of Approximate Number of Approximate Number of Approximate Class of Shares Shares percentage Shares percentage Shares percentage (%) (%) (%)
Unlisted Foreign Shares(1) ...... 696,945,872 62.84 33,272,400 2.25 33,272,400 2.17 Domestic Shares . . . 412,134,128 37.16 375,165,128 25.37 369,621,128 24.09 H Shares under the Global Offering (including H Shares to be sold by the Selling Shareholder) . . . . — — 406,662,000 27.50 467,660,000 30.48 Converted H Shares . — — 663,673,472 44.88 663,673,472 43.26
Total ...... 1,109,080,000 100.00 1,478,773,000 100.00 1,534,227,000 100.00
Note:
(1) The CSRC has approved the conversion of the 663,673,472 Shares held by Philips China and SCIP (HK) into Converted H Shares, and we expect the Stock Exchange to approve their listing prior to the Listing Date, and they may be freely transferred upon expiry of the Existing Shareholders Lock Up Period, subject only to approval from the Ministry of Commerce.
RANKING
Domestic Shares, Unlisted Foreign Shares (whether in the form of Converted H Shares or Shares held by Lanmax) and H Shares are ordinary shares in our share capital.
Domestic Shares
Domestic Shares may only be subscribed for by, and traded between, legal or natural persons of the PRC and must be subscribed for and traded in Renminbi. Domestic Shares held by COAMC, SCIPI and Shanghai Belling are not admitted for listing on any stock exchange and no arrangement has been made for the Domestic Shares to be traded or dealt with on any other authorized trading facility in the PRC.
Pursuant to amendments to the PRC Company Law which came into effect on January 1, 2006, the Shares held by our Promoters may not be transferred until one year after the Listing Date. Thereafter, under our Articles, all of our Domestic Shares (including the Lanmax Unlisted Foreign Shares which will be converted into Domestic Shares upon the return by Lanmax to COAMC, SCIPI and Shanghai Belling upon expiry of the Existing Shareholders Lock Up Period, further details of which are set out in the paragraphs below) may be converted into H Shares and become listed and tradable, subject to approval from the State Council or the State Council’s authorized approval authority and consent from the Stock Exchange.
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Unlisted Foreign Shares
Unlisted Foreign Shares include:
. Converted H Shares; and
. Lanmax Unlisted Foreign Shares.
Converted H Shares
Converted H Shares are held by Philips China and SCIP (HK). On January 11, 2005, the CSRC approved the conversion of the Unlisted Foreign Shares held by Philips China and SCIP (HK) into Converted H Shares. Converted H Shares have identical rights as that of H Shares, further details of which are set out below. We expect the Stock Exchange to approve their listing prior to the Listing Date, and therefore they may be freely transferred upon expiry of the Existing Shareholders Lock Up Period (being one year after the Listing Date), subject only to approval from the Ministry of Commerce.
Lanmax Unlisted Foreign Shares
Unlike the Converted H Shares, Lanmax Unlisted Foreign Shares, which are held by Lanmax, are not, and will not be, converted into H Shares and listed on the Stock Exchange. Lanmax was originally incorporated to implement the ASMC Compensation Trust. As a result of restrictions under PRC laws and regulations, we understand that Lanmax will not apply to the CSRC for approval in conversion of the Lanmax Unlisted Foreign Shares into H Shares, and Lanmax has undertaken to us and to the CSRC to return the Lanmax Unlisted Foreign Shares shortly after expiry of the Existing Shareholders Lock Up Period to Philips China, COAMC, SCIPI and Shanghai Belling.
There is, at present, no applicable PRC law or regulation governing the rights of Lanmax Unlisted Foreign Shares, nor do our Articles of Association contain express provision as to whether Lanmax Unlisted Foreign Shares constitute a different class of shares from H Shares. Jingtian & Gongcheng, our legal advisors as to PRC law, have confirmed that:
. the creation and the subsistence of the Lanmax Unlisted Foreign Shares do not contravene any PRC law or regulation; and
. until new laws or regulations are introduced, Lanmax, as holder of Lanmax Unlisted Foreign Shares, will be treated as if it is in the same class as holders of Domestic Shares.
Jingtian & Gongcheng have advised us that Lanmax enjoys the same rights as holders of Domestic Shares. In addition, it may:
. request us to pay dividends (which are calculated and declared in Renminbi) in foreign currencies;
. in the event of the winding-up of our Company, remit its share in our surplus assets (if any) in foreign currencies out of the PRC in accordance with the applicable foreign exchange laws and regulations of the PRC; and
. resolve disputes with holders of Domestic Shares or H Shares by way of arbitration.
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Each of the Promoters (including Lanmax) has confirmed to us that it understands the legal positions, rights and obligations of Lanmax as holder of Lanmax Unlisted Foreign Shares, and it agrees that Lanmax enjoys the same rights (other than the above exceptional rights) as those enjoyed by holders of the Domestic Shares.
In addition, Lanmax has undertaken in favor of our Company and the Stock Exchange that:
. it shall not join, participate or vote in class meetings of holders of H Shares; and
. upon or after expiry of the Existing Shareholders Lock Up Period, and upon it deciding to apply for approval of conversion of the Lanmax Unlisted Foreign Shares into H Shares, it shall, subject to the PRC laws and regulations then in force and our Articles, require our Company to convene such general meeting to consider and, if thought fit, to approve the proposal for conversion into H Shares.
This undertaking from Lanmax is binding upon all subsequent holder(s) of the Lanmax Unlisted Foreign Shares being persons other than PRC nationals or PRC incorporated entities, who have not yet received approval from the relevant governmental authorities in the PRC and in Hong Kong for conversion of the Lanmax Unlisted Foreign Shares which they hold into H Shares.
As discussed above, we understand that Lanmax has undertaken to return the Lanmax Unlisted Foreign Shares to Philips China, COAMC, SCIPI and Shanghai Belling upon expiry of the Existing Shareholders Lock Up Period. The return of the Lanmax Unlisted Foreign Shares by Lanmax constitutes a change to our shareholding structure. Jingtian & Gongcheng have advised that, while the return will not require approval from holders of Domestic Shares, given we are a foreign invested joint stock limited company, approval from the Ministry of Commerce may be required. In addition, the transferees of the Lanmax Unlisted Foreign Shares must consent to the transfer.
Jingtian & Gongcheng have further confirmed that, under the applicable PRC laws and regulations currently in force, the Shares returned to Philips China will remain Unlisted Foreign Shares, while the Shares returned to COAMC, SCIPI and Shanghai Belling will be automatically converted from Unlisted Foreign Shares into Domestic Shares.
Our Company expects, upon Philips China’s receipt of the Lanmax Unlisted Foreign Shares returned from Lanmax (amounting to approximately 0.86% of the total issued Shares immediately after completion of the Global Offering, assuming that the Over-allotment Option is not exercised), Philips China will apply for approval of conversion thereof into H Shares. Under the applicable PRC laws and regulations currently in force, Jingtian & Gongcheng have advised us that such a conversion requires:
. approval from the CSRC; and
. for the listing of and permission to deal in the Lanmax Unlisted Foreign Shares returned to Philips China, approval from the Stock Exchange.
The transfer of the Lanmax Unlisted Foreign Shares returned to Philips China also requires approval from the Ministry of Commerce.
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We understand from Jingtian & Gongcheng that, while the above are the requirements under the applicable PRC laws and regulations currently in force, it is uncertain what the PRC legal requirements will be at the time Philips China applies for conversion of the Lanmax Unlisted Foreign Shares returned from Lanmax.
HShares
H Shares may only be subscribed for in Hong Kong dollars by, and traded between, legal or natural persons of Hong Kong, Macau, Taiwan or any country other than the PRC.
All dividends in respect of H Shares are to be paid by us in Hong Kong dollars (translated from the Renminbi amount declared using the average selling PBOC Rate prevailing one week prior to the declaration of such dividends), whereas all dividends in respect of Domestic Shares are to be paid by us in Renminbi.
Existing Shareholders Lock Up
All the existing Shares held by Philips China, SCIP (HK), COAMC, SCIPI, Shanghai Belling and Lanmax may not be transferred until the Existing Shareholders Lock Up Period has expired and approval for their transfer has been obtained from the Ministry of Commerce.
Except as described above and in relation to the despatch of notices and financial reports to shareholders, dispute resolution, registration of shares on different parts of the share register, the method of share transfer and the appointment of dividend receiving agents, which are all provided for in our Articles (which are summarized in ‘‘Appendix VII — Summary of Articles of Association’’), the Domestic Shares, the Unlisted Foreign Shares and the H Shares (including Converted H Shares) will rank pari passu with each other in all respects and, in particular, will rank equally for all dividends or distributions declared, paid or made after the date of this prospectus. However, the transfer of Domestic Shares is subject to such restrictions as PRC law may impose from time to time.
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The following table sets forth the details of our shareholding structure immediately prior to the Global Offering:
Number of Number of Unlisted Foreign Approximate % Shareholders Domestic Shares Shares of shareholding
Philips China(1)...... — 408,806,888 36.86 SCIP (HK)(2) ...... — 254,866,584 22.98 COAMC...... 215,161,520 — 19.40 SCIPI(3) ...... 110,908,000 — 10.00 Shanghai Belling ...... 86,064,608 — 7.76 Lanmax...... — 33,272,400 3.00
412,134,128 696,945,872 100.00
Note:
(1) As at the date of this prospectus, Philips China is our controlling shareholder as defined in the Hong Kong Listing Rules. However, upon completion of the Global Offering, Philips China will cease to be our controlling shareholder as it will hold less than 30% of our entire issued share capital.
(2) SCIP (HK) is wholly-owned by SCIPI.
(3) As at the date of this prospectus, SCIPI is our controlling shareholder as defined in the Hong Kong Listing Rules, given it holds an aggregate shareholding of 32.98% in our entire issued share capital. However, upon completion of the Global Offering, SCIPI will cease to be our controlling shareholder as it will hold less than 30% of our entire issued share capital.
The following table sets forth details of our shareholding structure immediately following the completion of the Global Offering (but without taking into account any exercise of the Over-allotment Option):
Number of Number of Unlisted Foreign Number Approximate % Shareholders Domestic Shares Shares of H Shares(1) of shareholding
Philips China(2). . . . — — 408,806,888 27.65 SCIP (HK)(3) . . . . . — — 254,866,584 17.24 COAMC(4) ...... 178,192,520 — — 12.05 SCIPI(5) ...... 110,908,000 — — 7.50 Shanghai Belling . . 86,064,608 — — 5.81 Lanmax(6) ...... — 33,272,400 — 2.25 Public...... — — 406,662,000 27.50
Total ...... 375,165,128 33,272,400 1,070,335,472 100.00
Note:
(1) The CSRC has approved the conversion of the 663,673,472 Shares held by Philips China and SCIP (HK) into Converted H Shares, and we expect the Stock Exchange to approve their listing prior to the Listing Date, and they may be freely transferred upon expiry of the Existing Shareholders Lock Up Period, subject only to approval from the Ministry of Commerce.
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(2) For the purpose of the Securities and Futures Ordinance, Philips China is interested in 408,806,888 Foreign Shares. As Philips China is a direct wholly-owned subsidiary of Royal Philips, Royal Philips is also deemed to be interested in 408,806,888 Foreign Shares.
(3) For the purpose of the Securities and Futures Ordinance, SCIP (HK) is interested in 254,866,584 Foreign Shares. SCIP (HK) is a direct wholly-owned subsidiary of SCIPI, which is 95% owned by Shanghai Chemical Industrial Park Development Company Limited. Accordingly, both SCIPI and Shanghai Chemical Industrial Park Development Company Limited are also deemed to be interested in 254,866,584 Foreign Shares.
(4) For the purpose of the Securities and Futures Ordinance, COAMC is interested in 178,192,520 Domestic Shares.
(5) For the purpose of the Securities and Futures Ordinance, SCIPI is interested in 110,908,000 Domestic Shares. As SCIPI is 95% owned by Shanghai Chemical Industrial Park Development Company Limited, it is also deemed to be interested in 110,908,000 Domestic Shares.
(6) Lanmax has confirmed that, as a result of restrictions under PRC laws and regulations, it will not apply to the CSRC for approval for the conversion of the Shares held by Lanmax into H Shares, and it has undertaken to us and to the CSRC to return such Shares shortly after the expiry of the Existing Shareholders Lock Up Period to Philips China, COAMC, SCIPI and Shanghai Belling.
The following table sets out our shareholding structure immediately following the completion of the Global Offering (taking into account the exercise of the Over-allotment Option in full):
Number of Number of Unlisted Foreign Number Approximate % Shareholders Domestic Shares Shares of H Shares(1) of shareholding
Philips China(2). . . . — — 408,806,888 26.65 SCIP (HK)(3) . . . . . — — 254,866,584 16.61 COAMC(4) ...... 172,648,520 — — 11.25 SCIPI(5) ...... 110,908,000 — — 7.23 Shanghai Belling . . 86,064,608 — — 5.61 Lanmax(6) ...... — 33,272,400 — 2.17 Public...... — — 467,660,000 30.48
Total ...... 369,621,128 33,272,400 1,131,333,472 100.00
Note:
(1) The CSRC has approved the conversion of the 663,673,472 Shares held by Philips China and SCIP (HK) into Converted H Shares, and we expect the Stock Exchange to approve their listing prior to the Listing Date, and they may be freely transferred upon expiry of the Existing Shareholders Lock Up Period, subject only to approval from the Ministry of Commerce.
(2) For the purpose of the Securities and Futures Ordinance, Philips China is interested in 408,806,888 Foreign Shares. As Philips China is a direct wholly-owned subsidiary of Royal Philips, Royal Philips is also deemed to be interested in 408,806,888 Foreign Shares.
(3) For the purpose of the Securities and Futures Ordinance, SCIP (HK) is interested in 254,866,584 Foreign Shares. SCIP (HK) is a direct wholly-owned subsidiary of SCIPI, which is 95% owned by Shanghai Chemical Industrial Park Development Company Limited. Accordingly, both SCIPI and Shanghai Chemical Industrial Park Development Company Limited are also deemed to be interested in 254,866,584 Foreign Shares.
(4) For the purpose of the Securities and Futures Ordinance, COAMC is interested in 172,648,520 Domestic Shares.
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(5) For the purpose of the Securities and Futures Ordinance, SCIPI is interested in 110,908,000 Domestic Shares. As SCIPI is 95% owned by Shanghai Chemical Industrial Park Development Company Limited, it is also deemed to be interested in 110,908,000 Domestic Shares.
(6) Lanmax has confirmed that, as a result of restrictions under PRC laws and regulations, it will not apply to the CSRC for approval for the conversion of the Shares held by Lanmax into H Shares, and it has undertaken to us and to the CSRC to return such Shares shortly after the expiry of the Existing Shareholders Lock Up Period to Philips China, COAMC, SCIPI and Shanghai Belling.
In accordance with relevant PRC regulations, COAMC, the Selling Shareholder, will sell a number of its State-owned Shares pro rata to 10% of the H Shares offered in the Global Offering. Assuming the Over-allotment Option is not exercised, the Selling Shareholder will sell a total of 36,969,000 Sale H Shares, representing 2.5% of the total number of Shares outstanding immediately following completion of the Global Offering. Assuming the Over-allotment Option is exercised, the Selling Shareholder will sell a total of 42,513,000 Sale H Shares, representing 2.77% of the total number of Shares outstanding immediately following completion of the Global Offering as enlarged by the issue of additional H Shares pursuant to the Over-allotment Option. The sale of the Sale H Shares by the Selling Shareholder has been approved by the CSRC and the Ministry of Finance in accordance with the regulations promulgated by the State Council. We will not receive any of the proceeds from the sale of Sale H Shares by the Selling Shareholder including proceeds resulting from any exercise by the Joint Global Coordinators on behalf of the International Purchasers of the Over-allotment Option in respect of Shares held by the Selling Shareholder. These proceeds will not form part of our shareholders’ capital and the Selling Shareholder is required to remit these net proceeds to the national social security fund in accordance with the relevant PRC government requirements. See the section headed ‘‘Future Plans, Use of Proceeds and Dividend Policy — Use of Proceeds.’’
Save as described, none of our Directors or Supervisors is a legal or beneficial owner of any of the Shares. We are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.
For more information about Philips China, SCIP (HK), COAMC, SCIPI, Shanghai Belling and Lanmax, see the section headed ‘‘History, Corporate Structure and Reorganization — Our Reorganization and Corporate Structure.’’
Lanmax
Lanmax, one of our Promoters, was incorporated on July 8, 2002 in connection with our previous proposal to implement an employee compensation plan (the ‘‘Plan’’) to reward our selected Directors, Supervisors, senior management and employees (the ‘‘Beneficiaries’’) for their contributions to our Company. Under our previous proposal to implement the Plan, the ASMC Compensation Trust was originally established to hold 33,272,400 Shares, representing 3% of our issued share capital prior to the Global Offering and 2.25% of our issued share capital immediately following completion of the Global Offering (but without taking into account any exercise of the Over-allotment Option) and any cash derived from such Shares (the ‘‘Trust Assets’’) for the Beneficiaries.
It was originally envisaged that the Lanmax Unlisted Foreign Shares would be converted into H Shares, such that, upon the said conversion at the expiry of the Existing Shareholders Lock Up Period and the listing of such Shares on the Stock Exchange, the ASMC Compensation Trust may be entitled to the income derived from any increase in the trading price of the Shares.
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However, as a result of restrictions under PRC laws and regulations, our Board has determined that the Plan will no longer be implemented. Accordingly, we understand from Lanmax that it will not apply to the CSRC for approval for the conversion of the Lanmax Unlisted Foreign Shares into H Shares either in conjunction with the listing of our H Shares or at the expiry of the Existing Shareholders Lock Up Period, and that Lanmax has undertaken to our Company and to the CSRC to return the Lanmax Unlisted Foreign Shares previously transferred to it pursuant to the equity transfer agreement to each of the original transferors, namely Philips China, COAMC, SCIPI and Shanghai Belling, shortly after expiry of the Existing Shareholders Lock Up Period. We further understand that Lanmax will be dissolved after the return of the Lanmax Unlisted Foreign Shares to the original transferors, and will distribute its assets to its shareholders in accordance with their respective shareholdings in Lanmax at the time of dissolution (after deducting the costs payable for the dissolution). We may consider implementing an alternative employee compensation plan.
Under our previous proposal, Lanmax had been intended to be the holding vehicle of the Trust Assets. The shareholders of Lanmax, being certain Directors of our Company, are also the trustees (the ‘‘Trustees’’) of the ASMC Compensation Trust. The ASMC Compensation Trust was established to administer the Trust Assets, through the Trustees’ shareholding in Lanmax, for the benefit of the Beneficiaries. Pursuant to an equity transfer agreement dated December 21, 2002 between Philips China, COAMC, SCIPI, Shanghai Belling and Lanmax, 3% of the shares in our Company at the time were transferred to Lanmax, for a deferred consideration which amounted to US$12,032,932.32 (payable to Philips China), RMB11,423,052.65 (payable to Shanghai Belling), RMB6,719,442.73 (payable to COAMC) and RMB2,687,777.09 (payable to SCIPI) (together, the ‘‘Transfer Price’’). The Transfer Price was determined on the bases of (i) an appraisal of the value of our Company’s net assets as at December 31, 2001 by China Consultants of Accounting and Financial Management Co., Ltd., together with (ii) the amount of our Company’s net profits for the six months ended June 30, 2002. In connection with an agreement on the transfer of shares in our Company dated June 30, 2003 between Shanghai Belling, SCIPI and SCIP(HK), Shanghai Belling transferred to SCIPI its loan receivables, and all of its rights and obligations, in respect of 0.78% of shares in our Company which had been transferred by Shanghai Belling to Lanmax earlier. Accordingly, the amounts payable to Shanghai Belling and SCIPI became RMB2,687,777.09 and RMB11,423,052.65, respectively, while the amounts payable to Philips China and COAMC remained unchanged. However, given the ‘‘share return’’ arrangement mentioned above, Lanmax will not be required to repay the Transfer Price.
In addition, SCIP(HK) provided a loan amounting to HK$300,000 (the ‘‘Loan’’) to the Trustees, repayable by Lanmax, to pay for the initial establishment and the ongoing operational expenses of the ASMC Compensation Trust incurred before the ASMC Compensation Trust is able to generate any proceeds. The Loan was repaid by Lanmax in February 2005.
The Trustees hold the Trust Assets for the benefit of the Beneficiaries absolutely in accordance with the provisions of the declaration of trust dated December 19, 2002 and the Plan. Under the Plan, the Beneficiaries would not hold any of our Shares or the shares of Lanmax; instead, they would be granted entitlements by our Board to receive certain units under the Plan. Each unit represents an equal proportional right to receive the net proceeds of the Trust Assets.
Under the provisions of the Plan, the vesting of any units which our Company has granted to the Beneficiaries would take place, at the earliest, upon the expiry of the Existing Shareholders Lock Up Period. While our Company had resolved, at a shareholders’ meeting on March 25, 2004, to allocate units to certain of our directors and employees, none of such units have yet been granted so far.
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The following discussion and analysis of our business, financial condition and results of operations is based on and should be read in conjunction with our financial statements as at and for each of the years ended December 31, 2003, 2004 and 2005, including the notes thereto, as set forth in ‘‘Appendix I — Accountants’ Report’’ and other financial information appearing elsewhere in this prospectus. Our financial statements have been prepared in accordance with IFRS, which may differ in material respects from generally accepted accounting principles in other jurisdictions, including the United States.
OVERVIEW
We are a leading dedicated analog foundry focusing primarily on the manufacturing of analog semiconductors and higher bipolar content-based mixed-signal semiconductors. According to IC Insights, we were one of the top ten foundries (digital and analog) in the world in 2004 by sales. Our customers include some of the world’s leading IDMs and fabless semiconductor companies. We produce both standard and application-specific semiconductors, designed by our customers for use in various end-market applications, including computing, communications and consumer electronics. We serve a diversified portfolio of customers, such as Semtech, the Philips Group, Datang Microelectronics, Texas Instruments, Fairchild Semiconductor, National Semiconductor, AOS, California Micro Derives and Monolithic Power Systems.
We offer our customers a broad range of process technologies including:
. bipolar, BiCMOS and HVMOS process technologies for analog semiconductors; and
. non-volatile memory technology for producing smart identification cards.
Through our flexible and customized manufacturing model in handling a variety of process technologies, we are able to support our customers’ specific manufacturing requirements.
We operate two wafer fabrication facilities in Shanghai, China: one which manufactures 5-inch and 6-inch wafers and the other 8-inch wafers. As at December 31, 2005, we had a monthly production capacity of approximately 28,000 5-inch wafers, 51,000 6-inch wafers and 12,000 8-inch wafers. We intend to continue strategically expanding our 8-inch manufacturing facilities. We believe our strategies will enable us to strengthen our position in the global dedicated analog foundry industry and also help us penetrate the market for national identification cards in China.
We derive substantially all our revenue from the sale of wafers, with a small contribution from providing masks and probing services to our customers. Despite major global semiconductor industry downturns during 2001 and 2002 and the slow recovery in 2003, our revenue increased 21.9% in 2003, as we continued to benefit from IDMs outsourcing their manufacturing processes to dedicated foundries, such as ours, and the growth of fabless semiconductor companies, who rely on dedicated foundries to produce the products they design. In 2004, our revenue further increased 46.3%, benefiting in part from the strong global semiconductor industry recovery during much of the year and also from our launch of 8-inch wafer sales during the year. In response to this strong recovery, however, global semiconductor companies, including IDMs, expanded their own manufacturing capacity or increased their inventories through internal production or outsourcing, in anticipation of sustained demand. This expansion, combined with the lower than expected end- user demand, led to general over-capacity and a foundry industry-wide cyclical slowdown beginning in the fourth quarter of 2004 and continuing into the second half of 2005. As a result, our revenue for the year ended December 31, 2005 compared to the year ended December 31, 2004 decreased
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18.8% as our IDM customers shifted a significant proportion of their 5-inch and 6-inch wafer orders back to in-house production. We continue to manage the impact of the slowdown in the foundry industry on our revenue by improving the overall mix of our customer base to include greater proportion of fabless semiconductor companies and by positioning ourselves as the sole or primary manufacturer of the products our IDM customers outsource to us.
We achieved a gross margin of 32.9% and 27.9% for each of the years ended December 31, 2003 and 2004, respectively. Our gross margin of 7.6% for the year ended December 31, 2005, however, reflected the combined impact of our decline in sales of 5-inch and 6-inch wafers and the negative gross margin of our 8-inch business, which had still not achieved a profitable utilization level. Excluding the gross loss attributable to our 8-inch wafer sales for this period, our total gross margin would have been 25.8%. As a high proportion of our cost of sales is comprised of depreciation, we expect overall gross margin to improve as our 5-inch and 6-inch wafer sales return to previous levels and our 8-inch wafer production utilization rate improves. We have secured a number of cornerstone 8-inch wafer customers for 2006, including the Philips Group, Datang Microelectronics and National Semiconductor, which we expect will significantly improve our 8-inch utilization rate.
Sales to the Philips Group, accounted for 14.6%, 13.0% and 16.3% of our revenue for each of the years ended December 31, 2003, 2004 and 2005, respectively. Through our technology transfer and licensing arrangements, the Philips Group furnishes us information and technology for the production of their products and products for our other customers. To the extent such information and technology are covered by patents or other rights, the Philips Group has granted us a license to use any such relevant present or future patents registered in its name. As consideration for such information and technology, we pay a royalty fee of 3% of the net selling price of each of the Philips Licensed Products we sell to both the Philips Group and to customers other than the Philips Group who use Philips Semiconductors International processes. Under the Philips Identification Licensing Agreement, we also pay a fee of 10% of the net selling price of each product we produce using technology under this agreement (which includes the 3% royalty fee) and we sell to our customers (including the Philips Group). See the section headed ‘‘Business — Our Process Technologies — Technology transfer and cooperation arrangement with the Philips Group’’ for more details.
RECENT DEVELOPMENTS
Our order levels and capacity utilization rates have continued to improve since the beginning of 2006. For the two-month period ended February 28, 2006, our capacity utilization rates were 70%, 71% and 48% for our production of 5-inch, 6-inch and 8-inch wafers, respectively. During the same two-month period, we sold 39,696 5-inch, 74,548 6-inch and 14,636 8-inch wafers. As at February 28, 2006, we had in production 31,533 5-inch wafers, 54,913 6-inch wafers and 27,494 8-inch wafers.
FACTORS THAT IMPACT OUR RESULTS OF OPERATIONS
Cyclicality of the semiconductor industry
The semiconductor industry is highly cyclical, due to frequent imbalances of supply of and demand for end products that incorporate semiconductors. See the diagrams headed ‘‘Analog Semiconductor Revenue Projections’’ and ‘‘Analog and Total Semiconductor Market Revenues’’ under the section headed ‘‘Industry Overview.’’ During periods of strong demand, semiconductor manufacturers tend to expand their own production capacity in anticipation of sustained demand growth. Such expansion, which entails significant lead-time due to the scale and sophistication of
—135— FINANCIAL INFORMATION semiconductor manufacturing, sometimes results in market overcapacity if anticipated demand fails to materialize. This overcapacity, in turn, often results in under-utilization of production capacity and potential declines in wafer prices. In cyclical downturns, IDMs tend to reduce the outsourced proportion of their production requirements and shift them to their own internal production facilities, and therefore foundries that rely on IDMs for a significant proportion of their customer base will be particularly affected, which is what we experienced beginning in the fourth quarter of 2004 and continuing into the second half of 2005. While we have not experienced any loss of our key customers during the three years ended December 31, 2005, for instance, our aggregate sales to two of our major IDM customers, which in aggregate constituted approximately 22.7% of our revenue for the year ended December 31, 2004, declined to an aggregate of approximately 12.7% of our revenue for the year ended December 31, 2005, which was a more substantial decline when compared to the changes in our sales to our other key customers during the same periods. Conversely, foundries that have a large proportion of fabless semiconductor customers will generally be less affected during downturns. To mitigate the impact of industry cyclicality, we continue to improve the overall mix of our customers to include greater proportion of fabless semiconductor companies and by pursuing IDM orders for products that they do not have the capability to produce in-house. Our sales to fabless semiconductor companies have increased from 52.3% of total revenue in the year ended December 31, 2004 to 64.4% in the year ended December 31, 2005.
Change in product mix and migration in process technology and wafer size
The value of a wafer is, to a large extent, determined by the complexity of the process technologies used to fabricate the wafer. Typically, production of wafers with higher levels of functionality and greater system-level integration requires more sophisticated technologies and fabrication steps, and these wafers can generally command higher prices and yield better gross margins. Therefore, the ability to produce different mixes of wafers is one of the primary factors that affect our revenue and profitability.
To maintain our competitiveness, we began selling 8-inch wafers in December 2003. As the process technology we use in our manufacturing process becomes more advanced, it will be more economical to migrate to larger diameter wafers as larger diameter wafers increase the number of gross dies achievable on a wafer. We believe the addition of 8-inch capacity will enable us to increase our competitiveness over time.
Pricing
We price our wafers on a per wafer basis, taking into account the complexity of processes and technology (including the number of mask layers we apply), prevailing market conditions, order size, lead time, our relationship with the customer and capacity utilization. Since a large portion of our costs is fixed, fluctuations in the average selling prices of wafers have historically had a large impact on our gross margins. The average selling price of our wafers based on similar processes has decreased over the years mainly due to increasing competition in the semiconductor industry, declining prices of end products and our ability to offer our customers competitive pricing by improving our manufacturing efficiency.
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Capacity utilization rates
Operating at or near full capacity has a significant positive effect on our profitability because our operating results are affected by relatively high fixed costs, principally depreciation. With a higher utilization rate, total fixed costs are allocated over a greater number of wafers, which leads to lower fixed costs per wafer. Factors affecting our utilization rates include our total customer demand, the complexity of the wafers produced, the actual product mix and our ability to manage our production facilities more efficiently. The following table sets out historical capacity utilization rates for our production of each type of wafer for the periods indicated:
Year ended December 31, Fab 2003 2004 2005
Fab 1/2 5-inchwafers...... 83% 91%(1) 70% 6-inchwafers...... 90% 98% 69% Fab 3 8-inchwafers...... N/A(2) N/A(2) 44%
Notes:
(1) For the purpose of calculating the historical capacity utilization rate of our 5-inch wafer production for the year ended December 31, 2004, we have assumed cleanroom 1 of fab 1/2 produced 5-inch wafers only.
(2) We commenced production of our 8-inch wafers in late 2003. However, our 8-inch wafers production capacity remained low throughout 2004. Capacity utilization rates calculated for the years ended December 31, 2003 and 2004 are therefore not meaningful indications of our operations on a stable and on-going basis, and they do not present a fair and useful comparison with the rate for the year ended December 31, 2005.
Since we commenced commercial production of 8-inch wafers in late 2003, we have gradually expanded capacity in line with our rolling sales forecasts and customer qualification. During the course of this process, however, our utilization levels can vary significantly from month to month and quarter to quarter as the timing of new capacity coming on line and the generation of new sales may diverge.
Manufacturing yields
Our prices are determined on a per wafer basis. In most of the wafer manufacturing agreements we enter into with our customers, we undertake to achieve the customer’s minimum yield requirements. By achieving manufacturing yields that are higher than that pre-determined in the wafer manufacturing agreement, we are able to produce high quality products at competitive prices thereby allowing us to compete more effectively. If we are unable to achieve the minimum yield requirements that we had agreed with our customers, we may provide a concessionary discount to our customers for our low yield wafers. Based on their technological requirements for wafers, our customers may return low yield wafers we produce to us, which will be factored in as our costs of production. From time to time, we have been unable to achieve the agreed yields with certain of our customers. We do not believe the losses we have incurred in respect of our low yield wafers in the past have been material.
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Manufacturing and operating costs
Production of semiconductors involves relatively high fixed costs, principally depreciation arising from the high cost manufacturing equipment used. We have sought to reduce our capital expenditures and relative level of depreciation by employing, in our capacity expansion, a high proportion of refurbished manufacturing equipment. However, if suitable refurbished equipment is not available, we will still rely on new manufacturing equipment. Further, some of our customers partially fund our research and development when we jointly develop technologies with them. If we lose customers who are willing to jointly develop technologies with us, or if such customers cease to fund such joint development, we may be required to increase our research and development costs to develop our technologies internally. These factors may affect our costs and profitability.
In addition, our research and development expenses tend to rise relative to revenues when we seek to qualify our fab 3 for products from new customers or new products from our existing products. As our fab 3 uses narrower linewidth technology and because we only commenced production in fab 3 in 2003 and are still in the process of increasing utilization, research and development expenses have been particularly high relative to revenues for this fab in the three years ended December 31, 2005.
Tax incentives
Presently, we benefit from various tax incentive policies in the PRC as a result of our status as an IC Production Enterprise and a high technology foreign invested enterprise. In particular, in 2004, we received a full refund of the enterprise income tax of RMB15.2 million that we paid for the year 2003 as a result of an approval document issued by the relevant taxation authorities dated June 17, 2004. See the section headed ‘‘Financial Information — Incentives from the PRC government’’ for further details on these tax incentives.
Finance costs
Our finance costs have risen substantially during the three years ended December 31, 2005, principally due to our increasing level of bank indebtedness, in particular as a result of our drawdown of US$92.0 million under our US$100 million club term loan facility in 2005. Our finance costs for each of the three years ended December 31, 2003, 2004 and 2005 were RMB0.75 million, RMB4.93 million and RMB33.43 million, respectively. The increase in 2005 was principally attributable to the significant increase in our outstanding bank loan balance from RMB389.0 million as at December 31, 2004 to RMB1,186.3 million as at December 31, 2005. Consequently, our finance costs in 2005 were a large contributor to our net loss attributable to shareholders for the year ended December 31, 2005. We plan to use a portion of our proceeds from the Global Offering to reduce our outstanding indebtedness, as described under the section headed ‘‘Future Plans, Use of Proceeds and Dividend Policy.’’ However, we believe we will continue to have a high level of indebtedness and associated finance costs for the foreseeable future. In addition, given we pay most of our interest at floating rates linked to LIBOR, as interest rates rise, our finance costs will also increase.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with IFRS requires us to adopt accounting policies and make estimates and assumptions that affect amounts reported in our financial statements. In applying these accounting policies, we make subjective judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies,
—138— FINANCIAL INFORMATION estimates and related judgments are common in the semiconductor industry; others are specific to our businesses and operations. The following sections discuss the accounting policies applied in preparing our financial statements that we believe are most dependent on the application of these judgments and estimates, and, in addition, some other accounting policies that we believe are material to an understanding of our financial statements.
Revenue recognition
We manufacture wafers according to the designs and specifications of our customers. Revenue is recognized from sale of our products when the underlying risks and rewards of ownership are transferred to the customers in accordance with the shipment terms and other conditions determining the transfer of title and ownership of the goods.
We typically probe samples of our finished wafers prior to each shipment to identify the manufacturing yield of such shipment. We provide product warranties to our customers except in limited circumstances. We estimate the amount of sales returns on a monthly basis calculated in accordance with the average of our actual returns for the preceding six months. During each of the three years ended December 31, 2003, 2004 and 2005, we did not experience any material variance between our estimated and actual sales returns.
Property, plant and equipment, and depreciation
We state our property, plant and equipment, other than construction in progress, in the balance sheet at cost less accumulated depreciation and impairment losses. The cost of property, plant and equipment comprises their purchase price and any directly attributable costs of bringing the property, plant and equipment to their working condition and location for their intended use. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of property, plant and equipment, the expenditure is capitalized as an additional cost of the property, plant and equipment. Expenditure incurred after the property, plant and equipment that has been put into operation is normally charged to the income statement in the period in which it is incurred. The gain or loss on disposal or retirement of property, plant and equipment recognized in the income statement is the difference between the net sales proceeds and the carrying amount of the relevant property, plant and equipment at the time of disposal.
Depreciation is calculated on the straight-line basis to write off the cost of each asset to its residual value over its estimated useful life. The estimated useful lives of property, plant and equipment are as follows:
Buildings...... 30years Plant and machinery ...... 5–10 years Officeequipment...... 5years Motorvehicles...... 5years Computer software ...... 2–10 years
Inventories
Inventories are stated at the lower of cost and net realizable value. We are exposed to the risk that the ultimate selling price of wafers is less than the carrying value of corresponding goods. We estimate the realizable value for finished goods and work in progress with reference to the latest
—139— FINANCIAL INFORMATION invoice or contract prices and prevailing market conditions. We record a write-off to cost of sales for the differences between this estimated realizable value and the carrying value of the corresponding goods to reflect the decline to the estimated market value of the inventory on that date.
We also make a provision based on the ageing of our inventories and by taking into account the changes in circumstances which indicate that their carrying amounts may not be recoverable.
Deferred tax assets and liabilities
We provide for deferred income tax by using the liability method to consider the temporary differences at the balance sheet date between the tax base of assets and liabilities and their carrying values for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred income tax assets are recognized for all deductible temporary differences. Carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against the deductible temporary differences, can be made.
Deferred income tax assets and liabilities are measured at the tax rates that we expect to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date.
Provision for bad and doubtful debts
We have a policy for the provision for bad and doubtful debts in respect of our accounts receivable. We analyze the adequacy of our provision for bad and doubtful debts for each of our major debtors, on the basis of our evaluation of the age and collectability of the debts.
We make specific provision for debts the collectability of which we consider is in doubt. As for other accounts receivable, we make general provision as follows:
Provision Ageing rate
Current(withincreditterm)...... Nil
Overdue: Within2months...... Nil 2–6months...... 20% 7–12months...... 40% Over1year...... 100%
We believe that our provision policy for bad and doubtful debts is similar to that adopted by other companies in the semiconductor industry. We have not been required to write off any bad debts as a result of customer defaults.
As at February 28, 2006, approximately 91% of the balance of accounts and notes receivable as at December 31, 2005 had been settled.
—140— FINANCIAL INFORMATION
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, financial data from our income statements expressed in absolute figures and as a percentage of total revenue for the periods indicated:
Year ended December 31, 2003 2004 2005 (RMB’000) % of (RMB’000) % of (RMB’000) % of revenue revenue revenue
Revenue ...... 784,428 100.0 1,147,367 100.0 931,583 100.0 Cost of sales ...... (526,144) (67.1) (827,247) (72.1) (860,626) (92.4)
Gross profit ...... 258,284 32.9 320,120 27.9 70,957 7.6 Selling and marketing expenses. (10,467) (1.3) (11,128) (1.0) (7,377) (0.8) General administrative expenses (60,062) (7.7) (78,164) (6.8) (77,640) (8.3) Research and development costs (49,870) (6.4) (52,041) (4.5) (74,931) (8.0)
Total operating expenses . . . . (120,399) (15.4) (141,333) (12.3) (159,948) (17.1)
Profit/(loss) from operating activities ...... 137,885 17.5 178,787 15.6 (88,991) (9.5)
Other income ...... 7,993 1.0 6,632 0.6 37,397 4.0
Finance costs...... (748) (0.1) (4,934) (0.4) (33,427) (3.6)
Profit/(loss) before income tax 145,130 18.4 180,485 15.8 (85,021) (9.1) Income tax (expense)/refund, net (12,025) (1.5) 2,165 0.2 9,991 1.1
Net profit/(loss) attributable to shareholders ...... 133,105 16.9 182,650 16.0 (75,030) (8.0)
Dividends ...... — 0.0 35,109 3.1 — 0.0
Earnings/(loss) per share (RMB) ...... 0.12 N/A 0.16 N/A (0.07) N/A
—141— FINANCIAL INFORMATION
Revenue
We generate substantially all our revenue from the manufacturing of 5-inch, 6-inch and 8-inch wafers. We began selling 8-inch wafers in December 2003. In 2003, we began deriving a small portion of our revenue from providing masks and probing services for the convenience of our customers. The following table sets forth our revenue by type of wafer and the respective percentages of total revenue for the periods indicated:
Year ended December 31, 2003 2004 2005 (RMB’000) % of (RMB’000) % of (RMB’000) % of revenue revenue revenue
Products 5" wafers ...... 348,790 44.5 409,339 35.7 224,515 24.1 6" wafers ...... 409,682 52.2 584,011 50.9 482,708 51.8 8" wafers ...... 240 — 131,986 11.5 206,265 22.1 Others(1)...... 25,716 3.3 22,031 1.9 18,095 2.0
Total ...... 784,428 100.0 1,147,367 100.0 931,583 100.0
Note:
(1) Consists of probing services and provision of masks.
The following table sets forth the number of wafers we sold by type of wafer for the periods indicated:
Year ended December 31, 2003 2004 2005
Products 5"wafers...... 346,308 387,862 212,241 6"wafers...... 260,032 396,252 352,717 8"wafers...... 40 26,764 37,625
Total...... 606,380 810,878 602,583
Our revenue derived from the manufacturing of both 5-inch and 6-inch wafers increased in both 2003 and 2004. Revenue derived from the sale of 5-inch and 6-inch wafers for the year ended December 31, 2005 decreased significantly compared to sales during the same period in 2004. The percentage of our revenue derived from manufacturing 6-inch wafers has increased over time principally as a result of the migration of customer demand to higher technology products and our conversion of a portion of our 5-inch production capacity into 6-inch capacity in response to this trend. Revenue from manufacturing 8-inch wafers represented a small proportion of revenue in 2003 since sales of 8-inch wafers only began from December 2003. For the year ended December 31, 2004 and the year ended December 31, 2005, our revenues from 8-inch wafers increased as we received more orders for 8-inch wafers and began to establish a diversified customer base in the 8- inch business.
—142— FINANCIAL INFORMATION
The following table sets forth the average selling prices of our wafers for the periods indicated:
Year ended December 31, 2003 2004 2005 (RMB) (RMB) (RMB)
Products 5"wafers...... 1,007.2 1,055.4 1,057.7 6"wafers...... 1,575.5 1,473.8 1,368.6 8"wafers...... N/A(1) 4,931.5 5,482.1
Note:
(1) Sales of our 8-inch wafers commenced in December 2003. Therefore, the average selling price of 8-inch wafers is only meaningful starting from 2004.
Changes in our average selling prices during the periods indicated in the table above may not be indicative of any particular trends in our average selling prices because of our diverse product mix of 5-inch, 6-inch and 8-inch wafers and the technological complexities associated with our production process, such as the number of mask steps required for the production of a wafer.
The following table sets forth our revenue attributable to sales to IDMs and fabless semiconductor companies and the respective percentages of total revenue for the periods indicated:
Year ended December 31, 2003 2004 2005 (RMB’000) % of (RMB’000) % of (RMB’000) % of revenue revenue revenue
IDMs ...... 428,585 54.6 547,388 47.7 331,180 35.6 Fabless semiconductor companies(1) ...... 355,843 45.4 599,979 52.3 600,403 64.4
Total ...... 784,428 100.0 1,147,367 100.0 931,583 100.0
Note:
(1) We have categorized revenue derived from the orders placed with us by Jazz Semiconductor, our direct customer, based on what we know to be the nature of the ultimate end users for such orders.
—143— FINANCIAL INFORMATION
The following table sets forth our revenue by geographical segments for the periods indicated based on the location of each customer’s headquarters:
Year ended December 31, 2003 2004 2005 (RMB’000) % of (RMB’000) % of (RMB’000) % of revenue revenue revenue
United States of America. . . . 597,519 76.2 862,161 75.2 542,143 58.2 Europe ...... 114,506 14.6 149,524 13.0 169,556 18.2 Asia ...... 67,417 8.6 126,551 11.0 219,238 23.5 Other geographical areas . . . 4,986 0.6 9,131 0.8 646 0.1
Total ...... 784,428 100.0 1,147,367 100.0 931,583 100.0
Cost of sales
Our cost of sales consists principally of:
. depreciation of our production equipment and plant facilities;
. cost of raw materials, primarily including silicon wafers, chemicals and gas;
. overhead, including repair and maintenance of production equipment and plant facilities, indirect labor costs, costs of consumables and supplies, water and electricity;
. direct labor costs, which include the cost of permanent employees and of contract employees hired through agencies;
. royalty fees paid to the Philips Group;
. non-deductible value-added tax; and
. provisions for the non-realizable value of inventories, slow-moving and obsolete inventories.
The following table sets forth our cost of sales by wafer type as a percentage of total revenue for the periods indicated:
Year ended December 31, 2003 2004 2005 Cost of %of Cost of %of Cost of %of sales revenue sales revenue sales revenue (RMB’000) (RMB’000) (RMB’000)
Product 5" wafers ...... 192,653 24.6 221,507 19.3 165,011 17.7 6" wafers ...... 297,629 37.9 408,040 35.6 357,827 38.4 8" wafers ...... 15,084 1.9 180,169 15.7 322,764 34.6 Others(1) ...... 20,778 2.7 17,531 1.5 15,024 1.6
Total ...... 526,144 67.1 827,247 72.1 860,626 92.3
Note:
(1) Consists of probing services and provision of masks.
—144— FINANCIAL INFORMATION
The following table sets forth our gross margin set out by wafer type for the periods indicated:
Year end December 31, 2003 2004 2005
Product 5"wafers...... 44.8% 45.9% 26.5% 6"wafers...... 27.4% 30.1% 25.9% 8"wafers...... —(1) (36.5)%(2) (56.5)%(2)
Note:
(1) We commenced construction of fab 3 in April 2002, and began production of 8-inch wafers in October 2003. We sold our first batch of 8-inch wafers produced in fab 3 in December 2003, generating revenue from our sales of RMB240,000, which represented 0.03% of the total revenue generated for the year ended December 31, 2003. Our investment in fab 3 in 2003 (such as our acquisition of equipment and utilities for 8-inch wafer process technologies) resulted in substantial up-front fixed costs over this period. Accordingly, we believe the inclusion of a gross margin figure for the year ended December 31, 2003 in respect of fab 3 is not meaningful.
(2) The negative gross margin during each of these periods was principally the result of significantly higher cost of sales associated with the initial period of production of fab 3 and, in the year ended December 31, 2005, was also due to slower than expected ramp up orders for our 8-inch capacity. Cost of sales during each of these periods comprised depreciation of the up-front fixed costs and our continued investment in equipment for fab 3 and raw material and other variable costs.
Operating expenses
Our operating expenses consist of:
Selling and marketing expenses. Selling and marketing expenses consist primarily of selling and distribution staff salaries and other benefits and commissions paid to our overseas agents. The commissions are calculated as a percentage of sales proceeds received from customers referred to us by these agents in accordance with the terms of the underlying agency agreements. Selling and marketing expenses also include office costs and travel costs.
Research and development expenses. Research and development expenses are expensed as incurred and primarily consist of salaries and wages for staff involved in process and technology research and development activities, the cost of wafers and depreciation and repair costs of the equipment used for research and development purposes.
General and administrative costs. General and administrative costs consist primarily of staff salaries and other benefits, contribution to our profit-based staff bonus and welfare fund, rentals for our operating leases, import and export charges, exchange losses and other costs such as utility costs, consumables, recruitment and training costs and entertainment costs.
—145— FINANCIAL INFORMATION
The following table sets forth our operating expenses for the periods indicated:
Year ended December 31, 2003 2004 2005 Operating %of Operating %of Operating %of expenses revenue expenses revenue expenses revenue (RMB’000) (RMB’000) (RMB’000)
Selling and marketing expenses ...... 10,467 1.3 11,128 1.0 7,377 0.8 General and administrative expenses ...... 60,062 7.7 78,164 6.8 77,640 8.3 Research and development costs...... 49,870 6.4 52,041 4.5 74,931 8.0
Total operating expenses . . . 120,399 15.4 141,333 12.3 159,948 17.1
Non-operating income and expenses
Our non-operating income principally consists of:
. interest income;
. insurance compensation, including compensation for the losses from a fire on our premises in 2002;
. refunds of value-added tax arising from the sales of wafers within the PRC as a result of our status as an advanced technology enterprise and refunds of business tax;
. foreign exchange gains arising from the appreciation of the Renminbi; and
. income from sales of masks for prototyping by our customers.
Our non-operating expenses consist of financing costs arising from bank loans. We currently have loans outstanding under our US$100 million club term loan facility with a group of banks and several smaller working capital facilities aggregating US$50.0 million. See ‘‘— Indebtedness and Contingent Liabilities.’’
Income tax
We are located in Caohejing High-Tech Park of Shanghai, the PRC, which currently entitles us to a base income tax rate is 15%. In accordance with the prevailing tax laws in the PRC, we were entitled to full exemption from enterprise income tax for our first and second profitable years after our formation (after offsetting accumulated tax losses, which can be carried forward for utilization for a maximum period of five years). Our first profitable year was 1999. According to these laws, we also were entitled to a further 50% reduction in enterprise income tax for the third, fourth and fifth profitable years. Accordingly, we were initially subject to PRC enterprise income tax at an applicable income tax rate of 7.5% for the year ended December 31, 2003.
In addition, as an integrated circuits manufacturer with total investment of over RMB8.0 billion or with wafers of line widths equal to or below 0.25 micron, and pursuant to an approval document of the relevant tax authorities dated June 17, 2004, we were granted an additional tax concession
—146— FINANCIAL INFORMATION consisting of a refund of the income tax we paid for the year ended December 31, 2003. The income tax refund of RMB15.2 million was recognized on June 17, 2004 and was subsequently received on July 19, 2004. Therefore, we also enjoyed full exemption from enterprise income tax for the year ended December 31, 2003, our fifth profitable year. In addition, we are entitled to a 50% reduction off our base enterprise income tax rate for an additional five years from 2004 to 2008. Accordingly, we were subject to PRC enterprise income tax at an applicable income tax rate of 7.5% for the years ended December 31, 2004 and 2005.
Our effective tax rate for each of the years ended December 31, 2003, 2004 and 2005 was 8.3%, 7.2% and negative 5.9%, respectively. Our effective tax rate during these periods was affected by non-deductible tax costs, adjusted by additional tax deduction of research and development costs and capital expenditures in accordance with the relevant PRC tax rules and regulations. The effective tax rate for the year ended December 31, 2004 stated above excludes the benefits of income tax refund received in 2004 for the income tax paid for the year ended December 31, 2003. The negative effective tax rate for the year ended December 31, 2005 reflects our pre-tax loss for the year, excluding the effect of the over provision of tax in respect of prior years.
No provision for Hong Kong profits tax has been made as we had no assessable profits arising in Hong Kong during the three years ended December 31, 2003, 2004 and 2005.
PERIOD TO PERIOD COMPARISON OF RESULTS OF OPERATIONS
Year ended December 31, 2005 compared with year ended December 31, 2004
Revenue. Revenue decreased 18.8% from RMB1,147.4 million for the year ended December 31, 2004 to RMB931.6 million for the year ended December 31, 2005, primarily as a result of a significant decrease in the number of 5-inch and 6-inch wafers we sold which resulted from a foundry industry-wide cyclical slowdown which started in the fourth quarter of 2004. However, there were signs of recovery in the second half of 2005, and we experienced significant revenue improvement during the three months ended December 31, 2005.
The number of 5-inch wafers we sold decreased 45.3% from 387,862 for the year ended December 31, 2004 to 212,241 for the year ended December 31, 2005, and the number of 6-inch wafers we sold decreased 11.0% from 396,252 for the year ended December 31, 2004 to 352,717 for the year ended December 31, 2005. Despite the decrease in the sales volume of our 5-inch wafers, the average selling price per 5-inch wafer experienced a slight 0.2% improvement for the year ended December 31, 2005 when compared to the year ended December 31, 2004. The average selling price per 6-inch wafer, however, decreased by 7.1%, primarily due to pricing pressure and a change in product mix.
In contrast, revenue from our 8-inch wafer sales increased 56.3% for the year ended December 31, 2005 compared to the year ended December 31, 2004, partially offsetting the revenue decreases in our 5-inch and 6-inch wafer business. The number of 8-inch wafers we sold increased 40.6% from 26,764 for the year ended December 31, 2004 to 37,625 for the year ended December 31, 2005 as a result of continued capacity expansion and the qualification and delivery of new products. The average selling price for our 8-inch wafers in the year ended December 31, 2005 represented a 11.2% increase compared to the year ended December 31, 2004, primarily due to our sales of an increased proportion of wafers manufactured with a higher number of mask steps.
