Hua Hong Semiconductor Limited — Proxy Solicitation & Information Statement 2018

Mar 29, 2018

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in the Company, you should at once hand this circular together with the accompanying form of proxy to the purchaser or other transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee.

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

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HUA HONG SEMICONDUCTOR LIMITED 華虹半導體有限公司

(incorporated in Hong Kong with limited liability)

(Stock Code: 1347)

MAJOR TRANSACTION

IN RELATION TO THE EPC CONTRACT

29 March 2018

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
APPENDIX I: FINANCIAL INFORMATION OF THE GROUP . . . . . . . . . . . . .	21
APPENDIX II: GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24

– i –

DEFINITIONS

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

• “Board”

the board of Directors of the Company

• “Committee” as defined on page 9 of this circular

• “Company” Hua Hong Semiconductor, a company incorporated in Hong Kong with limited liability on 21 January 2005, the shares of which are listed on the main board of the Stock Exchange

• “Contractors” (1) The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering Corporation Limited, and (2) Shanghai Construction Group Co., Ltd

• “Director(s)” directors(s) of the Company “EPC Contract” the agreement dated 8 March 2018 entered into between the JV Company and the Contractors in relation to the engineering, procurement and construction work of the JV Project

• “Group” the Company and its subsidiaries from time to time

• “HHGrace”

• Shanghai Huahong Grace Semiconductor Manufacturing Corporation (上海華虹宏力半導體製造有限公司), a WFOE incorporated in the PRC on January 24, 2013 and a wholly-owned subsidiary of the Company

• “Hong Kong”

Hong Kong Special Administrative Region of the PRC

• “Huahong Group”

Shanghai Huahong (Group) Co., Ltd (上海華虹(集團)有 限公司), a company incorporated in the PRC on 9 April 1996 as Shanghai Hua Hong Microelectronic Co., Ltd. and renamed as Shanghai Huahong (Group) Co., Ltd. in 1998, and a controlling Shareholder

• “INESA”

INESA Holding Group (上海儀電控股(集團)有限公司), a state-owned company incorporated in the PRC in December 1993, and a controlling Shareholder

– 1 –

DEFINITIONS

• “JV Agreement”

• “JV Company”

• “JV Project”

• “Latest Practicable Date”

• “Listing Rules”

• “PRC” or “China”

• “RMB”

• “SAIL”

• “SFO”

the joint venture agreement dated 3 January 2018 entered into among the Company, HHGrace, the JV Company, the Subscriber and the Wuxi Entity

• Hua Hong Semi-Conductor (Wuxi) Co., Ltd, a company incorporated in the PRC on 10 October 2017 as a wholly-owned subsidiary of the Company. Upon completion of the JV Agreement, it will be held as to approximately 22.2% by the Company, 28.8% by HHGrace, 29.0% by the Subscriber and 20% by the Wuxi Entity

• the JV Company’s project to engage in the design, research, manufacturing, testing, packaging and sale of integrated circuits business, including the production of 12-inch (300mm) wafers

• 27 March 2018, being the latest practicable date prior to publication of this circular for ascertaining certain information contained herein

• the Rules Governing the Listing of Securities on the Stock Exchange

• the People’s Republic of China, excluding Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan for the purpose of this circular

• Renminbi, the lawful currency of the PRC

• Shanghai Alliance Investment Ltd (上海聯和投資有限公 司), a company incorporated in the PRC on September 26, 1994, and a controlling Shareholder

• The Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

– 2 –

DEFINITIONS

“Shanghai Hua Hong Shanghai Hua Hong International, Inc. is a wholly-owned International” subsidiary of Huahong Group. SAIL controls 51.83% of the voting rights of Huahong Group through its equity interest in Huahong Group and pursuant to a voting block of 4.75% voting rights from INESA to SAIL. As of the Latest Practicable Date, Shanghai Hua Hong International holds 350,401,100 Shares representing approximately 33.71% of the Shares and is a controlling Shareholder

• “Share(s)” the ordinary share(s) of the Company “Shareholder(s)” holder(s) of shares

• “Sino-Alliance International” Sino-Alliance International, Ltd. is a wholly-owned subsidiary of SAIL

• “sqm” square metre

• “Stock Exchange” The Stock Exchange of Hong Kong Limited

• “Subscriber” China Integrated Circuit Industry Investment Fund Co., Ltd., a company established in September 2014 under the laws of the PRC

• “Tender Rules” as defined on page 8 of this circular “Wuxi Entity” Wuxi Xi Hong Lian Xin Investment Co., Ltd., a professional investment company jointly established by municipal and district level state-owned enterprises

• “%” per cent

• English or Chinese translation, as the case may be, is for identification only.

