UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of April, 2016

 

Commission File Number: 001-31994

 

Semiconductor Manufacturing International 
Corporation

(Translation of registrant’s name into English)

 

18 Zhangjiang Road

Pudong New Area, Shanghai 201203

People’s Republic of China

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

x Form 20-F   o Form 40-F

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

 

o Yes   x No

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): n/a

 

 

 

 

 

 

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, 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 announcement.

 

 

 

SEMICONDUCTOR MANUFACTURING INTERNATIONAL CORPORATION

 

中 芯 國 際 集 成 電 路 製 造 有 限 公 司 *

(Incorporated in the Cayman Islands with limited liability)

(STOCK CODE: 0981)

 

ANNOUNCEMENT OF 2015 ANNUAL RESULTS

 

FINANCIAL HIGHLIGHTS

 

The Board announces the audited consolidated results of the Company for the year ended December 31, 2015.

 

Highlights include:

 

Record sales of US$2,236.4 million in 2015, a 13.5% increase from US$1,970.0 million in 2014, primarily due to an increase in wafer shipments in 2015 including a significant increase in China sales.

 

Record gross profit of US$682.6 million in 2015, a 41.2% increase from US$483.5 million in 2014.

 

Record gross margin of 30.5% in 2015, compared to 24.5% in 2014. The increase was primarily due to a higher utilization rate in 2015.

 

Net cash flow from operating activities was US$669.2 million in 2015 compared to US$608.1 million in 2014.

 

Record profit for the year attributable to owners of the Company of US$253.4 million in 2015 compared to US$153.0 million in 2014.

 

The board of directors (the “Director(s)“) (the “Board”) of Semiconductor Manufacturing International Corporation (“SMIC” or the “Company”) announces the audited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the year ended December 31, 2015 as follows:

 

 1 

 

 

Revision After Publication Of Unaudited Financial Results For the Three Months Ended December 31, 2015

 

The Group publishes its unaudited financial results for each quarter on a voluntary basis. After the publication of its unaudited financial results for the three months ended December 31, 2015, i.e. the results for the fourth quarter of year 2015, the Group has made a revision during the preparation of its full year financial results which impacted its statement of financial position. The revision was to reclassify the Group’s convertible bonds of US$392.6 million with maturity date of November 7, 2018 (the “Convertible Bonds”) from non- current liabilities to current liabilities as of December 31, 2015, to reflect the bondholders’ options to require the Company to redeem some or all of the Convertible Bonds at their principal amounts on November 7, 2016. Such revision resulted in an increase of US$392.6 million in the Group’s current liabilities and a corresponding decrease in the Group’s non-current liabilities as of December 31, 2015. The revision had no impact on the Group’s consolidated statement of profit or loss and other comprehensive income and consolidated statement of cash flows for the year ending December 31, 2015.

 

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

This annual results may contain, in addition to historical information, “forward-looking statements” within the meaning of the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on SMIC’s current assumptions, expectations and projections about future events. SMIC uses words like “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project” and similar expressions to identify forward- looking statements, although not all forward-looking statements contain these words. These forward- looking statements are necessarily estimates reflecting judgment of SMIC’s senior management and involve significant risks, both known and unknown, uncertainties and other factors that may cause SMIC’s actual performance, financial condition or results of operations to be materially different from those suggested by the forward-looking statements including, among others, risks associated with cyclicality and market conditions in the semiconductor industry, intense competition, timely wafer acceptance by SMIC’s customers, bad debt risk, timely introduction of new technologies, SMIC’s ability to ramp new products into volume, supply and demand for semiconductor foundry services, industry overcapacity, shortages in equipment, components and raw materials, availability of manufacturing capacity and financial stability in end markets.

 

Except as required by law, SMIC undertakes no obligation and does not intend to update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

 2 

 

 

Letter To Shareholders

 

Dear Shareholders,

 

We are pleased to announce that SMIC recorded historical highs in all key profitability indices including gross profit margin, operating profit and net profit for 2015. Notwithstanding the uncertainty in the industry and a slowdown of demand growth in the smartphone market last year, we achieved great results including profit growth for four consecutive quarters and an overall utilization rate of over 100% for three consecutive quarters. It is expected that revenues for the first quarter of this year will also continue to grow. In 2015, we recorded a historical high in annual revenues of US$2.24 billion, representing an increase of 13.5% YOY, and continued to achieve full year profitability. Net profit attributable to owners of the Company exceeded US$250 million, an increase of 65.7% YOY. As of the end of the fourth quarter of last year, we achieved our fifteenth consecutive profitable quarter. We recorded an annual gross profit margin of 30.5% and an EBITDA margin around 35%. As of the end of last year, our total debt to total equity ratio was 33.8% and our net debt to total equity ratio was 3.0%. The Company has maintained a healthy capital structure. SMIC has secured investment grade credit ratings from both Standard & Poor’s and Moody’s and an AAA rating, the highest credit rating in China, from CCX, reflecting the Company’s strong business fundamentals for the past two years and the increasing support and recognition from domestic and international credit rating agencies and investors. Looking forward, sustainable profitability continues to be our primary objective.

 

In 2015, contrary to the industry trend, SMIC’s substantial growth reflected the success of our positioning in China and the successful execution of our differentiation strategy to diversify products and customers. In 2015, revenues from PRC-based customers achieved an annual growth of over 25%. Annual revenues from our Eurasia region also recorded a growth of over 50%. Last year, revenues from 0.11µm to 0.35µm technology increased by 4.7% YOY, of which the annual growth rate for sensor-related technology was over 30%. With the launch of new technology and the expansion of capacity, it is expected that our differentiated processes will generate increasing revenues. In addition, customers’ orders for advanced node processes have been robust. The capacity utilization in our 12-inch fab recovered rapidly. Despite the inventory correction in the industry, we maintained significant growth in our revenues from 40/45nm process last year, recording 63% year-on-year growth. We commenced mass production of our 28nm process and began to generate revenues during the third quarter of last year. During the second half of last year, our 8-inch fab in Shenzhen and our new 12-inch fab in Beijing commenced production and have installed 13,000 and 6,000 wafers per month capacity, respectively. In order to capture the market opportunities and strengthen our competitive edge in differentiated technology, we plan to continue to expand the capacity of these two fabs in order to meet the growing customer demand this year.

 

Last year, we incorporated SMIC Holdings Corporation (“SMIC Holdings”), which will assume the role of regional headquarters, overseeing management functions in the China region. SMIC Holdings was established as part of SMIC’s integrated strategy to lay the foundation for its long term development. SMIC Holdings will use the regional headquarters to improve the sharing of company resources and workflow, which will enhance efficiency in the company’s decision making, increase management capabilities, and reduce operational costs.

 

In November last year, we donated a total of RMB300,000 to the Tianjin Charity Association for setting up the Rehabilitation Fund for Firemen, which will provide rehabilitation services to the firemen injured in the explosion in Tianjin on 12 August. This is the first fund that SMIC has set up for special rescue service personnel. We hope to make a contribution to the rehabilitation of those injured firemen through this fund; as SMIC has an 8-inch fab in Tianjin, this is in line with SMIC’s unwavering objectives of corporate social responsibility to “care for people, care for the environment, and care for society”.

 

We are pleased to welcome Mr. Lu Jun to join the Board as Non-executive Director. We believe that his extensive experience in the investment industry and deep understanding of industry policies will make contributions to the long-term development of the Company.

 

 3 

 

 

2015 was an incredibly successful year, thanks to our comprehensive preparations made in the prior years by improving our technology and relationships with customers. As we have reached full utilizations and our 28nm technology has entered into mass production, we will increase capital investment in 2016 to address the capacity constraints and expand our market share. With the availability of new additional capacity, we target to achieve above-industry-average revenue growth in 2016. We shall continue to benefit from opportunities brought by the China market, mobile products, smart consumer products, and internet of things (“IoT”). We are committed to diligently and carefully execute our business plan for the best interests of our shareholders. We would like to again express our sincere gratitude to all of our shareholders, customers, suppliers, and employees for their continued care and support of SMIC’s development.

 

Zhou  Zixue TY Chiu
Chairman of the Board and Executive Director Chief Executive Officer and Executive Director

 

Shanghai, China

March 30, 2016

 

 4 

 

 

BUSINESS REVIEW

 

In 2015, the Group continued to execute its long-term strategy with sustained profitability. The Group continued to advance its technology capabilities on leading edge and value-added differentiated processes. The Group’s technology portfolio and proximity to the China market, coupled with the management team’s global experience in operations, technology development and customer service, has positioned the Group well for long term growth. In addition, 2015 was a milestone year for SMIC in many aspects. Among other things, the Group generated record revenue at US$2.24 billion, the highest in the Company’s 15 years history, partnered with leading industry players on 14nm FinFET process technology development, achieved significant business engagements on 28nm technology with leading mobile baseband and digital consumer IC design companies, and expanded its 300mm fab operation in Beijing and 200mm fab operation in Shenzhen, China. We believe the Group was the first pure-play foundry in China to enter into mass production with 28nm wafer process technology for mobile computing applications, the first pure-play foundry worldwide to offer 55nm embedded Flash (“eFlash”) wafer solutions for SIM Card applications, and the first pure-play foundry worldwide to offer 38nm NAND Flash memory wafer process technology. The Group also continued to drive its value-added wafer manufacturing process technologies for specialty applications, such as Power Management IC, CMOS Image Sensors (“CIS”), eEEPROM, eFlash, embedded Microprocessor (“MCU”), Ultra- low-power Technologies (“ULP”), radio frequencies IC (“RF”) and wireless connectivity, Touch Controller IC (“TCIC”), fingerprint sensors and MEMS sensors. These applications are the essential building blocks for both mobile computing market and the growing Internet-of-Things (“IoT”) market in the near future. The Group is well positioned in China to serve both domestic and worldwide customers.

 

Financial Overview

 

Despite a challenging environment in 2015, the Group’s sales totaled US$2,236.4 million, compared to US$1,970.0 million in 2014. The Group recorded a profit of US$222.3 million in 2015, compared to US$126.3 million in 2014. During the year, we generated US$669.2 million in cash from operating activities, compared to US$608.1 million in 2014. Capital expenditures in 2015 totaled US$1,572.7 million, compared to US$1,014.4 million in 2014. Looking ahead, our objective is to achieve sustained profitability over the long term. To achieve these goals, we will continue to focus on precision execution, efficiency improvement, customer service excellence while fostering innovation.

 

Customers and Markets

 

The Group continues to serve a broad global customer base comprised of leading IDMs, fabless semiconductor companies and system companies. Geographically, customers from the United States of America contributed 34.7% of the overall revenue in 2015, compared to 43.4% in 2014. Leveraging on the Group’s strategic position in China, our China revenue contributed 47.7% of the overall revenue in 2015, compared to 43.3% in 2014. In particular, 54.8% of the Group’s advanced nodes (90nm and below) wafer revenue in 2015 was contributed by customers in China. Eurasia contributed 17.6% of the overall revenue in 2015, compared to 13.3% in 2014.

 

In terms of applications, revenue contribution from communication applications increased from 43.2% in 2014 to 51.5% in 2015. Consumer applications contributed 36.1% to the Group’s overall revenue in 2015 as compared to 46.0% in 2014. The Group has minimal exposure to the relatively weak PC market.

 

In terms of the revenue by technology, wafer revenue attributable to advanced technology at 90nm and below increased from 39.2% of total revenue in 2014 to 44.4% of total revenue in 2015 and, in particular, the revenue contribution percentage from 40/45nm technology increased from 11.1% in 2014 to 15.8% in 2015. In addition, the Group’s latest 28nm technology started to contribute revenue in 2015.