—147— FINANCIAL INFORMATION
Cost of sales and gross margin. Cost of sales increased 4.0% from RMB827.2 million for the year ended December 31, 2004 to RMB860.6 million for the year ended December 31, 2005. This increase was primarily due to increases in sales and average selling price of our 8-inch wafers which were largely offset by declines in sales of 5-inch and 6-inch wafers.
Our gross margin declined from 27.9% for the year ended December 31, 2004 to 7.6% for the year ended December 31, 2005, primarily reflecting the impact of the reduced revenues on our cost structure which consists of a high proportion of fixed costs. For the year ended December 31, 2005, for example, depreciation costs represented 25.8% of our revenue compared to 17.3% of our corresponding revenue for the year ended December 31, 2004. Gross margin for our 5-inch wafer sales decreased from 45.9% for the year ended December 31, 2004 to 26.5% for the year ended December 31, 2005, and gross margin for our 6-inch wafer sales decreased from 30.1% for the year ended December 31, 2004 to 25.9% for the year ended December 31, 2005 primarily in each case resulting from the decline in revenue. The gross margin for our 8-inch wafer sales also deteriorated from a negative 36.5% for the year ended December 31, 2004 to a negative 56.5% for the year ended December 31, 2005, despite meaningful growth in 8-inch wafer sales. The negative gross margin for our 8-inch wafer sales principally reflected the more rapid increase in our costs of sales, principally depreciation, as compared to revenue, as a result of the slower than expected ramp up in sales of 8-inch wafers, as we expanded our production capacity.
Operating expenses and income from operations. Our total operating expenses as a percentage of revenue for the year ended December 31, 2005 increased to 17.1% from 12.3% for the year ended December 31, 2004.
Our selling and marketing expenses decreased 33.3% from RMB11.1 million for the year ended December 31, 2004 to RMB7.4 million for the year ended December 31, 2005. This decrease was primarily due to a 53.4% decline in commission expenses. As a percentage of revenue, selling and marketing expenses decreased slightly.
General and administrative costs decreased slightly from RMB78.2 million for the year ended December 31, 2004 to RMB77.6 million for the year ended December 31, 2005, primarily as a result of a reduction of profit-based staff bonuses due to our net loss for the year. As a percentage of revenue, general and administrative costs increased from 6.8% for the year ended December 31, 2004 to 8.3% for the year ended December 31, 2005 mainly because of the decrease in revenue.
Research and development costs increased 44.0% from RMB52.0 million for the year ended December 31, 2004 to RMB74.9 million for the year ended December 31, 2005. The increase was primarily attributable to depreciation on production equipment used for research and development relating to our 8-inch wafer production prior to commercial production. As a percentage of revenue, research and development costs increased from 4.5% for the year ended December 31, 2004 to 8.0% for the year ended December 31, 2005. We expect this percentage to decline as sales of our 8-inch wafer increase.
Other income. Our other income increased from RMB6.6 million for the year ended December 31, 2004 to RMB37.4 million for the year ended December 31, 2005, as we benefitted from the appreciation of value of the Renminbi as against the US dollar. Since a significant amount of our bank loans are denominated in US dollars, the appreciation in Renminbi against the US dollar resulted in foreign exchange gains of RMB22.2 million in the year ended December 31, 2005.
—148— FINANCIAL INFORMATION
Finance costs. Our finance costs increased over six times from RMB4.9 million for the year ended December 31, 2004 to RMB33.4 million for the year ended December 31, 2005. This increase was primarily as a result of our drawdown in 2005 of US$92.0 million under our US$100 million club term loan facility and the resulting significantly higher outstanding borrowings through most of the year ended December 31, 2005 compared to the average outstanding borrowings for the year ended December 31, 2004, together with a higher LIBOR interest rate in the year ended December 31, 2005.
Income tax refund, net. Our net income tax refund for the year ended December 31, 2005 was RMB10.0 million compared to the net income tax refund of RMB2.2 million for the year ended December 31, 2004. The net refund in the year ended December 31, 2005 was principally due to our pre-tax loss during the period coupled with the write-back of the over provision of tax expense in the prior year. For the year ended December 31, 2004, however, the net tax refund was due to income tax refund of RMB15.2 million received in 2004 for the income tax paid for the year ended December 31, 2003.
Net loss. Our net profit dropped from RMB182.7 million for the year ended December 31, 2004 to a net loss of RMB75.0 million for the year ended December 31, 2005.
Year ended December 31, 2004 compared with year ended December 31, 2003
Revenue. Revenue increased 46.3% from RMB784.4 million for the year ended December 31, 2003 to RMB1,147.4 million for the year ended December 31, 2004, primarily as a result of the increase in our wafer sales, particularly of 8-inch wafers, which we had begun producing in October 2003 and selling in December 2003, and 6-inch wafers. Since the beginning of 2004, orders for 8- inch wafers have increased.
The total number of 8-inch wafers sold during the year ended December 31, 2004 reached 26,764 units, as a result of the increase in customer demand. The average selling price of our 8-inch wafers in 2004 is not comparable to that of 2003, because we sold only 40 8-inch wafers in December 2003. We also believe the change may not be indicative of any particular financial trends, given the diverse product mix and technological complexities associated with our production process, such as the number of mask steps required to produce a wafer.
The number of 5-inch wafers we sold increased 12.0% from 346,308 for the year ended December 31, 2003 to 387,862 for the year ended December 31, 2004, and the number of 6-inch wafers we sold increased 52.4% from 260,032 for the year ended December 31, 2003 to 396,252 for the year ended December 31, 2004. This increase was due to an improvement in our utilization rate and the increase in our production capacity as the orders we received from our customers increased. The average selling price per 5-inch wafer increased slightly by 4.8%. On the other hand, the increase in the number of 6-inch wafers sold was partially offset by a decrease in the average selling price per 6-inch wafer by 6.5%, primarily due to price pressure from our customers and the change in product mix of our 6-inch wafer production.
Cost of sales and gross margin. Cost of sales increased 57.2% from RMB526.1 million for the year ended December 31, 2003 to RMB827.2 million for the same period in 2004. This increase was due to the increase in wafer sales during this period, which led to increases in our manufacturing costs. The increase in costs was also attributable to the reduction in the VAT export refund rate from 17% to 13%. As a result of Cai Shui (2003) Document No. 222, which was jointly issued by the Ministry of Finance and the State Taxation Bureau in October 2003 and which came into effect on January 1, 2004, the VAT export refund rate applicable to our Company’s IC products was reduced
—149— FINANCIAL INFORMATION from 17% to 13%. Accordingly, our Company’s export sales have been subject to a VAT rate of 4%, which is charged, as incurred, to our cost of sales account. As such, we incurred additional costs of RMB35.6 million for the ten months ended October 31, 2004. The PRC government restored the VAT export refund rate to 17% with effect from November 1, 2004.
Our gross margin decreased from 32.9% for the year ended December 31, 2003 to 27.9% for the same period in 2004, primarily reflecting the reduction of our VAT export refund on our export sales, which reduced our gross margin by 3.1%, as well as the commencement of our 8-inch wafer production, which had not yet achieved optimal utilization. Gross margin for our 5-inch wafer sales increased from 44.8% for the year ended December 31, 2003 to 45.9% for the same period in 2004 as a result of lower raw material, labor and depreciation costs for our 5-inch fab, and a change in our 5-inch wafer product mix. Assuming there had been no reduction in our VAT export refund on our sales of 5-inch wafers, our gross margin for 5-inch wafer sales would have increased by an additional 3.2% to 49.1%. Gross margin for our 6-inch wafer sales increased from 27.4% for the year ended December 31, 2003 to 30.1% for the same period in 2004. Assuming there had been no reduction in our VAT export refund on our sales of 6-inch wafers, our gross margin for our 6-inch wafer sales would have increased by an additional 3.2% to 33.3%. This increase was offset by a negative gross margin of 36.5% for our 8-inch wafer sales for the year ended December 31, 2004. Assuming there had been no reduction in our VAT export refund on our sales of 8-inch wafers, our negative gross margin for our 8-inch wafer sales would have improved by an additional 3.0% to 33.5%.
Operating expenses. Our total operating expenses as a percentage of revenue for the year ended December 31, 2004 decreased to 12.3% from 15.4% for the same period in 2003.
Our selling and marketing expenses increased slightly from RMB10.5 million for the year ended December 31, 2003 to RMB11.1 million for the same period in 2004. As a percentage of revenue, selling and marketing expenses decreased slightly from 1.3% for the year ended December 31, 2003 to 1.0% in 2004.
General and administrative costs increased 30.1% from RMB60.1 million for the year ended December 31, 2003 to RMB78.2 million for the same period in 2004, primarily as a result of the increase in staff salaries and other benefits. This increase in staff salaries and other benefits was due to the increase in accrued profit-based bonus. Furthermore, beginning from our re-registration as a foreign invested joint stock limited company on March 2, 2004, our Directors and Supervisors received emoluments from us for their services. Prior to our re-registration, all of our previous directors were wholly remunerated for their services as our directors by the shareholders whom they each represented. As a percentage of revenue, general and administrative costs decreased from 7.7% for the year ended December 31, 2003 to 6.8% in 2004.
Research and development costs increased by 4.2% from RMB49.9 million for the year ended December 31, 2003 to RMB52.0 million for the same period in 2004, primarily as a result of the increasing complexities of processes associated with the 6-inch wafers we produce. This increase was offset by a reduction in our research and development costs associated with our 8-inch wafers, due to the commencement of commercial production at the end of 2003. As a percentage of revenue, research and development costs decreased from 6.4% for the year ended December 31, 2003 to 4.5% in 2004.
Other income. Our other income decreased 17.5% from RMB8.0 million for the year ended December 31, 2003 to RMB6.6 million in 2004 due to the reduction in our interest income as our bank balance decreased.
—150— FINANCIAL INFORMATION
Finance costs. Our finance costs increased over five times from RMB748,000 for the year ended December 31, 2003 to RMB4.9 million in 2004 as a result of interest expense arising from bank loans in 2003 and additional bank loans we incurred in 2004.
Income tax refund, net. Our income tax expense was RMB12.0 million for the year ended December 31, 2003 compared to a net refund of RMB2.2 million for the same period in 2004. The net refund in 2004 was due to the refund of RMB15.2 million for income tax paid for the year ended December 31, 2003 which we received in 2004.
Net profit. Our net profit increased 37.3% from RMB133.1 million for the year ended December 31, 2003 to RMB182.7 million for the same period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our audited cash flow statements for the periods indicated:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Cash flows from operating activities Profit/(loss) before income tax ...... 145,130 180,485 (85,021) Adjustments for depreciation, amortization of land use rights, loss on disposal of property, plant and equipment, provisions, fair value gain on interest rate swap and interest expenses...... 183,955 235,725 327,705 Working capital changes ...... 8,427 (11,720) (160,696)
Cashflowsfromoperations...... 337,512 404,490 81,988 Interestpaid...... (748) (4,934) (33,427) Refund of exempted income tax and prepaid income tax . . — 15,202 7,441 Incometaxpaid...... (10,985) (17,564) —
Net cash inflow from operating activities ...... 325,779 397,194 56,002
Cash flows from investing activities Total addition of property, plant and equipment and construction in progress, proceeds from disposal of property, plant and equipment and acquisition of land use rights...... (746,643) (612,174) (793,375)
Net cash outflow in investing activities...... (746,643) (612,174) (793,375)
Cash flows from financing activities Newbankloans...... 124,151 264,845 1,663,941 Repayment of bank loans ...... — — (866,618) Dividends paid ...... — (35,109) —
Net cash inflow from financing activities ...... 124,151 229,736 797,323
—151— FINANCIAL INFORMATION
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Net (decrease)/increase in cash and cash equivalents.. (296,713) 14,756 59,950 Cash and cash equivalents at beginning of year ...... 327,893 31,180 45,936
Cash and cash equivalents at end of year...... 31,180 45,936 105,886
We had cash and cash equivalents of RMB105.9 million as at December 31, 2005 compared with RMB45.9 million as at December 31, 2004. For the year ended December 31, 2005, we had a net cash inflow of RMB60.0 million compared to a net cash inflow of RMB14.8 million for the year ended December 31, 2004. The RMB45.2 million increase in net cash inflow for the year ended December 31, 2005 compared to the year ended December 31, 2004 resulted primarily from an increase of RMB567.6 million in net cash inflow from financing facilities, which was offset by a RMB181.2 million increase in net cash outflow in investing activities and a RMB341.2 million decrease in net cash inflow from operating activities.
We had cash and cash equivalents of RMB45.9 million as at December 31, 2004 and RMB31.2 million as at December 31, 2003. For 2004, we had a net cash inflow of RMB14.8 million compared to net cash outflow of RMB296.7 million in 2003. The difference of RMB311.5 million in 2004 compared to 2003 resulted primarily from a decrease of RMB134.5 million in net cash used in investing activities, an increase of RMB105.6 million in net cash inflow from financing activities and an increase of RMB71.4 million in net cash inflow from operating activities.
Net cash flows from operating activities
We had a net cash inflow from operating activities of RMB56.0 million for the year ended December 31, 2005 compared to a loss before income tax of RMB85.0 million. The difference was principally the result of non-cash depreciation of RMB284.9 million, which was largely offset by net cash outflow resulting from working capital changes. Depreciation for the year ended December 31, 2005 was higher than that in the year ended December 31, 2004 principally because of the expansion of our 8-inch manufacturing capacity. Accounts and notes receivable increased by RMB68.9 million in the year ended December 31, 2004, due principally to new notes receivable of RMB6.6 million due from, and the extension of credit terms of up to six months to, a significant customer. Inventories increased by RMB44.6 million principally due to an increase in work in progress and finished goods. Accounts payable decreased RMB26.5 million mainly due to our reduced capital expenditures for expansion of our 8-inch manufacturing capacity in the year ended December 31, 2005.
We had a net cash inflow from operating activities of RMB397.1 million for the year ended December 31, 2004 compared to a profit before income tax of RMB180.5 million. The difference was principally the result of non-cash depreciation of RMB215.2 million. Depreciation in 2004 was higher than in 2003 because of the expansion of our 8-inch fab capacity. Changes in working capital were largely cash flow neutral. Inventories increased by RMB23.2 million in 2004 primarily due to the commencement of production and sales of 8-inch wafers at the end of 2003 and amounts due from related companies increased by RMB12.3 million. Prepayments, deposits and other receivables decreased by RMB17.1 million and accounts payable increased by RMB11.9 million.
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We had a net cash inflow from operating activities of RMB325.8 million in 2003 compared to a profit before income tax of RMB145.1 million. The difference was primarily the result of non-cash depreciation of RMB166.1 million. Depreciation in 2003 was higher than in 2002 because of the increase in 8-inch production and the conversion of 5-inch to 6-inch capacity. Changes in working capital were largely cash flow neutral. Inventories increased by RMB65.8 million in 2003 primarily due to increase in work in progress and also due to increases in raw materials and finished goods and accounts and notes receivable increased by RMB29.1 million. These changes were offset by an increase in accounts payable of RMB111.5 million due to an increase in purchases of equipment and machinery to equip fab 3.
Net cash flows from investing activities
Our net cash flows from investment activities was primarily affected by our expenditures on property, plant and equipment and construction in progress as described in more detail under the heading ‘‘— Capital Expenditures’’ in this section. Our net cash outflow in investing activities was RMB793.4 million in the year ended December 31, 2005, RMB612.2 million in the year ended December 31, 2004 and RMB746.6 million in the year ended December 31, 2003.
Net cash flows from financing activities
Our cash flows from financing activities was provided by new bank loans. In the year ended December 31, 2005, we had net cash inflow from financing activities of RMB797.3 million as we incurred new bank loans of RMB1,663.9 million partially offset by repayment of bank loans of RMB866.6 million. The new bank loans consisted mainly of a US$92.0 million drawdown on our US$100 million club term loan facility in 2005.
In the year ended December 31, 2004, we had net cash inflow from financing activities of RMB229.7 million as a result of new bank loans of RMB264.8 million, partially offset by dividends paid of RMB35.1 million.
In the year ended December 31, 2003, we had net cash inflow from financing activities of RMB124.2 million as the result of new bank loans.
CAPITAL EXPENDITURES
Our business is capital-intensive. During each of the three years ended December 31, 2003, 2004, 2005, we have required significant amounts of capital to build, expand, upgrade and maintain our production facilities and our equipment and machinery. Our capital expenditures are comprised of our expenditures on buildings, plant and machinery, office equipment and motor vehicles.
Our capital expenditures for the year ended December 31, 2005 were RMB793.4 million, consisting primarily of RMB712.8 million of additions to our construction in progress, and RMB80.9 million of additions of property, plant and equipment. On the other hand, we received RMB0.3 million as proceeds from our disposal of property, plant and machinery. The increase in construction in progress and plant and machinery was primarily due to the expansion of fab 3 and also to the partial conversion of fab 1/2 from 5-inch to more 6-inch capacity. We spent RMB584.9 million in the expansion of our fab 3 capacity in the year ended December 31, 2005.
Our capital expenditures for the year ended December 31, 2004 were RMB612.2 million, consisting primarily of RMB38.7 million of additions of plant and machinery, RMB5.5 million for the acquisition of land use rights, RMB6.5 million additions of office equipment and RMB560.7 million
—153— FINANCIAL INFORMATION additions to our construction in progress. The increase in plant and machinery was primarily due to the continuing expansion of our 8-inch capacity. We spent RMB429.2 million in the expansion of our fab 3 capacity in the year ended December 31, 2004.
Our capital expenditures for the year ended December 31, 2003 were RMB746.6 million, consisting primarily of RMB12.8 million new additions of plant and machinery, RMB1.6 million new additions of office equipment and RMB731.6 million additions to our construction in progress. The increase in capital expenditures on our buildings and plant and machinery was attributable to the construction of our new fab 3 and the purchase of machinery to equip our fab 3 and to expand capacity at our fab 1/2. We spent RMB633.7 million in the expansion of our fab 3 capacity in the year ended December 31, 2003.
We currently expect our capital expenditures for the year ending December 31, 2006 to be approximately RMB201.8 million (equivalent to approximately US$25.0 million). These capital expenditures will be used primarily to increase our production flexibility, to reduce production cycle time and to improve production yield. The investment plans in 2006 are preliminary and subject to change based upon the execution of our expansion plans, market conditions and our outlook on future conditions in the semiconductor industry.
Additional expansion of our capacities and improvements and upgrades of our facilities in the future will continue to require significant cash for the acquisition of plant, machinery and equipment. We expect to fund our capital expenditure needs with a combination of cash generated from our operating activities, proceeds from the Global Offering, short-term and long-term bank loans and other debt and equity financing. We may not be able to raise additional capital, should that become necessary, on terms acceptable to us or at all.
Our sources of funding
As at December 31, 2005, our principal sources of liquidity included RMB105.9 million of cash and cash equivalents and US$5.1 million of unutilized bank loans consisting of short-term facilities. Our unutilized bank loans exclude undrawn amounts under our US$100 million club term loan agreement because of our covenant breach discussed below, or undrawn amounts under a total of US$36 million credit facilities with Bank of Communications, which we did not formally enter into until after December 31, 2005. During each of the three years ended December 31, 2005, we financed our expansion primarily through internally generated cash flow as well as bank loans as follows:
. Year ended December 31, 2003. For the year ended December 31, 2003, we had a net cash inflow from operating activities of RMB325.8 million and net cash outflow of capital expenditures of RMB746.6 million. In addition, we had cash and cash equivalents of RMB327.9 million at the end of 2002. Our capital expenditures were therefore partly financed out of our net cash inflow from operating activities, and the shortfall of RMB420.8 million was financed out of our prior year-end cash balance as well as our bank loans of RMB124.2 million. As a result, we had a year-end cash balance of RMB31.2 million.
. Year ended December 31, 2004. For the year ended December 31, 2004, we had a net cash inflow from operating activities of RMB397.2 million and net cash outflow of capital expenditures of RMB612.2 million. In addition, we had cash and cash equivalents of RMB31.2 million at the end of 2003. Our capital expenditures were therefore partly financed out of our net cash inflow from operating activities, and the shortfall of
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RMB215.0 million was financed out of our prior year-end cash balance as well as our bank loans of RMB264.8 million. In addition, we paid a dividend of RMB35.1 million during the year ended December 31, 2004. As a result, we had a positive year-end cash balance of RMB45.9 million.
. Year ended December 31, 2005. For the year ended December 31, 2005, we had a net cash inflow from operating activities of RMB56.0 million and net cash outflow of capital expenditures of RMB793.4 million. In addition, we had cash and cash equivalents of RMB45.9 million at the end of 2004. Our capital expenditures were therefore partly financed out of our net cash inflow from operating activities, and the shortfall of RMB737.4 million was financed out of our prior year-end cash balance as well as our net bank loans of RMB797.3 million. As a result, we had a positive year-end cash balance of RMB105.9 million.
Going forward, we expect our principal sources of funding to be cash generated from our operating activities, short-term and long-term bank loans and other debt and equity funding, including the proceeds from the Global Offering. As at December 31, 2005, we had indebtedness of US$92.0 million outstanding under our US$100 million club term loan facility with a group of lenders. This facility matures on March 31, 2010 and is amortizing beginning from 2007. In addition, we had US$55.0 million outstanding under several short-term working capital facilities with the Bank of China, Bank of Communications and Calyon Bank. We have obtained an extension of the US$40.0 million short-term credit facilities with the Bank of China until December 6, 2006. We have also recently obtained from Bank of Communications credit facilities totalling US$36.0 million, of which we drew down US$5.0 million as at December 31, 2005 prior to our formal execution of the facility agreement.
Under our US$100 million club term loan facility dated March 31, 2005, we have granted security over our property, plant and equipment and land use rights. We are also subject to financial covenants as to our net debt to EBITDA ratio, net debt to net tangible worth ratio and debt service coverage ratio, which are tested on a quarterly basis. In particular, our net debt to EBITDA ratio is subject to a sliding threshold schedule which declines over time, originally starting with 2.30x as at June 30, 2005 and ending with 0.80x as at December 31, 2009. As for our net debt to net tangible worth ratio and our debt service coverage ratio, we were subject to a constant threshold ratio of 1.00x and 1.40x, respectively, between June 30, 2005 to December 31, 2009.
We were in breach of the net debt to EBIDTA threshold ratio covenant under the US$100 million club term loan facility as at June 30, 2005 and as at September 30, 2005. Furthermore, our breaches of this financial covenant triggered cross defaults in three of our working capital facilities, the aggregate outstanding principal amount under which as at December 31, 2005 was US$55.0 million.
Despite our breaches, our lenders did not accelerate our repayment obligations under the US$100 million club term loan facility or any of our other borrowings. Instead, the lenders under our US$100 million club term loan facility issued a letter dated February 9, 2006, agreeing to waive our covenant breaches as at June 30, 2005 and as at September 30, 2005 and to revise our financial covenants to less stringent threshold ratios, to be first tested as at December 31, 2005. In particular, our revised net debt to EBITDA threshold ratio started with 5.50x as at December 31, 2005 and will end with 0.80x as at December 31, 2009, our revised net debt to tangible net worth threshold ratio started with 1.25x as at December 31, 2005 and will end with 1.00x as at December 31, 2009, and our revised debt service coverage threshold ratio will be largely constant at 1.40x as at December 31, 2005 through to as at December 31, 2009. We achieved a net debt to EBITDA ratio of 4.67x as
—155— FINANCIAL INFORMATION at December 31, 2005. We also obtained waivers of our cross defaults in our working capital facilities on February 21, 2006. In addition, we plan to use HK$271.5 million (equivalent to US$35.0 million) of the net proceeds we expect to receive from the Global Offering to repay a portion of our outstanding short-term indebtedness, which will have a significant positive effect on our net debt to EBITDA ratio on a stand-alone basis.
Save as described above, we are not subject to any other security or financial covenant in any of our other borrowing or credit facilities.
Our current liabilities have exceeded our current assets, with our net current liabilities amounting to RMB141.8 million, RMB421.3 million and RMB1,004.7 million as at each of December 31, 2003, 2004 and 2005, respectively. This imbalance is primarily a result of our relatively high level of short term interest-bearing borrowings. For a discussion of our net current liabilities position and related risks, please see the risk factor headed ‘‘Our current liabilities exceed our current assets, and if we are unable to refinance or repay our short-term indebtedness, which comprises a large proportion of our current liabilities, when it becomes due, we could become insolvent’’ in the section headed ‘‘Risk Factors.’’
Notwithstanding our net current liabilities position of RMB1,004.7 million as at December 31, 2005, the financial information set out in the Accountants’ Report has been prepared on a going concern basis because the key financial covenant in our US$100 million club term loan facility has been relaxed and our past breaches have been waived as discussed above and, taking into consideration the financial resources available to us, our current levels of internally generated funds and our planned use of proceeds from the Global Offering, our Directors believe we will have sufficient resources to meet our financial obligations as and when they fall due for a period of not less than 12 months from the date of this prospectus.
Factors affecting liquidity
We had the following outstanding capital commitments not provided for in our financial statements as at the dates indicated below:
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Capital commitments Capital commitments in respect of property, plant and equipment: — contracted, but not provided for ...... 183,850 577,462 163,177 — authorized, but not contracted for ...... 351,823 183,601 91,038
535,673 761,063 254,215
We had commitments of RMB46.4 million as at December 31, 2003 in respect of future lease payments under non-cancellable operating leases for our land located at 385 Hongcao Road, Shanghai, which has a site area of 39,010 square meters. On August 13, 2004, we obtained the land use right certificate to this land, and we do not have any commitment to make future lease payments under the related lease agreement.
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INCENTIVES FROM THE PRC GOVERNMENT
The chart below sets forth a brief summary of the material incentives received by us from the PRC government. We are qualified as an ICPE under the PRC government’s Integrated Circuit Policies. Under the Integrated Circuit Policies, since we engage in the semiconductor industry in the PRC and have a total investment size in excess of RMB8.0 billion (US$991.3 million) or fabricate integrated circuits that have a linewidth of equal to or less than 0.25 micron, we are entitled to the benefits listed below.
Incentive
Preferential Value-added . 17% VAT rate, but entitled to a refund for the portion exceeding TaxPolicies...... 3% of actual value-added tax burden relating to the domestic sale of self-made integrated circuit products.
. A foreign invested enterprise which purchases equipment produced in the PRC shall be entitled to a refund of the value- added tax charged on the purchase of such equipment.
. 17% VAT rate, but entitled to a full refund rate of 17% for export sales of integrated circuit products.
. The VAT refund rate related to export sales was reduced to 13% as a result of Cai Shui (2003) Document No. 222, which was jointly issued by the Ministry of Finance and the State Taxation Bureau in October 2003 and which came into effect on January 1, 2004. The Ministry of Finance and the State Taxation Bureau have since restored the VAT export refund rate to 17% with effect from November 1, 2004.
Preferential Enterprise . A base preferential enterprise income tax rate at 15% before Income Tax Policies. . . . reduction as a result of our location in the Caohejing High Tech Park in Shanghai.
. As a foreign invested enterprise, we were entitled a full exemption for our first (1999) and second profitable years and 50% reduction for our third, fourth and fifth profitable years.
. Pursuant to an approval document from the relevant tax authorities dated June 17, 2004, we were granted a tax concession for a refund of the income tax paid for the year ended December 31, 2003. Thus, we enjoyed full exemption from enterprise income tax for our fifth profitable year, being 2003.
. We also enjoy a continued 50% reduction from 2004 to 2008 as an integrated circuit manufacturer capable of manufacturing wafers with linewidths equal to or below 0.25 micron.
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. Foreign invested enterprise whose research and development costs increase more than 10% in a financial year shall be entitled to deduct 50% of its research and development costs from its taxable income.
Preferential Customs Duties . Exemption from customs duties and import-related VAT with and Import-related VAT respect to imported equipment, spare parts and raw materials. Policies ......
Preferential Time Limit for . No less than three years. Depreciation of Equipment Used in Production . According to industry standards, we use a basis of five to ten (applicable to foreign years. investments exceeding US$30.0 million) ......
INDEBTEDNESS AND CONTINGENT LIABILITIES
The following table sets forth our interest-bearing loans and borrowings as at the dates indicated:
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Bank loans, — unsecured...... 124,151 388,996 443,861 — secured...... — — 742,458
124,151 388,996 1,186,319
These loans bear interest at floating rates ranging, as at December 31, 2005, from 1.97% to 5.25%. For more information on our outstanding bank loans, please refer to ‘‘— Capital Expenditures — Our sources of funding’’ above.
Our total interest-bearing indebtedness amounted to RMB1,170.0 million as at February 28, 2006. This amount consists of unsecured bank loans and secured bank loans amounting to RMB430.2 million and RMB739.8 million, respectively.
We obtained a US$100 million club term loan facility from a group of lenders on March 31, 2005. Under this facility, we are subject to financial and security covenants, further details of which are set out in the sub-section headed ‘‘— Capital Expenditures — Our sources of funding’’ in this section. In addition, we are subject to other covenants, including:
. a restriction on our incurring additional borrowing (save for certain exceptions);
. a negative pledge with respect to our grant of further security over our property, assets or cash flow (save for certain exceptions);
. a prohibition on our entering into new businesses;
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. a restriction on any amalgamation, demerger, merger or reconstruction;
. dividends which we declare or distribute in any given financial year after the date of this prospectus being not more than 25% of our net profits (after tax); and
. a restriction on any reduction in our registered capital.
In addition, as required under the US$100 million club loan facility, we have secured our obligations thereunder with substantially all of our existing property, plant and equipment and our land use rights pursuant to an equipment mortgage agreement and a real estate mortgage agreement. These mortgage agreements also obligate us to mortgage all property, plant and land use rights that we acquire in the future and certain equipment purchased under existing contracts for so long as any amounts under the loan facility remain outstanding.
As at December 31, 2005, our total outstanding indebtedness under this facility amounted to US$92.0 million. While we were in breach of our financial covenant as to our net debt to EBITDA ratio as at June 30, 2005 and as at September 30, 2005, we obtained waivers from our lenders on such breaches on February 9, 2006. For further details, please refer to the sub-section headed ‘‘— Capital Expenditures — Our sources of funding’’ in this section.
As at February 28, 2006, we had unutilized banking facilities of US$25.6 million (equivalent to RMB205.8 million) which will expire on November 30, 2006 and March 31, 2010 in respect of US$17.6 million (equivalent to RMB141.5 million) and US$8.0 million (equivalent to RMB64.3 million), respectively.
Save as disclosed above, our Directors confirm there has been no material change in our indebtedness and contingent liabilities since February 28, 2006.
Save as aforesaid, we did not have, at the close of business on February 28, 2006, any debt securities issued and outstanding, and authorized or otherwise created but unissued, and term loans (guaranteed, unguaranteed or secured) or any outstanding liabilities or any mortgages, charges, debentures or other loan capital issued or agreed to be issued, bank overdrafts, loans, liabilities under acceptance (other than normal trade bills) or acceptance credit or other similar indebtedness, hire purchase and finance lease commitments or any guarantees or other material contingent liabilities.
WORKING CAPITAL
Taking into consideration the financial resources available to us, including our internally generated funds, presently available banking facilities and the estimated net proceeds of the Global Offering, our Directors are of the opinion that we have sufficient working capital for our present requirements, that is for at least the next 12 months from the date of this prospectus.
OFF-BALANCE SHEET TRANSACTIONS
We have not entered into any off-balance sheet transactions other than the interest rate swap described under ‘‘— Qualitative and Quantitative Disclosures about Market Risk — Interest rate risks.’’
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INFLATION
To date, inflation in the PRC has not had a material impact on our results of operations. Inflation in the PRC was approximately 1.2%, 3.9% and 2.0% in 2003, 2004 and 2005, respectively, according to the National Bureau of Statistics of China.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign exchange rate fluctuation risk
Substantial portions of our revenue and expenses are denominated in currencies other than the Renminbi. As at December 31, 2005, approximately 74.2% of our accounts and notes receivable and trade receivables from related parties were denominated in US dollars and 25.8% of our accounts and notes receivable and trade receivables from related parties were denominated in Renminbi. At the same date, approximately 2%, 2%, 35% and 61% of our accounts payable were denominated in Euro, Japanese Yen, Renminbi and US dollars respectively. The Renminbi, however, is our financial and reporting currency since it is the legal currency of the PRC, the primary economic environment in which we operate, and we are required under PRC regulations to convert the foreign currencies received, net of expenses, into Renminbi within a prescribed period of time.
See the sections headed ‘‘Risk Factors — Risk relating to the PRC — Government control of currency conversion may adversely affect our financial condition and results of operations as well as affect our ability to pay dividends in foreign currencies’’ and ‘‘Risk Factors — Risk relating to our Industry, Business and Operations — Exchange rate fluctuations could increase our costs, which could adversely affect our operating results’’ for further details on our foreign exchange rate fluctuation risk.
We do not currently use derivative financial instruments for the purpose of hedging our exchange rate risks although we intend to do so in the future.
Interest rate risks
Our exposure to risk related to changes in interest rates is primarily due to our interest-bearing loans and borrowings. Higher interest rates may adversely affect our operating profits. We have entered into an interest rate swap with respect to the interest payable on a minor portion of our outstanding principal amount under our US$100 million club term loan facility. Other than this, we do not use any derivative financial instruments to hedge our interest rate risk. As at February 28, 2006, we had RMB1,170.0 million outstanding floating rate indebtedness, of which RMB739.8 million comprised loans under our US$100 million club term loan facility.
Credit risks
Credit risk arises from the possible inability of our counterparties to meet their financial obligations to us. The financial assets that are potentially subject to significant concentrations of credit risk consist principally of cash and cash equivalents, trade and other receivables and due from our related companies. Our maximum exposure to credit risk in relation to each class of recognized financial assets is the carrying amount of these assets. There are no significant concentrations of credit risk for our financial assets.
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DISCLOSURE OF CERTAIN ADVANCES TO OTHER ENTITIES AND OTHER MATTERS REQUIRED UNDER THE HONG KONG LISTING RULES
As at February 28, 2006, we confirm that there is no circumstance that would give rise to a disclosure requirement under Rules 13.11 to 13.19 of the Hong Kong Listing Rules.
DISTRIBUTABLE RESERVES
Our distributable reserves are determined by reference to our profits as reflected in our PRC statutory financial statements which are prepared in accordance with PRC GAAP. These profits differ from those that are reflected in ‘‘Appendix I — Accountants’ Report.’’ Upon the listing of our H Shares on the Stock Exchange, we will distribute dividends, if any, based on the lower of our profits determined under PRC GAAP and IFRS.
Our maximum distributable reserves as at December 31, 2005, which represented our reserves as determined in accordance with PRC GAAP, after deduction of the minimum transfers to the statutory surplus reserve and the statutory public welfare fund (as required under the PRC Company Law and the Articles of Association), amounted to approximately RMB31.8 million.
FORECAST FOR THE SIX MONTHS ENDING JUNE 30, 2006
We forecast that, in the absence of unforeseen circumstances and on the bases and assumptions set out in ‘‘Appendix III — Forecast,’’ and in accordance with IFRS, our net profit attributable to our shareholders for the six months ending June 30, 2006 will be not less than RMB0.
The forecast is presented on a basis consistent in all material respects with the accounting policies currently adopted by us as set out in the Accountants’ Report dated the date of this prospectus (the text of which is set out in ‘‘Appendix I — Accountants’ Report’’).
Our Directors have prepared a profit forecast only for the six months ending June 30, 2006, as the cyclical nature of the foundry industry and other factors described under the sections headed ‘‘Risk Factors — Risks Relating to Our Industry, Business and Operations’’ and ‘‘Financial Information — Factors That Impact Our Results of Operations’’ make any forecast for a longer period subject to too many uncertainties.
We have undertaken to the Stock Exchange that our interim financial report for the six months ending June 30, 2006 will be audited, pursuant to Rule 11.18 of the Hong Kong Listing Rules.
On the basis of the prospective financial information and assuming that (i) the Shares to be issued pursuant to the Global Offering were issued on January 1, 2006 and (ii) the Over-allotment Option will not be exercised, the pro forma fully diluted forecast earnings per Share will not be less than RMB0.
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UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE ASSETS
The following statement of unaudited pro forma adjusted net tangible assets of the Company is prepared based on the net tangible assets of our Company as set out in ‘‘Appendix I — Accountants’ Report’’ adjusted as described below:
Audited net assets of the Estimated net Unaudited pro Company as at proceeds from forma adjusted Unaudited pro forma December 31, the Global net tangible adjusted net tangible 2005(1)(4) Offering(2) assets(4) assets per Share(3)(4) RMB’000,000 RMB’000,000 RMB’000,000 RMB HK$
BasedonanOfferPrice of HK$1.36 per share. . 1,180 449 1,629 1.10 1.06
BasedonanOfferPrice of HK$1.85 per share. . 1,180 628 1,808 1.22 1.18
Note:
(1) The financial information as at December 31, 2005 is extracted from the balance sheet of the Company set out in ‘‘Appendix I — Accountants’ Report.’’
(2) The estimated net proceeds accruing to our Company from the Global Offering (assuming the Over-allotment Option is not exercised) are based on the Offer Price of the lower and upper limits of the range of the Offer Price stated in the prospectus of between HK$1.36 and HK$1.85 per Share, after deduction of the underwriting fees and other related expenses payable by us.
(3) The number of Shares is based on a total of 1,478,773,000 Shares issued and outstanding during the entire year, adjusted as if the Global Offering had occurred on December 31, 2005, excluding any shares that might be issued under the Over-allotment Option.
(4) Our property interests as at December 31, 2005 have been valued by Sallmanns (Far East) Limited, an independent property valuer, and the relevant property valuation report is set out in ‘‘Appendix IV — Property Valuation.’’ The above adjustment does not take into account the surplus attributable to us arising from the revaluation of our property interests amounting to RMB190,240,000. The revaluation surplus has not been incorporated in our financial statements for the year ended December 31, 2005. If the valuation surplus was recorded in our financial statements, our depreciation expense for the year ended December 31, 2005 would be increased by approximately RMB8,465,000.
NO MATERIAL ADVERSE CHANGE
We confirm that there has been no material adverse change in our financial or trading position since December 31, 2005 (being the date to which our latest financial results were prepared) as set forth in ‘‘Appendix I — Accountants’ Report.’’
—162— FUTURE PLANS, USE OF PROCEEDS AND DIVIDEND POLICY
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately HK$519.6 million (equivalent to approximately US$67.0 million) from the Global Offering, after deducting the underwriting commission and expenses payable by us in the Global Offering, assuming the Over-allotment Option is not exercised and an Offer Price of HK$1.61 per Share, being the midpoint of the Offer Pricerangestatedinthisprospectus.
We currently intend to apply these net proceeds in the following manner:
. approximately HK$271.5 million (equivalent to approximately US$35.0 million) will be used to repay a portion of our outstanding indebtedness. Specifically, we intend to pay down all amounts outstanding under three of our revolving working capital facilities as follows:
— US$10.0 million under a facility bearing interest at a rate equal to 6-month LIBOR plus 0.8%, which matures on August 16, 2006;
— US$15.0 million under a facility bearing interest at a rate equal to 3-month LIBOR plus 0.8%, which matures on December 27, 2006; and
— US$10.0 million under a facility bearing interest at a rate equal to 3-month LIBOR plus 0.8%, which matures on January 10, 2007; and
. approximately HK$248.1 million (equivalent to approximately US$32.0 million) will be used to fund our capital expenditure plans. Of this total, we intend to apply approximately HK$54.2 million (equivalent to approximately US$7.0 million) to increase our 8-inch production flexibility and yield and reduce our production cycle time by the acquisition and/or upgrade of certain production equipment, and we plan to apply approximately HK$193.9 million (equivalent to approximately US$25.0 million) to increase our overall 8- inch monthly production capacity from approximately 12,000 wafers as at December 31, 2005 to approximately 14,000 wafers as at December 31, 2007.
To the extent our net proceeds are either more or less than expected, we will adjust the amount of our net proceeds to be applied in our capital expenditure plans accordingly.
In the event the Over-allotment Option is exercised in full, we estimate we would receive additional net proceeds of approximately HK$84.8 million, assuming an Offer Price of HK$1.61 per Share, being the midpoint of the Offer Price range stated in this prospectus. We intend to repay our other outstanding indebtedness with these additional net proceeds.
To the extent that any of our net proceeds are not applied immediately, we intend to deposit them in interest bearing bank accounts with licensed banks and/or authorized financial institutions in Hong Kong.
—163— FUTURE PLANS, USE OF PROCEEDS AND DIVIDEND POLICY
We are currently subject to certain amended financial covenants under our US$100 million club term loan facility, including one as to our net debt to EBITDA ratio, to be tested on a quarterly basis during the term of the facility. Our planned use of proceeds to repay certain outstanding indebtedness as described above will have a significant positive effect on our net debt to EBITDA ratio on a stand-alone basis. Should we become in breach of these covenants, however, our lenders under our US$100 million club term loan facility, and our other lenders under our working capital facilities, may accelerate our repayment of the relevant outstanding principal amounts (which totalled US$147.0 million (equivalent to HK$1,140.4 million) as at December 31, 2005), together with any accrued interest thereon. In the event of an acceleration of our repayment obligations under these loans, we may deviate from our intended use of proceeds described above, and reallocate all or part of the net proceeds we receive from the Global Offering to repay these obligations. In the event that we decide to change our intended use of proceeds described above for this reason, we will issue a separate announcement in accordance with the relevant requirements of theHongKongListingRules.
We will not receive any of the proceeds from the sale of Shares by COAMC, the Selling Shareholder, including proceeds resulting from any exercise by the Joint Global Coordinators on behalf of the International Purchasers of the Over-allotment Option in respect of the Shares held by the Selling Shareholder. Assuming the Over-allotment Option is not exercised and assuming an Offer Price of HK$1.61 per H Share (being the midpoint of the Offer Price range stated in this prospectus), the Selling Shareholder will receive total net proceeds of HK$52.0 million. These proceeds will not form part of our shareholders’ capital. The Company shall, on behalf of the Selling Shareholder, remit these net proceeds to the national social security fund in accordance with the relevant PRC government requirements.
DIVIDEND POLICY
The holders of H Shares will share proportionately, on a per Share basis, all dividends and other distributions declared by our Board. For holders of H Shares, cash dividend payments, if any, will be declared by our Board in Renminbi and paid in Hong Kong dollars (translated from the Renminbi amount declared using the average selling PBOC Rate prevailing one week prior to the declaration of such dividends).
The declaration of dividends is subject to, among other things, the full discretion of our Board and approval at a general meeting of our shareholders. The amounts of dividends actually declared and paid to holders of H Shares will depend upon the following factors:
. our financial results;
. the interests of our shareholders; and
. other factors our Board may deem relevant.
—164— FUTURE PLANS, USE OF PROCEEDS AND DIVIDEND POLICY
In particular, under a US$100 million club term loan facility we obtained from a group of banks, we are subject to a restrictive covenant such that, after completion of the Global Offering, we may only declare, make or distribute dividends of not more than 25% of our net profits (after tax) in any given financial year.
Other than the special dividend in the amount of RMB35,109,000 we declared on May 28, 2004, representing approximately 26.4% of the profit attributable to our shareholders for the year ended December 31, 2003, we have not declared or paid any dividends since our incorporation. This special dividend was paid to our shareholders in cash in August 2004. No portion of this special dividend will be paid to subscribers and purchasers of Shares in the Global Offering. Our Directors have no current intention to distribute any dividends, and will re-evaluate our dividend policy from time to time.
—165— UNDERWRITING
HONG KONG UNDERWRITERS
Goldman Sachs (Asia) L.L.C.
BOCI Asia Limited
First Shanghai Securities Limited
UNDERWRITING ARRANGEMENTS AND EXPENSES
Hong Kong Public Offering
Hong Kong Underwriting Agreement
We are offering the Hong Kong Offer Shares for subscription by the public in Hong Kong, at the Offer Price, on and subject to, the terms and conditions of this prospectus and the related Application Forms. Subject to the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the H Shares to be offered pursuant to the Global Offering as mentioned herein and to certain other conditions set out in the Hong Kong Underwriting Agreement, the Hong Kong Underwriters have agreed severally and not jointly to subscribe or procure subscribers for the Hong Kong Offer Shares which are being offered but are not taken up under the Hong Kong Public Offering on the terms and conditions of this prospectus, the related Application Forms and the Hong Kong Underwriting Agreement.
Grounds for Termination
The obligation of the Hong Kong Underwriters to subscribe or procure subscribers for the Hong Kong Offer Shares is subject to termination if, at any time prior to 8: 00 a.m. on the day that trading in the Offer Shares commences on the Stock Exchange, there shall develop, occur, exist or come into effect:
(a) a breach of any of the warranties or any material breach by our Company of any other provision of the Hong Kong Underwriting Agreement;
(b) any matter which has arisen or which has been discovered which would, had it arisen immediately before the date of this prospectus and not having been disclosed in this prospectus, and which constitutes a material omission therefrom;
(c) any statement contained in this prospectus which has become or which has been discovered to be untrue, incorrect or misleading in any material respect;
(d) any event, act or omission which gives or is likely to give rise to any material liability of our Company pursuant to the indemnities contained in the Hong Kong Underwriting Agreement;
—166— UNDERWRITING
(e) any adverse change, or any development involving a prospective adverse change, in or affecting the general affairs, management, financial position, shareholders’ equity, results of operations or trading position of our Company the effect of which in the judgment of any or both of the Joint Global Coordinators makes it impracticable, inadvisable or inexpedient to proceed with the Hong Kong public Offering and/or the International Placing on the terms and in the manner contemplated in this prospectus, the Application Forms, the preliminary offering circular and the final offering circular;
(f) any event or series of events, matters or circumstances concerning or relating to:
(i) any change in, or any event or series of events likely to result in any change in local, national or international financial, political, economic, legal, military, industrial, fiscal, regulatory, currency or market conditions or equity securities or stock or other financial market conditions or any monetary or trading settlement system (including, without limitation, a material devaluation of the Hong Kong currency or the Renminbi against any foreign currencies) in Hong Kong, the United Kingdom, the PRC, the United States, Japan, the United Arab Emirates or Australia; or
(ii) any new law or change in existing laws or any change in the interpretation or application thereof by any court or other competent authority in Hong Kong, the United Kingdom, the PRC, the United States or any other jurisdiction considered by the Joint Global Coordinators to be relevant; or
(iii) any event of force majeure affecting Hong Kong, the United Kingdom, the PRC, the United States or any other jurisdiction considered by the Joint Global Coordinators to be relevant including, without limiting the generality thereof, any act of God, war, outbreak or escalation of hostilities (whether or not war is declared) or act of terrorism, or declaration of a national or international emergency or war, riot, public disorder, civil commotion, economic sanctions, fire, flood, explosion, epidemic, outbreak of an infectious disease, calamity, crisis, strike or lock-out (whether or not covered by insurance); or
(iv) a suspension or material limitation in trading in securities generally on the Stock Exchange or the New York Stock Exchange or the London Stock Exchange or a suspension or material limitation in trading of any of the securities of the Company on any exchange or over-the-counter market or a material disruption in commercial banking or securities settlement or clearing services in the PRC, the United States, Hong Kong or the United Kingdom or a general moratorium on commercial banking activities in Hong Kong, New York, London or the PRC due to exceptional financial circumstances or otherwise; or
(v) a change or development involving a prospective change in taxation or exchange control (or the implementation of any exchange control) in the PRC, Hong Kong, the United States, the United Kingdom, Japan, the United Arab Emirates or Australia; or
(vi) any material litigation or claim being threatened or instigated against our Company;
—167— UNDERWRITING
which, in the sole opinion of any or both of the Joint Global Coordinators (for themselves and on behalf of the Hong Kong Underwriters):
(A) is or will be or is likely to be, materially adverse to the general affairs, management, financial position, shareholders’ equity, results of operations or trading or other condition or prospects of the Company or to any present or prospective shareholder of the Company in its capacity as such; or
(B) has or will have or is likely to have a material adverse impact on the success of the Global Offering or the level of Offer Shares applied for or accepted or subscribed for or purchased or the distribution of the Offer Shares or dealings in the H Shares in the secondary market; or
(C) makes it impracticable, inadvisable or inexpedient to proceed with the Hong Kong Public Offering and/or the International Placing on the terms and in the manner contemplated in the prospectus, the Application Forms, the preliminary offering circular and the final offering circular, then any or both of the Joint Global Coordinators, after prior notification to the Company, in its sole and absolute discretion, may for themselves and on behalf of the Hong Kong Underwriters, upon giving notice to us, terminate the Hong Kong Underwriting Agreement with immediate effect.
Undertakings
Pursuant to the Hong Kong Underwriting Agreement and the International Purchase Agreement, we have undertaken to the Hong Kong Underwriters and expect to undertake to the International Purchasers, respectively, that, except pursuant to the Global Offering, at any time after the date of the Hong Kong Underwriting Agreement and the International Purchase Agreement, respectively, up to and including the date falling 180 days after the Listing Date, we will not, without the prior written consent of the Joint Global Coordinators (for themselves and on behalf of the Underwriters) and unless in compliance with the Hong Kong Listing Rules, (a) offer, pledge, charge, allot, issue, sell, lend, contract to allot, issue or sell, sell any option or contract to purchase, purchase any option or contract to sell, grant or agree to grant any option, right or warrant to purchase or subscribe for, lend or otherwise transfer or dispose of, either directly or indirectly, conditionally or unconditionally, or repurchase, any of our share or debt capital or any securities of the Company or any interest therein (including, but not limited to, any securities that are convertible into or exercisable or exchangeable for, or that represent the right to receive any such capital or securities or any interest therein); or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any such share capital or securities or any interest therein; or (c) enter into any transaction with the same economic effect as any transaction described in (a) or (b) above; or (d) agree or contract to, or publicly announce any intention to enter into any transaction described in (a), (b) or (c) above, whether any such transaction described in (a) or (b) or (c) above is to be settled by delivery of share capital or other securities, in cash or otherwise.
Hong Kong Listing Rules obligations
Pursuant to Rule 10.08 of the Hong Kong Listing Rules, no further Shares or securities convertible into equity securities of our Company (whether or not of a class already listed) may be issued or form the subject of any agreement to such an issue within six months from the date on
—168— UNDERWRITING which dealings in our H Shares first commence on the Stock Exchange (whether or not such issue of Shares or securities will be completed within six months from the commencement of dealings), except in certain prescribed circumstances pursuant to the Hong Kong Listing Rules.
Pursuant to Rule 10.07 of the Hong Kong Listing Rules, Philips China and SCIPI shall not, except pursuant to the Global Offering and unless in compliance with the requirements of the Hong Kong Listing Rules, in the period commencing on the date of this prospectus and ending on the date which is six months from the date on which dealings in our H Shares first commence on the Stock Exchange, dispose of, or enter into any agreement to dispose of, or otherwise create any options, rights, interests or encumbrances in respect of, any of the Shares in respect of which Philips China or SCIPI are shown by this prospectus to be the beneficial owner.
Commission and expenses
The Hong Kong Underwriters will receive a commission of 2.5% of the aggregate Offer Price payable for the Hong Kong Offer Shares initially offered under the Hong Kong Public Offering, out of which they will pay any sub-underwriting commissions. For unsubscribed Hong Kong Offer Shares reallocated to the International Placing, we will pay an underwriting commission at the rate applicable to the International Placing and such commission will be paid to the International Purchasers and not the Hong Kong Underwriters.
Hong Kong Underwriters’ interest in our Company
Save for its obligations under the Hong Kong Underwriting Agreement, none of the Hong Kong Underwriters has any shareholding interests in our Company or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in our Company.
Bank of China, an affiliate of one of the Hong Kong Underwriters, BOCI Asia Limited, is one of our principal lenders. As at February 28, 2006, our bank loans from Bank of China amounted to US$58.4 million (equivalent to RMB469.6 million).
International Placing
International Purchase Agreement
In connection with the International Placing, we and the Selling Shareholder expect to enter into the International Purchase Agreement with the International Purchasers. Under the International Purchase Agreement, the International Purchasers to be named therein would severally agree to purchase the International Placing Shares or procure purchasers for the International Placing Shares.
