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 a stockbroker or other registered dealer in securities, a bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Hua Hong Semiconductor Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer 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.

This circular appears for information only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities of the Company.

==> picture [16 x 22] intentionally omitted <==

==> picture [8 x 22] intentionally omitted <==

==> picture [12 x 7] intentionally omitted <==

==> picture [12 x 13] intentionally omitted <==

==> picture [15 x 13] intentionally omitted <==

==> picture [17 x 13] intentionally omitted <==

==> picture [14 x 13] intentionally omitted <==

==> picture [25 x 24] intentionally omitted <==

==> picture [16 x 24] intentionally omitted <==

==> picture [8 x 16] intentionally omitted <==

==> picture [16 x 23] intentionally omitted <==

==> picture [18 x 21] intentionally omitted <==

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

(Incorporated in Hong Kong with limited liability)

(Stock code: 01347)

(1) MAJOR AND CONNECTED TRANSACTIONS IN RELATION TO

(i) THE SUBSCRIPTION AGREEMENT, (ii) THE JV AGREEMENT AND

(iii) THE CAPITAL INCREASE AGREEMENT

AND

(2) NOTICE OF EGM

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

==> picture [202 x 24] intentionally omitted <==

A letter from the Independent Board Committee containing its advice to the Independent Shareholders is set out on pages 43 to 44 of this circular. A letter from Somerley Capital Limited, the Independent Financial Adviser, containing its advice to the Independent Board Committee and the Independent Shareholders, is set out on pages 45 to 72 of this circular.

The notice convening an extraordinary general meeting to be held at 288 Halei Road, Zhangjiang Hi-Tech Park, Shanghai 201203, PRC on Wednesday, 14 February 2018 at 9:00 a.m. is contained on pages 84 to 86 of this circular. Shareholders are advised to read the notice and to complete and return the enclosed form of proxy for use at the EGM in accordance with the instructions printed thereon.

Whether you are able to attend the EGM or not, please complete and return the enclosed form of proxy to the branch share registrar of the Company, Tricor Investor Services Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. The completion and delivery of a form of proxy will not preclude you from attending and voting at the EGM in person should you wish.

30 January 2018

CONTENTS

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
2.	The Subscription Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
3.	The JV Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
4.	The Capital Increase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
5.	Reasons for and benefits of entering into the Proposed Transaction . . . . .	31
6.	Financial effects of the Proposed Transaction . . . . . . . . . . . . . . . . . . . . . .	35
7.	Information about the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
8.	Implications under the Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . .	39
9.	Extraordinary General Meeting and Voting . . . . . . . . . . . . . . . . . . . . . . . .	40
10.	Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	41
11.	Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	42
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . .		43
Letter from the Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . .		45
Appendix	I – Financial Information of the Group . . . . . . . . . . . . . . . . .	73
Appendix	II – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	76
Notice of	Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	84

– i –

DEFINITIONS

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

“Articles” the articles of association of the Company
“Announcement” the announcement of the Company dated 3 January 2018 regarding the major and connected transactions in relation to the Subscription Agreement, the JV Agreement and the Capital Increase Agreement
“Capital Increase Agreement” 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
“Company” Hua Hong Semiconductor Limited, 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
“connected person(s)” has the same meaning as ascribed to it under the Listing Rules
“Director(s)” the director(s) of the Company
“EGM” the extraordinary general meeting of the Company to approve, amongst other things, the Specific Mandate and the Proposed Transaction
“Group” the Company and its subsidiaries
“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 our Company

“HK$” Hong Kong dollars, the lawful currency of Hong Kong “Hong Kong” Hong Kong Special Administrative Region of the PRC

– 1 –

DEFINITIONS

“Huahong Group”
“Independent Board Committee”
“Independent Financial Adviser”
“Independent Shareholder(s)”
“JV Agreement”
“JV Business”
“JV Company”
“JV Shareholders”

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 of the Company

an independent committee of the Board that consists of all the independent non-executive Directors who have no direct or indirect interest in the Proposed Transaction
Somerley Capital Limited, a corporation licensed to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Proposed Transaction
Shareholders who are entitled to vote in the EGM in respect of the Specific Mandate and the Proposed Transaction pursuant to the Listing Rules and all applicable laws
the joint venture agreement dated 3 January 2018 entered into among the Company, HHGrace, the JV Company, the Subscriber and the Wuxi Entity
the design, research, manufacturing, testing, packaging and sale of integrated circuits business that the JV Company will engage in, including the production of 12-inch (300mm) wafers
Hua Hong Semiconductor (Wuxi) Co., Ltd, a company incorporated in the PRC on 10 October 2017, the registered capital of which is 100% owned by HHGrace as at the date of this circular, and will, upon completion of the JV Agreement and the Capital Increase Agreement, be owned as to approximately 22.2% by the Company, 28.8% by HHGrace, 29.0% by the Subscriber and 20% by the Wuxi Entity, respectively
the Company, HHGrace, the Subscriber and the Wuxi Entity

– 2 –

DEFINITIONS

“Last Trading Day”
“Latest Practicable Date”
“Listing Rules”
“Model Code”
“PRC”
“Proposed Transaction”
“RMB”
“SAIL”
“SFO”
“Shanghai Huali”
3 January 2017, being the last trading day of the Shares immediately prior to the date of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement
26 January 2018, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular
The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
The Model Code for Securities Transactions by Directors of Listed Issuers
the People’s Republic of China, but for the purposes of this circular only, excludes Hong Kong, Macau and Taiwan
the transactions contemplated under the Subscription Agreement, the JV Agreement and the Capital Increase Agreement
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 of the Company
The Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

Shanghai Huali Microelectronic Co., Ltd.* (上海華力微電子有限公司), a company principally engaging in the production of 12 inch (300mm) wafers in the PRC. Shanghai Huali’s process technology ability covers 5540-28nm nodes, with maximum full capacity of 35,000 wafers per month. Adopting the foundry model, Shanghai Huali provides logic and flash foundry services for fabless companies, integrated device manufacturer companies and other system companies. Shanghai Huali is located at Zhangjiang Hi-tech Park in Shanghai China, with offices in the areas of Taiwan, Japan, North America and other places to provide sales and technical support

– 3 –

DEFINITIONS

“Shareholders”

holder(s) of Shares

“Shares” shares of the Company
“Share Option Scheme”
the share option scheme dated 4 September 2015 approved by an extraordinary meeting of the Company on 1 September 2015, pursuant to which certain individuals were granted share options of the Company
“Specific Mandate” the specific mandate to be sought from the Independent Shareholders at the EGM to authorise the Directors to allot and issue the Subscription Shares under the Subscription Agreement
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Subscriber”
China Integrated Circuit Industry Investment Fund Co., Ltd. (國家集成電路產業投資基金股份有限公司), a company incorporated in the PRC in September 2014
“Subscription” the subscription of the Subscription Shares by the Subscriber
“Subscription Agreement” the subscription agreement dated 3 January 2018 entered into between the Company and the Subscriber in respect of the Subscription
“Subscription Completion”
the completion of the Subscription in accordance with the terms of the Subscription Agreement
“Subscription Price”
the subscription price of HK$12.90 per Subscription Share (equivalent to US$1.65, which US$ to HK$ foreign currency exchange rate was agreed by the Subscriber and the Company as of the date of the Subscription Agreement, as US$1 to HK$7.8175), exclusive of brokerage, SFC transaction levy and Stock Exchange trading fee
“Subscription Share(s)”
242,398,925 new Shares to be allotted and issued under the Subscription Agreement to the Subscriber upon Subscription Completion in respect of the Subscription
“US$”

United States dollar, the lawful currency of the United States

– 4 –

DEFINITIONS

“Wuxi Entity” Wuxi Xi Hong Lian Xin Investment Co., Ltd.* (無錫錫虹聯芯投資有限公司), a professional investment company jointly established by municipal and district-level stateowned enterprises “%” per cent.

In this circular, the terms “associate”, “connected person”, “connected transaction”, “controlling shareholder”, “subsidiary” and “substantial shareholder” shall have the meanings given to such terms in the Listing Rules, unless the context otherwise requires.

Certain amounts and percentage figures included in this circular have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures preceding them.

For identification purpose only

– 5 –

LETTER FROM THE BOARD

==> picture [16 x 22] intentionally omitted <==

==> picture [8 x 22] intentionally omitted <==

==> picture [12 x 7] intentionally omitted <==

==> picture [12 x 13] intentionally omitted <==

==> picture [15 x 13] intentionally omitted <==

==> picture [17 x 13] intentionally omitted <==

==> picture [14 x 13] intentionally omitted <==

==> picture [25 x 23] intentionally omitted <==

==> picture [16 x 25] intentionally omitted <==

==> picture [8 x 17] intentionally omitted <==

==> picture [16 x 23] intentionally omitted <==

==> picture [18 x 22] intentionally omitted <==

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

(Incorporated in Hong Kong with limited liability)

(Stock code: 01347)

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

Independent Non-executive Directors: Stephen Tso Tung Chang Kai Huen Wong, JP Long Fei Ye

Place of business and Head Office in the People’s Republic of China: 288 Halei road Zhangjian Hi-Tech Park Shanghai 201203 PRC

30 January 2018

To the Shareholders

Dear Sir/Madam,

(1) MAJOR AND CONNECTED TRANSACTIONS IN RELATION TO

(i) THE SUBSCRIPTION AGREEMENT,

(ii) THE JV AGREEMENT AND (iii) THE CAPITAL INCREASE AGREEMENT AND

(2) NOTICE OF EGM

1. INTRODUCTION

We refer to the Announcement in respect of the entering into of (i) the Subscription Agreement between the Company and the Subscriber pursuant to which the Subscriber has conditionally agreed to subscribe for and the Company has conditionally agreed to allot and issue an aggregate of 242,398,925 Subscription Shares at the Subscription Price of HK$12.90 per Subscription Share; (ii) the JV Agreement among the Company, HHGrace, the JV Company, the Subscriber and the Wuxi Entity, pursuant to which, amongst others, the Company, HHGrace, the Subscriber and the Wuxi Entity agreed to inject capital of

– 6 –

LETTER FROM THE BOARD

US$400,000,000, US$518,000,000, US$522,000,000 and US$360,000,000 in cash, respectively, into the JV Company to establish the JV Business; and (iii) the Capital Increase Agreement among the Company, HHGrace, the JV Company, the Subscriber and the Wuxi Entity, pursuant to which the authorized share capital of the JV Company shall be increased from RMB6,680,000 to USD$1,800,000,000.

The purpose of this circular is to provide you with, amongst other things, (i) further details of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement; (ii) the Specific Mandate; (iii) the letter from the Independent Board Committee to the Independent Shareholders, setting out its recommendations in connection with the terms of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement; (iv) the letter from the Independent Financial Adviser, setting out its recommendations to the Independent Board Committee and the Independent Shareholders in respect of the terms of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement; (v) a notice to the Shareholders convening the EGM to approve the transactions contemplated under the Subscription Agreement, the JV Agreement and the Capital Increase Agreement and a proxy form; and (vi) other information as required to be disclosed under the Listing Rules.

2. THE SUBSCRIPTION AGREEMENT

The Board is pleased to announce that the Company has entered into the Subscription Agreement with the Subscriber on 3 January 2018, pursuant to which the Subscriber has conditionally agreed to subscribe for and the Company has conditionally agreed to allot and issue an aggregate of 242,398,925 Subscription Shares at the Subscription Price of HK$12.90 per Subscription Share.

The major terms of the Subscription Agreement are set out as follows:

Date: 3 January 2018

Parties:

(i) The Company, as the issuer of the Subscription Shares; and

(ii) China Integrated Circuit Industry Investment Fund Co., Ltd. as the Subscriber

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, as at the Latest Practicable Date, the Subscriber and its ultimate beneficial owner(s) are third parties independent of the Company and the connected persons of the Company.

Upon the Subscription Completion, the Subscriber will become a substantial shareholder of the Company holding approximately 18.91% of the Company’s total number of issued Shares as enlarged by the Subscription Shares issued to the Subscriber and hence a connected person of the Company.

– 7 –

LETTER FROM THE BOARD

Subscription:

The Subscriber has conditionally agreed to subscribe for and the Company has conditionally agreed to allot and issue an aggregate of 242,398,925 Subscription Shares at the Subscription Price of HK$12.90 per Subscription Share (equivalent to US$1.65, which US$ to HK$ foreign currency exchange rate was agreed by the Subscriber and the Company as of the date of the Subscription Agreement, as US$1 to HK$7.8175), exclusive of brokerage, SFC transaction levy and Stock Exchange trading fee.

As at the Latest Practicable Date, the Company had 1,039,454,995 Shares in issue. The Subscription Shares represent approximately 23.32% of the total number of issued Shares as at the Latest Practicable Date and approximately 18.91% of the total number of issued Shares as enlarged by the allotment and issue of the Subscription Shares, subject to the Subscription Completion and assuming there will be no other changes in the issued Shares between the Latest Practicable Date and the date of the Subscription Completion.

Subscription Price:

The Subscription Price of HK$12.90 per Subscription Share represents:

(i) a discount of approximately 18.56% to the closing price of the Shares of HK$15.84 per Share as quoted on the Stock Exchange as at the Last Trading Day;
(ii) a discount of approximately 20.29% to the average of the closing prices per Share as quoted on the Stock Exchange for the 5 consecutive trading days up to and including the Last Trading Day of approximately HK$16.18 per Share;
(iii) a discount of approximately 18.42% to the average of the closing prices per Share as quoted on the Stock Exchange for the 10 consecutive trading days up to and including the Last Trading Day of approximately HK$15.81 per Share;
(iv) a discount of approximately 12.94% to the average of the closing prices per Share as quoted on the Stock Exchange for the 30 consecutive trading days up to and including the Last Trading Day of approximately HK$14.82 per Share;

– 8 –

LETTER FROM THE BOARD

(v) the average of the closing prices per Share as quoted on the Stock Exchange for the 90 consecutive trading days up to and including the Last Trading Day of approximately HK$12.90 per Share;
(vi) a discount of approximately 16.99% to the closing price of the Shares of HK$15.54 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
(vii) a premium of approximately 9.97% over the net asset value per Share attributable to the Shareholders as at 30 June 2017 of approximately HK$11.73 per Share (equivalent to approximately US$1.50 per Share based on the exchange rate of US$1:HK$7.82).

The net price per Subscription Share is approximately HK$12.90.

Basis of determining the Subscription Price

Whilst the Company and the Subscriber had during commercial negotiations considered determining the Subscription Price based on the average trading price of the Shares over a shorter period of time, i.e. 30 or 60 preceding trading days from (and including) the date of the Subscription Agreement, it was finally agreed between the parties that a period of 90 preceding trading days from (and including) the date of the Subscription Agreement would be a more appropriate time period for determining the Subscription Price, given that (i) it would take into account properly the performance of the Shares over a reasonable period of time and minimize any short-term price fluctuations to the price of the Shares and give a fair and representative indication of the Company’s value, and (ii) the Subscriber and the Company had already begun to engage in commercial negotiation and discussion with respect to the Subscription Price over 4 months prior to the date of the Subscription Agreement, with the backdrop of a previously relatively stable price of the Shares, for example, in the month of August 2017, the price of the Shares was trading more stably and the average price of the Shares was approximately HK$10.59 per Share.

– 9 –

LETTER FROM THE BOARD

The Subscription Price was determined based on a formula of the average price of the Shares during the 90 preceding trading days period from (and including) the date of the Subscription Agreement as a result of commercial negotiations between the Subscriber and the Company. The Board is of the view that determining the Subscription Price on such basis would properly take into account any potential short-term fluctuations to the price of the Shares, which could result in either a discount or premium to the price of the Shares as at the date of signing the Subscription Agreement. Further, the Board considered that the determination of the Subscription Price based on the average market price of the Shares over a certain period of time was in line with normal commercial terms for similar transactions, despite the approximately 20% discount to the average closing price of the Shares as at the Last Trading Day (the “ Discount ”). The Board is of the view that the Discount, which resulted from a commercially agreed formula of average trading prices, was primarily attributable to the increase in the price of the Shares as a result of the positive market sentiment surrounding the Hong Kong stock market and the semiconductor industry in general.

In addition to providing the necessary funding to the Company for its capital injection into the JV Company, the Board believes that the Subscriber’s strong and relevant industry expertise and resources in the integrated circuit industry sector will bring forth strategic long-term benefits to the JV Company and consequently, to the Group.

– 10 –

LETTER FROM THE BOARD

For example, the Board expects that the JV Company will be able to benefit from the knowledge and experience the Subscriber possesses in relation to the strategic landscape of the integrated circuit industry sector in both China and internationally, to facilitate the development of the business of the JV Company and to better adhere and align its operations, quality assurance standards, internal governance protocols and employee benefits to the relevant international standards. In addition, the Subscriber’s size, shareholder’s background and reputation are expected to make it easier for the JV Company to obtain future debt financing from third party financing providers on commercially-favourable terms. The JV Company may also leverage on the connections of the Subscriber in the integrated circuit industry sector to engage experienced and reputable experts to facilitate its construction of the 12-inch (300mm) wafer fab on commercially favourable terms. In addition, by utilising its relevant investment expertise in the integrated circuit field, the Subscriber may assist the Company with identifying other potential opportunities for the expansion of the Group’s business in the future.

The Board believes that such strategic long-term benefits brought by the Subscriber are expected to create sizeable value and returns to the Group as a whole, including to the minority Shareholders. Accordingly, the Board is of the view that such strategic benefits derived from the Subscriber’s investment in the Company will outweigh any impact of the Discount and the dilution impact to the minority Shareholders.