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LETTER FROM THE BOARD

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HUA HONG SEMICONDUCTOR LIMITED 華虹半導體有限公司

(incorporated in Hong Kong with limited liability)

(Stock Code: 1347)

Executive Directors:

Suxin Zhang (Chairman) Yu Wang (President)

Registered Office:

Room 2212, Bank of America Tower 12 Harcourt Road, Central Hong Kong

Non-Executive Directors:

Jianbo Chen Yuchuan Ma Takayuki Morita Jun Ye

288 Halei road Zhangjian Hi-Tech Park Shanghai 201203 PRC

Independent Non-Executive Directors:

Stephen Tso Tung Chang Kai Huen Wong, JP Long Fei Ye

29 March 2018

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION IN RELATION TO THE EPC CONTRACT

1. INTRODUCTION

Reference is made to the announcement of the Company dated 12 March 2018 in relation to the entering into of the EPC Contract between the JV Company and the Contractors dated 8 March 2018 to implement the JV Project. Reference is also made to the announcement of the Company dated 3 January 2018 and the circular of the Company dated 30 January 2018 in relation to, amongst other things, the entering into the JV Agreement among the Company, HHGrace, the Subscriber, and the Wuxi Entity to inject capital into the JV Company for the purpose of engaging in the JV Project.

The purpose of this circular is to provide you with, amongst other things, further details of the EPC Contract and other information required to be disclosed under the Listing Rules.

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LETTER FROM THE BOARD

2. THE EPC CONTRACT

In order to implement the JV Project, the Board is pleased to announce that, on 8 March 2018, the JV Company entered into the EPC Contract with the Contractors in relation to the engineering, procurement and construction work of the JV Project, which involves the construction of various new buildings and ancillary facilities in Wuxi city, south Jiangsu province, PRC with the aim of serving a production line to manufacture 12-inch (300mm) integrated circuit chips for the JV Company. The total consideration under the EPC Contract is RMB3,471,720,698.20 (inclusive of all taxes).

A summary of the principal terms of the EPC Contract is set out below:

Date 8 March 2018

Parties

Principal: the JV Company

Contractors:

• (i) The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering Corporation Limited; and

• (ii) Shanghai Construction Group Co., Ltd

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, each Contractor and its ultimate beneficial owner is a third party independent of the Group and its connected persons.

Subject Matter

The Contractors shall be appointed as the contractors to undertake the engineering, procurement and construction services in respect of the JV Project, namely to provide design and construction services of buildings and ancillary facilities, including (but not limited to) manufacturing workshops, power plants, sewage treatment stations, engineering control building, integrated complex, research and development building, office building, central substation, diesel generator room, oil tank unit, bicycle shed, underground parking garage, warehouse, solid waste station, silane station, natural gas pressure regulation station, corridor, door guard, overall outdoor project, greening services.

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LETTER FROM THE BOARD

Total consideration

The total consideration payable to the Contractors under the EPC Contract shall be RMB3,471,720,698.20 (inclusive of all taxes), which consists of the following components with reference to the various types of services to be provided by the Contractors:

Fees Design Fee Construction and Installation Fee Electronic Engineering Construction Fee Total	Amount (RMB) 94,983,100.00 1,041,800,888.48 2,334,936,709.72
	3,471,720,698.20

The total consideration will be financed by the internal resources of the JV Company. The JV Company expects to utilise the capital injection from the Company, HHGrace, the Subscriber and the Wuxi Entity pursuant to the JV Agreement and the Capital Increase Agreement, to pay the consideration under the EPC Contract. Accordingly, the Company confirms the JV Company has sufficient internal resources to settle the consideration under the EPC Contract.

Consideration adjustment

Pursuant to the terms of the EPC Contract, the total consideration is subject to adjustments pursuant to (i) any changes in the construction process requested by the JV Company, and (ii) certain specified external circumstances not in the control of the EPC Contract parties.

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LETTER FROM THE BOARD

Under the EPC Contract, the JV Company is entitled to propose adjustments to various aspects of the EPC Contract, including the scope, price and sources of materials etc. It has the right to submit proposals for adjustments to the Contractors, after which the Contractors would have to submit a written report in response, detailing the reasons for agreeing to or disagreeing with the suggested adjustments and the execution plan (if any) for the JV Company to review within 10 days after receiving their proposal. If the JV Company approves the Contractors’ written report, it will have to issue a formal adjustment order in writing. If the JV Company does not approve the Contractors’ written report, the JV Company will have to provide further supplementary information in writing and issue a further adjustment order for the Contractors’ execution. Each of the shareholders of the JV Company shall take part in the decision-making process of the JV Company through its appointed director(s) on the board of the JV Company in accordance with the JV Agreement and the articles of association of the JV Company, which provides that the board of directors of the JV Company shall consist of seven directors, of which three shall be appointed by the Company and/or HHGrace, two shall be appointed by the Subscriber, one shall be appointed by the Wuxi Entity and one will be the employee representative of the JV Company to be elected.

The total consideration is also subject to adjustments pursuant to certain specified external circumstances not in the control of the EPC Contract parties, as stipulated under the EPC Contract. Within 30 days after any of the following incidents, either the JV Company or the Contractors has the right to adjust the consideration by notifying the other party or its representative in writing:

1. any changes in laws, national policies or industry practices that have an effect on the construction after the EPC Contract has been entered into;

2. any price adjustments published by the relevant construction pricing management departments administered under the government authorities in Jiangsu Province of the PRC which entail an increase or decrease in costs incurred by the Contractors in the execution of the construction under the EPC Contract; or

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LETTER FROM THE BOARD

1. any water supply outages, power outages, gas outages or road blocks not effected by the Contractors but which have caused a delay in the construction under the EPC Contract for more than 8 hours.