Under the International Purchase Agreement, we and the Selling Shareholder intend to grant to the International Purchasers the Over-allotment Option, exercisable by the Joint Global Coordinators on behalf of the International Purchasers within 30 days of the last day for the lodging of applications under the Hong Kong Public Offering, to require the Selling Shareholder to sell up to an aggregate of 5,544,000 additional H Shares and us to issue up to an aggregate of 55,454,000 additional H Shares, representing in aggregate approximately 15% of the initial number of Offer Shares at the Offer Price, solely to cover over-allocations in the International Placing, if any.
—169— UNDERWRITING
Total Expenses
Assuming an Offer Price of HK$1.61 per H Share (being the midpoint of the stated offer price range of HK$1.36 to HK$1.85 per H Share), the aggregate commissions and fees, together with Stock Exchange listing fees, SFC transaction levy of 0.005%, Stock Exchange trading fee of 0.005%, legal and other professional fees and printing and other expenses relating to the Global Offering, are estimated to amount to approximately HK$83.2 million (assuming the Over-allotment Option is not exercised). Such commissions, fees and expenses are payable by us (as to HK$75.6 million) and the Selling Shareholder (as to HK$7.6 million), being in proportion to the number of H Shares offered by us and the Selling Shareholder in the Global Offering.
—170— STRUCTURE OF THE GLOBAL OFFERING
THE GLOBAL OFFERING
This prospectus is published in connection with the Hong Kong Public Offering as part of the Global Offering. Goldman Sachs (Asia) L.L.C. and BOCI Asia Limited are the Joint Global Coordinators and Joint Bookrunners of the Global Offering.
The Global Offering consists of (subject to adjustment and the Over-allotment Option):
— the Hong Kong Public Offering of 40,668,000 H Shares (subject to adjustment as mentioned below) in Hong Kong as described below under ‘‘The Hong Kong Public Offering;’’ and
— the International Placing of 365,994,000 H Shares (subject to adjustment as mentioned below) in the United States with qualified institutional buyers in reliance on Rule 144A, and outside the United States in reliance on Regulation S.
Of the total 406,662,000 H Shares comprised in the Global Offering (assuming the Over- allotment Option is not exercised), we are offering 369,693,000 H Shares and the Selling Shareholder is offering 36,969,000 H Shares. Investors may apply for our H Shares under the Hong Kong Public Offering or indicate an interest, if qualified to do so, for our H Shares under the International Placing, but may not do both. The Hong Kong Public Offering is open to members of the public in Hong Kong as well as to institutional and professional investors in Hong Kong. The International Placing will involve selective marketing of our H Shares to qualified institutional buyers in the United States in reliance on Rule 144A, as well as to institutional and professional investors and other investors expected to have a sizeable demand for our H Shares in Hong Kong and other jurisdictions outside the United States in reliance on Regulation S. The International Purchasers are soliciting from prospective investors indications of interest in acquiring our H Shares in the International Placing. Prospective investors will be required to specify the number of our H Shares under the International Placing they would be prepared to acquire either at different prices or at a particular price. This process, known as ‘‘book-building,’’ is expected to continue up to, and to cease on or around Friday, March 31, 2006.
The number of H Shares to be offered under the Hong Kong Public Offering and the International Placing respectively may be subject to reallocation as described in ‘‘Pricing and Allocation.’’
PRICING AND ALLOCATION
The Offer Price is expected to be fixed by agreement between the Joint Global Coordinators (on behalf of the Underwriters) and us on the Price Determination Date, when market demand for the Offer Shares will be determined. The Price Determination Date is expected to be on or around Friday, March 31, 2006 and in any event, no later than Tuesday, April 4, 2006.
The Offer Price will be not more than HK$1.85 per Offer Share and is expected to be not less than HK$1.36 per Offer Share, unless otherwise announced not later than the morning of the last day for lodging applications under the Hong Kong Public Offering, as explained below. Prospective
—171— STRUCTURE OF THE GLOBAL OFFERING investors should be aware that the Offer Price to be determined on the Price Determination Date may be, but is not expected to be, lower than the indicative offer price range stated in this prospectus.
If, based on the level of interest expressed by prospective institutional, professional and other investors during the book-building process, the Joint Global Coordinators (on behalf of the Underwriters and with our consent) consider it appropriate, the indicative offer price range and/or the number of Offer Shares may be reduced below that stated in this prospectus at any time prior to the morning of the last day for lodging applications under the Hong Kong Public Offering. In such a case, we will, as soon as practicable following the decision to make such reduction, and in any event not later than the morning of the last day for lodging applications under the Hong Kong Public Offering on Thursday, March 30, 2006, cause to be published in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese) notice of the reduction in the indicative offer price range and/or reduction in the number of Offer Shares. Such notice will also include confirmation or revision, as appropriate, of the working capital statement, the offering statistics as currently set out in the section headed ‘‘Summary’’ and any other financial information which may change as a result of such reduction. Before submitting applications for Hong Kong Offer Shares, applicants should have regard to the possibility that any announcement of a reduction in the indicative offer price range may not be made until the day which is the last day for lodging applications under the Hong Kong Public Offering. Applicants under the Hong Kong Public Offering should note that in no circumstances can applications be withdrawn once submitted, even if the indicative offer price range and/or the number of Offer Shares is so reduced. The Offer Price, if agreed upon, will be fixed within such revised Offer Price range. In the absence of any notice being published of a reduction in the indicative offer price range stated in this prospectus on or before the last day for lodging applications under the Hong Kong Public Offering, the Offer Price, if agreed upon, will under no circumstances be set outside the offer price range as stated in this prospectus.
Allocation of H Shares pursuant to the International Placing will be determined by the Joint Global Coordinators and will be based on a number of factors including the level and timing of demand, total size of the relevant investor’s invested assets or equity assets in the relevant sector and whether or not it is expected that the relevant investor is likely to buy further, and/or hold or sell the H Shares after the listing of the Offer Shares on the Stock Exchange. Such allocation may be made to professional, institutional, corporate investors and is intended to result in a distribution of our H Shares on a basis which would lead to the establishment of a solid shareholder base for our benefit and the benefit of our shareholders as a whole.
Allocation of H Shares to investors under the Hong Kong Public Offering will be based solely on the level of valid applications received under the Hong Kong Public Offering. The basis of allocation may vary, depending on the number of Hong Kong Offer Shares validly applied for by applicants, although the allocation of Hong Kong Offer Shares could, where appropriate, consist of balloting, which would mean that some applicants may receive a higher allocation than others who have applied for the same number of Hong Kong Offer Shares, and those applicants who are not successful in the ballot may not receive any Hong Kong Offer Shares.
The net proceeds from the Global Offering accruing to us (after deduction of underwriting fees and estimated expenses payable by us in relation to the Global Offering, assuming that the Over- allotment Option is not exercised and an Offer Price of HK$1.61, being the midpoint of the proposed Offer Price range of HK$1.36 to HK$1.85) are estimated to be approximately HK$519.6 million.
—172— STRUCTURE OF THE GLOBAL OFFERING
The net proceeds from the Global Offering accruing to the Selling Shareholder (after deduction of underwriting fees and estimated expenses payable by the Selling Shareholder in relation to the Global Offering, assuming that the Over-allotment Option is not exercised and an Offer Price of HK$1.61, being the midpoint of the proposed Offer Price range of HK$1.36 to HK$1.85) are estimated to be approximately HK$52.0 million.
The net proceeds from the sale of Sale H Shares received by the Selling Shareholder are required to be remitted to the national social security fund in accordance with relevant PRC government requirements.
The applicable Offer Price, level of applications in the Hong Kong Public Offering, the level of indications of interest in the International Placing, and the basis of allocations of the Hong Kong Offer Shares are expected to be announced on Thursday, April 6, 2006 in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese).
CONDITIONS OF THE HONG KONG PUBLIC OFFERING
Acceptance of all applications for the Hong Kong Offer Shares pursuant to the Hong Kong Public Offering will be conditional on:
(a) the granting by the Listing Committee of the Stock Exchange of listing of, and permission to deal in, our H Shares being offered pursuant to the Global Offering (including the additional H Shares which may be made available pursuant to the exercise of the Over- allotment Option) and the Converted H Shares (although such converted H Shares may not be transferred until expiry of the Existing Shareholders Lock Up Period and except with the approval of the Ministry of Commerce to be obtained at the relevant time) subject only to allotment and the dispatch of share certificates in respect thereof and such other normal conditions acceptable to us and the Joint Global Coordinators, on behalf of the Underwriters, and such listing and permission not subsequently having been revoked prior to the commencement of dealings in the H Shares on the Stock Exchange; and
(b) the execution and delivery of the International Purchase Agreement on or around the Price Determination Date; and
(c) the obligations of the Underwriters under each of the Hong Kong Underwriting Agreement and the International Purchase Agreement having become unconditional and not having been terminated in accordance with the terms of the respective agreements, in each case on or before the dates and times specified in the Underwriting Agreements (unless and to the extent such conditions are validly waived on or before such dates and times).
If for any reason, the Offer Price is not agreed by April 4, 2006 between the Joint Global Coordinators (on behalf of the Underwriters) and us, the Global Offering will not proceed and will lapse.
If the above conditions are not fulfilled or waived prior to the times and dates specified, the Global Offering will lapse and the Stock Exchange will be notified immediately. Notice of the lapse of the Hong Kong Public Offering will be caused to be published by us in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese) on the next day following such lapse. In such eventuality, all application monies will be returned, without interest, on the terms set out in the section headed ‘‘How to Apply for Hong Kong Offer Shares.’’ In the meantime, the application
—173— STRUCTURE OF THE GLOBAL OFFERING monies will be held in separate bank account(s) with the receiving bankers or other bank(s) in Hong Kong licensed under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong) (as amended).
The consummation of each of the Hong Kong Public Offering and the International Placing is conditional upon, among other things, the other becoming unconditional and not having been terminated in accordance with its terms.
THE HONG KONG PUBLIC OFFERING
We are initially offering 40,668,000 H Shares at the Offer Price, representing approximately 10% of the 406,662,000 H Shares initially available under the Global Offering, for subscription by the public in Hong Kong. Subject to adjustment as mentioned below, the number of H Shares offered under the Hong Kong Public Offering will represent approximately 2.75% of our total issued share capital immediately after completion of the Global Offering, assuming that the Over-allotment Option is not exercised. In Hong Kong, individual retail investors are expected to apply for Offer Shares through the Hong Kong Public Offering and individual retail investors, including individual investors in Hong Kong applying through banks and other institutions, seeking Offer Shares in the International Placing will not be allotted Offer Shares in the International Placing.
The Joint Global Coordinators (on behalf of the Underwriters) may require any investor who has been offered H Shares under the International Placing, and who has made an application under the Hong Kong Public Offering, to provide sufficient information to the Joint Global Coordinators so as to allow them to identify the relevant applications under the Hong Kong Public Offering and to ensure that it is excluded from any application for H Shares under the Hong Kong Public Offering.
For allocation purposes only, the 40,668,000 H Shares initially being offered for subscription under the Hong Kong Public Offering (after taking into account any adjustment in the number of Offer Shares allocated between the Hong Kong Public Offering and the International Placing) will be divided equally into two pools: Pool A comprising 20,334,000 Hong Kong Offer Shares and Pool B comprising 20,334,000 Hong Kong Offer Shares, both of which are available on an equitable basis to successful applicants. All valid applications that have been received for Hong Kong Offer Shares with a total amount (excluding brokerage, SFC transaction levy and the Stock Exchange trading fee) of HK$5.0 million or below will fall into Pool A and all valid applications that have been received for Hong Kong Offer Shares with a total amount (excluding brokerage, SFC transaction levy and Stock Exchange trading fee) of over HK$5.0 million and up to the total value of Pool B, will fall into Pool B.
The Offer Price will be not more than HK$1.85 and is expected to be not less than HK$1.36. Applicants under the Hong Kong Public Offering are required to pay, on application, the maximum offer price of HK$1.85 per H Share plus brokerage fee of 1%, 0.005% SFC transaction levy and 0.005% Stock Exchange trading fee. If the Offer Price, as finally determined on the Price Determination Date, is lower than HK$1.85, being the maximum price, we will refund the respective difference (including the brokerage fee, the SFC transaction levy and the Stock Exchange trading fee attributable to the surplus application monies) to successful applicants, without interest. Further details are set out in the section headed ‘‘How to Apply for Hong Kong Offer Shares.’’
Applicants should be aware that applications in Pool A and Pool B are likely to receive different allocation ratios. If Hong Kong Offer Shares in one pool (but not both pools) are undersubscribed, the surplus Hong Kong Offer Shares will be transferred to the other pool to satisfy demand in that other pool and be allocated accordingly. Applicants can only receive an allocation of Hong Kong
—174— STRUCTURE OF THE GLOBAL OFFERING
Offer Shares from either Pool A or Pool B but not from both pools. Multiple or suspected multiple applications and any application for more than 50% of the 40,668,000 H Shares initially comprised in the Hong Kong Public Offering (that is 20,334,000 Hong Kong Offer Shares) will be rejected.
The allocation of H Shares between the Hong Kong Public Offering and the International Placing is subject to adjustment. If the number of H Shares validly applied for in the Hong Kong Public Offering represents (i) 15 times or more but less than 50 times, (ii) 50 times or more but less than 100 times, and (iii) 100 times or more, of the number of H Shares initially available under the Hong Kong Public Offering, the total number of H Shares available under the Hong Kong Public Offering will be increased to 122,000,000, 162,666,000 and 203,332,000 H Shares, respectively, representing 30% (in the case of (i)), 40% (in the case of (ii)) and 50% (in the case of (iii)), respectively, of the total number of H Shares initially available under the Global Offering (before any exercise of the Over-allotment Option). In such cases, the number of H Shares allocated in the International Placing will be correspondingly reduced, in such manner as the Joint Global Coordinators deem appropriate, and such additional H Shares will be allocated equally between Pool A and Pool B.
If the Hong Kong Offer Shares are not fully subscribed, the Joint Global Coordinators have the authority to reallocate all or any unsubscribed Hong Kong Offer Shares to the International Placing, in such proportions as the Joint Global Coordinators deem appropriate.
In the event of a reduction in the number of Offer Shares, the Joint Global Coordinators may also, at their discretion, reallocate the number of H Shares to be offered in the Hong Kong Public Offering and the International Placing, provided that the number of H Shares comprised in the Hong Kong Public Offering shall not be less than 10% of the total number of the Offer Shares in the Global Offering. The H Shares to be offered in the Hong Kong Public Offering and the H Shares to be offered in the International Placing may, in certain circumstances, be reallocated as between these offerings at the discretion of the Joint Global Coordinators.
References in this prospectus to applications, Application Forms, application monies or to the procedure for application relate solely to the Hong Kong Public Offering.
THE INTERNATIONAL PLACING
We and the Selling Shareholder will be initially offering for subscription or sale under the International Placing 365,994,000 H Shares (comprising 329,025,000 New H Shares and 36,969,000 Sale H Shares to be offered by us and the Selling Shareholder, respectively), representing 90.0% of the Offer Shares under the Global Offering. The International Placing is subject to the Hong Kong Public Offering becoming unconditional.
Pursuant to the International Placing, the International Purchasers will conditionally place our H Shares with qualified institutional buyers in the United States in reliance on Rule 144A, as well as with institutional and professional investors and other investors expected to have a sizeable demand for our H Shares in Hong Kong and other jurisdictions outside the United States in reliance on Regulation S.
We and the Selling Shareholder expect to grant the Over-allotment Option to the International Purchasers, exercisable by the Joint Global Coordinators on behalf of the International Purchasers within 30 days of the last day for the lodging of applications under the Hong Kong Public Offering. A press announcement will be made in the event that the Over-allotment Option is exercised. Pursuant to the Over-allotment Option, the Joint Global Coordinators will have the right to require (i)
—175— STRUCTURE OF THE GLOBAL OFFERING the Selling Shareholder to sell up to an aggregate of 5,544,000 additional H Shares and (ii) us to allot and issue up to an aggregate of 55,454,000 additional H Shares, representing in aggregate approximately 15.0% of the initial Offer Shares, at the Offer Price, solely to cover over-allocations in the International Placing, if any.
DEALING ARRANGEMENTS
Assuming that the Hong Kong Public Offering becomes unconditional at or before 8: 00 a.m. in Hong Kong on Friday, April 7, 2006, it is expected that dealings in H Shares on the Stock Exchange will commence at 9: 30 a.m. on Friday, April 7, 2006.
UNDERWRITING ARRANGEMENTS
The Hong Kong Public Offering is fully underwritten by the Hong Kong Underwriters under the terms of the Hong Kong Underwriting Agreement, subject to agreement on the Offer Price between the Joint Global Coordinators (on behalf of the Underwriters) and us on the Price Determination Date.
We and the Selling Shareholder expect, on or about March 31, 2006, shortly after determination of the Offer Price, to enter into the International Purchase Agreement relating to the International Placing.
Underwriting arrangements, the Hong Kong Underwriting Agreement and the International Purchase Agreement are summarized in the section headed ‘‘Underwriting.’’
—176— HOW TO APPLY FOR HONG KONG OFFER SHARES
I. METHODS OF APPLYING FOR THE HONG KONG SHARES
There are two ways to make an application for our H Shares. You may either use a WHITE or YELLOW Application Form or you may electronically instruct HKSCC to cause HKSCC Nominees to apply for H Shares on your behalf. Except where you are a nominee and provide the required information in your application, you or you and your joint applicant(s) may not make more than one application (whether individually or jointly) by applying on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC.
II. APPLYING BY USING A WHITE OR YELLOW APPLICATION FORM
1. Which Application Form to use
(a) Use a WHITE Application Form if you want the H Shares to be issued in your own name.
(b) Use a YELLOW Application Form if you want the H Shares to be issued in the name of HKSCC Nominees and deposited directly into CCASS for credit to your CCASS Investor Participant stock account or your designated CCASS Participant’s stock account.
Note: Our H Shares are not available to our existing beneficial owners of Shares, our Directors, Supervisors or chief executive or any of our subsidiaries, or associates (as defined in the Hong Kong Listing Rules) of any of them or to legal or natural persons of the PRC (other than Hong Kong, Macau and Taiwan) or persons who do not have a Hong Kong address.
2. Where to collect the Application Forms
(a) You can collect a WHITE Application Form and a prospectus from:
Any participant of The Stock Exchange of Hong Kong Limited
or
Goldman Sachs (Asia) L.L.C. BOCI Asia Limited 68th Floor, Cheung Kong Center 26th Floor, Bank of China Tower 2 Queen’s Road Central 1 Garden Road, Central Hong Kong Hong Kong
or
First Shanghai Securities Limited 19th Floor, Wing On House 71 Des Voeux Road Central Hong Kong
—177— HOW TO APPLY FOR HONG KONG OFFER SHARES or any of the following branches of Bank of China (Hong Kong) Limited:
Hong Kong Island: Bank of China Tower Branch 3/F., 1 Garden Road, Central Central District 71 Des Voeux Road, Central (Wing On House) Branch 409 Hennessy Road Branch 409–415 Hennessy Road, Wan Chai Taikoo Shing Branch Shop G1006–7, Hoi Sing Mansion, Taikoo Shing North Point Branch Roca Centre, 464 King’s Road, North Point
Kowloon: Mong Kok (President 608 Nathan Road, Mong Kok Commercial Centre) Branch Festival Walk Branch Unit LG256, Festival Walk, Kowloon Tong Hoi Yuen Road Branch 55 Hoi Yuen Road, Kwun Tong Yau Ma Tei Branch 471 Nathan Road, Yau Ma Tei Kowloon Plaza Branch Unit 1, Kowloon Plaza, 485 Castle Peak Road Humphrey’s Avenue Branch 4–4A Humphrey’s Avenue, Tsim Sha Tsui
New Territories: Castle Peak Road 167 Castle Peak Road, Tsuen Wan (Tsuen Wan) Wealth Management Centre Lucky Plaza Branch Lucky Plaza, Wang Pok Street, Shatin Tuen Mun Town Plaza Branch Shop 2, Tuen Mun Town Plaza Phase II East Point City Branch Shop 101, East Point City, Tseung Kwan O
(b) You can collect a YELLOW Application Form and a prospectus during normal business hours from 9: 00 a.m. on Monday, March 27, 2006 until 12: 00 noon on Thursday, March 30, 2006 from:
(1) The Depository Counter of HKSCC at 2nd Floor, Vicwood Plaza, 199 Des Voeux Road Central, Hong Kong;
(2) The Customer Service Center of HKSCC at Upper Ground Floor, V-Heun Building, 128–140 Queen’s Road Central, Hong Kong; or
(3) Your stockbroker, who may have such Application Forms and this prospectus available.
3. How to complete the Application Form
There are detailed instructions on each Application Form. You should read these instructions carefully. If you do not follow the instructions your application may be rejected and returned by ordinary post together with the accompanying cheque(s) or banker’s cashier order(s) to you (or the first-named applicant in the case of joint applicants) at your own risk at the address stated in the Application Form.
—178— HOW TO APPLY FOR HONG KONG OFFER SHARES
You should note that by completing and submitting the Application Form, among other things:
(i) you agree with us and each of our shareholders, and we agree with each of our shareholders, to observe and comply with the PRC Company Law, the Special Regulations, and the Articles of Association;
(ii) you agree with us, each of our shareholders, Directors, Supervisors, president and other members of senior management, and we acting for ourselves and for each of our Directors, Supervisors, president and other members of senior management agree with each shareholder to refer all differences and claims arising from our Articles or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning the affairs of our Company to arbitration in accordance with our Articles, and any reference to arbitration shall be deemed to authorize the arbitration tribunal to conduct hearings in open session and to publish its award, which arbitration shall be final and conclusive;
(iii) you agree with us and each of our shareholders that our H Shares (save for the Converted H Shares prior to expiry of the Existing Shareholders Lock Up Period unless approval for their transfer is obtained from the Ministry of Commerce) are freely transferable by the holders thereof;
(iv) you authorize us to enter into a contract on your behalf with each of our Directors, Supervisors and other members of senior management whereby such Director, Supervisor and other member of senior management undertakes to observe and comply with his obligations to shareholders as stipulated in our Articles;
(v) you confirm that you have only relied on the information and representations in this prospectus in making your application and will not rely on any other information and representations save as set out in any supplement to this prospectus;
(vi) you agree that we and our Directors, the Selling Shareholder, the Joint Global Coordinators, the Underwriters, their respective directors, and other parties involved in the Global Offering are liable only for the information and representations contained in this prospectus and any supplement thereto;
(vii) you undertake and confirm that, you (if the application is made for your benefit) or the person(s) for whose benefit you have made the application have not indicated, and will not indicate; an interest for, or applied for or taken up, any Offer Shares under the International Placing; and
(viii) you agree to disclose to us, our registrar, receiving banker, advisers and the Joint Global Coordinators and their respective advisors and agents personal data and any information which they require about you or the person(s) for whose benefit you have made the application.
—179— HOW TO APPLY FOR HONG KONG OFFER SHARES
In order for the YELLOW Application Forms to be valid:
(i) If the application is made through a designated CCASS Participant (other than a CCASS Investor Participant):
(a) the designated CCASS Participant or its authorized signatories must sign in the appropriate box; and
(b) the designated CCASS Participant must endorse the Application Form with its company chop (bearing its company name) and insert its participant I.D. in the appropriate box.
(ii) If the application is made by an individual CCASS Investor Participant:
(a) the Application Form must contain the CCASS Investor Participant’s name and Hong Kong Identity Card Number; and
(b) the CCASS Investor Participant must insert its participant I.D. and sign in the appropriate box in the Application Form.
(iii) If the application is made by a joint individual CCASS Investor Participant:
(a) the Application Form must contain all joint CCASS Investor Participants’ names and the Hong Kong Identity Card Number of all joint CCASS Investor Participants; and
(b) the participant I.D. must be inserted and the authorized signatory(ies) of the CCASS Investor Participant’s stock account must sign in the appropriate box in the Application Form.
(iv) If the application is made by a corporate CCASS Investor Participant:
(a) the Application Form must contain the CCASS Investor Participant’s company name and Hong Kong Business Registration number; and
(b) the participant I.D. and company chop (bearing its company name) endorsed by its authorized signatory(ies) must be inserted in the appropriate box in the Application Form.
Signature(s), number of signatories and form of chop, where appropriate, should match the records kept by HKSCC. Incorrect or incomplete details of the CCASS Participant or the omission or inadequacy of authorized signatory(ies) (if applicable), participant I.D. or other similar matters may render the application invalid.
4. How to make payment for the application
Each completed WHITE or YELLOW Application Form must be accompanied by either one cheque or one banker’s cashier order, which must be stapled to the top left hand corner of the Application Form.
—180— HOW TO APPLY FOR HONG KONG OFFER SHARES
If you pay by cheque, the cheque must:
. be in Hong Kong dollars;
. be drawn on your Hong Kong dollar bank account in Hong Kong;
. bear an account name (or, in the case of joint applicants, the name of the first- named applicant) (either pre-printed on the cheque or endorsed on the reverse of the cheque by an authorized signatory of the bank on which it is drawn), which must be the same as the name on your Application Form (or, in the case of joint applicants, the name of the first-named applicant). If the cheque is drawn on a joint account, one of the joint account names must be the same as the name of the first- named applicant);
. be made payable to ‘‘Bank of China (Hong Kong) Nominees Limited — ASMC Public Offer;’’
. be crossed ‘‘Account Payee Only;’’ and
. not be post dated.
Your application may be rejected if your cheque does not meet all of these requirements or is dishonoured on first presentation.
If you pay by banker’s cashier order, the banker’s cashier order must:
. be in Hong Kong dollars;
. be issued by a licensed bank in Hong Kong and have your name certified on the reverse of the banker’s cashier order by an authorized signatory of the bank on which it is drawn. The name on the reverse of the banker’s cashier order and the name on the Application Form must be the same. If the application is a joint application, the name on the back of the banker’s cashier order must be the same as the name of the first-named applicant;
. be made payable to ‘‘Bank of China (Hong Kong) Nominees Limited — ASMC Public Offer;’’
. be crossed ‘‘Account Payee Only;’’ and
. not be post-dated.
Your application may be rejected if your banker’s cashier order does not meet all of these requirements.
The right is reserved to present all or any remittance for payment. However, your cheque or banker’s cashier order will not be presented for payment before 12: 00 noon on Thursday, March 30, 2006. We will not give you a receipt for your payment. We will keep any interest accrued on your application monies (up until, in the case of monies to be refunded, the date of
—181— HOW TO APPLY FOR HONG KONG OFFER SHARES despatch of refund cheques). The right is also reserved to retain any H Share certificates and/ or any surplus application monies or refunds pending clearance of your cheque or banker’s cashier order.
5. Members of the public — time for applying for Hong Kong Offer Shares
Completed WHITE or YELLOW Application Forms, together with payment attached, must be lodged by 12: 00 noon on Thursday, March 30, 2006, or, if the application lists are not open on that day, then by the time and date stated in the sub-paragraph headed ‘‘Effect of bad weather on the opening of the application lists’’ below.
Your completed Application Form, together with payment attached, should be deposited in the special collection boxes provided at any of the branches of Bank of China (Hong Kong) Limited listed under the paragraph headed ‘‘WheretocollecttheApplicationForms’’aboveat the following times:
Monday, March 27, 2006 — 9: 00 a.m. to 5: 00 p.m. Tuesday, March 28, 2006 — 9: 00 a.m. to 5: 00 p.m. Wednesday, March 29, 2006 — 9: 00 a.m. to 5: 00 p.m. Thursday, March 30, 2006 — 9: 00 a.m. to 12: 00 noon
The application lists will be open from 11: 45 a.m. to 12: 00 noon on Thursday, March 30, 2006.
After the opening of the Hong Kong Public Offering on Monday, March 27, 2006, if the Company and the Joint Sponsors consider it advisable for Bank of China (Hong Kong) Limited to make available additional branches (‘‘Additional Receiving Branches’’) for the collection of the WHITE Application Forms and the Prospectuses and/or for the collection branches noted above to extend the time during which they will collect the completed Application Forms on the dates noted above, an announcement setting out the details of such additional branches and extended hours, if applicable, will be published in the South China Morning Post (in English) and in the Hong Kong Economic Times (in Chinese) on or before Thursday, March 30, 2006. If any Additional Receiving Branches were to be opened, the completed Application Forms can also be deposited in the special collection boxes provided at such Additional Receiving Branches during the times stated above or as otherwise announced.
No proceedings will be taken on applications for the H Shares and no allotment of any such H Shares will be made until the closing of the application lists. No allotment of any of the H Shares will be made later than Wednesday, April 26, 2006.
6. Effect of bad weather on the opening of the application lists
The application lists will not open if there is:
. a tropical cyclone warning signal number 8 or above; or
. a ‘‘black’’ rainstorm warning signal
—182— HOW TO APPLY FOR HONG KONG OFFER SHARES in force in Hong Kong at any time between 9: 00 a.m. and 12: 00 noon on Thursday, March 30, 2006. Instead they will open between 11: 45 a.m. and 12: 00 noon on the next Business Day which does not have either of those warning signals in force in Hong Kong at any time between 9: 00 a.m. and 12: 00 noon.
7. Publication of results
We expect to announce the level of indication of interest in the International Placing, the basis of allotment, the results of applications and the Hong Kong Identity Card/passport/Hong Kong Business Registration numbers of successful applicants under the Hong Kong Public Offering on Thursday, April 6, 2006 in the South China Morning Post (in English) and Hong Kong Economic Times (in Chinese).
8. Despatch/collection of H share certificates and refund cheques
If an application is rejected, not accepted or accepted in part only, or if the Offer Price as finally determined is less than the initial price per H Share (excluding brokerage, SFC transaction levy and Stock Exchange trading fee thereon) paid on application, or if the conditions of the Hong Kong Public Offering are not fulfilled in accordance with the section headed ‘‘Structure of the Global Offering — Conditions of the Hong Kong Public Offering’’ or if any application is revoked or any allotment pursuant thereto has become void, the application monies, or the appropriate portion thereof, together with the related brokerage, SFC transaction levy and Stock Exchange trading fee, will be refunded, without interest. It is intended that special efforts will be made to avoid any undue delay in refunding application monies where appropriate.
No temporary document of title will be issued in respect of the H Shares. No receipt will be issued for sums paid on application but, subject as mentioned below, in due course there will be sent to you (or, in the case of joint applicants, to the first-named applicant) by ordinary post, at your own risk, to the address specified on your Application Form:
(a) For applications on WHITE Application Forms: (i) H Share certificate(s) for all the Hong Kong Offer Shares applied for, if the application is wholly successful; or (ii) H Share certificate(s) for the number of Hong Kong Offer Shares successfully applied for, if the application is partially successful (except for wholly successful and partially successful applicants on YELLOW Application Forms whose share certificates will be deposited into CCASS as described below); and/or
(b) For applications on WHITE or YELLOW Application Forms: refund cheque(s) crossed ‘‘Account Payee Only’’ in favor of the applicant (or, in the case of joint applicants, the first-named applicant) for (i) the surplus application monies for the Hong Kong Offer Shares unsuccessfully applied for, if the application is partially unsuccessful; or (ii) all the application monies, if the application is wholly unsuccessful; and/or (iii) the difference between the Offer Price and the initial price per H Share paid on application in the event that the Offer Price is less than the initial price per H Share paid on application, in each case including brokerage at the rate of 1%, SFC transaction levy of 0.005% and Stock Exchange trading fee of 0.005%, attributable to such refund/surplus monies but without interest.
—183— HOW TO APPLY FOR HONG KONG OFFER SHARES
Subject as mentioned below, refund cheques for surplus application monies (if any) in respect of wholly and partially unsuccessful applications and H Share certificates for successful applicants under WHITE Application Forms are expected to be posted on or before Thursday, April 6, 2006. The right is reserved to retain any H Share certificates and any surplus application monies pending clearance of cheque(s).
H Share certificates will only become valid certificates of title at 8: 00 a.m. on Friday, April 7, 2006 provided that the Hong Kong Public Offering has become unconditional in all respects and the right of termination described in the section headed ‘‘Underwriting’’ has not been exercised.
(a) If you apply using a WHITE Application Form:
If you apply for 1,000,000 Hong Kong Offer Shares or more and you have elected on your WHITE Application Form to collect your refund cheque(s) (where applicable) and/or share certificate(s) (where applicable) in person, you may collect your refund cheque(s) (where applicable) and/or H Share certificate(s) (where applicable) from our H Share registrar, Computershare Hong Kong Investor Services Limited, at Room 1712–16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong from 9: 00 a.m. to 1: 00 p.m. on Thursday, April 6, 2006. If you are an individual, you must not authorize any other person to make collection on your behalf. If you are a corporate applicant, you must attend by your authorized representative bearing a letter of authorization from your corporation stamped with your company chop. Both individuals and authorized representatives (if applicable) must produce, at the time of collection, evidence of identity acceptable to Computershare Hong Kong Investor Services Limited. If you do not collect your refund cheque(s) and share certificate(s) within the time period specified for collection, they will be despatched promptly thereafter to you by ordinary post to the address as specified in your Application Form at your own risk.
If you apply for less than 1,000,000 Hong Kong Offer Shares or if you apply for 1,000,000 Hong Kong Offer Shares or more but have not indicated on your Application Form that you will collect your refund cheque(s) (where applicable) and/or H Share certificate(s) (where applicable) in person, your refund cheque(s) (where applicable) and/ or H Share certificate(s) (where applicable) will be sent to the address on your Application Form on Thursday, April 6, 2006 by ordinary post and at your own risk.
(b) If you apply using a YELLOW Application Form:
If you apply for 1,000,000 Hong Kong Offer Shares or more and you have elected on your YELLOW Application Form to collect your refund cheque (where applicable) in person, please follow the same instructions as those for WHITE Application Form applicants as described above.
If you apply for less than 1,000,000 Hong Kong Offer Shares or if you apply for 1,000,000 Hong Kong Offer Shares or more but have not indicated on your Application Form that you will collect your refund cheque(s) (where applicable) in person, your refund cheque(s) (where applicable) will be sent to the address on your Application Form on Thursday, April 6, 2006, by ordinary post and at your own risk.
—184— HOW TO APPLY FOR HONG KONG OFFER SHARES
If you apply for Hong Kong Offer Shares using a YELLOW Application Form and your application is wholly or partially successful, your H Share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for credit to your CCASS Investor Participant stock account or the stock account of your designated CCASS Participant as instructed by you in your Application Form at the close of business on Thursday, April 6, 2006, or under contingent situation, on any other date as shall be determined by HKSCC or HKSCC Nominees.
Ifyouareapplyingthroughadesignated CCASS Participant (other than a CCASS Investor Participant), for Hong Kong Offer Shares credited to the stock account of your designated CCASS Participant (other than a CCASS Investor Participant), you can check the number of Hong Kong Offer Shares allotted to you with that CCASS Participant.
If you are applying as a CCASS Investor Participant, we expect to publish the results of CCASS Investor Participants’ applications together with the results of the Hong Kong Public Offering in the newspapers on Thursday, April 6, 2006. You should check the announcement published by us and report any discrepancies to HKSCC before 5: 00 p.m. on Thursday, April 6, 2006 or such other date as shall be determined by HKSCC or HKSCC Nominees. Immediately after the credit of the Hong Kong Offer Shares to your stock account), you can check your new account balance via the CCASS Phone System and CCASS Internet System (under the procedures contained in HKSCC’s ‘‘An Operating Guide for Investor Participants’’ in effect from time to time). HKSCC will also make available to you an activity statement showing the number of Hong Kong Offer Shares credited to your stock account.
III. APPLYING BY GIVING ELECTRONIC APPLICATION INSTRUCTIONS TO HKSCC
1. General
CCASS Participants may give electronic application instructions to HKSCC to apply for the Hong Kong Offer Shares and to arrange payment of the monies due on application and payment of refunds. This will be in accordance with their participant agreements with HKSCC and the General Rules of CCASS and the CCASS Operational Procedures.
If you are a CCASS Investor Participant, you may give electronic application instructions through the CCASS Phone System by calling 2979 7888 or through the CCASS Internet System (https://ip.ccass.com) (using the procedures contained in HKSCC’s ‘‘An Operating Guide for Investor Participants’’ in effect from time to time).
HKSCC can also input electronic application instructions foryouifyougoto:
Hong Kong Securities Clearing Company Limited Customer Service Centre Upper Ground Floor V-Heun Building 128–140 Queen’s Road Central Hong Kong
and complete an input request form.
Prospectuses are available for collection from the above address.
—185— HOW TO APPLY FOR HONG KONG OFFER SHARES
If you are not a CCASS Investor Participant, you may instruct your broker or custodian who is a CCASS Broker Participant or a CCASS Custodian Participant to give electronic application instructions via CCASS terminals to apply for the Hong Kong Offer Shares on your behalf.
You are deemed to have authorized HKSCC and/or HKSCC Nominees to transfer the details of your application, whether submitted by you or through your broker or custodian, to us and our registrars.
2. Application for Hong Kong Offer Shares by HKSCC nominees on your behalf
Where a WHITE Application Form is signed by HKSCC Nominees on behalf of persons whohavegivenelectronic application instructions to apply for the Hong Kong Offer Shares:
(i) HKSCC Nominees is only acting as a nominee for those persons and shall not be liable for any breach of the terms and conditions of the WHITE Application Form or this prospectus;
(ii) HKSCC Nominees on behalf of each such person:
. agrees that the Hong Kong Offer Shares to be allotted shall be issued in the name of HKSCC Nominees and deposited directly into CCASS for the credit of the stock account of the CCASS Participant who has inputted electronic application instructions on that person’s behalf or that person’s CCASS Investor Participant stock account;
. undertakes and agrees to accept the Hong Kong Offer Shares in respect of which that person has given electronic application instructions or any lesser number;
. undertakes and confirms that that person has not indicated an interest for, applied for or taken up any H Shares under the International Placing nor otherwise participated in the International Offering;
. (if the electronic application instructions are given for that person’s own benefit) declares that only one set of electronic application instructions has been given for that person’s benefit;
. (if that person is an agent for another person) declares that that person has only given one set of electronic application instructions for the benefit of that other person and that that person is duly authorized to give those instructions as that other person’s agent;
. understands that the above declaration will be relied upon by us, our Directors and the Joint Global Coordinators in deciding whether or not to make any allotment of Hong Kong Offer Shares in respect of the electronic application instructions given by that person and that that person may be prosecuted if he makes a false declaration;
—186— HOW TO APPLY FOR HONG KONG OFFER SHARES
. authorizes us to place the name of HKSCC Nominees on our register of members as the holder of the Hong Kong Offer Shares allotted in respect of that person’s electronic application instructions andtosendHShare certificate(s) and/or refund money in accordance with the arrangements separately agreed between HKSCC and us;
. confirms that that person has read the terms and conditions and application procedures set out in this prospectus and agrees to be bound by them;
. confirms that that person has only relied on the information and representations in this prospectus in giving that person’s electronic application instructions or instructing that person’s broker or custodian to give electronic application instructions on that person’s behalf and will not rely on any other information and representations and will not rely on any other information and representations save as set out in any supplement to this prospectus;
. agrees that we and our Directors, the Selling Shareholder, the Joint Global Coordinators, the Underwriters, their respective directors, and other parties involved in the Global Offering are liable only for the information and representations contained in this prospectus and any supplemental thereto;
. agrees to disclose that person’s personal data to us and our registrar, receiving bankers and the Joint Global Coordinators and their respective advisors and agents, any information which they may require about that person;
. agrees (without prejudice to any other rights which that person may have) that once the application of HKSCC Nominees is accepted, the application cannot be rescinded for innocent misrepresentation;
. agrees that any application made by HKSCC Nominees on behalf of that person pursuant to electronic application instructions given by that person is irrevocable before Wednesday, April 26, 2006, such agreement to take effect as a collateral contract with us and to become binding when that person gives the instructions and such collateral contract to be in our consideration agreeing that it will not offer any Hong Kong Offer Shares to any person before Wednesday, April 26, 2006 except by means of one of the procedures referred to in this prospectus. However, that person may revoke the instructions before Wednesday, April 26, 2006 if a person responsible for this prospectus under section 40 of the Hong Kong Companies Ordinance gives a public notice under that section which excludes or limits the responsibility of that person for this prospectus;
. agrees that once the application of HKSCC Nominees is accepted, neither that application nor that person’s electronic application instructions can be revoked, and that acceptance of that application will be evidenced by the announcement of the results of the Hong Kong Public Offering published by us;
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. agrees to the arrangements, undertakings and warranties specified in the participant agreement between that person and HKSCC, read with the General Rules of CCASS and the CCASS Operational Procedures, in respect of the giving of electronic application instructions relating to Hong Kong Offer Shares;
. agrees with us, for ourselves and for the benefit of each of our shareholders (and so that we will be deemed by our acceptance in whole or in part of the application by HKSCC Nominees to have agreed, for ourselves and on behalf of each of our shareholders, with each CCASS Participant giving electronic application instructions) to observe and comply with the PRC Company Law, the Special Regulations and our Articles;
. agrees with us, for ourselves and for the benefit of each of our shareholders and each of our Directors, Supervisors, president, and other members of senior management (and so that we will be deemed by our acceptance in whole or in part of the application to have agreed, for ourselves and on behalf of each of our shareholders and each of our Directors, Supervisors, president, and other members of senior management, with each CCASS Participant giving electronic application instructions):
(a) to refer all differences and claims arising from our Articles or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning our affairs to arbitration in accordance with our Articles; and
(b) that any reference to arbitration shall be deemed to authorize the arbitration tribunal to conduct hearings in open session and to publish its award, which arbitration shall be final and conclusive;
. agrees with us (for ourselves and for the benefit of each of our shareholders) that our H Shares (save for the Converted H Shares prior to the expiry of the Existing Shareholders Lock Up Period unless approval for their transfer is obtained from the Ministry of Commerce) are freely transferable by the holders thereof;
. authorizes us to enter into a contract on that person’s behalf with each of our Directors, Supervisors and other members of senior management whereby each such Director, Supervisor and other member of senior management undertakes to observe and comply with his obligations to shareholders stipulated in our Articles; and
. agrees that that person’s application, any acceptance of it and the resulting contract will be governed by and construed in accordance with the Laws of Hong Kong.
—188— HOW TO APPLY FOR HONG KONG OFFER SHARES
3. Effect on giving electronic application instructions to HKSCC
By giving electronic application instructions to HKSCC or instructing your broker or custodian who is a CCASS Broker Participant or a CCASS Custodian Participant to give such instructions to HKSCC, you (and if you are joint applicants, each of you jointly and severally) are deemed to have done the following things. Neither HKSCC nor HKSCC Nominees shall be liable to us or any other person in respect of the things mentioned below:
. you instructed and authorized HKSCC to cause HKSCC Nominees (acting as nominee for the relevant CCASS Participants) to apply for the Hong Kong Offer Shares on your behalf;
. you instructed and authorized HKSCC to arrange payment of the maximum offer price, brokerage, the SFC transaction levy and the Stock Exchange trading fee by debiting your designated bank account and, in the case of a wholly or partially unsuccessful application and/or the Offer Price is less than the initial price per H Share paid on application, refund of the application monies, in each case including brokerage, the SFC transaction levy and the Stock Exchange trading fee, by crediting your designated bank account;
. you instructed and authorized HKSCC to cause HKSCC Nominees to do on your behalf all the things which it is stated to do on your behalf in the WHITE Application Form.
4. Multiple applications
If you are suspected of having made multiple applications or if more than one application is made for your benefit, the number of Hong Kong Offer Shares applied for by HKSCC Nominees will be automatically reduced by the number of Hong Kong Offer Shares in respect of which you have given such instructions and/or in respect of which such instructions have been given for your benefit. Any electronic application instructions to make an application for the Hong Kong Offer Shares given by you or for your benefit to HKSCC shall be deemed to be an actual application for the purposes of considering whether multiple applications have been made.
5. Minimum subscription amount and permitted multiples
You may give or cause your broker or custodian who is a CCASS Broker Participant or a CCASS Custodian Participant to give electronic application instructions in respect of a minimum of 2,000 Hong Kong Offer Shares. Such instructions in respect of more than 2,000 Hong Kong Offer Shares must be in one of the numbers set out in the table in the Application Forms. No application for any other number of Hong Kong Offer Shares will be considered and any such application is liable to be rejected.
—189— HOW TO APPLY FOR HONG KONG OFFER SHARES
6. Time for inputting electronic application instructions
CCASS Broker/ Custodian Participants can input electronic application instructions at the following times on the following dates:
Monday, March 27, 2006 — 9: 00 a.m. to 8: 30 p.m.(1) Tuesday, March 28, 2006 — 8: 00 a.m. to 8: 30 p.m.(1) Wednesday, March 29, 2006 — 8: 00 a.m. to 8: 30 p.m.(1) Thursday, March 30, 2006 — 8: 00 a.m.(1) to 12: 00 noon
1. These times are subject to change as HKSCC may determine from time to time with prior notification to CCASS Broker/Custodian Participants.
CCASS Investor Participants can input electronic application instructions from 9: 00 a.m. on Monday, March 27, 2006 until 12: 00 noon on Thursday, March 30, 2006 (24 hours daily, except the last application day).
7. Effect of bad weather on the last application day
The latest time for inputting your electronic application instructions will be 12: 00 noon on Thursday, March 30, 2006, the last application day. If there is:
. a tropical cyclone warning signal number 8 or above; or
. a ‘‘black’’ rainstorm warning signal in force in Hong Kong at any time between 9: 00 a.m. and 12: 00 noon on Thursday, March 30, 2006, the last application day will be postponed to the next Business Day which does not have either of those warning signals in force in Hong Kong at any time between 9: 00 a.m. and 12:00noononsuchday.
8. Allocation of Hong Kong Offer Shares
For the purposes of allocating Hong Kong Offer Shares, HKSCC Nominees will not be treated as an applicant. Instead, each CCASS Participant who gives electronic application instructions or each person for whose benefit each such instructions is given will be treated as an applicant.
9. Deposit of H Shares certificates into CCASS and refund of application monies
. No temporary documents of title will be issued. No receipt will be issued for application monies received.
. If your application is wholly or partially successful, your H Share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for the credit of the stock account of the CCASS Participant which you have instructed to give electronic application instructions on your behalf or your CCASS Investor Participant stock account at the close of business on Thursday, April 6, 2006 or, in the event of a contingency, on any other date as shall be determined by HKSCC or HKSCC Nominees.
—190— HOW TO APPLY FOR HONG KONG OFFER SHARES
. We expect to publish the application results of CCASS Participants (and where the CCASS Participant is a broker or custodian, we will include information relating to the relevant beneficial owner, if supplied), your Hong Kong identity card/passport number or other identification code (Hong Kong business registration number for corporations) and the basis of allotment of the Hong Kong Public Offering in the newspapers on Thursday, April 6, 2006. You should check the announcement published by us and report any discrepancies to HKSCC before 5: 00 p.m. on Thursday, April 6, 2006 or such other date as shall be determined by HKSCC or HKSCC Nominees.
. If you have instructed your broker or custodian to give electronic application instructions on your behalf, you can also check the number of Hong Kong Offer Shares allotted to you and the amount of refund monies (if any) payable to you with that broker or custodian.
. If you have applied as a CCASS Investor Participant, you can also check the number of Hong Kong Offer Shares allotted to you and the amount of refund monies (if any) payable to you via the CCASS Phone System and the CCASS Internet System (under the procedures contained in HKSCC’s ‘‘An Operating Guide for Investor Participants’’ in effect from time to time) on Thursday, April 6, 2006. Immediately after the credit of the Hong Kong Offer Shares to your CCASS Investor Participant stock account and the credit of refund monies to your designated bank account, HKSCC will also make available to you an activity statement showing the number of Hong Kong Offer Shares credited to your CCASS Investor Participant stock account and the amount of refund monies (if any) credited to your designated bank account.
. Refund of your application monies (if any) in respect of wholly and partially unsuccessful applications and/or difference between the Offer Price and the initial price per H Share paid on application, in each case including brokerage fee of 1%, SFC transaction levy of 0.005% and Stock Exchange trading fee of 0.005%, will be credited to your designated bank account or the designated bank account of your broker or custodian on Thursday, April 6, 2006. No interest will be paid thereon.
10. Section 40 of the Hong Kong Companies Ordinance
For the avoidance of doubt, we and all other parties involved in the preparation of this prospectus acknowledge that each CCASS Participant who gives or causes to give electronic application instructions is a person who may be entitled to compensation under section 40 of the Hong Kong Companies Ordinance.
11. Personal data
The section of the Application Form headed ‘‘Personal Data’’ applies to any personal data held by us and our registrar about you in the same way as it applies to personal data about applicants other than HKSCC Nominees.
—191— HOW TO APPLY FOR HONG KONG OFFER SHARES
12. Warning
The subscription of the Hong Kong Offer Shares by giving electronic application instructions to HKSCC is only a facility provided to CCASS Participants. We, our Directors, the Joint Sponsors, the Joint Global Coordinators and the Underwriters take no responsibility for the application and provide no assurance that any CCASS Participant will be allotted any Hong Kong Offer Shares.
To ensure that CCASS Investor Participants can give their electronic application instructions to HKSCC through the CCASS Phone System or the CCASS Internet System, CCASS Investor Participants are advised not to wait until the last minute to input their electronic application instructions to the systems. In the event that CCASS Investor Participants have problems connecting to the CCASS Phone System or the CCASS Internet System to submit their electronic application instructions, they should either: (i) submit a WHITE or YELLOW Application Form; or (ii) go to HKSCC’s Customer Service Centre to complete an input request form for electronic application instructions before 12: 00 noon on Thursday, March 30, 2006.
IV. HOW MANY APPLICATIONS YOU MAY MAKE
You may make more than one application for Hong Kong Offer Shares only if:
You are a nominee, in which case you may both give electronic application instructions to HKSCC (if you are a CCASS Participant) and lodge more than one Application Form in your own name on behalf of different beneficial owners. In the box on the Application Form marked ‘‘For nominees’’ you must include:
. an account number; or
. some other identification code
for each beneficial owner. If you do not include this information, the application will be treated as being for your benefit.
Otherwise, multiple applications are not allowed.
It will be a term and condition of all applications that by completing and delivering an Application Form, you:
. (if the application is made for your own benefit) warrant that the application made pursuant to the Application Form is the only application which will be made for your benefit on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC;
. (if you are an agent for another person) warrant that reasonable enquiries have been made of that other person that this is the only application which will be made for the benefit of that other person on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC, and that you are duly authorized to sign the Application Form as that other person’s agent.
—192— HOW TO APPLY FOR HONG KONG OFFER SHARES
All of your applications will be rejected as multiple applications if you, or you and your joint applicant(s) together:
. make more than one application (whether individually or jointly) on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC; or
. both apply (whether individually or jointly) on one WHITE Application Form and one YELLOW Application Form or on one WHITE or YELLOW Application Form and give electronic application instructions to HKSCC; or
. apply on one WHITE or YELLOW Application Form (whether individually or jointly) or by giving electronic application instructions to HKSCC for more than 50% of the Hong Kong Offer Shares initially being offered for public subscription under the Hong Kong Public Offering as more particularly described in the section headed ‘‘Structure of the Global Offering — The Hong Kong Public Offering;’’ or
. have indicated an interest for or have been or will be placed Offer Shares under the International Placing.
All of your applications will also be rejected as multiple applications if more than one application is made foryourbenefit(including the part of an application made by HKSCC Nominees acting on electronic application instructions). If an application is made by an unlisted company and:
. the principal business of that company is dealing in securities; and
. you exercise statutory control over that company, then the application will be treated as being made for your benefit.
Unlisted company means a company with no equity securities listed on the Stock Exchange.
Statutory control means you:
. control the composition of the board of directors of the company; or
. control more than one-half of the voting power of the company; or
. hold more than one-half of the issued share capital of the company (not counting any part of it which carries no right to participate beyond a specified amount in a distribution of either profits or capital).