 

The Group is well positioned geographically with its continued business growth in China. According to IHS iSuppli, China continues to be the number one region of the world in terms of semiconductor IC consumption, mainly due to its high volume electronics manufacturing and mass consumer market. In 2015, China consumed US$147 billion of semiconductors from international and China domestic suppliers. This represented 42% of the semiconductor worldwide total market. In addition, we believe the IC design market in China is growing rapidly. Local analyst, ICwise, estimated that the China’s IC design market reached US$13.9 billion in 2015, a 10% year to year increase from 2014 and is projected to experience a compounded annual growth rate of 20.4% over the next 5 years, which will bring the worth of the China IC design market to US$35.3 billion by 2020.

 

 5 

 

 

Notably, our business objective in China is not just revenue growth, but also growth in the number of new designs using advanced technology, in particular on 55/65nm, 40/45nm and 28nm process technologies. The Group has, in each of its geographical regions, customers utilizing its most advanced nodes of technology. We believe China is rapidly closing the gap with the rest of the world in terms of its innovation and design capabilities. To fully leverage the market growth potential in China, the Group plans to continue to deepen its collaboration with Chinese customers while broadening relationships with its global customers.

 

Long-Term Business Model and Strategy for Generating and Preserving Value

 

SMIC’s long-term goal is to focus on generating value for the benefit of all stakeholders. SMIC’s strategy to generate sustainable profitability is three-fold. First, we aim for optimal efficiency by fully utilizing existing assets through enhanced customer relationships, quality, and service. Second, through taking advantage of our position in China, we plan to differentiate our technology offering by providing customers with added value and innovation that not only enables us to seize China market opportunities, but also gives global customers a foothold in that fast-growing market. Third, with long-term profitability as our priority, we plan to carefully invest capital in advanced technology and capacity to address suitable market growth opportunities into the future. We constantly evaluate the potential value addition of all opportunities in our decision-making processes. Our management team is committed to building value in the long-term for the benefit of our employees and shareholders.

 

Research and Development

 

In 2015, the research and development (R&D) expenses were US$237.2 million, which is equivalent to 10.6% of our sales.

 

The R&D efforts were focused primarily on advanced logic and value-added specialty technologies. SMIC achieved many significant milestones in 2015. In the area of advanced logic technologies, the PolySiON R&D programs on the 28nm successfully entered into mass production in the second half of 2015. On our 14nm technology development, the basic CMOS process-flow was set up; subsequently, the full process characterization and SRAM yield learning vehicle was taped out at the end of 2015.

 

In the area of non-volatile memory (NVM) technologies, we believe that SMIC was the world’s first pure foundry to produce 55nm eflash and we successfully ramped products which were adopted by domestic and overseas telecom carriers. A number of new technologies also entered into production in 2015 including Back-Side Illumination CMOS image sensor (BSI-CIS) products with scaled pixel size (1.4µm and 1.1µm), CMOS integrated MEMS devices and TSV- based wafer level packaging technologies. SMIC also launched 95nm ultra-low power SPOCULL (SMIC Poly Contact Ultra Low Leakage) technology, which can pack 2 times the logic density and three times the SRAM density compared to the 0.13µm node; and which can be used for various applications including RF, power management, and internet-of-things (IoT).

 

The building and strengthening of SMIC’s technology R&D organization continued in 2015 through further optimizations on organization structure and resource distribution to improve operational efficiency and to address the growing demands on advanced technologies as well as specialty technology enhancements. During 2015, SMIC achieved over 1,200 patent filings as a result of its technology R&D activities.

 

 6 

 

 

Outlook for 2016

 

Looking forward, we are full of anticipation in regards to the upcoming business opportunities. With the growing demand from our customers and our investment in R&D accelerating, we estimate 2016 sales revenue will exceed global foundry industry average growth. Our capacity target by 2016 year-end is to install 341,000 8-inch equivalent wafers per month capacity, an increase of 20% compared to 2015 year-end. Shanghai 12- inch fab capacity is targeted to expand to 20,000 12-inch wafers per month compared to 14,000 wafers per month at the end of 2015; in addition, the majority owned Beijing 12-inch joint venture fab capacity is targeted to expand to 15,000 12-inch wafers per month capacity, from 6,000 as of 2015 year-end; Shenzhen 8-inch fab capacity is targeted to reach 30,000 8-inch wafers per month from 13,000 wafers per month as of 2015 year-end. We believe 28nm is a long-lived node and is strategic for the long-term growth and development of SMIC. Our 28nm and 40nm flexible capacity allows us to best utilize our capacity according to our customers’ needs. With the opportunities presented to us being in China, we strive to capture the attractive prospects with profitability as our underlying objective. In order to capture the many opportunities at hand, SMIC plans to grow through both organic and inorganic means.

 

 7 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

 

Consolidated Financial Data

 

The summary consolidated financial data presented below as of and for the years ended December 31, 2011, 2012, 2013, 2014 and 2015 are derived from, and should be read in conjunction with, the audited consolidated financial statements, including the related notes, included elsewhere in this annual results announcement. The summary consolidated financial data presented below as of and for the years ended December 31, 2011, 2012, 2013, 2014 and 2015 have been prepared in accordance with IFRS.

 

   Year Ended   Year  Ended   Year  Ended   Year  Ended   Year  Ended 
   12/31/15   12/31/14   12/31/13   12/31/12   12/31/11 
   (in US$ thousands, except for earnings (loss) per share) 
Continuing operations
Revenue   2,236,415    1,969,966    2,068,964    1,701,598    1,319,466 
Cost of sales   (1,553,795)   (1,486,514)   (1,630,528)   (1,352,835)   (1,217,525)
Gross profit   682,620    483,452    438,436    348,763    101,941 
Research and development expenses, net   (237,157)   (189,733)   (145,314)   (193,569)   (191,473)
Sales  and  marketing  expenses   (41,876)   (38,252)   (35,738)   (31,485)   (32,559)
General  and  administration expenses   (213,177)   (139,428)   (138,167)   (107,313)   (57,435)
Other  operating  income (expense), net   31,594    14,206    67,870    19,117    (11,190)
Profit (loss) from operations   222,004    130,245    187,087    35,513    (190,716)
Interest income   5,199    14,230    5,888    5,390    4,724 
Finance costs   (12,218)   (20,715)   (34,392)   (39,460)   (21,903)
Foreign exchange gains or losses   (26,349)   (5,993)   13,726    3,895    17,589 
Other gains or losses, net   55,611    18,210    4,010    6,398    6,709 
Share of (loss) profit of investment using equity method   (13,383)   2,073    2,278    1,703    4,479 
Profit (loss) before tax   230,864    138,050    178,597    13,439    (179,118)
Income  tax  (expense)  benefit   (8,541)   (11,789)   (4,130)   9,102    (82,503)
Profit (loss) for the year from continuing  operations   222,323    126,261    174,467    22,541    (261,621)
Discontinued operations
Profit for the year from discontinued  operations                   14,741 
Profit (loss) for the year   222,323    126,261    174,467    22,541    (246,880)
Other comprehensive income
Item that may be reclassified subsequently to profit or loss
Exchange differences on translating  foreign  operations   (8,185)   (324)   731    70    4,938 
Change in value of available-for- sale financial assets   452                 
Others   130                 
Total comprehensive income (loss) for the year   214,720    125,937    175,198    22,611    (241,942)

 

 8 

 

 

   Year Ended   Year Ended   Year  Ended   Year  Ended   Year  Ended 
   12/31/15   12/31/14   12/31/13   12/31/12   12/31/11 
   (in US$ thousands, except for earnings (loss) per share) 
Profit (loss) for the year attributable to:                         
Owners of the Company   253,411    152,969    173,177    22,771    (246,817)
Non-controlling interest   (31,088)   (26,708)   1,290    (230)   (63)
    222,323    126,261    174,467    22,541    (246,880)
Total comprehensive income (loss) for the year attributable to:                         
Owners of the Company   245,803    152,645    173,908    22,841    (241,879)
Non-controlling interest   (31,083)   (26,708)   1,290    (230)   (63)
    214,720    125,937    175,198    22,611    (241,942)
Earnings (loss) per share                         
From  continuing  and discontinued  operations                         
Basic  $0.01   $0.00   $0.01   $0.00   $(0.01)
Diluted  $0.01   $0.00   $0.01   $0.00   $(0.01)
From  continuing  operations                         
Basic  $0.01   $0.00   $0.01   $0.00   $(0.01)
Diluted  $0.01   $0.00   $0.01   $0.00   $(0.01)

 

 9 

 

 

   As of December 31, 
   2015   2014   2013   2012   2011 
   (in US$ thousands) 
Statements of Financial Position Data:
Property,  plant  and  equipment   3,903,818    2,995,086    2,528,834    2,385,435    2,516,578 
Land use right   91,030    135,331    136,725    73,962    77,231 
Total non-current assets   4,525,297    3,471,120    2,960,151    2,803,173    2,866,416 
Inventories   387,326    316,041    286,251    295,728    207,308 
Prepayment and Prepaid operating expenses   40,184    40,628    43,945    46,986    52,805 
Trade and other receivables   499,846    456,388    379,361    328,211    200,905 
Other financial assets   282,880    644,071    240,311    18,730    1,973 
Restricted  cash   302,416    238,051    147,625    217,603    136,907 
Cash and cash equivalent   1,005,201    603,036    462,483    358,490    261,615 
Assets  classified  as  held-for-sale   72,197    44    3,265    4,239     
Total current assets   2,590,050    2,298,259    1,563,241    1,269,987    861,513 
Total assets   7,115,347    5,769,379    4,523,392    4,073,160    3,727,929 
Total  non-current  liabilities   1,157,901    1,311,416    991,673    688,622    230,607 
Total current liabilities   1,767,191    1,150,241    938,537    1,108,086    1,251,324 
Total liabilities   2,925,092    2,461,657    1,930,210    1,796,708    1,481,931 
Non-controlling interest   460,399    359,307    109,410    952    1,182 
Total equity   4,190,255    3,307,722    2,593,182    2,276,452    2,245,998 
                          
   For the year ended December 31, 
   2015   2014   2013   2012   2011 
   (in US$ thousands except percentages and operating data) 
Cash Flow Data:                         
Profit (loss) for the year   222,323    126,261    174,467    22,541    (246,880)
Non-cash  adjustment  to  reconcile  profit (loss) to net operating cash flow:                         
Depreciation  and  amortization   523,549    549,468    546,910    566,899    551,857 
Net cash from operating activities   669,197    608,102    738,016    435,166    379,368 
Payments for property, plant and equipment   (1,230,812)   (653,134)   (650,160)   (400,291)   (931,574)
Net cash used in investing activities   (789,556)   (1,144,123)   (807,467)   (522,277)   (903,641)
Net cash from financing activities   537,078    676,683    173,458    184,101    268,855 
Net increase (decrease) in cash and bank balances    416,719    140,662    104,007    96,990    (255,418)
Other Financial Data:                         
Gross margin   30.5%   24.5%   21.2%   20.5%   7.7%
Net margin   9.9%   6.4%   8.4%   1.3%   –18.7%
Operating Data:                         
Wafers shipped (in units):                         
Total(1)   3,015,966    2,559,245    2,574,119    2,217,287    1,703,615 

 

(1)Including logic, DRAM, copper interconnects and all other wafers.

 

 10 

 

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Revenue

Revenue increased by 13.5% from US$1,970.0 million for 2014 to US$2,236.4 million for 2015, primarily due to an increase in wafer shipments in 2015 including a significant increase in China sales. For 2015, the overall wafer shipments were 3,015,966 units of 8-inch equivalent wafers, up 17.8% year-over-year.