In the event of the occurrence of any of the above circumstances, upon the JV Company’s confirmation of a reasonable amount to be adjusted from the agreed consideration, the consideration for the progress payments for that relevant phase will be adjusted accordingly.

Save for as disclosed above, the total consideration shall not be adjusted under any other circumstances, and the Company does not expect to incur any additional costs for the construction of the JV Project.

There is no cap to the adjustment amount to the total consideration under the EPC Contract. The Company undertakes to comply with any additional requirements under Chapter 14 of the Listing Rules should the total consideration under the EPC Contract be adjusted such that the transaction would fall under a different classification pursuant to Rule 14.06 of the Listing Rules.

Public tender process

The Company invited public tenders for the construction work under the EPC Contract. The public tender process in respect of the construction work of the JV Project was carried out in accordance with (i) the Administrative Measures for the Bidding and Submission of Tendering for Construction Projects in Wuxi City (無錫市建設工程招標投標管理辦法), a PRC government order effective from 1 October 2014 and Implementation Opinions regarding the Reform and Improvement on the Submission of Tendering for Housing Construction and Municipal Infrastructure Engineering (關於 改革和完善房屋建築和市政基礎設施工程招標投標制度的實 施意見) published by the Department of Rural Development and Construction of Jiangsu Province (江蘇省住房和城鄉建 設廳) (together the “ Tender Rules ”). The public tender process involved three stages: (i) invitation to tender; (ii) review of tender documents; and (iii) tender selection.

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LETTER FROM THE BOARD

On 19 January 2018, the JV Company published the tender document on the Bidding and Tendering for Construction Projects System of Wuxi City (無錫市建設工程網上招投標系 統) to invite tenders to submit their offers. Six entities (in three groups) eventually submitted their tenders.

The tender evaluation was conducted by a committee (the “ Committee ”) consisting of 7 experts in the construction industry, which composition was also constituted in accordance with the Tender Rules. The Committee evaluated the following factors in assessing the tenders submitted by the Contractors: (1) the working plan proposed by the tenderers and their technical capability; (2) the reputation of tenderers; (3) the financial and management resources of the tenderers; and (4) the experience of the tenderers in similar projects.

The Board is of the view that the evaluation criteria of the public tender is in line with market practice for construction projects which are comparable to the JV Project because: (i) the evaluation criteria in the public tender process is set out in the Tender Rules, which is in accordance with the relevant PRC government and industry regulations, and (ii) the evaluation criteria is required of all state-owned companies’ bidding and tender process of construction projects in the Jiangsu region.

As the two Contractors were selected amongst the six entities (in three groups) who submitted tenders, and as a result of a transparent and formal tender process, involving an impartial and holistic assessment by the Committee in accordance with Tender Rules, the Board is of the view that the Contractors finally selected possess the adequate relevant knowledge, expertise and experience to carry out the construction of the JV Project.

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LETTER FROM THE BOARD

As the public tender was carried out in accordance with a standardised and formal process pursuant to the Tender Rules. The Committee, which was constituted in accordance with the Tender Rules, has considered, after taking into account the relevant evaluation criteria, that the Contractors were the most capable and suitable candidates for the construction of the JV Project among the tenderers, and that the bidding price of the Contractors (which was the same as the total consideration under the EPC Contract) was consistent with the market rates of comparable construction projects and with those offered by other tenderers. Accordingly, the Board is of the view that the terms and conditions of the EPC Contract, including the total consideration, are fair and reasonable and in the interest of the Company and the Shareholders as a whole.

Allocation of work and consideration

The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering Corporation Limited is responsible for (i) the design work, and (ii) the installation work to ensure the satisfaction of the technical conditions for installing process equipment under the EPC Contract (the “ Completion Work ”), whereas Shanghai Construction Group Co., Ltd. is responsible for the main construction work (including the excavation for foundations and the construction of the wafer plant) under the EPC Contract.

The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering Corporation Limited is expected to be allocated approximately RMB2,430 million, of which approximately RMB95 million is for the design work and approximately RMB2,335 million for the Completion Work under the EPC Contract. Shanghai Construction Group Co., Ltd. is expected to be allocated approximately RMB1,040 million for the main construction work (including the excavation for foundations and the construction of the wafer plant) under the EPC Contract.

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LETTER FROM THE BOARD

Construction

commencement and expected completion date

Construction commencement date: 28 March 2018

Expected completion date: 28 March 2020

The JV Company will appoint a construction manager with the appropriate qualifications to assist in assessing the progress of the construction work at various stages by tracking the Contractors’ progress against the construction progress plans, actively monitoring the construction works and reporting to the JV Company on a regular basis. In line with the industry practice, the JV Company, the construction manager and the Contractors will have regular and frequent meetings to discuss and evaluate the progress of the construction work under the EPC Contract.

The JV Company will also have bi-weekly meetings with the Company internally to discuss and evaluate the construction progress of the JV Project to ensure that the Contractors’ construction works are completed on schedule and meeting the requisite quality standards.

Pursuant to the terms of the EPC Contract, the Contractors are required to submit various project progress plans to the JV Company prior to the commencement of the construction works and in any event, before 28 March 2018. Such progress plans shall detail the expected construction progress for each phase of the JV Project.

