2009 Annual Report Annual Report 2009 Important The Board of Directors, Supervisory Committee and the Directors, Supervisors and senior management of the Company confirm that this annual report does not contain any false information, misleading statements or material omissions, and collectively and individually accept responsibility for the truthfulness, accuracy and completeness of the contents of this annual report. Mr. Hou Weigui, Chairman of the Company, Mr. Wei Zaisheng, Chief Financial Officer of the Company and Mr. Shi Chunmao, Head of Finance Division of the Company, hereby declare that they warrant the truthfulness and completeness of the financial reports contained in this annual report. This annual report has been considered and approved at the second meeting of the Fifth Session of the Board of Directors of the Company. Mr. Zhang Junchao, Director, was unable to attend the meeting due to work reasons and authorised in writing Mr. Hou Weigui, Chairman, to vote on his behalf. Mr. Li Jin, Independent Director, was unable to attend the meeting due to work reasons and authorised in writing Mr. Chen Naiwei, Independent Director, to vote on his behalf. Mr. Tan Zhenhui, Independent Director, was unable to attend the meeting due to work reasons and authorised in writing Mr. Chen Naiwei, Independent Director, to vote on his behalf. There are no Directors, Supervisors or senior management who do not warrant or who dispute the truthfulness, accuracy and completeness of the contents of this annual report. The respective financial statements of the Group for the year ended 31 December 2009 were prepared in accordance with PRC Accounting Standards for Business Enterprises (“PRC ASBEs”) and with Hong Kong Financial Reporting Standards (“HKFRSs”) respectively, and had been audited by Ernst & Young Hua Ming and Ernst & Young, and an unqualified auditors’ report has been issued by each of them. This report has been prepared in Chinese and English respectively. In case of discrepancy, the Chinese version shall prevail, except for the financial statements prepared in accordance with HKFRSs, of which the English version shall prevail. Contents DEFINITIONS 2 GLOSSARY 4 COMPANY PROFILE 6 CORPORATE INFORMATION 7 CHAIRMAN’S STATEMENT 12 MAJOR EVENTS OF THE GROUP 16 ACCOUNTING AND FINANCIAL DATA HIGHLIGHTS 18 CHANGES IN SHARE CAPITAL AND INFORMATION OF SHAREHOLDERS 24 DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES 31 CORPORATE GOVERNANCE STRUCTURE 45 GENERAL MEETINGS OF SHAREHOLDERS 64 REPORT OF THE BOARD OF DIRECTORS 65 MANAGEMENT DISCUSSION AND ANALYSIS 88 REPORT OF THE SUPERVISORY COMMITTEE 96 MATERIAL MATTERS 98 REPORT OF THE PRC AUDITORS 120 FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH PRC ASBEs AND NOTES THERETO 122 INDEPENDENT AUDITORS’ REPORT 247 FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH HKFRSs AND NOTES THERETO 249 DOCUMENTS AVAILABLE FOR INSPECTION 336 ZTE CORPORATION Definitions In this annual report, 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”. “Company” or “ZTE” ZTE Corporation, a joint stock limited company incorporated in China on 11 November 1997 under the Company Law of the People’s Republic of China, the A shares and H shares of which are listed on the Shenzhen Stock Exchange and the Hong Kong Stock Exchange respectively “Articles of Association” The Articles of Association of ZTE Corporation “Group” ZTE and one or more of its subsidiaries “Board of Directors” The board of directors of the Company “Supervisors” Members of the supervisory committee of the Company “China” or “PRC” People’s Republic of China “ITU” International Telecommunications Union, a specialised agency for telecommunications within the United Nations, the primary aim of which is to coordinate the operation of telecommunications network and services and advance the development of communications technology “China Mobile” China Mobile Communications Corporation and its subsidiaries “China Telecom” China Telecommunications Corporation and its subsidiaries “China Unicom” China United Network Communications Group Corporation and its subsidiaries “CSRC” China Securities Regulatory Commission “Hong Kong Stock The Stock Exchange of Hong Kong Limited Exchange” “Shenzhen Stock The Shenzhen Stock Exchange of China Exchange” “Shenzhen CSRC” The CSRC Shenzhen Bureau “Hong Kong Stock Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Exchange Listing Rules” Limited (as amended from time to time) “HKFRSs” Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations “PRC ASBEs” Generally accepted accounting principles in China “CASC” China Aerospace Science and Technology Corporation and its subsidiaries “CASIC” CASIC (Group) Company, Limited and its subsidiaries “Xi’an Microelectronics” Xi’an Microelectronics Technology Research Institute 2 ANNUAL REPORT 2009 “Zhongxing WXT” Shenzhen Zhongxing WXT Equipment Company Limited “Zhongxingxin” Shenzhen Zhongxingxin Telecommunications Equipment Company, Limited “Zhongxing Xindi” Shenzhen Zhongxing Xindi Telecommunications Equipment Company, Limited “Zhongxing Xinyu” Shenzhen Zhongxing Xinyu FPC Company, Limited “Zhongxing Xinzhou” Shenzhen Zhongxing Xinzhou Complete Equipment Company Limited “ZTE Kangxun” Shenzhen ZTE Kangxun Telecom Company Limited “Zhongxing Software” Shenzhen Zhongxing Software Company, Limited “ZTE HK” ZTE (H.K.) Limited “Changfei” Shenzhen Changfei Investment Company, Limited “Hongde” Shenzhen Hongde Battery Company, Limited “Kangquan” Shenzhen Kangquan Electromechanical Company, Limited “Lead” Shenzhen Lead Communications Company, Limited “Ruide” Shenzhen Ruide Electronic Industrial Company, Limited “Fudekang” Shenzhen Fudekang Electronics Company Limited “Nanchang Xingfei” Nanchang Xingfei Technology Company Limited 3 ZTE CORPORATION Glossary This glossary contains certain definitions of technical terms used in this annual report as they relate to the Group. Some of these definitions may not correspond to standard industry definitions or usage. 3G Third-generation mobile networks supporting peak data rates of 144 Kbps at mobile user speeds, 384 Kbps at pedestrian user speeds and 2 Mbps in fixed locations (peak speeds), although some initial deployments were configured to support just 64 Kbps. ITU coordinates 3G standards through its IMT-2000 project and key standards bodies such as 3GPP and 3GPP2. CDMA Code division multiple access, one of the standards for 2G mobile communications. It is a spread spectrum technology standard that assigns a pseudo-noise (PN) code to all speech and data bits, sends a scrambled transmission of the encoded speech over the air and reassembles the speech in its original format. By assigning a unique correlating code to each transmitter, several simultaneous conversations can share the same frequency allocations. FTTX FTTX Abbreviation of “Fiber-to-the-X”, a collective name given to various methods for fiber access. FTTX commonly includes: FTTN (Fiber-to-the-Node), FTTC (Fiber- to-the-Curb), FTTB (Fiber-to-the-Building), FTTH (Fiber-to-the-Home). GSM A global system for mobile communications, a digital cellular phone system standard that originated in Europe. It is deployed in more than 170 countries and uses a TDMA radio propagation scheme. IP Internet protocol, as more specifically defined in RFC 791, the primary purpose of which is to define packet architecture and address format. PTN Packet based Transport Network. In contrast to the traditional TDM mode, PTN transmits data flow in packets. PTN is a novel integrated equipment utilizing IP packet-based internal audit and incorporating traditional TDM user habits. TD-SCDMA Time division synchronous code division multiple access, a 3G technology developed in China to support voice and data transmission. WCDMA Wideband CDMA, a UMTS standard for 3G digital mobile networks adopting CDMA technologies to provide enhanced capacity for voice with a theoretical maximum data rate of 3Mbps. UMTS A reference to WCDMA standards generally used in Europe. 3G technologies have been collectively referred to as UMTS (Universal Mobile Telecommunications System) by European Telecommunications Standards Institute (ETSI) since the early 1990s. xPON Optical access that applies WDM technology with optical fiber as transmission medium, enabling high access bandwidth and end-to-end POS (passive optical splitting) transmission. xPON has a significant edge over other optical access technology and comprises EPON and GPON. Service network Built upon the access network/carrying network/core network to provide value-added services to users, the service network comprises the service engine (SMS centres, colour ringtone colours and WAP), the service platform and various value-added services (prepaid services, colour ringtone, VPN, paging centres, SMS, colour messaging, WAP, positioning and payments). 4 ANNUAL REPORT 2009 Access network Located in the public telecommunications network as an interface between the local switchboard and users, the primary function of which is to facilitate user access to the core network. The access network is formed by a series of equipment between the service node interface (SNI) and the user-network interface (UNI). Carrying network Carrying level network that provides the basic carriage function for the services. It directs each service information flow from its source to the destination according to various