 

The average selling price1 of the wafers the Group shipped decreased from US$770 per wafer in 2014 to US$742 in 2015. The percentage of wafer revenues from advanced 40/45nm technologies increased from 11.1% in 2014 to 15.8% in 2015 and the Group entered into mass production of the advanced 28nm technologies in the second half of 2015.

 

Cost of sales and gross profit

Cost of sales increased by 4.5% from US$1,486.5 million for 2014 to US$1,553.8 million for 2015, primarily due to an increase in wafer shipments but partially offset by an improved fab efficiency and cost saving. Out of the total cost of sales, US$436.1 million and US$424.9 million were attributable to depreciation and amortization for the year ended December 31, 2014 and 2015, respectively.

 

The Group’s gross profit was US$682.6 million for 2015 compared to US$483.5 million for 2014, representing an increase of 41.2%. Gross margin was 30.5% in 2015 compared to 24.5% in 2014. The increase in gross margin was primarily due to a higher utilization rate in 2015.

 

Profit for the year from operations

Profit from operations increased from US$130.2 million for the year ended December 31, 2014 to US$222.0 million for the year ended December 31, 2015 primarily due to the combined effect of 1) an increase of wafer shipments in 2015 and 2) higher utilization in 2015.

 

Research and development expenses increased by 25.0% from US$189.7 million for the year ended December 31, 2014 to US$237.2 million for the year ended December 31, 2015. The increase was mainly due to higher number of R&D activities.

 

General and administrative expenses increased by 52.9% from US$139.4 million for the year ended December 31, 2014 to US$213.2 million for the year ended December 31, 2015. The increase was primarily due to 1) the start-up expenses relating to the two new fab projects — the 12-inch fab in Beijing and the 8-inch fab in Shenzhen and 2) an increase in accrued employee bonus in 2015.

 

Sales and marketing expenses increased by 9.5% from US$38.3 million for the year ended December 31, 2014 to US$41.9 million for the year ended December 31, 2015.

 

Other operating income, net increased by 122.4% from US$14.2 million for the year ended December 31, 2014 to US$31.6 million for the year ended December 31, 2015. The increase was due to the higher gain realized from the partial disposal of our living quarters in 2015.

 

As a result, the Group’s profit from operations increased to US$222.0 million for the year ended December 31, 2015 from US$130.2 million for the year ended December 31, 2014.

 

1Based on simplified average selling price which is calculated as total revenue divided by total shipments.

 

 11 

 

 

Profit for the Year

 

Due to the factors described above, the Group recorded a profit of US$222.3 million in 2015 compared to US$126.3 million in 2014.

 

Funding Sources for Material Capital Expenditure in the Coming Year

 

The Group’s planned 2016 capital expenditures for foundry operations are approximately US$2.1 billion, which are mainly for 1) the expansion of capacity in 12-inch fab in Semiconductor Manufacturing North China (Beijing) Corporation, a majority-owned subsidiary of the Company (“SMNC”), 8-inch fab in Semiconductor Manufacturing International (Shenzhen) Corporation (“SMIC Shenzhen”), 12-inch fab in Semiconductor Manufacturing International (Shanghai) Corporation (“SMIS” or “SMIC Shanghai”) and a new 12-inch majority-owned joint venture with bumping services in SJ Semiconductor (Jiangyin) Corporation (”SJ Jiangyin”), 2) a new majority-owned joint venture company, which will focus on research and development on 14nm logic technology, and 3) research and development equipment, mask shops and intellectual property acquisition.

 

The Group’s planned 2016 capital expenditures for non-foundry operations are approximately US$60 million, mainly for the construction of living quarters.

 

The Group’s actual expenditures may differ from its planned expenditures for a variety of reasons, including changes in its business plan, process technology, market conditions, equipment prices, or customer requirements. The Group will monitor the global economy, the semiconductor industry, the demands of its customers, and its cash flow from operations and will adjust its capital expenditures plans as necessary.

 

The primary sources of capital resources and liquidity include cash generated from operations, bank borrowings and debt or equity issuances and other forms of financing. Future acquisitions, mergers, strategic investments, or other developments also may require additional financing. The amount of capital required to meet the Group’s growth and development targets is difficult to predict in the highly cyclical and rapidly changing semiconductor industry.

 

Bad Debt Provision

 

The Group determines its bad debt provision based on the Group’s historical experience and the relative aging of receivables as well as individual assessment of certain debtors. A fixed percentage is applied to receivables in each past due age category, ranging from 1% for the shortest past due age category to 100% for the longest past due age category. The Group’s bad debt provision excludes receivables from a limited number of customers due to their high creditworthiness. Any receivables which have been fully provided for and are subsequently deemed non-collectible will be written off against the relevant amount of provision. The Group’s recognized bad debt provision in 2014 and 2015 amounted to US$1.6 million and US$0.5 million, respectively. The Group reviews, analyzes and adjusts bad debt provisions on a monthly basis.

 

 12 

 

 

Debt Arrangements

 

Set forth in the table below are the aggregate amounts, as of December 31, 2015, of the Group’s future cash payment obligations under the Group’s existing contractual arrangements on a consolidated basis:

 

   Payments due by period Less than 
Contractual obligations  Total   1 year   1–2  years   2–5  years   Over 5 years 
   (consolidated, in US$ thousands) 
Short-term borrowings   62,872    62,872             
Long-term  loans   466,232    50,196    15,830    172,916    227,290 
Convertible bonds(1)   392,632    392,632             
Bonds payable   493,207            493,207     
Purchase obligations(2)   1,340,941    1,340,941             
Total  contractual  obligations   2,755,884    1,846,641    15,830    666,123    227,290 

 

(1)The holders of each convertible bond will have the right to require the Company to redeem all or some only of the convertible bonds at their principal amount on November 7, 2016.

 

(2)Represents commitments for construction or purchase of semiconductor equipment, and other property or services.

 

As of December 31, 2015, the Group’s outstanding long-term loans primarily consisted of US$63.6 million in secured bank loans and US$402.6 million in unsecured bank loans, which are repayable in installments starting in June 2016, with the last payment due in December 2030.

 

2013 USD Loan (SMIC Shanghai)

 

In August 2013, Semiconductor Manufacturing International (Shanghai) Corporation (“SMIS”) entered into a loan facility in the aggregate principal amount of US$470 million with a syndicate of financial institutions based in the PRC. This seven-year bank facility was used to finance the planned expansion for SMIS’ 12-inch fab. The facility is secured by the manufacturing equipment located in the SMIS’ 12-inch fab. As of December 31, 2015 SMIS had drawn down US$260 million and repaid US$249.2 million on this loan facility. The outstanding balance of US$10.8 million is repayable from February 2018 to August 2018. The interest rate on this loan facility ranged from 4.33% to 4.89% in 2015. SMIS was in compliance with the related financial covenants as of December 31, 2015.

 

2015 USD Loan (SMIC Shanghai)

 

In April 2015, SMIS entered into a loan facility in the aggregate principal amount of US$66.1 million with US Export-Import Bank. This five-year bank facility was used to finance the planned expansion for SMIS’ 12- inch fab. The facility is secured by the manufacturing equipment located in the SMIS’ 12-inch fab. As of December 31, 2015, SMIS had drawn down US$66.1 million and repaid US$13.2 million on this loan facility. The outstanding balance of US$52.9 million is repayable from June 2016 to December 2019. The interest rate on this loan facility ranged from 1.21% to 1.75% in 2015. SMIS was in compliance with the related financial covenants as of December 31, 2015.

 

2015 RMB Loan I (SMIC Shanghai)

 

In December 2015, SMIS entered into a loan facility in the aggregate principal amount of RMB1,000 million with China Development Bank, which is guaranteed by SMIC. This fifteen-year bank facility was used for new SMIS’ 12-inch fab. As of December 31, 2015, SMIS had drawn down RMB1,000 million (approximately US$154.1 million) on this loan facility. The outstanding balance is repayable from November 2021 to November 2030. The interest rate on this loan facility was 1.20% in 2015.

 

 13 

 

 

2015 RMB Loan II (SMIC Shanghai)

 

In December 2015, SMIS entered into a loan facility in the aggregate principal amount of RMB475 million with China Development Bank, which is guaranteed by SMIC. This ten-year bank facility was used to expand the capacity of SMIS’ 12-inch fab. As of December 31, 2015, SMIS had drawn down RMB475 million (approximately US$73.2 million) on this loan facility. The outstanding balance is repayable from December 2018 to December 2025. The interest rate on this loan facility was 1.20% in 2015.

 

2015 EXIM RMB Loan (SMIC Shanghai)

 

In December 2015, SMIS entered into a loan facility in the aggregate principal amount of RMB480 million with The Export-Import Bank of China, which is unsecured. This three-year bank facility was used for working capital purposes. As of December 31, 2015, SMIS had drawn down RMB480 million (approximately US$74.0 million) on this loan facility. The outstanding balance is repayable in December 2018. The interest rate on this loan facility was 2.65% in 2015.

 

2014 EXIM RMB Loan (SMIC Beijing)

 

In December 2014, Semiconductor Manufacturing International (Beijing) Corporation (“SMIB”) entered into a RMB Loan, a two-year working capital loan facility in the principal amount of RMB240 million with The Export-Import Bank of China, which is unsecured. This two-year bank facility was used for working capital purposes. As of December 31, 2015, SMIB had drawn down RMB240 million (approximately US$37.0 million) on this loan facility. The principal amount is repayable in December 2016. The interest rate on this loan facility ranged from 3.65% to 3.90% in 2015.

 

2015 CDB RMB Loan (SMIC Beijing)

 

In December 2015, SMIB entered into the new RMB Loan, a fifteen-year working capital loan facility in the principal amount of RMB195 million with China Development Bank, which is unsecured. As of December 31, 2015, SMIB had drawn down RMB195 million (approximately US$30.0 million) on this loan facility. The principal amount is repayable from December 2017 to December 2030. The interest rate on this loan facility was 1.20% in 2015.

 

2015 RMB Entrust Loan (SJ Jiangyin)

 

In July 2015, SJ Jiangyin entered into the new RMB Loan of zero-interest rate, a five-year working capital loan facility in the principal amount of RMB93 million with Jiangyin Science and Technology New City Investment Management Company Ltd, which is unsecured. As of December 31, 2015, SJ Jiangyin had drawn down RMB93 million (approximately US$14.3 million) on this loan facility. The principal amount is repayable in July 2020.

 

2015 CDB USD Loan (SJ Jiangyin)

 

In September 2015, SJ Jiangyin entered into the new USD Loan, a seven-year working capital loan facility in the principal amount of US$44.5 million with China Development Bank. This bank facility was used to expand the capacity of SJ Jiangyin’ 12-inch bumping fab. The facility is guaranteed by SMIB. As of December 31, 2015, SJ Jiangyin had drawn down US$20 million on this loan facility. The principal amount is repayable from September 2017 to September 2022. The interest rate on this loan facility ranged from 4.20% to 4.23% in 2015.

 

As of December 31, 2015, the Group had 29 short-term credit agreements that provided total credit facilities of up to US$1,414.6 million on a revolving basis. As of December 31, 2015, the Group had drawn down US$62.9 million under these credit agreements and US$1,351.7 million was available for future trading and borrowings. The outstanding borrowings under the credit agreements are unsecured. The interest rate ranged from 0.98% to 4.20% in 2015.

 

 14 

 

 

In May 2012, SMIS entered into a four-year strategic framework credit facility in the aggregate amount of RMB5 billion with China Development Bank. The 2013 USD Loan (SMIC Shanghai) constituted part of this strategic framework credit facility.