Conditions:

The Subscription Agreement is subject to certain conditions being fulfilled (or waived, if applicable (other than condition (v) set out below which is not waivable)) which include, amongst others: (i) the Stock Exchange granting the approval for the listing of the Subscription Shares, and such approval not having been revoked before the Subscription Completion;

– 11 –

LETTER FROM THE BOARD

(ii) the members of the Company having passed all necessary resolutions in approving, amongst other things, the Subscription Agreement, the JV Agreement and the transactions contemplated under the Subscription Agreement and the JV Agreement (including but not limited to the allotment and issuance of the Subscription Shares and the appointment of a person nominated by the Subscriber as a director of the Company, effective from the Subscription Completion);
(iii) (where required) the obtaining of all necessary approvals and consents from any government or regulatory authority or any person and the completion of all necessary filings with any government or regulatory authority required for the entering into of the Subscription Agreement and the JV Agreement, and the performance of its obligations under the Subscription Agreement and the JV Agreement by the Company (including but not limited to the allotment and issuance of the Subscription Shares);
(iv) (where required) the obtaining of all necessary approvals and consents from any government or regulatory authority or any person and the completion of all necessary filings with any government or regulatory authority required for the entering into of Subscription Agreement and the JV Agreement and the performance of its obligations under the Subscription Agreement and the JV Agreement by the Subscriber (including but not limited to the obtaining of approval from the State Administration of Foreign Exchange of the PRC for the transmission of foreign currency fund out of the PRC); and

– 12 –

LETTER FROM THE BOARD

(v) the SFC (i) confirming that there is no requirement for the Subscriber to make a mandatory offer to the Shareholders under Rule 26.1 of the Takeovers Code as a result of the Subscription pursuant to the Subscription Agreement or (ii) granting the waiver pursuant to Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code from an obligation on the part of the Subscriber to make a general offer for the issued Shares not owned or agreed to be acquired by the Subscriber and persons acting in concert with it as a result of the Subscription pursuant to the Subscription Agreement.

The Company and the Subscriber have no intention to waive any of the conditions of the Subscription Agreement.

The SFC has confirmed there is no requirement for the Subscriber to make a mandatory offer to the Shareholders under Rule 26.1 of the Takeovers Code as a result of the Subscription pursuant to the Subscription Agreement. Other conditions of the Subscription Agreement remain outstanding as at the Latest Practicable Date.

Director Nomination Right:

The Company agrees that the Subscriber shall have the right to nominate one Director with effect from the date of Subscription Completion.

The appointment of such Director by the Subscriber will be subject to the same approval procedures as required under Article 112 of the Articles, which provides that the Directors may appoint a person who is willing to act to be a Director as an additional Director. The nominated director shall also be subject to the approval and recommendation of the Nomination Committee of the Company, who shall, after due and careful consideration of the nominated director, approve or disapprove such nominated candidate as Director.

The Company will seek the Shareholders’ approval at the EGM to approve the Proposed Transaction, which terms include the appointment of a new Director to be nominated by the Subscriber.

– 13 –

LETTER FROM THE BOARD

The Directors will then appoint the nominated person designated by the Subscriber to be the new Director pursuant to Article 112 of the Articles. The new Director to be appointed shall retire at the next following annual general meeting of the Company and shall then be eligible for re-election, but shall not be taken into account in determining the Directors who are to retire by rotation at the meeting pursuant to Article 112 of the Articles.

As at the Latest Practicable Date, the Subscriber has not identified any potential candidate to be nominated as the Company’s Director.

Subscription Completion:

The Subscription Completion will take place on the third business day upon the satisfaction (or waiver, if applicable) of the conditions or such other date as the Company and the Subscriber may agree.

On the date of the Subscription Completion, the Subscriber shall pay to the Company the total Subscription Price of US$400,000,000 in cash and the Subscription Shares shall be allotted and issued to the Subscriber which shall rank pari passu among themselves (and shall rank in full for dividends and other distributions declared or paid thereafter) and with the Shares then in issue and be free from all encumbrances.

As at the Latest Practicable Date and assuming there will be no unexpected delays on the part of the Subscriber to obtain the relevant PRC regulatory approvals as set out in the Subscription Agreement, the Company currently expects the completion date of the Subscription would be by the end of July 2018.

Longstop Date:

Longstop Date shall mean 31 August 2018, or if Condition (iv) (as described in “Conditions” above) is not fulfilled on or before 31 August 2018, 30 November 2018.

– 14 –

LETTER FROM THE BOARD

The reason for such an extended subscription period has taken into account that the Subscriber, a PRC entity, requires a certain period of time to obtain all the necessary approvals and consents from the relevant government and regulatory authorities in the PRC for the Subscription, in particular, the approval from the State Administration of Foreign Exchange of the PRC for the transfer of foreign currency out of the PRC. For the reasons set out in this circular, the Company believes that securing the funding and support from the Subscriber for the Proposed Transaction is of strategic benefit to the Company. Given the practicality of the situation and the benefits the Subscriber is expected to be able to bring to the Proposed Transaction, the Board is of the view that the length of the subscription period is reasonable and is in the overall interests of the Company and the shareholders.

As a result of such an extended subscription period, the Specific Mandate to be sought at the EGM shall be valid and effective up to 30 November 2018. The Company will re-comply with the Listing Rules and seek approval from the shareholders in the event the conditions precedent(s) of the Subscription Agreement cannot be fulfilled before the expiry of the Specific Mandate and an extension of the Longstop Date of the Subscription Agreement is agreed between the Company and the Subscriber. As of the Latest Practicable Date, the Company does not expect to have to extend the Longstop Date of the Subscription Agreement.

Termination:

The Subscription Agreement may be terminated if:

(i) any of the conditions of the Subscription Agreement have not been fulfilled or waived before the Longstop Date; or
(ii) upon agreement by all the parties to the Subscription Agreement in writing that the Subscription Agreement shall be terminated.

– 15 –

LETTER FROM THE BOARD

Lock-up: Transfer Restriction:

The Subscription Shares will be subject to a 2-year lock-up period commencing on the day after the Subscription Completion.

The Subscriber shall be required to obtain the prior written consent of the Company in the event that it intends to sell, transfer or otherwise deal with any of the Subscription Shares to any Competitor(s) (as defined in the Subscription Agreement) upon the expiry of the 2-year lock-up period.

Use of proceeds

Upon the Subscription Completion, the net proceeds of the Subscription will be approximately US$400,000,000. The expenses in connection with the issuance of the Subscription Shares pursuant to the Subscription Agreement are expected to be HK$10 million. The Company intends to apply all of the net proceeds at the Subscription to finance its capital injection into the JV Company pursuant to the terms of the JV Agreement. The Shares are not and the Subscription Shares will not be listed in any other stock exchange other than the Stock Exchange.

Specific Mandate

The Subscription Shares will be allotted and issued under the Specific Mandate to be proposed for passing by the Independent Shareholders by ordinary resolution(s) at the EGM in accordance with the Listing Rules. The general mandate of the Company will not be used for the issue of the Subscription Shares. Application will be made by the Company to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Subscription Shares.

Equity Fund Raising Activity during the past twelve months

The Company has not carried out any equity fund raising activities during the past twelve months.

– 16 –

LETTER FROM THE BOARD

Effect on the shareholding structure of the Company as a result of the Subscription

As at the Latest Practicable Date, the Company had 1,039,454,995 Shares in issue. For reference and illustrative purpose only, assuming (1) the Subscription Completion and (2) no further Shares are issued by the Company from the Latest Practicable Date to the date of the Subscription Completion, the changes in the number of issued Shares and shareholding of the Company are set forth below:

			Immediately after	Subscription
Name of Shareholder	As at the Latest	Practicable Date	Completion
	No. of	Approximate	No. of	Approximate
	Shares held	%	Shares held	%
Shanghai Hua Hong International,
Inc. (Note 1)	350,401,100	33.71	350,401,100	27.34
Sino-Alliance International, Ltd.
(Note 2)	223,474,995	21.50	223,474,995	17.43
The Subscriber	0	0	242,398,925	18.91
Directors or former Directors	788,000	0.08	788,000	0.06
Other public Shareholders	464,790,900	44.71	464,790,900	36.26
Total	1,039,454,995	100.00	1,281,853,920	100.00

Notes:

Shanghai Hua Hong International, Inc. 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.
Sino-Alliance International, Ltd. is a wholly-owned subsidiary of SAIL. Of the 223,475,995 shares, such shares are either held directly by Sino-Alliance International, Ltd. or through its controlled corporations. In addition to the 223,475,995 shares indirectly held through Sino-Alliance, Ltd. 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 578,877,095 shares.

– 17 –

LETTER FROM THE BOARD

3. THE JV AGREEMENT

In connection with the Subscription Agreement, on 3 January 2018 (after trading hours), the Company, HHGrace, the Subscriber, the Wuxi Entity and the JV Company, entered into the JV Agreement, pursuant to which, amongst others, the Company, HHGrace, the Subscriber and the Wuxi Entity agreed to inject capital of US$400,000,000, US$518,000,000, US$520,000,000 and US$360,000,000 in cash, respectively into the JV Company.

The major terms of the JV Agreement and further information on the business of the JV Company are set out as follows:

Date: 3 January 2018

Parties: (i) the Company; (ii) HHGrace; (iii) the Subscriber;

(iv) the Wuxi Entity; and (v) the JV Company.

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, as at the Latest Practicable Date, the Subscriber, the Wuxi Entity and their respective ultimate beneficial owners are third parties independent of the Company and the connected persons of the Company.

Upon Subscription Completion, the Subscriber will become a substantial shareholder of the Company holding approximately 18.91% of the Company’s shareholding interest as enlarged by the Subscription Shares issued to the Subscriber and hence a connected person of the Company.

– 18 –

LETTER FROM THE BOARD

Scope of Business:

The JV Company will engage in the design, research, manufacturing, testing, packaging and sale of integrated circuits fabricated on 12-inch (300mm) wafers. These chips are used in technical products such as high density smart card integrated circuits, microcontrollers (MCUs), smart power management systems and system-on-chips (SoCs). The JV Company is expected to commence production in the 4[th] quarter of 2019, with the monthly production capacity targeted to be 10,000 wafers by the end of 2019 and to increase to 40,000 wafers by the end of 2022. The JV Company is expected to cooperate with the PRC government initiatives in relation to the integrated circuit industry to further its business development. The Company is of the view that the JV Company will be able to extend the existing technology and product strategy of the Company and capture the increasing demand of customers using the 12-inch (300mm) wafer technologies.

The expectation is based on, amongst other, the following major factors: (i) the construction and facilities systems can be accomplished in accordance with the timeline by 2019, (ii) the process and product qualification can delivered in accordance with the timeline by the 1st quarter of 2020, (iii) the monthly production capacity can be increased from 10,000 wafers from the end of 2019 to 40,000 by the end of 2022 and (iv) the tool installation can be completed on time in accordance with the timeline for the expansion of the monthly production capacity by the end of 2022.

Total Investment Amount:

The total investment amount by the JV Company in the JV Business will amount to US$2,500,000,000, which was determined after arm’s length negotiations by all parties to the JV Agreement based on the need to finance the business contemplated under the JV Agreement.

Of the total investment amount of US$2,500,000,000, US$1,800,000,000 will be by funded by way of equity capital contribution by the JV Shareholders, and the rest of the total investment amount, i.e. US$700,000,000, will be raised by way of debt financing.

– 19 –

LETTER FROM THE BOARD

In relation to the US$700,000,000 to be raised by debt financing, whilst no such debt financing has been obtained as at the Latest Practicable Date, the Company has been in discussion with several major banks who have all expressed their strong interests in providing loan facilities to the JV Company for its development and operation of the projects pursuant to the JV Agreement. As such, the Company does not currently foresee any difficulty for the JV Company to obtain such debt financing. In the unlikely situation that the JV Company is not able to obtain such debt financing, the JV Company may consider obtaining financings through other means by way of loans from other financial institutions and/or shareholders’ loans in accordance with the terms of the JV Agreement to support the development and operation of the business of the JV Company.

Based on the current budget of the JV Company, please see below the detailed plan (with timeline) on how the investment amount of US$2,500,000,000 is planned to be applied to the business of the JV Company:

	2018	2019		2020	Total
		_(in _	US$)
Tools &
Hook up	504,000,000	880,320,000	346,080,000		1,730,400,000
Facilities	298,360,000	74,590,000		–	372,950,000
Building	155,710,000	–		–	155,710,000
Land	41,180,000	–		–	41,180,000
Intellectual
Property	25,000,000	–		–	25,000,000
Other Capital
Expenditure	45,130,000	75,370,000		–	120,500,000
Working Capital	–	16,278,000		37,982,000	54,260,000
Total	1,069,380,000	1,046,558,000	384,062,000		2,500,000,000

Registered Capital:

The registered capital of the JV Company will be US$1,800,000,000.

– 20 –

LETTER FROM THE BOARD

Capital Commitment:

The Company, HHGrace, the Subscriber and the Wuxi Entity, have each agreed to inject capital of US$400,000,000, US$518,000,000, US$522,000,000 and US$360,000,000 in cash, respectively, into the JV Company, in the following manner:

(i) the Company agreed to inject US$400,000,000 in cash into the JV Company before 30 September 2018, representing in total approximately 22.2% of the enlarged registered capital of the JV Company. The JV Shareholders agree that if the Subscription Completion cannot take place on or before the Longstop Date (as defined in the Subscription Agreement) and as a result of which the Company is unable to inject part or all of the US$400,000,000 before 30 September 2018, the Company will not be considered to be in breach of the JV Agreement and the JV Shareholders shall negotiate in good faith to seek an amicable solution;
(ii) HHGrace agreed to inject US$112,000,000 in cash from its internal cash reserves into the JV Company three (3) business days after the completion of the registration and filings with the State Administration for Industry and Commerce of the PRC by the JV Company in respect of the JV Agreement and the appointment of directors in the JV Company and the completion of record-keeping in respect of the JV Agreement by the Ministry of Commerce of the PRC, to further inject US$223,000,000 in cash before 30 June 2018 and to inject US$183,000,000 in cash before 31 March 2019, representing in total approximately 28.8% of the enlarged registered capital of the JV Company;

– 21 –

LETTER FROM THE BOARD

(iii) the Subscriber agreed to inject US$112,000,000 in cash into the JV Company three (3) business days after the completion of the registration and filings with the State Administration for Industry and Commerce of the PRC by the JV Company in respect of the JV Agreement and the appointment of directors in the JV Company and the completion of recordkeeping in respect of the JV Agreement by the Ministry of Commerce of the PRC, to further inject US$223,000,000 in cash before 30 June 2018 and to inject US$187,000,000 in cash before 31 March 2019, representing in total approximately 29.0% of the enlarged registered capital of the JV Company;
(iv) the Wuxi Entity agreed to inject US$76,000,000 in cash into the JV Company three (3) business days after the completion of the registration and filings to the State Administration for Industry and Commerce of the PRC by the JV Company in respect of the JV Agreement and the appointment of directors in the JV Company and the completion of record-keeping in respect of the JV Agreement by the Ministry of Commerce of the PRC, to further inject US$154,000,000 before 30 June 2018, to further inject US$130,000,000 in cash before 31 March 2019, representing in total approximately 20.0% of the enlarged registered capital of the JV Company.

The amount of the capital commitments is determined after arm’s length negotiation among the JV Shareholders with reference to the funding needs of the JV Company, in particular, the construction cost of US$588,000,000 for the 12-inch (300mm) wafer fab (being a semiconductor fabrication plant that fabricates a variety of semiconductor integrated circuits on 12-inch (300mm) wafers), and the agreed proportion by each JV Shareholder.

The Company currently has no plan or intention to make any further capital commitment into the JV Company apart from the initial capital injection of US$400,000,000 by the Company and US$518,000,000 by HHGrace into the JV Company pursuant to the JV Agreement and the Capital Increase Agreement.

The Company does not currently have any intention or plan to dispose of further interest in the JV Company.

– 22 –

LETTER FROM THE BOARD

Commencement of the production and full operation:

The JV Company is currently expected to commence production in the 4th quarter of 2019, with the monthly production capacity targeted to be 10,000 wafers by the end of 2019 and to increase to 40,000 wafers (reaching full operation) by the end of 2022, along with a gradual increase in its utilisation rate and profitability. The JV Company is expected to cooperate with PRC government initiatives in relation to the integrated circuit industry to further its business development.

Construction of 12-inch (300mm) wafer fab:

Subject to the relevant construction approvals to be obtained and the timing of completion of the relevant investments pursuant to the JV Agreement and the Capital Increase Agreement, the construction of the 12-inch (300mm) wafer fab is expected to take place from March 2018 to February 2019 and the detailed timeline for the construction is as follows:

	Expected
	commencement	Expected
	time	completion time
Piling	March 2018	June 2018
Foundation Construction	April 2018	June 2018
Steel Structure Hosting	May 2018	September 2018
Structural roof-sealing	July 2018	October 2018
Construction of the Seconds Floor	August 2018	November 2018
Construction of the Third Floor	September 2018	February 2019
(Wafer Board)
Exterior Wall Enclosure	November 2018	February 2019

The facilities systems and cleanroom setup in relation to the 12-inch (300mm) wafer fab is expected to take place from March 2019 to August 2019. The mini-line, which means the minimum tool sets needed to support the full process loop needed for the products, is expected to be completed by 4th quarter of 2019. The 12-inch (300mm) wafer fab is expected to have a monthly production capacity of 10,000, 20,000, 30,000 and 40,000 wafers by the end of 2019, 2020, 2021 and 2022 respectively.

The capital of the JV Company will be utilised to cover the construction cost of the 12-inch (300mm) wafer fab. Accordingly, the construction cost is to be borne by the Company, HHGrace, the Subscriber and the Wuxi Entity in proportion to their respective capital contributions into the JV Company pursuant to the terms of the JV Agreement and the Capital Increase Agreement.

– 23 –

LETTER FROM THE BOARD

Profit Sharing:

Conditions:

The JV Shareholders will share the profits of the JV Company based on the proportion of their respective capital contribution into the JV Company.