Pursuant to the EPC Contract, the Contractors are also required to submit a monthly progress report detailing the construction progress made that month. The JV Company will monitor the construction progress made by the Contractors by reviewing and approving the monthly progress report before tendering the progress payments due to the Contractors for that month.

The Contractors have also undertaken to submit the detailed construction schedule to the JV Company every three months to ensure the JV Company is kept up-to-date with the construction progress.

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LETTER FROM THE BOARD

Timeline

Payment terms and schedule

• No. Date Progress Item 1 March 2018 Completion of construction drawing and verification

• 2 March 2018 Obtaining construction permit and commencement of construction work

• 3 March 2019 Completion of main construction work 4 September Completion of construction and 2019 installation works (including cleaning room), satisfying the technical conditions for moving in process equipment

• 5 March 2020 Inspection and acceptance of construction work

• 1. Prepayment

1.1. Design Fee

Within 30 days from the date of the EPC Contract, the JV Company shall make a prepayment in an amount equivalent to 20% of the Design Fee under the EPC Contract.

1.2. Construction and Installation Fee

Within 30 days from the date of the EPC Contract, the JV Company shall make a prepayment in an amount equivalent to 10% of the Construction and Installation fees under the EPC Contract.

1.3. Electronic Engineering Construction Fee

Within 30 days from the date of the sub-contract in relation to the electronic engineering construction work, the JV Company shall make a prepayment in an amount equivalent to 20% of the consideration of the Electronic Construction Engineering Fee under that sub-contract.

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LETTER FROM THE BOARD

2. Payment Schedule

2.1. Design Fee

• 2.1.1. Upon the verification of the basic design drawing and within 30 days after the Contractors have submitted the qualified valueadded tax invoices, the JV Company shall make a payment in an amount equivalent to 40% of the Design Fee under the EPC Contract. 20% of the prepayment in respect of the Design Fee shall be deducted from this progress payment.

• 2.1.2. Upon the submission of all construction drawings and obtaining the certificate of verification, and within 30 days after the Contractors have submitted the qualified valueadded tax invoices, the JV Company shall make a further payment of 25%, bringing the total payment of the Design Fee to 65%.

• 2.1.3. Upon the completion and roofing of the main manufacturing workshop, and within 30 days after the Contractors have submitted the qualified value-added tax invoices, the JV Company shall make a further payment of 12.5%, bringing the total payment of the Design Fee to 77.5%.

• 2.1.4. Upon the completion of the installation construction, and within 30 days after the Contractors have submitted the qualified valueadded tax invoices, the JV Company shall make a further payment of 12.5%, bringing the total payment of the Design Fee to 90%.

• 2.1.5. Upon the completion of the passing of the inspection and acceptance as well as the submission of the completion drawing, and within 30 days after the Contractors have submitted the qualified value-added tax invoices to the amount equivalent to 97% of the Design Fee, the JV Company shall make a further payment of 7%, bringing the total payment of the Design Fee to 97%.

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LETTER FROM THE BOARD

• 2.1.6. The remaining 3% of the Design Fee shall be reserved as quality assurance fee. Within one year from the trial of the production line, if there are no further issues, and after the Contractors have provided value-added tax invoices in the equivalent amount, the JV Company shall pay the corresponding amount to the Contractors within 1 month.

• 2.2. Construction and Installation Fee

• 2.2.1. On a monthly basis, the JV Company shall, after receiving the “Completion Progress Report” compiled by the Contractors based on the construction progress before the 25th day of every month and the qualified value-added tax invoices submitted by the Contractors and upon passing the verification procedures and confirmation by the JV Company, make a payment in an amount equivalent to 75% of the progress payment that month.

• 2.2.2. 2% of the prepayment in respect of the Construction and Installation Fee shall be deducted from each of the progress payment to be made in each of the first to fifth months after the commencement of the construction. If the amount of prepayment to be deducted is greater than the progress payment that month, the Contractors and the JV Company shall negotiate separately.

• 2.2.3. Upon the completion of the construction and passing of the inspection acceptance, and within 30 days after the Contractors have submitted the qualified value-added tax invoices, the JV Company shall make a payment in an amount equivalent to the difference between 85% of the Construction and Installation Fee and the progress payments made.

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LETTER FROM THE BOARD

• 2.2.4. Upon the completion of the valuation process of the construction, and within 30 days after the Contractors have submitted the qualified valueadded tax invoices in an amount equivalent to 97% of the Construction and Installation Fee, the JV Company shall make a further payment of 12%, bringing the total payment to 97% of the Construction and Installation Fee to the Contractors.

• 2.2.5. The remaining 3% of the Construction and Installation Fee shall be reserved as quality assurance fees. If there are no further issues upon the expiry of the 2-year quality assurance period, and upon the Contractors’ submission of the qualified value-added tax invoices in the equivalent amount, the JV Company shall make the payment within 1 month.

• 2.3. Electronic Engineering Construction Fee

• 2.3.1. On a monthly basis, the JV Company shall, after receiving the “Completion Progress Report” compiled by the Contractors based on the construction progress before the 25th day of every month, the qualified value-added tax invoices submitted by the Contractors and upon passing the verification procedures and confirmation by the JV Company, make a payment in an amount equivalent to 75% of the progress payment that month.