 

Capitalized Interest

 

Interest, after netting off government funding received, incurred on borrowed funds used to construct plant and equipment during the active construction period is capitalized. The interest capitalized is determined by applying the borrowing interest rate to the average amount of accumulated capital expenditures for the assets under construction during the period. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful life of the assets. Capitalized interests of US$30.3 million and US$13.7 million in 2015 and 2014, respectively, have been added to the cost of the underlying assets during the year and are amortized over the respective useful life of the assets. In 2015 and 2014, the Group recorded amortization expenses relating to the capitalized interest of US$15.5 million and US$12.5 million, respectively.

 

Commitments

 

As of December 31, 2015, the Group had commitments of US$165.3 million for facilities construction obligations in connection with the Group’s Shanghai, Beijing, Tianjin, Shenzhen and Jiangyin facilities.

 

As of December 31, 2015, the Group had commitments of US$1,146.3 million to purchase machinery and equipment for its Shanghai, Beijing, Tianjin, Shenzhen and Jiangyin fabs.

 

As of December 31, 2015 the Group had commitments of US$29.4 million to purchase intellectual property.

 

Debt to Equity Ratio

 

As of December 31, 2015, the Group’s net debt to equity ratio was approximately 3.0%. Please refer to Note 39 to our financial statements for calculation.

 

Foreign Exchange Rate Fluctuation Risk

 

The Group’s revenue, expense, and capital expenditures are primarily transacted in U.S. dollars. The Group also enters into transactions in other currencies. The Group is primarily exposed to changes in exchange rates for the Euro, Japanese Yen, and RMB.

 

To minimize these risks, the Group purchases foreign-currency forward exchange contracts with contract terms normally lasting less than twelve months to protect against the adverse effect that exchange rate fluctuations may have on foreign-currency denominated activities. These forward exchange contracts are principally denominated in RMB, Japanese Yen or Euros and do not qualify for hedge accounting in accordance with IFRS.

 

Cross Currency Swap Fluctuation Risk

 

In December 2015, the Company entered into a long-term loan facility agreement in the aggregate principal amount of RMB480 million. The Company was primarily exposed to changes in the exchange rate for the RMB.

 

To minimize the currency risk, the Company entered into cross currency swap contracts with a contract term fully matching the repayment schedule of the whole part of this RMB long-term loan to protect against the adverse effect of exchange rate fluctuations arising from foreign-currency denominated loans. The cross currency swap contracts did not qualify for hedge accounting in accordance with IFRS.

 

Outstanding Foreign Exchange Contracts

 

As of December 31, 2015, the Group had outstanding foreign currency forward exchange contract with notional amounts of US$42.9 million, which will mature in 2016. As of December 31, 2015, the fair value of foreign currency forward exchange contracts was approximately US$0.2 million, which was recorded in other financial assets.

 

 15 

 

 

As of December 31, 2014 and 2013, the Group had no outstanding foreign currency forward exchange contracts.

 

The Group does not enter into foreign currency exchange contracts for speculative purposes.

 

   As of
December 31, 2015
   As of
December 31, 2014
   As of
December 31, 2013
 
   (in US$ thousands)   (in US$ thousands)   (in US$ thousands) 
   Notional
Value
   Fair Value   Notional
Value
   Fair Value   Notional
Value
   Fair Value 
                         
Forward Foreign Exchange Agreement                              
(Receive  Eur/Pay  US$)                              
Contract Amount   42,872    172                 
Total Contract Amount   42,872    172                 

 

Outstanding Cross Currency Swap Contracts

 

As of December 31, 2015, the Company had outstanding cross currency swap contracts with notional amounts of US$74.0 million. Notional amounts are stated in the U.S. dollar equivalents at spot exchange rates as of the respective dates. As of December 31, 2015, the fair value of cross currency swap contracts was approximately US$(1.5) million and was recorded in other financial liabilities. The cross currency swap contracts will mature in 2018.

 

As of December 31, 2014 and 2013, the Group had no outstanding cross currency swap contracts.

 

   As of
December 31, 2015
   As of
December 31, 2014
   As of
December 31, 2013
 
   (in US$ thousands)   (in US$ thousands)   (in US$ thousands) 
   Notional
Value
   Fair Value   Notional
Value
   Fair Value   Notional
Value
   Fair Value 
                         
Cross Currency Swap Contracts                              
(Receive  RMB/Pay  US$)                              
Contract Amount   73,966    (1,459)                
Total Contract Amount   73,966    (1,459)                

 

Interest Rate Risk

 

The Group’s exposure to interest rate risks relates primarily to the Group’s long-term loans, which the Group generally assumes to fund capital expenditures and working capital requirements. The table below presents annual principal amounts due and related weighted average implied forward interest rates by year of maturity for the Group’s debt obligations outstanding as of December 31, 2015. The Group’s long-term loans are all subject to variable interest rates. The interest rates on the Group’s U.S. dollar-denominated loans are linked to the LIBOR. As a result, the interest rates on the Group’s loans are subject to fluctuations in the underlying interest rates to which they are linked.

 

 16 

 

 

 

   As of December 31, 
   2016   2017   2018   2019   2020 and
thereafter
 
   (Forecast) 
   (in  US$  thousands,  except  percentages) 
US$  denominated
Average balance   910,807    561,418    465,203    444,044    2,455 
Average interest rate   2.78%   2.40%   2.37%   2.33%   5.22%
RMB denominated
Average balance   381,640    345,630    340,924    261,762    123,970 
Average interest rate   1.66%   1.46%   1.45%   1.13%   1.19%
Weighted average forward interest rate   2.45%   2.04%   1.98%   1.89%   1.27%

 

Co-Investment in Relation to Proposed Acquisition of STATS ChipPAC

 

On December 22, 2014, (i) SilTech Shanghai, an indirectly wholly-owned subsidiary of the Company; (ii) Jiangsu Changjiang Electronics Technology Co., Ltd. (”JCET“); and (iii) China Integrated Circuit Industry Investment Fund Co., Ltd., (“China IC Fund”) entered into a co-investment agreement to form an investment consortium in connection with the proposed acquisition of STATS ChipPAC Ltd. (“STATS ChipPAC”), a leading provider of advanced semiconductor packaging and test services in the world and a company incorporated in the Republic of Singapore, shares of which are listed on the Singapore Exchange Securities Trading Limited.

 

On June 18, 2015, according to the co-investment agreement, the Group invested US$102 million as a capital contribution for 19.6% equity interest in Suzhou Changjiang Electric Xinke Investment Co., Ltd. (“Changjiang Xinke”), a company incorporated in Jiangsu province, China. The transaction was recorded as an investment in associate of the Group.

 

On June 26, 2015, JCET-SC (Singapore) Pte. Ltd. (“JCET-SC”), a company incorporated in the Republic of Singapore, the subsidiary of Changjiang Xinke, announced a voluntary conditional cash offer (the “Offer”) for all the shares in STATS ChipPAC at SGD0.46577 per share. On August 5, JCET-SC’s financial advisers announced, for and on behalf of JCET-SC, that all conditions to the Offer had been fulfilled and the Offer had become and was declared unconditional in all respects. The unconditional acceptance announcement offer was closed on August 27, 2015 and the acquisition was finished soon afterwards.

 

Furthermore, JCET granted the Company an option to sell the shares of Changjiang Xinke to JCET at an exercise price equivalent to the Company’s initial investment plus an annual return rate at any time after Stats ChipPAC was acquired.

 

Joint Venture Agreement in Relation to SMIC Advanced Technology Research & Development (Shanghai) Corporation

 

On June 23, 2015, the Company, Huawei, Qualcomm Global Trading Pte. Ltd. (“Qualcomm”), and IMEC International (“imec”) jointly issued a press release in relation to the formation of SMIC Advanced Technology Research & Development (Shanghai) Corporation, an equity joint venture company. The joint venture company will focus on R&D towards next generation CMOS logic technology and is designed to build China’s most advanced integrated circuit (IC) development R&D platform. SMIC Advanced Technology R&D (Shanghai) Corporation is majority owned by SMIC, while Huawei, imec, and Qualcomm are minority shareholders. The current focus of the joint venture company will be on developing 14nm logic technology.

 

 17 

 

 

Issue of Equity Securities under General Mandate

 

Issue of 4,700,000,000 New Ordinary Shares

On February 12, 2015, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with the China Integrated Circuit Industry Investment Fund Co., Ltd., a company established under the laws of the PRC (the “China IC Fund”) whereby (i) the Company has conditionally agreed to allot and issue to the China IC Fund, and the China IC Fund has conditionally agreed to subscribe, through its wholly-owned subsidiary incorporated in Hong Kong, for 4,700,000,000 new Ordinary Shares of par value of US$0.0004 each (the “New Share(s)”) at the subscription price of HK$0.6593 per New Share (the “Subscription Price”). The aggregate nominal value of the New Shares was US$1,880,000. The Subscription Price represented a discount of approximately 7.14% to the closing price of HK$0.710 per Ordinary Share as quoted on The Stock Exchange of Hong Kong Limited (“SEHK”) on February 12, 2015, being the last full trading day immediately before the execution of the Share Purchase Agreement.

 

On June 8, 2015, the New Shares, representing approximately 11.54% of the issued share capital of the Company as enlarged by the issue of the New Shares, were issued to Xinxin (Hongkong) Capital Co. (a wholly-owned subsidiary of the China IC Fund), Limited pursuant to the general mandate granted to the Directors by the shareholders at the annual general meeting of the Company held on June 27, 2014 and ranked pari passu in all respect with the existing Ordinary Shares in issue. The net proceeds were approximately US$399.5 million and were used for capital expenditure, debt repayment and general corporate purposes.

 

The Company considered that the China IC Fund would bring strategic value to the Company and the funds raised in this transaction would improve the working capital position of the Group and enhance its overall liquidity; the transaction therefore would enhance shareholders’ value and is in the interests of the Company and its shareholders as a whole.

 

Share Capital

 

During the year ended December 31, 2015, the Company issued 126,900,443 Ordinary Shares to certain of the eligible participants including employees, directors, officers, and service providers of the Company (“eligible participants”) pursuant to the Company’s 2004 Stock Option Plan (“2004 Stock Option Plan”), 75,546,693 Ordinary Shares to certain of the eligible participants pursuant to the Company’s amended and restated 2004 Equity Incentive Plan (“2004 Equity Incentive Plan”). During the year, there were 2,407,402 and 27,429,599 Ordinary Shares issued as a result of the exercise of equity awards granted pursuant to the Company’s 2014 stock option plan (the “2014 Stock Option Plan”) and the Company’s 2014 equity incentive plan (the “2014 Equity Incentive Plan”) which have replaced the 2004 Stock Option Plan and the 2004 Equity Incentive Plan, respectively, upon their termination.

 

Outstanding Share Capital as at December 31, 2015:  Number of
Shares
Outstanding
 
Ordinary  Shares   42,073,748,961 

 

Under the terms of the 2014 Equity Incentive Plan, the Compensation Committee may grant restricted share units (“RSU(s)”) to eligible participants. Each RSU represents the right to receive one Ordinary Share. RSUs granted to new employees and existing employees generally vest at a rate of 25% upon the first, second, third, and fourth anniversaries of the vesting commencement date. Upon vesting of the RSUs and subject to the terms of the Insider Trading Policy and the payment by the participants of applicable taxes, the Company will issue the relevant participants the number of Ordinary Shares underlying the awards of RSU. For the year ended December 31, 2015, the Compensation Committee of the Company granted a total of 146,852,985 RSUs.