The payment of the respective capital contribution to the JV Company by each of the JV Shareholders in cash is conditional upon satisfaction and/or waiver (as applicable) by the JV Shareholders of the following conditions:

(i) each of the JV Shareholders obtaining internal approval to set up the JV Company and approve the transactions contemplated under the JV Agreement;
(ii) the Company obtaining its shareholders’ approval in respect of the transactions contemplated under the JV Agreement and to set up the JV Company;
(iii) the issuance of business licence in respect of the JV Company from and the completion of all the filings in respect of the appointment of the directors in the JV Company to the State Administration for Industry and Commerce of the PRC (“ SAIC Filing ”);
(iv) the completion of all the filings in respect of the transactions contemplated under the JV Agreement and the set-up of the JV company in the form of a foreign-investment enterprise to the Ministry of Commerce of the PRC (“ MOFCOM Filing ”); and
(v) the tabling of the management method established among the JV shareholders in respect of the JV Company’s connected transaction(s) at the first board meeting at the JV Company after the SAIC Filing and the MOFCOM Filing and the unanimous approval of the directors of the JV Company regarding such management method.

In addition, the payment of the capital contribution to the JV Company by the Company in cash is conditional upon the Subscription Completion.

– 24 –

LETTER FROM THE BOARD

If and when it comes to the attention of the Company and the Subscriber that the Subscription is unable to be completed before the Longstop Date, the Company shall assess the circumstances at the time and discuss and negotiate in good faith (i) with the Subscriber to seek for an extension of the Longstop Date if it is considered at the time to be in the interests of the Group and the Shareholders as a whole, and (ii) with the other JV Shareholders to seek an amicable solution in accordance with the terms of the JV Agreement. The Company will not be considered to be in breach of the JV Agreement if it is unable to inject part or all of its share of the capital into the JV Company before the designed deadline as set out in the JV Agreement (i.e. 30 September 2018) pursuant to the terms of the JV Agreement.

HHGrace has sufficient cash reserves for its total capital contribution into the JV Company. Accordingly, its ability to contribute its part of the capital into the JV Company would not be affected even if the Subscription could not be completed before the Longstop Date expires.

Future Capital Contributions:

Any increase in the registered capital of the JV Company shall be unanimously approved by the board of directors of the JV Company. Each JV Shareholder has the right to subscribe for any additional increased registered capital of the JV Company in proportion to their then respective shareholdings in the JV. Such JV Shareholder shall be deemed to surrender such right if it fails to notify the JV Company of its intention to subscribe within 30 days of receipt of such notice.

The JV Company may obtain its future financing from third parties or by way of shareholders’ loan in accordance with the terms of the JV Agreement.

– 25 –

LETTER FROM THE BOARD

Necessary licences and/or filings:

The JV Company has obtained the business licence for its operation. As at the Latest Practicable Date, the outstanding necessary licences and/or filings for the JV Company’s operation are the relevant filings in respect of the transactions contemplated under the JV Agreement and the set-up of the JV Company in the form of a foreigninvestment enterprise with the Ministry of Commerce of the PRC and the relevant filings in respect of the appointment of the directors in the JV Company with the State Administration for Industry and Commerce of the PRC.

Corporate Governance:

Board of directors and senior management

The Company and HHGrace shall be responsible for the running of the JV Company’s daily business operations. As set out in the JV Agreement, the Subscriber, as a strategic investor in the Proposed Transaction, shall have the general obligation to assist with the JV Company in relation to its future financing needs, whereas the Wuxi Entity shall facilitate the implementation of any government policies in relation to the operation of the JV Company’s business and also to facilitate overall communication between the Wuxi Municipal People’s Government of the PRC and the JV Company.

(i) The board of directors of the JV Company shall consist of seven (7) directors, of which three (3) will be appointed by the Company and/or HHGrace, two (2) will be appointed by the Subscriber, one (1) will be appointed by the Wuxi Entity and one (1) will be the employee representative of the JV Company to be elected. The board of directors of the JV Company has the ultimate power and authority to make decisions with respect to the JV Company in accordance with the terms of the JV Agreement. Certain decisions of the JV Company will require either the approval from two-thirds of all directors attending the board meeting of the JV Company or unanimous consent of the directors of the JV Company as set out in the “ Reserved matters ” section below.

– 26 –

LETTER FROM THE BOARD

(ii) The JV Company shall establish a supervision committee comprising of five (5) members, of which two (2) will be appointed by the Company and/or HHGrace, one (1) each will be appointed by the Subscriber and the Wuxi Entity, and one (1) will be the employee representative of the JV Company to be elected. The number and composition of the supervision committee may be adjusted from time to time subject to the parties’ agreement.
(iii) The Company and/or HHGrace and the Subscriber shall appoint the chairman and vice chairman of the board of directors of the JV Company respectively.
(iv) The Company and/or HHGrace shall nominate the general manager of the JV Company, who shall nominate the vice general manager(s) of the JV Company. The general manager is responsible for the daily business operations of the JV Company. Accordingly, the Company and/or HHGrace has/have the right to make the final decision of the JV Company’s daily business operations. In this regard, the Subscriber and the Wuxi Entity have the right to make suggestions and to discuss business matters with the JV Company, the Company and HHGrace.
(v) The Company and/or HHGrace shall nominate the financial controller of the JV Company.
(vi) The Subscriber or Wuxi Entity has the right to make suggestions and to discuss with the JV Company and the Company and/or HHGrace in relation to the operation and management of the JV Company and/or its subsidiaries. The JV Company shall reasonably (i) consider the Subscriber’s suggestion and (ii) execute accordingly (if appropriate and reasonable).

– 27 –

LETTER FROM THE BOARD

Reserved matters

The approval from all directors of the JV Company attending the board meeting shall be obtained for, amongst others, the following matters:

(i) any material change to the monthly production capacity of 40,000 12-inch (300mm) wafers during the first phase of production;
(ii) any issuance of bonds or financing instrument (other than bank loans) by the JV Company and/or any of its controlled corporations;
(iii) any material change to the JV Company’s and/or any of its controlled corporations’ scope of business;
(iv) any change to the JV Company’s and/or any of its controlled corporations’ registered capital; and
(v) any change to the JV Company’s and/or any of its controlled corporations’ articles of associations.

The approval from two thirds of all directors of the JV Company attending the board meeting shall be obtained for, amongst others, the following matters:

(i) any set-up, dissolution or sale of any entity controlled by the JV Company and/or any of its controlled corporations;
(ii) total expenses over US$20 million for any single case or US$50 million in an aggregate basis within any fiscal year of the annual budget or annual operation plan of the JV Company and/or any of its controlled operations;
(iii) bringing or settling any legal lawsuit or arbitration by the JV Company and/or any of its controlled corporations, for an amount over 1% of the net assets of the JV Company as calculated in its latest audited accounts for any single case or 3% of the net assets of the JV Company as calculated in its latest audited accounts in an aggregated basis with a 12-month period; and

– 28 –

LETTER FROM THE BOARD

(iv) any acquisition of material assets outside the JV Company’s and/or any of its controlled corporations’ ordinary course of business exceeding US$2,000,000 within any fiscal year.

Articles of Association

In connection with the JV Agreement, the JV Shareholders have also entered into new articles of association of the JV Company to make amendments to the existing articles of association of the JV Company to reflect the terms as agreed under the JV Agreement.

Restrictions on Transfer:

JV Shareholders (other than the Company and HHGrace) shall not transfer all or any of its shares in the JV Company to any Competitor(s) (as defined in the JV Agreement) without the prior written consent of the Company and/or HHGrace.

Non-compete:

Pursuant to the terms of the JV Agreement, the Company and HHGrace are restricted from competing with the JV Company in the business of 12-inch (300mm) wafers below 90nm (exclusive of 90nm) to 65nm. The Company’s current intention is to operate the JV Company as a subsidiary of the Company and it does not have any plan or arrangement in place to dispose of any of its interests in the JV Company, which would result in the JV Company ceasing to be a subsidiary of the Company. In the unlikely situation that the JV Company is no longer a subsidiary of the Company, the Company expects that the terms of the JV Agreement, including the non-compete undertaking, would be negotiated and discussed with the other JV Shareholders.

– 29 –

LETTER FROM THE BOARD

Save for HHGrace’s 6.39% minority shareholding in Shanghai Huali as at the Latest Practicable Date, the Company and HHGrace are not currently engaged in the business of 12-inch (300mm) wafers. The Board is of the view that HHGrace’s 6.39% minority shareholding in Shanghai Huali does not constitute a breach of the Company’s and/or HHGrace’s obligation under such noncompete provision.

Term:

50 years from the date of the issuance of the business licence of the JV Company.

4. THE CAPITAL INCREASE AGREEMENT

The major terms of the Capital Increase Agreement are set out as follows:

Date: 3 January 2018 Parties: (i) the Company; (ii) HHGrace; (iii) the Subscriber;

(iv) the Wuxi Entity; and

(v) the JV Company.

To the best of the Director’s knowledge, information and belief and having made all reasonable enquiries, as at the Latest Practicable Date, the Subscriber, the Wuxi Entity and their respective ultimate beneficial owners are third parties independent of the Company and the connected persons of the Company.

Upon the Subscription Completion, the Subscriber will become a substantial shareholder of the Company holding approximately 18.91% of the Company’s total issued Shares as enlarged by the Subscription Shares issued to the Subscriber and hence a connected person of the Company.

– 30 –

LETTER FROM THE BOARD

Subscription of Registered Capital:

The registered capital of the JV Company will be increased from RMB6,680,000 to US$1,800,000,000.

The terms governing each party’s subscription of the registered capital of the JV Company under the Capital Increase Agreement are the same as set out in the JV Agreement. Please refer to “Capital Commitment” under the summary of the terms of the JV Agreement above for details regarding such subscription.

Other terms: The contribution of the increased capital will be conditional upon, amongst others, approval by the Independent Shareholders at the EGM, Subscription Completion and the approvals by the relevant registration and filing in the PRC as set out in the Capital Increase Agreement.

5. REASONS FOR AND BENEFITS OF ENTERING INTO THE PROPOSED TRANSACTION

(1) Industry Overview

The rapid developments and increased investments into cloud computing, internet of things, big data, smart city and 5G communication applications have driven up the demand for 12-inch (300mm) wafers, especially in the PRC. In particular, the PRC government will continue to support the development of semiconductor industry in the PRC, as demonstrated by its commitment announced in the “Outline for Promoting the Development of the National Integrated Circuit Industry” (《國家集成電路產業發展推進綱要》) in June 2014, “Made in China 2025” (《中國製造2025》國發[2015]38號) in May 2015 and in the 13th Five-Year Plan for Economic and Social Development of the PRC (《中華人民共和國國民經濟和社會發展第十三個五年規劃》) in March 2016.

– 31 –

LETTER FROM THE BOARD

(2) The Company’s existing business

Despite its continued capacity expansion, the Company is still unable to meet the market growth, due to the continuously robust demand for the existing 8-inch (200mm) wafers. The capacity utilisation rate of the Company remained at a very high level. Set out below is a table showing the Company’s utilisation rate in 2016 and 2017:

K Wafers

K Wafers
per Month	1Q 2016	2Q 2016	3Q 2016	4Q 2016	1Q 2017	2Q 2017	3Q 2017	4Q 2017
Fab 1	56	56	56	56	56	60	63	63
Fab 2	50	55	57	57	57	57	57	57
Fab 3	40	40	40	42	42	42	46	48
Monthly
Capacity	146	151	153	155	155	159	166	168
Wafer
Shipments	391	441	467	488	432	459	477	501
Capacity
utilisation	94.7%	95.5%	100.7%	99.5%	96.2%	99.4%	99.8%	96.8%

The Company does not currently have any intention or plan to downsize or dispose its existing business. The Company believes there will be a growing demand for products that can be manufactured on 200mm wafers, particularly in China and especially for products using the Company’s differentiated technologies such as power discrete, analog & power management, and embedded non-volatile memory. Accordingly, the Company will continue to enhance its development in these technologies and may further look for opportunities for a potential acquisition of a low-cost 200mm fab as part of its development plan.

(3) Target Customers of the JV Company

Given the strong demand for 12-inch (300mm) wafers due to the rapid expansion of the relevant markets and the potential development of the semiconductor industry in the PRC pursuant to the “Made in China 2025” plan, the Company expects 12-inch (300mm) wafers to be in high demand in the near future. The target customers of the JV Company are expected to be mainly existing and also future third party customers of the Group. The Company understands that certain of its existing customers would benefit from migrating to the more technologically advanced platforms available on 12-inch (300mm) wafers in order to better cope with the changing market environments and to satisfy the increased demand for the relevant products. The Company is also expected to actively market and leverage its leading position in the 8-inch (200mm) wafers production to attract future third-party customers who are active in or are considering the 12-inch (300mm) wafer sector for the JV Company. It is not currently envisaged that the JV Company will sell its products to the Company or its connected persons. The Company expects that its strategic cooperation in the Proposed Transaction with the Subscriber, an entity with significant investment expertise in the integrated circuit field, will attract future business opportunities for the JV Company.

– 32 –

LETTER FROM THE BOARD

(4) Reasons and benefits of entering into the Subscription Agreement

The Company had prepared an internal report to examine and explore the operational needs of the Company to expand its production capacity and undertaken an internal feasibility assessment for the projects to be carried out by the JV Company. Given the size and timing of the Proposed Transaction, the Company had assessed that it would require external financing for its equity capital contribution into the JV Company, whether by way of debt and/or equity. At the time, the Company was already engaged in discussions with various banks in relation to the debt financing of the JV Company, and it had come to the view that debt financing would not be a preferred option for the financing of the Company’s capital contribution into the JV Company, primarily because the expected interest payments would be significant and the gearing ratio of the Company would be increased.

With respect to equity financing options, the Company and the Subscriber had, as part and parcel of the overall negotiations for the Proposed Transaction, considered and discussed the option of raising capital by way of the issuance of new Shares to the Subscriber. After commercial negotiations between the Company and the Subscriber, the Company was of the view that it would be commercially beneficial for the Group as a whole for the Subscriber to invest in the Company, both at the Company level and at the JV Company level, particularly given the Subscriber’s investment expertise and the potential strategic benefits expected to be derived from the future cooperation and relationship with the Subscriber. The Board was also of the view that the issuance of new Shares to the Subscriber would be more favourable to the Group when compared with placing arrangements to independent third parties with no experience or expertise in the semiconductor industry. After careful consideration of these options, the Company had reached the view that the current financing structure for the Proposed Transaction would be the most beneficial to the Company, given the Subscriber’s investment expertise in the semiconductor industry and the favourable geographical location, abundance of resources and the talents and support from the Wuxi Municipal People’s Government of the PRC.

The management of the Company had discussed in detail the investment proposal regarding the Proposed Transaction and engaged in arm’s length negotiations with the Subscriber in order to obtain the current terms of the Subscription. These terms include a 2-year lock-up period commencing on the day after the Subscription Completion for the Subscription Shares from the Subscriber and the requirement that the Subscriber shall obtain the prior written consent of the Company if it intends to transfer the Subscription Shares to competitors of the Company after the 2-year lock up period, both of which are, in the Company’s view, favourable terms to the Company and reflect a long term investment commitment on the part of the Subscriber. Accordingly, the Company believes the terms of the Subscription are fair and reasonable and are in the interest of the Company and the Shareholders.

The Subscriber has invested in different areas of the integrated circuit industry since its inception in 2014, which includes investments in the chip manufacturing, chip designing, packaging and testing, and equipment and materials sectors in the PRC. Apart from providing

– 33 –

LETTER FROM THE BOARD

the Company with the necessary financing needs to undertake the new project under the JV Company, the Company believes that the Subscriber’s strong and relevant industry expertise and resources would benefit the Company’s development in the long term by attracting further business opportunities, supporting technological advancements and enhancing production capacities of the JV Company. Based on such expected synergies and benefits that the Subscriber would provide to the JV Company, the Board is of the view that this strategic and cooperative relationship between the Company and the Subscriber is in the interest of the Company and the Shareholders as a whole.

(5) Reasons and benefits of entering into the JV Agreement and the Capital Increase Agreement

Pursuant to the JV Agreement and the Capital Increase Agreement, the JV Shareholders will each inject capital into the JV Company for the JV Company to engage in the business of the production, manufacturing and sale of the 12-inch (300mm) wafers. The Company is of the view that the JV Company would capture the unfilled demand from the 200mm (90nm technology) wafers market and extend the technology to 65nm to support a broader product range. Accordingly, it is expected that the Company will benefit from a number of new business opportunities as a result of the JV Agreement and Capital Increase Agreement.

The 12-inch (300mm) wafer production line can, not only expand the capacity required by the Company’s specialty technologies, but also extend the Company’s specialty technologies to 65nm to cover a wider range of product applications. There has been a rapid development in the global markets, in particular in China, relating to cloud computation, IoT, big data, wisdom city and 5G telecommunication applications and technologies which drive up the demand for related applications and products of relevant specialty technologies. The Company intends to capture and capitalize on this attractive and significant market opportunity by entering into the JV Agreement for production of 12-inch (300mm) wafers.

In addition, as the Company’s existing 200mm production line has successfully commenced the mass-production of 90nm technology products, a process node that typically starts with the 12-inch production line, our specialty technologies, including embedded Non-Volatile Memory (eNVM), RF, power management and related IPs can be easily transferred and built on the 12-inch (300mm) wafers, will provide crucial support to the development of the JV Business. The specialty technology platform has further extended to the 65nm node which can achieve higher performance at lower cost. For example, the extension of the Company’s embedded Non-Volatile Memory technology from 0.11um to 65nm would allow the Company to expand from low speed MCU products to high speed MCU products.

Furthermore, the short term strong demand for the 8-inch (200mm) wafers means that 8-inch (200mm) wafer manufacturing equipment is difficult and costly to acquire, which leads to relatively higher production cost structure for the 8-inch (200mm) wafers as compared to the 12-inch (300mm) wafers. The addition of the 12-inch (300mm) wafer production capacity will enhance the Company’s present core competitiveness and allow the Company to develop into one of the leaders in both the 8-inch (200mm) and 12-inch (300mm) wafers fields. By entering

– 34 –

LETTER FROM THE BOARD

into the JV Agreement and the Capital Increase Agreement, the Company intends to extend its value proposition to obtain favourable financial returns for the medium to long term in the 12-inch (300mm) wafers market.