• 2.3.2. 7% of prepayment in respect of the Electronic Engineering Construction Fee shall be deducted in the first and second month after the commencement of the construction, and 6% of the prepayment in respect of the Electronic Engineering Construction Fee shall be deducted in the third month. If the amount of prepayment to be deducted is greater than the progress payment that month, the Contractors and JV Company shall negotiate separately.

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LETTER FROM THE BOARD

• 2.3.3. Upon the completion of the construction and passing of the inspection acceptance, and within 30 days after the Contractors have submitted the qualified value-added tax invoices, the JV Company shall make a payment in an amount equivalent to the difference between 85% of the Electronic Engineering Construction Fee and the progress payments made.

• 2.3.4. Upon the completion of the valuation process of the construction, and within 30 days after the Contractors have submitted the qualified valueadded tax invoices in an amount equivalent to 97% of the Electronic Engineering Construction Fee, the JV Company shall make a further payment of 12%, bringing the total payment to 97% of the Electronic Engineering Construction Fee to the Contractors.

• 2.3.5. The remaining 3% of the Electronic Engineering Construction Fee shall be reserved as quality assurance fees. If there are no further issues upon the expiry of the 2-year quality assurance period, and upon the Contractors’ submission of the qualified value-added tax invoices in the equivalent amount, the JV Company shall make the payment within 1 month.

• Penalty Pursuant to the terms of the EPC Contract, in the event of any delay in construction progress caused by the Contractors, the Contractors shall pay a penalty of 0.2% of the total consideration under the EPC Contract for each day of delay up to an amount of 10% of the total consideration under the EPC Contract to the JV Company. If the Contractors cause a delay in construction for 90 days or more, the JV Company has the additional right to terminate the EPC Contract.

Early Termination The EPC Contract can be early terminated by either the JV Company or the Contractors in accordance with its terms and as set out below.

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LETTER FROM THE BOARD

The JV Company has the right to early terminate the EPC Contract pursuant to certain specified conditions under the EPC Contract, including, amongst others, if any of the Contractors:

• (i) fails to execute the construction in accordance with the agreed schedule,

• (ii) has caused serious defects in the quality of the construction, or

• (iii) undergoes bankruptcy, insolvency or liquidation.

The Contractors have the right to early terminate the EPC Contract pursuant to certain specified conditions under the EPC Contract, including, amongst others, if the JV Company:

• (i) delays in tendering payment,

• (ii) causes a delay in the Contractors’ construction progress,

• (iii) encounters any force majeure events listed under the EPC Contract, or

• (iv) undergoes bankruptcy, insolvency or liquidation.

If the JV Company or the Contractors terminate the EPC Contract pursuant to any of the above circumstances, both parties shall calculate and determine the payment tendered thus far in the JV Project as the basis for calculating the remaining compensation. The JV Company or the Contractors’ obligation to pay to the other party the agreed compensation amount remains valid even after the EPC Contract has been terminated until the agreed compensation has been fully tendered. The Contractors must also remove all of the materials, tools, equipment and facilities from the construction sites upon the termination of the EPC Contract. In the event of a dispute, the JV Company and the Contractors shall engage in amicable negotiation with the aim to resolve the dispute. If the dispute cannot be resolved within 30 days of such amicable negotiation, the JV Company and/or the Contractors is/are entitled to litigate such matter at the courts of Wuxi city.

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LETTER FROM THE BOARD

3. REASONS FOR AND BENEFITS OF THE AGREEMENT

The JV Company is expected to engage in the JV Project, namely, the business of the production, manufacturing and sale of 12-inch (300mm) wafers. The Company is of the view that this would allow the Company to (i) benefit from a number of new business opportunities, (ii) capture and capitalize on the significant market opportunity in China in relation to 12-inch (300mm) wafers, (iii) enhance the Company’s present core competitiveness and (iv) extend its value proposition to obtain favorable financial returns for the medium to long term in the 12-inch (300mm) wafers market. For further details of the reasons and benefits of entering into the JV Agreement, please refer to the circular of the Company dated 30 January 2018.

In order to implement the JV Project, the JV Company entered into the EPC Contract to engage the Contractors in relation to the engineering, procurement and construction work of the JV Project. The Company invited public tenders for the construction work under the EPC Contract. After carrying out relevant evaluation procedures and considering various factors, including the technical experience, professional qualifications, business reputation, project management abilities, total expenses and other relevant factors of all the tenderers, the Company selected the Contractors as the tender winners. The Company considers the Contractors to possess the necessary professional qualification and extensive experience in undertaking such work for the JV Company and are expected to be able to ensure the smooth implementation of the construction work for the JV Company. The EPC Contract was negotiated on an arm’s length basis and are on normal commercial terms.

Based on the above, the Directors are of the view that the terms of the EPC Contract are fair and reasonable and in the interests of the Group and the Shareholders as a whole.

4. FINANCIAL EFFECTS OF ENTERING INTO THE EPC CONTRACT

As a result of entering into the EPC Contract, the fixed assets of the Group will increase by approximately RMB3.47 billion and the liabilities of the Group will not be changed. The overall effects of entering into the EPC Contract on the future earnings of the Group will depend on the return to be generated from the operation of the JV Project.

5. INFORMATION ON THE PARTIES

The Company

The Company is a manufacturer of semiconductors predominantly on 8-inch (200mm) wafers for specialty applications. The Company’s technologies, in particular eNVM and power discreet, are primarily engaged in the consumer electronic, communication, computing and industrial as well as automotive industries.