V. CIRCUMSTANCES IN WHICH YOU WILL NOT BE ALLOTTED HONG KONG OFFER SHARES
Full details of the circumstances in which you will not be allotted H Shares are set out in the notes attached to the Application Forms whether you are making your application by an Application Form or electronically instructing HKSCC to cause HKSCC Nominees to apply on your behalf, and you should read them carefully. You should note in particular the following two situations in which the Hong Kong Offer Shares will not be allotted to you:
—193— HOW TO APPLY FOR HONG KONG OFFER SHARES
. If your application is revoked:
By completing and submitting an Application Form or giving an electronic application instruction to HKSCC you agree that you cannot revoke your application on or before Wednesday, April 26, 2006. This agreement will take effect as a collateral contract with us, and will become binding when you lodge your Application Form or submit your electronic application instructions to HKSCC. This collateral contract will be in consideration of us agreeing that we will not offer any H Shares to any person on or before Wednesday, April 26, 2006 except by means of one of the procedures referred to in this prospectus.
You may only revoke your application on or before April 26, 2006 if a person responsible for this prospectus under section 40 of the Hong Kong Companies Ordinance gives a public notice under that section which excludes or limits the responsibility of that person for this prospectus.
If any supplement to the prospectus is issued, applicant(s) who have already submitted an application may or may not (depending on the information contained in the supplement) be notified that they can withdraw their applications. If applicant(s) have not been so notified, or if applicant(s) have been notified but have not withdrawn their applications in accordance with the procedure to be notified, all applications that have been submitted remain valid and may be accepted. Subject to the above, an application once made is irrevocable and applicants shall be deemed to have applied on the basis of the prospectus as supplemented.
If your application has been accepted, it cannot be revoked. For this purpose, acceptance of applications which are not rejected will be constituted by notification in the announcement of the results of allocation, and where such basis of allocation is subject to certain conditions or provides for allocation by ballot, such acceptance will be subject to the satisfaction of such conditions or results of the ballot respectively.
. Full discretion of our Company or our agent to reject or accept your application:
We and the Joint Global Coordinators (as agents for us), or their respective agents and nominees, have full discretion to reject or accept any application, or to accept only part of any application.
We, the Joint Global Coordinators and the Hong Kong Underwriters, in their capacity as our agents, and their agents and nominees do not have to give any reason for any rejection or acceptance.
If the allotment of Hong Kong Offer Shares is void:
The allotment of Hong Kong Offer Shares to you or to HKSCC Nominees (if you give electronic application instruction to HKSCC or apply by a YELLOW Application Form) will be void if the Listing Committee of the Stock Exchange does not grant permission to list the H Shares either:
. within three weeks from the closing of the application lists; or
. withinalongerperiodofuptosixweeksiftheListingCommitteeoftheStock Exchange notifies us of that longer period within three weeks of the closing date of the application lists.
—194— HOW TO APPLY FOR HONG KONG OFFER SHARES
You will not receive any allotment if:
. you make multiple applications or you are suspected to have made multiple applications;
. you or the person whose benefits you apply for have taken up or indicated an interest or applied for or received or have been or will be placed or allocated (including conditionally and/or provisionally) Hong Kong Offer Shares and/or Offer Shares in the International Placing. By filling in any of the Application Forms or apply by giving electronic application instructions to HKSCC, you agree not to apply for Hong Kong Offer Shares as well as Offer Shares in the International Placing. Reasonable steps will be taken to identify and reject applications in the Hong Kong Public Offering from investors who have received Offer Shares in the International Placing, and to identify and reject indications of interest in the International Placing from investors who have received Hong Kong Offer Shares in the Hong Kong Public Offering;
. your payment is not made correctly or you pay by cheque or banker’s cashier order and the cheque or banker’s cashier order is dishonored upon its first presentation;
. your Application Form is not completed in accordance with the instructions as stated in the Application Form (if you apply by an Application Form);
. the Underwriting Agreements do not become unconditional; or
. the Underwriting Agreements are terminated in accordance with their respective terms.
You should also note that you may apply for H Shares under the Hong Kong Public Offering or indicate an interest for H Shares under the International Placing, but may not do both.
VI. HOW MUCH ARE THE HONG KONG OFFER SHARES
The maximum offer price is HK$1.85 per H Share. You must also pay brokerage fee of 1%, SFC transaction levy of 0.005% and Stock Exchange trading fee of 0.005%. This means that for every 2,000 H Shares you will pay HK$3,737.38. The Application Forms have tables showing the exact amount payable for certain numbers of H Shares up to 20,334,000 H Shares.
You must pay the maximum offer price, brokerage, SFC transaction levy and the Stock Exchange trading fee in full when you apply for the H Shares. You must pay the amount payable upon application for H Shares by a cheque or a banker’s cashier order in accordance with the terms set out in the Application Form.
If your application is successful, brokerage is paid to participants of the Stock Exchange, SFC transaction levy and the Stock Exchange trading fee are paid to the Stock Exchange (in the case of the SFC transaction levy collected on behalf of the SFC).
—195— HOW TO APPLY FOR HONG KONG OFFER SHARES
VII. REFUND OF APPLICATION MONIES
If you do not receive any Hong Kong Offer Shares for any reason, we will refund your application monies, including brokerage fee of 1%, SFC transaction levy of 0.005% and Stock Exchange trading fee of 0.005%. No interest will be paid thereon.
If your application is accepted only in part, we will refund to you the appropriate portion of your application monies (including the related brokerage fee of 1%, SFC transaction levy of 0.005% and Stock Exchange trading fee of 0.005%) without interest.
If the Offer Price as finally determined is less than the initial price per H Share (excluding brokerage, SFC transaction levy and Stock Exchange trading fee thereon) paid on application, we will refund to you the surplus application monies, together with the related brokerage fee of 1%, SFC transaction levy of 0.005% and Stock Exchange trading fee of 0.005%, without interest.
All such interest accrued prior to the date of despatch of refund cheques will be retained for our benefit.
In a contingency situation involving a substantial over-subscription, at our discretion and the discretion of the Joint Global Coordinators, cheques for applications made on Application Forms for certain small denominations of Hong Kong Offer Shares (apart from successful applications) may not be cleared.
Refund of your application monies (if any) is expected to be made on Thursday, April 6, 2006 in accordance with the various arrangements as described above. All refunds will be made by a cheque crossed ‘‘Account Payee Only’’ made out to you, or if you are joint applicants, to the first- named applicant. Part of your Hong Kong Identity Card number or passport number, or, if you are joint applicants, part of the Hong Kong Identity Card number or passport number of the first-named applicant, provided by you may be printed on your refund cheque; if any. Such data would also be transferred to a third party for refund purposes. Your banker may require verification of your Hong Kong Identity Card number or passport number before encashment of your refund cheque. Inaccurate completion of your Hong Kong Identity Card number or passport number may lead to delay in encashment of or may invalidate your refund cheque.
VIII. COMMENCEMENT OF DEALINGS IN THE H SHARES
Dealings in the H Shares on the Stock Exchange are expected to commence on Friday, April 7, 2006.
The H Shares will be traded in board lots of 2,000 each. The stock code of H Shares is 3355.
IX. H SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS
If the Stock Exchange grants the listing of and permission to deal in the H Shares and we comply with the stock admission requirements of HKSCC, the H Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the H Shares on the Stock Exchange or any other date HKSCC chooses. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second Business Day after any trading day.
—196— HOW TO APPLY FOR HONG KONG OFFER SHARES
All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.
Investors should seek the advice of their stockbroker or other professional advisor for details of the settlement arrangements as such arrangements may affect their rights and interests.
All necessary arrangements have been made enabling the H Shares to be admitted into CCASS.
—197— APPENDIX I ACCOUNTANTS’ REPORT
The following is the text of a report, prepared for the purpose of incorporation in this prospectus, received from the independent reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong. As described in the section headed ‘‘Documents Delivered to the Registrar of Companies and Available for Inspection’’ in ‘‘Appendix IX — Documents Delivered to the Registrar of Companies and Available for Inspection,’’ a copy of the Accountants’ Report is available for inspection.
18th Floor Two International Finance Centre 8FinanceStreet Central Hong Kong
March 27, 2006
The Directors Advanced Semiconductor Manufacturing Corporation Limited Goldman Sachs (Asia) L.L.C. BOCI Asia Limited
Dear Sirs,
We set out below our report on the financial information regarding Advanced Semiconductor Manufacturing Corporation Limited (formerly ‘‘Philips Semiconductor Corporation of Shanghai’’ and ‘‘Advanced Semiconductor Manufacturing Corporation of Shanghai’’, the ‘‘Company’’) for the years ended December 31, 2003, 2004 and 2005 (the ‘‘Relevant Periods’’) for inclusion in the prospectus of the Company dated March 27, 2006 (the ‘‘Prospectus’’).
The Company was established in the People’s Republic of China (the ‘‘PRC’’) on October 4, 1988 as a Sino-foreign joint venture company with limited liability. On March 2, 2004, the Company was re-registered as a foreign invested joint stock limited company by the issuance of 1,109,080,000 fully paid shares with a nominal value of RMB1 each to the then shareholders.
The Company is principally engaged in the manufacture and sale of semiconductors. The registered office and principal place of business of the Company is located at 385 Hongcao Road, Shanghai 200233, the PRC.
The financial information set out in this report, including the income statements, cash flow statements and statements of changes in equity of the Company for the Relevant Periods, the balance sheets of the Company as at December 31, 2003, 2004 and 2005, and the notes thereto (collectively referred to as the ‘‘Financial Information’’), has been prepared based on the audited financial statements of the Company after making such adjustments as are appropriate to comply with International Financial Reporting Standards (‘‘IFRS’’).
The Financial Information and financial statements which give a true and fair view are the responsibility of the Directors who approve their preparation and issuance. In preparing the Financial Information and financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently, that judgements and estimates are made which are prudent and reasonable and that the reasons for any significant
I-1 APPENDIX I ACCOUNTANTS’ REPORT departure from applicable accounting standards are stated. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion thereon.
Procedures Performed in Respect of the Relevant Periods
The financial statements of the Company for the year ended December 31, 2003 as prepared in accordance with PRC accounting rules and regulations (‘‘PRC GAAP’’) for PRC statutory filing purposes were audited by Ernst & Young Da Hua Certified Public Accountants (formerly ‘‘Da Hua Certified Public Accountants’’). The financial statements of the Company for the years ended December 31, 2004 and 2005 as prepared in accordance with PRC GAAP for PRC statutory filing purposes were audited by Ernst & Young Hua Ming Certified Public Accountants.
For the purpose of this report, we have undertaken an independent audit of the Financial Information in accordance with the Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’), and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline ‘‘Prospectuses and the Reporting Accountant’’ issued by the HKICPA.
Opinion in respect of the Relevant Periods
In our opinion, the Financial Information set out below, for the purpose of this report, and prepared in accordance with IFRS, gives a true and fair view of the operating results and cash flows of the Company for the Relevant Periods and of the balance sheets of the Company as at December 31, 2003, 2004 and 2005.
I-2 APPENDIX I ACCOUNTANTS’ REPORT
I. FINANCIAL STATEMENTS
Income statements
Year ended December 31, 2003 2004 2005 Notes RMB’000 RMB’000 RMB’000
Revenue ...... 5 784,428 1,147,367 931,583
Cost of sales ...... (526,144) (827,247) (860,626)
Gross profit ...... 258,284 320,120 70,957
Selling and marketing expenses...... (10,467) (11,128) (7,377) General and administrative expenses . . . . (60,062) (78,164) (77,640) Research and development costs...... (49,870) (52,041) (74,931)
Profit/(loss) from operating activities . . 137,885 178,787 (88,991)
Other income ...... 5 7,993 6,632 37,397 Finance costs...... 6 (748) (4,934) (33,427)
Profit/(loss) before income tax ...... 6 145,130 180,485 (85,021) Income tax (expense)/refund, net ...... 9 (12,025) 2,165 9,991
Net profit/(loss) attributable to shareholders ...... 133,105 182,650 (75,030)
Dividends ...... 10 — 35,109 —
Earnings/(loss) per share (RMB) ...... 11 0.12 0.16 (0.07)
I-3 APPENDIX I ACCOUNTANTS’ REPORT
Balance sheets
Year ended December 31, 2003 2004 2005 Notes RMB’000 RMB’000 RMB’000
Non-current assets Property, plant and equipment ...... 12 1,121,160 1,429,036 1,964,885 Construction in progress ...... 13 125,482 207,704 175,937 Land use rights ...... 14 — 38,161 37,392 Deferredtaxassets...... 15 2,953 1,766 6,821
Total non-current assets ...... 1,249,595 1,676,667 2,185,035
Current assets Cash and cash equivalents ...... 31,180 45,936 105,886 Accounts and notes receivable...... 16 56,325 55,404 124,264 Inventories...... 17 124,909 134,220 171,799 Prepayments, deposits and other receivables...... 18 35,545 18,410 22,974 Due from related companies ...... 19 6,425 18,760 31,945 Prepaidtax...... — 2,505 —
Total current assets ...... 254,384 275,235 456,868
Totalassets...... 1,503,979 1,951,902 2,641,903
Current liabilities Interest-bearing borrowings ...... 20 124,151 388,996 1,186,319 Accounts payable ...... 21 177,823 222,721 196,200 Accrued liabilities and other payables . . . . 82,628 76,578 64,745 Due to related companies ...... 19 8,370 8,268 14,330 Taxpayable...... 3,209 — —
Total current liabilities ...... 396,181 696,563 1,461,594
Net current liabilities ...... 141,797 421,328 1,004,726
Net assets ...... 1,107,798 1,255,339 1,180,309
Represented by: Paid-up capital/share capital ...... 22 718,247 1,109,080 1,109,080 Reserves...... 23 389,551 146,259 71,229
Owners’/shareholders’ equity ...... 1,107,798 1,255,339 1,180,309
I-4 APPENDIX I ACCOUNTANTS’ REPORT
Statements of changes in equity
Year ended December 31, 2003 2004 2005 Notes RMB’000 RMB’000 RMB’000
Paid-up capital/share capital ...... 22 At beginning of year ...... 572,570 718,247 1,109,080 Transferred from retained earnings...... 145,677 129,469 — Transferred from capital reserve ...... — 208,322 — Transferredfromreservefund...... — 26,521 — Transferred from enterprise expansion fund — 26,521 —
At end of year ...... 718,247 1,109,080 1,109,080
Capital reserve ...... 23 At beginning of year ...... 207,837 208,361 39 Transferred from retained earnings...... 524 — — Transferredtosharecapital...... — (208,322) —
At end of year ...... 208,361 39 39
Reserve fund ...... 23 At beginning of year ...... 26,521 26,521 — Transferred from retained earnings...... — — — Transferredtosharecapital...... — (26,521) —
At end of year ...... 26,521 — —
Enterprise expansion fund ...... 23 At beginning of year ...... 26,521 26,521 — Transferred from retained earnings...... — — — Transferredtosharecapital...... — (26,521) —
At end of year ...... 26,521 — —
Statutory surplus reserve ...... 23 At beginning of year ...... — — 12,902 Transferred from retained earnings...... — 12,902 —
At end of year ...... — 12,902 12,902
Statutory public welfare fund ...... 23 At beginning of year ...... — — 6,451 Transferred from retained earnings...... — 6,451 —
Atendofyear...... — 6,451 6,451
I-5 APPENDIX I ACCOUNTANTS’ REPORT
Year ended December 31, 2003 2004 2005 Notes RMB’000 RMB’000 RMB’000
Retained earnings...... 23 At beginning of year ...... 141,244 128,148 126,867 Net profit/(loss) for the year...... 133,105 182,650 (75,030) Transferred to paid-up capital/share capital (145,677) (129,469) — Transferredtocapitalreserve...... (524) — — Transferredtoreservefund...... — — — Transferred to enterprise expansion fund . — — — Transferred to statutory surplus reserve . . — (12,902) — Transferred to statutory public welfare fund — (6,451) — Dividends paid ...... — (35,109) —
At end of year ...... 128,148 126,867 51,837
Reserves ...... 23 389,551 146,259 71,229
Owners’/shareholders’ equity ...... 1,107,798 1,255,339 1,180,309
I-6 APPENDIX I ACCOUNTANTS’ REPORT
Cash flow statements
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Cash flows from operating activities Profit/(loss) before income tax ...... 145,130 180,485 (85,021) Adjustments for: Depreciation...... 166,104 215,242 284,888 Amortisation of land use rights...... — 321 769 Loss on disposal of property, plant and equipment 6 1,352 2,068 Provision for bad and doubtful debts ...... 22 — — Provision for impairment loss on construction in progress...... — — 2,337 Provision for inventories ...... 17,075 13,876 7,056 Fairvaluegainoninterestrateswap...... — — (2,840) Interestexpenses...... 748 4,934 33,427
Operating profit before working capital changes. . . . 329,085 416,210 242,684 Decrease/(increase) in accounts and notes receivable...... (29,105) 921 (68,860) Increaseininventories...... (65,824) (23,187) (44,635) Decrease/(increase) in prepayments, deposits and otherreceivables...... (5,290) 17,135 (1,724) Increase in amounts due from related companies . . (2,488) (12,335) (13,185) Increase/(decrease) in accounts payable ...... 111,529 11,898 (26,521) Decrease in accrued liabilities and other payables . . (1,156) (6,050) (11,833) Increase/(decrease) in amounts due to related companies...... 761 (102) 6,062
Cashflowsfromoperations...... 337,512 404,490 81,988 Interestpaid...... (748) (4,934) (33,427) Refund of exempted income tax...... — 15,202 — Refund of prepaid income tax ...... — — 7,441 Incometaxpaid...... (10,985) (17,564) —
Net cash inflow from operating activities ...... 325,779 397,194 56,002
I-7 APPENDIX I ACCOUNTANTS’ REPORT
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Cash flows from investing activities Acquisition of property, plant and equipment and constructioninprogress...... (746,643) (606,692) (788,148) Interest capitalised attributable to construction of qualifyingassets...... — — (5,550)
Total addition of property, plant and equipment and constructioninprogress...... (746,643) (606,692) (793,698) Proceeds from disposal of property, plant and equipment...... — — 323 Acquisition of land use rights ...... — (5,482) —
Net cash outflow in investing activities ...... (746,643) (612,174) (793,375)
Cash flows from financing activities New bank loans ...... 124,151 264,845 1,663,941 Repaymentofbankloans...... — — (866,618) Dividends paid ...... — (35,109) —
Net cash inflow from financing activities ...... 124,151 229,736 797,323
Net (decrease)/increase in cash and cash equivalents ...... (296,713) 14,756 59,950 Cash and cash equivalents at beginning of year . . . 327,893 31,180 45,936
Cash and cash equivalents at end of year...... 31,180 45,936 105,886
Analysis of balances of cash and cash equivalents
Cash and bank balances ...... 31,180 45,936 105,886
I-8 APPENDIX I ACCOUNTANTS’ REPORT
II. NOTES TO FINANCIAL STATEMENTS
1. Basis of presentation
The Financial Information, which is prepared based on the audited financial statements of the Company, after making such adjustments as are appropriate to comply with IFRS, includes the income statements, cash flow statements, statements of changes in equity and balance sheets of the Company.
The Financial Information has been prepared in accordance with IFRS, which comprise standards and interpretations approved by the International Accounting Standards Board, and International Accounting Standards and Interpretations of the Standing Interpretation Committee approved by the International Accounting Standards Committee that remain in effect, and under the historical cost convention. This basis of accounting differs from that used in the statutory financial statements of the Company, which are prepared in accordance with PRC GAAP.
2. Fundamental accounting concept
As at December 31, 2005, the current liabilities of the Company exceeded its current assets by approximately RMB1,004,726,000.
As set out in note 20, on March 31, 2005, the Company entered into a US$100 million credit facility term loan agreement (the ‘‘Term Loan Agreement’’) with a syndicate of banks (the ‘‘Lenders’’) to finance the capital expenditure for the expansion of its production capacity. Pursuant to the Term Loan Agreement, the Company shall comply with certain financial covenants, which are tested at each quarter-end for the period from June 30, 2005 to December 31, 2009. On June 30, 2005 and September 30, 2005, the Company did not comply with certain financial covenants. However, on December 22, 2005, the Lenders agreed in principle to grant a waiver in respect of the breach of the financial covenants for the testing days as at June 30, 2005 and September 30, 2005, and to revise the financial covenants according to the revised terms and conditions as set out in a revised term sheet dated December 21, 2005, subject to the formal credit approval from the Lenders. On December 31, 2005, the Company complied with the revised financial covenants set out in the revised term sheet dated December 21, 2005, but not the original financial convenants set out in the Term Loan Agreement dated March 31, 2005. The secured term loan amounting to approximately RMB742,458,000 has therefore been reclassified from non current to current liabilities in the balance sheet as at December 31, 2005 because, at December 31, 2005, the Company did not have an unconditional right to defer its settlement for at least twelve months from the balance sheet date. The final unconditional waiver letter was subsequently obtained on February 9, 2006.
Notwithstanding the net current liabilities position of RMB1,004,726,000 as at December 31, 2005, the Financial Information has been prepared on a going concern basis because the key financial covenant in the Term Loan Agreement has been relaxed and the past breaches have been waived as discussed above and, taking into consideration the financial resources available to the Company, its current levels of internally generated funds and the planned use of proceeds from the Global Offering, the Directors believe the Company will have sufficient resources to meet its financial obligations as and when they fall due for a period of not less than twelve months from the date of the Prospectus.
I-9 APPENDIX I ACCOUNTANTS’ REPORT
3. Principal accounting policies
The principal accounting policies adopted by the Company in arriving at the Financial Information described in this report, which conform with IFRS, are set out below:
Impairment of assets
Where an indication of impairment exists, or when annual impairment testing for an asset is required, recoverable amount is estimated. The recoverable amount is calculated as the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises.
A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of such impairment loss is credited to the income statement in the period in which it arises.
Property, plant and equipment and depreciation
Property, plant and equipment, other than construction in progress, is stated at cost less accumulated depreciation and impairment losses.
The cost of an asset comprises its purchase price and any directly attributable costs of bringing the property, plant and equipment to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment, the expenditure is capitalised as an additional cost of that asset.
Depreciation is calculated on the straight-line basis to write off the cost of each asset to its residual value over its estimated useful life. The estimated useful lives of property, plant and equipment are as follows:
Buildings...... 30years Plantandmachinery...... 5–10years Officeequipment...... 5years Motorvehicles...... 5years Computersoftware...... 2–10years
I-10 APPENDIX I ACCOUNTANTS’ REPORT
Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.
Construction in progress (‘‘CIP’’)
Construction in progress represents buildings, plant and machinery and other fixed assets under construction or installation, which is stated at cost less accumulated impairment losses, and is not depreciated. Cost comprises the direct costs of purchase, construction, installation and testing and capitalised borrowing costs on related borrowed funds during the period of construction or installation. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.
Land use rights
Land use rights are stated at cost less accumulated amortisation and impairment losses. Land use rights are amortised using the straight-line basis over the unexpired period of the rights.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and, in the case of work in progress and finished goods, cost comprises direct materials, direct labour, and an appropriate proportion of overheads. Net realisable value is based on estimated selling price less all further costs expected to be incurred to completion and disposal.
Accounts and other receivables
Accounts receivable are recognised and carried at original invoice amounts less allowances for any uncollectible amounts. An estimate for doubtful debts for accounts and other receivables is made when collection of the full amount is no longer probable. Bad debts are written off to the income statement in the period in which it is identified.
Interest-bearing borrowings
Interest-bearing borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.
After initial recognition, interest-bearing borrowings are subsequently measured at amortised cost using the effective interest method. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. Amortised cost is calculated by taking into account any transaction costs, and any discount or premium on settlement.
I-11 APPENDIX I ACCOUNTANTS’ REPORT
Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use, are capitalised as a part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised.
Provisions
A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.
When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement.
Income tax
Income tax comprises current and deferred tax. Income tax is recognised in the income statement, or in equity if it relates to items that are recognised in the same or a different period directly in equity.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary differences:
. except where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
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Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax assets and unused tax losses can be utilised:
. except where the deferred tax asset relating to the deductible temporary differences arises from negative goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Retirement benefits
Obligatory retirement benefits in the form of contributions under a defined contribution retirement plan administered by local government agencies are charged to the income statement as incurred.
Accommodation benefits
Contributions to an accommodation fund administered by the Public Accumulation Funds Administration Centre are charged to the income statement as incurred.
Foreign currency transactions
The functional and presentation currency of the Company is Renminbi (‘‘RMB’’).
Foreign currency transactions are initially recorded using the functional currency rate ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are recognised in the income statement. Non- monetary items that are measured in terms of historical cost in a foreign currency are
I-13 APPENDIX I ACCOUNTANTS’ REPORT
translated using the exchange rates as at the dates of the initial transactions. Non- monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
Related parties
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties arealsoconsideredtoberelatediftheyare subject to common control or common significant influence. Related parties may be individuals or corporate entities.
Operating leases
A lease is an agreement whereby the lessor conveys rights to use the asset for an agreed period of time in return for a payment or a series of payments. An arrangement conveys the right to use the asset if the arrangement conveys to the lessee the right to control the use of the underlying asset. Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Company is the lessee, rentals payable under the operating leases are charged to the income statement on the straight-line basis over the lease terms.
Research and development costs
Research costs are expensed as incurred. An intangible asset arising from development expenditure on an individual project is recognised only when the Company can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the ability of resources to complete and the availability to measure reliably the expenditure during the development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure capitalised is amortised over the period of expected future sales from the related project.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at banks and cash in hand and short term deposits with an original maturity of three months or less.
For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
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Revenue recognition
Revenue is recognised when it is probable that the economic benefits will flow to the Company and when the revenue can be measured reliably, on the following bases:
(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Company maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) from the rendering of services, when the services have been rendered; and
(c) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable.
Government grants
Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments.
Derivative financial instruments
The Company uses derivative financial instruments including interest rate swaps to hedge its risks associated with interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. The fair values of derivative financial instruments are obtained from quoted market prices and discounted cash flow models as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Realised and unrealised gains and losses are recognised in the income statement.
Certain derivative transactions, while providing effective economic hedges under the Company’s risk management positions, do not qualify for hedge accounting under the specific rules in IAS 39 and are therefore treated as derivatives held for trading with fair value gains or losses reported in the income statement.
Use of estimates
The preparation of the financial statements of the Company in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the Relevant Periods. Actual results could differ from those estimates.
I-15 APPENDIX I ACCOUNTANTS’ REPORT
The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are disclosed below:
(a) Deferred tax assets
Deferred tax assets are recognised for deductible temporary differences, carryforward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax assets and unused tax losses can be utilised. Where the actual or expected tax positions of the Company in future are different from the original estimate, such differences will impact the recognition of deferred tax assets and income tax charge in the period in which such estimate has been changed.
(b) Provision for slow-moving inventories
Provision for slow-moving inventories is made based on the ageing and estimated net realisable value of inventories. The assessment of the provision amount required involves management judgment and estimates. Where the actual outcome or expectation in future is different from the original estimate, such differences will impact the carrying value of inventories and provision charge/write- back in the period in which such estimate has been changed.
(c) Provision for doubtful debts
Provision for doubtful debts is made based on assessment of the recoverability of trade receivables and other receivables. The identification of doubtful debts requires management judgment and estimates. Where the actual outcome or expectation in future is different from the original estimate, such differences will impact the carrying value of the receivables and doubtful debt expenses/write-back in the period in which such estimate has been changed.
(d) Impairment of property, plant and equipment
The carrying value of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable in accordance with the accounting policy as disclosed in the relevant part of this section. The recoverable amount of property, plant and equipment is the greater of net selling price and value in use, the calculations of which involve the use of estimates.
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4. Segment information
The Company’s revenue and profit for the Relevant Periods were mainly derived from the sale of wafers. The Company has only one business segment.
The principal assets employed by the Company are located in Shanghai, the PRC. Therefore, no segment information based on the geographical location of the Company’s assets is presented for the Relevant Periods.
The Company’s revenue is attributed to geographical areas based on the location of customers. Revenue regarding geographical segments based on the location of customers for the Relevant Periods is presented as follows:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
United States of America...... 597,519 862,161 542,143 Europe ...... 114,506 149,524 169,556 Asia...... 67,417 126,551 219,238 Other geographical areas ...... 4,986 9,131 646
784,428 1,147,367 931,583
5. Revenue and other income
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Revenue Sale of goods...... 780,059 1,143,662 929,711 Others...... 4,369 3,705 1,872
784,428 1,147,367 931,583
Other income Interestincome...... 1,331 231 393 Insurance compensation received...... 6,138 — — Government subsidies: — Refund of value-added tax (‘‘VAT’’) . . . . . — 6,401 7,314 Technology service income ...... — — 4,656 Foreign exchange gains as a result of appreciationofRMB...... — — 22,194 Fairvaluegainoninterestrateswap...... — — 2,840 Others...... 524 — —
7,993 6,632 37,397
Total revenue ...... 792,421 1,153,999 968,980
I-17 APPENDIX I ACCOUNTANTS’ REPORT
6. Profit/(loss) before income tax
Profit/(loss) before income tax is arrived at after charging:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Staff costs (including directors’, supervisors’ and senior executives’ emoluments as set out in note 7): Retirement benefits (note 8) — defined contribution fund ...... 6,637 8,330 9,679 Accommodation benefits (note 8) — defined contribution fund ...... 2,014 2,534 3,057 Salaries and other staff costs ...... 112,423 133,241 126,396
121,074 144,105 139,132
Interestonbankloans...... 748 4,934 38,977 Less:Interestcapitalised...... — — (5,550)
Financecosts...... 748 4,934 33,427
Average interest rate of interest capitalised.... — — 4.93% Depreciation...... 166,104 215,242 284,888 Amortisation of land use rights...... — 321 769 Operating lease rentals in respect of land . . . . . 1,318 659 — Auditors’remuneration...... 110 909 1,000 Loss on disposal of property, plant and equipment 6 1,352 2,068 Foreignexchangelosses...... 974 1,128 1,730 Provision for bad and doubtful debts ...... 22 — — Provision for impairment loss on construction in progress...... — — 2,337 Provision for inventories ...... 17,075 13,876 7,056
I-18 APPENDIX I ACCOUNTANTS’ REPORT
7. Directors’, supervisors’ and senior executives’ emoluments
Details of directors’ and supervisors’ emoluments for the Relevant Periods are as follows:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Fees: — Executivedirectors...... — — — — Non-executivedirectors...... — 1,062 1,941 — Supervisors...... — 1,062 1,248
— 2,124 3,189
Other emoluments for executive directors and supervisors: — Basic salaries and other benefits ...... — 3,202 4,786 — Non-discretionary bonuses paid and payable...... — 1,349 630 — Retirementcontributions...... — 86 33
— 4,637 5,449
— 6,761 8,638
I-19 APPENDIX I ACCOUNTANTS’ REPORT
The remuneration of each director and supervisor is as follows:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Directors: TonyYuhaiLiu...... — 4,056 3,285 ChengJianyu...... — — 1,619 RuanYanhua...... — 177 208 ZhuJian...... — 177 208 AnthonyLear...... — 177 208 MangWaiKin...... — 177 208 ZhuPeiyi...... — 177 208 MaMai...... — 177 35 ZhouWeiping...... — — 150 JamesArthurWatkins...... — — 238 Thaddeus Thomas Beczak ...... — — 238 Shen Weijia ...... — — 238
— 5,118 6,843
Supervisors: ShenQitang...... — 177 208 Yang Yanhui ...... — 177 208 Zhang Yueh (alias Chang David Yueh) . . . . . — 177 208 AjitManocha...... — 177 208 WangXiangqun...... — 177 208 Huang Jihua...... — 177 208 Xu Songneng ...... — 581 547
— 1,643 1,795
— 6,761 8,638
The number of directors and supervisors, whose remuneration fell within the following bands, is as follows:
Year ended December 31, 2003 2004 2005
Nil–HK$1,000,000...... — 13 17 HK$1,000,001–HK$1,500,000 ...... — — — HK$1,500,001–HK$2,000,000 ...... — — 1 HK$3,000,001–HK$3,500,000 ...... — — 1 HK$3,500,001–HK$4,000,000 ...... — 1 —
—1419
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The five highest paid individuals of the Company include no executive director for the year ended December 31, 2003, one executive director for the year ended December 31, 2004 and two executive directors for the year ended December 31, 2005, details of whose emoluments have been disclosed above.
The details of the emoluments of the remaining highest paid individuals for the Relevant Periods are as follows:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Basic salaries and other benefits ...... 7,120 5,263 3,629 Non-discretionary bonuses paid and payable. . . 2,377 1,487 605 Retirementcontributions...... 655 805 49
10,152 7,555 4,283
The number of non-executive director, highest paid employees, whose remuneration fell within the following bands, is as follows:
Year ended December 31, 2003 2004 2005
Nil–HK$1,000,000...... — — — HK$1,000,001–HK$1,500,000 ...... 2 1 2 HK$1,500,001–HK$2,000,000 ...... 2 3 1 HK$3,500,001–HK$4,000,000 ...... 1 — —
543
During the Relevant Periods, no emoluments were paid by the Company to any of the directors or the five highest paid individuals as an inducement to join, or upon joining the Company, or as compensation for loss of office.
8. Retirement benefits and accommodation benefits
Retirement benefits
As stipulated by the PRC law and regulations, the Company participates in a defined contribution retirement plan. All local Chinese employees are entitled to an annual pension equal to a fixed proportion of the average basic salary amount within the geographical area of their last employment at their retirement date. The Company is required to make contributions to the Labour and Social Security Bureau of the Shanghai Government at a rate of 22.5% of the employees’ salaries and wages of the previous year, limited to a ceiling amount of three times of the previous year’s average basic salaries within the geographical area where the local Chinese employees are under employment with the Company. The Company has no obligation for the payment of pension benefits beyond the annual contributions to the Labour and Social Security Bureau of the Shanghai Government as set out above. The retirement benefits do not apply to expatriate employees.
I-21 APPENDIX I ACCOUNTANTS’ REPORT
Accommodation benefits
According to the relevant rules and regulations of the PRC, the Company and its local Chinese employees are each required to make contributions which are in proportion to the salaries and wages of the employees to an accommodation fund administered by the Public Accumulation Funds Administration Centre. There are no further obligations on the part of the Company except for such contributions to the accommodation fund. The accommodation benefits do not apply to expatriate employees.
9. Income tax
No provision for Hong Kong profits tax has been made as the Company had no assessable profits arising in Hong Kong during the Relevant Periods.
The Company is located at Caohejing High-Tech Park of Shanghai, the PRC, and its applicable corporate income tax rate is 15%. In accordance with the prevailing tax laws in the PRC, the Company is entitled to full exemption from corporate income tax for the first and second profitable years (after offsetting accumulated tax losses, which can be carried forward for utilisation for a maximum period of five years), and a further 50% exemption for the succeeding three years.
The year ended December 31, 2003 was the Company’s fifth year of its tax holiday. Accordingly, the Company was subject to PRC corporate income tax at an applicable income tax rate of 7.5% for the year ended December 31, 2003.
As an integrated circuits manufacturer capable of manufacturing wafers with linewidths equal to or below 0.25 micron, and pursuant to an approval document of the relevant tax authorities dated June 17, 2004, the Company is entitled to a 50% reduction in corporate income tax for an additional five years from 2004 to 2008. Accordingly, the Company was subject to PRC corporate income tax at an applicable income tax rate of 7.5% for the years ended December 31, 2004 and 2005. By virtue of the same approval document, the Company was granted a refund of the income tax paid for the year ended December 31, 2003, and the refund of income tax of RMB15,202,000 was received on 19 July 2004.
A refund of prepaid income tax of RMB7,441,000 pertaining to the year ended December 31, 2004 was received on July 18, 2005.
I-22 APPENDIX I ACCOUNTANTS’ REPORT
Major components of income tax expenses for the Relevant Periods are as follows:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Provision for income tax in respect of profit for the year: Currentyear...... 14,570 11,850 — Over provision in respect of prior years . . . . — (15,202) (4,936)
14,570 (3,352) (4,936) Deferredtax...... (2,545) 1,187 (5,055)
Income tax expense/(refund), net ...... 12,025 (2,165) (9,991)
A numerical reconciliation between net income tax expense/(refund) and the profit/(loss) before income tax multiplied by the applicable tax rate is as follows:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Profit/(loss) before income tax ...... 145,130 180,485 (85,021)
Tax at applicable tax rate of 7.5% ...... 10,885 13,536 (6,377)
Tax effect of: — non-deductible expenses ...... 1,729 75 906 — additional deduction in respect of domestically purchased property, plant and equipment...... (1,026) (645) — — incometaxrefund...... — (15,202) — — over provision of tax expense in prior year — — (4,936) — others...... 437 71 416
Income tax expense/(refund), net ...... 12,025 (2,165) (9,991)
I-23 APPENDIX I ACCOUNTANTS’ REPORT
10. Dividends
The amount which the Company can legally distribute by way of a dividend is determined by reference to its profits as reflected in its PRC statutory financial statements which are prepared in accordance with PRC GAAP. These profits differ from those that are reflected in this report which is prepared in accordance with IFRS.
Upon listing of the Company’s shares on the Main Board of The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’), the Company will distribute dividends based on the lower of the Company’s profits determined under PRC GAAP and IFRS.
Pursuant to a resolution of the Company’s annual general meeting on May 28, 2004, the Company declared a final dividend in an aggregate amount of approximately RMB35,109,000 pertaining to the profit for the year ended December 31, 2003 to the then shareholders in proportion to their respective equity interests in the Company on December 31, 2003. Save as disclosed above, no dividend has been paid or declared by the Company during the Relevant Periods and during the period from January 1, 2006 to the date of this report.
11. Earnings/(loss) per share
Earnings/(loss) per share for the Relevant Periods have been computed by dividing the net profit/(loss) attributable to shareholders during the Relevant Periods by 1,109,080,000 shares in issue on the assumption that the 1,109,080,000 shares had been in issue throughout the Relevant Periods, as if the conversion of the Company’s entire shareholders’ equity into 1,109,080,000 shares with a nominal value of RMB1 each upon the re-registration of the Company as a foreign invested joint stock limited company had taken place at the beginning of the Relevant Periods.
Diluted earnings/(loss) per share for the Relevant Periods have not been disclosed because there were no dilutive options and other potential dilutive ordinary shares in issue during the Relevant Periods.
I-24 APPENDIX I ACCOUNTANTS’ REPORT
12. Property, plant and equipment
Plant and Office Motor Computer Buildings machinery equipment vehicles software Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Cost: At January 1, 2003 ...... 47,779 1,301,186 25,487 2,462 — 1,376,914 Additions...... — 12,849 1,646 505 — 15,000 Transferred from CIP . . . . 55,018 713,600 9,523 — — 778,141 Disposals...... — (5,156) (72) — — (5,228)
At December 31, 2003 . . . 102,797 2,022,479 36,584 2,967 — 2,164,827
Accumulated depreciation: At January 1, 2003 ...... 15,698 847,142 17,965 1,980 — 882,785 Charge for the year...... 2,355 159,745 3,655 349 — 166,104 Disposals...... — (5,153) (69) — — (5,222)
At December 31, 2003 . . . 18,053 1,001,734 21,551 2,329 — 1,043,667
Net book value: At December 31, 2003 . . . 84,744 1,020,745 15,033 638 — 1,121,160
Cost: At January 1, 2004 ...... 102,797 2,022,479 36,584 2,967 — 2,164,827 Additions...... 268 38,681 6,539 482 — 45,970 Transferred from CIP . . . . 567 476,205 1,728 — — 478,500 Disposals...... (1,809) (492) (1,467) (70) — (3,838)
At December 31, 2004 . . . 101,823 2,536,873 43,384 3,379 — 2,685,459
Accumulated depreciation: At January 1, 2004 ...... 18,053 1,001,734 21,551 2,329 — 1,043,667 Charge for the year...... 3,370 206,990 4,629 253 — 215,242 Disposals...... (697) (400) (1,326) (63) — (2,486)
At December 31, 2004 . . . 20,726 1,208,324 24,854 2,519 — 1,256,423
Net book value: At December 31, 2004 . . . 81,097 1,328,549 18,530 860 — 1,429,036
Cost: At January 1, 2005 ...... 101,823 2,536,873 43,384 3,379 — 2,685,459 Additions...... — 58,951 3,324 35 18,569 80,879 Transferred from CIP . . . . 2,399 734,876 4,974 — — 742,249 Disposals...... — (12,247) (1,249) (23) — (13,519)
At December 31, 2005 . . . 104,222 3,318,453 50,433 3,391 18,569 3,495,068
Accumulated depreciation: At January 1, 2005 ...... 20,726 1,208,324 24,854 2,519 — 1,256,423 Charge for the year...... 3,414 275,542 5,671 261 — 284,888 Disposals...... — (9,860) (1,245) (23) — (11,128)
At December 31, 2005 . . . 24,140 1,474,006 29,280 2,757 — 1,530,183
Net book value: At December 31, 2005 . . . 80,082 1,844,447 21,153 634 18,569 1,964,885
I-25 APPENDIX I ACCOUNTANTS’ REPORT
The Company’s buildings, plant and machinery with a net book value of RMB1,924,529,000 as at December 31, 2005 were pledged to the banks as security for the bank loans amounting to US$92 million (equivalent to approximately RMB742,458,000) as at December 31, 2005.
13. Construction in progress
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
At beginning of year ...... 171,980 125,482 207,704 Additions ...... 731,643 560,722 712,819 Transferred to property, plant and equipment . . (778,141) (478,500) (742,249) Provisionforimpairment...... — — (2,337)
At end of year ...... 125,482 207,704 175,937
The Company’s construction in progress with a net book value of RMB175,937,000 as at December 31, 2005 were pledged to the banks as security for the bank loans amounting to US$92 million (equivalent to approximately RMB742,458,000) as at December 31, 2005.
14. Land use rights
December December 31, 2004 31, 2005 RMB’000 RMB’000
Cost: Atbeginningofyear...... — 38,482 Additions...... 38,482 —
Atendofyear...... 38,482 38,482
Accumulated amortisation: Atbeginningofyear...... — 321 Chargefortheyear...... 321 769
Atendofyear...... 321 1,090
Net book value: Atbeginningofyear...... — 38,161
Atendofyear...... 38,161 37,392
The Company’s land use rights with a net book value of RMB37,392,000 as at December 31, 2005 were pledged to banks to secure bank loans amounting to US$92 million (equivalent to approximately RMB742,458,000) as at December 31, 2005.
I-26 APPENDIX I ACCOUNTANTS’ REPORT
15. Deferred tax assets
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Deferred tax assets/(liabilities) in respect of — Depreciation charges ...... 2,953 1,766 (782) — Fair value gain on interest rate swap . . . . — — (213) — Unutilised tax losses...... — — 5,684 —Provisions...... — — 2,132
2,953 1,766 6,821
Under the relevant tax laws in the PRC, the Company is able to carry forward the unutilised tax losses for five years. The Company has recognised current year unutilised tax losses of approximately RMB5,684,000 as a deferred tax asset in 2005 as the Directors are confident that the Company is able to generate sufficient taxable profits to utilise the tax losses before the expiry of the five years period.
16. Accounts and notes receivable
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Accounts receivable ...... 56,325 55,404 117,645 Notesreceivable...... — — 6,619
56,325 55,404 124,264
Credit terms granted by the Company to its customers generally range from 30 days to 60 days.
An aged analysis of accounts receivable as at December 31, 2003, 2004 and 2005 is as follows:
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Outstanding balances with ages: Within30days...... 45,142 47,766 68,840 Between 31 days and 90 days ...... 11,204 6,173 47,997 Between 91 days and 180 days ...... — 1,487 113 Between 181 days and 365 days ...... — — 717 Over365days...... 1 — —
56,347 55,426 117,667 Less: Provision for bad and doubtful debts . . . . (22) (22) (22)
56,325 55,404 117,645
I-27 APPENDIX I ACCOUNTANTS’ REPORT
17. Inventories
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Rawmaterials...... 35,528 42,040 43,726 Spare parts and consumables ...... 30,120 50,980 54,508 Workinprogress...... 60,834 52,280 79,071 Finishedgoods...... 22,936 10,288 22,918
149,418 155,588 200,223 Less: Provision for inventories ...... (24,509) (21,368) (28,424)
124,909 134,220 171,799
Represented by: Inventories carried at cost ...... 109,894 116,547 129,654 Inventories carried at net realisable value . . . . . 15,015 17,673 42,145
124,909 134,220 171,799
Analysis of provision for inventories: Balanceatbeginningofyear...... 10,132 24,509 21,368 Providedfortheyear...... 17,075 13,876 15,028 Utilised for the year ...... (2,698) (17,017) (7,972)
Balance at end of year ...... 24,509 21,368 28,424
18. Prepayments, deposits and other receivables
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Prepayments...... 5,597 15,135 6,870 Deposits...... 1,141 126 295 VAT refundable ...... 24,464 — 2,261 Financialasset...... — — 2,840 Sundry debtors...... 4,343 3,149 10,708
35,545 18,410 22,974
19. Balances with related companies
The Company was under the significant influence of Koninklijke Philips Electronics N.V. (‘‘Royal Philips’’) through its wholly-owned subsidiary, Philips Electronics China B.V. (formerly Philips Electronics South-East Asia Holding B.V.), which held more than 35% of the equity interest of the Company throughout the Relevant Periods. The companies controlled by or under the significant influence of Royal Philips are considered to be the Company’s related parties.
I-28 APPENDIX I ACCOUNTANTS’ REPORT
The amounts due from/to related companies, which are subsidiaries or associates of Royal Philips, are unsecured, interest-free and have no fixed terms of repayment. All the balances with related companies arose from trade transactions in the ordinary course of business.
20. Interest-bearing borrowings
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Bank loans: Unsecured ...... 124,151 388,996 443,861 Secured...... — — 742,458
124,151 388,996 1,186,319
The bank loans are repayable within one year, bear interest at rates from 1.97% to 5.25% per annum.
Bank loans amounting to US$92 million (equivalent to approximately RMB742,458,000) as at December 31, 2005 were secured on the Company’s buildings, plant and machinery with a net book value of approximately RMB1,924,529,000, construction in progress with a net book value of RMB175,937,000 and land use rights with a net book value of RMB37,392,000 as at December 31, 2005.
As at December 31, 2005, the Company had unutilised banking facilities of approximately US$5.1 million (equivalent to approximately RMB41,158,000), which expired on January 31, 2006.
On March 31, 2005, the Company entered into a US$100 million credit facility term loan agreement with a syndicate of banks to finance the capital expenditure for the expansion of its production capacity. As at December 31, 2005, bank loans of US$92 million (equivalent to approximately RMB742 million) were drawn down under the Term Loan Agreement.
The principal debt covenants of the Term Loan Agreement are set out below:
(a) The Company shall comply with certain financial covenants on every testing date of every quarter end for the period from June 30, 2005 to December 31, 2009;
(b) The Company shall not engage in any business beyond its business scope as indicated in its business license;
(c) The Company shall not merge or consolidate with other entities, or take any step with a view toward dissolution, liquidation or winding-up;
(d) The Company shall not guarantee, provide security (other than to the Lenders), sell, transfer, lend, lease (as a lessor), or otherwise dispose of any whole or substantial part of its property, assets, or cash flows, whether by a single transaction or by a
I-29 APPENDIX I ACCOUNTANTS’ REPORT
number of transactions whether related or not (other than any guarantee, security, sale, transfer, lending or lease entered into by the Company in the normal course of business);
(e) The Company shall not incur any additional indebtedness (except clean facility, subordinated loan and trade facilities) without the Lender’s prior consent;
(f) The Company shall maintain the status of all insurance policies that have been assigned to the Lenders;
(g) No dividend or other distribution shall be made by the Company prior to its listing on any stock exchange. After the Company is listed, up to (and including) 25% of its net profit after tax for any financial year may be declared, made or distributed as dividend by the Company;
(h) No decrease or reduction shall be made to the Company’s registered capital without prior written consent of the Lenders; and
(i) The Company shall mortgage in favor of the Lenders all its land use rights, buildings, machinery and equipment. For any of such land use rights, buildings, machinery or equipments that the Company acquires after the first drawdown under the Term Loan Agreement, the Company shall undertake to perfect or register the mortgage once a year after the first drawdown date, over such property or assets that the Company has acquired during the immediate past year.
On June 30, 2005 and September 30, 2005, the Company did not comply with certain financial covenants. On December 22, 2005, the Lenders agreed in principle to grant a waiver in respect of the breach of the financial covenants for the testing days as at June 30, 2005 and September 30, 2005, and to revise the financial covenants according to the revised terms and conditions as set out in a revised term sheet dated December 21, 2005, subject to the formal credit approval from the Lenders. On December 31, 2005, the Company complied with the revised financial covenants set out in the revised term sheet dated December 21, 2005, but not the original financial covenants set out in the Term Loan Agreement dated March 31, 2005. The secured term loan amounting to approximately RMB742,458,000 has therefore been reclassified from non current to current liabilities in the balance sheet as at December 31, 2005 because, at December 31, 2005, the Company did not have an unconditional right to defer its settlement for at least twelve months from the balance sheet date. The final unconditional waiver letter was subsequently obtained on February 9, 2006.
I-30 APPENDIX I ACCOUNTANTS’ REPORT
21. Accounts payable
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Outstanding balances with ages: Within30days...... 89,020 55,634 108,714 Between 31 days and 90 days ...... 16,083 139,878 46,737 Between 91 days and 180 days ...... 40,022 19,617 10,679 Between 181 days and 365 days ...... 26,941 3,239 15,140 Over365days...... 5,757 4,353 14,930
177,823 222,721 196,200
22. Paid-up capital/share capital
The details of movements in the Company’s paid-up capital/share capital during the Relevant Periods are as follows:
(i) Pursuant to a resolution of a meeting of the board of directors on June 3, 2003, the Company transferred its 2002 distributable profits of RMB145,677,000, as reflected in its PRC statutory financial statements, to the Company’s paid-up capital account.
(ii) On March 2, 2004, the Company was re-registered as a foreign invested joint stock limited company by converting its entire shareholders’ equity, including all distributable reserves, as reflected in its PRC statutory financial statements, as at August 31, 2003 in an aggregate amount of RMB1,109,080,000 into 1,109,080,000 fully paid shares with a nominal value of RMB1 each.
(iii) As at December 31, 2005, the number of shares and class of shares held by the Company’s shareholders were as follows:
Class of shares Number of shares Shareholders held held
Philips Electronics China B.V. Foreign Shares 408,806,888 (‘‘Philips’’) (notes (a) & (e)) ......
SCIP (HK) Limited (‘‘SCIP (HK)’’) Foreign Shares 254,866,584 (notes (a) & (e)) ......
China Orient Asset Management Domestic Shares 215,161,520 Corporation (‘‘COAMC’’) (notes (b) & (e)) ......
Shanghai Chemical Industry Park Domestic Shares 110,908,000 Investment Enterprise Co., Ltd. (‘‘SCIPI’’) (notes (c) & (e)) ......
I-31 APPENDIX I ACCOUNTANTS’ REPORT
Class of shares Number of shares Shareholders held held
Shanghai Belling Co., Ltd. (‘‘Shanghai Domestic Shares 86,064,608 Belling’’) (notes (c) & (e)) ......
Lanmax International Limited Foreign Shares 33,272,400 (‘‘Lanmax’’) (notes (d) and (e))......
1,109,080,000
Notes:
(a) Pursuant to an approval of the China Securities Regulatory Commission (the ‘‘CSRC’’) dated January 11, 2005, the Foreign Shares held by Philips and SCIP (HK) were approved to be converted into H Shares after the Company’s issue and listing of H Shares on the Stock Exchange (the ‘‘Global Offering’’). In this regard, the Foreign Shares held by Philips and SCIP (HK) will be classified as Converted H Shares immediately upon completion of the Global Offering.