By cooperating with the Subscriber and the Wuxi Entity, the JV Company would also be able to benefit from certain policies of the Wuxi Municipal People’s Government of the PRC in relation to the recruitment of talent, financing discounts and land subsidies, all of which would facilitate the development of the projects of the JV Company. Such benefits are unlikely to be available, wholly or partially, if the Company decided to engage other investors for the Proposed Transaction.

(6) Potential Disadvantages

While the Board expects there to be potential depreciation expenses prior to the full production phase of the business of the JV Company, for example, in relation to the plant and machinery and equipment, such depreciation costs are expected to be significantly reduced as a result of the subsidies expected to be issued in favour of the JV Company by the Wuxi Municipal People’s Government of the PRC. The Board does not therefore expect any material disadvantages to the Company in entering into the JV Agreement and the Capital Increase Agreement.

(7) Summary

Given (i) the increasing demand for the 12-inch (300mm) wafers due to the rapid expansion of the relevant markets, (ii) the relative ease of the Company in transferring its existing technologies offerings to the 12-inch (300mm) wafer production, (iii) the maintenance of the Company’s continuing growth in the middle to long term and (iv) the strategic and cooperative relationship between the Company and the Subscriber in relation to the performance of the JV Agreement as described above, the Directors (including the independent non-executive Directors) have confirmed that the terms of the Proposed Transaction were entered into by the Company after arm’s length negotiations with the relevant parties and the terms set out therein are fair and reasonable and in the interests of the Company and its Shareholders as a whole.

6. FINANCIAL EFFECTS OF THE PROPOSED TRANSACTION

The Company intends to finance the capital contribution and the fund commitment in the JV Company of US$400,000,000 by cash proceeds from the Subscription pursuant to the Subscription Agreement. The overall effects of the transactions on the future earnings of the Group will depend on the return to be generated from the projects of the JV Company shall operate and/or invest in.

– 35 –

LETTER FROM THE BOARD

The JV Company will be owned as to approximately 22.2% by the Company and 28.8% by HHGrace and therefore its results will be consolidated into the financial statements of the Group. As the Company and HHGrace will subscribe the JV Shares in cash, the cash balance of the Group will be increased after consolidation. Of the total investment amount of US2,500,000,000 in the JV Company, US$700,000,000 will be raised by way of debt financing. As such, upon completion of the Subscription and the JV Agreement, the assets of the Group will increase by approximately US$2,500,000,000 and the liabilities of the Group will increase by approximately US$700,000,000.

7. INFORMATION ABOUT THE PARTIES

The Company

The Company primarily focuses on research and manufacturing of semiconductors on 200mm wafers for specialty applications, in particular eNVM and power discretes.

HHGrace

HHGrace is a wholly foreign owned enterprise incorporated in the PRC on January 24, 2013 and a wholly-owned subsidiary of the Company. The principal business of HHGrace is to research, develop, manufacture and sell semiconductors as a pure-play foundry.

The JV Company

The JV Company was duly established on 10 October 2017 under PRC Laws and is an indirectly wholly-owned subsidiary of the Company. As the JV Company is newly established, it has had no operating business to date and therefore does not have any assets.

The JV Company is 100% owned by HHGrace as at the date of this circular, a wholly-owned subsidiary of the Company, and will continue to be a subsidiary of the Company following the completion of the transactions contemplated under the JV Agreement and the Capital Increase Agreement. Upon completion of the capital injection under the JV Agreement and the Capital Increase Agreement, the JV Company will be held as to approximately 51.0% by the Company, of which 22.2% will be held directly by the Company and 28.8% will be held indirectly by the Company through HHGrace, its wholly-owned subsidiary, respectively.

The Subscriber

The Company understands that the Subscriber is a joint-stock corporate fund launched collectively by a number of institutions, mainly including the Ministry of Finance of the Government of the PRC, China Development Bank Capital Corporation Ltd, State Tobacco Monopoly Administration and Beijing E-Town International Investment & Development Co., Ltd, all of which are state-owned enterprises or PRC government institutions.

– 36 –

LETTER FROM THE BOARD

Based on the information provided by the Subscriber, the Subscriber primarily invests in the integrated circuit chip manufacturing, as well as the chip designing, packaging and testing, and equipment and materials industries, and has constantly and proactively explored suitable opportunities to invest in to develop synergies with companies in the integrated circuit industry and has realised its strategic layout and reach in the PRC’s integrated circuit industry.

Based on the information provided by the Subscriber and to the best knowledge of the Company, the Subscriber is an experienced investor in the integrated circuit industry and it has invested in several listed and non-listed companies in the integrated circuit manufacturing field, which may include entities that engage in businesses which are in competition with the Company and/or the JV Company. Save for such investments, based on the confirmation from the Subscriber and to the best knowledge of the Company, the Subscriber itself does not engage in any other businesses which are in competition with the Company and/or the JV Company.

The Wuxi Entity

The Wuxi Entity was incorporated on 19 December 2017 with registered capital of RMB24,000,000,000. It is a state-owned entity set up by the Wuxi Municipal People’s Government of the PRC to support the business operation of the JV Company. According the business registration certificate of the Wuxi Entity, its principal business is to invest in the business operation of the JV Company by injecting capital equivalent to approximately 20% of the total capital of the JV Company. It does not have any other line of business.

Based on the confirmation provided by the Wuxi Entity, the Wuxi Entity has limited experience and expertise in the JV Company’s business. Based on the confirmation from the Wuxi Entity and to the best knowledge of the Company, the Wuxi Entity is not engaged in any business which is in competition with the Company and/or the JV Company.

How the Subscriber and the Wuxi Entity were introduced to the Company

For the purpose of the Proposed Transaction, the Company had carefully considered and contemplated certain suitable investment partners for the Proposed Transaction. Given the Subscriber is a well-known investment fund with significant investment expertise in the integrated circuit industry and the abundance of resources and the talents and support from the government in Wuxi, PRC, the Company is of the view that it would be beneficial to engage them as investment partners to utilise their resources and bring synergies to the Proposed Transaction.

– 37 –

LETTER FROM THE BOARD

Relationship between the Subscriber and the Company or its connected persons and the existing Shareholders

Based on the information from the Subscriber and to the best knowledge of the Company, the Subscriber does not have any current or past relationships with the Company or its connected persons and the existing Shareholders save for:

(i) In September 2016, the Subscriber invested RMB190,000,000 to subscribe for 25% of shares in Centec Networks (Su Zhou) Co., Ltd. (盛科網路(蘇州)有限公司) through an equity financing transaction; CEC Innovation Fund (LP) (中電創新基金(有限合伙)), an investment fund controlled by China Electronic Corporation (“ CEC ”), an entity holding 47.08% of Shanghai Hua Hong International., Inc. (which itself is a wholly-owned subsidiary of Huahong Group, a substantial shareholder of the Company) of Shanghai Hua Hong International., Inc., also invested RMB120,000,000 to subscribe for 15.179% of shares in Centec Networks (Su Zhou) Co., Ltd. in the same transaction.
(ii) In July 2017, the Subscriber, CEC and Huaxin Investment Management Co., Ltd.* (華芯投資管理有限責任公司) entered into a non-binding strategic cooperation agreement in respect of the Subscriber’s proposed future investment in CEC of approximately RMB20 billion to support the development of the integrated circuit industry in China. The Subscriber understand the parties have not agreed on any timetable or the future shareholding percentage of the Subscriber in CEC and there has been no further agreement or arrangement in relation to this strategic cooperation agreement.
(iii) In December 2017, the Subscriber entered into an agreement in respect of the Series B financing by Shen Zhen CEAC International Information Science & Technology Co., Ltd.* (深圳中電國際信息科技有限公司), which is indirectly controlled by CEC. Upon completion of this transaction, the Subscriber is expected to subscribe for approximately 14.18% of shares in Shen Zhen CEAC International Information Science & Technology Co., Ltd..
(iv) As at the Latest Practicable Date, Shanghai Huali is currently held as to 50.23% by SAIL, 40.18% by Shanghai Integrated Circuit Industry Investment Fund Co., Ltd. (上海集成電路產業投資基金股份有限公司) (“ Shanghai IC Fund ”), 6.39% by HHGrace and 3.2% by Huahong Group, respectively. The Subscriber holds approximately 10.5% of the shares in Shanghai IC Fund.
(v) As at the Latest Practicable Date, Shanghai Huali Semiconductor Manufacturing Co., Ltd (上海華力集成電路製造有限公司) is currently held as to 54.05% by Shanghai Huali, 39.19% by the Subscriber and 6.76% by Shanghai IC Fund, respectively. The Subscriber holds about 10.5% of the shares in Shanghai IC Fund.

– 38 –

LETTER FROM THE BOARD

Relationship between the Wuxi Entity and the Company or its connected persons and the existing Shareholders

Based on the confirmation from the Wuxi Entity and to the best knowledge of the Company, the Wuxi Entity does not have any relationship with the Company or its connected persons and the existing Shareholders.

Relationship between the Wuxi Entity and the Subscriber

Based on the confirmations from the Wuxi Entity and the Subscriber, the Wuxi Entity does not have any relationship with the Subscriber.

8. 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 JV Agreement and the Capital Increase Agreement exceeds 25% but all are below 100%, the entering into of the JV Agreement and the Capital Increase Agreement constitute major transactions of the Company under Chapter 14 of the Listing Rules. The entering into of the JV Agreement and the Capital Increase Agreement are therefore subject to the announcement, circular and shareholders’ approval requirements under the Listing Rules.

Upon the Subscription Completion, the Subscriber will hold approximately 18.91% of the enlarged total issued Shares and will become a substantial shareholder and a connected person of the Company under the Listing Rules. Therefore, the entering into of the JV Agreement and the Capital Increase Agreement by the Company with, amongst others, the Subscriber constitutes connected transactions of the Company under Chapter 14A of the Listing Rules. As the JV Agreement is conditional upon the performance of the Subscription Agreement, the entering into of the Subscription Agreement will also constitute a non-exempt connected transaction of the Company. Therefore, each of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement is subject to the reporting, announcement and the Independent Shareholders’ approval requirements under the Listing Rules.

In accordance with the Listing Rules, the Company has established an Independent Board Committee comprising Stephen Tso Tung Chang, Kwai Huen Wong, JP and Long Fei Ye, being all of the independent non-executive Directors, to advise and provide their recommendation to the Independent Shareholders on the Subscription Agreement, the JV Agreement, the Capital Increase Agreement and the transactions contemplated thereunder and to advise the Independent Shareholders on the Proposed Transaction and to advise the Independent Shareholders on how to vote. Somerley Capital Limited has been appointed by the Company as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the Proposed Transaction.

The EGM will be convened for the purpose of considering and, if deemed appropriate, approving, amongst other things, the grant of the Specific Mandate and the Proposed Transaction.

– 39 –

LETTER FROM THE BOARD

No Director is considered to have a material interest in the Proposed Transaction which would have required the Director to abstain from voting at the Board meeting authorising the Proposed Transaction.

The Subscription Completion and the injection of capital pursuant to the JV Agreement and the Capital Increase Agreement are subject to the fulfilment or (waiver, if applicable) of certain conditions precedents set out in the Subscription Agreement, the JV Agreement and the Capital Increase Agreement and therefore may or may not proceed. Shareholders and potential investors of the Company are advised to exercise caution when dealing in the Shares.

9. EXTRAORDINARY GENERAL MEETING AND VOTING

The EGM will be held at 288 Halei Road, Zhangjiang Hi-Tech Park, Shanghai 201203, PRC on Wednesday, 14 February 2018 at 9:00 a.m. to consider and, if thought fit, approve, inter alia, the Subscription Agreement and the transactions contemplated thereafter, the Specific Mandate, the JV Agreement, the Capital Increase Agreement and the transactions contemplated thereunder.

The notice of the Extraordinary General Meeting is set out on pages 84 to 86 of this circular. A proxy form for use at the EGM is enclosed with this circular. Whether you are able to attend the EGM or not, please complete and return the enclosed form of proxy to the branch share registrar of the Company, Tricor Investor Services Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. The completion and delivery of a form of proxy will not preclude you from attending and voting at the EGM in person should you wish.

The voting at the EGM will be taken by a poll. The Company will make an announcement of the poll results in accordance with the relevant requirements under the Listing Rules as soon as possible.

To the best knowledge, information and belief of the Directors, having made all reasonable enquiries, there is (i) no voting trust or other agreement or arrangement or understanding entered into by or binding upon any Shareholders; (ii) no obligation or entitlement of any Shareholder as at the Latest Practicable Date, whereby such Shareholder had or might have temporarily or permanently passed control over the exercise of the voting right in respect of its/his Shares to a third party, either generally or on a case-by-case basis; and (iii) the Subscriber and its associates do not hold any Shares of the Company as at the Latest Practicable Date and no Shareholder is required to abstain from voting on the relevant resolutions for approving the Proposed Transaction.

– 40 –

LETTER FROM THE BOARD

A form of proxy for the EGM is enclosed with this circular. Whether or not you intend to be present at the EGM, you are requested to complete the form of proxy and return it to the branch share registrar of the Company, Tricor Investor Services Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong in accordance with the instructions printed thereon not less than 48 hours before the time fixed for the EGM. The completion of a form of proxy will not preclude you from attending and voting at the EGM in person.

For determining the entitlement to attend and vote at the EGM, the register of members of the Company will be closed from Friday, 9 February 2018 to Wednesday, 14 February 2018 (both days inclusive), during which period no transfer of Shares in the Company will be registered. In order to qualify for attending and voting at the EGM, all transfers, accompanied by the relevant certificates, must be lodged with the branch share registrar of the Company, Tricor Hong Kong Investor Services Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong by no later than 4:30 pm on Thursday, 8 February 2018. All persons who are registered holders of the Shares on Wednesday, 14 February 2018, the record date for the EGM, will be entitled to attend and vote at the EGM.

10. RECOMMENDATIONS

The Board (including the independent non-executive Directors) considers that it is in the best interests of the Company and the Shareholders as a whole to enter into the Subscription Agreement, the JV Agreement, the Capital Increase Agreement and the transactions contemplated thereunder; the terms of the Subscription Agreement, JV Agreement, and the Capital Increase Agreement are fair and reasonable; and the entering into of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement and the transactions contemplated thereunder are on normal commercial terms or better, in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole.

Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Subscription Agreement, the JV Agreement and the Capital Increase Agreement and grant the Specific Mandate.

– 41 –

LETTER FROM THE BOARD

11. FURTHER INFORMATION

Your attention is also drawn to :

(a) the letter from the Independent Board Committee, the text of which is set out on pages 43 to 44 of this circular;
(b) the letter from the Independent Financial Adviser, the text of which is set out on pages 45 to 72 of this circular;
(c) the additional information set out in the appendices to this circular.

Yours faithfully, For and on behalf of the Board

Hua Hong Semiconductor Limited Suxin Zhang Chairman

– 42 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Set out below is the text of the letter of recommendation from the Independent Board Committee to the Independent Shareholders in connection with the entering into of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement for inclusion in this circular.

==> picture [16 x 22] intentionally omitted <==

==> picture [8 x 22] intentionally omitted <==

==> picture [12 x 7] intentionally omitted <==

==> picture [12 x 13] intentionally omitted <==

==> picture [15 x 13] intentionally omitted <==

==> picture [17 x 13] intentionally omitted <==

==> picture [14 x 13] intentionally omitted <==

==> picture [25 x 24] intentionally omitted <==

==> picture [16 x 24] intentionally omitted <==

==> picture [8 x 16] intentionally omitted <==

==> picture [16 x 23] intentionally omitted <==

==> picture [18 x 21] intentionally omitted <==

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

(Incorporated in Hong Kong with limited liability)

(Stock code: 01347)

To the Independent Shareholders

Dear Sir or Madam

(1) MAJOR AND CONNECTED TRANSACTIONS IN RELATION TO

(i) THE SUBSCRIPTION AGREEMENT, (ii) THE JV AGREEMENT AND (iii) THE CAPITAL INCREASE AGREEMENT AND (2) NOTICE OF EGM

We refer to the circular dated 30 January 2018 (the “ Circular ”) issued by the Company to the Shareholders of which this letter forms part of. Unless the context otherwise requires, terms used in this letter shall have the same meanings given to them in the Circular.

We have been appointed by the Board as the Independent Board Committee to consider and advise the Independent Shareholders as to whether the terms of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement are fair and reasonable, and whether the entering into of the Subscription Agreement, JV Agreement and the Capital Increase Agreement and the transactions contemplated thereunder are on normal commercial terms or better, in the ordinary and usual course of business of the Company and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote, taking into account the recommendations of the Independent Financial Adviser.

Somerley Capital Limited has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement are fair and reasonable, and whether the entering into of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement are on normal commercial terms or better, in the ordinary and usual course of business of the Company and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote. Details of its advise, together with the principal factors and reasons taken into consideration in arriving at such advice, are set out on pages 45 to 72 of this Circular.

– 43 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We, having taken into account the advice of Independent Financial Adviser, consider that the terms of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned, and the entering into of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement, while not in the ordinary and usual course of business of the Group, is in the interests of the Company and the Shareholders as a whole.

Accordingly, we recommend the Independent Shareholders to vote in favour of all the ordinary resolutions to be proposed at the EGM. Your attention is also drawn to the letter from the Board set out on pages 6 to 42 of the Circular and the additional information set out in the Appendix I and Appendix II to the Circular.

Yours faithfully, Independent Board Committee Stephen Tso Tung Chang Kwai Luen Wong, JP Long Fei Ye Independent Non-Executive Directors

– 44 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the letter of advice from Somerley Capital Limited to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of inclusion in this circular.