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LETTER FROM THE BOARD

The JV Company

The JV Company, Hua Hong Semi-Conductor (Wuxi) Co., Ltd, is currently a non-wholly owned subsidiary of the Company. Its business is to engage in the design, research, manufacturing, testing, packaging and sale of integrated circuits fabricated on 12-inch (300mm) wafers.

The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering Corporation Limited

The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering Corporation Limited is a subsidiary of Wuxi Taiji Industry Co., Ltd. that is listed in the Shanghai Stock Exchange (stock number: 600667) and a large-scale comprehensive engineering technology service company engaged in engineering consultation, engineering design and engineering general-contracting.

Shanghai Construction Group Co., Ltd

Shanghai Construction Group Co., Ltd. is a company founded in 1998 which is listed on the Shanghai Stock Exchange that engages in the construction business in China and internationally. It constructs high-rise buildings, bridges, railways, public culture and sport facilities, industrial plants, environment protection projects, etc. It also invests, constructs, and operates urban infrastructure; and provides general contracting services. It is a subsidiary of Shanghai Construction (Group) General Corporation.

Relationship between the Contractors

The Company confirms that the Contractors have no relationship with each other and are independent third parties from each other.

6. IMPLICATIONS UNDER THE LISTING RULES

As one or more of the applicable percentage ratios under Rule 14.07 of the Listing Rules in respect of the entering into of the EPC Contract exceeds 25% but are all below 100%, the entering into of the EPC Contract constitutes a major transaction of the Company under Chapter 14 of the Listing Rules. The entering into of the EPC Contract is therefore subject to the announcement, circular and shareholders’ approval requirements under Chapter 14 of the Listing Rules.

To the best of the knowledge of the Directors, no Shareholders or any of their respective associates have any material interest in the EPC Contract and none of the Shareholders is required to abstain from voting in favour of the resolution to approve the entering into of the EPC Contract. Pursuant to Rule 14.44 of the Listing Rules, written shareholders’ approval by Shanghai Hua Hong International and Sino-Alliance International, being a closely allied group of Shareholders, who, as of the Latest Practicable Date, held in aggregate, 573,876,095 Shares representing approximately 55.20% of the total issued Shares, has been obtained in lieu of holding a general meeting of the Company to approve the entering into of the EPC Contract.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, Shanghai Hua Hong International was a wholly-owned subsidiary of Hua Hong Group and held 350,401,100 Shares, representing 33.71% of the Shares.

As at the Latest Practicable Date, Huahong Group was 47.08% owned by China Electronic Corporation, and 47.08% by SAIL. In addition, as at the Latest Practicable Date, SAIL controlled 51.83% of the voting rights of Hua Hong Group by virtue of its 47.08% equity interest in Huahong Group and an additional 4.75% voting rights pursuant to a voting bloc from INESA to SAIL. As at the Latest Practicable Date, Sino-Alliance International was a wholly-owned subsidiary of SAIL and held 223,474,995 Shares, representing 21.50% of the Shares.

7. ADDITIONAL INFORMATION

Your attention is also drawn to the additional information contained in the appendices to this circular.

8. RECOMMENDATION

The Directors, including the independent non-executive Directors, consider that the terms of the EPC Contract are fair and reasonable, and are in the interests of the Company and the Shareholders as a whole. Had an extraordinary general meeting been convened for the approval of the EPC Contract, the Directors, including the independent non-executive Directors, would have recommended the Shareholders to vote in favour of the EPC Contract.

Yours faithfully,

On behalf of the Board

Hua Hong Semiconductor Limited Mr. Suxin Zhang

Chairman and Executive Director

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. FINANCIAL INFORMATION OF THE GROUP

The audited consolidated financial information of the Group for each of the three years ended 31 December 2014, 2015 and 2016 are disclosed in the annual reports of the Company for the years ending 31 December 2014, 2015 and 2016 published on 13 April 2015, 8 April 2016 and 13 April 2017 respectively. There was no qualified audit opinion expressed on the financial statements of the Group for the aforementioned three years.

The above annual reports of the Company have been published on both the website of the Stock Exchange and the website of the Company, and the relevant links to these annual reports are set out below:

2016 annual report:

• (i) http://www.huahonggrace.com/attachment/2017040616350100012772338_en.pdf

• (ii) http://www.hkexnews.hk/listedco/listconews/SEHK/2017/0406/LTN20170406499.pdf

2015 annual report:

• (i) http://www.huahonggrace.com/attachment/2016040817020100032479438_en.pdf

• (ii) http://www.hkexnews.hk/listedco/listconews/SEHK/2016/0408/LTN20160408373.pdf

2014 annual report:

• (i) http://www.huahonggrace.com/attachment/2015041312020100032168305_en.pdf

• (ii) http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0413/LTN20150413115.pdf

2. STATEMENT OF INDEBTEDNESS

Debt securities and term loans

As at the close of business of 28 February 2018, save as disclosed in respect of the borrowings and indebtedness of the Group below, the Group has no debt securities issued or outstanding, or authorised or otherwise created but unissued, and no term loans, distinguishing between guaranteed, unguaranteed, secured (whether the security is provided by the Company or by independent third parties) or unsecured.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Borrowings and indebtedness

As at the close of business of 28 February 2018, being the latest practicable date for the purpose of this statement of indebtedness prior to the printing of this circular, the Group has outstanding unguaranteed borrowings and indebtedness of approximately USD94.1 million. The Group’s bank loans were all secured.