(b) In accordance with relevant PRC regulations, COAMC will sell a number of its State-owned shares equal to 10% of the H Shares offered in the Global Offering (the ‘‘Sale H Shares’’). The sale of the Sale H Shares by COAMC has been approved by the CSRC and the Ministry of Finance in accordance with the regulations promulgated by the State Council. The Company will not receive any of the proceeds from the sale of the Sale H Shares and these proceeds from the sale of the Sale H Shares will also not form any part of the Company’s share capital; COAMC is required to remit these net proceeds to the National Social Security Fund in accordance with the relevant PRC government authorities. The remaining unsold shares held by COAMC will still be classified as Domestic Shares immediately after the Global Offering.
(c) The shares held by SCIPI and Shanghai Belling are Domestic Shares in issue and will still be classified as Domestic Shares immediately after the Global Offering.
(d) Shares held by Lanmax are Foreign Shares in issue and will not be converted into H Shares and listed on the Stock Exchange and but remain classified as non-listed Foreign Shares (‘‘Non-Listed Foreign Shares’’) immediately after the Global Offering. Lanmax was originally incorporated to implement the ASMC Compensation Trust. As a result of restrictions under the PRC laws and regulations, the Company understands that Lanmax will not apply to the CSRC for approval to convert the Non-Listed Foreign Shares into H Shares, and that Lanmax has undertaken to the Company and to the CSRC to return the Non- Listed Foreign Shares shortly after the one-year period pursuant to the PRC Company Law commencing from the date on which the Company is listed on the Hong Kong Stock Exchange upon completion of the Global Offering (the ‘‘Lock Up Period’’), to Philips, COAMC, SCIPI and Shanghai Belling. Jingtian &
I-32 APPENDIX I ACCOUNTANTS’ REPORT
Gongcheng, the Company’s legal advisor as to the PRC law, have confirmed that, under the applicable PRC laws and regulations currently in force, the shares to be returned to Philips will remain as Non-Listed Foreign Shares, while the shares to be returned to COAMC, SCIPI and Shanghai Belling will be automatically converted from Non-Listed Foreign Shares into Domestic Shares.
(e) According to the relevant regulations in the PRC, Domestic Shares, Foreign Shares (whether in the form of Converted H Shares or Shares held by Lanmax) and H Shares are all ordinary shares in the Company’s share capital.
Domestic Shares may only be subscribed for by, and traded between, legal or natural persons of the PRC and must be subscribed for and traded in RMB. The Domestic Shares held by SCIPI, Shanghai Belling and COAMC are not admitted for listing on any stock exchange and no arrangement has been made for the Domestic Shares to be traded or dealt with on any other authorised trading facility in the PRC.
H Shares may only be subscribed for in Hong Kong dollars by, and traded between, legal or natural persons of Hong Kong, Macau, Taiwan or any country other than the PRC. H Shares and Converted H Shares belong to the same class of shares in the Company’s share capital. Holders of H Shares and Converted H Shares have identical rights, save that the Converted H Shares may not be transferred (a) until the expiry of the Lock Up Period and (b) except with approval from the Ministry of Commerce. The Foreign Investment Joint Stock Company Provisional Regulations stipulate that the PRC laws and regulations which regulate foreign invested enterprises also apply to foreign invested joint stock limited companies, such as the Company. The trading of such Converted H shares on the Stock Exchange upon the expiry of the Lock Up Period will require prior approval from the Ministry of Commerce.
In relation to the Non-Listed Foreign Shares, although there is at present no applicable PRC law or regulation governing the rights of such Non-Listed Foreign Shares, nor do the Company’s Articles of Association contain express provisions as to whether such Non-Listed Foreign Shares constitute a different class of shares from the H Shares, Jingtian & Gongcheng, the Company’s legal advisor as to the PRC law, have confirmed that the creation of Lanmax and the subsistence of the Non-Listed Foreign Shares do not contravene any PRC law or regulation, and until new laws or regulations are introduced, the holder of Non-Listed Foreign Shares (that is, Lanmax) shall be treated as being in the same class as holders of Domestic Shares. As the holder of the Non- Listed Foreign Shares, Lanmax enjoys the same rights as holders of Domestic Shares. However, it also enjoys the following rights:
. to request the Company to pay dividends in foreign currencies;
. to request the Company to distribute its assets upon the winding-up of the Company in foreign currencies and remit out of the PRC, subject to the applicable foreign exchange control regulations; and
. may resolve disputes with holders of Domestic Shares or H Shares.
I-33 APPENDIX I ACCOUNTANTS’ REPORT
23. Reserves
(i) Capital reserve
The Company’s capital reserve as at December 31, 2003 consisted of (i) a share premium of RMB207,837,000 arising from the contribution of paid-up capital of the Company by the investors; and (ii) an amount of RMB524,000, being cash gifts received from the Company’s business partners during the Company’s grand opening of the 8-inch wafer production line, capitalised in the capital reserve account in accordance with the relevant PRC regulations.
On March 2, 2004, the capital reserve of RMB208,322,000 was transferred to the share capital account upon the re-registration of the Company as a foreign invested joint stock limited company as set out in note 22(ii) above.
(ii) Reserve fund and enterprise expansion fund
In accordance with the relevant PRC laws and regulations for Sino-foreign joint venture enterprises, the Company is required to set aside a certain percentage of its net profit, as determined in accordance with PRC GAAP applicable to the Company, decided by the board of directors with due consideration to the business performance of the Company from time to time, to the reserve fund and the enterprise expansion fund. The reserve fund and the enterprise expansion fund are non-distributable reserves and are subject to certain restrictions set out in the relevant PRC laws and regulations for Sino- foreign joint venture enterprises. Part of the reserve fund and enterprise expansion fund can be converted to increase paid-up capital/share capital.
On March 2, 2004, a reserve fund of RMB26,521,000 and an enterprise expansion fund of RMB26,521,000 were transferred to the share capital account upon the re- registration of the Company as a foreign invested joint stock limited company as set out in note 22(ii) above and, thereafter, the Company is not required to transfer its net profit to the reserve fund and the enterprise expansion fund.
(iii) Statutory surplus reserve
Following the re-registration of the Company as a foreign invested joint stock limited company, and in accordance with the Company Law of the PRC and the Articles of Association of the Company, the Company is required to allocate 10% of its profit after tax to the statutory surplus reserve until such reserve reaches 50% of the registered share capital of the Company. Subject to certain restrictions set out in the Company Law of the PRC, part of this reserve may be converted to increase share capital, provided that the remaining balance after the capitalisation is not less than 25% of the registered share capital.
(iv) Statutory public welfare fund
Following the re-registration of the Company as a foreign invested joint stock limited company, and in accordance with the Company Law of the PRC and the Articles of Association of the Company, the Company is required to transfer 5% to 10% of its profit after tax to the statutory public welfare fund which is a non-distributable reserve other
I-34 APPENDIX I ACCOUNTANTS’ REPORT
than in the event of liquidation of the Company. The fund must be used for capital expenditure on staff welfare facilities. Although such facilities are for staff use, they are owned by the Company.
When the fund is utilised, an amount equal to the lower of the cost of the assets and the balance of the fund is transferred from the fund to the general surplus reserve. This reserve is non-distributable other than in the event of liquidation of the Company. On disposal of the relevant assets, the original transfers from the fund are reversed.
(v) Distributable reserves
As set out in note 10, for dividend purposes, the amount which the Company can legally distribute by way of a dividend is determined by reference to its profits as reflected in its PRC statutory financial statements which are prepared in accordance with PRC GAAP. These profits differ from those that are reflected in this report which is prepared in accordance with IFRS.
Upon listing of the Company’s shares on the Stock Exchange, the Company will distribute dividends based on the lower of the Company’s profits determined under PRC GAAP and IFRS.
As set out in note 22(ii) above, on March 2, 2004, the Company was re-registered as a foreign invested joint stock limited company by converting its entire shareholders’ equity, including all distributable reserves, as reflected in its PRC statutory financial statements, as at August 31, 2003 in an aggregate amount of RMB1,109,080,000 into 1,109,080,000 fully paid shares with a nominal value of RMB1 each.
The Company’s maximum distributable reserves as at December 31, 2005, which represented the Company’s reserves as determined in accordance with PRC GAAP, after deduction of the minimum transfers to the statutory surplus reserve and the statutory public welfare fund as set out in notes 23(iii) and 23(iv) above, amounted to approximately RMB31,758,000.
24. Financial instruments
Financial risk management objectives and policies
The main financial risks faced by the Company are interest rate risk, foreign currency risk and credit risk. The Company does not hold or issue derivative financial instruments either for hedging or for trading purposes, other than interest rate swaps disclosed in interest rate risk below.
Interest rate risk
The Company’s exposure to market risk for changes in interest rates relates primarily to its interest-bearing borrowings.
The Company uses interest rate swaps to hedge its interest rate risk. The interest rate swap contracts that the Company has entered into entitle it to receive interest at floating rates on notional principal amounts and obliges it to pay interest at fixed rates on the same amounts. Under the interest rate swaps, the Company agrees with other parties
I-35 APPENDIX I ACCOUNTANTS’ REPORT
to exchange, at semi-annually intervals, the differences between the fixed rate and floating rate interest amounts calculated by reference to the agreed notional principal amounts.
The floating rates of the Company’s interest rate swap contracts are linked to the US$-LIBOR-BBAM. The weighted average interest rate of the Company’s floating rate borrowings at the balance sheet date was 4.98 % per annum. After the interest rate swap, the Company weighted average interest rate at the balance sheet date was 5.06% per annum.
The remaining terms and notional principal amounts of the outstanding interest rate swap contracts of the Company at the balance sheet date, which are denominated in US Dollars, were as follows:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Later than one year and not later than 5 years...... 0 0 201,750 Laterthan5years...... 0 0 0
0 0 201,750
The fair value gain of the interest rate swap contracts as at December 31, 2005 of RMB2,840,000 has been recorded in the financial statements.
Foreign currency risk
The Company has transactional currency exposure. Such exposure arises from sales, purchases and borrowings of the Company in currencies other than RMB. The Company does not use derivative financial instruments to hedge its exchange rate risk.
I-36 APPENDIX I ACCOUNTANTS’ REPORT
The foreign currency profile of the financial assets and liabilities denominated in currencies other than the functional currency of the Company is as follows:
Year ended December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Financial assets: Cash and cash equivalents: —US$...... 17,838 25,539 50,781 —Others...... — — —
17,838 25,539 50,781
Accounts and notes receivable —US$...... 55,899 50,543 84,087 —Others...... — — —
55,899 50,543 84,087
Due from related companies: —US$...... 6,425 18,760 31,866 —Others...... — — —
6,425 18,760 31,866
Financial liabilities: Interest bearing borrowings: — US$ ...... 124,151 388,996 1,186,319 —Others...... — — —
124,151 388,996 1,186,319
Accounts payable: — US$ ...... 153,476 145,695 120,419 —Others...... 3,174 9,198 8,182
156,650 154,893 128,601
Accrued liabilities and other payables: —US$...... 1,124 7,356 1,493 —Others...... — — 3,124
1,124 7,356 4,617
Due to related companies: —US$...... 4,297 4,044 1,830 —Others...... — — 1,249
4,297 4,044 3,079
I-37 APPENDIX I ACCOUNTANTS’ REPORT
Credit risk
Credit risk arising from the inability of a counterparty to meet the terms of the Company’s financial instrument contracts is generally limited to the amounts, if any, by which the counterparty’s obligations exceed the obligations of the Company. Financial assets of the Company that are potentially subject to significant concentrations of credit risk consist principally of cash and cash equivalents, accounts, notes and other receivables and amounts due from related companies. The Company’s maximum exposure to credit risk in relation to each class of recognised financial assets is the carrying amount of these assets. There are no significant concentrations of credit risk for the Company’s financial assets.
Fair value
Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature, involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The carrying amounts of financial assets and liabilities of the Company at balance sheet dates approximated their fair values.
25. Related party transactions
As set out in note 19, the companies controlled by or under significant influence of Royal Philips are considered to be related to the Company.
The Company had the following material transactions with the companies controlled by or under significant influence of Royal Philips during the Relevant Periods:
Year ended December 31, 2003 2004 2005 Notes RMB’000 RMB’000 RMB’000
Sales...... (i) 114,348 148,798 152,258 Purchases...... (i) 1,464 195 6,560 Technology transfer fees ...... (ii) 3,993 5,799 13,757 Information technology (‘‘IT’’) related service fees ...... (iii) 2,768 2,097 2,641
Notes:
(i) Sale to and purchases from the related companies were carried out based on normal commercial terms and at market prices.
(ii) Royalties in the form of technology transfer fees paid/payable to a related company were determined at 3% of net sales of certain specified products sold by agreement of the parties.
(iii) IT related service fees were charged by the related companies by agreement of the parties.
I-38 APPENDIX I ACCOUNTANTS’ REPORT
In the opinion of the Directors, all transactions above were carried out in the ordinary course of business of the Company. Such transactions were conducted on an arm’s length basis and on normal commercial terms, and will continue after the listing of the shares of the Company on the Stock Exchange.
26. Commitments
The Company had the following commitments as at December 31, 2003, 2004 and 2005:
December 31, 2003 2004 2005 RMB’000 RMB’000 RMB’000
Capital commitments Capital commitments in respect of property, plant and equipment: — contracted, but not provided for ...... 183,850 577,462 163,177 — authorised, but not contracted for...... 351,823 183,601 91,038
535,673 761,063 254,215
Operating lease commitments Future minimum lease payments under non- cancellable operating leases in respect of land for each of the following periods: —Withinoneyear...... 1,318 — — — In the second to fifth years, inclusive . . . . 7,369 — — —Overfiveyears...... 37,733 — —
46,420 — —
The Company’s corporate headquarters and fabs in Shanghai occupy an aggregate area of approximately 39,010 square meters of land (the ‘‘Land’’). Pursuant to a land lease agreement dated March 23, 2001, the land use rights of the Land were leased to the Company for a term of 25 years commencing from October 1, 1988 and expiring on September 30, 2013.
Pursuant to a land grant contract dated August 9, 2004 entered into between Shanghai Housing and Land Resources Administration Bureau (‘‘SLRAB’’) and the Company, SLRAB granted the land use rights of the Land to the Company for a term of 50 years commencing from August 9, 2004 and expiring on August 9, 2054 for industrial uses and the above land lease agreement was terminated. Accordingly, there was no operating lease commitment as at December 31, 2004 and December 31, 2005.
I-39 APPENDIX I ACCOUNTANTS’ REPORT
27. Contingent liabilities
On March 8, 2005, the Company received a summons issued by the United States District Court, Northern District of California regarding the case known as Monolithic Power Systems, Inc. v. O2 Micro International Limited, in which the Company was identified as one of the counter-defendants and was alleged, by virtue of the manufacture and sale of single stage, full-bridge configuration inverter controller integrated circuits to Monolithic Power Systems, Inc. (‘‘MPS’’), without permission or license from O2 Micro International Limited (‘‘O2 Micro’’), to directly infringe, induce infringement and/or contribute to the infringement of United States Patent No. 6,396,722 (the ‘‘722 patent’’).
TheCompanyfiledamotiontodismissforlack of personal jurisdiction in this case on June 6, 2005. On December 21, 2005, the court in California denied the motion of the Company to dismiss for lack of personal jurisdiction. The Company is advised by its US counsel that the trial date is likely to be in early 2007.
On April 20, 2005, the Company received a summon issued by the United States District Court, Eastern District of Texas regarding the case known as O2 Micro International Limited v. Monolithic Power Systems, Inc., in which the Company was identified as one of defendants and was alleged, by designing, manufacturing, and/or selling computer hardware, including DC-to-AC inverter controller circuits, liquid crystal displays, and notebook computers which embody, or when used, practice one or more claims of the Patent No. 6,804,129 (the ‘‘129 patent’’), without license or permission from O2 Micro, to directly infringe, induce infringement and/or contribute to the infringement of the 129 patent. The trial for the case is set on August 7, 2006.
TheCompanyfiledamotiontodismissforlack of personal jurisdiction in this case on June 10, 2005. In the event that O2 Micro claims prevent the Company from manufacturing and/or selling wafers that used the allegedly infringed patents, it should not prevent the Company from manufacturing and/or selling other products for MPS.
The Directors are of the opinion that this will not have material adverse effect on the financial position or operational results of the Company. The revenue derived from the wafers that used the allegedly infringed patents accounted for less than 2% of the total revenue of the Company for each of the years ended December 31, 2003, 2004 and 2005. The Directors believe that the Company can, if necessary, replace its foundry capacity and/or orders related to the allegedly infringed products from MPS with similar technology and order levels from its other customers (including MPS).
28. Subsequent event
On February 9, 2006, the Company obtained the final unconditional waiver letter to waive the breach of the financial covenants for the testing days as at June 30, 2005 and September 30, 2005, and to revise the financial covenants according to the revised terms and conditions as set out in a revised term sheet dated December 21, 2005. Details of the breach of the financial covenants are disclosed in note 20.
I-40 APPENDIX I ACCOUNTANTS’ REPORT
29. Subsequent financial statements
No audited financial statements have been prepared by the Company in respect of any period subsequent to December 31, 2005.
Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong
I-41 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
For illustrative purpose only, the unaudited pro forma financial information prepared in accordance with Rule 4.29 of the Hong Kong Listing Rules is set out below to provide prospective investors with further information about how the Global Offering might have affected (a) the forecast earnings per Share for the six months ending June 30, 2006 as if the Global Offering had taken place on January 1, 2006, and (b) the adjusted net tangible assets of our Company as at December 31, 2005 as if the Global Offering had taken place on December 31, 2005, in both cases assuming the Over-allotment Option is not exercised.
Although reasonable care has been exercised in preparing the said information, prospective investors who read the information below should bear in mind that these figures are inherently subject to adjustments and may not give a complete picture of the actual results and earnings per Share of our Company and our financial position as at December 31, 2005 or at any future date.
The unaudited pro forma financial information should be read in conjunction with the section headed ‘‘Financial Information’’ and the Accountants’ Report of our Company set out in ‘‘Appendix I — Accountants’ Report.’’
A. FORECAST FOR THE SIX MONTHS ENDING JUNE 30, 2006
Forecast profit attributable to shareholders of the Company for the six months ending June 30, 2006(1) ...... notlessthanRMB0
Unaudited pro forma fully diluted forecast earnings per Share(2) ...... notlessthanRMB0
Notes:
(1) The bases and assumptions on which the forecast profit attributable to shareholders of our Company for the six months ending June 30, 2006 has been prepared are set out in ‘‘Appendix III — Forecast.’’ We have undertaken to the Stock Exchange that our interim financial report for the six months ending June 30, 2006 will be audited pursuant to Rule 11.18 of the Hong Kong Listing Rules.
(2) The calculation of the forecast earnings per Share on a pro forma fully diluted basis is based on the forecast profit attributable to shareholders of our Company for the six months ending June 30, 2006 assuming that we had been listed since January 1, 2006 and a total of 1,478,773,000 Shares were issued during the entire six-month period. This calculation assumes that the Over-allotment Option will not have been exercised and the H Shares issued pursuant to the Global Offering were issued on January 1, 2006.
II-1 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
B. UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE ASSETS
The following is an illustrative statement of unaudited pro forma adjusted net tangible assets of our Company which has been prepared for the purpose of illustrating the effect of the Global Offering as if it had been taken place on December 31, 2005 (without any exercise of the Over- allotment Option) and based on our audited net assets as at December 31, 2005 as shown in the Accountants’ Report, the text of which is set out in ‘‘Appendix I — Accountants’ Report,’’ and is adjusted as follows:
Audited net assets of the Estimated net Unaudited pro Company as at proceeds from forma adjusted Unaudited pro forma December 31, the Global net tangible adjusted net tangible 2005(1) Offering(2) assets assets per Share(3) RMB’000,000 RMB’000,000 RMB’000,000 RMB HK$
BasedonanOfferPriceof HK$1.36 per share . . . 1,180 449 1,629 1.10 1.06
BasedonanOfferPriceof HK$1.85 per share . . . 1,180 628 1,808 1.22 1.18
This statement has been prepared for illustrative purpose only and because of its nature, it may not give a true picture of financial position of our Company following the Global Offering.
(1) With reference to the valuation of our property interests as set out in ‘‘Appendix IV — Property Valuation,’’ the aggregate revalued amount of our property interests is approximately RMB276,000,000 (equivalent to approximately HK$265,308,000). The audited net book value of these properties as at December 31, 2005 was approximately RMB80,882,000 (equivalent to approximately HK$77,749,000). Thus, the revaluation surplus, net of provision for deferred taxation on revaluation surplus, is approximately RMB190,240,000 (equivalent to approximately HK$182,870,000), which has not been included in the above adjusted net tangible assets of our Company. Such a revaluation surplus will not be recorded in our financial statements as we account for our property interests at cost. If such revaluation surplus was included in our financial statements for the year ended December 31, 2005, additional depreciation charges of approximately RMB8,465,000 (equivalent to approximately HK$8,137,000) per annum would be incurred.
(2) The estimated net proceeds accruing to our Company from the Global Offering (assuming the Over-allotment Option is not exercised) are based on the Offer Price of the lower and upper limits of the range of the Offer Price stated in the prospectus of between HK$1.36 and HK$1.85 per Share, after deduction of the underwriting fees and other related expenses payable by us.
(3) The unaudited pro forma adjusted net tangible asset value per Share is arrived at after the adjustments referred to in the preceding paragraph and on the basis that 1,478,773,000 Shares are in issue.
II-2 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
C. COMFORT LETTER ON UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following is the text of a report, prepared for the purpose of incorporation in this prospectus, received from the independent reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong, in respect of the unaudited pro forma financial information.
18th Floor Two International Finance Centre 8FinanceStreet Central Hong Kong
March 27, 2006
The Directors Advanced Semiconductor Manufacturing Corporation Limited Goldman Sachs (Asia) L.L.C. BOCI Asia Limited
Dear Sirs,
We report on the unaudited pro forma fully diluted forecast earnings per Share and unaudited pro forma adjusted net tangible assets (the ‘‘Unaudited Pro Forma Financial Information’’) set out in sections (A) and (B) of Appendix II to the prospectus dated March 27, 2006 in connection with the placing and public offer of the shares of Advanced Semiconductor Manufacturing Corporation Limited (the ‘‘Company’’), which has been prepared, for illustrative purposes only, to provide information about how the placing and public offer of the Company’s shares might have affected the relevant financial information presented.
RESPONSIBILITIES
The Directors are solely responsible for the preparation of the Unaudited Pro Forma Financial Information in accordance with Rule 4.29(1) of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the ‘‘Hong Kong Listing Rules’’).
It is our responsibility to form an opinion, as required by the Hong Kong Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion solely to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.
BASIS OF OPINION
We conducted our work in accordance with the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 ‘‘Reporting on pro forma financial information pursuant to the Listing Rules’’ issued by the Auditing Practice Board in the United Kingdom, where applicable. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the Directors.
II-3 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
Our work does not constitute an audit or review in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants and accordingly, we do not express any such assurance on the Unaudited Pro Forma Financial Information.
The Unaudited Pro Forma Financial Information has been prepared in accordance with the basis set out in sections (A) and (B) of Appendix II to the prospectus of the Company for illustrative purpose only and because of its nature, it is not indicative of the results and forecast earnings per share of the Company and of the financial position of the Company as at December 31, 2005 or any future date.
OPINION
In our opinion:
(a) the Unaudited Pro Forma Financial Information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Company; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to Rule 4.29(1) of the Hong Kong Listing Rules.
Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong
II-4 APPENDIX III FORECAST
The forecast profit attributable to shareholders of our Company for the six months ending June 30, 2006 is set out in the paragraph headed ‘‘Forecast For the Six Months Ending June 30, 2006’’ in the section headed ‘‘Financial Information.’’
BASES AND ASSUMPTIONS
Our Directors have prepared the forecast profit attributable to shareholders of our Company for the six months ending June 30, 2006 on the basis of our unaudited management accounts for the one month ended January 31, 2006 and a forecast of our results for the remaining five months ending June 30, 2006. We have undertaken to the Stock Exchange that our interim financial report for the six months ending June 30, 2006 will be audited pursuant to Rule 11.18 of the Hong Kong Listing Rules. The forecast has been prepared on a basis consistent in all material respects with the accounting policies normally adopted by us as summarized in ‘‘Appendix I — Accountants’ Report’’ and on the following principal assumptions.
(a) there will be no material changes in existing government policies or political, legal (including changes in legislation or regulations or rules), fiscal, market or economic conditions in any of the countries, regions or industries in which we operate, where our customers carry out business, to where we export our products or from which we import our raw materials;
(b) there will be no significant fluctuations in currency exchange rates, interest rates and tariffs and duties in the respective countries in which we operate;
(c) there will be no material changes in the bases or rates of taxation applicable to us in the respective jurisdictions in which we operate;
(d) we will not be materially and adversely affected by any of the risk factors set out in the section headed ‘‘Risk Factors;’’ and
(e) our operation and business will not be severely interrupted by any force majeure events or unforeseeable factors or any unforeseeable reasons that are beyond the control of our Directors, including but not limited to the occurrence of natural disasters or catastrophes (such as floods and typhoons), epidemics or serious accidents.
III-1 APPENDIX III FORECAST
LETTER FROM THE REPORTING ACCOUNTANTS
The following is the text of a letter, prepared for inclusion in this prospectus, received by our Directors from Ernst & Young, Certified Public Accountants, Hong Kong, in connection with the forecast of our profit attributable to the shareholders of our Company for the six months ending June 30, 2006.
18th Floor Two International Finance Centre 8FinanceStreet Central Hong Kong
March 27, 2006
The Directors Advanced Semiconductor Manufacturing Corporation Limited Goldman Sachs (Asia) L.L.C. BOCI Asia Limited
Dear Sirs,
We have reviewed the accounting policies and calculations adopted in arriving at the forecast profit attributable to shareholders of Advanced Semiconductor Manufacturing Corporation Limited (the ‘‘Company’’) for the six months ending June 30, 2006 (the ‘‘Profit Forecast’’), for which the Directors are solely responsible, as set out in the paragraph headed ‘‘Forecast for the Six Months Ending June 30, 2006’’ in the section headed ‘‘Financial Information’’ in the prospectus of the Company dated March 27, 2006 (the ‘‘Prospectus’’). The Profit Forecast has been prepared by the Directors based on the unaudited management accounts of the Company for the one month ended January 31, 2006 and a forecast of the results for the remaining five months ending June 30, 2006.
In our opinion, the Profit Forecast, so far as the accounting policies and calculations are concerned, has been properly compiled in accordance with the bases and assumptions adopted by the Directors as set out in Appendix III to the Prospectus, and is presented on a basis consistent in all material respects with the accounting policies adopted by the Company as set out in our Accountants’ Report dated March 27, 2006, the text of which is set out in Appendix I to the Prospectus.
Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong
III-2 APPENDIX III FORECAST
LETTER FROM THE JOINT SPONSORS
The following is the text of a letter, prepared for inclusion in this prospectus, received by the Directors from the Joint Sponsors in connection with the forecast of our profit attributable to shareholders of our Company for the six months ending June 30, 2006.
March 27, 2006
The Board of Directors Advanced Semiconductor Manufacturing Corporation Limited
Dear Sirs,
We refer to the forecast of the profit attributable to shareholders of the Company of Advanced Semiconductor Manufacturing Corporation Limited (the ‘‘Company’’) for the six months ending June 30, 2006 (the ‘‘Forecast’’), as set out in the prospectus issued by the Company dated March 27, 2006.
The Forecast, for which the Directors of the Company are solely responsible, has been prepared by them based on the unaudited management accounts of the Company for the one month ended January 31, 2006 and a forecast of the results of the Company for the remaining five months ending June 30, 2006.
We have discussed with you the basis upon which the Forecast has been made. We have also considered the letter dated March 27, 2006 addressed to yourselves and ourselves from Ernst & Young, Certified Public Accountants, Hong Kong, regarding the accounting policies and calculations upon which the Forecast has been made.
On the basis of the information comprising the Forecast and on the basis of the accounting policies and calculations adopted by you and reviewed by Ernst & Young, Certified Public Accountants, Hong Kong, we are of the opinion that the Forecast, for which you as the Directors of the Company are solely responsible, has been made after due and careful enquiry.
Yours faithfully For and on behalf of
Goldman Sachs (Asia) L.L.C. BOCI Asia Limited Chia-lin Chang Daniel Ng Executive Director Executive Director Head of Corporate Finance
III-3 APPENDIX IV PROPERTY VALUATION
The following is the text of a letter and valuation certificate, prepared for the purposes of incorporation of this prospectus, received from Sallmanns (Far East) Limited, an independent valuer, in connection with its valuation as at February 28, 2006 of the property interest of the Company.
March 27, 2006
The Board of Directors Advanced Semiconductor Manufacturing Corporation Limited No. 385 Hongcao Road Shanghai The PRC
Dear Sirs,
In accordance with your instructions to value the property in which Advanced Semiconductor Manufacturing Corporation Limited (hereinafter referred to as the ‘‘Company’’) has interest in the People’s Republic of China (the ‘‘PRC’’), we confirm that we have carried out inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the capital value of the property interest as at February 28, 2006 (the ‘‘date of valuation’’).
Our valuations of the property interest represents the market value which we would define as intended to mean the ‘‘estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.’’
Where, due to the nature of the buildings and structures of the property in the PRC, there are no market sales comparables readily available, the property interest has been valued on the basis of its depreciated replacement cost.
Depreciated replacement cost is defined as ‘‘the current cost of replacement (reproduction) of a property less deductions for physical deterioration and all relevant forms of obsolescence and optimization.’’ It is based on an estimate of the Market Value for the existing use of the land, plus the current cost of replacement (reproduction) of the improvements less deductions for physical deterioration and all relevant forms of obsolescence and optimization. The depreciated replacement costs of the property interests are subject to adequate potential profitability of the concerned business.
Our valuation has been made on the assumption that the seller sells the property interest in the open market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement, which could serve to affect the value of the property interest.
IV-1 APPENDIX IV PROPERTY VALUATION
No allowance has been made in our report for any charges, mortgages or amounts owing on any of the property interest valued nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property interest is free from encumbrances, restrictions and outgoings of an onerous nature, which could affect its value.
In valuing the property interest, we have complied with all the requirements contained in Chapter 5 and Practice Note 12 to the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited; the RICS Appraisal and Valuation Standards (5th Edition May 2003) published by the Royal Institution of Chartered Surveyors; and the HKIS Valuation Standards on Properties (1st Edition January 2005) published by the Hong Kong Institute of Surveyors.
We have relied to a very considerable extent on the information given by the Company and have accepted advice given to us on such matters as tenure, planning approvals, statutory notices, easements, particulars of occupancy, letting, and all other relevant matters.
We have been shown copies of various documents and official plans relating to the property interest and have made relevant enquiries where possible. Due to the nature of the land registration system in the PRC, we have not examined the original documents to verify the existing title to the property interest in the PRC or any material encumbrances that might be attached to the property interest or any lease amendments. We have relied on the advice given by the Company’s PRC legal advisor — Jingtian & Gongcheng, concerning the validity of the Company’s titles to the property interest.
We have not carried out detailed site measurements to verify the correctness of the site area in respect of the property but have assumed that the site area shown on the documents and official site plans handed to us are correct. Based on our experience of valuation of similar property interest in the PRC, we consider the assumptions so made to be reasonable. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations. No on-site measurement has been taken.
We have inspected the exterior and, where possible, the interior of the property. However, no structural survey has been made, but in the course of our inspection, we did not note any serious defects. We are not, however, able to report whether the property interest is free of rot, infestation or any other structural defects. No tests were carried out on any of the services.
We have had no reason to doubt the truth and accuracy of the information provided to us by the Company. We have also sought confirmation from the Company that no material factors have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view, and we have no reason to suspect that any material information has been withheld.
IV-2 APPENDIX IV PROPERTY VALUATION
Unless otherwise stated, all monetary figures stated in this report are in Renminbi (RMB).
Our valuation certificate is attached.
Yours faithfully, for and on behalf of Sallmanns (Far East) Limited Paul L. Brown B.Sc. FRICS FHKIS Director
Note: Paul L. Brown is a Chartered Surveyor who has 23 years’ experience in the valuation of properties in the PRC and 26 years of property valuation experience in Hong Kong, the United Kingdom and the Asia-Pacific region.
IV-3 APPENDIX IV PROPERTY VALUATION
VALUATION CERTIFICATE PROPERTY INTEREST HELD AND OCCUPIED BY THE GROUP IN THE PRC
Capital value in Particulars of existing state as at Property Description and tenure occupancy February 28, 2006 RMB
A parcel of land, The property comprises a parcel of land with a The property is 276,000,000 various buildings and site area of approximately 39,010 sq.m. currently occupied by structures located at the Company for No. 385 Hongcao Road, The property also comprises9buildingsand production, ancillary Shanghai, the PRC various ancillary structures which were office and ancillary completed in various stages between 1992 and facilities purposes. 2003.
The 9 buildings have a total gross floor area of approximately 40,041.77 sq.m. The details of these buildings are tabulated as follows:
No. of Gross Floor No. Property Storey Area (sq.m.)
1. 5"6" Wafer Fab 2 9,969 2. Composite Building 5 4,560 3. Sewage Treatment 144 Station 4. Sewage Treatment 2203 Station 5. Guard House 1 30 6. Guard House 2 224 7. Substation 2 356 8. Power Station 1 203 9. 8" Wafer Fab 5 24,452.77
Total 40,041.77
The property also comprises a 6-storey (including 1 storey of basement) central utilities building which is substantially completed. The gross floor area of the central utilities building is approximately 11,402 sq.m. The building is under application for Construction Completion Registration.
The property also comprises a building which is currently under construction (‘‘north wing extension’’) with a planned gross floor area of approximately 9,962 sq.m. and is scheduled to be completed in March 2006.
Thelanduserightsofthepropertyweregranted to Advanced Semiconductor Manufacturing Corporation Limited for a term of 50 years expiring on August 9, 2054 for industrial uses.
IV-4 APPENDIX IV PROPERTY VALUATION
Notes:
1. Pursuant to an agreement, namely (the ‘‘agreement for land development cost payment’’) dated July 30, 2004 entered into between a company, namely (Shanghai Hi-Tech Park United Development Co., Ltd.) (the ‘‘developer’’) and (Advanced Semiconductor Manufacturing Corporation Limited), the Company agreed to pay the developer land development cost for the subject site with an area of approximately 39,010 sq.m. The developer also agreed to assist the Company to obtain the Shanghai Certificate of Real Estate Ownership ( )forthe subject land. The Company agreed to pay the land development cost to the developer by instalments. The last instalment should be paid before 31 December 2006 under the agreement.
2. Pursuant to a land use rights grant contract, namely dated August 9, 2004 entered into between (Shanghai Housing and Land Resources Administration Bureau) and (Advanced Semiconductor Manufacturing Corporation Limited), the land use rights of the land with an area of approximately 39,010 sq.m. were granted to the Company by the Shanghai Housing and Land Resources Administration Bureau for a term of 50 years for industrial uses. The permitted developable gross floor area of the subject site is approximately 78,020 sq.m. and the equivalent plot ratio is 2. As advised by the Company, the land premium has been fully settled by the Company.
3. Pursuant to the Shanghai Certificate of Real Estate Ownership ( ) — Hu Fang Di Xu Zi (2004) Di No. 029325 issued by the Shanghai Housing and Land Resources Administration Bureau ( ), the building ownership rights of 12 buildings with a total gross floor area of approximately 41,976.77 sq.m. erected on a land with a site area of approximately 39,010 sq.m. are held by Advanced Semiconductor Manufacturing Corporation Limited. The land use rights of the subject land were granted to Advanced Semiconductor Manufacturing Corporation Limited for a term of 50 years commencing from August 9, 2004 and expiring on August 9, 2054 for industrial uses. As per Company’s confirmation, 2 warehouses and a workshop with an aggregate gross floor area of approximately 1,935 sq.m. have been demolished in July 2004 and December 2004, respectively.
4. A 6-storey (including 1 storey of basement) central utilities building with a gross floor area of approximately 11,402 sq.m. is substantially completed. As informed by the Company, as at the date of valuation, the estimated construction cost paid in this building is approximately RMB22,724,872, and the total estimated cost is approximately RMB26,715,372.
5. The north wing extension which is currently under construction has a planned gross floor area of approximately 9,962 sq.m. As informed by the Company, as at the date of valuation, the north wing extension is approximately 70% completed and the estimated construction cost paid in this building is approximately RMB16,890,746, and the total estimated cost is approximately RMB23,593,511. The construction work of the south wing extension has not yet been commenced.
6. Pursuant to 2 Construction Works Commencement Permits — Nos. 0201XH0283D03 and 0201XH0283D04 dated August 4, 2004 and October 26, 2004 respectively, the construction of central utilities building with a gross floor area of approximately 11,402 sq.m. was permitted by the Construction Industry Administration Office of Shanghai.
7. Pursuant to a Construction Planning Permit — Hu Jian Gui No. (2004) 0280 dated September 28, 2004, the construction planning of the central utilities building was permitted by the Town Planning Administration Bureau of Shanghai.
8. Pursuant to a Construction Works Commencement Permit — No. 0201XH0283D07 dated May 27, 2005, the construction of the north wing extension with a planned gross floor area of approximately 9,962 sq.m. was permitted by the Construction Industry Administrative Bureau of Shanghai.
9. Pursuant to a Construction Planning Permit — Hu Jian Gui No. 200500050429F00610 dated April 28, 2005, the construction planning of the south wing and north wing extensions was permitted by the Town Planning Administrative Bureau of Shanghai.
IV-5 APPENDIX IV PROPERTY VALUATION
10. Pursuant to a mortgage agreement dated March 31, 2005 entered into between the Company (‘‘mortgagor’’) and the Shanghai Branch of Bank of Communications (‘‘mortgagee’’), the land and 9 buildings mentioned in note 3 are subject to a mortgage in favour of the mortgagee at a consideration of RMB190,561,545.
11. Pursuant to a Certificate of Registration of Real Estate of Shanghai Municipality No. Xu 200504016560, the mortgage with an amount of RMB190,561,545 mentioned in note 10 has been registered on April 7, 2005.
12. We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser, which contains, inter alia, the following:
i. The land use rights of the property are legally owned by the Company and can be freely occupied, transferred, leased and mortgaged by the Company.
ii. Thebuildingownershiprightsof9buildingsasmentionedinnote3arelegallyownedbytheCompany and can be freely occupied, transferred, leased and mortgaged by the Company.
iii. The new Central Utilities Building is a permanent building and the relevant planning approval and commencement permit for construction have been obtained. Real Estate Title Certificate for the new Central Utilities Building shall be obtained in accordance with the relevant laws upon its completion.
iv. Relevant planning approval of the south wing and north wing extensions and commencement permit for construction of the north wing extension have been obtained.
IV-6 APPENDIX V TAXATION AND FOREIGN EXCHANGE
TAXATION OF SECURITY HOLDERS
The following is a summary of certain PRC and Hong Kong tax consequences of the ownership of H Shares by an investor that purchases such H Shares in connection with the Global Offering and holds the H Shares as capital assets. This summary does not purport to address all material tax consequences of the ownership of H Shares, and does not take into account the specific circumstances of any particular investors, some of which may be subject to special rules. This summary is based on the tax laws of the PRC and the tax laws of Hong Kong, as in effect on the date hereof, as well as on the Agreement Between the United States of America and the People’s Republic of China for the Avoidance of Double Taxation (the ‘‘PRC-US Treaty’’), all of which are subject to change (or changes in interpretation), possibly with retroactive effect.
For purposes of this discussion, an ‘‘Eligible US Holder’’ is a holder that (i) is a resident of the United States for purposes of the PRC-US Treaty, (ii) does not maintain a permanent establishment (within the meaning of the PRC-US Treaty) in the PRC to which income and gain derived in connection with the H Shares are attributable and (iii) who is not otherwise ineligible for benefits under the PRC-US Treaty with respect to income and gain derived in connection with the H Shares.
The discussion does not address any aspects of Hong Kong or PRC taxation other than income taxation, taxation of capital gains, stamp taxation and estate taxation. Prospective investors are urged to consult their tax advisors regarding the PRC, Hong Kong and other tax consequences of owning and disposing of H Shares.
Taxation of Dividends
PRC Taxation
Individual Investors
According to the Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System (the ‘‘Provisional Regulations’’) and the Individual Income Tax Law of the PRC, as amended on October 31, 1993, August 30, 1999 and October 27, 2005, respectively and effective thereon, dividends paid by PRC companies are ordinarily subject to a PRC withholding tax levied at a flat rate of 20%. For a foreign individual who is not a resident of the PRC, the receipt of dividends from a company in the PRC is normally subject to a withholding tax of 20% unless reduced by an applicable tax treaty. However, the PRC State Administration of Taxation (the ‘‘SAT,’’ the PRC central government tax authority which succeeded the State Tax Bureau) issued, on July 21, 1993, a Notice of the PRC State Administration of Taxation Concerning the Taxation of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign Invested Enterprises, Foreign Enterprises and Foreign Individuals (‘‘Tax Notice’’) which states that dividends paid by a PRC company to foreign individuals with respect to shares listed on an overseas stock exchange (‘‘Overseas Shares’’), such as H Shares, are not subject to PRC withholding tax.
The Amendments to the Individual Income Tax Law of the PRC (the ‘‘Amendments’’) were promulgated on October 31, 1993 and became effective on January 1, 1994. The Amendments state that they shall supersede the provisions of any contradictory prior administrative regulations concerning individual income tax. Pursuant to the requirements of the Amendments, foreign individuals are subject to withholding tax on dividends paid by a PRC company at a rate of 20% unless specifically exempted by the tax authority of the State Council. However, in a letter dated July 26, 1994 to the State Restructuring Commission, the Securities Commission and CSRC, the SAT reiterated the temporary tax exemption stated in the Tax Notice for dividends received from a
V-1 APPENDIX V TAXATION AND FOREIGN EXCHANGE
PRC company listed overseas. In the event that this letter is withdrawn, a 20% tax may be withheld on dividends in accordance with the Joint Stock Company Provisional Regulations, the Amendments and the Individual Income Tax Law. Such withholding tax may be reduced pursuant to an applicable double taxation treaty. To date, the relevant tax authority has not collected withholding tax on dividend payments on Overseas Shares.
Enterprises
According to the Income Tax Law of the PRC Concerning Foreign Invested Enterprises and Foreign Enterprises, dividends paid by PRC companies to foreign enterprises are ordinarily subject to a PRC withholding tax levied at a flat rate of 20%. However, according to the Tax Notice, a foreign enterprise with no permanent establishment in the PRC receiving dividends paid with respect to a PRC company’s Overseas Shares will temporarily not be subject to the 20% withholding tax. If such withholding tax becomes applicable in the future, the rate could be reduced pursuant to an applicable double taxation treaty.
Hong Kong Taxation
No tax will be payable in Hong Kong in respect of dividends paid by our Company.
Taxation of Capital Gains
PRC Taxation
The Tax Notice provides that gains realized by foreign enterprises with no permanent establishment in the PRC that are holders of H Shares would, temporarily, not be subject to capital gains taxes. As to individual holders of H Shares, the Provisions for Implementation of Individual Income Tax Law of the PRC (the ‘‘Provisions’’), issued on January 28, 1994 and as amended on December 19, 2005 stipulated that gains realized on the sale of equity shares would be subject to individual income tax at a rate of 20% on the gains and empowered the Ministry of Finance to draft detailed tax rules on the mechanism for collecting such tax, which should be subject to the approval of the State Council. However, no income tax on gains realized on sale of equity shares has been collected. Gains on the sale of shares by individuals were temporarily exempted from individual income tax pursuant to notices issued by the State Administration of Taxation dated June 20, 1994, February 9, 1996 and March 30, 1998, respectively. In the event such temporary exemption is withdrawn or ceases to be effective, individual holders of H Shares may be subject to capital gains tax at the rate of 20% unless such tax is reduced or eliminated by an applicable double taxation treaty.
On November 18, 2000, the State Council issued a notice entitled ‘‘State Council Notice on the Income Tax Reduction for Interest and Other Income that Foreign Enterprises Derive in the PRC,’’ (the ‘‘Tax Reduction Notice’’). Under the Tax Reduction Notice, beginning January 1, 2001, enterprise income tax at a reduced 10% rate will apply to interest, rental, license fees and other income obtained in the PRC by foreign enterprises without agencies or establishment in the PRC, or by foreign enterprises without any substantive relationship with their agencies or establishments in the PRC. Therefore, if the exemption provided in the Tax Notice does not apply or is not renewed, and Tax Reduction Notice is found not to apply, a foreign enterprise shareholder may be subject to a 20% tax on capital gains, unless reduced by an applicable double taxation treaty.
V-2 APPENDIX V TAXATION AND FOREIGN EXCHANGE
Hong Kong Taxation
No tax is imposed in Hong Kong in respect of capital gains from the sale of property (such as the H Shares). Trading gains from the sale of property by persons carrying on a business in Hong Kong, where such gains are derived from or arise in Hong Kong from such business, will be chargeable to Hong Kong profits tax which is currently imposed at the rate of 17.5% on corporations and at a maximum rate of 16% on individuals. Gains from sales of the H Shares effected on the Stock Exchange will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect of trading gains from sales of H Shares realized by persons carrying on a business of trading or dealing in securities in Hong Kong. There is no tax treaty in effect between the US and Hong Kong and the PRC-US Treaty does not apply to Hong Kong.
Effect of Tax Treaties on the Taxation of Dividends and Capital Gains by the PRC
Investors, who do not reside in the PRC and reside in countries which have entered into double-taxation treaties with the PRC, may be entitled to a reduction of the withholding tax imposed on the payment of dividends to investors of our Company who do not reside in the PRC. The PRC currently has double-taxation treaties with a number of other countries, which include Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.
Under the PRC-US Treaty the PRC may tax a dividend paid by our Company to an Eligible US Holder up to a maximum of 10% of the gross amount of such dividend.
Additional PRC Tax Considerations
PRC Stamp Tax
PRC stamp tax imposed on the transfer of shares of PRC publicly-traded companies under the Joint Stock Company Provisional Regulations should not apply to the acquisition and disposal by non-PRC investors of H Shares outside of the PRC by virtue of the Joint Stock Company Provisional Regulations of the PRC Concerning Stamp Tax which became effective on October 1, 1988 and which provide that PRC stamp tax is imposed only on documents executed or received within the PRC which are legally binding in the PRC and are protected under the PRC law.
Estate Tax
No liability for estate tax under PRC law will arise from non-PRC nationals holding H Shares.
Additional Hong Kong Tax Consideration
Stamp Duty
Hong Kong stamp duty will be payable by the purchaser on every purchase, and by the seller on every sale, of H Shares. The duty is charged to each of the buyer and the seller at the ad valorem rate of HK$1.00 per HK$1,000 or part thereof of the consideration for, or (if greater) the value of, the H Shares transferred (i.e., a total of HK$2.00 per HK$1,000 or part thereof is currently payable on a typical sale and purchase transaction of H Shares). In addition, a fixed duty of HK$5 is currently payable on an instrument of transfer of H Shares. Where one of the parties is resident outside of Hong Kong and does not pay the ad valorem duty due by it, the duty not paid will be assessed on the instrument of transfer (if any) and will be payable by the transferee.
V-3 APPENDIX V TAXATION AND FOREIGN EXCHANGE
Estate Duty
The Revenue (Abolition of Estate Duty) Ordinance 2005 came into effect on February 11, 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holders of H Shares whose death occur on or after February 11, 2006.
TAXATION OF OUR COMPANY BY THE PRC
Income Tax
From July 1, 1991, income tax payable by foreign invested enterprises established in the PRC is governed by the Income Tax Law of the PRC for Foreign Invested Enterprises and Foreign Enterprises which took effect as from July 1, 1991, and which provides for an income tax rate of 33% unless a lower rate is provided by law, administrative regulations or State Council regulations. Our Company is generally subject to tax at a rate of 15% pursuant to the Income Tax Law of the PRC for Foreign Invested Enterprises and Foreign Enterprises. After approval by the relevant Shanghai taxation authority, we became entitled to a full exemption from FEIT in our first and second profitable years (after offsetting accumulated tax losses, which can carried forward for utilization for a maximum period of five years) and a 50% reduction (the application income tax being 7.5%) in our fifth to tenth profitable years. For additional information on our income tax treatment, see the section headed ‘‘Regulations — Encouragement of Foreign Investment in IC Production Enterprises’’ in the body of this prospectus.
Value-added Tax
Pursuant to the Provisional Regulations of the PRC Concerning Value Added Tax effective from January 1, 1994 and their implementing rules, all units or individuals who are engaged in the sale of goods, the provision of proceeding, repairs and replacement services, and the importation of goods within the territory of the PRC are required to pay value-added tax (‘‘VAT’’). VAT payable is calculated as ‘‘output VAT’’ minus ‘‘input VAT.’’ Input VAT payable by our Company on purchases is recoverable out of the output VAT collected from its customers, and any excess of output VAT over input VAT paid is payable to the tax authority. The rate of VAT is 17%, or, in certain limited circumstances, 13%, depending on the product type. For additional information on our VAT tax treatment, see the section headed ‘‘Regulations — Encouragement of Foreign Investment in IC Production Enterprises’’ in the body of this prospectus.
Business Tax
Pursuant to the Provisional Regulations of the PRC Concerning Business Tax effective from January 1, 1994 and the implementing rules, business tax is imposed on enterprises which provide taxable services, transfer intangible property or sell real estate in the PRC. The business tax is levied at a rate of between 3% to 5% on the provision of taxable services, transfer of intangible property or sale of real estate in the PRC.
TAXATION OF OUR COMPANY BY HONG KONG
Our Directors do not consider that any of our income is derived from or arises in Hong Kong for the purpose of Hong Kong taxation. We will therefore not be subject to Hong Kong taxation.
V-4 APPENDIX V TAXATION AND FOREIGN EXCHANGE
FOREIGN EXCHANGE
The lawful currency of the PRC is Renminbi, which is subject to foreign exchange controls and is not freely convertible into foreign exchange at this time. The SAFE, under the authority of the People’s Bank of China, is empowered with the functions of administering all matters relating to foreign exchange, including the enforcement of foreign exchange control regulations.
Prior to December 31, 1993, a quota system was used for the management of foreign currency. Any enterprise requiring foreign currency was required to obtain a quota from the local SAFE office before it could convert Renminbi into foreign currency through the People’s Bank of China or other designated banks. Such conversion had to be effected at the official rate prescribed by the SAFE on a daily basis. Renminbi could also be converted into foreign currency at swap centers. The exchange rates used by swap centers were largely determined by the demand for, and supply of, foreign currencies and the Renminbi requirements of enterprises in the PRC. Any enterprise that wished to buy or sell foreign currency at a swap center first had to obtain the approval of the SAFE.
On December 28, 1993, the People’s Bank of China, under the authority of the State Council, promulgated the Notice of the People’s Bank of China Concerning Further Reform of the Foreign Currency Control System (the ‘‘Notice’’), effective from January 1, 1994. The Notice announces the abolition of the system of foreign exchange quotas, the implementation of conditional convertibility of Renminbi in current account items, the establishment of the system of settlement and payment of foreign exchange by banks, and the unification of the official Renminbi exchange rate and the market rate for Renminbi established at swap centers. On March 26, 1994, the People’s Bank of China promulgated the Provisional Regulations for the Administration of Settlement, Sale and Payment of Foreign Exchange, which set out detailed provisions regulating the sale and purchase of foreign exchange by enterprises, economic organizations and social organizations in the PRC.
On January 29, 1996, the State Council promulgated new Regulations of the People’s Republic of China for the Control of Foreign Exchange (‘‘Control of Foreign Exchange Regulations’’) which was effective from April 1, 1996. The Control of Foreign Exchange Regulations classify all international payments and transfers into current account items and capital account items. Current account items are no longer subject to SAFE approval while capital account items still are. The Control of Foreign Exchange Regulations were subsequently amended on January 14, 1997. This latest amendment affirmatively states that the State shall not restrict international current account payments and transfers.