==> picture [39 x 41] intentionally omitted <==

SOMERLEY CAPITAL LIMITED 20th Floor China Building 29 Queen’s Road Central Hong Kong

30 January 2018

To: the Independent Board Committee and the Independent Shareholders

Dear Sirs,

MAJOR AND CONNECTED TRANSACTIONS IN RELATION TO (I) THE SUBSCRIPTION AGREEMENT; (II) THE JV AGREEMENT; AND (III) THE CAPITAL INCREASE AGREEMENT

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in connection with the Proposed Transaction. Details of the Proposed Transaction are set out in the circular of the Company dated 30 January 2018 (the “ Circular ”), of which this letter forms part. Unless otherwise defined, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

On 3 January 2018, the Company and the Subscriber entered into the Subscription Agreement in relation to the subscription of 242,398,925 Subscription Shares at the Subscription Price of HK$12.90 per Subscription Share. The Subscription Shares represent approximately (i) 23.32% of the existing issued share capital of the Company as at the Latest Practicable Date; and (ii) 18.91% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares. The Subscription Shares will be allotted and issued under the Specific Mandate to be sought at the EGM.

In connection with the Subscription Agreement, on 3 January 2018, the Company, HHGrace, the Subscriber, the Wuxi Entity and the JV Company entered into the JV agreement, pursuant to which, amongst others, the Company, HHGrace, the Subscriber and the Wuxi Entity agreed to inject capital of US$400,000,000, US$518,000,000, US$522,000,000 and US$360,000,000 in cash, respectively into the JV Company. On the same date, the Company, HHGrace, the Subscriber, the Wuxi Entity and the JV company entered into the Capital Increase Agreement to increase the registered capital of the JV Company from RMB6,680,000 to US$1,800,000,000.

– 45 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

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 JV Agreement and the Capital Increase Agreement exceeds 25%, the entering into of the JV Agreement and the Capital Increase Agreement constitute major transactions of the Company under Chapter 14 of the Listing Rules. The entering into of the JV Agreement and the Capital Increase Agreement are therefore subject to the announcement, circular and shareholders’ approval requirements under the Listing Rules.

Upon the Subscription Completion, the Subscriber will hold approximately 18.91% of the enlarged total issued Shares and will become a substantial shareholder and a connected person of the Company under the Listing Rules. Therefore, the entering into of the JV Agreement and the Capital Increase Agreement by the Company with, amongst others, the Subscriber constitutes connected transactions of the Company under Chapter 14A of the Listing Rules. As the JV Agreement is conditional upon the completion of the Subscription Agreement, the entering into of the Subscription Agreement will also constitute a non-exempt connected transaction of the Company. Therefore, each of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement is subject to the reporting, announcement and the Independent Shareholders’ approval requirements under the Listing Rules.

The Independent Board Committee comprising all of the independent non-executive Directors, namely Stephen Tso Tung Chang, Kwai Huen Wong, JP and Long Fei Ye, has been established to advise the Independent Shareholders in respect of the Proposed Transaction and on how they should vote at the EGM. We, Somerley Capital Limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. No Shareholder is required to abstain from voting on the relevant resolutions for approving the Proposed Transaction.

In formulating our advice, we have reviewed, among other things, the Subscription Agreement, the JV Agreement, the Capital Increase Agreement, the annual report of the Company for the financial year ended 31 December 2016 (the “ Annual Report ”) and interim report of the Company for the six months ended 30 June 2017 (the “ Interim Report ”), and the information contained in the Circular. We have relied on the information and facts supplied, and the opinions expressed, by the Directors and the management of the Group, and have assumed that they were true, accurate and complete in all material aspects at the time they were made and will remain so up to the time of the EGM. We have also sought and received confirmation from the Directors, that all material relevant information has been supplied to us and that no material facts have been omitted or withheld from the information supplied and opinions expressed to us. We have no reason to doubt the truth or accuracy of the information provided to us, or to believe that any material information has been omitted or withheld. We consider that the information we have received is sufficient for us to reach our opinion and recommendation as set out in this letter. However, we have not conducted any independent investigation into the business and affairs of the Group.

– 46 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As at the Latest Practicable Date, Somerley Capital Limited does not have any relationships or interests with the Company that could reasonably be regarded as relevant to the independence of Somerley Capital Limited. In the last two years, there has been no engagement between the Group and Somerley Capital Limited. Apart from normal professional fees paid or payable to us in connection with this appointment as independent financial adviser, no arrangement exists whereby we will receive any fees or benefits from the Company.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation, we have taken into account the following principal factors and reasons:

1. Background of the Group and the parties involved in the Proposed Transaction

The Group and HHGrace

The Group primarily focuses on research and manufacturing of semiconductors on 200mm wafers for specialty applications, in particular, embedded non-volatile memory (“ eNVM ”) and power discretes.

HHGrace is a wholly-owned subsidiary of the Company. The principal business is to research, develop, manufacture and sell semiconductors as a pure-play foundry.

The JV Company

The JV Company was established on 10 October 2017 under PRC laws and is an indirectly wholly-owned subsidiary of the Company. It has had no operating business to date and therefore does not have any assets. It is 100% owned by HHGrace as at the Latest Practicable Date, and will continue to be a subsidiary of the Company following completion of the transactions contemplated under the JV Agreement and the Capital Increase Agreement.

The Subscriber

The Subscriber is a joint-stock corporate fund launched collectively by a number of institutions, mainly including the Ministry of Finance of the government of the PRC, China Development Bank Capital Corporation Ltd., State Tobacco Monopoly Administration and Beijing E-Town International Investment & Development Co., Ltd., all of which are state-owned enterprises or PRC government institutions. It primarily invests in the integrated circuit (“ IC ”) chip manufacturing, as well as the chip designing, packaging and testing, and equipment and materials industries, and has constantly and proactively explored suitable opportunities to invest in to develop synergies with companies in the IC industry.

– 47 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Wuxi Entity

The Wuxi Entity was incorporated on 19 December 2017 and is a state-owned entity set up by the Wuxi Municipal People’s Government of the PRC to support the business operation of the JV Company.

2. Background to and reasons for the Proposed Transaction

As disclosed in the “Letter from the Board” contained in the Circular, the 12-inch (300mm) wafer production line can expand the capacity required by the Company’s specialty technologies. Each wafer can be cut into a number of pieces called “die”, a material on which a given functional IC is fabricated. Technically, a larger wafer has a greater surface area, from which more dies can be derived. Given substantial time and resources spent on producing a wafer, the Company can achieve economies of scale by saving the cost of producing each die when increased number of dies can be produced by each wafer.

As advised by the management of the Company, the 12-inch (300mm) wafer production line can extend the Company’s technology nodes to 65nm. Technology node refers to a semiconductor manufacturing process. In general, the smaller the technology node, the smaller the transistor on an IC, which is normally used as a general rule for classifying generations of process technology of ICs. Progress in the advancement of the IC has been driven by the scaling, or downsizing, of its components, primarily the transistors. By downsizing the transistors, the number of transistors per die increases. As a result, the Company can achieve cost-saving in production due to combined effects of enlarged wafer size and smaller technology nodes.

Furthermore, there has been a rapid development in the global markets, in particular, in China, relating to cloud computation, internet of things, big data, wisdom city and 5G telecommunication applications and technologies which drive up the demand for related applications and products of relevant specialty technologies. By extending the technology nodes to 65nm/55nm, the Company can produce smaller IC which can be applied in wider product range, including but not limited to, smart card ICs, micro controller units (“ MCU ”) as well as radio frequency, and achieve higher performance at lower cost. For example, the extension of the Company’s eNVM technology from 0.11um to 65nm would allow the Company to expand business from lower speed MCU products to higher speed MCU products. As a result, the Company’s present core competitiveness can be enhanced and the Company can be developed into one of the leaders in both the 8-inch (200mm) and 12-inch (300mm) wafers fields.

The management of the Company further advised that since early 2000, most of equipment suppliers have shifted their focus to 300mm and significantly reduced or stopped manufacturing of new 200mm tools, with the strong demand for used 200mm tools, the inventory of 200mm tools has reduced significantly. As such, the 200mm tool price has remained at high level. Therefore, there is relatively higher production cost structure for the 8-inch (200mm) wafers as compared to the 12-inch (300mm) wafers. Since the Company’s

– 48 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

existing 200mm production line has successfully commenced the mass production of 90nm technology products, a technology node that typically starts with the 12-inch production line. Hence, the Company’s existing specialty technologies can be easily transferred to and built on the 12-inch (300mm) wafers and will provide crucial support to the development of the JV Business.

Apart from the increasing demand for 12-inch (300mm) wafers, the PRC government is also providing support to market players in relevant industries. The PRC government has been stating its intentions to promote and develop the IC industry back in 2014 as demonstrated by the “Outline for Promoting the Development of the National Integrated Circuit Industry” (《國家集成電路產業發展推進綱要》) published by the State Council of the PRC in June 2014, stating that financial support will be increased for the industry in the form of providing new credit products and financial services, state-level investment funds for the IC industry are to be set up to provide focused support for development of the industry and preferential tax policies will be implemented for the industry. Furthermore, it is noted that the State Council of the PRC announced “Made in China 2025” (《中國製造2025》國發[2015]38號) in May 2015, showing the national initiative to improve the manufacturing industry and achieve self-sufficiency. In particular, electronics and semiconductor technology is considered as one of the top 10 focus areas of the PRC government. With the PRC government’s initiatives and the future state-directed investments in the industry, the market is likely to have significant potentials. Such intention is further emphasised in the 13th Five-Year Plan for Economic and Social Development of the PRC (中華人民共和國國民經濟和社會發展第十三個五年規劃) released by the State Council of the PRC in March 2016, stating that implementation of the plan “Made in China 2025” is necessary. It also outlines that a number of key scientific and technological projects will be launched in the course of upgrading the related industries. The PRC government aims at developing the high-technology industries in order to reduce the PRC’s reliance on foreign technology and imported goods through these initiatives.

According to the Annual Report, the capacity utilisation rate of the Group remained at a very high level of approximately 98% in 2016. The Group’s existing three factories have almost reached their maximum capacities and additional capacity is required for the Group to achieve further business growth. In order to capture the potential market opportunities along with the support to be given by the PRC government as indicated in its policies, it is necessary for the Company to increase its capacity by developing new production line in order to maintain continuous growth.

The addition of the 12-inch (300mm) wafer production capacity is costly and therefore the Group requires substantial amount of funding for the investment. By entering into the Subscription Agreement, not only will the Company be able to secure the necessary funding for its capital injection into the JV Company in accordance with the JV Agreement, but also foster the strategic cooperation between the Company and the Subscriber. We understand from the management of the Company that the Subscriber has substantial experience and expertise in investments within the IC industry with abundant resources, including talents and support from the Wuxi Municipal People’s Government of the PRC. Such strong and relevant industry expertise and resources will benefit the Group’s development in the long term by attracting

– 49 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

further business opportunities, supporting technological advancements and enhancing production capacities of the JV Company. As the JV Business is new to the Group, it is beneficial to the Group by sharing the business risks involved with other JV Shareholders who have expertise and business connections within the industry through the JV Agreement, while maintaining the majority control of operations of the JV Company.

Given (i) the increasing demand for the 12-inch (300mm) wafers due to the rapid expansion of the relevant markets; (ii) the transferability of the Company’s existing technologies offerings to the 12-inch (300mm) wafer production; (iii) development of the semiconductor industry given the PRC government’s intentions to boost the industry; (iv) the current production capacity of the Group and its high utilisation rate; (v) the maintenance of the Company’s continuing growth in the middle to long term with increased product diversity and production capacity; and (vi) the strategic and cooperative relationship between the Company and the Subscriber can be established through the Proposed Transaction as described above, we concur with the Directors’ view that the entering into of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement is in the interests of the Company and the Shareholders as a whole.

3. Financial information of the Group

– Financial results

Set out below is certain unaudited financial information of the Group for the six months ended 30 June 2016 and 2017 and certain audited financial information of the Group for the years ended 31 December 2013, 2014, 2015 and 2016 as extracted from the Interim Report and the Annual Report.

					For the six months ended	For the six months ended	For the six months ended
	For	the year ended	31 December			30	June
	2013	2014	2015	2016		2016	2017
	US$’000	US$’000	US$’000	US$’000		US$’000	US$’000
	(audited)	(audited)	(audited)	(audited)	(unaudited)		(unaudited)
Revenue	584,719	664,586	650,131	721,428		342,118	381,304
Gross profit	125,449	197,771	201,426	220,348		102,733	120,102
Gross profit margin	21.5%	29.8%	31.0%	30.5%		30.0%	31.5%
Profit for the year/period	61,849	93,090	112,549	128,832		60,815	68,419
Net profit margin	10.6%	14.0%	17.3%	17.9%		17.8%	17.9%

Revenue

The Group’s revenue demonstrated stable growth over the years 2013 to 2016, with a compound annual growth rate of approximately 7.3% during the period. Revenue for the six months ended 30 June 2017 amounted to approximately US$381 million, representing an increase of approximately US$39 million as compared to that for the six months ended 30 June 2016. Such increase was mainly attributable to strong demand for smart card integrated circuits, micro controller units, super junction, analog and insulated-gate bipolar transistor products.

– 50 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Gross profit margin

The Group’s gross profit margin has remained broadly stable at approximately 30% since 2014. The increment was mainly due to increased revenue and improved product mix. It recorded a gross profit margin of approximately 31.5% for the six months ended 30 June 2017 as compared to approximately 30.0% for the six months ended 30 June 2016.

Profit for the period/year and net profit margin

The Group’s profit attributable to owners of the Company has been increasing since 2013 from approximately US$61.8 million to US$128.8 million, mainly attributable to the increase in revenue and the decrease in finance costs over the years. Net profit margin of the Group has demonstrated an increasing trend through the years 2013 to 2016, from approximately 10.6% in 2013 to approximately 17.9% in 2016. The Group recorded a profit of approximately US$68 million for the six months ended 30 June 2017 with a net profit margin of approximately 17.9%, representing an increase of approximately US$7 million as compared to that for the six months ended 30 June 2016. The increase in profit was mainly attributable to the increase in gross profit which was in line with the revenue growth, partially offset by increase in administrative expenses and foreign exchange loss.

– Financial position

The following is a summary of the unaudited consolidated financial position of the Group as at 30 June 2017 and the audited consolidated financial position of the Group as at 31 December 2015 and 2016 respectively, as extracted from the Interim Report and the Annual Report.

Total non-current assets Total current assets TOTAL ASSETS Total current liabilities Total non-current liabilities TOTAL LIABILITIES NET CURRENT ASSETS NET ASSETS Net asset value (“NAV”) per Share (US$) CURRENT RATIO	As at 30 June 2017 US$’000 (unaudited) 1,183,375 717,560 1,900,935 252,968 92,704 345,672 464,592 1,555,263 1.50 2.84	As at 31 December 2016 US$’000 (audited) 1,111,870 714,794 1,826,664 237,945 100,033 337,978 476,849 1,488,686 1.44 3.00	As at 31 December 2015 US$’000 (audited) 1,113,903 797,830
			1,911,733 277,926 143,117
			421,043 519,904 1,490,690 1.44 2.87

– 51 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As at 30 June 2017, total assets of the Group mainly comprised property, plant and equipment, investment property, available-for-sale investments and cash and cash equivalents. Total assets of the Group decreased from approximately US$1,912 million as at 31 December 2015 to approximately US$1,827 million as at 31 December 2016, which was mainly due to decrease in cash and cash equivalents, partly offset by the increase in property, plant and equipment. Total assets of the Group subsequently increased to approximately US$1,901 million as at 30 June 2017. The increment was also mainly attributable to increase in property, plant and equipment.

As at 30 June 2017, total liabilities of the Group mainly comprised trade payables, other payables, advances from customers and accruals and interest-bearing bank borrowings. Total liabilities of the Group decreased from approximately US$421 million as at 31 December 2015 to approximately US$331 million as at 31 December 2016, which was primarily attributable to repayment of bank borrowings. Total liabilities of the Group subsequently increased to approximately US$346 million as at 30 June 2017, which was mainly because of increase in other payables.

The Group’s NAV decreased from approximately US$1,491 million as at 31 December 2015 to approximately US$1,489 million as at 31 December 2016, and subsequently increased to approximately US$1,555 million as at 30 June 2017. The NAV per Share as at 30 June 2017, calculated by dividing the NAV attributable to the Shareholders of approximately US$1,555 million by the number of Shares in issue as at 30 June 2017, was approximately US$1.50.

Current ratio increased from approximately 2.87 as at 31 December 2015 to 3.00 as at 31 December 2016, which was mainly due to decrease in current portion of interest-bearing bank borrowings. The ratio subsequently decreased to approximately 2.84 as at 30 June 2017, primarily attributable to increase in other payables, advances from customers and accruals.

– 52 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

– Cash flow

Set out below is a summary of the unaudited consolidated statements of cash flows of the Group for the six months ended 30 June 2016 and 2017 and each of the two years ended 31 December 2015 and 31 December 2016 as extracted from the Interim Report and the Annual Report.

	For the six	months	For the year	ended
	ended 30 June		31 December
	2017	2016	2016	2015
	US$’000	US$’000	US$’000	US$’000
	(unaudited)	(unaudited)	(audited)	(audited)
Net cash flows generated
from operating
activities	94,624	81,896	211,908	187,777
Net cash flows used in
investing activities	(158,981)	(85,924)	(233,398)	(207,658)
Net cash flows used in
financing activities	(40,748)	(37,908)	(125,341)	(88,693)
Cash and cash
equivalents as at end
of period/year	241,437	457,909	341,255	510,441
Net decrease in cash and
cash equivalents	(105,105)	(41,936)	(146,831)	(108,574)

There was a net decrease in cash and cash equivalents of approximately US$105 million for the six months ended 30 June 2017, as compared to a decrease of approximately US$42 million for the corresponding period in 2016. It was mainly due to cash outflows for (i) purchase of property, plant and equipment; and (ii) payment of dividends to the Shareholders during the period.

There was a net decrease in cash and cash equivalents of approximately US$147 million for the year ended 31 December 2016 as compared to approximately US$109 million for the year ended 31 December 2015. Such decrease was mainly attributable to (i) payment for purchase of property, plant and equipment; (ii) payment of dividends to the Shareholders; and (iii) repayment of bank loans during the year.