Contingent liabilities

As at the close of business of 28 February 2018, the Group has no material contingent liability or guarantees.

Mortgage and charges

As at the close of business of 28 February 2018, the Group’s above outstanding secured borrowings were secured by the Group’s assets and certain equity investments.

Save as aforesaid or as otherwise mentioned herein and apart from intra-group liabilities, the Group did not have any outstanding mortgages, charges, debentures, loan capital, debt securities, bank loans and overdrafts or other similar borrowings or indebtedness, liabilities under acceptance (other than normal trade bills) or acceptance credits or hire purchase commitments, guarantees or other material contingent liabilities as at the close of business on 28 February 2018.

The Directors confirm that there was no material change in the indebtedness status of the Group since 28 February 2018 up to the Latest Practicable Date.

3. WORKING CAPITAL

The Directors are of the opinion that, after taking into account the effect of the EPC contract and the transactions contemplated thereunder, its internal resources, the financial resources available to the Group, including its existing cash and cash equivalents on hand, its cash flow from operating activities, the working capital available to the Group is sufficient for the Group’s requirements for at least 12 months from the date of this circular.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

The Company has seen strong growth in the demand for its 8-inch (200mm) wafers since 31 December 2016 and throughout 2017. The Company expects the demand for its 8-inch (200mm) wafers to remain strong in the foreseeable future as the PRC government continues to support the development of the integrated circuit industry in the PRC and the applications utilising 8-inch (200mm) wafers in technologies such as internet of things, big data, wisdom city and 5G communication applications continues to develop.

Due to the favourable Chinese semiconductor industry polices and the continuous support of the Subscriber to semiconductor design houses related to IoT, 5G, AI and smart cars, the sales of the Chinese design houses will continue to increase at a rapid rate, especially in discrete, smart card, and microcontroller application fields, where the Company has technological strength. The Group will continue to benefit from such policies and support. With the successful production of the 2nd generation 90nm embedded flash technology platform, the Company can provide more competitive the storage size and reliable performance in eNVM technology. In 2018, more smart card and microcontroller products will be introduced to this 2nd generation 90nm embedded flash technology platform, which will further enhance the Company’s strength in those markets.

Due to the strong growth of the IoT market and the development and adoption of future 5G cellular communications, the demand for radio frequency components in the IoT and mobile devices will continue to grow. To target such applications and to keep pace with the development trend, the Company will continue to develop radio frequency related technologies, including Radio Frequency SOI devices.

Going forward, the Company will focus on further reductions of the size of memory units and IP modules and optimization of the advanced differentiated technologies to deliver efficient and cost-effective value added solutions to the diverse customers of the Company. The establishment of 12-inch (300mm) wafer manufacturing plant in Wuxi, PRC will enable the continuous optimization and development of the Company’s differential technologies, especially the embedded eNVM technology. The total capacity of Company will continue to be expanded so as to meet the growing demand for products.

The Company will maintain its market sensitivity and insight to intensify the long-term success of its 8-inch (200mm) wafer business and grow and strengthen the potential of the JV Company. The Company will take a more pro-active stance to cope with global market competition and make substantial contributions to the leapfrog development of China’s semiconductor industry.

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GENERAL INFORMATION

APPENDIX II

1. RESPONSIBILITY STATEMENT

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

2. DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN SHARES UNDERLYING SHARES AND DEBENTURES

As at the Latest Practicable Date, the interest or short position of the Directors of the Company in the Shares, underlying Shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were (i) required to be notified to the Company and the Stock Exchange pursuant to Division 7 and 8 of Part XV of the SFO (including interest and/or short positions which they were taken or deemed to have under such provisions of the SFO); (ii) required, pursuant to section 352 of the SFO, to be entered in the register; or (iii) required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange, are as follows:

			Approximate
		Number of	percentage of
		underlying	interests as
		shares held in	at the Latest
		long position	Practicable
Name of Director	Nature of interest	(Note 1)	Date
Mr. Yu Wang	Beneficial owner	669,000	0.06%
Mr. Takayuki Morita	Beneficial owner	119,000	0.01%

Note:

• (1) These are the share options granted by the Company pursuant to the Share Option Scheme. One third of such share options shall vest on each of 4 September 2017, 4 September 2018 and 4 September 2019 and can be exercised at an exercise price of HK$6.912 per Share.

Save as disclosed above, so far as known to any Directors, as at the Latest Practicable Date, none of the Directors of the Company or any of their associates had or was deemed to have any interest or short position in the Shares, underlying Shares and debentures of the Company and its associated corporations as defined in Part XV of the SFO, which were (i) required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest and/or short positions which they were taken or deemed to have under such provisions of the SFO); (ii) required, pursuant to section 352 of the SFO, to be entered in the register; (iii) required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange.