 

 18 

 

 

As at December 31, 2015, a total of 304,512,677 RSUs granted pursuant to the terms of the 2004 Equity Incentive Plan and the 2014 Equity Incentive Plan, whether or not such RSUs were vested, remained outstanding. The vesting schedule of these outstanding Restricted Share Units is set forth below:

 

Vesting Dates  No. of Restricted Share Units Outstanding 
2015
1-Mar   127,345 
17-Jun   600,364 
5-Nov   561,114 
2016
1-Mar   91,345,911 
6-Mar   2,701,246 
15-Apr   80,000 
1-May   13,230,000 
4-May   80,000 
1-Jun   100,000 
15-Jun   130,000 
17-Jun   600,364 
7-Jul   100,000 
9-Jul   625,000 
8-Oct   100,000 
5-Nov   561,114 
2017
1-Mar   91,345,903 
6-Mar   2,701,246 
15-Apr   80,000 
4-May   80,000 
1-Jun   100,000 
15-Jun   130,000 
17-Jun   600,364 
7-Jul   100,000 
8-Oct   100,000 
5-Nov   561,114 
2018
1-Mar   58,229,735 
6-Mar   2,701,246 
15-Apr   80,000 
4-May   80,000 
1-Jun   100,000 
15-Jun   130,000 
7-Jul   100,000 
8-Oct   100,000 
5-Nov   561,114 
2019
1-Mar   32,398,250 
6-Mar   2,701,247 
15-Apr   80,000 
4-May   80,000 
1-Jun   100,000 
15-Jun   130,000 
7-Jul   100,000 
8-Oct   100,000 
Total   304,512,677 

 

Repurchase, Sale or Redemption of the Company’s Listed Securities

 

Neither the Company nor any of its subsidiaries has repurchased, sold or redeemed any of the Ordinary Shares during the year ended December 31, 2015.

 

 19 

 

 

Corporate Governance Practices

 

The HKSE’s Corporate Governance Code (the “CG Code”) as set out in Appendix 14 to the Hong Kong Stock Exchange Listing Rules contains code provisions (the “Code Provisions”) to which an issuer, such as the Company, is expected to comply or advise as to reasons for deviations and recommends best practices which an issuer is encouraged to implement (the “Recommended Practices”). The Company has adopted a set of Corporate Governance Policy (the “CG Policy”) since January 25, 2005 as its own code of corporate governance, which was amended from time to time to comply with the CG Code. The CG Policy, a copy of which can be obtained on the Company’s website at www.smics.com under “Investor Relations > Corporate Governance > Policy and Procedures”, incorporates all of the Code Provisions of the CG Code except for Code Provision E.1.3, which relates to the notice period of general meetings of the Company, and some of the Recommended Practices. In addition, the Company has adopted or put in place various policies, procedures, and practices in compliance with the provisions of the CG Policy.

 

During the year ended December 31, 2015, the Company was in compliance with all the Code Provisions set out in the CG Code except as explained below:

 

Code Provision A.6.7 of the CG Code requires that independent non-executive directors and other non- executive directors should attend general meetings and develop a balanced understanding of the views of shareholders. Mr. Sean Maloney, an independent non-executive Director, was not able to attend the AGM held on June 26, 2015 due to his overseas engagements during the meeting time. Mr. Tudor Brown, an independent non-executive Director, was not able to attend the extraordinary general meeting of the Company held on August 11, 2015 due to his other engagements during the meeting time.

 

Save as the aforesaid and in the opinion of the Directors, the Company had complied with all Code Provisions set out in the CG Code during the year ended December 31, 2015.

 

Model Code for Securities Transactions by Directors of Listed Issuers

 

The Company has adopted an Insider Trading Compliance Program (the “Insider Trading Policy”) which encompasses the requirements of the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Hong Kong Stock Exchange Listing Rules (the “Model Code”). The Company, having made specific enquiry of all Directors, confirms that all Directors have complied with the Insider Trading Policy and the Model Code throughout the year ended December 31, 2015. The senior management of the Company as well as all officers, Directors, and employees of the Company and its subsidiaries are also required to comply with the provisions of the Insider Trading Policy.

 

REVIEW BY AUDIT COMMITTEE

 

The Audit Committee of the Company has reviewed with the management of the Company, the accounting principles and practices accepted by the Company and has discussed with the Directors matters concerning internal controls and financial reporting of the Company, including a review of the audited financial statements of the Group for the year ended December 31, 2015.

 

 20 

 

 

CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME

For the year ended December 31, 2015

 

(In USD’000, except share and per share data)

 

   Notes  

Year ended

12/31/15

   Year ended
12/31/14
   Year ended
12/31/13
 
       USD’000   USD’000   USD’000 
Revenue   5    2,236,415    1,969,966    2,068,964 
Cost of sales        (1,553,795)   (1,486,514)   (1,630,528)
Gross profit        682,620    483,452    438,436 
Research and development expenses, net        (237,157)   (189,733)   (145,314)
Sales  and  marketing  expenses        (41,876)   (38,252)   (35,738)
General and administration expenses        (213,177)   (139,428)   (138,167)
Other operating income (expense), net   7    31,594    14,206    67,870 
Profit from operations        222,004    130,245    187,087 
Interest income        5,199    14,230    5,888 
Finance costs   8    (12,218)   (20,715)   (34,392)
Foreign exchange gains or losses        (26,349)   (5,993)   13,726 
Other gains or losses, net   9    55,611    18,210    4,010 
Share of (loss) profit of investment using equity method        (13,383)   2,073    2,278 
Profit before tax        230,864    138,050    178,597 
Income tax expense   10    (8,541)   (11,789)   (4,130)
Profit for the year   11    222,323    126,261    174,467 
Other comprehensive income (loss)                    
Items that may be reclassified subsequently to profit or loss                    
Exchange differences on translating foreign operations        (8,185)   (324)   731 
Change in value of available-for-sale financial assets        452         
Others        130         
Total comprehensive income for the year        214,720    125,937    175,198 
Profit (loss) for the year attributable to:                    
Owners of the Company        253,411    152,969    173,177 
Non-controlling  interests        (31,088)   (26,708)   1,290 
         222,323    126,261    174,467 
Total comprehensive income (loss) for the year attributable to:                    
Owners of the Company        245,803    152,645    173,908 
Non-controlling  interests        (31,083)   (26,708)   1,290 
         214,720    125,937    175,198 
Earnings per share                    
Basic   14    0.01    0.00    0.01 
Diluted   14    0.01    0.00    0.01 

 

 21 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As of December 31, 2015

 

(In USD’000, except share and per share data)

 

   Notes   12/31/15   12/31/14   12/31/13 
       USD’000   USD’000   USD’000 
Assets
Non-current assets
Property,  plant  and  equipment   17    3,903,818    2,995,086    2,528,834 
Land use right        91,030    135,331    136,725 
Intangible assets   18    224,279    207,822    215,265 
Investments in associates   20    181,331    57,631    29,200 
Investments in joint ventures   21    17,646         
Deferred tax assets   10    44,942    44,383    43,890 
Derivative financial instrument   22    30,173         
Other assets   23    32,078    30,867    6,237 
Total non-current assets        4,525,297    3,471,120    2,960,151 
Current assets
Inventories   25    387,326    316,041    286,251 
Prepayment and prepaid operating expenses        40,184    40,628    43,945 
Trade and other receivables   26    499,846    456,388    379,361 
Other financial assets   24    282,880    644,071    240,311 
Restricted  cash   27    302,416    238,051    147,625 
Cash and cash equivalent        1,005,201    603,036    462,483 
         2,517,853    2,298,215    1,559,976 
Assets  classified  as  held-for-sale   16    72,197    44    3,265 
Total current assets        2,590,050    2,298,259    1,563,241 
Total assets        7,115,347    5,769,379    4,523,392 

 

 22 

 

 

(In USD’000, except share and per share data)

 

   Notes   12/31/15   12/31/14   12/31/13 
       USD’000   USD’000   USD’000 
Equity and liabilities                    
Capital and reserves                    
Ordinary shares $0.0004 par value, 50,000,000,000  shares  authorized, 42,073,748,961, 35,856,096,167 and 32,112,307,101 shares issued and outstanding at December 31, 2015, 2014 and 2013, respectively   28    16,830    14,342    12,845 
Share premium   28    4,903,861    4,376,630    4,089,846 
Reserves   29    96,644    98,333    74,940 
Accumulated deficit   30    (1,287,479)   (1,540,890)   (1,693,859)
Equity attributable to owners of the Company        3,729,856    2,948,415    2,483,772 
Non-controlling  interests        460,399    359,307    109,410 
Total equity        4,190,255    3,307,722    2,593,182 
Non-current  liabilities                    
Borrowings   31    416,036    256,200    600,975 
Convertible bonds   32        379,394    180,563 
Bonds payable   33    493,207    491,579     
Deferred tax liabilities   10    7,293    69    167 
Deferred government funding        175,604    184,174    209,968 
Other liabilities   34    65,761         
Total  non-current  liabilities        1,157,901    1,311,416    991,673 
Current liabilities                    
Trade and other payables   35    1,047,766    794,361    393,890 
Borrowings   31    113,068    162,054    390,547 
Convertible bonds   32    392,632         
Deferred government funding        79,459    62,609    26,349 
Accrued liabilities   36    132,452    131,114    127,593 
Other financial liabilities   37    1,459         
Current tax liabilities   10    355    103    158 
Total current liabilities        1,767,191    1,150,241    938,537 
Total liabilities        2,925,092    2,461,657    1,930,210 
Total equity and liabilities        7,115,347    5,769,379    4,523,392 

 

 23 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended December 31, 2015

 

(In USD’000)

 

   Ordinary
shares
   Share
premium
   Equity-
settle
employee
benefits
reserve
   Foreign
currency
translation
reserve
   Change in
value of
available-
for-sale
financial
assets
   Convertible
bonds
equity
reserve
   Others   Accumulated
deficit
   Attributable
to  owner
of the
Company
   Non-
controlling
interest
   Total
Equity
 
   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
   (Note  28)   (Note  28)   (Note  29)   (Note  29)   (Note  29)   (Note  29)       (Note  30)             
                                             
Balance at December 31, 2012   12,800    4,083,588    42,232    3,916                (1,867,036)   2,275,500    952    2,276,452 
Profit for the year                               173,177    173,177    1,290    174,467 
Other comprehensive income for the year               731                    731        731 
Total comprehensive income for the year               731                173,177    173,908    1,290    175,198 
Exercise of stock options   45    6,641    (3,457)                       3,229        3,229 
Share-based  compensation           16,402                        16,402        16,402 
Capital contribution from non-controlling interest                                       108,000    108,000 
Purchased additional shares of subsidiaries       (383)                           (383)   (178)   (561)
Deconsolidation of  subsidiaries  due to loss  of  control               (94)                   (94)   (654)   (748)
Recognition of equity component of convertible  bonds                       15,210            15,210        15,210 
Subtotal   45    6,258    12,945    (94)       15,210            34,364    107,168    141,532 
Balance at December 31, 2013   12,845    4,089,846    55,177    4,553        15,210        (1,693,859)   2,483,772    109,410    2,593,182 
Profit for the year                               152,969    152,969    (26,708)   126,261 
Other comprehensive income for the year               (324)                   (324)       (324)
Total comprehensive income for the year               (324)               152,969    152,645    (26,708)   125,937 
Issuance of ordinary shares   1,411    268,362                            269,773        269,773 
Exercise of stock options   86    18,422    (9,025)                       9,483        9,483 
Share-based  compensation           18,388                        18,388        18,388 
Capital contribution from non-controlling interest                                       276,605    276,605 
Recognition of equity component of convertible  bonds                       14,354            14,354        14,354 
Subtotal   1,497    286,784    9,363            14,354            311,998    276,605    588,603 
Balance at December 31, 2014   14,342    4,376,630    64,540    4,229        29,564        (1,540,890)   2,948,415    359,307    3,307,722 
Profit for the year                               253,411    253,411    (31,088)   222,323 
Other comprehensive income for the year               (8,185)   447        130        (7,608)   5    (7,603)
Total comprehensive income for the year               (8,185)   447        130    253,411    245,803    (31,083)   214,720 
Issuance of ordinary shares   2,395    506,412                            508,807        508,807 
Exercise of stock options   93    20,819    (12,169)                       8,743        8,743 
Share-based  compensation           18,088                        18,088    241    18,329 
Capital contribution from non-controlling interest                                       132,082    132,082 