– 53 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. The Subscription Agreement

(i) Principal terms of the Subscription Agreement

Set out below is a summary of the principal terms of the Subscription Agreement. Further details of the Subscription Agreement are set out in the “Letter from the Board” contained in the Circular.

Date: 3 January 2018

Parties: (1) the Company as the issuer of the Subscription Shares
(2) the Subscriber

the Subscription Price

The Subscription Price is HK$12.90 per Subscription Share. As stated in the “Letter from the Board” contained in the Circular, the Subscription Price was arrived at after arm’s length negotiations between the Company and the Subscriber with reference to recent Share price performance and the financing requirement of the JV Company to carry out the JV Business.

the size of the Subscription, ranking of the Subscription Shares and lock-up

The Subscription Shares represent approximately 23.32% of the total number of issued Shares as at the Latest Practicable Date and approximately 18.91% of the total number of issued Shares as enlarged by the allotment and issue of the Subscription Shares, subject to the Subscription Completion and assuming there will be no other changes in the issued Shares between the Latest Practicable Date and the date of the Subscription Completion.

The Subscription Shares shall rank pari passu among themselves (and shall rank in full for dividends and other distributions declared or paid thereafter) and with the Shares then in issue and be free from all encumbrances.

The Subscription Shares will be subject to a two-year lock-up period commencing on the day after the Subscription Completion.

– 54 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

–

use of proceeds

Upon the Subscription Completion, the net proceeds of the Subscription will be approximately US$400,000,000. The Company intends to apply all of the net proceeds of the Subscription to finance its capital injection into the JV Company pursuant to the terms of the JV Agreement.

Conditions precedent

The Subscription is conditional upon the fulfilment (or waiver, if applicable, other than condition (c) set out below which is not waivable) of the following conditions (the “ Conditions Precedent ”), including but not limited to:

(a) the members of the Company having passed all necessary resolutions in approving, amongst other things, the Subscription Agreement, the JV Agreement and the transactions contemplated under the Subscription Agreement and the JV Agreement (including but not limited to the allotment and issuance of the Subscription Shares and the appointment of a person nominated by the Subscriber as a director of the Company, effective from the Subscription Completion);
(b) the granting of approval from the Listing Committee of the Stock Exchange for the listing of the Subscription Shares on the Main Board of the Stock Exchange and such approval not having been revoked before the Subscription Completion; and
(c) the SFC (i) confirming that there is no requirement for the Subscriber to make a mandatory offer to the Shareholders under Rule 26.1 of the Takeovers Code as a result of the Subscription pursuant to the Subscription Agreement or (ii) granting the waiver pursuant to Note 1 of the Notes on dispensations from Rule 26 of the Takeovers Code from an obligation on the part of the Subscriber to make a general offer for the issued Shares not owned or agreed to be acquired by the Subscriber and persons acting in concert with it as a result of the Subscription pursuant to the Subscription Agreement.

As disclosed in the “Letter from the Board” contained in the Circular, the SFC has confirmed that there is no requirement for the Subscriber to make a mandatory offer to the Shareholders under Rule 26.1 of the Takeovers Code as a result of the Subscription pursuant to the Subscription Agreement.

Other conditions of the Subscription Agreement remain outstanding as at the Latest Practicable Date.

(ii) Evaluation of the Subscription Price

The Subscription Price of HK$12.90 per Subscription Share represents:

(a) a discount of approximately 18.56% to the closing price of the Shares of HK$15.84 per Share as quoted on the Stock Exchange on the Last Trading Day, being the date of the Subscription Agreement;

– 55 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(b) a discount of approximately 20.29% to the average of the closing prices per Share as quoted on the Stock Exchange for the five consecutive trading days up to and including the Last Trading Day of approximately HK$16.18 per Share;
(c) a discount of approximately 18.42% to the average of the closing prices per Share as quoted on the Stock Exchange for the 10 consecutive trading days up to and including the Last Trading Day of approximately HK$15.81 per Share;
(d) a discount of approximately 12.94% to the average of the closing prices per Share as quoted on the Stock Exchange for the 30 consecutive trading days up to and including the Last Trading Day of approximately HK$14.82 per Share;
(e) the average of the closing prices per Share as quoted on the Stock Exchange for the 90 consecutive trading days up to and including the Last Trading Day of approximately HK$12.90 per Share;
(f) a discount of approximately 16.99% to the closing price of the Shares of HK$15.54 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
(g) a premium of approximately 9.97% over the NAV per Share attributable to the Shareholders as at 30 June 2017 of approximately HK$11.73 per Share (equivalent to approximately US$1.50 per Share based on the exchange rate of US$1:HK$7.82).
Historical Share price performance

The following chart sets out the daily closing prices of the Shares on the Stock Exchange for the period from 3 January 2017 (being the first trading day in 2017) up to and including the Latest Practicable Date (the “ Review Period ”).

==> picture [370 x 187] intentionally omitted <==

----- Start of picture text -----

Share price chart of the Company Announcement of continuing
connected transactions
20 Announcement in relation Announcement of 2017 35,000
18 to placing of shares by third quarter results
Announcement of 2016 controlling shareholder 30,000
16 fourth quarter results
14 Subscription Price HK$12.90 25,000
12 20,000
10
8 Announcement 15,000
of the Proposed
6 Transaction 10,000
Announcement of 2017 Announcement of
4 Announcement of frst quarter results 2017 interim results
2016 annual results 5,000
2
0 0
Date
Share price Subscription price Hang Seng Index
Share price (HK$)
----- End of picture text -----

Source: website of the Stock Exchange

– 56 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As illustrated in the chart above, the Share price closed in a range between HK$8.14 and HK$18.18, with an average Share price of approximately HK$11.51, during the Review Period.

Overall, the Share price has been relatively stable during the period from January 2017 to September 2017, except for (i) the day after an announcement of the placing of shares of the Company by a controlling shareholder; and (ii) the release of the Company’s 2017 interim results. On 28 June 2017, the Company announced a placing of shares of the Company held by Sino-Alliance International, Ltd, a wholly-owned subsidiary of SAIL. The Share price closed at HK$10.6 on the next trading day, representing a decrease of approximately 10.8% from the date of the announcement. The Company released its interim results for the six months ended 30 June 2017 on 8 August 2017, the Share price dropped from HK$11.02 to HK$10.24 on 9 August 2017, representing a decrease of approximately 7.1%, despite an improvement was shown in the Group’s revenue and profit for the six months ended 30 June 2017 as compared to that in the corresponding period in 2016.

However, the Share price demonstrated an upward trend from October 2017 to mid-November 2017. On 7 November 2017, the Company published its third quarter results for the three months ended 30 September 2017, the Share price dropped by approximately 0.7% on the next day. Subsequently, the Share price closed in a range between HK$13.18 and HK$16.2 from 9 November 2017 to 27 December 2017. On 27 December 2017, the Company released an announcement in relation to the renewal of lease and management agreements for staff dormitory premises. The Share price increased from HK$15.96 to HK$16.5 on the next day.

After the publication of the Announcement on 3 January 2018, the closing price of the Shares increased from HK$15.84 on the Last Trading Day to HK$17.6 on 4 January 2018 (the first trading day after the publication of the Announcement), representing an increase of approximately 11% over the closing price on the Last Trading Day. The Share price further increased to HK$18.18 on 5 January 2018. The Share price closed at HK$15.54 on the Latest Practicable Date.

The Company was listed on the Main Board of the Stock Exchange on 15 October 2014 with an offer price of HK$11.25 (the “ IPO Price ”). The average Share price during the period from the date of listing to end of 2014 was approximately HK$10.52. In 2015 and 2016, the average Share price was approximately HK$8.86 and HK$7.85 respectively. Since the date of listing up to the Latest Practicable Date, the average Share price is approximately HK$9.53. It is also noted that the Share price has increased over 50% since the last quarter of 2017, which was likely due to the positive market environment, as demonstrated by the trend of the Hang Seng Index, instead of corporate actions taken by the Company during the period.

– 57 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

–

Comparable Issues

We have also performed an analysis of comparable issues by searching the website of the Stock Exchange on a best effort basis for all share issues (the “ Comparable Issues ”) announced since 1 December 2017 (approximately one month prior to the date of the Announcement) and up to the date of the Announcement by companies listed on the Stock Exchange which involve placing/subscription/issue of new shares of listed companies to parties which are independent from the respective listed companies, without involving acquisition and/or restructuring of assets and/or business of listed companies and/or whitewash waiver applications. We have excluded (i) issues announced by listed companies, which, as at the date of announcement and/or currently, were/are under prolonged suspension; (ii) issues which have subsequently been terminated; (iii) issues involving only convertible securities; and (iv) open offers or rights issues of new shares, where different pricing considerations apply for these three types of issue.

It should be noted that the subject companies involved in the Comparable Issues may have different principal activities, market capitalisations, profitability or financial positions as compared to those of the Company. However, the Comparable Issues can provide a general understanding of this type of transaction in Hong Kong stock market under the current market environment.

For each of the Comparable Issues identified, we compared the premium or discount of its issue/subscription price to (a) the closing price on the last trading day; and (b) the average closing price for the five trading days, immediately prior to the release of the respective announcement, as summarised in the following table.

Premium/(discount) of placing/subscription/issue price over/(to)

		closing share price	average closing
		as at the last full	share price for the
		day of trading	five full trading
		immediately	days immediately
Date of		prior to the	prior to the
announcement	Company name and stock code	announcement	announcement
		%	%
		(approximate)	(approximate)
1 December 2017	Earnest Investments Holdings Limited	(5.56)	(5.56)
	(stock code: 339)
3 December 2017	China Goldjoy Group Limited	(3.08)	(2.48)
	(stock code: 1282)
4 December 2017	New Sports Group Limited	(16.67)	(17.66)
	(stock code: 299)
5 December 2017	Feishang Non-metal Materials	(9.38)	(9.26)
	Technology Limited
	(stock code: 8331)

– 58 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

		Premium/(discount) of	Premium/(discount) of
		placing/subscription/issue price over/(to)
		closing share price	average closing
		as at the last full	share price for the
		day of trading	five full trading
		immediately	days immediately
Date of		prior to the	prior to the
announcement	Company name and stock code	announcement	announcement
		%	%
		(approximate)	(approximate)
6 December 2017	Brockman Mining Limited	(18.70)	(16.11)
	(stock code: 159)
11 December 2017	Future World Financial Holdings	(17.61)	(10.82)
	Limited (stock code: 572)
12 December 2017	DT Capital Limited (stock code: 356)	(2.08)	(3.09)
12 December 2017	Sino Prosper (Group) Holdings Ltd	(19.23)	(17.45)
	(stock code: 766)
13 December 2017	Royal Catering Group Holdings	3.96	3.55
	Company Limited (stock code: 8300)
14 December 2017	Birmingham Sports Holdings Limited	(15.66)	(16.86)
	(stock code: 2309)
14 December 2017	Sunshine Oilsands Ltd (stock code:	(13.44)	(17.24)
	2012)
15 December 2017	China Zhengtong Auto Services	(5.00)	(4.55)
	Holdings Limited (stock code: 1728)
15 December 2017	Champion Technology Holdings	(11.34)	(16.83)
	Limited (stock code: 92)
15 December 2017	Dingyi Group Investment Limited	(20.00)	(12.35)
	(stock code: 508)
15 December 2017	ZMFY Automobile Glass Services	(6.17)	(5.71)
	Limited (stock code: 8135)
15 December 2017	Sunac China Holdings Ltd (stock code:	(11.90)	(8.69)
	1918)
17 December 2017	O Luxe Holdings Limited (stock code:	(6.25)	(4.21)
	860)
18 December 2017	Sunshine 100 China Holdings Ltd	(15.76)	(11.38)
	(stock code: 2608)

– 59 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

		Premium/(discount) of	Premium/(discount) of
		placing/subscription/issue price over/(to)
		closing share price	average closing
		as at the last full	share price for the
		day of trading	five full trading
		immediately	days immediately
Date of		prior to the	prior to the
announcement	Company name and stock code	announcement	announcement
		%	%
		(approximate)	(approximate)
18 December 2017	Jiayuan International Group Ltd (stock	(7.56)	(6.69)
	code: 2768)
19 December 2017	Centron Telecom International Holding	(16.36)	(16.67)
	Ltd (stock code: 1155)
19 December 2017	Shifang Holding Limited (stock code:	(19.89)	(18.90)
	1831)
19 December 2017	Q Technology (Group) Company	(3.74)	(5.99)
	Limited (stock code: 1478)
20 December 2017	Colour Life Services Group Co.,	(6.02)	(2.87)
	Limited (stock code: 1778)
21 December 2017	New Concepts Holdings Limited	(18.82)	(18.21)
	(stock code: 2221)
21 December 2017	New focus Auto Tech Holdings Limited	(38.24)	(38.05)
	(stock code: 360)
22 December 2017	CIL Holdings Limited (stock code: 479)	(6.54)	(4.58)
22 December 2017	Huazhang Technology Holding Limited	(4.76)	(4.91)
	(stock code: 1673)
28 December 2017	Victory City International Holdings	(6.40)	(5.75)
	Limited (stock code: 539)
3 January 2018	Huiyin Smart Community Company	(30.56)	(29.58)
	Limited (stock code: 1280)
	Mean (simple average)	(12.16)	(11.34)
	Minimum	3.96	3.55
	Maximum	(38.24)	(38.05)
	The Subscription	(18.56)	(20.29)

Source: relevant announcements published on the website of the Stock Exchange

– 60 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The 29 Comparable Issues set out in the table above have generally involved a placing, subscription or issue of new shares at discounts to their respective closing prices on the last trading day and their respective historical trading prices. As set out in the table above, the Subscription Price represents (a) a discount of approximately 18.56% to the closing Share price on the Last Trading Day; and (b) a discount of approximately 20.29% to the average closing price for the five trading days immediately prior to and including the Last Trading Day. These discounts are higher than the mean of discounts of the Comparable Issues for the closing share prices as at the last trading day immediately prior to the announcement as well as for the average closing share prices for the five trading days.

It is noted that from the share price chart above, the Share price during the Review Period has been relatively stable and at a level lower than the Subscription Price most of the time, i.e. prior to mid-October 2017. It is also noted that the upward trend of the Share price is consistent with the positive market environment given the general increment in the Hang Seng Index over the period from October 2017 to the date of the Announcement. As mentioned in the section headed “3. Financial information of the Group” of this letter, there has been an improvement in the Group’s performance over the past few years, in particular, the profitability of the Group started to increase in 2014 and the Group has been able to maintain the increased level of profitability in the recent financial year. However, the Share price has not reflected such development of the Company. As discussed in the section headed “4. The Subscription Agreement – (ii) Evaluation of the Subscription Price – historical Share price performance” of this letter, the average Share price in 2015 and 2016 was approximately HK$8.86 and HK$7.85 respectively, and the average Share price is approximately HK$9.53 since the date of listing up to the Latest Practicable Date, which are (i) lower than the IPO Price despite the improvement in the Group’s performance; and (ii) substantially lower than the Subscription Price. The Share price only started to go up in October 2017 along with the positive market sentiment.

As a result, the discounts of the Subscription Price may not be particularly favourable to the Company in terms of its comparison with the Share price in the short term as compared to that of the Comparable Issues as illustrated above. However, taking into account (i) the Share price movement in the last few months, i.e. with an increment over 50% since the last quarter in 2017; (ii) the historical Share price level since the date of listing; and (iii) the recent market environment, we consider that comparable issues further back in time may be more meaningful in assessing the fairness and reasonableness of the Subscription Price. Given the large population of comparable issues with the extended period of review, we have enhanced our research to all share issues (the “ Industry Comparable Issues ”) announced since 1 January 2015 and up to the date of the Announcement by comparable companies within the same sector listed on the Stock Exchange (the “ Comparable Companies ”) which involve placing/subscription/issue of new shares of listed companies to parties which are independent from the respective listed

– 61 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

companies, without involving acquisition and/or restructuring of assets and/or business of listed companies and/or whitewash waiver applications. We have excluded (i) issues announced by listed companies, which, as at the date of announcement and/or currently, were/are under prolonged suspension; (ii) issues which have subsequently been terminated; (iii) issues involving only convertible securities; and (iv) open offers or rights issues of new shares, where different pricing considerations apply for these three types of issue as a result of change in control and value of assets being acquired through issuance of consideration of shares. We consider the Comparable Companies an exhaustive list of relevant comparable companies and they are fair and representative samples based on the said criteria below.

The Comparable Companies have been selected based on the following criteria: (i) listed on the Stock Exchange; (ii) under the sector of “Technology – Semiconductor” as classified by the Bloomberg Industry Classification System; and (iii) principally engaged in the manufacturing of semiconductor-related products.

For each of the Industry Comparable Issues identified, we compared the premium or discount of its issue/subscription price to (a) the closing price on the last trading day; and (b) the average closing price for the five trading days, immediately prior to the release of the respective announcement, as summarised in the following table.