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GENERAL INFORMATION

APPENDIX II

3. SUBSTANTIAL SHAREHOLDERS’ INTEREST

As at the Latest Practicable Date, so far as was known to the Directors, the persons or entitles, other than a Director or chief executive of the Company, who had an interest or a short position in the Shares or the underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were recorded in the register required to be kept by the Company under Section 336 of the SFO, or as otherwise notified to the Company and the Stock Exchange were as follows:

		Number of	Approximate
Name of substantial		Shares directly or	percentage of
Shareholder	Nature of interest	indirectly held	interests
Shanghai Hua Hong	Legal and	350,401,100	33.71%
International (Note 1)	beneficial owner
Sino-Alliance International	Legal and	223,474,995	21.50%
(Note 2)	beneficial owner

Notes:

1. Shanghai Hua Hong International is a wholly-owned subsidiary of Huahong Group. As at the Latest Practicable Date, Huahong Group was 47.08% owned by China Electronics Corporation, and 47.08% owned by SAIL.

2. Sino-Alliance International is a wholly-owned subsidiary of SAIL of the 223,475,995 Shares, such Shares are either held directly by Sino-Alliance International or through its controlled corporations. In addition to the 223,475,995 shares indirectly held through Sino-Alliance International and its controlled corporations, SAIL also indirectly held 350,401,100 shares through Huahong Group. Accordingly, pursuant to Part XV of the Securities and Futures Ordinance, SAIL is deemed to be interested in an aggregate of 573,876,095 shares.

Save as disclosed above, as at the Latest Practicable Date, so far as was known to the Directors, the Company has not been notified by any persons (other than a Director or chief executive of the Company) who had an interest or a short position in the Shares or the underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were recorded in the register required to be kept by the Company under Section 336 of the SFO, or as otherwise notified to the Company and the Stock Exchange.

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GENERAL INFORMATION

APPENDIX II

4. DIRECTORS’ OTHER INTERESTS

• (a) Save as disclosed in this circular, none of the Directors was materially interested, directly or indirectly, in any contract or arrangement entered into by any member of the Group subsisting as at the Latest Practicable Date which was significant in relation to the business of the Group.

• (b) None of the Directors has any direct or indirect interest in any assets acquired or disposed of by or leased to any member of the Group or is proposed to be acquired or disposed of by or lease to member of the Group since 31 December 2016, being the date to which the latest published audited accounts of the Group were made up.

5. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries was engaged in any litigation or arbitration of material importance and, so far as the Directors are aware, no litigation or claims of material importance is pending or threatened by or against the Company and any of its subsidiaries.

As at the Latest Practicable Date, the Directors are not aware of any material adverse change in the financial position or trading position of the Group since 31 December 2016,being the date to which the latest published and audited financial statements of the Group were made up.

6. MATERIAL CONTRACTS

The following contracts have been entered into by the Group (not being contracts entered into in the ordinary course of business) within the two years immediately preceding the date of this circular and is or may be material:

• the EPC Contract;

• the subscription agreement dated 3 January 2018 entered into between the Company and the Subscriber in respect of the subscription by the Subscriber of the Company’s 242,398,925 Shares. For more details, please refer to the Company’s announcement dated 3 January 2018 and the Company’s circular dated 30 January 2018;

• the joint venture agreement dated 3 January 2018 entered into among the Company, HHGrace, the JV Company, the Subscriber and the Wuxi Entity in respect of the operation of the JV Business. For more details, please refer to the Company’s announcement dated 3 January 2018 and the Company’s circular dated 30 January 2018; and

• the capital increase and subscription agreement dated 3 January 2018 entered into among the Company, HHGrace, the JV Company, the Subscriber and the Wuxi Entity in respect of the capital injection into the JV Company. For more details, please refer to the Company’s announcement dated 3 January 2018 and the Company’s circular dated 30 January 2018.

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GENERAL INFORMATION

APPENDIX II

7. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into, or proposed to enter into, any service contract with the Company or any of its subsidiaries which is not expiring or determinable by the Group within one year without payment of compensation (other than statutory compensation).

8. COMPETING INTERESTS

As at the Latest Practicable Date, as far as the Directors were aware of, none of the Directors and their respective close associates (as defined under the Listing Rules) was interested in any business which competes or was likely to compete, either directly or indirectly, with the business of the Company or the Group.

9. DOCUMENTS AVAILABLE FOR INSPECTION

A copy of each of the following documents will be available for inspection at the office of the Company at Room 2212, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong during normal business hours from 9:00 a.m. to 5:00 p.m. for a period of 14 days from the day of this circular (both days inclusive):

• (a) the annual reports of the Company for the financial years ended 31 December 2015 and 31 December 2016;

• (b) the articles of association of the Company;

• (c) the letter from the Board dated 29 March 2018 to the Shareholders, the text of which is set out on pages 4 to 20 of this circular;

• (d) the material contracts referred to under “6. Material Contracts”, including the EPC Contract;

• (e) this circular; and

• (f) the circular of the Company dated 30 January 2018.

10. GENERAL

• (a) The company secretary of the Company is Mr. Xiaojun Wang, who is a practicing solicitor admitted in the PRC, Hong Kong and England and Wales.

• (b) The registered office of the Company is at Room 2212, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong.

• (c) The Hong Kong branch share registrar and transfer office of the Company is Tricor Investor Services Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

• (d) The English text of this circular shall prevail over the Chinese text in the case of inconsistency.

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