Deconsolidation of subsidiaries due to loss of control

                                       (148)   (148)
Subtotal   2,488    527,231    5,919                        535,638    132,175    667,813 
Balance at December 31, 2015   16,830    4,903,861    70,459    (3,956)   447    29,564    130    (1,287,479)   3,729,856    460,399    4,190,255 

 

 24 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended December 31, 2015

 

(In USD’000)

 

  

Year ended

12/31/15

   Year ended
12/31/14
   Year ended
12/31/13
 
   USD’000   USD’000   USD’000 
Profit for the year   222,323    126,261    174,467 
Adjustments for:
Income tax expense   8,541    11,789    4,130 
Amortization of intangible assets and land use right   50,541    43,102    44,987 
Depreciation  of  property,  plant  and  equipment   473,008    506,366    501,923 
Impairment loss of available-for-sale equipment           279 
Expense recognized in respect of equity-settled share-based payments   18,329    18,388    16,402 
Finance costs   12,218    20,715    34,392 
Gain on disposal of available-for-sale investment   (387)        
Gain on disposal of property, plant and equipment   (28,949)   (13,904)   (33,996)
Gain on disposal of subsidiaries           (28,304)
Loss (gain) on deconsolidation of subsidiaries   57    208    (5,419)
Interest income recognized in profit or loss   (5,199)   (14,230)   (5,888)
Bad debt allowance on trade receivables   528    1,616    617 
Impairment (reversal) loss recognized on inventories   (13,338)   29,577    (141)
Net (gain) loss arising on financial assets at fair value through  profit  or  loss   (52,834)   (8,649)   76 
Net loss (gain) arising on financial liabilities at fair value through  profit  or  loss   1,459        (25)
Net loss on foreign exchange   15,608         
Reversal of bad debt allowance on trade receivables   (541)   (59)   (1,213)
Share of loss (profit) of investment using equity method   13,383    (2,073)   (2,278)
Other non-cash expense       (769)   (413)
    714,747    718,338    699,596 
Operating cash  flows  before movements in  working  capital:
Increase in trade and other receivables   (39,902)   (89,232)   (33,375)
(Increase) decrease in inventories   (57,947)   (59,367)   8,595 
Increase in restricted cash relating to operating activities   (16,675)   (41,637)   (5,944)
(Increase) decrease in prepaid operating expenses   (856)   1,129    2,129 
(Increase) decrease in other assets   (6,476)   (1,731)   619 
Increase  (decrease)  in  trade  and  other  payables   39,096    79,340    (24,311)
Increase in deferred government funding   8,280    8,268    85,972 
Increase (decrease) in accrued liabilities and other liabilities   49,928    (3,768)   42,264 
Cash generated from operations   690,195    611,340    775,545 
Interest paid   (26,174)   (16,087)   (43,239)
Interest received   4,894    14,239    6,770 
Income  taxes  received  (paid)   282    (1,390)   (1,060)
Net cash generated from operating activities   669,197    608,102    738,016 

 

 25 

 

 

(In USD’000)

 

  

Year ended

12/31/15

   Year ended
12/31/14
   Year ended
12/31/13
 
   USD’000   USD’000   USD’000 
Investing activities               
Payments to acquire financial assets   (2,412,259)   (1,997,624)   (258,102)
Proceeds on sale of financial assets   2,782,181    1,602,513    39,245 
Payments for property, plant and equipment   (1,230,812)   (653,134)   (650,160)
Net proceeds after netting off land appreciation tax from  disposal  of  property,  plant  and  equipment  and assets classified as held for sale   87,890    52,911    61,099 
Proceeds from disposal of available-for-sale investment   1,204         
Payments for intangible assets   (29,384)   (49,285)   (45,425)
Payments for land use rights   (9,265)   (1,123)   (76,032)
Payments to acquire long-term investment   (160,777)   (49,034)   (562)
Change in restricted cash relating to investing activities   181,963    (48,411)   71,933 
Net cash inflow from disposition of disposal subsidiaries           57,743 
Net cash outflow from deconsolidation of subsidiaries   (297)   (936)   (6,799)
Others           (407)
Net cash used in investing activities   (789,556)   (1,144,123)   (807,467)
Financing  activities               
Proceeds from borrowings   341,176    376,554    905,127 
Repayment of borrowings   (453,730)   (952,383)   (1,008,698)
Proceeds from issuance of new shares   508,807    270,180     
Proceeds from issuance of convertible bonds       203,763    195,800 
Proceeds from issuance of corporate bonds       492,315     
Proceeds from exercise of employee stock options   8,743    9,483    3,229 
Repayment of promissory notes           (30,000)
Proceeds  from  non-controlling  interest-capital  contribution   132,082    276,771    108,000 
Net cash from financing activities   537,078    676,683    173,458 
Net increase in cash and cash equivalent   416,719    140,662    104,007 
Cash and cash equivalent at the beginning of the year   603,036    462,483    358,490 
Effects of exchange rate changes on the balance of cash held in foreign currencies   (14,554)   (109)   (14)
Cash and cash equivalent at the end of the year   1,005,201    603,036    462,483 

 

 26 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended December 31, 2015

 

1.General information

 

Semiconductor Manufacturing International Corporation (the “Company” or “SMIC”) was established as an exempt company incorporated under the laws of the Cayman Islands on April 3, 2000. The address of the principal place of business is 18 Zhangjiang Road, Pudong New Area, Shanghai, China, 201203. The registered address is at PO Box 309, Ugland House, Grand Cayman, KY1-1104 Cayman Islands. Semiconductor Manufacturing International Corporation is an investment holding company.

 

The Company and its subsidiaries (hereinafter collectively referred to as the “Group”) are mainly engaged in the computer-aided design, manufacturing, testing, packaging, and trading of integrated circuits and other semiconductor services, as well as designing and manufacturing semiconductor masks. The principal subsidiaries and their activities are set out in Note 19.

 

These financial statements are presented in US dollars, unless otherwise stated.

 

2.Application of new and revised International Financial Reporting Standards (“IFRSs”)

 

(a)New and revised IFRSs that are mandatorily effective for the year ended December 31, 2015

 

In the current year, the Group has adopted the following amendments to IFRSs that are mandatorily effective for an accounting period that begins on or after January 1, 2015. Such adoption did not have a material effect on the Group’s consolidated financial statements.

 

 27 

 

 

2.Application of new and revised International Financial Reporting Standards (“IFRSs”) (continued)

 

(a)New and revised IFRSs that are mandatorily effective for the year ended December 31, 2015 (continued)

Annual Improvements to IFRSs 2010–2012 Cycle

The amendments to IAS 24 clarify that the reporting entity is not required to disclose the compensation paid by the management entity (as a related party) to the management entity’s employee or directors, but it is required to disclose the amounts charged to the reporting entity by the management entity for services provided. The amendments are effective for annual periods beginning on or after July 1, 2014.

 

Annual Improvements to IFRSs 2011–2013 Cycle

The amendments to IFRS 3 clarify that IFRS 3 does not apply to the accounting for the formation of any joint arrangement under IFRS 11 in the financial statements of the joint arrangement. The amendments are prospectively effective for annual periods beginning on or after July 1, 2014 with early adoption permitted.

 

(b)New or revised IFRSs in issue but not yet effective

The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective:

 

New or revised IFRSs   Effective date
     
IFRS 9 — Financial Instruments   On or after July 1, 2018
IFRS 15 — Revenue from contracts with customers   On or after January 1, 2017
IFRS 16 — Leases   On or after January 1, 2019
Amendments to IFRS 11 — Accounting for acquisitions of interests in joint operations   On or after January 1, 2016
Amendments to IFRS 10, 12 and IAS 28 — Investment entities:  applying  the  consolidation  exception   On or after January 1, 2016
Amendments to IAS 1 — Disclosure initiative   On or after January 1, 2016
Amendments to IAS 16 and IAS 38 — Clarification of acceptable methods of depreciation and amortization   On or after January 1, 2016
Amendments to IFRS 10 and IAS 28 — Sale or contribution of assets between an investor and its associate or joint venture   On or after January 1, 2016
Amendments to IAS 27 — Equity method in separate financial statements   On or after January 1, 2016
Amendments to IFRSs — Annual Improvements to IFRSs 2012–2014  Cycle   On or after January 1, 2016

 

The Group is in the process of evaluating the impact of the new standards or amendments on its consolidated financial statements.

 

 28 

 

 

2.Application of new and revised International Financial Reporting Standards (“IFRSs”) (continued)

 

(c)New Hong Kong Companies Ordinance (Cap. 622)

The requirements of Part 9 “Accounts and Audit” of the new Hong Kong Companies Ordinance (Cap. 622) come into operation during the financial year, as a result, there are changes to presentation and disclosures of certain information in the consolidated financial statements. Major changes include: (i) Parent company balance sheet is no longer required to be presented as a primary statement. It is presented in the notes to the financial statements; (ii) More extensive disclosures are required for the benefits and interests of directors.

 

3.Significant accounting policies

 

Statement of compliance

The consolidated financial statements have been prepared in accordance with all applicable IFRS issued by the IASB. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited.

 

Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments that are measured at fair value as explained in the accounting policies set out below. The consolidated financial statements are presented in US dollars and all values are rounded to the nearest thousand, except when otherwise indicated.

 

Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36.

 

In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

 

 29 

 

 

3.Significant accounting policies (continued)

 

Basis of preparation (continued)

Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

 

Level 3 inputs are unobservable inputs for the asset or liability

 

The principal accounting policies are set out below.

 

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Group and entities (including structured entities) controlled by the Group. Control is achieved when the Group:

 

has power over the investee;

 

is exposed, or has rights, to variable returns from its involvement with the investee; and

 

has the ability to use its power to affect its returns.

 

The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

 

When the Group has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Group considers all relevant facts and circumstances in assessing whether or not the Group’s voting rights in an investee are sufficient to give it power, including:

 

the size of the Group’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

 

potential voting rights held by the Group, other vote holders or other parties;

 

rights arising from other contractual arrangements; and

 

any additional facts and circumstances that indicate that the Group has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

 

Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

 

 30 

 

 

3.Significant accounting policies (continued)

 

Basis of consolidation (continued)

Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non- controlling interests having a deficit balance.

 

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies.

 

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

 

Changes in the Group’s ownership interests in existing subsidiaries

Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Company.

 

When the Group loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39, when applicable, the cost on initial recognition of an investment in an associate or a joint venture.

 

Investments in associates

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

 

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income of the associates. When the Group’s share of losses of an associate exceeds the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate.

 

 31 

 

 

3.Significant accounting policies (continued)

 

Investments in associates (continued)

An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate. On acquisition of the investment in an associate, any excess of the cost of the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in profit or loss in the period in which the investment is acquired.

 

The requirements of IAS 39 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Group’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. The difference between the recoverable amount and the carrying amount is recognized as impairment loss in the profit or loss. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.

 

The Group discontinues the use of the equity method from the date when the investment ceases to be an associate, or when the investment is classified as held for sale. When the Group retains an interest in the former associate and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IAS 39. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, the Group accounts for all amounts previously recognized in other comprehensive income in relation to that associate on the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued.

 

When the Group reduces its ownership interest in an associate but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities.

 

When a group entity transacts with an associate of the Group, profits and losses resulting from the transactions with the associate are recognized in the Group’s consolidated financial statements only to the extent of interests in the associate that are not related to the Group. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

 32 

 

 

3.Significant accounting policies (continued)

 

Investments in joint ventures

The Group has applied IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method.