		Premium/(discount) of	Premium/(discount) of
		placing/subscription/issue price
		over/(to)
		closing share	average closing
		price as at the	share price for
		last full day of	the five full
		trading	trading days		% of
		immediately	immediately		new shares to
Date of	Company name and	prior to the	prior to the	Market	enlarged issued
announcement	stock code	announcement	announcement	capitalisation	share capital
		%	%	HK$’million
		(approximate)	(approximate)
12 February 2015	Semiconductor	(7.14)	(6.61)	56,535.2	11.6%
	Manufacturing
	International
	Corporation
	(stock code: 981)
22 April 2015	Phoenitron Holdings	(19.33)	(15.38)	81.2	10.2%
	Limited
	(stock code: 8066)

– 62 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

		Premium/(discount) of	Premium/(discount) of
		placing/subscription/issue price
		over/(to)
		closing share	average closing
		price as at the	share price for
		last full day of	the five full
		trading	trading days		% of
		immediately	immediately		new shares to
Date of	Company name and	prior to the	prior to the	Market	enlarged issued
announcement	stock code	announcement	announcement	capitalisation	share capital
		%	%	HK$’million
		(approximate)	(approximate)
18 May 2015	Megalogic Technology	(10.53)	(8.60)	211.1	16.7%
	Holdings Limited
	(stock code: 8242)
2 June 2015	QPL International	(18.84)	(15.15)	239.2	16.7%
	Holdings Limited
	(stock code: 243)
28 October 2015	Heng Xin China	(16.00)	(12.65)	290.7	11.2%
	Holdings Limited
	(stock code: 8046)
8 December 2015	Heng Xin China	(30.72)	(29.79)	290.7	24.9%
	Holdings Limited
	(stock code: 8046)
7 January 2016	QPL International	(65.81)	(66.72)	239.2	79.2%
	Holdings Limited
	(stock code: 243)
22 November 2016	Tech Pro Technology	1.59	1.16	544.0	7.1%
	Development Limited
	(stock code: 3823)
3 April 2017	Tech Pro Technology	(15.23)	(14.21)	544.0	6.2%
	Development Limited
	(stock code: 3823)
9 May 2017	Phoenitron Holdings	(12.28)	(13.12)	81.2	16.6%
	Limited
	(stock code: 8066)
7 July 2017	Shenzhen Mingwah	(16.67)	(16.90)	784.0	16.7%
	Aohan High
	Technology
	Corporation Limited
	(stock code: 8301)

– 63 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

		Premium/(discount) of	Premium/(discount) of
		placing/subscription/issue price
		over/(to)
		closing share	average closing
		price as at the	share price for
		last full day of	the five full
		trading	trading days		% of
		immediately	immediately		new shares to
Date of	Company name and	prior to the	prior to the	Market	enlarged issued
announcement	stock code	announcement	announcement	capitalisation	share capital
		%	%	HK$’million
		(approximate)	(approximate)
29 September 2017	Shanghai Fudan	(5.50)	(4.62)	4,450.5	6.4%
	Microelectronics
	Group Company
	Limited (stock code:
	1385)
29 November 2017	Semiconductor	(4.91)	(9.62)	56,535.2	4.9%
	Manufacturing
	International
	Corporation (stock
	code: 981)
	Mean (simple average)	(17.03)	(16.32)
	Minimum	1.59	1.16
	Maximum	(65.81)	(66.72)
	Mean (simple average)	(17.45)	(15.73)
	(excluding
	the outliers) *(Note 1)*
	Minimum	(10.53)	(8.6)
	Maximum	(30.72)	(29.79)
	The Subscription	(18.56)	(20.29)

Source: relevant announcements published on the website of the Stock Exchange

Note:

The Industry Comparable Issues involving Semiconductor Manufacturing International Corporation on 12 February 2015 and 29 November 2017, QPL International Holdings Limited on 7 January 2016, Tech Pro Technology Development Limited on 22 November 2016 and Shanghai Fudan Microelectronics Group Company Limited on 29 September 2017 having extreme premium/(discount). Given the majority of discounts fall in the range from approximately 10% to 31%, we consider more meaningful to exclude those with extreme premium/(discount) from our assessment.

The 13 Industry Comparable Issues set out in the table above have generally involved a placing, subscription or issue of new shares at discounts to their respective closing prices on the last trading day and their respective historical trading prices. As set out in the table above, the discounts of the Subscription Price

– 64 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

are close to the mean of discounts of the Industry Comparable Issues for the closing share price as at the last trading day immediately prior to the announcement and slightly higher than the mean of discounts of the Industry Comparable Issues for the average closing share prices for the five trading days.

As disclosed in the “Letter from the Board” contained in the Circular, the Subscription Price has been determined based on the closing prices per Share as quoted on the Stock Exchange for the 90 consecutive trading days up to and including the date of the Subscription Agreement. Taking into account the share price movement of the Company since the date of listing and the recent upward trend of Share price, it is considered that (i) the analysis of the Subscription Price based on the Industry Comparable Issues is more relevant with a longer review period given the strategic long-term benefits expected to be derived from the Subscriber’s investment in the Company; and (ii) the basis of determination of the Subscription Price as discussed above is reasonable as it is more reflective of the valuation of the Company in the long run and reduces the impact of any short-term price fluctuations on the Share price.

On this basis, we are of the view that the pricing of the Subscription is acceptable so far as the Company and the Independent Shareholders are concerned.

(iii) Effect of the Subscription on the shareholding structure of the Company

The following table illustrates the shareholding structure of the Company (i) as at the Latest Practicable Date; and (ii) immediately after the Subscription Completion (assuming no further Shares are issued by the Company from the Latest Practicable Date to the date of the Subscription Completion).

Name of Shareholder Shanghai Hua Hong International, Inc. Sino-Alliance International, Ltd The Subscriber Directors or former Directors Other public Shareholders Total	As at the Latest Practicable Date Number of Shares held Approximate % 350,401,100 33.71 223,474,995 21.50 – – 788,000 0.08 464,790,900 44.71 1,039,454,995 100.0	Immediately after the Subscription Completion Number of Shares held Approximate % 350,401,100 27.34 223,474,995 17.43 242,398,925 18.91 788,000 0.06 464,790,900 36.26 1,281,853,920 100.0	Immediately after the Subscription Completion Number of Shares held Approximate % 350,401,100 27.34 223,474,995 17.43 242,398,925 18.91 788,000 0.06 464,790,900 36.26 1,281,853,920 100.0
			100.0

As shown in the table above, the existing public Shareholders’ shareholdings will be diluted from approximately 44.71% as at the Latest Practicable Date to approximately 36.26% immediately after the Subscription Completion. Having taken into account (i) the

– 65 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

benefits to be brought about by funding of the investment in the JV Company and the addition of the 12-inch (300mm) wafer production capacity; and (ii) the fairness and reasonableness of the Subscription Price, we consider this dilution acceptable.

–

Conclusion

Having considered (i) the benefits to be derived by the Group from the Subscription as set out in the section headed “2. Background to and reasons for the Proposed Transaction” of this letter, given that the use of proceeds from the Subscription is wholly for the purpose of investment in the JV Company for development of a new production line, which is beneficial to the Group in terms of its long-term sustainable development and continual growth; (ii) the Subscription Price represents a premium over the latest NAV per Share attributable to the Shareholders; (iii) discounts of the Subscription Price are close to the mean of discounts of the Industry Comparable Issues, which is considered to be a more meaningful comparison given the historical and recent Share price movement and the recent market sentiment; and (iv) the dilution of the shareholding of other public Shareholders is acceptable, we consider the terms of the Subscription Agreement fair and reasonable.

5. The JV Agreement

In connection with the Subscription Agreement, on 3 January 2018 (after trading hours), the Company, HHGrace, the Subscriber, the Wuxi Entity and the JV Company, entered into the JV Agreement. The JV Agreement has a term of 50 years from the date of the issuance of the business licence of the JV Company. We have reviewed the terms and conditions stated in the JV Agreement to understand management operation, board composition and distribution of economic returns of the JV Company so as to assess if such terms in the JV Agreement would be fair to the Company as one of the JV Shareholders.

The JV Company intends to engage in design, research, manufacturing, testing, packaging and sale of integrated circuits fabricated on 12-inch (300mm) wafers. These chips are used in technical products such as high density smart card ICs, MCUs, smart power management systems and system-on-chips. The JV Company is expected to commence production in the 4th quarter of 2019, with the monthly production capacity targeted to be 10,000 wafers by the end of 2019 and to increase to 40,000 wafers by the end of 2022.

– 66 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(i) Capital commitment

Details of the shareholding structure and capital contribution of each of the JV Shareholders in the JV Company are as follow:

JV Shareholders The Company HHGrace The Subscriber The Wuxi Entity Total	Amount of capital contribution (in US$) 400,000,000 518,000,000 522,000,000 360,000,000 1,800,000,000	Shareholding structure 22.2% 28.8% 29.0% 20.0%
		100.0%

As confirmed by the Company, it has not injected any capital into the JV Company as at the Latest Practicable Date. Pursuant to the JV Agreement, the Company, HHGrace, the Subscriber and the Wuxi Entity, have each agreed to inject capital of US$400,000,000, US$518,000,000, US$522,000,000 and US$360,000,000 in cash, respectively, into the JV Company, in the following manner:

the Company agreed to inject US$400,000,000 in cash into the JV Company before 30 September 2018;
HHGrace agreed to inject US$112,000,000 in cash from its internal cash reserves into the JV Company three business days after the completion of the registration and filings with the State Administration for Industry and Commerce of the PRC by the JV Company in respect of the JV Agreement and the appointment of directors in the JV Company and the completion of record-keeping in respect of the JV Agreement by the Ministry of Commerce of the PRC, to further inject US$223,000,000 in cash before 30 June 2018 and to inject US$183,000,000 in cash before 31 March 2019;
the Subscriber agreed to inject US$112,000,000 in cash into the JV Company three business days after the completion of the registration and filings with the State Administration for Industry and Commerce of the PRC by the JV Company in respect of the JV Agreement and the appointment of directors in the JV Company and the completion of record-keeping in respect of the JV Agreement by the Ministry of Commerce of the PRC, to further inject US$223,000,000 in cash before 30 June 2018 and to inject US$187,000,000 in cash before 31 March 2019; and
the Wuxi Entity agreed to inject US$76,000,000 in cash into the JV Company three business days after the completion of the registration and filings to the

– 67 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

State Administration for Industry and Commerce of the PRC by the JV Company in respect of the JV Agreement and the appointment of directors in the JV Company and the completion of record-keeping in respect of the JV Agreement by the Ministry of Commerce of the PRC, to further inject US$154,000,000 in cash before 30 June 2018 and to inject US$130,000,000 in cash before 31 March 2019.

The capital to be contributed by the Company into the JV Company are sourced from the proceeds from the Subscription. As advised by the management of the Company, as it takes time for (i) the Subscriber to obtain all necessary approvals and consents from the relevant government and regulatory authorities in the PRC (including the approval from the State Administration of Foreign Exchange of the PRC for the transmission of foreign currency out of the PRC) to transfer the proceeds to the Company from onshore to offshore; and (ii) the Company to arrange for the money to be injected to the JV Company onshore, the latest day for the injection has been agreed to be before 30 September 2018. The other JV Shareholders have undertaken to contribute part of their capital injection three business days after the completion of the relevant registration and filings as mentioned above, which is expected to be in March 2018, due to the actual funding and operational needs of the JV Company to bid for land of the projects to be carried out by the JV Company.

The JV Shareholders, other than the Company, would have injected approximately 64% of their agreed capital contribution by the time the Company injects capital into the JV Company before 30 September 2018. The capital commitment arrangement has been determined mainly based on (i) expected time required for obtaining relevant regulatory approvals by the JV Shareholders to transfer the necessary funds; and (ii) funding needs of the JV Company for investing in planned projects. It is, therefore, considered reasonable to take into account these factors in determining the payment arrangement of the capital.

(ii) Conditions

(a) each of the JV Shareholders obtaining internal approval to set up the JV Company and approve the transactions contemplated under the JV Agreement;
(b) the Company obtaining its shareholders’ approval in respect of the transactions contemplated under the JV Agreement and to set up the JV Company;
(c) the issuance of business licence in respect of the JV Company from and the completion of all the filings in respect of the appointment of the directors in the JV Company to the State Administration for Industry and Commerce of the PRC;

– 68 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(d) the completion of all the filings in respect of the transactions contemplated under the JV Agreement and the setup of the JV Company in the form of a foreign-investment enterprise to the Ministry of Commerce of the PRC; and
(e) the tabling of the management method established among the JV Shareholders in respect of the JV Company’s connected transaction(s) at the first board meeting of the JV Company after the SAIC Filing and the MOFCOM Filing and the unanimous approval of the directors of the JV Company regarding such management method.

In addition, the payment of the capital contribution to the Company by the Company in cash is conditional upon the Subscription Completion, which is considered to be reasonable given the intended use of proceeds and reasons for the Subscription.

(iii) Board composition and senior management of the JV Company

The Company and HHGrace shall be responsible for the running of the JV Company’s daily business operations. As set out in the “Letter from the Board” contained in the Circular, the Subscriber, as a strategic investor in the Proposed Transaction, shall have the general obligation to assist the JV Company in relation to its future financing needs, whereas the Wuxi Entity shall facilitate the implementation of any government policies in relation to operation of the JV Company’s business and overall communication between the Wuxi Municipal People’s Government of the PRC and the JV Company.

The board of directors of the JV Company shall consist of seven directors, of which three will be appointed by the Company and/or HHGrace, two will be appointed by the Subscriber, one will be appointed by the Wuxi Entity and one will be the employee representative of the JV Company to be elected.

The JV Company shall establish a supervision committee comprising five members, of which two will be appointed by the Company and/or HHGrace, one each will be appointed by the Subscriber and the Wuxi Entity, and one will be the employee representative of the JV Company to be elected. The number and composition of the supervision committee may be adjusted from time to time subject to the parties’ agreement.

The Company and/or HHGrace and the Subscriber shall appoint the chairman and vice chairman of the board of directors of the JV Company respectively. The Company and/or HHGrace shall nominate the general manager of the JV Company, who shall nominate the vice general manager(s) of the JV Company. The Company and/or HHGrace shall nominate the financial controller of the JV Company.

– 69 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Ordinary resolutions of the board of directors of the JV Company shall be passed by simple majority rule by all directors, except for specific matters below.

Pursuant to the JV Agreement and the articles of association of the JV Company (the “ Articles of Association ”), certain corporate actions including, but not limited to (i) change in registered capital, articles of associations or scope of business of the JV Company and/or any of its controlled corporations; (ii) issuance of bonds or financing instrument (other than bank loans) by the JV Company and/or any of its controlled corporations; and (iii) any material change to the monthly production capacity as stated in the JV Agreement, can only be carried out by the unanimous approval of all directors of the JV Company attending the board meeting.

Certain corporate actions, including but not limited to, (i) any set-up, dissolution or sale of any entity controlled by the JV Company and/or any of its controlled corporations; (ii) expenses over a specific amount; (iii) bringing or settling material legal lawsuit or arbitration over an amount as specified in the Articles of Association; and (iv) any acquisition of material assets outside the JV Company’s and/or any of its controlled corporations’ ordinary course of business, can only be carried out by a two-thirds approval of all directors of the JV Company attending the board meeting. As such, the Group has more control on these corporate actions in terms of the approval required.

According to the JV agreement, the employee representative will be elected by the labour union of the JV Company. Excluding the employee representative, who will not be appointed by any JV Shareholders, and having considered that the capital contribution of the Group amounting to approximately 51%, the voting power is largely proportional to the capital contribution to be made by the Group.

(iv) Sharing of economic interest

Under the terms of the JV Agreement, any future net profit (or loss) generated by the JV Company will be shared by the JV Shareholders on a pro-rata basis according to their respective capital contribution in the JV Company. Accordingly, the Group will share any economic return from the JV Company amounting to approximately 51% interest.

(v) Non-compete undertaking and restrictions on transfer

Pursuant to the JV Agreement, the Company and HHGrace shall not compete with the JV Company in the business of 12-inch (300mm) wafers below 90nm (exclusive of 90nm) to 65nm.

Each JV Shareholder is entitled to exercise its right of first refusal to purchase any equity interest of the JV Company that another JV Shareholder intends to transfer to any third parties in proportion to its then existing shareholding of the JV Company in accordance with the terms and conditions of the JV Agreement. The JV Shareholders (other than the Company and HHGrace) shall not transfer all or any of its shares in the JV Company to any competitor(s) (as defined in the JV Agreement) without the prior written consent of the Company and/or HHGrace.

– 70 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As advised by the management of the Company, the Subscriber and the Wuxi Entity do not engage in the operations in the semiconductor industry, they are mainly engaged in the investment in semiconductor projects/companies. On the other hand, the Company and HHGrace are directly engaged in the manufacturing of semiconductors and related products. Accordingly, the Subscriber and the Wuxi entity are not subject to the same type of non-compete undertakings as the Company and HHGrace, which is considered reasonable.

Given the nature of the business of the Subscriber and the Wuxi Entity, the Subscriber and the Wuxi entity are subject to certain share transfer restrictions to competitors of the Company and HHGrace, such restrictions, from the Company’s and HHGrace’s perspective, are considered more crucial than non-compete undertakings in relation to the manufacturing of relevant wafers. Without such share transfer restrictions, it would be potential risk to the JV Company, or even the Company, if the JV Shareholder would be allowed to transfer shares in the JV Company to competitor(s) so as to allow competitor(s) having access to business and technical knowledge of the JV Company.

Based on the above, we note that the rights and obligations of the JV Shareholders are largely in proportion to their respective equity interests in the JV Company. On this basis, we consider the terms of the JV Agreement fair and reasonable.

6. The Capital Increase Agreement

On 3 January 2018 (after trading hours), the Company, HHGrace, the Subscriber, the Wuxi Entity and the JV company entered into the Capital Increase Agreement to increase the registered capital of the JV Company from RMB6,680,000 to US$1,800,000,000. We have reviewed the terms and conditions stated in the Capital Increase Agreement so as to assess if such terms in the Capital Increase Agreement would be fair to the Company as one of the JV Shareholders.

The terms governing each party’s subscription of the registered capital of the JV Company under the Capital Increase Agreement are the same as set out in the JV Agreement.

The contribution of the increased capital will be conditional upon, amongst others, approval by the Independent Shareholders at the EGM, the Subscription Completion and the approvals by the relevant registration and filings in the PRC as set out in the Capital Increase Agreement.

Given the Capital Increase Agreement is entered into for the purpose of the JV Agreement and the increased registered capital of the JV Company of US$1,800,000,000 is equivalent to the total amount of equity capital contribution by the JV Shareholders, it is therefore considered that the terms of the Capital Increase Agreement are fair and reasonable.

– 71 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

7. Financial effects of the Proposed Transaction

The Company intends to finance the capital contribution and the fund commitment in the JV Company of US$400,000,000 by cash proceeds from the Subscription pursuant to the Subscription Agreement. The overall effects of the Proposed Transaction on future earnings of the Group will depend on the return to be generated from the projects of the JV Company shall operate and/or invest in.