On June 20, 1996, the People’s Bank of China promulgated the ‘‘Regulations for Administration of Settlement, Sale and Payment of Foreign Exchange’’ (the ‘‘Settlement Regulations’’) which entered into effect on July 1, 1996. The Settlement Regulations supersede the Provisional Regulations for the Administration of Settlement, Sale and Payment of Foreign Exchange and abolish the remaining restrictions on convertibility of foreign exchange in respect of current account items while retaining the existing restrictions on foreign exchange transactions in respect of capital account items. On the basis of the Settlement Regulations, the People’s Bank of China also published the Announcement on the Implementation of Foreign Exchange Settlement and Sale at Banks by Foreign invested Enterprises’’ (the ‘‘Announcement’’). The Announcement permits foreign invested enterprises to open, on the basis of their needs, foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments at designated foreign exchange banks.
V-5 APPENDIX V TAXATION AND FOREIGN EXCHANGE
On October 25, 1998, the People’s Bank of China and the SAFE promulgated the Notice Concerning the Discontinuance of Foreign Exchange Swapping Business pursuant to which and with effect from December 1, 1998, all foreign exchange swapping business in the PRC for foreign invested enterprises shall be discontinued, while the trading of foreign exchange by foreign invested enterprises shall come under the banking system for the settlement and sale of foreign exchange.
On January 1, 1994, the former dual exchange rate system for Renminbi has been abolished and replaced by a managed floating exchange rate system, which is determined by demand and supply. The People’s Bank of China sets and publishes daily the Renminbi-US dollar base exchange rate. This exchange rate is determined with reference to the transaction price for Renminbi-US dollar in the inter-bank foreign exchange market on the previous day. The People’s Bank of China will also, with reference to exchange rates in the international foreign exchange market, announce the exchange rates of Renminbi against other major currencies. In foreign exchange transactions, designated foreign exchange banks may, within a specified range, freely determine the applicable exchange rate in accordance with the exchange rate announced by the People’s Bank of China.
Save for foreign invested enterprises or other enterprises which are specially exempted by relevant regulations, all entities in China must sell their foreign exchange income to designated foreign exchange banks. Foreign exchange income from loans issued by organizations outside the territory or from the issuance of bonds and shares (for example foreign exchange income received by our Company from the sale of shares overseas) is not required to be sold to designated foreign exchange banks, but may be deposited in foreign exchange accounts at the designated foreign exchange banks.
Chinese enterprises (including foreign invested enterprises) which require foreign exchange for transactions relating to current account items, may, without the approval of the SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks, on the strength of valid receipts and proof. Foreign invested enterprises which need foreign exchange for the distribution of profits to their shareholders, and Chinese enterprises which in accordance with regulations are required to pay dividends to shareholders in foreign exchange (like us), may on the strength of board resolutions on the distribution of profits, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks.
Convertibility of foreign exchange in respect of capital account items, like direct investment and capital contribution, is still subject to restriction, and prior approval from the SAFE and the relevant branch must be sought.
Dividends to holders of H Shares are fixed in Renminbi but must be paid in foreign currencies.
V-6 APPENDIX VI SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
This Appendix contains a summary of PRC company and securities laws and regulations, certain material differences between the PRC Company Law and Hong Kong Companies Ordinance and additional regulatory provisions introduced by the Stock Exchange in relation to PRC joint stock limited companies. The principal objective is to provide potential investors with an overview of the principal legal and regulatory provisions applicable to our Company. As the information contained below is in summary form, it does not contain all the information that may be important to potential investors.
PRC LEGAL SYSTEM
The PRC legal system is based on the PRC Constitution and is made up of written laws, regulations, directives and local laws, laws of Special Administrative Regions and laws resulting from international treaties entered into by the PRC government. Court case verdicts do not constitute binding precedents. However, they are used for the purpose of judicial guidance.
The National People’s Congress of the PRC (‘‘NPC’’) and the Standing Committee of the NPC are empowered by the PRC Constitution to exercise the legislative power of the State. The NPC has the power to amend the PRC Constitution and enact and amend basic laws governing State agencies and civil and criminal matters. The Standing Committee of the NPC is empowered to interpret, enact and amend all laws except for the laws that are required to be interpreted, enacted and amended by the NPC.
The State Council is the highest organ of the State administration and has the power to enact administrative rules and regulations. The ministries and commissions under the State Council are also vested with the power to issue orders, directives and regulations within the jurisdiction of their respective departments. All administrative rules, regulations, directives and orders promulgated by the State Council and its ministries and commissions must be consistent with the PRC Constitution and the national laws enacted by the NPC. In the event that a conflict arises, the Standing Committee of the NPC has the power to annul administrative rules, regulations, directives and orders.
At the regional level, the provincial and municipal congresses and their respective standing committees may enact local rules and regulations and the PRC government may promulgate administrative rules and directives applicable to their own administrative areas. These local laws and regulations must be consistent with the PRC Constitution, the national laws and the administrative rules and regulations promulgated by the State Council.
The State Council, provincial and municipal governments may also enact or issue rules, regulations or directives in new areas of the law for experimental purposes. After gaining sufficient experience with experimental measures, the State Council may submit legislative proposals to be considered by the NPC or the Standing Committee of the NPC for enactment at the national level.
The PRC Constitution vests the power to interpret laws in the Standing Committee of the NPC. According to the Decision of the Standing Committee of the NPC Regarding the Strengthening of Interpretation of Laws passed on June 10, 1981, the Supreme People’s Court, in addition to its power to give general interpretation on the application of laws in judicial proceedings, also has the power to interpret specific cases. The State Council and its ministries and commissions are also vested with the power to interpret rules and regulations that they have promulgated. At the regional level, the power to interpret regional laws is vested in the regional legislative and administrative bodies which promulgate such laws.
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PRC JUDICIAL SYSTEM
Under the PRC Constitution and the Law of Organization of the People’s Courts, the judicial system is made up of the Supreme People’s Court, the local people’s courts, military courts and other special people’s courts. The local people’s courts are comprised of the basic people’s courts, the intermediate people’s courts and the higher people’s courts. The basic people’s courts are organized into civil, criminal and administrative divisions. The intermediate people’s courts are organized into divisions similar to those of the basic people’s courts, and are further organized into other special divisions, such as the intellectual property division. The higher level people’s courts supervise the basic and intermediate people’s courts. The people’s procuratorates also have the right to exercise legal supervision over the civil proceedings of people’s courts of the same level and lower levels. The Supreme People’s Court is the highest judicial body in the PRC. It supervises the administration of justice by all of the people’s courts.
The people’s courts employ a two-tier appellate system. A party may appeal against a judgment or order of a local people’s court to the people’s court at the next highest level. Second judgments or orders given at the same level and at the next highest level are final. First judgments or orders of the Supreme People’s Court are also final. If, however, the Supreme People’s Court or a people’s court at a higher level finds an error in a judgment which has been given in any people’s court at a lower level, or the presiding judge of a people’s court finds an error in a judgment which has been given in the court over which he presides, the case may then be retried according to the judicial supervision procedures.
The Civil Procedure Law of the PRC, which was adopted on April 9, 1991, sets forth the criteria for instituting a civil action, the jurisdiction of the people’s courts, the procedures to be followed for conducting a civil action and the procedures for enforcement of a civil judgment or order. All parties to a civil action conducted within the PRC must comply with the Civil Procedure Law. Generally, a civil case is initially heard by a local court of the municipality or province in which the defendant resides. The parties to a contract may, by express agreement, select a jurisdiction where civil actions may be brought, provided that the jurisdiction is either the plaintiff’s or the defendant’s place of residence, the place of execution or implementation of the contract or the object of the action.
A foreign national or enterprise generally has the same litigation rights and obligations as a citizen or legal person of the PRC. If a foreign country’s judicial system limits the litigation rights of PRC citizens and enterprises, the PRC courts may apply the same limitations to the citizens and enterprises of that foreign country within the PRC. If any party to a civil action refuses to comply with a judgment or order made by a people’s court or an award granted by an arbitration panel in the PRC, the aggrieved party may apply to the people’s court to request enforcement of the judgment, order or award. There are time limits imposed on the right to apply for such enforcement. If at least one of the parties to the dispute is an individual, the time limit is one year. If both parties to the dispute are legal persons or other institutions, the time limit is ten months. If a person fails to satisfy a judgment made by the court within the stipulated time, the court will, upon application by either party, mandatorily enforce the judgment.
A party seeking to enforce a judgment or order of a people’s court against a party who is not located within the PRC and does not own any property in the PRC, may apply to a foreign court with proper jurisdiction for recognition and enforcement of the judgment or order. A foreign judgment or ruling may also be recognized and enforced by the people’s court according to PRC enforcement procedures if the PRC has entered into, or acceded to, an international treaty with the relevant foreign country, which provides for such recognition and enforcement, or if the judgment or ruling satisfies the court’s examination according to the principle of reciprocity, unless the people’s court
VI-2 APPENDIX VI SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS finds that the recognition or enforcement of such judgment or ruling will result in a violation of the basic legal principles of the PRC, its sovereignty or security, or for reasons of social and public interest.
THE PRC COMPANY LAW, SPECIAL REGULATIONS AND MANDATORY PROVISIONS
As a joint stock limited liability company incorporated in the PRC, and seeking a listing on the Stock Exchange, we are subject to the following three laws and regulations in the PRC:
. the PRC Company Law, which was promulgated by the Standing Committee of the NPC on December 29, 1993, took effect on July 1, 1994 and was revised as at October 27, 2005 and such amendments have become effective on January 1, 2006;
. the Special Regulations, which were passed by the State Council on August 4, 1994 pursuant to the PRC Company Law; and
. the Mandatory Provisions, which were jointly promulgated by the Securities Committee and the State Restructuring Commission on August 27, 1994, and which we, as a joint stock limited liability company seeking an overseas listing, must incorporate into our Articles.
Set out below is a summary of the provisions of the PRC Company Law which has become effective on January 1, 2006, the Special Regulations and the Mandatory Provisions applicable to us.
Incorporation
A company limited by shares may be incorporated by a minimum of two and maximum of two hundred promoters, and at least half of the promoters must reside within the PRC. According to the Special Regulations, State-owned enterprises or enterprises with the majority of their assets owned by the PRC government can be restructured in accordance with the relevant regulations to become joint stock limited companies which may issue shares to overseas investors. We are incorporated under the PRC Company Law as a joint stock limited liability company. This means that we are a legal entity and that our registered capital is divided into Shares of equal par value. The liability of our shareholders is limited to the amount of Shares held by them and we are liable to our creditors for an amount equal to the total value of our assets.
Under the PRC Company Law, we may invest in other limited liability companies in the PRC.
The promoters shall convene an inaugural meeting within 30 days after the issued shares have been fully paid up, and shall give notice to all subscribers or make an announcement of the date of the inaugural meeting 15 days before the meeting. The inaugural meeting may be convened only with the presence of shareholders holding 50% of all shares of the Company. At the inaugural meeting, matters including the adoption of draft articles of association proposed by the promoter(s) and the election of the board of directors and the supervisory committee of the company will be dealt with. All resolutions of the meeting require the approval of subscribers with more than half of the voting rights present at the meeting.
Within 30 days after the conclusion of the inaugural meeting, the board of directors shall apply to the registration authority for registration of the establishment of the company.
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A company’s promoters shall be liable for: (i) the payment of all expenses and liabilities incurred in the incorporation process jointly and severally if the company cannot be incorporated; (ii) the repayment of subscription monies to the subscribers, together with interest, at bank rates for a deposit of the same term jointly and severally if the company cannot be incorporated; and (iii) damages suffered by the company as a result of the default of the promoters in the course of incorporation of the company. According to the Provisional Regulations Concerning the Issuance and Trading of Shares promulgated by the State Council on April 22, 1993 (which is only applicable to issuance and trading of shares in the PRC and their related activities), if a company is established by means of public subscription, the promoters of such company are required to assume joint responsibility for the accuracy of the contents of the prospectus and to ensure that the prospectus does not contain any misleading statement or omit any material information.
Registered or Bearer Shares
The promoters may make capital contributions in cash, in kind or by way of injection of assets, industrial property rights, land use rights and other non-cash assets (which can be appraised and transferable) based on their appraised value, except for those which are prohibited by PRC laws and regulations. The promoters’ cash contribution shall not be less than 30% of the registered capital. Shares that we issue to foreign investors and Shares that are listed overseas must be in registered form, denominated in Renminbi and subscribed for in a foreign currency. Shares that are purchased by investors from the territories of Hong Kong, Macau and Taiwan and listed in Hong Kong are known as ‘‘overseas listed foreign shares.’’ Within the PRC, all Shares that we issue to a promoter, State-designated investment institution or legal person must be in registered form. Shares that we issue to the public in the PRC, however, may be in either registered or bearer form.
We are required to maintain a register of shareholders for all Shares issued in registered form. Information such as our shareholders’ particulars, number of Shares held by each shareholder and the dates on which the shareholders became holders of the relevant Shares are required to be entered into the register.
We are also required to record the amount of bearer shares issued, the number designated to each bearer share and the date of issue of each bearer share.
Increase of Share Capital
We must satisfy the conditions set forth by the relevant securities administration authority and obtain our shareholders’ approval and the approval of the relevant securities administration authority to issue new shares when we won’t issue shares by way of a public offering. If we issue Shares by way of a public offering, we must satisfy the conditions set forth by the Securities Law and must also obtain the approval of the relevant securities administration authority. After we complete a subscription of new Shares, we must registertheincreaseinregisteredcapitalwiththe SAIC and issue a public notice.
Reduction of Share Capital
Subject to minimum registered capital requirements, we may reduce our registered capital in accordance with the following procedures:
. we must prepare a current balance sheet and financial statement;
. our shareholders must approve the reduction of registered capital in a general meeting;
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. once the resolution approving the reduction has been passed, we must inform our creditors of the reduction in capital within 10 days and publish an announcement of the reduction in a newspaper at least three times within 30 days;
. our creditors may, within the statutory prescribed time limit, require us to pay our debts or provide guarantees covering such debts;
. we must register the reduction in registered capital with the SAIC; and
. we must obtain necessary approvals from all relevant supervisory authorities.
Repurchase of Shares
We may only repurchase our Shares to: (i) reduce our registered share capital; (ii) to merge with another company that holds our Shares; and for any other purpose permitted by law and relevant administrative regulations, according to the Company Law, there are two additional reasons: (iii) to grant the repurchased share to our employees as encouragement; and (iv) to comply with the requirements from those shareholders who disagree with the resolution made by the shareholders’ general meeting in relation to merge or division. We may repurchase our Shares by making a general offer to our shareholders, by purchasing our Shares on a stock exchange or by purchasing our Shares through an off-market contract.
We are required to obtain the approval of the shareholders’ general meeting when we repurchase our Shares for reasons (i), (ii) and (iii). We must cancel the portion of our Shares that have been repurchased within 10 days since the date of repurchase when we repurchase our Shares due to reason (i) and we must cancel or transfer the repurchased Shares within 6 months when we repurchase our Shares due to reason (ii) or (iv). Shares that are repurchased for the purpose of encouraging our employees shall not constitute over 5% of the issued Shares and should be transferred to our employees within one year.
Transfer of Shares
Our Shares may be transferred in accordance with any applicable laws and regulations, such as the PRC Company Law, the PRC Securities Laws and the Special Regulations. The Converted H Shares may not be transferred (a) until the expiry of the Existing Shareholders Lock Up Period and (b) except with the approval from the Ministry of Commerce to be obtained at the relevant time.
Any Shares that are held by our Directors, Supervisors or managers may not be transferred during the first year after the Listing Date. Thereafter, only 25% of such Shares may be transferred each year during their respective terms of office, and after their departure from office, the transfer of such Shares will be subject to a half year restriction.
The PRC Company Law does not limit the shareholding percentage of an individual shareholder.
Transfer of Shares may not be entered in the register of shareholders within 20 days before the date of a shareholders’ meeting or within five days before the record date set for the purpose of distribution of dividends unless otherwise stipulated by the law in relation to the listed companies.
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Shareholders
Under the PRC Company Law and the Mandatory Provisions, our shareholders are entitled to the following rights:
. to attend and vote in person or to appoint a proxy to attend and vote on his or her behalf at a general meeting;
. to receive dividends and distributable benefits in other forms in proportion to his or her shareholding;
. to inspect our Articles, minutes of shareholders’ meetings and financial reports and to put forward proposals and to ask questions relating to our operations;
. to transfer our Shares on the Stock Exchange in accordance with any applicable laws;
. to initiate legal proceedings in the people’s court if a resolution passed at a shareholders’ meeting or Board meeting infringes applicable law or administrative rules or the company’s articles of association;
. to receive surplus assets of the company upon its termination in proportion to his or her shareholding;
. to claim against other shareholders who abuse their shareholders’ rights for the damages; and
. any other shareholders’ rights specified in the company’s articles of association.
The obligation of a general shareholder include: (i) the obligation to abide by law, the administrative regulations and the company’s articles of association; (ii) to pay the subscription monies in respect of the shares subscribed for; (iii) to be liable for the company’s debts and liabilities to the extent of the amount of subscription monies agreed to be paid in respect of the shares taken up by such shareholder; (iv) not to abuse shareholders’ right to damage the interests of the company or other shareholders of the company; (v) not to abuse the independent status of the company as a legal person and the limited liability to damage the interests of the creditors of the company and (vi) any of the shareholders’ obligations specified in the company’s articles of association.
Our shareholders’ liability is limited to the amount of Shares each shareholder holds, however, under the circumstances that some shareholders abuse the independent status of the company as a legal person and the limited liability of the shareholders, evade debt and severely harm the interests of the creditors, these shareholders shall undertake joint liability in relation to the debts of the company.
Shareholders’ General Meetings
Our shareholders may exercise the following powers in a general meeting:
. determine our business policies and investment plans;
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. elect or remove our Directors and supervisors who are not the representatives of the employees of us and fix the remuneration of them;
. consider and approve the reports of our Board and our Supervisory Committee;
. consider and approve our annual financial budget and accounting plans;
. consider and approve our profit distribution plan and plans for recovery of losses;
. approve an increase or reduction in our share capital;
. approve an issue of bonds;
. approve a merger, division, conversion of corporate form, dissolution or liquidation;
. approve the appointment and removal of our auditors;
. consider and approve resolutions submitted by shareholders holding 5% or more of our voting rights;
. approve amendments to our Articles; and
. other issues stipulated in our Articles.
Shareholders’ general meetings are divided into annual general meetings and extraordinary shareholders’ general meetings. An annual general meeting must be held once every year. Our Board is required to convene an extraordinary shareholders’ general meeting within two months after the occurrence of any of the following circumstances:
. the number of Directors on our Board is less than two-thirds of the number required under the PRC Company Law or our Articles;
. our accumulated losses amount to one-third of our total share capital;
. upon a request by holders of not less than 10% of our Shares, respectively or accumulatively;
. the Board or the Supervisory Committee considers such a meeting necessary; or
. other circumstances stipulated in the Company’s articles of association.
A shareholders’ general meeting is convened by the Board and presided over by the chairman of the Board. Under the Special Regulations and the Mandatory Provisions, we are required to give 45 days’ notice of a shareholders’ general meeting and this notice must specify the matters to be considered and the date and place of the meeting. If we have bearer Shares in issue, we must make a public announcement of the shareholders’ general meeting at least 45 days prior to the meeting being held. Under the Special Regulations and the Mandatory Provisions, shareholders who plan to attend a shareholders’ general meeting are required to provide us with a written confirmation of their intentions 20 days prior to the meeting. Shareholders holding 5% or more of our voting rights are entitled, under the Special Regulations, to submit written resolutions to be considered at an annual general meeting. Any proposed resolutions that can be decided at a shareholders’ general meeting must be included in the agenda of that meeting.
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The Special Regulations and the Mandatory Provisions provide that a general meeting of our shareholders may be held if shareholders holding 50% or more of our voting rights have confirmed in writing 20 days prior to the proposed date of the meeting that they intend to attend the meeting. If this 50% minimum is not attained, a shareholders’ general meeting may only be held if, within five days after the deadline for confirming attendance, we notify the shareholders by public announcement of the matters to be considered and the date and place of the meeting.
Each shareholder present at a shareholders’ general meeting is entitled to one vote for each Share held. A shareholder may appoint a proxy to attend and vote on his behalf at a shareholders’ general meeting. Ordinary resolutions proposed at a shareholders’ general meeting generally must be passed by more than half of the votes cast by shareholders present in person or by proxy. However, special resolutions and the following actions must be approved by more than two-thirds of the votes cast by shareholders present in person or by proxy: (i) amendments to our Articles; (ii) a merger, division or dissolution; (iii) an increase or reduction of capital or the issue of any class of Shares, bonds and securities; (iv) conversion of corporate form; and (v) other matters which the shareholders’ general meeting has resolved by way of ordinary resolution as having a potential material effect on us as a company and should be approved by special resolution.
In the event of a variation or abrogation of the rights of a particular class of shareholders, the Mandatory Provisions require us to hold a special class meeting. Holders of our Domestic Shares and holders of our H Shares are deemed to be different classes of shareholders.
Board
Our Articles provide that our Board may consist of up to 12 Directors. The term of office for our Directors is determined by our Articles but may not exceed three years. Our Directors are allowed to serve consecutive terms if re-elected. Our Board may exercise the following powers:
. convene shareholders’ meetings and report to the shareholders;
. implement resolutions passed by shareholders in general meetings;
. decide on our business plans and investment plans;
. formulate annual budgets and accounts;
. formulate profit distribution plans and plans for recovery of losses;
. formulate plans for a merger, demerger, conversion of corporate form or dissolution;
. formulate plans for the increase or decrease in our registered capital or plans for the issue of bonds;
. decide on our internal management structure;
. appoint or dismiss our managers, and at the recommendation of a manager, employ or dismiss deputy managers and financial controllers and to fix their remuneration and decide their commission;
. decide on a management control system; and
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. other issues stipulated in our Articles.
In addition, the Mandatory Provisions provide that our Board is also responsible for formulating proposals for amending our Articles.
Board Meetings
Our Board holds regular meetings at least twice every year. Notice of the regular Board meetings is given at least ten days before the date of the meeting. Our Board may determine the notice period and manner for extraordinary Board meetings.
Our Articles require that more than half of our Directors must be present to convene a meeting. A Director may attend a Board meeting personally or may appoint another Director to attend on his behalf. All Board resolutions must be passed by the affirmative votes of more than half of the Directors. All resolutions passed at a Board meeting must be recorded in the minutes of the relevant meeting and the minutes must be signed by the Directors in attendance at the meeting and the person who recorded the minutes. If a Board resolution contravenes any applicable laws or regulations or our Articles and results in substantial damages to us as a company, the Directors who participated in passing the resolution (except those who voted against the resolution and whose dissenting vote was recorded in the relevant minutes) are personally liable to us.
Chairman of our Board
Our chairman is elected by a vote of our Board and must be approved by more than half of the Directors. The chairman is our legal representative and may exercise the following powers:
. presides over shareholders’ general meetings and convenes and presides over meetings of the Board; and
. examines the implementation of resolutions of the Board.
Non-Executive Directors and Independent Directors
No less than half of our Directors must be non-executive Directors and there must be at least two independent Directors on our Board.
. We are required to provide non-executive Directors with the necessary information and documentation for them to fulfill their responsibilities. The opinions expressed by any independent Director will be recorded in the Board minutes.
. Connected Transactions will be endorsed by an independent director before they can become effective. Two or more independent directors may propose the convening of an interim general shareholders’ meeting.
. Independent Directors may directly report unusual circumstances to the general shareholders’ meeting, the CSRC and other relevant regulatory authorities.
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Qualification of Directors
The PRC Company Law provides that the following persons may not serve as one of our Directors:
. a person who is unable or has limited ability to undertake any civil liabilities;
. a person who has been convicted of an offence relating to bribery, corruption, appropriation of property, or the destruction of social economic order, or who has been deprived of his political rights, where less than five years have elapsed since the date of completion of the sentence or deprivation (as applicable);
. a person who is a Director, factory manager or manager of a company or enterprise that has become bankrupt and has been liquidated due to mismanagement, and who is personally liable for the bankruptcy or liquidation of such company or enterprise, where less than three years have elapsed since the date of the completion of the liquidation of the company or enterprise;
. a person who has been a legal representative of an enterprise that has had its business license revoked because of unlawful operations and the person is personally responsible for such revocation, where less than three years have elapsed since the date of such revocation; or
. a person who is liable for a relatively large amount of debt which has not been repaid when due.
Other circumstances under which a person is disqualified from acting as a Director are set out in our Articles and the Mandatory Provisions.
Supervisory Committee
We are required to establish a Supervisory Committee comprised of at least three members. The Supervisory Committee is responsible for the following matters:
. examining our financial affairs;
. supervising our Directors and officers to ensure that they carry out their duties in compliance with the relevant laws and regulations and our Articles, and advising on the dimissal of such Directors or officers if they do not comply with the relevant laws and regulations and our Articles;
. requiring our Directors and officers to rectify any action which adversely affects our interests;
. proposing the convening of extraordinary shareholders’ general meetings, and convening and presiding over such meeting in the absence of the Board;
. to formulate proposals to the shareholders’ general meeting;
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. to initiate legal proceedings against the Directors or managers under the circumstances for the damages of the Company due to the breach of law or administrative regulations committed by the Directors or managers when they perform their duties; and
. carrying out other duties as specified in our Articles.
Our Supervisors are required to attend our Board Meetings
Under our Articles, the affirmative vote of a majority of our Supervisors is required to pass resolutions of the Supervisory Committee.
Members of the Supervisory Committee include representatives elected by our workers and representatives elected by our shareholders in a general meeting. Our Directors and officers may not serve as a Supervisor. The term of office for our Supervisors is three years and a Supervisor may serve consecutive terms if re-elected. The circumstances under which a person is disqualified from acting as a Director under the PRC Company Law and the Mandatory Provisions also apply to a Supervisor.
Manager and Officers
We are required to have a manager who is appointed, and may be removed, by the Board. Our manager is accountable to the Board and may exercise the following powers:
. supervise our production, business and administration and implement resolutions of our Board;
. organize the implementation of our business and investment plans;
. formulate plans for the establishment of our internal management structure;
. formulate our basic administration system;
. formulate our internal rules;
. dismiss other administrative officers (other than those required to be appointed or dismissed by our Board);
. attend Board meetings; and
. other powers conferred by our Board or our Articles.
The Special Regulations require us to employ other corporate officers, including a financial controller and company secretary.
The circumstances under which a person is disqualified from acting as a Director under the PRC Company Law and the Mandatory Provisions also apply to our manager and other senior officers.
The articles of association of a company shall have binding effect on the shareholders, directors, supervisors, managers and other executives of the company. Such persons shall be entitled to exercise their rights, apply for arbitration and issue legal proceedings according to the
VI-11 APPENDIX VI SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS articles of association of the company. The provisions of the Mandatory Provisions regarding the senior management of a company have been incorporated in the Articles (a summary of which is set out in ‘‘Appendix VII — Summary of Articles of Association’’).
Duties of Directors, Supervisors, Managers and Officers
Our Directors, Supervisors, managers and officers are required under the PRC Company Law to comply with the relevant laws and regulations, to comply with our Articles, to carry out their duties honestly and to protect our interests. The Special Regulations and the Mandatory Provisions provide that our Directors, Supervisors, managers and officers owe a fiduciary duty to us, and require them to perform their duties faithfully, protect our corporate interests and not abuse their positions for personal gain. Our Directors, Supervisors, managers and officers are also under a duty of confidentiality and are prohibited from divulging certain information unless required by applicable laws or regulations or by our shareholders.
If a Director, Supervisor, manager or officer contravenes any law, regulation or our Articles in the performance of his duties and such contravention results in a loss to us, the respective individual will be held personally liable to us for such loss.
Finance and Accounting
We are required to establish a financial and accounting system which must comply with relevant laws and regulations as well as rules stipulated by the Ministry of Finance and the State Council.
We are also required to prepare financial statements at the end of each financial year. These financial statements should be audited by an accounting firm, including our balance sheet, profit and loss account, a statement on financial status and changes of financial status and a profit distribution statement. We are required to make our financial statements available for inspection by our shareholders 20 days prior to our annual general meeting. We must also publish our financial statements by way of public announcement.
We are required by PRC law to make the following transfers from our after-tax profit before we distribute any profits to our shareholders:
. 10% of our after-tax profit must be transferred to our statutory common reserve fund, provided that no transfer is required if our accumulated statutory common reserve fund exceeds 50% of our registered capital; and
. subject to our shareholders’ approval in a general meeting and after transfer of the requisite amount to the statutory common reserve fund, a discretionary amount from our after-tax profit must be transferred to the discretionary common reserve.
Any balance of the after-tax profit after making-up losses and transfers to the common reserve may be distributed to our shareholders in proportion to their respective shareholdings, unless our Articles of Association stipulate otherwise.
If the amount in our statutory common reserve fund is insufficient to make up for losses from the previous year, our profits in the current year must be applied to make up for such losses before we make allocations to the statutory common reserve fund and the statutory public welfare fund.
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Our capital common reserve fund is made up of the premium over the nominal value of our Shares. Other amounts required by the relevant governmental financial authority are to be treated as the capital common reserve fund.
Our common reserve must be applied for the following purposes:
. to make up for any losses;
. to expand our business operations; and
. to pay up our registered share capital; provided that if the statutory common reserve is converted into registered capital, the balance of the statutory common reserve after such conversion may not be less than 25% of our registered capital before such conversion.
The statutory public welfare fund must be applied for the collective welfare of our employees.
Appointment and Retirement of Auditors
The Special Regulations require us to employ an independent PRC qualified firm of accountants to audit our annual financial statements and review certain other financial reports.
The auditors are to be appointed for a term commencing from their appointment at an annual general meeting to the close of the next annual general meeting.
If we remove or fail to renew the appointment of our existing auditors, we are required by the Special Regulations to give prior notice to the auditors and the auditors are entitled to make representations before our shareholders in a general meeting. If our auditors resign, they are obligated to make a statement to the shareholders stating whether or not we have undertaken any inappropriate transactions. The appointment, removal or nonrenewal of appointment of auditors is decided by our shareholders and must be recorded with the CSRC.
Distribution of Profits
The Special Regulations provide that dividends and other distributions payable to holders of our H Shares must be declared and calculated in Renminbi and paid in a foreign currency. Under the Mandatory Provisions, the payment of dividends and other distributions in foreign currency to these shareholders must be made through a receiving agent appointed by us for holders of H shares.
Amendments to Articles of Association
Our Articles may only be amended by an affirmative vote of more than two-thirds of our shareholders at a general meeting. An amendment to our Articles will only take effect after we have obtained any necessary approvals from relevant regulatory and administrative agencies. If an amendment to our Articles affects the information in our business registration, we must apply to the related government department to change the relevant details in the license.
Merger and Division
Our shareholders must approve all mergers and divisions. In the PRC, a merger may be effected either by way of absorption followed by the dissolution of the company being absorbed or by the establishment of a new entity followed by the dissolution of the original entities.
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If our shareholders approve a proposed merger, we are required to sign a merger agreement and to prepare our balance sheet and an inventory of assets. We must notify our creditors of the merger within 10 days and publicly announce the merger in the newspapers within 30 days after the resolution approving the merger has been passed. Our creditors are allowed, within a certain time period, to request us to repay any outstanding indebtedness or provide guarantees covering such indebtedness.
In the case of a division, we are likewise required to prepare our balance sheet and an inventory of assets and to notify our creditors. Our creditors are again entitled to ask us to repay or guarantee any outstanding indebtedness.
Dissolution and Liquidation
Under the PRC Company Law and Mandatory Provisions, we will be dissolved and liquidated if any of the following events occur:
(i) our term of operations as stipulated in our Articles has expired;
(ii) the occurrence of any event in our Articles which specifically triggers our dissolution;
(iii) our shareholders in a general meeting agree to our dissolution by special resolution;
(iv) a merger or division that requires our dissolution;
(v) the declaration of our insolvency as a result of our inability to pay our debts when they become due and payable; or
(vi) we have been ordered to close down as a result of a violation of the law or administrative regulations.
If we are dissolved in the circumstances referred to in (i) through (iii), (v) and (vi) above, in a general meeting our shareholders must, within 15 days of the occurrence of the event, appoint the members of a liquidation committee, consisting of Directors and other parties required at the general meeting. If the liquidation committee is not established within the specified time, our creditors may apply to the people’s court to appoint the members of the liquidation committee. The people’s court will then organize a liquidation committee to conduct the liquidation.
A liquidation committee is required to notify our creditors of our dissolution within 10 days after its establishment and issue a public announcement of our dissolution within 60 days after its establishment. A creditor is required to lodge its claim with the liquidation committee within the statutory time limit.
The liquidation committee shall exercise the following powers during the liquidation period:
. to sort the company’s assets and to prepare a balance sheet and an inventory of the assets;
. to notify creditors or issue public notices to notify creditors;
. to dispose of and liquidate any unfinished businesses of the company;
. to pay outstanding taxes and any tax resulting from the liquidation;
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. to settle the company’s claims and liabilities;
. to deal with the surplus assets of the company after its debts have been paid off; and
. to represent the company in civil lawsuits.
Any surplus assets after payment of employees’ wages, social insurance, liquidation fees, statutory indemnities, tax and our general indebtedness will be distributed to our shareholders in proportion to their respective shareholdings. If our assets are insufficient to repay or discharge our indebtedness, the liquidation committee will apply to the people’s court for a declaration of insolvency and will transfer the liquidation proceedings to the people’s court.
If we are involved in liquidation proceedings, we will not be allowed to engage in business operations unrelated to such liquidation proceedings.
Upon completion of the liquidation process, the liquidation committee is required to submit a liquidation report to our shareholders in a general meeting or to apply to the People’s Court for confirmation. The liquidation committee is also required to apply to the Administration of Industry and Commerce for the cancellation of our registration and to make a public announcement of our dissolution following such cancellation.
Members of the liquidation committee are required to discharge their duties honestly and in compliance with the law. A member of the liquidation committee is liable to us and our creditors in respect of any loss arising from his willful or material default.
Overseas Listing
We must obtain the approval of the CSRC to list our Shares overseas. An overseas listing of our Shares must comply with the Special Regulations.
According to the Special Regulations and the Mandatory Provisions, our Board must implement our plan to issue the H Shares and Domestic Shares within 15 months after the CSRC has approved our application.
Loss of Share Certificates
If a Share certificate in registered form of our domestic shares is either lost, stolen or destroyed, the respective shareholder may apply, in accordance with the relevant provisions set out in the PRC Civil Procedure Law, to a people’s court for a declaration that such certificate will no longer be valid. After obtaining the declaration, the shareholder may apply to us for a replacement certificate.
A separate procedure regarding the loss of H Share certificates is provided for in the Mandatory Provisions, which have been incorporated into our Articles, a summary of which is set out in ‘‘Appendix VII — Summary of Articles of Association.’’
Suspension and Termination of Listing
We may have our listing on the Stock Exchange suspended by the Stock Exchange if any of the following events occur:
(i) our registered capital or the distribution of our Shares no longer complies with the relevant listing requirements;
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(ii) we have failed to disclose our financial position in accordance with the relevant law and regulations or our financial report contains false information;
(iii) we have committed a material breach of the law; or
(iv) we have incurred losses for three consecutive years.
If the circumstances referred to in (ii) or (iii) above have occurred and are considered serious, or if the circumstances referred to in (i) or (iv) above have occurred and the situation has not been rectified within the time stipulated, the securities administration department of the State Council may terminate the listing of our Shares.
The securities administration department of the State Council may also terminate the listing of our Shares if we have resolved to be wound up or are ordered by the relevant governmental authority to be dissolved, or if we are declared insolvent.
SECURITIES LAW AND REGULATIONS
The PRC has promulgated a number of regulations that relate to the issue and trading of our Shares and disclosure of information by us. In early 1993, the State Council established the Securities Committee (the ‘‘Securities Committee’’) and the CSRC. The Securities Committee is responsible for coordinating the drafting of securities regulations, formulating securities-related policies, planning the development of securities markets, directing, coordinating and supervising all securities-related institutions in the PRC and administering the CSRC. The CSRC is the regulatory arm of the Securities Committee and is responsible for the drafting of regulatory provisions of securities markets, supervising securities companies, regulating public offers of securities by PRC companies in the PRC or overseas, regulating the trading of securities, compiling securities-related statistics and undertaking research and analysis.
On April 22, 1993, the State Council promulgated the Joint Stock Company Provisional Regulations Concerning the Issuance and Trading of Shares (the ‘‘Securities Joint Stock Company Provisional Regulations’’). These regulations deal with the application and approval procedures for public offerings of equity securities, trading in equity securities, the acquisition of listed companies, deposit, settlement, clearing and transfer of listed equity securities, the disclosure of information with respect to a listed company, investigation and penalties and dispute settlement. According to these regulations, we must obtain the approval of the Securities Committee to offer our Shares outside the PRC. In addition, if we propose to issue Renminbi-denominated ordinary shares as well as special Renminbi-denominated shares, we must comply with the Securities Joint Stock Company Provisional Regulations. Provisions of these regulations in relation to acquisitions of listed companies and disclosure of information expressly apply to listed companies in general without being confined to listed companies on any particular stock exchange.
On September 2, 1993, the Securities Committee promulgated the Provisional Measures Prohibiting Fraudulent Conduct Relating to Securities. The prohibitions imposed by these measures include the use of insider information in connection with the issuance of, or trading in, securities (insider information being defined to include undisclosed material information known to any insider, which may affect the market price of securities); the use of funds or information or through an abuse of power in creating a false or disorderly market or influencing the market price of securities or inducing investors to make investment decisions without knowledge of actual circumstances; and the making of any statement in connection with the issue of, and trading in, securities which is false
VI-16 APPENDIX VI SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS or materially misleading, or in respect of which there is any material omission. Penalties imposed for contravening any of the provisions of the measures include fines, confiscation of profits and suspension of trading. In serious cases, criminal liability may be imposed.
On December 25, 1995, the State Council promulgated the Regulations of the State Council Concerning Domestic Listed Foreign Shares of Joint Stock Limited Liability Companies. These regulations deal mainly with the issue, subscription, trading and declaration of dividends and other distributions of domestic listed foreign shares and disclosure of information of joint stock limited liability companies having domestic listed foreign shares.
The Securities Law took effect on July 1, 1999 which has been amended on August 28, 2004 and on October 27, 2005, and the last amendment came into effect on January 1, 2006. The Securities Law comprehensively regulates activities in the PRC securities market. Article 238 of the Securities Law provides that we must obtain prior approval from the State Council’s regulatory authorities to list our Shares outside the PRC. Article 239 of the Securities Law provides that specific measures in respect of shares of companies in the PRC which are to be subscribed and traded in foreign currencies shall be separately formulated by the State Council. Currently, the issue and trading of foreign issued shares (including H Shares) are still mainly governed by the rules and regulations promulgated by the State Council and the CSRC.
In order to promote strict compliance of ‘‘companies listed outside China’’ (‘‘Listed Companies’’) with the relevant domestic and foreign laws and regulations, their conscientious performance of their continuing obligations toward investors and their establishment of a good corporate image on domestic and foreign capital markets, the State Economic and Trade Commission (the ‘‘SETC’’) and the CSRC jointly issued the Further Standardizing Operations and Reform of Companies Listed Outside China Opinion (‘‘Standardizing Opinion’’) on March 29, 1999. The Standardizing Opinion requires us to specify our decision-making process, strengthen director responsibility, establish a sound external and independent director system, strengthen the functions of our supervisory board and the secretary of the Board, explore methods to motivate our senior management personnel and intensify our internal reform.
ARBITRATION AND ENFORCEMENT OF ARBITRAL AWARDS
The Arbitration Law of the People’s Republic of China (the ‘‘Arbitration Law’’) was passed by the Standing Committee of the NPC on August 31, 1994 and became effective on September 1, 1995. It is applicable to, among other matters, trade disputes involving foreign parties where the parties have entered into a written agreement to refer the matter to arbitration before an arbitration committee constituted in accordance with the Arbitration Law. Under the Arbitration Law, an arbitration committee may, before the promulgation by the PRC Arbitration Association of arbitration regulations, formulate interim arbitration rules in accordance with the Arbitration Law and the PRC Civil Procedure Law. Where the parties have by agreement provided arbitration as the method for dispute resolution, the people’s court will refuse to handle the case.
The Hong Kong Listing Rules and the Mandatory Provisions require an arbitration clause to be included in our Articles of Association and, in the case of the Hong Kong Listing Rules, also in contracts with each of our Directors and Supervisors, to the effect that whenever any disputes or claims arise between holders of our H Shares and us; holders of our H Shares and our Directors, Supervisors, managers or other senior officers; or holders of our H Shares and holders of Domestic Shares, in respect of any disputes or claims in relation to our affairs or as a result of any rights or obligations arising under our Articles, the PRC Company Law or other relevant laws and administrative regulations, such disputes or claims shall be referred to arbitration.
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Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, shall comply with the arbitration. Disputes in respect of the definition of shareholders and disputes in relation to our register of shareholders need not be resolved by arbitration.
A claimant may elect for arbitration to be carried out at either the China International Economic and Trade Arbitration Commission in accordance with its Rules or the Hong Kong International Arbitration Center in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. If the claimant elects for arbitration to be carried out at the Hong Kong International Arbitration Center, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Center.
Under the Arbitration Law and PRC Civil Procedure Law, an arbitral award is final and binding on the parties. If a party fails to comply with an award, the other party to the award may apply to the people’s court for enforcement. A people’s court may refuse to enforce an arbitral award made by an arbitration commission if there is any procedural or membership irregularity specified by law or the award exceeds the scope of the arbitration agreement or is outside the jurisdiction of the arbitration commission.
A party seeking to enforce an arbitral award of a PRC arbitration panel against a party who, or whose property, is not within the PRC, may apply to a foreign court with jurisdiction over the case for enforcement. Similarly, an arbitral award made by a foreign arbitration body may be recognized and enforced by the PRC courts in accordance with the principles of reciprocity or any international treaty concluded or acceded to by the PRC. The PRC acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘‘New York Convention’’) adopted on June 10, 1958 pursuant to a resolution of the Standing Committee of the NPC passed on December 2, 1986. The New York Convention provides that all arbitral awards made in a state which is a party to the New York Convention shall be recognized and enforced by other parties to the New York Convention, subject to their right to refuse enforcement under certain circumstances, including where the enforcement of the arbitral award is against the public policy of the state to which the application for enforcement is made. It was declared by the Standing Committee of the NPC simultaneously with the accession of the PRC that (i) the PRC will only recognize and enforce foreign arbitral awards on the principle of reciprocity and (ii) the PRC will only apply the New York Convention in disputes considered under PRC laws to arise from contractual and non-contractual mercantile legal relations. On June 18, 1999, an arrangement was made between Hong Kong and the Supreme People’s Court of the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People’s Court of the PRC and the Hong Kong Legislative Council, and became effective on February 1, 2000. The arrangement is made in accordance with the spirit of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Under the arrangement, awards made by PRC arbitral authorities recognized under the Arbitration Ordinance of Hong Kong can be enforced in Hong Kong. Hong Kong arbitration awards are also enforceable in China.
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FOREIGN EXCHANGE CONTROL
The foreign exchange control system is regulated by three sets of provisions. On December 28, 1993, the PBOC, with the authorization of the State Council, issued the Notice to Further Reform of the Foreign Exchange Control System, which became effective on January 1, 1994. Other main regulations and implementation measures include the PRC Foreign Exchange Control Regulations, which became effective on April 1, 1996 and was promulgated by the State Council on January 29, 1996 and amended on January 14, 1997, and the Regulations on the Foreign Exchange Settlement, Sale and Payments, which were promulgated by the PBOC on June 20, 1996 and became effective on July 1, 1996 and which contain detailed provisions regulating the settlement, sale and payment of foreign exchange by domestic enterprises, individuals, economic organizations and social organizations in the PRC.
The PBOC publishes, on each business day, the Renminbi exchange rate against other major foreign currencies. Such rate is set by reference to the previous days’ trading price of Renminbi/ major foreign currencies on the inter-bank foreign exchange market.
In general, all organizations and individuals within the PRC are required to sell their recurrent foreign exchange earnings to designated banks unless they have received a specific waiver. Foreign invested enterprises, on the other hand, are permitted to retain a certain percentage of their recurring foreign exchange earnings and the sums retained may be deposited into foreign exchange bank accounts maintained with designated banks. Capital foreign exchange must be deposited into foreign exchange bank accounts maintained with designated banks and can generally be retained in such accounts.
At present, the PRC government is relaxing its control over foreign exchange. Enterprises that require foreign exchange for recurring activities such as trading and payment of staff remuneration may purchase foreign exchange from designated banks, subject to the production of relevant supporting documents.
In addition, where an enterprise requires foreign exchange for the payment of dividends, such as the distribution of profits by a foreign invested enterprise to its foreign investor, then, subject to the due payment of taxes on such dividends, the amount required may be withdrawn from funds in foreign exchange accounts maintained with designated banks, and where the amount of the funds in foreign exchange is insufficient, the enterprise may purchase additional foreign exchange from designated banks.
Despite the relaxation of foreign exchange control over current account transactions, the approval of the SAFE is still required before an enterprise may receive a foreign currency loan, provide a foreign exchange guarantee, make an investment outside the PRC or enter into any other capital account transaction that involves the purchase of foreign exchange.
When conducting foreign exchange transactions, the designated banks may, based on the exchange rate published by the PBOC and subject to certain limits, freely determine the applicable exchange rate.
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HONG KONG LAWS AND REGULATIONS
Summary of material differences between Hong Kong and PRC company law
The Hong Kong law applicable to a company incorporated in Hong Kong is based on the Companies Ordinance and supplemented by common law and the rules of equity that apply to Hong Kong.
As a joint stock limited liability company established in the PRC that is seeking a listing of H Shares on the Stock Exchange, we are governed by the PRC Company Law and all other rules and regulations promulgated pursuant to the PRC Company Law.
In the following sections, we summarize certain material differences between Hong Kong company law applicable to a company incorporated in Hong Kong and the PRC Company Law applicable to a joint stock limited liability company incorporated and existing under the PRC Company Law. This summary is, however, not intended to be an exhaustive comparison.
Share Capital
Under Hong Kong law, the authorized share capital of a Hong Kong company is the amount of share capital that the company is authorized to issue. A company is not bound to issue the entire amount of its authorized share capital. The authorized share capital of a Hong Kong company may be larger than the issued share capital. Hence, the directors of a Hong Kong company may, with the prior approval of the shareholders if required, cause the company to issue new shares. The PRC Company Law does not provide for authorized share capital. Our registered capital is the amount of our issued share capital. Any increase in our registered capital must be approved by our shareholders in a general meeting and the relevant PRC governmental and regulatory authorities.
Under the PRC Securities Law, a company which is authorized by the relevant securities administration authority to list its shares on a stock exchange must have a registered capital of not less than RMB30.0 million. Hong Kong law does not prescribe any minimum capital requirements for companies incorporated in Hong Kong.
Under the PRC Company Law, the shares subscribed for in the form of cash may not be less than 30% of a joint stock limited company’s registered capital. There is no such restriction on a Hong Kong company under Hong Kong law.
Restrictions on Shareholding and Transfer of Shares
Under PRC Company law, our Domestic Shares, which are denominated and subscribed for in Renminbi, may only be subscribed for or traded by the State, PRC legal persons and natural persons. Our overseas-listed H Shares, which are denominated in Renminbi and subscribed for in a currency other than Renminbi, may only be subscribed for, and traded by, investors from Hong Kong, Macau and Taiwan or any country and territory outside the PRC.
Under the PRC Company Law, our Promoters are not allowed to transfer the Shares they hold for a period of one year after the listing of our Shares.
There are no such restrictions on shareholdings and transfer of shares under Hong Kong law.
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Financial Assistance for Acquisition of Shares
Although the PRC Company Law does not prohibit or restrict us from providing financial assistance for the purpose of an acquisition of our Shares, the Mandatory Provisions contain restrictions on a company and its subsidiaries providing such financial assistance similar to those under the Hong Kong company law.
Variation of Class Rights
The PRC Company Law makes no specific provision relating to variation of class rights. However, the PRC Company Law states that the State Council can promulgate regulations relating to other kinds of shares. The Mandatory Provisions contain elaborate provisions relating to the circumstances which are deemed to be variations of class rights and the approval procedures required to be followed in respect thereof. These provisions have been incorporated in our Articles, which are summarized in ‘‘Appendix VII — Summary of Articles of Association.’’ Under the Hong Kong Companies Ordinance, no rights attached to any class of shares can be varied except; (i) with the approval of a special resolution of the holders of the relevant class at a separate meeting; (ii) with the consent in writing of the holders of three-fourths in nominal value of the issued shares of the class in question; (iii) by agreement of all the members of the Company; or (iv) if there are provisions in the articles of association relating to the variation of those rights, then in accordance with those provisions. We (as required by the Hong Kong Listing Rules and the Mandatory Provisions) have adopted in our Articles provisions protecting class rights in a similar manner to those found in Hong Kong law. Holders of overseas listed foreign invested shares and domestic invested shares are defined in our Articles as different classes, except where: (i) our Company issues and allots, in any 12-month period, pursuant to a shareholders’ special resolution, not more than 20% of each of the issued overseas listed foreign invested shares and the issued domestic invested shares existing as at the date of the shareholders’ special resolution; or (ii) any plan for the issue of domestic invested shares and listed foreign invested shares upon its establishment is implemented within 15 months following the date of approval by the CSRC. The Mandatory Provisions contain detailed provisions relating to circumstances which are deemed to constitute a variation of class rights.
Directors, Officers and Supervisors
The PRC Company Law, unlike Hong Kong company law, does not contain any specific requirement relating to the declaration of directors’ interests in material contracts, interested directors being restricted from counting towards the quorum of, and voting at, a meeting of the board of directors at which a transaction in which a director is interested in being considered, restrictions on directors’ authority in making major dispositions, restrictions on companies providing certain benefits, such as loans, to directors and guarantees in respect of directors’ liability and prohibitions against compensation for loss of office without shareholders’ approval. The Mandatory Provisions, however, contain certain restrictions on major dispositions and specify the circumstances under which a director may receive compensation for loss of office, all of which provisions have been incorporated in our Articles, a summary of which is set out in ‘‘Appendix VII — Summary of Articles of Association.’’
Supervisory Committee
Under the PRC Company Law, our Directors and managers are subject to the supervision of a Supervisory Committee. There is no mandatory requirement for the establishment of a supervisory committee for a company incorporated in Hong Kong.
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The Mandatory Provisions provide that each supervisor owes a duty, in the exercise of his powers, to act in good faith and honestly in what he considers to be our best interests and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Derivative Action by Minority Shareholders
Hong Kong law permits minority shareholders to start a derivative action on behalf of all shareholders against directors who have committed a breach of their fiduciary duties to the company if the directors control a majority of votes at a general meeting, thereby effectively preventing a company from suing the directors in breach of their duties in its own name. The PRC Company Law gives our shareholders the right in certain circumstances to initiate proceedings in their own name in the people’s court for the benefit of the Company against our Directors or senior management for their violation of their fiduciary duties. The Mandatory Provisions, however, provide us with certain remedies against our Directors, Supervisors and officers who breach their duties to us. In addition, as a condition to the listing of our H Shares on the Stock Exchange and in accordance with our Articles, each of our Directors and Supervisors is required to give an undertaking in favor of us acting as agent for each of our shareholders. This allows minority shareholders to act against our Directors and Supervisors in default.
Protection of Minorities
Under Hong Kong law, a shareholder who complains that the affairs of a company incorporated in Hong Kong are conducted in a manner unfairly prejudicial to his interests may petition to the court to either wind up the company or make an appropriate order regulating the affairs of the company. In addition, on the application of a specified number of members, the Financial Secretary may appoint inspectors who are given extensive statutory powers to investigate the affairs of a company incorporated in Hong Kong. PRC Company Law also has provisions to guard against oppression by the majority shareholders of minority shareholders, but it lacks detailed procedural rules. The Company, as required by the Mandatory Provisions, has adopted in its Articles of Association minority protection provisions similar to (though not as comprehensive as) those available under the Hong Kong law. These provisions state that a controlling shareholder may not exercise its voting rights in a manner prejudicial to the interests of our shareholders, may not relieve a Director or Supervisor of his duty to act honestly in our best interests or may not approve the expropriation by a Director or Supervisor of our assets or the individual rights of other shareholders.