 

Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. The Group’s investments in joint ventures include goodwill identified on acquisition. Upon the acquisition of the ownership interest in a joint venture, any difference between the cost of the joint venture and the Group’s share of the net fair value of the joint venture’s identifiable assets and liabilities is accounted for as goodwill. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Group’s net investment in the joint ventures), the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.

 

Unrealized gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint ventures. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

Non-current assets held-for-sale

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

 

Non-current assets (and disposal groups) classified as held-for-sale are measured at the lower of their previous carrying amount and fair value less costs of disposal.

 

 33 

 

 

3.Significant accounting policies (continued)

 

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.

 

Sale of goods

The Group manufactures semiconductor wafers for its customers based on the customers’ designs and specifications pursuant to manufacturing agreements and/or purchase orders. The Group also sells certain semiconductor standard products to customers.

 

Revenue from the sale of goods is recognized when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:

 

the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;

 

the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

 

the amount of revenue can be measured reliably;

 

it is probable that the economic benefits associated with the transaction will flow to the Group; and

 

the costs incurred or to be incurred in respect of the transaction can be measured reliably.

 

Customers have the right of return within one year pursuant to warranty provisions. The Group typically performs tests of its products prior to shipment to identify yield rate per wafer. Occasionally, product tests performed after shipment identify yields below the level agreed with the customer. In those circumstances, the customer arrangement may provide for a reduction to the price paid by the customer or for the costs to return products and to ship replacement products to the customer. The Group estimates the amount of sales returns and the cost of replacement products based on the historical trend of returns and warranty replacements relative to sales as well as a consideration of any current information regarding specific known product defects at customers that may exceed historical trends.

 

Gain on sale of real estate property

Gain from sales of real estate property is recognized when all the following conditions are satisfied: 1) sales contract executed, 2) full payment collected, or down payment collected and non-cancellable mortgage contract is executed with borrowing institution, 3) and the respective properties have been delivered to the buyers.

 

Interest income

Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

 

 34 

 

 

3.Significant accounting policies (continued)

 

Foreign currencies

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Untied States dollar (“US dollar”), which is the Company’s functional and the Group’s presentation currency.

 

In preparing the financial statements of each individual group entity transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

Exchange differences on monetary items are recognized in profit or loss in the period in which they arise.

 

For the purposes of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into United States dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity (attributed to non-controlling interests as appropriate).

 

On the disposal of a foreign operation (i.e. a disposal of the Group’s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Company are reclassified to profit or loss.

 

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

 

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.

 

All other borrowing costs are recognized in profit or loss in the period in which they are incurred.

 

 35 

 

 

3.Significant accounting policies (continued)

 

Government funding

Government funding is not recognized in profit or loss until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the funding will be received.

 

Government funding relating to costs are deferred and recognized in profit or loss over the period necessary to match them with the costs that they are intended to compensate.

 

Government funding relating to property, plant and equipment, whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets, are recognized as deferred income in the consolidated statements of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

 

Government funding that is receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related cost are recognized in profit or loss in the period in which they become receivable.

 

Retirement benefits

The Group’s local Chinese employees are entitled to a retirement benefit based on their basic salary upon retirement and their length of service in accordance with a state-managed pension plan. The PRC government is responsible for the pension liability to these retired staff. The Group is required to make contributions to the state-managed retirement plan at a main rate equal to 20.0% to 21.0% (the standard in Shenzhen site ranges from 13% to 14% according to Shenzhen government regulation) of the monthly basic salary of current employees. The Group has no further payment obligations once the contributions have been paid. The costs are recognized in profit or loss when incurred.

 

Share-based payment arrangements

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in Note 38.

 

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve. When share options are exercised, the amount previously recognized in the reserve will be transferred to share premium.

 

Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.

 

 36 

 

 

3.Significant accounting policies (continued)

 

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

 

Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the consolidated statements of profit or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

 

Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition other than in a business combination of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

 

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

 

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

 

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

 

 37 

 

 

3.Significant accounting policies (continued)

 

Property, plant and equipment

Property, plant and equipment held for use in the production or supply of goods or services, or for administrative purposes, are stated in the consolidated statement of financial position at their costs, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Such cost includes the cost of replacing part of the property, plant and equipment and borrowing costs for long- term construction projects if the recognition criteria are met.

 

The Group constructs certain of its plant and equipment. In addition to costs under the construction contracts, external costs that are directly related to the construction and acquisition of such plant and equipment are capitalized. Depreciation is recorded at the time assets are ready for their intended use. Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

 

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the profit or loss during the financial period in which they are incurred.

 

An item at property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.

 

Depreciation is recognized so as to write off the cost of items of property, plant and equipment other than properties under construction over their estimated useful lives, using the straight-line method. The estimated useful lives and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

 

The following useful lives are used in the calculation of depreciation.

 

Buildings 25 years
Plant and equipment 5–10 years
Office equipment 3–5  years

 

Land use right

Land use rights, which are all located in the PRC, are recorded at cost and are charged to profit or loss ratably over the term of the land use agreements which range from 50 to 70 years.

 

 38 

 

 

3.Significant accounting policies (continued)

 

Intangible assets

Acquired intangible assets which consists primarily of technology, licenses and patents, are carried at cost less accumulated amortization and any accumulated impairment loss. Amortization is computed using the straight-line method over the expected useful lives of the assets of three to ten years. The estimated useful life and amortization method are reviewed at the end of each reporting period, with effect of any changes in estimate being accounted for on a prospective basis.

 

Impairment of tangible and intangible assets other than goodwill

At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash- generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

 

When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized as income.

 

Cash and cash equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subjected to an insignificant risk of changes in value, with original maturities of three months or less.

 

Restricted cash

Restricted cash consists of bank deposits pledged against letters of credit and short-term credit facilities and unused government funding for certain research and development projects. Changes of restricted cash pledged against letter of credit and short-term credit facilities and changes of restricted cash paid for property, plant and equipment are presented as investing activity in consolidated statements of cash flows. Changes of restricted cash of unused government funding for expensed research and development activities are presented as operating activity in consolidated statements of cash flows.

 

 39 

 

 

3.Significant accounting policies (continued)

 

Inventories

Inventories are stated at the lower of cost and net realizable value. Costs of inventories are determined on a weighted average basis. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

 

Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

 

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).

 

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

 

Financial instruments

Financial assets and financial liabilities are recognized when a group entity becomes a party to the contractual provisions of the instruments.

 

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities other than financial assets and financial liabilities at fair value through profit or loss are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

 

Financial assets

Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (“FVTPL”) and ‘available-for-sale’ (“AFS”) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

 

 40 

 

 

3.Significant accounting policies (continued)

 

Financial assets (continued)

Effective interest method

The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

 

Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL.

 

Financial assets at FVTPL

Financial assets are classified as at FVTPL when the financial asset is held for trading.

 

A financial asset is classified as held for trading if:

 

it has been acquired principally for the purpose of selling in the near term; or

 

it is a part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or

 

it is a derivative that is not designated and effective as a hedging instrument.

 

Financial assets at FVTPL (including foreign currency forward contracts, cross currency swap contracts, put option and financial products sold by banks) are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ’other gains and losses’ line item.

 

Available-for-sale financial assets (AFS financial assets)

AFS financial assets are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

 

AFS financial assets are initially recognized at fair value plus transaction costs and subsequently carried at fair value, with changes in fair value recognized in other comprehensive income.

 

 41 

 

 

3.Significant accounting policies (continued)

 

Financial assets (continued)

Available-for-sale financial assets (AFS financial assets) (continued)

When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the income statement as “other gains and losses”.

 

Interest on available-for-sale securities calculated using the effective interest method is recognized in the income statement as part of “other income”.

 

Dividends on AFS equity instruments are recognized in profit or loss when the Group’s right to receive the dividends is established.

 

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables including trade and other receivables, and cash and bank balances and restricted cash are measured at amortized cost using the effective interest method, less any impairment loss.

 

Interest income is recognized by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial.

 

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

 

For all other financial assets, objective evidence of impairment could include:

 

significant financial difficulty of the issuer or counterparty; or

 

breach of contract, such as a default or delinquency in interest or principal payments; or

 

it becoming probable that the borrower will enter bankruptcy or financial re-organization.

 

 42 

 

 

3.Significant accounting policies (continued)

 

Financial assets (continued)

Impairment of financial assets (continued)

For certain categories of financial assets, such as trade receivables, assets are assessed for impairment on a collective basis even if they were assessed not to be impaired individually. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as observable changes in national or local economic conditions that correlate with default on receivables.

 

For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

 

For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

 

For assets classified as available for sale, it is assessed at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired.

 

For debt securities, if any such evidence exists the cumulative loss — measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss — is removed from equity and recognized in profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the consolidated statement of profit or loss.

 

For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists the cumulative loss — measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss — is removed from equity and recognized in profit or loss. Impairment losses recognized in the consolidated statement of profit or loss on equity instruments are not reversed through the consolidated statement of profit or loss.

 

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

 

 43 

 

 

3.Significant accounting policies (continued)

 

Financial assets (continued)

Derecognition of financial assets

The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

 

On derecognition of a financial asset in its entirety the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

 

Financial liabilities and equity instruments

Classification as debt or equity

Debt and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

 

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. Equity instruments issued by the Group are recognized at the proceeds received, net of direct issue costs.

 

Convertible Bonds

The component parts of the convertible bonds issued by the Group are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Group’s own equity instruments is an equity instrument.

 

At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible instruments. This amount is recorded as a liability on an amortized cost basis using the effective interest method until extinguished upon conversion or at the instrument’s maturity date.

 

 44 

 

 

3.Significant accounting policies (continued)

 

Financial liabilities and equity instruments (continued)

Convertible Bonds (continued)

The conversion option classified as equity is determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole. This is recognized and included in equity, net of income tax effects, and is not subsequently remeasured. In addition, the conversion option classified as equity will remain in equity until the conversion option is exercised, in which case, the balance recognized in equity will be transferred to share premium. Where the conversion option remains unexercised at the maturity date of the convertible note, the balance recognized in equity will be transferred to retained earnings. No gain or loss is recognized in profit or loss upon conversion or expiration of the conversion option.

 

The Group assesses if the embedded derivatives in respect of the early redemption features are deemed to be clearly and closely related to the host debt contract. Embedded derivatives need not be separated if they are regarded as closely related to its host contract. If they are not, they would be separately accounted for.

 

Transaction costs that relate to the issue of the convertible bonds are allocated to the liability and equity components in proportion to the allocation of the gross proceeds. Transaction costs relating to the equity component are charged directly to equity. Transaction costs relating to the liability component are included in the carrying amount of the liability portion and amortized over the period of the convertible bonds using the effective interest method.

 

Financial liabilities

Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.

 

Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL (including cross currency swap contracts) when the financial liability is held for trading.

 

Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest paid on the financial liability and is included in the ‘other gains and losses’ line item. Fair value is determined in the manner described in Note 39.

 

Other financial liabilities

Other financial liabilities (including borrowings, trade and other payables, promissory notes, long-term financial liabilities and bonds payable) are subsequently measured at amortized cost using the effective interest method.

 

The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability or (where appropriate) shorter period, to the net carrying amount on initial recognition.

 

 45 

 

 

3.Significant accounting policies (continued)

 

Financial liabilities and equity instruments (continued)

Financial liabilities (continued)

Derecognition of financial liabilities

The Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.

 

Derivative financial instruments

The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risks, including foreign exchange forward contracts, interest rate swaps and cross currency swaps. Further details of derivative financial instruments are disclosed in Note 39.