The JV Company will be owned as to approximately 22.2% by the Company and 28.8% by HHGrace and therefore its results will be consolidated into the financial statements of the Group. As the Company and HHGrace will subscribe the JV Shares in cash, the cash balance of the Group will be increased after consolidation of the JV Company. Of the total investment amount of US$2,500,000,000 in the JV Company, US$700,000,000 will be raised by way of debt financing. As such, upon completion of the Subscription and the JV Agreement, the assets of the Group will increase by approximately US$2,500,000,000 and the liabilities of the Group will increase by approximately US$700,000,000, assuming that the debt financing has been arranged.

OPINION AND RECOMMENDATION

Having taken into account the above principal factors, we consider that the terms of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned, and the entering into of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement, while not in the ordinary and usual course of business of the Group, is in the interests of the Company and the Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the relevant ordinary resolutions to be proposed at the EGM.

Yours faithfully, for and on behalf of SOMERLEY CAPITAL LIMITED David Ching Director

Mr. David Ching is a licensed person registered with the Securities and Futures Commission and a responsible officer of Somerley Capital Limited, which is licensed under the SFO to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities. He has over fifteen years of experience in the corporate finance industry.

– 72 –

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 31 December 2017, 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.

– 73 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Borrowings and indebtedness

As at the close of business of 31 December 2017, 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 USD92.89 million. Outstanding borrowing and indebtedness were secured by the pledges of the Group’s assets and the Company’s 36.23% of equity interest in its subsidiary. Group’s bank loans were all secured.

Contingent liabilities

As at the close of business of 31 December 2017, the Group has no material contingent liability or guarantees.

Mortgage and charges

As at the close of business of 31 December 2017, the Group’s above outstanding secured borrowings were secured by the Group’s property, plant and equipment 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 31 December 2017.

The Directors confirm that there was no material change in the indebtedness status of the Group since 31 December 2017 up to the Latest Practicable Date.

3. MATERIAL ADVERSE CHANGE

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.

– 74 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. WORKING CAPITAL

The Directors are of the opinion that, after taking into account the effect of the Subscription Agreement, the JV Agreement and the Capital Increase Agreement 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.

5. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

Since 31 December 2016, being the latest published audited accounts of the Company, the Company has seen strong growth in the demand for its 8-inch (200mm) wafers. 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 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.

– 75 –

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. SHARE CAPITAL

The issued Shares of the Company as at the Latest Practicable Date was, and as a result of the allotment and issue of the Subscription Shares will be, as follows:

Issued and fully paid: HK$ 1,039,454,995 Shares as at the Latest Practicable Date 16,153,130,622 Shares to be issued: 242,398,925 Subscription Shares to be issued 3,766,879,295

Total Shares issued and to be issued: 1,281,853,920 Shares 19,920,009,917

Since 31 December 2016 (the date to which the latest audited financial statements of the Company were made up) and up to the Latest Practicable Date, the Company has issued 5,583,339 new Shares as a result of the exercise of share options granted under the Share Option Scheme, a summary of is set out as follows:

Purpose of the Share Option The purpose of the Share Option Scheme is to Scheme: attract, retain and provide incentives to the Participants (as defined below), to provide them with the opportunity to obtain Shares of the Company and to link their interests closely to the operating results and share performance of the Company with the view to increasing the value of the Company.

– 76 –

GENERAL INFORMATION

APPENDIX II

Participants:

Maximum entitlement of each participant:
Minimum period, if any, for which an option must be held before it can be exercised:
The amount payable on application or acceptance of the Share Option and the period within which payments or calls must be made or loans for such purposes must be paid:
Remaining life of the Share Option Scheme:

The participants of the Share Option Scheme (“ Participants ”) include (1) existing Executive and Non-Executive Directors of any member of the Group; or (2) senior management and key managerial and technical personnel having a direct impact on the results of operations and sustainable development of any member of the Group, subject always to any limits and restrictions specified in the Share Option Scheme, but shall not include any Independent Non-Executive Directors.

If the total number of Shares allotted and which may fall to be allotted upon exercise of all the share options (“ Share Options ”) granted and to be granted (including exercised, cancelled and outstanding Share Options) to a Participant in any 12-month period in aggregate exceeds 1% of the issued Shares of the Company at the time, no further grant of Share Options shall be given to such Participant. Share Options may be granted to a Participant in excess of the individual limit of 1% in any 12-month period only with the approval of the Shareholders in general meeting. No Share Option shall be granted to any person who holds over 5% of Shares which carry voting rights on the Grant Date (as defined in the Share Option Scheme) unless such grant is approved by the Shareholders in general meeting.

Two years unless otherwise stated in the grant notice of the Share Options.

HK$1.00 is to be paid by each grantee as consideration for the grant of the Share Options within 28 days from the date of offer.

The Share Option Scheme shall be valid and effective for a period of seven (7) years commencing on the date of adoption and will expire on 1 September 2022.

– 77 –

GENERAL INFORMATION

APPENDIX II

Details of the Share Options granted as follows:

Date of grant: 4 September 2015 Exercise price of options granted: HK$6.912 Number of options granted: 30,250,000 (representing 2.91% of the issued Shares as at the Latest Practicable Date.) Validity period of the options From 4 September 2015 to 3 September 2022 (seven (7) years), both dates inclusive.

Vesting period of the options One third of the Share Options shall vest on each of 4 September 2017, 4 September 2018 and 4 September 2019.

Particulars of the outstanding options granted under the 2015 Share Option Scheme as at the Latest Practicable Date are as follows:

			Exercisable	Outstanding as
		Exercise	period (both	at the Latest
Capacity of grantee	Grant date	price	days inclusive)	Practicable Date
		HK$
Directors and	4 September 2015	6.912	4 September 2017	129,334
chief executives			– 3 September
			2022
		6.912	4 September 2018	329,334
			– 3 September
			2022
		6.912	4 September 2019	329,332
			– 3 September
			2022
Other individuals	4 September 2015	6.912	4 September 2017	3,452,296
			– 3 September
			2022
		6.912	4 September 2018	8,675,034
			– 3 September
			2022
		6.912	4 September 2019	8,737,932
			– 3 September
			2022
			Total:	21,653,262

– 78 –

GENERAL INFORMATION

APPENDIX II

Saved as disclosed above, the Company did not have any other options, warrants, derivatives and other convertible securities or rights affecting the Shares or any commissions, discounts as at the Latest Practicable Date.

3. 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.

– 79 –

GENERAL INFORMATION

APPENDIX II

4. 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 Inc. (Note 1)	beneficial owner
Sino-Alliance International,	Legal and	223,474,995	21.50%
Ltd (Note 2)	beneficial owner

Notes:

Shanghai Hua Hong International, Inc. 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.
Sino-Alliance International, Ltd. is a wholly-owned subsidiary of SAIL of the 223,475,995 Shares, such Shares are either held directly by Sino-Alliance International, Ltd. or through its controlled corporations. In addition to the 223,475,995 shares indirectly held through Sino-Alliance, Ltd. 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 578,877,095 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.

– 80 –

GENERAL INFORMATION

APPENDIX II

5. 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.

6. 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.

7. MATERIAL CONTRACTS

There are no contracts that are not entered into in the ordinary course of business carried on or intended to be carried on by the Company or any of its subsidiaries have been entered into by the Company or any of its subsidiaries within the date two years before the Latest Practicable Date, which are or maybe material.

8. 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).

9. 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.

– 81 –

GENERAL INFORMATION

APPENDIX II

10. EXPERT AND CONSENT

The following is the qualification of the expert who has given opinion or advice which is contained in this circular:

Expert

Qualification

Somerley Capital Limited A corporation licensed to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and the independent financial adviser to the Independent Board Committees and the Independent Shareholders in respect of the Proposed Transaction.

The Independent Financial Adviser has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter and references to its name, in the form and context in which they respectively appear.

As at the Latest Practicable Date, the Independent Financial Adviser did not have any shareholding, directly or indirectly, in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for shares in any member of the Group.

As at the Latest Practicable Date, the Independent Financial Adviser did not have any interest, direct or indirect, in any assets which since 31 December 2016, the date to which the latest published audited financial statements of the Company were made up, had been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

11. 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 Articles;
(b) the annual reports of the Company for the financial years ended 31 December 2015 and 31 December 2016;
(c) the Subscription Agreement;
(d) the JV Agreement;
(e) the Capital Increase Agreement;

– 82 –

GENERAL INFORMATION

APPENDIX II

(f) the articles of association of the JV Company;
(g) the letter from the Board dated 30 January 2018 to the Shareholders, the text of which is set out on pages 6 to 42 of this circular;
(h) the letter from the Independent Board Committee dated 30 January 2018 to the Shareholders, the text of which is set out on pages 43 to 44 of this circular;
(i) the letter from the Independent Financial Adviser dated 30 January 2018 to the Shareholders, the text of which is set out on pages 45 to 72 of this circular;
(j) the written consents referred to in the section headed “Expert’s Qualification And Consent” in this appendix; and
(k) this circular.

12. 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.

– 83 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [16 x 22] intentionally omitted <==

==> picture [8 x 22] intentionally omitted <==

==> picture [12 x 7] intentionally omitted <==

==> picture [12 x 13] intentionally omitted <==

==> picture [15 x 13] intentionally omitted <==

==> picture [17 x 13] intentionally omitted <==

==> picture [14 x 13] intentionally omitted <==

==> picture [25 x 23] intentionally omitted <==

==> picture [16 x 25] intentionally omitted <==

==> picture [8 x 17] intentionally omitted <==

==> picture [16 x 23] intentionally omitted <==

==> picture [18 x 22] intentionally omitted <==

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

(Incorporated in Hong Kong with limited liability)

(Stock code: 01347)

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notice is hereby given that an extraordinary general meeting (the “ EGM ”) of Hua Hong Semiconductor Limited (the “ Company ”) will be held at 288 Halei Road, Zhangjiang Hi-Tech Park, Shanghai 201203, PRC on Wednesday, 14 February 2018 at 9:00 a.m. for considering and, if thought fit, passing, with or without amendments, the following resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT :
(a) the subscription agreement dated 3 January 2018 (the “ Subscription Agreement ”) entered into between the Company and China Integrated Circuit Industry Investment Fund Co., Ltd. (國家集成電路產業投資基金股份有限公司) (the “ Subscriber ”) pursuant to which, the Company has conditionally agreed to allot and the Subscriber has conditionally agreed to subscribe for an aggregate of 242,398,925 shares of the Company (the “ Subscription Shares ”) at the price of HK$12.90 per Subscription Share (a copy of which has been produced to the EGM marked “ A ” and signed by the chairman of the EGM for identification purpose) and the transactions contemplated thereunder (including but not limited to the allotment and issuance of the Subscription Shares and the appointment of a person nominated by the Subscriber as a director of the Company, effective from the completion of the Subscription Agreement), be and are hereby approved, confirmed and ratified;
(b) conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited granting the listing of, and permission to deal in the Subscription Shares, the Directors be and are hereby specifically authorized to allot and issue 242,398,925 new ordinary shares of HK$12.90 each in the capital of the Company pursuant to the terms of the Subscription Agreement, where such Subscription Shares shall rank equally in all respects among themselves and with all fully paid ordinary shares of the Company in issue as at the date of allotment and issue;
(c) the joint venture agreement dated 3 January 2018 (the “ JV Agreement ”) entered into among the Company, Shanghai Huahong Grace Semiconductor Manufacturing Corporation (“ HHGrace ”), the JV Company (as defined

– 84 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

below), the Subscriber and Wuxi Xi Hong Lian Xin Investment Co., Ltd. (“ Wuxi Entity ”) in relation to formation of a joint venture company (the “ JV Company ”) to engage in the design, research, manufacturing, testing, packaging and sale of integrated circuits, in particular, the production of 12-inch (300mm) wafers (a copy of which has been produced to the EGM marked “ B* ” and signed by the chairman of the EGM for identification purpose) and the transactions contemplated thereby be and are hereby approved, confirmed and ratified;

(d) the capital increase agreement dated 3 January 2018 (the “ Capital Increase Agreement ”) entered into among Company, HHGrace, the JV Company, the Subscriber and the Wuxi Entity in relation to increasing the authorised share capital of the JV Company from RMB6,680,000 to USD1,800,000,000, of which the Company, HHGrace, the Subscriber, and the Wuxi Entity will each contribute US$400,000,000, US$518,000,000, US$522,000,000 and US$360,000,000 respectively as capital injection into the JV Company (a copy of which has been produced to the EGM marked “ C ” and signed by the chairman of the EGM for identification purpose) and the transactions contemplated thereby be and are hereby approved, confirmed and ratified;
(e) any one director of the Company be and is hereby authorized to all such acts and things, to sign and execute documents or agreements or deeds on behalf of the Company and to do such other things and to take all such actions as he considers necessary, appropriate, desirable or expedient for the purposes of giving effect to or in connection with the Subscription Agreement, the JV Agreement, the Capital Increase Agreement and any transactions contemplated thereunder, and to agree to such variation, amendments or waiver of matters relating thereto as are, in the opinion of such Director, in the interests of the Company and its shareholders as a whole.”

By Order of the Board Hua Hong Semiconductor Limited Suxin, Zhang Chairman

Shanghai, PRC, 30 January 2018

– 85 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

All resolutions at the meeting will be taken by poll (except where the chairman, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands) pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Listing Rules ”). The results of the poll will be published on the websites of Hong Kong Exchanges and Clearing Limited and the Company in accordance with the Listing Rules.
Any shareholder of the Company entitled to attend and vote at the above meeting is entitled to appoint a proxy to attend and vote instead of him. A proxy need not be a shareholder of the Company. If more than one proxy is appointed, the number of shares in respect of which each such proxy so appointed must be specified in the relevant form of proxy.
In order to be valid, the form of proxy together with the power of attorney or other authority, if any, under which it is signed or a certified copy of that power of attorney or authority, must be deposited at the Company’s share registrar, Tricor Investor Services Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 48 hours before the time appointed for the holding of the meeting or any adjournment thereof. In calculating the aforesaid 48 hours period, no account will be taken of any part of a day that is a public holiday. Accordingly, the form of proxy must be delivered to the Company’s share registrar not later than 9:00 a.m. on Monday, 12 February 2018. Delivery of the form of proxy shall not preclude a shareholder of the Company from attending and voting in person at the meeting and, in such event, the instrument appointing a proxy shall be deemed to be revoked.
For determining the entitlement to attend and vote at the above meeting, the Register of Members of the Company will be closed from Friday, 9 February 2018 to Wednesday, 14 February 2018, both dates inclusive, during which period no transfer of shares will be registered. In order to be eligible to attend and vote at the Extraordinary General Meeting, unregistered holders of shares of the Company shall ensure that all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s share registrar, Tricor Investor Services Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong for registration not later than 4:30 p.m. on Thursday, 8 February 2018.

– 86 –

AI assistant

Hua Hong Semiconductor Limited — Proxy Solicitation & Information Statement 2018

49868_rns_2018-01-30_a9d75e29-b502-4c31-940a-1fd43da069e8.pdf

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

(1) MAJOR AND CONNECTED TRANSACTIONS IN RELATION TO

(i) THE SUBSCRIPTION AGREEMENT, (ii) THE JV AGREEMENT AND

(iii) THE CAPITAL INCREASE AGREEMENT

AND

(2) NOTICE OF EGM

DEFINITIONS

DEFINITIONS

DEFINITIONS

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

(1) MAJOR AND CONNECTED TRANSACTIONS IN RELATION TO

(i) THE SUBSCRIPTION AGREEMENT,

(2) NOTICE OF EGM

1. INTRODUCTION

2. THE SUBSCRIPTION AGREEMENT

LETTER FROM THE BOARD

Basis of determining the Subscription Price

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Use of proceeds

Specific Mandate

Equity Fund Raising Activity during the past twelve months

Effect on the shareholding structure of the Company as a result of the Subscription

3. THE JV AGREEMENT

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Board of directors and senior management

LETTER FROM THE BOARD

Reserved matters

LETTER FROM THE BOARD

Articles of Association

4. THE CAPITAL INCREASE AGREEMENT

LETTER FROM THE BOARD

(1) Industry Overview

(2) The Company’s existing business

K Wafers

(3) Target Customers of the JV Company

(4) Reasons and benefits of entering into the Subscription Agreement

LETTER FROM THE BOARD

(5) Reasons and benefits of entering into the JV Agreement and the Capital Increase Agreement

(6) Potential Disadvantages

(7) Summary

6. FINANCIAL EFFECTS OF THE PROPOSED TRANSACTION

7. INFORMATION ABOUT THE PARTIES

The Company

HHGrace

The JV Company

The Subscriber

LETTER FROM THE BOARD

The Wuxi Entity

How the Subscriber and the Wuxi Entity were introduced to the Company

Relationship between the Subscriber and the Company or its connected persons and the existing Shareholders

Relationship between the Wuxi Entity and the Company or its connected persons and the existing Shareholders

Relationship between the Wuxi Entity and the Subscriber

8. IMPLICATIONS UNDER THE LISTING RULES

9. EXTRAORDINARY GENERAL MEETING AND VOTING

10. RECOMMENDATIONS

11. FURTHER INFORMATION

Hua Hong Semiconductor Limited Suxin Zhang Chairman

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

(Stock code: 01347)

(1) MAJOR AND CONNECTED TRANSACTIONS IN RELATION TO

(i) THE SUBSCRIPTION AGREEMENT, (ii) THE JV AGREEMENT AND (iii) THE CAPITAL INCREASE AGREEMENT AND (2) NOTICE OF EGM

MAJOR AND CONNECTED TRANSACTIONS IN RELATION TO (I) THE SUBSCRIPTION AGREEMENT; (II) THE JV AGREEMENT; AND (III) THE CAPITAL INCREASE AGREEMENT

INTRODUCTION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background of the Group and the parties involved in the Proposed Transaction

Hua Hong Semiconductor Limited Proxy Solicitation & Information Statement 2018