Notice of Shareholders’ Meetings
Under the PRC Company Law, notice of a shareholders’ general meeting must be given not less than 20 days before the meeting or, in the case of a company having bearer shares, a public announcement of a shareholders’ general meeting must be made at least 30 days prior to it being held. Under the Special Regulations and the Mandatory Provisions, 45 days’ written notice must be given to all our shareholders and shareholders who wish to attend the meeting must reply in writing 20 days before the date of the meeting. For a Hong Kong limited company, the minimum period of notice of a general meeting where convened for the purpose of considering ordinary resolutions is 14 days and where convened for the purpose of considering special resolutions, is 21 days. The notice period for an annual general meeting is also 21 days.
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Quorum for Shareholders’ Meetings
Under Hong Kong law, the quorum for a general meeting is provided for in the articles of association of a company, but must be at least two members. The PRC Company Law does not specify any quorum requirement for a shareholders’ general meeting, but the Special Regulations and the Mandatory Provisions provide that our general meeting may only be convened when replies to the notice of that meeting have been received from shareholders whose Shares represent 50% of the voting rights at least 20 days before the proposed date of the meeting, or if that 50% level is not achieved, we must within five days notify our shareholders by way of a public announcement and we may hold the shareholders’ general meeting thereafter.
Voting
Under Hong Kong law, an ordinary resolution is passed by a simple majority of votes cast by members present in person or by proxy at a general meeting and a special resolution is passed by a majority of not less than three quarters of votes cast by members present in person or by proxy at a general meeting.
Under the PRC Company Law, the passing of any resolution requires more than one-half of the votes held by our shareholders present in person or by proxy at a shareholders’ general meeting except in cases of proposed amendments to our Articles, increase or reduction of our registered capital, merger, division or dissolution, which require two-thirds of the votes held by shareholders present in person or by proxy at a shareholders’ general meeting.
Financial Disclosure
We are required under the PRC Company Law to make available at our office for inspection by shareholders our annual balance sheet, profit and loss account, statement of changes in financial position and other relevant annexes 20 days before our shareholders’ annual general meeting. In addition, we must publish our financial statements and our annual balance sheet must be verified by registered accountants. The Hong Kong Companies Ordinance requires a company incorporated in Hong Kong to send to every shareholder a copy of its balance sheet, auditors’ report and directors’ report, which are to be laid before the company in its annual general meeting, not less than 21 days before such meeting.
We are required under PRC law to prepare our financial statements in accordance with PRC accounting standards. The Mandatory Provisions require that we must, in addition to preparing our accounts according to PRC standards, have our accounts prepared and audited in accordance with international or Hong Kong accounting standards and our financial statements must also contain a statement of the financial effect of the material differences (if any) from the financial statements prepared in accordance with the PRC accounting standards. Our Company is required to publish its interim and annual accounts within 60 days from the end of the first six months of a financial year and within 120 days from the end of a financial year, respectively.
The Special Regulations require that there should not be any inconsistency between the information disclosed within and outside the PRC and that, to the extent that there are differences in the information disclosed in accordance with the relevant PRC and overseas laws, regulations and requirements of the relevant stock exchanges, such differences should also be disclosed simultaneously.
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Information on Directors and Shareholders
The PRC Company Law gives our shareholders the right to inspect our Articles, minutes of the shareholders’ general meetings and financial and accounting reports. Under our Articles, shareholders have the right to inspect and copy (at reasonable charges) certain information on shareholders and on directors similar to that available to shareholders of Hong Kong companies under Hong Kong law.
Receiving Agent
Under the PRC Company Law and Hong Kong law, dividends once declared are debts payable to shareholders. The limitation period for debt recovery action under Hong Kong law is six years, while under the PRC law this limitation period is two years. The Mandatory Provisions require us to appoint a trust company registered under the Hong Kong Trustee Ordinance (Chapter 29 of the Laws of Hong Kong) as a receiving agent to receive on behalf of holders of H Shares dividends declared and all other monies owed by us in respect of our Shares.
Corporate Reorganization
Corporate reorganizations involving a company incorporated in Hong Kong may be effected in a number of ways, such as a transfer of the whole or part of the business or property of the company to another company in the course of being wound up voluntarily, pursuant to section 237 of the Hong Kong Companies Ordinance or a compromise or arrangement between the company and its creditors or between the company and its members pursuant to section 166 of the Hong Kong Companies Ordinance, which requires the sanction of the court. For PRC companies, such reorganizations are administratively considered and sanctioned under the PRC Company Law.
Dispute Arbitration
In Hong Kong, disputes between shareholders on the one hand, and a company incorporated in Hong Kong or its directors on the other, may be resolved through the courts. The Mandatory Provisions provide that disputes between holders of H Shares and our Company, our Directors, Supervisors, management or our domestic shareholders should be submitted to arbitration at either the Hong Kong International Arbitration Center (‘‘HKIAC’’) or the China International Economic and Trade Arbitration Commission (‘‘CIETAC’’), at the claimant’s choice.
Mandatory Deductions
Under the PRC Company Law, after-tax profits of a company are subject to deductions of contributions to the statutory common reserve fund before they can be distributed to shareholders. There are prescribed limits under the PRC Company Law for such deductions. There are no corresponding provisions under the Hong Kong Companies Ordinance.
Remedies of the Company
Under the PRC Company Law, if a director, supervisor or manager in carrying out his duties infringes any law, administrative regulation or the articles of association of a company, which results in damage to the company, that director, supervisor or manager should be responsible to the company for such damages. In addition, in compliance with the Hong Kong Listing Rules, remedies
VI-24 APPENDIX VI SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS of our Company similar to those available under the Hong Kong law (including rescission of the relevant contract and recovery of profits made by a Director, Supervisor or officer) have been set out in our Articles.
Dividends
Our Articles empower us to withhold, and pay to the relevant tax authorities, any tax payable under PRC law on any dividends or other distributions payable to a shareholder. Under Hong Kong law, the limitation period for an action to recover a debt (including the recovery of dividends) is six years, whereas under PRC laws, the relevant limitation period is two years. Our Company shall not exercise its powers to forfeit any unclaimed dividend in respect of H Shares until after the expiry of the applicable limitation period.
Fiduciary Duties
In Hong Kong, there is the common law concept of the fiduciary duty of directors. Under the PRC Company Law and the Special Regulations, directors, supervisors, officers, and managers owe a fiduciary duty towards their company and shall not engage in any activities which compete with the interests of their company without prior approval at general meeting, or which damage the interests of their company.
Closure of Register of Shareholders
The Hong Kong Companies Ordinance requires that the register of shareholders of a company must not generally be closed for the registration of transfers of shares for more than 30 days (extendable to 60 days in certain circumstances) in a year, whereas our Articles provide, as required by the PRC Company Law, that share transfers may not be registered within 20 days before the date of a shareholders’ meeting or within five days before the record date set for the purpose of distribution of dividends, unless otherwise provided by law.
Hong Kong Listing Rules
The Hong Kong Listing Rules provide additional requirements which apply to us as an issuer incorporated in the PRC as a joint stock limited liability company seeking a primary listing or whose primary listing is on the Stock Exchange. Set out below is a summary of the principal provisions containing the additional requirements which apply to us.
Compliance Advisor
The appointment of a compliance advisor as required by Chapter 3A of the Hong Kong Listing Rules may not be terminated until a replacement acceptable to the Stock Exchange has been appointed.
If the Stock Exchange is not satisfied that the compliance advisor is fulfilling its responsibilities adequately, it may require us to terminate the sponsor’s appointment and appoint a replacement.
In addition to the roles set out in Chapter 3A of the Hong Kong Listing Rules, our compliance advisor must be satisfied that the Directors and the Supervisors appreciate the nature of their responsibilities and can be expected to honor their obligations required of them under their respective undertakings, the Hong Kong Listing Rules and applicable laws and regulations. The compliance advisor must also keep us informed on a timely basis of changes in the Hong Kong
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Listing Rules and any new or amended law, regulation or code in Hong Kong applicable to our Company. It must act as our principal channel of communication with the Stock Exchange if our authorized representatives are expected to be frequently outside Hong Kong.
Accountants’ Report
An accountants’ report will not normally be regarded as acceptable by the Stock Exchange unless the relevant accounts have been audited to a standard comparable to that required in Hong Kong. Such report will normally be required to conform to either Hong Kong accounting standards or International Financial Reporting Standards.
Process Agent
We are required to appoint and maintain a person authorized to accept service of process and notices on our behalf in Hong Kong throughout the period during which our securities are listed on the Stock Exchange and must notify the Stock Exchange of his, her or its appointment, the termination of his, her or its appointment and his, her or its contact particulars.
Public Shareholding
If at any time we issue securities other than the H Shares which are listed on the Stock Exchange, the Hong Kong Listing Rules require that all of our H Shares must be held by the public, the H Shares must represent not less than 10% of our issued share capital and the aggregate number of our H Shares and other securities held by the public must constitute not less than 25% of our issued share capital.
Independent Non-Executive Directors and Supervisors
Independent non-executive Directors are required to demonstrate an acceptable standard of competence and adequate commercial or professional expertise to ensure that the interests of our general body of shareholders will be adequately represented. Supervisors must have the character, expertise and integrity and be able to demonstrate a standard of competence commensurate with their position as Supervisors.
Restrictions on Purchase of its Own Securities
Subject to governmental approvals and our Articles, we may repurchase our own H Shares on the Stock Exchange in accordance with the provisions of the Hong Kong Listing Rules. Approval by way of special resolution of the holders of Domestic Shares and the holders of H Shares at separate class meetings conducted in accordance with our Articles is required for share repurchases. In seeking approvals, we are required to provide information on any proposed or actual purchases of all or any of our equity securities, whether or not listed or traded on the Stock Exchange. We must also state the consequences of any purchases which will arise under either or both of the Hong Kong Takeovers Codes and any similar PRC law of which Directors are aware, if any. Any general mandate given to Directors to repurchase H Shares must not exceed 10% of the total number of our existing issued H Shares.
Redeemable Shares
We must not issue any redeemable shares unless the Stock Exchange is satisfied that the relative rights of the holders of our H Shares are adequately protected.
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Pre-emptive Rights
Except in the circumstances mentioned below, Directors are required to obtain the approval by a special resolution of shareholders in general meeting, and the approvals by special resolutions of the holders of Domestic Shares and H Shares (each being otherwise entitled to vote at general meetings) at separate class meetings conducted in accordance with our Articles, prior to:
(i) authorizing, allotting, issuing or granting Shares or securities convertible into Shares, options, warrants or similar rights to subscribe for any Shares or such convertible securities; or
(ii) any major subsidiary making any such authorization, allotment, issue or grant so as materially to dilute the percentage of our equity interest in such subsidiary.
No such approval will be required, except to the extent that our existing shareholders have by special resolution in general meeting given a mandate to Directors, either unconditionally or subject to such terms and conditions as may be specified in the resolution, to authorize, allot or issue, either separately or concurrently once every 12 months, not more than 20% of each of the existing issued Domestic Shares and H Shares as at the date of the passing of the relevant special resolution or such Shares as are part of our plan at the time of our establishment, to issue Domestic Shares and H Shares and which plan is implemented within 15 months from the date of approval by the State Council Securities Policy Committee.
Amendment to Articles of Association
We may not permit or cause any amendment to our Articles which would cause them to cease to comply with the PRC Company Law, the Mandatory Provisions or the Hong Kong Listing Rules.
Documents for Inspection
We are required to make available at a place in Hong Kong for inspection by the public and our shareholders free of charge, and for copying by our shareholders at reasonable charges the following:
. a complete duplicate register of shareholders;
. a report showing the state of our issued share capital;
. our latest audited financial statements and the reports of the Directors, auditors and (if any) Supervisors, if any, thereon;
. special resolutions;
. reports showing the number and nominal value of securities repurchased by us since the end of the last financial year, the aggregate amount paid for such securities and the maximum and minimum prices paid in respect of each class of securities repurchased (with a breakdown between Domestic Shares and H Shares);
. a copy of the latest annual return filed with the PRC SAIC or other competent PRC authority; and
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. for shareholders only, copies of minutes of meetings of shareholders.
Receiving Agents
Under Hong Kong law, we are required to appoint one or more receiving agents in Hong Kong and pay to such agents dividends declared and other monies owed in respect of the H Shares to be held, pending payment, in trust for the holders of such H Shares.
Statements in Share Certificates
We are required to ensure that all our listing documents and share certificates include the statements stipulated below and to instruct and cause each of our share registrars not to register the subscription, purchase or transfer of any of our Shares in the name of any particular holder unless and until such holder delivers to the share registrar a signed form in respect of those Shares bearing statements to the following effect, that the acquirer of Shares:
. agrees with us and each shareholder, and we agree with each shareholder, to observe and comply with the PRC Company Law, the Special Regulations and our Articles;
. agrees with us, each shareholder, Director, Supervisor, manager and other officer and we, acting both for the company and for each Director, Supervisor, manager and other officer, agree with each shareholder to refer all differences and claims arising from our Articles or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning our affairs to arbitration in accordance with our Articles. Any reference to arbitration will be deemed to authorize the arbitration tribunal to conduct its hearing in open session and to publish its award. Such arbitration will be final and conclusive;
. agrees with us and each shareholder that Shares are freely transferable by the holder thereof; and
. authorizes us to enter into a contract on his behalf with each Director and officer whereby such Directors and officers undertake to observe and comply with their obligations to shareholders as stipulated in our Articles.
Compliance with the PRC Company Law, the Special Regulations and the Articles of Association
We are required to observe and comply with the PRC Company Law, the Special Regulations and our Articles.
Contract between Us and Directors, Officers and Supervisors
We are required to enter into a contract in writing with every Director and officer containing at least the following provisions:
. an undertaking by the Director or officer to us to observe and comply with the PRC Company Law, the Special Regulations, our Articles, the Hong Kong Takeovers Codes and an agreement that we shall have the remedies provided in our Articles and that neither the contract nor his office is capable of assignment;
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. an undertaking by the Director or officer to us acting as agent for each shareholder to observe and comply with his obligations to our shareholders as stipulated in our Articles; and
. an arbitration clause which provides that whenever any differences or claims arise from the contract, our Articles or any rights or obligations conferred or imposed by the PRC Company Law or other relevant law and administrative regulations concerning affairs between us and our Directors or officers and between a holder of H Shares and a Director or officer, such differences or claims will be referred to arbitration at either the CIETAC in accordance with its rules or the HKIAC in accordance with its Securities Arbitration Rules, at the election of the claimant and that once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. Such arbitration will be final and conclusive.
We are also required to enter into a contract in writing with every Supervisor containing terms substantially similar to those for Directors.
If the party seeking arbitration elects to arbitrate the dispute or claim at HKIAC, then either party may apply to have such arbitration conducted in Shenzhen, according to the Securities Arbitration Rules of HKIAC.
PRC laws shall govern the arbitration of disputes or claims referred to above, unless otherwise provided by law or administrative regulations.
The award of the arbitral body is final and shall be binding on the parties thereto.
Disputes over who is a shareholder and over the share register do not have to be resolved through arbitration.
Subsequent Listing
We must not apply for the listing of our H Shares on a PRC stock exchange unless the Stock Exchange is satisfied that the relative rights of the holders of our H Shares are adequately protected.
GENERAL
If any change in the PRC law or market practices materially alters the validity or accuracy of any basis upon which the additional requirements have been prepared, the Stock Exchange may impose additional requirements or make listing of our H Shares subject to special conditions as the Stock Exchange may consider appropriate. Whether or not any such changes in the PRC law or market practices occur, the Stock Exchange retains its general power under the Hong Kong Listing Rules to impose additional requirements and make special conditions in respect of our listing.
OTHER LEGAL AND REGULATORY PROVISIONS
Upon our listing on the Stock Exchange, the provisions of the Securities and Futures Ordinance, the Hong Kong Takeovers Codes and such other relevant ordinances and regulations as may be applicable to companies listed on the Stock Exchange will apply to us.
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SECURITIES ARBITRATION RULES
Our Articles provide that certain claims arising from our Articles or the PRC Company Law shall be arbitrated at either the CIETAC or the HKIAC in accordance with their respective rules.
The Securities Arbitration Rules of the HKIAC contain provisions allowing, upon application by any party, an arbitral tribunal to conduct a hearing in Shenzhen for cases involving the affairs of companies incorporated in the PRC and listed on the Stock Exchange so that PRC parties and witnesses may attend. Where any party applies for a hearing to take place in Shenzhen, the tribunal shall, where satisfied that such application is based on bona fide grounds, order the hearing to take place in Shenzhen conditional upon all parties, including witnesses and the arbitrators, being permitted to enter Shenzhen for the purpose of the hearing. Where a party, other than a PRC party or any of its witnesses or any arbitrator, is not permitted to enter Shenzhen, then the tribunal shall order that the hearing be conducted in any practicable manner, including the use of electronic media. For the purpose of the Securities Arbitration Rules, a PRC party means a party domiciled in the PRC other than the territories of Hong Kong, Macau and Taiwan.
PRC LEGAL MATTERS
Jingtian & Gongcheng, our legal advisor on PRC law, has sent to us a letter dated March 27, 2006 confirming that it has reviewed the summaries of PRC company and securities regulations and the summaries of certain material differences between the Hong Kong company law and the PRC Company Law in so far as they relate to PRC law as contained in this Appendix and that, in its opinion, such summaries are correct summaries of relevant PRC laws and regulations. This letter is available for inspection as referred to in the section headed ‘‘Documents Available for Inspection’’ in ‘‘Appendix IX — Documents Delivered to the Registrar of Companies and Available for Inspection.’’
VI-30 APPENDIX VII SUMMARY OF ARTICLES OF ASSOCIATION
This Appendix contains a summary of our Articles of Association. The principal objective is to provide potential investors with an overview of our Articles of Association. As the information contained below is in summary form, it does not contain all the information that may be important to potential investors. As stated in the section headed ‘‘Documents Available for Inspection’’ in ‘‘Appendix IX — Documents Delivered to the Registrar of Companies and Available for Inspection,’’ a copy of the Articles of Association, together with an English translation, is available for inspection.
DIRECTORS AND OTHER MEMBERS OF SENIOR MANAGEMENT
Power to allot and issue shares
There is no provision in the Articles of Association empowering the Directors to allot and issue shares.
To increase the capital of our Company, the board of Directors (the ‘‘Board’’) is responsible for formulating proposals for approval at a shareholders’ general meeting by way of special resolution. Any such increase must be conducted in accordance with the procedures stipulated by relevant laws and administrative regulations.
Power to dispose of the assets of our Company or any subsidiary
The Board shall not, without the prior approval of a shareholders’ general meeting, dispose or agree to dispose of any fixed assets of our Company where the aggregate of the amount or value of the consideration for the proposed disposition, and the amount or value of the consideration for any disposition of fixed assets of our Company that has been completed in the period of four months immediately preceding the proposed disposition, exceeds 33% of the value of our Company’s fixed assets as shown in the last balance sheet placed before the shareholders’ general meeting.
For the purposes of the Articles of Association, a ‘‘disposal’’ includes an act involving the transfer of an interest in assets but does not include the provision of fixed assets by way of security. The validity of a disposition by our Company shall not be affected by a breach of the above provision of the Articles of Association.
Loans to Directors, Supervisors and other members of senior management
Our Company shall not directly or indirectly make a loan, or provide any guarantee in connection with the making of a loan, to a Director, Supervisor, the president or other member of senior management of our Company or its parent company or any of their respective associates. However, the following transactions are not subject to such prohibition:
(1) the provision by our Company of a loan or a guarantee in connection with the making of a loan to a company which is a subsidiary of our Company;
(2) the provision by our Company of a loan or a guarantee in connection with the making of a loan or any other funding to any of its Directors, Supervisors, the president or other members of senior management to meet expenditure incurred or to be incurred by such person(s) for the purposes of our Company or for the purpose of enabling such person(s) to perform his or, as the case may be, their duties properly, in accordance with the terms of the service contract(s) approved by the shareholders’ general meeting; and
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(3) if the ordinary course of business of our Company includes the lending of money or the providing of guarantees in connection with the making of loans, our Company may make a loan or provide a guarantee in connection with the making of a loan to any of its Directors, Supervisors, the president or other members of senior management, or their respective associates, in the ordinary course of business on normal commercial terms.
A loan made by our Company in breach of the above provisions shall be forthwith repayable by the recipient of the loan regardless of the terms of the loan.
A guarantee provided by our Company in connection with the making of a loan in breach of the above provisions shall be unenforceable against our Company, unless:
(1) the guarantee was provided in connection with a loan to an associate of any of the Directors, Supervisors, the president or other members of senior management of our Company or its parent company, and at the time the loan was advanced, the lender did not know the relevant circumstances; or
(2) the collateral provided by our Company has been lawfully disposed of by the lender of the loan to a bona fide purchaser.
For these purposes, a ‘‘guarantee’’ includes an undertaking or property provided by the guarantor to secure the performance of obligations by the obligor.
Financial assistance for the acquisition of shares in our Company or any subsidiary
Subject to the exceptions in the Articles of Association, our Company and its subsidiaries shall not, by any means at any time, provide any kind of financial assistance (as defined below) to a person who is acquiring or is proposing to acquire shares in the Company. The said acquiror of shares includes a person who directly or indirectly incurs any obligations (as defined below) due to the acquisition of shares in the Company. Our Company and its subsidiaries shall not, by any means at any time, provide financial assistance to the said acquiror for the purpose of reducing or discharging their obligations.
The following activities shall not be deemed to be prohibited activities:
(1) the provision of financial assistance by our Company where the financial assistance is given in good faith in the interest of our Company, and the principal purpose in giving the financial assistance is not for the acquisition of shares in the Company, or the giving of the financial assistance is an incidental part of some larger purpose of our Company;
(2) the lawful distribution by our Company of its assets by way of dividend;
(3) the allotment of bonus shares as dividends;
(4) a reduction of registered capital, a repurchase of shares or a reorganization of the share capital structure of our Company effected in accordance with the Articles of Association;
(5) the lending of money by our Company within its scope of business and in the ordinary course of its business (provided that the net assets of our Company are not thereby reduced or that, to the extent that net assets are thereby reduced, the financial assistance is provided out of our Company’s distributable profits);
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(6) the provision of money by our Company for contributions to staff and employees’ share schemes (provided that the net assets of our Company are not thereby reduced or that, to the extent that net assets are thereby reduced, the financial assistance is provided out of our Company’s distributable profits).
For these purposes:
(1) ‘‘financial assistance’’ includes (without limitation) the following meanings:
(i) gift;
(ii) guarantee (including the assumption of liability by the guarantor or the provision of assets by the guarantor to secure the performance of obligations by the obligor), or compensation (other than compensation in respect of our Company’s own default) or release or waiver of any rights;
(iii) provision of loan or any other agreement under which the obligations of our Company are to be fulfilled before the obligations of another party, or a change in the parties to, or the assignment of rights arising under, such loan or agreement; or
(iv) any other form of financial assistance given by our Company when our Company is insolvent or has no net assets, or when its net assets would thereby be reduced to a material extent.
(2) ‘‘assumption of obligation’’ includes the assumption of obligations by the changing of the obligor’s financial position by way of contract or the making of an arrangement (whether enforceable or not, and whether such obligation is to be borne solely by the Obligor or jointly with any other persons), or by any other means.
Disclosure of interests in contracts with our Company or any of its subsidiaries
Where a Director, Supervisor, the president or other member of senior management of our Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with our Company, (other than his contract of employment with our Company), he shall declare the nature and extent of his interests to the Board at the earliest opportunity, whether or not such contract, transaction or arrangement or proposal is otherwise subject to the approval of the Board.
A Director shall not vote on any contract, transaction or arrangement in which he is materially interested, nor shall he be counted in the quorum for that meeting.
Unless the interested Director, Supervisor, the president or other member of senior management discloses his interests to the Board in accordance with the Articles of Association and such contract, transaction or arrangement is approved by the Board at a meeting in which the interested Director, Supervisor, president or other member of senior management is not counted in the quorum and refrains from voting, a contract, transaction or arrangement in which that Director, Supervisor, the president or other member of senior management is materially interested is voidable by our Company except as against a bona fide party thereto acting without notice of the breach of duty by the interested Director, Supervisor, president or other member of senior management.
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For these purposes, a Director, Supervisor, the president or other member of senior management of our Company is deemed to be interested in a contract, transaction or arrangement in which an associate of his is interested.
If our Company is to enter into a contract, transaction or arrangement in which an associate of a Director, Supervisor, the president or other member of senior management of our Company is interested, and the Director, Supervisor, president or other member of senior management of our Company gives to the Board a notice in writing stating that, by reason of the facts specified in the notice, he is interested in the contract, transaction or arrangement which may subsequently be made by our Company, such Director, Supervisor, president or other member of senior management shall be deemed to have made sufficient declaration of his interests in accordance with the preceding paragraph, so far as the content stated in such notice is concerned, provided that such general notice shall have been given before the date on which the question of entering into the relevant contract, transaction or arrangement is first taken into consideration by our Company.
Remuneration
The remuneration of Directors must be approved by a shareholders’ general meeting.
Retirement, appointment and removal
The term of office of the chairman and the other Board members shall be three years. A Director may serve consecutive terms if re-elected.
Directors shall be elected and removed by a shareholders’ general meeting. A Director is not required to hold shares of our Company.
The Board shall consist of 11 Directors, of which at least three shall be independent Directors. Independent Directors are those Directors who are independent from our Company and its shareholders and do not hold any other position in our Company. The Board shall have one chairman. The chairman shall be elected and removed by more than one half of all of the members of the Board.
The following persons may not serve as a Director, Supervisor, the president or other member of senior management of our Company:
(1) a person without legal or with restricted legal capacity;
(2) a person who has committed an offence of corruption, bribery, infringement of property, misappropriation of property or sabotaging the social economic order and has been punished because of committing such offence; or who has been deprived of his political rights;
(3) a person who is a former director, factory manager or manager of a company or enterprise which has entered into insolvent liquidation because of mismanagement and who is personally liable for the insolvency of such company or enterprise;
(4) a person who is a former legal representative of a company or enterprise which had its business license revoked due to a violation of the law and who incurred personal liability;
(5) a person who has a relatively large amount of debts due and outstanding;
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(6) a person who is under criminal investigation by a judicial organization for violation of the criminal law which investigation is not yet concluded;
(7) a person who is not eligible for enterprise leadership according to laws and administrative regulations;
(8) a non-natural person; or
(9) a person convicted of the contravention of provisions of relevant securities regulations by a relevant government authority, and such conviction involves a finding that he has acted fraudulently or dishonestly.
The validity of an act of a Director, the president or other member of senior management on behalf of our Company is not, vis-a`-vis a bona fide third party, affected by any irregularity in his office, election or any defect in his qualification.
Borrowing powers
On condition of compliance with applicable laws and regulations of the PRC, our Company has the power to raise and borrow money, which power includes, without limitation, the issue of debentures, the charging or mortgaging of a part or the whole of our Company’s business or properties and other rights permitted by laws and administrative regulations of the PRC. The Articles of Association do not contain any specific provision in respect of the manner in which borrowing powers may be exercised by the Directors nor do they contain any specific provision in respect of the manner in which such powers may be varied, other than: (a) provisions which give the Directors the power to formulate proposals for the issuance of debentures by our Company; and (b) provisions which provide that the issuance of debentures must be approved by a shareholders’ general meeting by way of a special resolution.
Duties
In addition to obligations imposed by laws, administrative regulations or required by the stock exchange on which shares are listed, each of our Company’s Directors, Supervisors, president and other members of senior management owes a duty to each shareholder, in the exercise of the functions and powers of our Company entrusted to him:
(1) not to cause our Company to exceed the scope of the business stipulated in its business license;
(2) to act honestly in the best interest of our Company;
(3) not to expropriate in any guise our Company’s property, including (without limitation) usurpation of opportunities which benefit our Company; and
(4) not to expropriate the individual rights and interests of shareholders, including (without limitation) rights to distributions and voting rights, save pursuant to a restructuring of our Company which has been submitted for approval by a shareholders’ general meeting in accordance with the Articles of Association.
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Each of our Company’s Directors, Supervisors, the president and other members of senior management owes a duty, in the exercise of his powers and discharge of his duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Each of our Company’s Directors, Supervisors, the president and other members of senior management shall exercise his powers and carry on his duties in accordance with fiduciary principles and shall not put himself in a position where his duty and his interest may conflict. This principle includes (without limitation) discharging the following obligations:
(1) to act honestly in the best interests of our Company;
(2) to act within the scope of his powers and not to exceed those powers;
(3) to exercise the discretion vested in him personally and not to allow himself to act under the control of another and, unless and to the extent permitted by laws, administrative regulations or with the informed consent of shareholders given in a shareholders’ general meeting, not to delegate the exercise of his discretion;
(4) to treat shareholders of the same class equally and to treat shareholders of different classes fairly;
(5) except in accordance with the Articles of Association or with the informed consent of shareholders given in a shareholders’ general meeting, not to enter into any contract, transaction or arrangement with our Company;
(6) without the informed consent of shareholders given in a shareholders’ general meeting, not to use our Company’s property for his own benefit;
(7) not to exploit his position to accept bribes or other illegal income or expropriate our Company’s property by any means, including (without limitation) opportunities advantageous to our Company;
(8) without the informed consent of shareholders given in a shareholders’ general meeting, not to accept commissions in connection with our Company’s transactions;
(9) to abide by the Articles of Association, faithfully execute his official duties and protect our Company’s interests, and not to exploit his position and power in our Company to advance his own private interests;
(10) not to compete with our Company in any form unless with the informed consent of shareholders given in a shareholders’ general meeting;
(11) not to misappropriate our Company’s funds or lend such funds to others, not to open accounts in his own name or other names for the deposit of our Company’s assets and not to use our Company’s assets to guarantee the debts of a shareholder of our Company or other individual(s); and
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(12) unless with the informed consent of shareholders in a shareholders’ general meeting, to keep in confidence information acquired by him in the course of and during his tenure and not to use the information other than in furtherance of the interests of our Company, save that disclosure of such information to the court or other governmental authorities is permitted if:
(i) disclosure is made under compulsion of law;
(ii) the interests of the public require disclosure;
(iii) the interests of the relevant Director, Supervisor, the president or other member of senior management require disclosure.
Each of our Directors, Supervisors, the president or other members of senior management shall not cause the following persons or institutions (‘‘associates’’) to do what he is prohibited from doing:
(1) the spouse or minor child of that Director, Supervisor, president or other member of senior management;
(2) a person acting in the capacity of trustee of that Director, Supervisor, president or other member of senior management or any person referred to in the preceding paragraph;
(3) a partner of that Director, Supervisor, president or other member of senior management or any person referred to in paragraphs (1) and (2) above;
(4) a company in which that Director, Supervisor, president or other member of senior management, alone or jointly with one or more persons referred to in paragraphs (1), (2) and (3) above, or with other Directors, Supervisors, the president and other members of senior management, has a de facto controlling interest; and
(5) the directors, supervisors, president and other members of senior management of the controlled company referred to in the preceding paragraph.
The fiduciary duties of the Directors, Supervisors, the president and other members of senior management of our Company do not necessarily cease with the termination of their tenure. The duty of confidence in relation to trade secrets of our Company survives the termination of their tenure for a period of five years. Other duties may continue for such period as fairness may require depending on the length of time elapsed between the termination and the act concerned, and the circumstances and conditions under which their relationship with our Company was terminated.
In addition to any rights and remedies provided by laws and administrative regulations, where a Director, Supervisor, the president or other member of senior management of our Company is in breach of his duties to our Company, our Company has a right to:
(1) claim damages from the Director, Supervisor, president or other member of senior management as compensation for losses sustained by our Company as a result of such breach;
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(2) rescind any contract or transaction entered into by our Company with the Director, Supervisor, president or other member of senior management or with a third party (where such third party knows or should know that there is such a breach of duties by such Director, Supervisor, president or other member of senior management);
(3) demand an account of the profits made by the Director, Supervisor, president or other member of senior management in breach of his duties;
(4) recover from the Director, Supervisor, the president or other member of senior management any monies which should have been received by our Company, including (without limitation) commissions; and
(5) demand repayment of the interest earned or which may have been earned by the Director, Supervisor, president or other member of senior management on the monies that should have been paid to our Company.
Subject to the Articles of Association, a Director, Supervisor, the president or other member of senior management of our Company may be relieved of liability for specific breaches of his duty by the informed consent of shareholders given at a shareholders’ general meeting.
ALTERATIONS TO CONSTITUTIONAL DOCUMENTS
Our Company may amend its Articles of Association in accordance with the requirements of laws, administrative regulations and the Articles of Association.
The Articles of Association may be amended in accordance with the following procedures:
(1) the Board shall pass a resolution pursuant to the Articles of Association proposing amendments to the Articles of Association;
(2) notice of the proposed amendments shall be given to the shareholders and a shareholders’ general meeting shall be convened to vote on such amendments;
(3) proposed amendments submitted to the shareholders’ general meeting for voting shall be passed by a special resolution.
Amendments to the Articles of Association involving the contents of the Mandatory Provisions shall become effective upon approval by the company examination and approval department authorized by the State Council. If there is any change relating to the registered particulars of our Company, application shall be made for a change in registration in accordance with the law.
VARIATION OF RIGHTS OF EXISTING SHARES OR CLASSES OF SHARES
Rights conferred on any class of shareholders in the capacity of shareholders (‘‘class rights’’) may not be varied or abrogated by the Company unless approved by a special resolution of shareholders in a shareholders’ general meeting and by holders of shares of that class at a separate meeting conducted in accordance with the Articles of Association.
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The following circumstances shall be deemed to be a variation or abrogation of the class rights of a class:
(1) to increase or decrease the number of shares of such class, or increase or decrease the number of shares of another class having voting rights, rights to distributions or privileges equal or superior to those of the shares of such class;
(2) to effect an exchange of all or part of the shares of such class into shares of another class or to effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such class;
(3) to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of such class;
(4) to reduce or remove a dividend preference or a liquidation preference attached to shares of such class;
(5) to add, remove or reduce conversion privileges, options, voting rights, transfer or pre- emptive rights, or rights to acquire securities of our Company attached to shares of such class;
(6) to remove or reduce rights to receive payment payable by our Company in particular currencies attached to shares of such class;
(7) to create a new class of shares having voting rights, rights to distributions or privileges equal or superior to those of the shares of such class;
(8) to restrict the transfer or ownership of the shares of such class or add to such restriction;
(9) to allot and issue rights to subscribe for, or to convert the existing shares in our Company of such class or another class;
(10) to increase the rights or privileges of shares of another class;
(11) to restructure our Company where the proposed restructuring will result in different classes of shareholders bearing a disproportionate burden of such proposed restructuring; and
(12) to vary or abrogate provisions in the Articles of Association.
Shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning paragraphs (2) to (8), (11) and (12) above, but interested shareholder(s) (as defined below) shall not be entitled to vote at class meetings.
Resolutions of a class of shareholders shall be passed by votes representing more than two- thirds of the voting rights of shareholders of that class represented at the relevant meeting who are entitled to vote at the class meeting.
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Written notice of a class meeting shall be given 45 days before the date of the class meeting to notify all the shareholders of that class in the register of shareholders of the matters to be considered, and the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to our Company 20 days before the date of the class meeting.
If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one-half of the voting shares at the class meeting, our Company may hold the class meeting; if not, our Company shall within five days further notify the shareholders of the class by public announcement of the matters to be considered, the date and the place for the class meeting. Our Company may then hold the class meeting after the publication of such announcement.
Notice of class meetings need only be served on shareholders entitled to vote at the class meeting.
Meetings of any class of shareholders shall be conducted in a manner as similar as possible to that of shareholders’ general meetings. The provisions of the Articles of Association relating to the manner of conducting shareholders’ general meetings shall apply to any meeting of a class of shareholders.
Apart from the holders of other classes of shares, the holders of Domestic Shares and overseas listed foreign invested shares are deemed to be shareholders of different classes.
Pursuant to amendments to the PRC Company Law which came into effect on January 1, 2006, the Shares held by our Promoters may not be transferred until one year after the Listing Date. Thereafter, under the Articles of Association, the Domestic Shares may be converted into H Shares and become listed and tradable, subject to approval from the State Council or the State Council’s authorized approval authority and consent from the Stock Exchange.
The special procedures for approval by a class of shareholders shall not apply in the following circumstances:
(1) where our Company issues, upon the approval by a special resolution of shareholders in a shareholders’ general meeting, either separately or concurrently once every 12 months, not more than 20 per cent. of each of its existing issued Domestic Shares (as defined in the Articles of Association) and overseas listed foreign invested shares (as defined in the Articles of Association); or
(2) where our Company’s plan to issue Domestic Shares and overseas listed foreign invested shares at the time of its establishment is carried out within 15 months from the date of approval by the State securities regulatory authority.
For the purposes of the class rights provisions of the Articles of Association, the meaning of ‘‘interested shareholder(s)’’ is:
(1) in the case of a repurchase of shares by pro rata general offers to all shareholders or open transactions on the stock exchange, a ‘‘controlling shareholder’’ within the meaning of the Articles of Association;
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(2) in the case of a repurchase of shares by an off-market agreement, a holder of the shares to which the proposed agreement relates; and
(3) in the case of a restructuring of our Company, a shareholder within a class who bears less than a proportionate burden imposed on that class under the proposed restructuring or who has an interest in the proposed restructuring different from the interest of the shareholders of that class.
RESOLUTIONS REQUIRING MAJORITY APPROVAL
Resolutions of shareholders’ general meetings shall be divided into ordinary resolutions and special resolutions.
To adopt an ordinary resolution, votes representing more than one-half of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favor of the resolution in order for it to be passed.
To adopt a special resolution, votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favor of the resolution in order for it to be passed.
VOTING RIGHTS (GENERALLY, ON A POLL AND RIGHT TO DEMAND A POLL)
A shareholder (including a proxy) when voting at a shareholders’ general meeting may exercise voting rights in accordance with the number of shares carrying the right to vote and each share shall have one vote.
At any shareholders’ general meeting, a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded:
(1) by the chairman of the meeting;
(2) by at least two shareholders entitled to vote present in person or by proxy; or
(3) by one or more shareholders present in person or by proxy and representing (alone or in aggregate) ten per cent. or more of all shares carrying the right to vote at the meeting.
Unless a poll be so demanded, a declaration by the chairman that a resolution has been passed on a show of hands, and an entry to that effect in the minutes of the meeting shall be conclusive evidence of that fact, without proof of the number or proportion of the votes recorded in favor of or against such resolution. The demand for a poll may be withdrawn by the person who makes such demand.
A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded. On a poll taken at a meeting, a shareholder (including a proxy) entitled to two or more votes need not cast all his votes in the same way.
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In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall be entitled to one additional vote.
REQUIREMENTS FOR SHAREHOLDERS’ ANNUAL GENERAL MEETINGS
The Board shall convene a shareholders’ annual general meeting once each year and within six months from the end of the preceding financial year.
ACCOUNTS AND AUDIT
Our Company shall establish its financial and accounting system in accordance with laws, administrative regulations and PRC accounting standards formulated by the finance regulatory department of the State Council. Our Company shall set aside funds for the statutory common reserve fund and the statutory welfare fund in accordance with the law.
The Board shall place before the shareholders at every shareholders’ annual general meeting such financial reports as are required to be prepared by our Company pursuant to any laws, administrative regulations or directives promulgated by competent regulatory authorities. Such financial reports shall have been verified.
Our Company’s financial reports shall be made available for shareholders’ inspection at our Company at least 20 days before the date of every shareholders’ annual general meeting. Each shareholder shall be entitled to obtain a copy of the financial reports. Our Company may make available to shareholders summary financial reports that comply in form and in substance with the relevant requirements of the place where our Company’s shares are listed.
The financial statements of our Company shall, in addition to being prepared in accordance with PRC accounting standards and regulations, be prepared in accordance with either international accounting standards, or the accounting standards of the overseas place where our Company’s shares are listed. If there is any material difference between the financial statements prepared respectively in accordance with the two accounting standards, such difference shall be stated in an appendix to the financial statements. When our Company is to distribute its after-tax profits, the lower of the after-tax profits as shown in the two financial statements shall be adopted.
Any interim results or financial information published or disclosed by our Company must also be prepared and presented in accordance with PRC accounting standards and regulations, and also in accordance with either international accounting standards or the accounting standards of the overseas place where our Company’s shares are listed.
Our Company shall publish its financial reports twice every fiscal year, that is, the interim financial report shall be published within 60 days after the expiration of the first six months of each fiscal year and the annual financial report shall be published within 120 days after the expiration of each fiscal year.
NOTICE OF MEETINGS AND BUSINESS TO BE CONDUCTED AT THE MEETINGS
The shareholders’ general meeting is the organ of authority of our Company and shall exercise its functions and powers in accordance with the law.
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Our Company shall not, without the prior approval of a shareholders’ general meeting, enter into any contract with any person other than a Director, Supervisor, president or other member of senior management whereby the management of the whole or any substantial part of the business of our Company is to be handed over to such person.
Shareholders’ general meetings are divided into annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the Board.
Under any of the following circumstances, the Board shall convene a shareholders’ extraordinary general meeting within two months:
(1) when the number of Directors is less than the number of Directors required by the PRC Company Law or two-thirds of the number of Directors as specified in the Articles of Association;
(2) when the unrecovered losses of our Company amount to one-third of the total amount of our share capital;
(3) when shareholder(s) holding ten per cent. or more of our Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of a shareholders’ extraordinary general meeting;
(4) when deemed necessary by the Board or as requested by the supervisory committee; or
(5) when two or more independent Directors request the convening of a shareholders’ extraordinary general meeting.
When our Company convenes a shareholders’ general meeting, written notice of the meeting shall be given at least 45 days before the date of the meeting to notify all the shareholders in the register of shareholders of the matters to be considered and the date and the place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to our Company 20 days before the date of the meeting.
When our Company convenes a shareholders’ annual general meeting, shareholders holding five per cent. or more of the total voting shares of our Company shall have the right to propose new motions in writing, and our Company shall place matters in the proposed motions within the scope of functions and powers of the shareholders’ general meeting on the agenda.
A shareholders’ extraordinary general meeting shall not decide on those matters not stated in thenoticeofmeeting.
Our Company shall, based on the written replies received 20 days before the date of the shareholders’ general meeting from the shareholders, calculate the number of voting shares represented by shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting reaches more than one-half of our Company’s total voting shares, our Company may hold the meeting. If not, then our Company shall within five days further notify the shareholders by public announcement of the matters to be considered, the place and the date for the meeting. Our Company then may hold the meeting after the publication of such announcement.
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A notice of meeting of shareholders shall comply with the following requirements:
(1) be in writing;
(2) specify the place, the day and the time of the meeting;
(3) state the matters to be discussed at the meeting;
(4) provide such information and explanation as are necessary for the shareholders to exercise an informed judgment on the proposals before them. Without limiting the generality of the foregoing, where a proposal is made to amalgamate our Company with another, to repurchase shares, to reorganize the share capital, or to restructure our Company in any other way, the terms of the proposed transaction must be provided in detail together with copies of the proposed agreement, if any, and the cause and effect of such proposal must be properly explained;
(5) contain a disclosure of the nature and extent, if any, of the material interests of any Director, Supervisor, the president or any other member of senior management in the proposed transaction and the effect of the proposed transaction on them in their capacity as shareholders in so far as it is different from the effect on the interests of the shareholders of the same class;
(6) contain the full text of any special resolution proposed to be moved at the meeting;
(7) contain a clear statement that a shareholder entitled to attend and vote is entitled to appoint one or more proxies to attend and vote instead of him and that a proxy need not be a shareholder; and
(8) specify the time and place for lodging proxy forms for the relevant meeting.
Notice of a shareholders’ general meeting shall be served on the shareholders (whether or not entitled to vote at the meeting), by delivery or prepaid airmail to their addresses as shown in the register of shareholders. For the holders of Domestic Shares, notice of general meetings may also be issued by way of public announcements.
Such public announcements shall be published in one or more national newspapers designated by the State securities regulatory authority within the interval between 45 days and 50 days before the date of the meeting. After the publication of such announcement, the holders of Domestic Shares shall be deemed to have received the notice of the relevant shareholders’ general meeting. The accidental omission to give notice of a meeting to, or the non-receipt of notice of a meeting by, any person entitled to receive notice shall not invalidate the proceedings at that meeting.
The following matters shall be resolved by an ordinary resolution at a shareholders’ general meeting:
(1) work reports of the Board and the supervisory committee;
(2) plans formulated by the Board for the distribution of profits and recovery of losses;
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(3) election and removal of the members of the Board and members of the supervisory committee, their remuneration and the method of payment;
(4) annual preliminary and final budgets, balance sheets, profit and loss accounts and other financial statements of our Company; and
(5) matters other than those required by laws and administrative regulations or by the Articles of Association to be adopted by a special resolution.
The following matters shall be resolved by a special resolution at a shareholders’ general meeting:
(1) the increase or reduction of share capital and the issue of shares of any class, warrants and other similar securities;
(2) the issue of debentures by our Company;
(3) material purchases and sales, the division, merger, dissolution and liquidation of our Company;
(4) amendments to the Articles of Association;
(5) amendments to or removal of rights of shareholders of any class; and
(6) any other matters considered by the shareholders’ general meeting, resolved by way of an ordinary resolution, to be of a nature which may have a material impact on our Company and should be adopted by a special resolution.
TRANSFER OF SHARES
All fully paid-up H Shares listed in Hong Kong can be freely transferred in accordance with the Articles of Association. The Board may refuse to recognize an instrument of transfer without providing any reason unless:
(1) a fee of HK$2.50 per instrument of transfer or a higher fee approved by the Stock Exchange is paid to our Company for the registration of the instrument of transfer relating to the H Shares or any other documents in connection with the title to the shares or which may affect or change the title to the H Shares;
(2) the instrument of transfer relates only to the H Shares listed in Hong Kong;
(3) the stamp duty payable thereon is paid;
(4) the relevant share certificate and such other evidence as the Board may reasonably require to show the right of the transferor to transfer the H Shares has been submitted;
(5) if the shares are transferred to joint holders, the number of such joint holders shall not exceed four; and
(6) the relevant shares are free from all liens of our Company; and
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(7) the mandatory transfer restriction period for the transfer of Converted H Shares has expired upon approval by the regulatory authorities in the PRC and the Stock Exchange.
The alteration and rectification of each part of the register of shareholders shall be carried out in accordance with the laws of the place where each part of the register is maintained.
No changes resulting from share transfers may be made to the register of shareholders within 30 days before the date of a shareholders’ general meeting or within five days before the record date for our Company’s distribution of dividends.
Register of Shareholders
Our Company shall keep a register of shareholders to record the following:
(1) the name, address, profession or nature of each shareholder;
(2) the number and class(es) of shares held by each shareholder;
(3) the amounts paid or agreed to be payable by each shareholder for the shares he is holding;
(4) the serial number of the shares held by each shareholder;
(5) the date on which the name of each shareholder was entered in the register of shareholders; and
(6) the date on which any shareholder ceases to be a shareholder.
Unless there is proof to the contrary, the register of shareholders shall be sufficient proof of the title to an equity interest in our Company.
POWER OF OUR COMPANY TO PURCHASE ITS OWN SHARES
In accordance with the provisions of the Articles of Association, our Company may reduce its registered share capital.
Our Company may, with approval according to the procedures provided in the Articles of Association and subject to the approval of the relevant State department in charge, repurchase its issued shares under the following circumstances:
(1) cancellation of shares for the reduction of its capital;
(2) merging with another company that holds shares in our Company; and
(3) other circumstances permitted by laws and administrative regulations.
Our Company may, with the approval of the relevant State department in charge, conduct the repurchase in one of the following ways:
(1) making a pro rata general offer of repurchase to all of its shareholders;
(2) repurchasing shares through open transactions on the stock exchange; or
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(3) repurchasing by an off-market agreement.
Where our Company repurchases its shares by an off-market agreement, the prior sanction of shareholders in a shareholders’ general meeting shall be obtained in accordance with the Articles of Association. Our Company may release, vary or waive its rights under a contract so entered into by our Company with the prior approval of shareholders in a shareholders’ general meeting obtained in the same manner.
A contract to repurchase shares includes (without limitation) an agreement to become obliged to repurchase or an acquisition of the right to repurchase shares of our Company. Rights of our Company under a contract to repurchase its shares are not capable of being assigned.
Shares repurchased in accordance with the law by our Company shall be cancelled within the period prescribed by laws and administrative regulations, and our Company shall apply to the original company registry for registration of the change of its registered share capital. The amount of our Company’s registered share capital shall be reduced by the aggregate nominal value of those cancelled shares.
Unless our Company is in the course of liquidation, it must comply with the following provisions in relation to the repurchasing of its issued shares:
(1) where our Company repurchases its shares at nominal value, payment shall be made out of book surplus distributable profits of our Company or out of proceeds of a fresh issue of shares made for that purpose;
(2) where our Company repurchases its shares at a premium to its nominal value, payment up to the nominal value shall be made out of the book surplus distributable profits of our Company or out of the proceeds of a fresh issue of shares made for that purpose. Payment of the portion in excess of the nominal value shall be effected as follows:
(i) if the shares being repurchased were issued at nominal value, payment shall be made out of the book surplus distributable profits of our Company; or
(ii) if the shares being repurchased were issued at a premium to its nominal value, payment shall be made out of the book surplus distributable profits of our Company or out of the proceeds of a fresh issue of shares made for that purpose, provided that the amount paid out of the proceeds of the fresh issue shall not exceed the aggregate of premiums received by our Company on the issue of the shares repurchased nor the current amount of our Company’s share premium account or capital common reserve fund account (including the premiums on the fresh issue) at the time of the repurchase;
(3) payment by our Company in consideration of the following shall be made out of our Company’s distributable profits:
(i) expenses incurred for the acquisition of rights to repurchase shares of our Company;
(ii) expenses incurred for the variation of any contract to repurchase shares of our Company; and
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(iii) payment for the release of any of our Company’s obligation under any contract to repurchase shares of our Company; and
(iv) after our Company’s registered share capital has been reduced by the total nominal value of the cancelled shares in accordance with the relevant provisions, the amount deducted from the distributable profits of our Company for payment of the nominal value portion of the shares repurchased shall be transferred to our Company’s share premium account or common capital reserve fund account.
POWER FOR ANY SUBSIDIARY OF OUR COMPANY TO OWN SHARES IN OUR COMPANY
There are no provisions in the Articles of Association preventing ownership of shares in our Companybyasubsidiary.
DIVIDENDS AND OTHER METHODS OF PROFIT DISTRIBUTION
Our Company may distribute dividends in the following manner:
(1) cash; or
(2) shares.
Cash dividends or other payments declared by our Company to be payable to holders of Domestic Shares shall be paid in Renminbi. Those payable to holders of overseas listed foreign invested shares and Unlisted Foreign Shares shall be declared and calculated in Renminbi, and paid in foreign exchange.
Our Company shall appoint receiving agents for holders of overseas listed foreign invested shares. Such receiving agents shall receive dividends which have been declared by our Company and all other amounts which our Company should pay to holders of overseas listed foreign invested shares on such shareholders’ behalf.
The receiving agents appointed by our Company shall meet the relevant requirements of the laws of the place where the stock exchange on which our Company’s shares are listed or the relevant regulations of such stock exchange.
Each of the receiving agents appointed for holders of H Shares shall be a company registered as a trust company under the Trustee Ordinance of Hong Kong.
PROXIES
Any shareholder entitled to attend and vote at a shareholders’ general meeting of our Company shall be entitled to appoint one or more other persons (whether a shareholder or not) as his proxy to attend and vote on his behalf, and a proxy so appointed shall be entitled to exercise the following rights pursuant to the authorization from that shareholder:
(1) the shareholder’s right to speak at the meeting;
(2) the right to demand or join in demanding a poll; and
(3) the right to vote by hand or on a poll, but a proxy of a shareholder who has appointed morethanoneproxymayonlyvoteonapoll.
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If the said shareholder is a designated clearing house (or its attorney) as defined in relevant laws or regulations of the place where our Company’s shares are listed, the shareholder may appoint one or more person(s) deemed appropriate to be its proxy(ies) at any shareholders’ general meeting or class meeting. However, where more than one person is so appointed, the appointment letter shall state the number of shares and classes of shares represented by the proxies. The persons so appointed has the right to represent the clearing house proxies to exercise the rights as if the clearing house is an individual shareholder of our Company.
The instrument appointing a proxy shall be in writing under the hand of the appointor or his attorney duly authorized in writing, or if the appointor is a legal person, under seal or under the hand of a director, or an authorized person or attorney duly authorized. The instrument appointing a proxy shall state the number of shares in respect of which the proxy is given. If more than one person are appointed as proxies, the instrument shall state the number of shares in respect of which the proxy is given to each such person.
The instrument appointing a proxy and (if the instrument is signed by a person under a power of attorney on behalf of the appointor) a notarially certified copy of that power of attorney or other authorization shall be deposited at the residence of our Company or at such other place specified in the notice of general meeting, not less than 24 hours before the time for holding the meeting at which the proxy proposes to vote, or the time appointed for the passing of the resolution.
If the appointor is a legal entity, its legal representative or such person as is authorized by resolution of its board of directors or other governing body to act as its representative may attend at any meeting of shareholders of our Company as a representative of the appointor.
Any form issued to a shareholder by the Directors for the appointment of a proxy to attend and vote at meetings of our Company shall be such as to enable the shareholder, according to his intention, to freely instruct the proxy to vote in favor of or against each resolution dealing with any business to be transacted at the meeting. Such a form shall contain a statement that, in the absence of specific instructions by the shareholder, the proxy may vote as he thinks fit.
A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or loss of capacity of the appointor, revocation of the proxy or the authority under which the proxy was executed, or the transfer of the shares in respect of which the proxy is given, provided that no notice in writing of such death, incapacity, revocation or transfer as aforesaid shall have been received by our Company before the commencement of the meeting at which the proxy is used.
CALLS ON SHARES AND FORFEITURE OF SHARES
There are no provisions in the Articles of Association relating to the making of calls on shares or for the forfeiture of shares.
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RIGHTS OF SHAREHOLDERS (INCLUDING INSPECTION OF REGISTER)
The ordinary shareholders of our Company shall enjoy the following rights:
(1) the right to receive dividends and other distributions in proportion to the number of shares held by the relevant shareholder;
(2) the right to attend or appoint a proxy to attend shareholders’ general meetings and to vote at such meetings;
(3) the right to supervise the management of our Company’s business operations and the right to present proposals or to raise queries;
(4) the right to transfer shares in accordance with laws, administrative regulations and provisions of the Company’s Articles of Association;
(5) the right to obtain relevant information in accordance with the provisions of our Company’s Articles of Association, including:
(i) the right to obtain a copy of our Company’s Articles of Association, subject to payment of costs;
(ii) subject to payment of a reasonable fee, the right to inspect and copy:
(a) all parts of the register of shareholders;
(b) personal particulars of each of our Company’s directors, supervisors, general manager and other senior officers, including:
(aa) present and former name and alias;
(bb) principal address (place of residence);
(cc) nationality;
(dd) primary and all other concurrent occupations and duties;
(ee) identification documents and the numbers thereof;
(c) reports on the state of our Company’s share capital;
(d) reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by our Company since the end of the last accounting year and the aggregate amount paid by our Company for this purpose;
(e) minutes of shareholders’ meetings;
(6) in the event of the termination or liquidation of our Company, the right to participate in the distribution of surplus assets of our Company in accordance with the number of shares held; and
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(7) other rights conferred by laws, administrative regulations and our Company’s Articles of Association.
QUORUM FOR MEETINGS AND SEPARATE CLASS MEETINGS
Our Company may convene a shareholders’ general meeting where the number of voting shares represented by those shareholders from whom our Company has received, 20 days before the meeting, notices of intention to attend the meeting is more than one-half of our Company’s voting shares; or, if not, where our Company has further informed the shareholders of the business to be considered at the meeting, the date and the venue of the meeting, within five days before the meeting by way of a public announcement.
Our Company may convene a class meeting where the number of voting shares represented by those shareholders from whom our Company has received, 20 days before the meeting, notices of intention to attend the meeting is more than one-half of the total number of voting shares of that class; or, if not, where our Company has further informed the shareholders of the business to be considered at the meeting, as well as the date and the venue of the meeting, within five days before the meeting by way of a public announcement.
RIGHTS OF THE MINORITIES IN RELATION TO FRAUD OR OPPRESSION
In addition to obligations imposed by laws, administrative regulations or required by the stock exchange on which shares of our Company are listed, a controlling shareholder (as defined below) shall not, when exercising his voting rights as a shareholder, cause any decision prejudicial to the interest of the shareholders generally or to some of the shareholders of our Company to be made in respect of the following matters:
(1) relieving a Director or Supervisor from his duty to act honestly in the best interests of our Company;
(2) approving the expropriation by a Director or Supervisor (for his own benefit or for the benefit of another person), in any guise, of our Company’s assets, including (without limitation) usurpation of opportunities which benefit our Company; or
(3) approving the expropriation by a Director or Supervisor (for his own benefit or for the benefit of another person) of the individual rights of other shareholders, including (without limitation) rights to distributions and voting rights save pursuant to a restructuring submitted for approval by a shareholders’ general meeting in accordance with the Articles of Association.
For these purposes, a ‘‘controlling shareholder’’ means a person who satisfies any one of the following conditions:
(1) he alone, or acting in concert with others, has the power to elect more than one-half of the Board;
(2) he alone, or acting in concert with others, has the power to exercise or to control the exercise of more than 30% of the voting rights in our Company;
(3) he alone, or acting in concert with others, holds more than 30% of the issued and outstanding shares of our Company; or
VII-21 APPENDIX VII SUMMARY OF ARTICLES OF ASSOCIATION
(4) he alone, or acting in concert with others, in any other manner has actual control of our Company.
PROCEDURES ON LIQUIDATION
Our Company shall be dissolved and liquidated upon the occurrence of any of the following events:
(1) a resolution for dissolution is passed by a shareholders’ general meeting;
(2) dissolution is necessary due to a merger or division of our Company;
(3) our Company is legally declared bankrupt due to its failure to repay debts due; or
(4) our Company is ordered to close down because of its violation of laws or administrative regulations.
A liquidation committee shall be set up within 15 days of our Company being dissolved pursuant to sub-paragraphs (1) of the preceding paragraph, and the composition of the liquidation committee of our Company shall be determined by an ordinary resolution of a shareholders’ general meeting, failing which creditors may apply to the People’s Court for the establishment of a liquidation committee from specified persons. Where our Company is dissolved under sub- paragraph (3) of the preceding paragraph, the People’s Court shall, in accordance with the provisions of relevant laws, organize the shareholders, relevant authorities and relevant professional personnel to establish a liquidation committee to carry out the liquidation. Where our Company is dissolved under sub-paragraph (4) of the preceding paragraph, the relevant governing authorities shall organize the shareholders, relevant authorities and professional personnel to establish a liquidation committee to carry out the liquidation.
Where the Board proposes to liquidate our Company due to causes other than where our Company has declared that it is insolvent, the Board shall include a statement in its notice convening a shareholders’ general meeting to consider the proposal to the effect that, after making full inquiry into the affairs of our Company, the Board is of the opinion that our Company is able to pay its debts in full within 12 months from the commencement of the liquidation.
Upon the passing of the resolution by a shareholders’ general meeting for the liquidation of our Company, all functions and powers of the Board shall cease.
The liquidation committee shall act in accordance with the instructions of the shareholders’ general meeting to make a report at least once every year to the shareholders’ general meeting on the committee’s receipts and payments, the business of our Company and the progress of the liquidation and to present a final report to the shareholders’ general meeting on completion of the liquidation.
OTHER PROVISIONS MATERIAL TO OUR COMPANY AND ITS SHAREHOLDERS
General provisions
Our Company is a joint stock limited company in perpetual existence.
VII-22 APPENDIX VII SUMMARY OF ARTICLES OF ASSOCIATION
The Articles of Association take effect from the date of formal approval by our Company’s extraordinary general meeting of shareholders on February 1, 2005. From the date of the Articles of Association becoming effective, the Articles of Association constitute a legally binding document regulating our Company’s organization and activities, and the rights and obligations between our Company and each shareholder, and among the shareholders inter se.
Our Company may, based on its requirements for operation and development, and in accordance with the relevant provisions of the Articles of Association, approve an increase of capital.
Our Company may increase its capital in the following ways:
(1) offering new shares to unspecified investors for subscription;
(2) placing new shares with its existing shareholders;
(3) distributing new shares to its existing shareholders; and
(4) any other way permitted by laws and administrative regulations.
An increase in our Company’s capital through an issue of new shares shall, after being approved in accordance with the provisions of the Articles of Association, be conducted in accordance with the procedures stipulated by relevant laws and administrative regulations.
Unless otherwise provided by laws or administrative regulations, shares in our Company are freely transferable and are not subject to any lien.
When our Company reduces its registered share capital, it must draw up a balance sheet and an inventory of assets. Our Company shall notify its creditors within ten days of the date of our Company’s resolution for the reduction of registered share capital and shall publish an announcement in a newspaper at least three times within 30 days of the date of such resolution. A creditor has the right within 30 days of receiving the notice from our Company or, in the case of a creditor who does not receive the notice, within 90 days of the date of the first public announcement, to demand our Company to repay its debts or provide a corresponding guarantee for such debt. Our Company’s registered capital after reduction shall not be less than the statutory minimum amount.
The ordinary shareholders of our Company shall assume the following obligations:
(1) to abide by the Articles of Association;
(2) to pay subscription monies according to the number of shares subscribed and the method of subscription; and
(3) other obligations imposed by laws, administrative regulations and the Articles of Association.
Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription.
VII-23 APPENDIX VII SUMMARY OF ARTICLES OF ASSOCIATION
Secretary of the Board
Our Company shall have one secretary of the Board. A secretary shall be a member of the senior management of our Company.
The secretary of the Board shall be a natural person who has the requisite professional knowledge and experience, and shall be appointed by the Board. His primary tasks include the following:
(1) to assist the Directors to deal with the daily work of the Board, to continuously provide the Directors with, remind them of, and ensure that they are informed of, laws, regulations, policies and requirements of both domestic and overseas regulatory authorities concerning the operations of our Company, and to assist the Directors and the president to implement domestic and foreign laws and regulations, the Articles of Association and any other relevant regulations in performing their functions and exercising their powers;
(2) to be responsible for the organization and preparation of documents for Board meetings and shareholders’ general meetings, to take minutes of meetings, to ensure that the meeting policies are in conformity with the legal procedures, and to ensure the smooth execution of Board resolutions;
(3) to be responsible for the organization and coordination of information disclosure, and enhance the transparency of our Company; and
(4) to handle our Company’s relationship with intermediary organizations, regulatory authorities and the press.
A Director or other member of the senior management of our Company may hold the post of secretary of the Board concurrently. An accountant of the accountancy firm engaged by our Company shall not be permitted to hold the post of secretary of the Board concurrently.
Where the post of secretary of the Board is concurrently held by a Director and if a certain action requires separate conduct by the Director and the secretary of the Board, that Director holding the post of secretary shall not be permitted to act with dual capacity.
Supervisory Committee
Our Company shall have a supervisory committee. The Directors, president, vice-presidents, financial supervisors, and other senior management shall not act concurrently as Supervisors. The supervisory committee shall compose of seven Supervisors. External supervisors (being Supervisors who are not also employees of our Company) shall make up more than one-half of the total number of Supervisors. The supervisory committee shall have one chairman. The term of office of Supervisors shall be three years, renewable upon re-election and re-appointment. The election or removal of the chairman of the supervisory committee shall be resolved and approved by two-thirds or more of the members of the supervisory committee. The chairman of the supervisory committee shall organize and exercise the functions and powers of the supervisory committee.
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The supervisory committee shall comprise at least one representative of staff and employees, and the remaining Supervisors shall be elected by the shareholders. The Supervisors to be elected by the shareholders shall be elected and removed by a shareholders’ general meeting; the representative of staff and employees shall be elected or removed democratically by the staff and employees of our Company.
Meetings of the supervisory committee shall be convened at least twice every year and the chairman of the supervisory committee shall be responsible for convening the meeting.
The supervisory committee shall be accountable to the shareholders’ general meeting and shall exercise the following powers in accordance with law:
(1) to examine our Company’s financial position;
(2) to monitor whether the Directors, president and other members of senior management of our Company, in performing their duties, have acted in contravention of laws, administrative regulations and the Articles of Association;
(3) to demand rectification from a Director, the president or other member of senior management where the acts of such persons are harmful to our Company’s interest;
(4) to verify financial information, such as financial reports, business reports and plans for distribution of profits, to be submitted by the Board to the shareholders’ general meetings and, should any queries arise, to authorize, in the name of our Company, a re- examination by certified public accountants and practising auditors;
(5) to propose to convene a shareholders’ extraordinary general meeting;
(6) to represent our Company in negotiations with or bringing an action against a Director; and
(7) to exercise other powers specified in the Articles of Association.
The supervisory committee may make recommendations in relation to the appointment of our Company’s accountants’ firm and, if necessary, may appoint, in the name of our Company, another accountants’ firm to conduct an independent audit of our Company’s financial results. The supervisory committee may report directly to the State securities governing authority and other relevant authorities.
External supervisors shall report separately to the shareholders’ general meeting on the honesty and diligence of the members of senior management of our Company.
Members of the supervisory committee shall be present at meetings of the Board.
Resolutions of the supervisory committee shall require the approval of more than two-thirds of the total number of Supervisors. The Supervisors shall carry out their duties honestly and faithfully in accordance with laws, administrative regulations and the Company’s Articles of Association.
VII-25 APPENDIX VII SUMMARY OF ARTICLES OF ASSOCIATION
President of our Company
Our Company shall have one president, who shall be appointed and dismissed by the Board. Our Company shall have a number of vice-presidents who shall assist the president in his work. The vice-presidents shall be nominated by the president, and shall be appointed or dismissed by the Board. A Director may be appointed to act concurrently as president or vice-president.
The president shall be accountable to the Board and exercise the following powers and functions:
(1) to be in charge of our Company’s operations and management, and to organize the implementation of the resolutions of the Board;
(2) to organize the implementation of our Company’s annual business plans and investment plans;
(3) to draft plans for the establishment of our Company’s internal management structure and, based on operating needs, to decide on general organizational restructuring plans;
(4) to draft plans for the establishment of our Company’s branch organizations;
(5) to draft our Company’s basic management system;
(6) to formulate basic rules and regulations for our Company;
(7) propose to the Board to appoint or dismiss our Company’s vice president(s) and financial supervisors;
(8) to appoint or dismiss management personnel other than those required to be appointed or dismissed by the Board;
(9) to exercise other powers conferred by the Articles of Association and the Board.
The president shall be present at meetings of the Board and shall be entitled to receive notices of meetings and other relevant documents. However, the president has no voting rights at the Board meetings unless he is also a Director.
The president, in performing his functions and powers, shall act honestly and diligently, and in accordance with laws, administrative regulations and the Articles of Association.
Board
The Board is responsible to the shareholders’ general meeting and shall exercise the following powers:
(1) to be responsible for convening shareholders’ general meetings and to report on its work to the shareholders’ general meeting;
(2) to implement the resolutions of the shareholders’ general meetings;
(3) to decide on our Company’s annual business plans and investment plans;
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(4) to formulate our Company’s proposed annual preliminary and final financial budget;
(5) to formulate our Company’s plans for the distribution of profit and recovery of losses;
(6) to formulate the Company’s debt and financial policies;
(7) to formulate proposals for increases or reductions in our Company’s registered share capital and the issue of corporate debentures;
(8) to draw up plans for material purchases and sales, the merger, division or dissolution of our Company;
(9) to decide on the establishment of our Company’s internal management structure;
(10) to appoint or remove our Company’s president and, based on the nominations of the president, to appoint or remove the vice-president(s), financial supervisor(s) and secretary of the Board of our Company, and to decide on their remuneration;
(11) to decide on the establishment of our Company’s branch organizations;
(12) to formulate proposals for any amendments to the Articles of Association;
(13) to approve our Company’s basic management system;
(14) except for matters that the PRC Company Law and our Articles of Association require to be resolved by the shareholders in general meeting, to decide on other important and administrative matters of our Company and to execute other important agreements; and
(15) to exercise any other powers conferred by the shareholders’ general meetings and the Articles of Association.
With the exception of our Board’s resolutions in respect of the matters specified in the above paragraphs (6), (7), (8) and (11), which shall be passed by more than two-thirds of the Directors, the Board resolutions in respect of all other matters may be passed by a simple majority of the Directors. Any resolution passed by the Board in respect of connected transactions of our Company shall not become effective until after it has been signed by the independent Directors.
Meetings of the Board shall be held at least twice every year and convened by the chairman of the Board. Notice of the meeting shall be served on all the Directors 10 days before the date of the meeting. In cases of any urgent matters, upon requisition by either the chairman or two of the directors, or the president of our Company, an extraordinary meeting of the Board may be held and such meetings shall not be constrained by the notice period requirements.
In relation to important matters that are to be determined by the Board, notices of meetings, together with sufficient information, must be served on all the executive Directors and external Directors within the time limit set out in the Articles of Association and in strict compliance with the required procedures. Directors may demand further information. If more than one-quarter of the Directors or more than two external Directors consider that the information required for the matters to be resolved is not sufficient or not clear, they may jointly propose a postponement of the Board meeting or of the deliberation of some of the matters to be considered by the Board, and such proposal shall be accepted by the Board.
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A notice of meeting shall be deemed to have been served on a Director who is present at a meeting and who has not, before or during the meeting, raised the fact that he has not received a notice of the meeting.
Regular or extraordinary meetings of the Board may be conducted by telephone or other similar means of communication, provided that all the participating Directors can hear each other clearly and can speak to each other, and in such case, all participating Directors shall be deemed to have attended the meeting in person.
Meetings of the Board shall be held only if more than one-half of the Directors (including any proxies appointed in accordance with the Articles of Association) are present. Each Director shall have one vote. Where the number of votes cast for and against a resolution are equal, the chairman of the Board shall have a casting vote.
Accounts and Audit
(1) Appointment of accountancy firm
Our Company shall appoint an independent and internationally well-known firm of accountants which is qualified under relevant regulations of the State to audit our Company’s annual financial statements and review our Company’s other financial reports. The first accountancy firm appointed by our Company may be appointed by the inaugural meeting of our Company before the first shareholders’ annual general meeting and the accountancy firm so appointed shall hold office until the conclusion of the first shareholders’ annual general meeting. If the inaugural meeting fails to exercise its powers under the preceding paragraph, those powers shall be exercised by the Board.
The accountancy firm appointed by our Company shall hold office from the conclusion of the shareholders’ annual general meeting at which the appointment is made until the conclusion of the next shareholders’ annual general meeting.
Before the convening of the shareholders’ general meeting, the Board may fill any casual vacancy in the office of the accountancy firm, but while any such vacancy continues, the surviving or continuing firm, if any, may act.
The shareholders in a shareholders’ general meeting may, by ordinary resolution, remove an accountancy firm before the expiration of its office, notwithstanding the terms of the contract between our Company and the firm, but without prejudice to the firm’s right to claim for damages, if any, in respect of such removal.
The remuneration for the accountancy firm or the manner in which such firm is to be remunerated shall be determined at the shareholders’ general meeting. The remuneration of an accountancy firm appointed by the Board shall be determined by the Board.
(2) Change and removal of accountancy firm
Our Company’s appointment, removal and non-reappointment of an accountancy firm shall be resolved by shareholders in a shareholders’ general meeting. The resolution of the shareholders’ general meeting shall be filed with the State securities governing authority.
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Where it is proposed that any resolution be passed at a shareholders’ general meeting concerning the appointment of an accountant, which is not an incumbent accountant, to fill a casual vacancy in the office of the accountancy firm, re-appointment of a retiring accountancy firm which was appointed by the Board to fill a casual vacancy, or removal of the accountancy firm before the expiration of its term of office, the following provisions shall apply:
(1) a copy of the proposal shall be sent to the firm proposed to be appointed or proposing to leave its post or the firm which has left its post in the relevant accounting year (leaving includes leaving by removal, resignation and retirement) before notice of meeting is given to the shareholders.
(2) if the firm leaving its post makes representations in writing and requests our Company to notify such representations to the shareholders, our Company shall (unless the representations are received too late):
(i) in any notice given to shareholders for the purpose of the resolution, state the fact of the representations having been made; and
(ii) attach a copy of the representations to the notice and deliver it to the shareholders in the manner stipulated in the Articles of Association.
(3) if the firm’s representations are not sent in accordance with the preceding paragraph, the relevant firm may require that the representations be read out at the shareholders’ general meeting and may lodge further complaints.
(4) an accountancy firm which is leaving its post shall be entitled to attend:
(i) the shareholders’ general meeting at which its term of office would otherwise have expired;
(ii) any shareholders’ general meeting at which it is proposed to fill the vacancy caused by its removal; and
(iii) any shareholders’ general meeting convened on its resignation;
and to receive all notices of, and other communications relating to, any such meetings, and to speak at any such meeting in relation to matters concerning its role as the former accountancy firm of our Company.
(3) Resignation of accountants’ firm
Where the accountancy firm resigns from its post, it shall make clear to the shareholders’ general meeting whether there has been any impropriety on the part of our Company.
Where the accountancy firm resigns from its office, it may deposit a resignation notice at our Company’s legal residence. Such notice shall become effective on the date of such deposit or on such later date as may be stipulated in such notice. Such notice shall include the following:
(1) a statement to the effect that there are no circumstances connected with its resignation which it considers should be brought to the notice of the shareholders or creditors of our Company; or
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(2) a statement of any such circumstances.
Where a notice is deposited under the preceding paragraph, our Company shall within 14 days send a copy of the notice to the relevant governing authority. If the notice contains a statement under sub-paragraph (2) of the preceding paragraph, a copy of such statement shall be placed at our Company’s registered office for shareholders’ inspection. Our Company shall also send a copy of such statement by prepaid mail to every holder of overseas listed foreign invested shares at the address recorded in the register of shareholders.
Where the accountancy firm’s notice of resignation contains a statement of any circumstances which should be brought to the notice of the shareholders or creditors of our Company, the accountancy firm may require the Board to convene a shareholders’ extraordinary general meeting for the purpose of giving an explanation of the circumstances connected with its resignation.
Dispute resolution
Whenever any disputes or claims arise between holders of overseas listed foreign invested shares and our Company, holders of overseas listed foreign invested shares and our Company’s Directors, Supervisors, president or other members of senior management, or holders of overseas listed foreign invested shares and holders of Domestic Shares, based on the Articles of Association or any rights or obligations conferred or imposed by the PRC, the PRC Company Law or any other relevant laws and administrative regulations concerning the affairs of our Company, such disputes or claims shall be referred by the relevant parties to arbitration.
Where a dispute or claim described in the preceding paragraph is referred to arbitration, the entire dispute or claim but not part of it must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, shall abide by the arbitration provided that such person is our Company or our Company’s shareholder, Director, Supervisor, president or a member of our senior management. Disputes in relation to the definition of shareholders and disputes in relation to the register of shareholders need not be referred to arbitration.
A claimant may elect arbitration at either the China International Economic and Trade Arbitration Commission in accordance with its rules or the Hong Kong International Arbitration Center in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the decision of the arbitration body elected by the claimant.
If a claimant elects arbitration at the Hong Kong International Arbitration Center, any party to the dispute or claim may, in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Center, apply for a hearing to take place in Shenzhen.
If any dispute or claim is referred to the China International Economic and Trade Arbitration Commission, the laws of the PRC shall apply, save as otherwise provided in laws and administrative regulations.
The award of an arbitration body shall be final and conclusive and binding on all parties.
VII-30 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
1. FURTHER INFORMATION ABOUT OUR COMPANY
(A) Incorporation
We were initially incorporated in October 1988 in the PRC as a Sino-foreign equity joint venture and re-registered as a foreign invested joint stock company in the PRC with limited liability on March 2, 2004. We established a principal place of business in Hong Kong at 8th Floor, Gloucester Tower, The Landmark, 11 Pedder Street, Central, Hong Kong and we are registered as an oversea company under Part XI of the Companies Ordinance. Ms Pui Yee, Samantha Suen and Mr James Arthur Watkins have been appointed as our agents for the acceptance of service of process in Hong Kong. The address for service of process in Hong Kong is the same as that of our principal place of business in Hong Kong as set out above. As we are incorporated in the PRC, our corporate structure and our Articles are subject to the relevant laws and regulations of the PRC. A summary of the relevant laws and regulations of the PRC and of our Articles is set out in ‘‘Appendix VI — Summary of Principal Legal and Regulatory Provisions’’ and ‘‘Appendix VII — Summary of Articles of Association,’’ respectively.
Our principal place of business in the PRC is located at 385 Hongcao Road, Shanghai 200233, PRC.
(B) Changes in share capital
At the time of our incorporation in 1988, our registered capital was US$16.0 million. At the time of our re-registration as a foreign invested joint stock company, our registered capital was RMB1,109,080,000, divided into 1,109,080,000 ordinary shares of par value RMB1.00 each.
The following describes the alterations to our registered capital since December 31, 2001:
(i) On June 14, 2002, pursuant to an approval issued by the Shanghai Foreign Investment Commission on May 10, 2002, and as filed with the former Ministry of Foreign Trade and Economic Cooperation of the PRC (‘‘MOFTEC’’) on May 27, 2002, our registered capital increased from US$72.0 million to US$108.8 million. The equity interests in our company held by the respective shareholders remained unchanged with Shanghai No. 7 Radio Factory, Bank of China, Shanghai Branch, Shanghai Jiushi, Philips China and Shanghai Belling contributing US$2.2 million, US$19.6 million, US$8.7 million, US$41.3 million and US$37.0 million, respectively.
(ii) On November 21, 2002, pursuant to an approval issued by the Shanghai Foreign Investment Commission on November 12, 2002, and as filed with MOFTEC on November 20, 2002, all equity interests in our company held by Shanghai No. 7 Radio Factory and Bank of China, Shanghai Branch (being 2% and 18% of our share capital, respectively) were transferred to COAMC, and all equity interests in our Company held by Shanghai Jiushi Company (being 8% of our share capital) was transferred to SCIPI. Our registered capital remained unchanged.
(iii) On January 22, 2003, pursuant to an approval issued by the Shanghai Foreign Investment Commission on December 30, 2002, and as filed with MOFTEC on January 18, 2003, the following transfers of equity interests in our company were effected:
(a) Philips China transferred 1.14% of our equity interests to Lanmax;
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(b) Shanghai Belling transferred 1.02% of our equity interests to Lanmax;
(c) COAMC transferred 0.6% of our equity interests to Lanmax;
(d) SCIPI transferred 0.24% of our equity interests to Lanmax; and
(e) SCIPI transferred 6% of our equity interests to SCIP (HK).
The registered capital of our Company remained unchanged.
(iv) On July 14, 2003, pursuant to an approval issued by the Shanghai Foreign Investment Commission on June 17, 2003, and as filed with the Ministry of Commerce on July 23, 2003, our registered capital increased from US$108.8 million to US$337.8 million.
(v) On August 28, 2003, pursuant to an approval issued by the Shanghai Foreign Investment Commission on July 25, 2003, and as filed with the Ministry of Commerce on August 29, 2003, Shanghai Belling transferred 8.24% and 16.98% of our equity interests to SCIPI and SCIP (HK), respectively. Our registered capital remained unchanged.
(C) Resolutions passed at our Shareholders’ General Meetings
At our extraordinary general meeting held on March 25, 2004, our shareholders passed certain resolutions, including:
. the approval of issue and offer for subscription of H Shares and the granting of the Over- allotment Option;
. the approval of the listing of H Shares on the Stock Exchange; and
. the adoption of our Articles and the authorization for our Directors to amend our Articles in accordance with any comments from the relevant governing authorities in the PRC and the Stock Exchange.
At our extraordinary general meetings held on February 1, 2005 and January 16, 2006, our shareholders passed certain resolutions, including the adoption of amendments to our Articles.
At our annual general meeting for the year ended December 31, 2005 held on March 15, 2006, our shareholders passed certain resolutions, including:
. the adoption of further amendments to our Articles; and
. the election of Mr Petrus Antonius Maria van Bommel as our non-executive Director.
2. THE REORGANIZATION
On December 2, 2003, our Board resolved to convert us into a foreign invested joint stock limited company by way of promotion in accordance with PRC Company Law and the Foreign Investment Joint Stock Company Provisional Regulations. To effect the Reorganization, on December 4, 2003, the Promoters entered into the Termination Agreement, the Promoters Agreement and our Articles. Supplementary agreements in relation to the Termination Agreement, the Promoters Agreement and our Articles were subsequently entered into on February 6, 2004.
VIII-2 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
Under the Promoters Agreement, the Promoters agree and undertake to reorganize and convert us into a foreign invested joint stock limited company by way of promotion in accordance with the relevant PRC laws. The Promoters further acknowledged that subsequent to our re- registration as a foreign invested joint stock limited company, we would apply to the CSRC and other relevant PRC government authorities to issue and list our H Shares on the Stock Exchange. Each Promoter agreed that it would, in full cooperation with each other, take any and all actions reasonably necessary for us to become listed on the Stock Exchange. For further details of certain undertakings made by the Promoters to us which survive the Global Offering, see the section headed ‘‘Relationship with our Shareholders — The Promoters Agreement.’’
On February 12, 2004, the Ministry of Commerce approved our conversion into a foreign invested joint stock limited company and issued an approval letter to us . An approval certificate was subsequently issued to us on February 16, 2004 by the Ministry of Commerce.
On March 2, 2004, we re-registered from a Sino-foreign equity joint venture to a foreign invested joint stock limited company under PRC law, with Philips China, SCIP (HK), COAMC, SCIPI, Shanghai Belling and Lanmax as our Promoters and our new business license was issued by the Shanghai Administration of Industry and Commerce. On the same day, we completed the Reorganization in preparation for the Global Offering.
3. FURTHER INFORMATION ABOUT OUR BUSINESS
(A) Summary of our Material Contracts
The following is a summary of contracts (not being contracts in the ordinary course of business) which have been entered into by us within the two years preceding the date of this prospectus and are or may be material:
(a) a land use rights grant contract dated August 9, 2004 between (Shanghai Housing and Land Resources Administration Bureau) (‘‘SHLRAB’’) and us, pursuant to which the land use rights of the land with an area of 39,010 sq.m. were granted to us for RMB4,291,100 by SHLRAB for a term of 50 years for industrial use. SHLRAB also charges us an annual fee of RMB39,010 for our use of the land during the term of this agreement;
(b) a second amendment agreement dated January 12, 2005 to the Technology Transfer and Cooperation Agreement dated November 28, 1994 between Philips Semiconductors International and us, whereby Philips Semiconductors International agrees to provide us certain information, technology and technical assistance, and grants us a license over the intellectual property rights relating to such information and technology. The Technology Transfer and Cooperation Agreement, as amended, is effective for ten years and shall continue thereafter for a further period of ten years unless terminated in accordance with its terms;
(c) a deed of indemnity dated February 18, 2005 between our shareholders (namely Philips China, SCIPI, SCIP(HK), COAMC, Shanghai Belling and Lanmax) and us, whereby our shareholders agree to indemnify us against certain tax and estate duty liabilities which we may suffer prior to the Global Offering;
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(d) a club term loan facility dated March 31, 2005 between (among others) a group of lender banks and us, whereby the group of lender banks agreed to grant a total commitment of US$100 million at the interest rate of LIBOR plus 1.20% per annum, and with security over our property, plant and equipment and our land use rights. The availability period within which we may borrow under this facility is 18 months commencing on March 31, 2005, and the final repayment date is March 30, 2010;
(e) an equipment mortgage agreement dated March 31, 2005 between Bank of Communications, Shanghai Branch (as security agent) and us, whereby in consideration of the club term loan facility (as described under (d) above) being entered into and as security for our due payment of the loan extended under such facility and our proper discharge of other obligations thereunder, we mortgaged to the group of lender banks various equipment. This agreement became effective upon execution and completion of registration of this mortgage agreement with the relevant PRC regulatory authorities and remains in force until the loan is fully repaid;
(f) a real estate mortgage agreement dated March 31, 2005 between Bank of Communications, Shanghai Branch (as security agent) and us, whereby in consideration of the club term loan facility (as described under (d) above) being entered into and as security for our due payment of the loan extended under such facility and our proper discharge of other obligations thereunder, we mortgaged to the group of lender banks various land use rights, construction works-in-progress rights and buildings. This agreement became effective upon execution and completion of registration of this mortgage agreement with the relevant PRC regulatory authorities and remains in force until the loan is fully repaid;
(g) a service level agreement dated January 27, 2006 between Philips Semiconductors and us, whereby Philips Semiconductors agrees to maintain and service the ERIC software. This agreement is effective for one year from January 1, 2006 to December 31, 2006;
(h) a waiver letter dated February 9, 2006 issued by DBS Bank Ltd, Shanghai Branch as facility agent of the group of lender banks under the club term loan facility (as described under (d) above) to us, pursuant to which the lender banks agreed to waive our breaches as at June 30, 2005 and as at September 30, 2005 of certain financial covenants under the facility and to reset the test dates from December 31, 2005 to June 30, 2007 for such financial covenants;
(i) an IT services agreement dated March 13, 2006 between Philips International and us, whereby Philips International agrees to provide us with certain IT services. This agreement was effective from January 1, 2005 for one year and continued from year to year thereafter unless terminated in accordance with its terms;
(j) an agreement dated March 15, 2006 between PSC and us, whereby PSC agrees to provide us various IT services relating to our use of the dataPower Software, and to offer maintenance and support services for the dataPower Software for which we pay a fee. This agreement is effective from January 1, 2006 to December 31, 2006; and
(k) a Hong Kong Underwriting Agreement dated March 24, 2006, entered into between us, the Joint Global Coordinators, the Joint Sponsors and the Hong Kong Underwriters, further details of which are set out in the section headed ‘‘Underwriting.’’
VIII-4 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
(B) Intellectual Property Rights of our Company
As at February 28, 2006, our Directors consider that the following intellectual property rights of our Company are material to the business and operation of our Company. We have applied to the State Intellectual Property Bureau of the PRC for registration of the following patents and such applications have been accepted and are pending registration:
Patent Territory Application number Class
A method of manufacturing integrated circuits using BiMOS process technology with DP gate
...... PRC 0311693.7 Invention
A method of improving bipolar devices process technology ...... PRC 200410018261.2 Invention
A semiconductor process technology method of using compacted aluminium to inject into micron size holes ...... PRC 200410018260.8 Invention
A method of manufacturing devices to store bipolar multi-die silicon wafers ...... PRC 200410025369.4 Invention
A method of manufacturing rewritable and non- volatile double level polysilicon memory devices
...... PRC 200410052675.7 Invention
An improved method of manufacturing 0.8m BICMOS integrated circuits ...... PRC 200410053723.4 Invention
VIII-5 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
As at February 28, 2006, we were the registered proprietor and beneficial owner of the following trademark:
Place of Trade Mark Registration Trademark Registration Number Date Renewal Date Class
Hong Kong 300458451 July 15, 2005 July 15, 2015 9/40
As at February 28, 2006, we have applied for the following trademarks to be registered:
Place of Application Trademark Application Date of Application Number Class
China June 13, 2005 4713345 40
China June 13, 2005 4713346 40
China June 13, 2005 4713347 9
China June 13, 2005 4713348 9
USA July 1, 2005 78662627 009/040
USA July 1, 2005 78662621 009/040
4. FURTHER INFORMATION ABOUT OUR DIRECTORS AND SUPERVISORS
(A) Particulars of Directors’ and Supervisors’ Service Agreements
On May 28, 2004, we entered into service contracts with each of our Directors (with the exception of Ms Jianyu Cheng, Mr Weiping Zhou, Mr Petrus Antonius Maria van Bommel and our independent non-executive Directors) and our Supervisors. We entered into service contracts with Ms Cheng and each of our independent non-executive Directors with effect from the date of our Articles of Association, that is, February 1, 2005. We entered into service contracts with Mr Zhou and Mr van Bommel on April 11, 2005 and March 15, 2006, respectively.
Each of the service contracts with our Directors and Supervisors has an initial term ending on March 1, 2007. Our Directors or Supervisors may terminate the service contracts in advance by giving us three months’ notice of termination. At the expiry of the term, we and our Directors and our Supervisors may renew the service contracts in accordance with our Articles.
Under these service contracts, the aggregate annual salaries of the executive Directors, the non-executive Directors, the independent non-executive Directors, and the Supervisors are HK$3.7 million, HK$1.2 million, HK$750,000 and RMB1.5 million, respectively.
Save as disclosed above, none of our Directors or Supervisors has entered or proposed to enter into a service contract with us (excluding contracts expiring or determinable by the employer within one year without payment of compensation other than statutory compensation).
VIII-6 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
(B) Directors’ and Supervisors’ Remuneration
We did not pay any salary, housing allowance, retirement contribution, other allowance and benefits in kind to our Directors during the financial year ended December 31, 2003 since all of our Directors during these periods were nominees of the shareholders and were remunerated entirely by them. We did not have any Supervisors for the year ended December 31, 2003.
Upon our Company’s re-registration as a foreign invested joint stock limited company on March 2, 2004, we paid and granted to our Directors and our Supervisors remuneration, fees and benefits in kind (including pension contributions and bonuses which are not discretionary bonuses). During the years ended December 31, 2004 and 2005, the aggregate of such remuneration and fees paid, and such benefits in kind granted, to our Directors and our Supervisors were RMB6.8 million (equivalent to HK$6.5 million) and RMB8.6 million (equivalent to HK$8.3 million), respectively.
We estimate that we will pay an aggregate amount of approximately RMB8.4 million and RMB1.8 million, including benefits in kind as described above, to our Directors and our Supervisors, respectively, as remuneration in respect of the year ending December 31, 2006 according to the present arrangements.
5. DISCLOSURE OF INTERESTS
(A) Disclosure of Interests
(a) The Directors confirm that Philips China, SCIP (HK), COAMC, SCIPI, Shanghai Belling and Lanmax will, immediately following completion of the Global Offering and assuming that the Over-allotment Option is not exercised, have an interest in 1,072,111,000 Shares, representing approximately 72.50% of the Shares carrying rights to vote in all circumstances at our shareholders’ general meetings (or, assuming that the Over- allotment Option is exercised in full, 1,066,567,000 Shares, representing approximately 69.52% of the Shares carrying rights to vote in all circumstances at our shareholders’ general meetings).
VIII-7 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
(b) Immediately following completion of the Global Offering and assuming that the Over- allotment Option is not exercised, the Directors confirm, so far as is known to any of them, that the following persons will have an interest or short position in our Shares or underlying Shares which would fall to be disclosed to us under the provisions of Divisions 2 and 3 of Part XV of the Securities and Futures Ordinance, or are expected, directly or indirectly, to have an interest in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of our Company (assuming that their interests will remain unchanged after the Latest Practicable Date):
Approximate % of interest in Approximate % Number and relevant class of interest in all Name Capacity class of Shares of Shares Shares
Philips China ...... Beneficial owner 408,806,888 37.04 27.65 Foreign Shares
Royal Philips(1) ..... Interestinacontrolled 408,806,888 37.04 27.65 corporation Foreign Shares
SCIP(HK)...... Beneficialowner 254,866,584 23.09 17.24 Foreign Shares
SCIPI(2) ...... Beneficialowner 110,908,000 29.56 Domestic Shares 24.74 Interest in a controlled 254,866,584 23.09 } corporation Foreign Shares
Shanghai Chemical Interest in a controlled 110,908,000 29.56 Industrial Park corporation Domestic Shares 24.74 Development Interest in a controlled 254,866,584 23.09 } Company Limited(3) corporation Foreign Shares
COAMC(4) ...... Beneficialowner 178,192,520 47.50 12.05 Domestic Shares
Shanghai Belling . . . Beneficial owner 86,064,608 22.94 5.82 Domestic Shares
Notes:
(1) Philips China is a direct wholly-owned subsidiary of Royal Philips. Accordingly, Royal Philips is deemed to be interested in 408,806,888 Foreign Shares which are beneficially owned by Philips China for the purpose of the Securities and Futures Ordinance.
(2) SCIP (HK) is a direct wholly-owned subsidiary of SCIPI. Accordingly, for the purpose of the Securities and Futures Ordinance, in addition to SCIPI’s interest in 110,908,000 Domestic Shares as beneficial owner, it is also deemed to be interested in 254,866,584 Foreign Shares which are beneficially owned by SCIP (HK).
(3) Shanghai Chemical Industrial Park Development Company Limited owns 95% of shares in SCIPI, which in turn wholly owns SCIP (HK). Accordingly, for the purpose of the Securities and Futures Ordinance, it is deemed to be interested in 110,908,000 Domestic Shares which are beneficially owned by SCIPI, and 254,866,584 Foreign Shares which are beneficially owned by SCIP (HK).
(4) COAMC is wholly-owned by the Ministry of Finance.
VIII-8 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
(B) Disclaimers
Save as disclosed in this prospectus:
(a) none of our Directors or Supervisors has any interest or short position in any of our Shares, underlying Shares or debentures or any shares, underlying shares or debentures of any associated corporation within the meaning of Part XV of the Securities and Futures Ordinance, which will have to be notified to us and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the Securities and Futures Ordinance (including interests and short positions which he is deemed to have under such provisions of the Securities and Futures Ordinance) or which will be required, pursuant to section 352 of the Securities and Futures Ordinance, to be entered in the register referred to therein or which will be required to be notified to us and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, in each case once the H Shares are listed. For this purpose, the relevant provisions of the Securities and Futures Ordinance will be interpreted as if they applied to our Supervisors;
(b) none of our Directors or our Supervisors nor any of the parties listed in paragraph 6(J) of this Appendix is interested in our promotion, or in any assets which have, within the two years immediately preceding the issue of this prospectus, been acquired or disposed of by or leased to us, or are proposed to be acquired or disposed of by or leased to us;
(c) none of our Directors or Supervisors nor any of the parties listed in paragraph 6(J) of this Appendix is materially interested in any contract or arrangement subsisting at the date of this prospectus which is significant in relation to our business, except for BOCI Asia Limited, whose affiliate, Bank of China, is one of our principal lenders;
(d) save in connection with the Underwriting Agreements, none of the parties listed in paragraph 6(J) of this Appendix:
(i) is interested legally or beneficially in our securities; or
(ii) has any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for our securities;
(e) no cash, securities or other benefit has been paid, allotted or given within the two years preceding the date of this prospectus to our Promoters nor is any such cash, securities or other, allotted benefit are proposed to be paid, allotted or given;
(f) save for the Philips Group (one of our substantial shareholders), none of our Directors or our Supervisors or their associates or our shareholders (which to the knowledge of our Directors owns more than 5% of our share capital) have any interest in any of our five largest customers; and
(g) none of our Directors or Supervisors, their associates or our shareholders (which to the knowledge of our Directors owns more than 5% of our share capital) have any interest in any of our five largest suppliers.
VIII-9 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
6. OTHER INFORMATION
(A) Tax and Estate Duty
Currently, no liability for estate duty under PRC laws and regulations will arise from non-PRC nationals holding H Shares.
Our Directors have been advised that no material liability for estate duty under the laws of the PRC, where all of our assets and businesses are situated, or Hong Kong, would be likely to fall upon us.
We have also entered into a deed of indemnity between our shareholders (namely Philips China, SCIP(HK), COAMC, SCIPI, Shanghai Belling and Lanmax), whereby they agree to indemnify us against certain tax and estate duty liabilities which we may suffer prior to the Global Offering.
(B) Preliminary Expenses
Our preliminary expenses are estimated to be approximately HK$50.4 million and are payable by us and the Selling Shareholder in proportion to the number of H Shares offered by us and the Selling Shareholder in the Global Offering.
(C) Promoters
Philips China, SCIP (HK), COAMC, SCIPI, Shanghai Belling and Lanmax, are our Promoters. As defined in the Hong Kong Listing Rules, Shanghai Belling was a controlling shareholder in us until August 28, 2003. Philips China and SCIPI are, as at the date of this prospectus, our controlling shareholders by virtue of their direct and/or indirect interest in us, but both will cease to be our controlling shareholders upon completion of the Global Offering.
VIII-10 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
(D) Particulars of the Selling Shareholder
Certain particulars of the Selling Shareholder are set out as follows:
Number of H Shares for sale (assuming the Over-allotment Name Address Description of business Option is not exercised)
COAMC...... No.410FuchengmenNei acquiring and managing the non- 36,969,000 Dajie, Beijing, PRC, performing assets of Bank of 100034 China and other state-owned banks, reorganizing loans and enterprises, securitizing assets, making direct investments, issuing debentures, providing commercial loans, assisting in debt recovery, valuing assets and other projects, assisting enterprises in auditing and liquidation and other businesses authorized by the relevant financial regulatory authorities.
(E) Joint Sponsors
The Joint Sponsors have made an application on our behalf to the Listing Committee of the Stock Exchange for listing of, and permission to deal in, the Offer Shares to be issued or sold pursuant to the Global Offering and the Converted H Shares (including any additional H Shares which may be issued or sold pursuant to the exercise of the Over-allotment Option). All necessary arrangements have been made enabling the securities to be admitted into CCASS.
Each of the Joint Sponsors is independent of the Company pursuant to Rule 3A.07 of the Hong Kong Listing Rules.
(F) No Material Adverse Change
Our Directors confirm that there has been no material adverse change in our financial or trading position or prospects since December 31, 2005.
(G) Binding Effect
This prospectus shall have the effect, if an application is made in pursuance hereof, of rendering all persons concerned bound by all the provisions (other than the penal provisions) of sections 44A and 44B of the Hong Kong Companies Ordinance so far as applicable.
(H) Exemption from the Companies Ordinance
The English language and Chinese language versions of this prospectus are being published separately, in reliance upon the exemption provided in section 4 of the Companies Ordinance (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong).
VIII-11 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
(I) Miscellaneous
(a) Save as disclosed in this prospectus:
(i) within the two years preceding the date of this prospectus, we have not issued or agreed to issue fully or partly paid, either for cash or for a consideration other than cash, any of our share or loan capital;
(ii) none of our share or loan capital is under an option agreement or is agreed conditionally or unconditionally to be put under an option agreement;
(iii) we have not issued or agreed to issue any founder shares, management shares or deferred shares;
(iv) since the date two years prior to the date of this prospectus, no commissions, discounts, brokerage or other special terms have been granted in connection with the issue or sale of any of our shares; and
(v) within the two years preceding the date of this prospectus, no commission has been paid or payable (except commissions to underwriters) for subscription, agreeing to subscribe, procuring subscription or agreeing to procure subscription for any of our HShares.
(b) Save as disclosed in this prospectus, none of our equity and debt securities is listed or dealt in any other stock exchange nor is any listing or permission to deal being or proposed to be sought.
(c) We have no outstanding convertible debt securities.
(d) We are a foreign invested joint stock limited company and are subject to the PRC Sino- foreign Joint Venture Law.
VIII-12 APPENDIX VIII STATUTORY AND GENERAL INFORMATION
(J) Qualification of experts
The qualifications of the experts (as defined in the Hong Kong Listing Rules) who have given their opinions and/or reports dated the date of this prospectus in this prospectus are as follows:
Name Qualification
Goldman Sachs (Asia) L.L.C.. . . Licensed under the Securities and Futures Ordinance for type1(dealinginsecurities),type4(advisingon securities), type 5 (advising on futures contracts), type 6 (advising on corporate finance) and type 9 (asset management) activities
BOCI Asia Limited ...... Licensed under the Securities and Futures Ordinance for type1(dealinginsecurities)andtype6(advisingon corporate finance) activities as defined under the Securities and Futures Ordinance
Ernst&Young...... CertifiedPublicAccountants,HongKong
Sallmanns (Far East) Limited. . . Property valuer
Jingtian & Gongcheng...... PRC lawyers
(K) Consents
Goldman Sachs (Asia) L.L.C. and BOCI Asia Limited, as Joint Sponsors, Ernst & Young, as our independent auditors, Sallmanns, as our property valuer, and Jingtian & Gongcheng, as our legal advisors as to PRC law, have given and have not withdrawn their respective written consents to the issue of this prospectus with the inclusion of their reports and/or letters and/or valuation certificates and/or the references to their names included herein in the form and context in which they are respectively included.
(L) Litigation
As at the Latest Practicable Date, except for the matters set out under ‘‘Business — Intellectual Property,’’ we are not engaged in any litigation or arbitration of material importance, and no litigation or claim of material importance is known to our Directors to be pending or threatened by or against us, that would have a material adverse effect on the results of our operation or financial condition.
VIII-13 APPENDIX IX DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES AND AVAILABLE FOR INSPECTION
DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES
The documents attached to the copy of this prospectus and delivered to the Registrar of Companies in Hong Kong for registration were copies of the WHITE and YELLOW Application Forms, the written consents referred to in paragraph 6(K) of ‘‘Appendix VIII — Statutory and General Information,’’ copies of each of the material contracts referred to in paragraph 3A of ‘‘Appendix VIII — Statutory and General Information’’ and a copy of the statement of adjustments relating to the Accountants’ Report prepared by Ernst & Young, Certified Public Accountants, Hong Kong. For further information, see ‘‘Appendix VIII — Statutory and General Information — Summary of our Material Contracts.’’
DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the offices of Freshfields Bruckhaus Deringer at 11th Floor, Two Exchange Square, Central, Hong Kong during normal business hours up to and including the date which is 14 days from the date of the prospectus:
(a) the Articles of Association (both English and Chinese versions);
(b) the Accountants’ Report prepared by Ernst & Young, Certified Public Accountants, Hong Kong, the text of which is set out in ‘‘Appendix I — Accountants’ Report,’’ together with the statement of adjustments;
(c) the letter from Ernst & Young, Certified Public Accountants, Hong Kong, concerning the unaudited pro forma financial information relating to the unaudited pro forma fully diluted forecast earnings per Share and the unaudited pro forma adjusted net tangible assets, the text of which is set out in ‘‘Appendix II — Unaudited Pro Forma Financial Information;’’
(d) the letters relating to the forecast, the texts of which are set out in ‘‘Appendix III — Forecast;’’
(e) the letter dated the date of this prospectus, with the valuation certificate relating to our property interests prepared by Sallmanns, the text of which is set out in ‘‘Appendix IV — Property Valuation;’’
(f) the full Property Valuation Report prepared by Sallmanns;
(g) the material contracts referred to in paragraph 3(A) of ‘‘Appendix VIII — Statutory and General Information;’’
(h) the written consents referred to in paragraph 6(K) of ‘‘Appendix VIII — Statutory and General Information;’’
(i) the PRC Company Law, together with an unofficial English translation;
(j) the Special Regulations, together with an unofficial English translation;
(k) the Mandatory Provisions, together with an unofficial English translation;
(l) the PRC Securities Law, together with an unofficial English translation;
IX-1 APPENDIX IX DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES AND AVAILABLE FOR INSPECTION
(m) the Opinion on the Further Promotion of the Regular Operation and In-Depth Reform of Companies Listed Overseas issued by the State Economic and Trade Commission and the CSRC on March 29, 1999, together with an unofficial English translation;
(n) the Arbitration Law of the PRC promulgated by the Standing Committee of the NPC on August 31, 1994 and effective on September 1, 1995, together with an unofficial English translation;
(o) the Civil Procedure Law of the PRC adopted at the fourth meeting of the seventh NPC, promulgated by the premier on April 9, 1991 and effective on April 9, 1991, together with an unofficial English translation;
(p) the Joint Stock Company Provisional Regulations on Establishment of Foreign Investment Joint Stock Limited Companies issued by the PRC Ministry of Foreign Trade and Economic Co-operation on January 10, 1995, together with an unofficial English translation; and
(q) the PRC legal opinion issued by Jingtian & Gongcheng, our legal advisors on PRC law, dated the date of this prospectus.
IX-2