 

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

 

4.Critical accounting judgments and key sources of estimation uncertainty

 

In the application of the Group’s accounting policies, which are described in Note 3, the Group is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Key sources of estimation uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

 

Inventories

Inventories are stated at the lower of cost (weighted average) or net realizable value (NRV), with NRV being the “estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale”. The Group estimates the recoverability for such finished goods and work-in-progress based primarily upon the latest invoice prices and current market conditions. If the NRV of an inventory item is determined to be below its carrying value, the Group records a write-down to cost of sales for the difference between the carrying cost and NRV.

 

 46 

 

 

4.Critical accounting judgments and key sources of estimation uncertainty (continued)

 

Key sources of estimation uncertainty (continued)

Long-lived assets

The Group assesses the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of asset or cash-generating unit (“CGU”) may not be recoverable. Factors that the Group considers in deciding when to perform an impairment review include, but are not limited to significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets.

 

An impairment analysis is performed at the lowest level of identifiable independent cash flows for an asset or CGU. An impairment exists when the carrying value of an asset or cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model.

 

The Group makes subjective judgments in determining the independent cash flows that can be related to a specific CGU based on its asset usage model and manufacturing capabilities. The Group measures the recoverability of assets that will continue to be used in the Group’s operations by comparing the carrying value of CGU to the Group’s estimate of the related total future discounted cash flows. If a CGU’s carrying value is not recoverable through the related discounted cash flows, the impairment loss is measured by comparing the difference between the CGU’s carrying value and its recoverable amount, based on the best information available, including market prices or discounted cash flow analysis. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash-inflows and the growth rate and sales margin used for extrapolation purposes.

 

In order to remain technologically competitive in the semiconductor industry, the Group has entered into technology transfer and technology license arrangements with third parties in an attempt to advance the Group’s process technologies. The payments made for such technology licenses are recorded as an intangible asset or as a deferred cost and amortized on a straight-line basis over the estimated useful life of the asset. The Group routinely reviews the remaining estimated useful lives of these intangible assets and deferred costs. The Group also evaluates these intangible assets and deferred costs for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. When the carrying amounts of such assets are determined to exceed their recoverable amounts, the Group will impair such assets and write down their carrying amounts to recoverable amount in the year when such determination was made.

 

 47 

 

 

4.Critical accounting judgments and key sources of estimation uncertainty (continued)

 

Key sources of estimation uncertainty (continued)

Share-based Compensation Expense

The fair value of options and shares issued pursuant to the Group’s option plans at the grant date was estimated using the Black-Scholes option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected term of the options, the estimated forfeiture rates and the expected stock price volatility. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The Group estimated forfeiture rates using historical data to estimate option exercise and employee termination within the pricing formula. The Group uses projected volatility rates based upon the Group’s historical volatility rates. These assumptions are inherently uncertain. Different assumptions and judgments would affect the Group’s calculation of the fair value of the underlying ordinary shares for the options granted, and the valuation results and the amount of share-based compensation would also vary accordingly. Further details on share-based compensation are disclosed in note 38.

 

Taxes

Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective domicile of the Group companies.

 

Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with tax planning strategies.

 

As at December 31, 2015, a deferred tax asset of US$0.4 million (December 31, 2014: US$0.5 million and December 31, 2013: nil) in relation to unused tax losses recognized in the Group’s consolidated statement of financial position. The realizability of the deferred tax asset mainly depends on whether sufficient profits or taxable temporary differences will be available in the future. In cases where the actual future profits generated are less than expected, a material reversal of deferred tax assets may arise, which would be recognized in profit or loss for the period in which such a reversal takes place. Further details on taxes are disclosed in Note 10.

 

 48 

 

 

4.Critical accounting judgments and key sources of estimation uncertainty (continued)

 

Key sources of estimation uncertainty (continued)

Fair value of financial instruments

Some of the Group’s assets and liabilities are measured at fair value for financial reporting purposes.

 

In estimating the fair value of an asset or a liability, the Group uses market-observable data to the extent it is available. Where Level 1 inputs are not available, the Group engages third party qualified valuers to perform the valuation.

 

The Group uses valuation techniques that include inputs that are not based on observable market data to estimate the fair value of certain types of financial instruments. Notes 39 provide detailed information about the valuation techniques, inputs and key assumptions used in the determination of the fair value of various assets and liabilities.

 

Impairment of trade and other receivable

The Group assesses at the end of each reporting period whether there is any objective evidence that trade and other receivable is impaired. To determine whether there is objective evidence of impairment, the Group considers factors such as the probability of insolvency or significant financial difficulties of the debtor and default or significant delay in payments.

 

When there is objective evidence of impairment loss, the Group takes into consideration the estimation of future cash flows. The amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (that is, the effective interest rate computed at initial recognition). Where the actual future cash flows are less than expected, a material impairment loss may arise. The carrying amount of the Group’s trade and other receivable at the end of the reporting period is disclosed in Note 26.

 

5.Segment information

 

The Group is engaged principally in the computer-aided design, manufacturing and trading of integrated circuits. The Group’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about resources allocation and assessing performance of the Group. The Group operates in one segment. The measurement of segment profits is based on profit from operation as presented in the statements of profit or loss and other comprehensive income.

 

The Group operates in three principal geographical areas — United States, Europe, and Asia Pacific. The Group’s operating revenue from customers, based on the location of their headquarters, is detailed below.

 

 49 

 

 

5.Segment information (continued)

 

   Revenue from external customers 
  

Year ended

12/31/15

   Year ended
12/31/14
   Year ended
12/31/13
 
   USD’000   USD’000   USD’000 
United States   776,223    855,792    1,002,699 
Mainland China and Hong Kong   1,066,558    852,204    836,771 
Eurasia*   393,634    261,970    229,494 
    2,236,415    1,969,966    2,068,964 

 

*Not including Mainland China and Hong Kong

 

The Group’s operating revenue by product and service type is detailed below:

 

   Revenue by product and service type 
  

year ended

12/31/15

   year ended
12/31/14
   year ended
12/31/13
 
   USD’000   USD’000   USD’000 
Sales of wafers   2,134,943    1,864,524    1,952,774 
Mask making, testing and others   101,472    105,442    116,190 
    2,236,415    1,969,966    2,068,964 

 

The Group’s business is characterized by high fixed costs relating to advanced technology equipment purchases, which result in correspondingly high levels of depreciation expenses. The Group will continue to incur capital expenditures and depreciation expenses as it equips and ramps-up additional fabs and expand its capacity at the existing fabs. The following table summarizes property, plant and equipment of the Group by geographical location.

 

   Property, plant and equipment 
   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
United States   95    124    33 
Europe   5    4    4 
Taiwan   122    9    14 
Hong  Kong   3,040    3,240    3,440 
Mainland  China   3,900,556    2,991,709    2,525,343 
    3,903,818    2,995,086    2,528,834 

 

 50 

 

 

6.Significant customers

 

The following table summarizes net revenue or gross accounts receivable for customers which accounted for 10% or more of net revenue and gross accounts receivable:

 

   Net revenue   Gross accounts receivable 
   Year ended  December 31,   December 31, 
   2015   2014   2013   2015   2014   2013 
Customer A   366,696    483,430    473,699    75,643    107,475    109,778 
Customer B   324,267    *    *    50,068    *    * 
Customer C   215,527    *    270,230    25,548    *    19,619 
Customer D   168,352    *    *    55,852    *    * 
                               
Customer A   16%   25%   23%   19%   25%   31%
Customer B   15%   *    *    13%   *    * 
Customer C   10%   *    13%   6%   *    6%
Customer D   8%   *    *    14%   *    * 

 

* Less than 10% of net revenue and gross accounts receivable in the period.

 

7.Other operating income (expense), net

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Gain on disposal of property, plant and equipment and assets classified as held-for-sale     28,949       13,904       33,996  
Gain on disposal of subsidiaries                 28,304  
(Loss) gain on deconsolidation of subsidiaries     (57 )     (208 )     5,419  
Others     2,702       510       151  
      31,594       14,206       67,870  

 

The gain on disposal of property, plant and equipment and assets classified as held-for-sale for the year ended December 31, 2015, 2014 and 2013 was primarily from the sales of the staff living quarters in Shanghai and Beijing to employees.

 

 51 

 

  

8.Finance costs

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Interest on:                        
Bank and other borrowings                        
— wholly repayable within five years     6,782       19,245       45,924  
— not wholly repayable within five years     202             1,440  
Interest on convertible bonds     13,238       9,614       1,173  
Interest on corporate bonds     22,253       5,554        
Accretion of interest to preferred shareholders of a subsidiary                 1,683  
Total interest expense for financial liabilities not classified as at FVTPL     42,475       34,413       50,220  
Less: amounts capitalized     (30,257 )     (13,698 )     (15,828 )
      12,218       20,715       34,392  

 

The weighted average effective interest rate on funds borrowed generally is 3.75% per annum (2014: 2.91% per annum and 2013: 4.42% per annum).

 

9.Other gains and losses, net

 

For the year ended December 31, 2015, other gains or losses, net were US$55.6 million (2014: US$18.2 million and 2013: US$4.0 million), within which the changes of fair value of the financial products were US$22.5 million (2014: US$14.5 million and 2013: US$0.4 million) and the changes of far value of the derivative financial instruments were US$28.9 million (2014: nil and 2013: nil).

 

10.Income taxes

 

Income tax recognized in profit or loss

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Current tax — Enterprise Income Tax     (47 )     1,226       957  
Deferred tax     6,665       (591 )     (783 )
Current tax — Land Appreciation Tax     1,923       11,154       3,956  
Total income tax expense raised in the current year     8,541       11,789       4,130  

 

 52 

 

 

10.Income taxes (continued)

 

Income tax recognized in profit or loss (continued)

 

The income tax expense for the year can be reconciled to the accounting profit as follows:

 

   

Year ended

12/31/15

    Year ended
12/31/14
    Year ended
12/31/13
 
    USD’000     USD’000     USD’000  
Profit before tax   230,864     138,050     178,597  
Income tax expense calculated at 15% (2014: 15% and 2013:15%)     34,630       20,708       26,790  
Effect of expenses not deductible for tax purpose                 1,247  
Effect of tax holiday and tax concession     (54,483 )     (12,032 )     (3,045 )
Tax losses for which no deferred tax assets were recognized     25,732       20,134        
Utilization of previously unrecognized tax losses and temporary  differences     (3,687 )     (32,818 )     (23,042 )
Effect of different tax rates of subsidiaries operating in other jurisdictions     4,226       6,387       (641 )
Others     488       (71 )     (578 )
Land Appreciation Tax (after tax)     1,635       9,481       3,399  
Income tax expense     8,541       11,789       4,130  

 

The tax rate used for the 2015, 2014 and 2013 reconciliation above is the corporate tax rate of 15% payable by most of the Group’s entities in Mainland China under tax law in that jurisdiction.

 

Current tax liabilities

 

 
      12/31/15       12/31/14       12/31/13  
    USD’000       USD’000       USD’000  
Current tax liabilities                        
Income tax payable — Land Appreciation Tax                 73  
Income tax payable — Others     355       103       85  
      355       103       158  

 

 53 

 

 

10.Income taxes (continued)

 

Deferred tax balances

 

The following is the analysis of deferred tax assets (liabilities) presented in the consolidated statement of financial position:

 

      12/31/15       12/31/14       12/31/13  
      USD’000       USD’000       USD’000  
Deferred tax assets     44,942       44,383       43,890  
Deferred tax liabilities     (7,293 )     (69 )     (167 )
      37,649       44,314       43,723  

  

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Deferred tax assets            
Net operating loss carry forwards   419    524     
Property plant and equipment   44,523    43,859    43,890 
Deferred tax assets   44,942    44,383    43,890 
Deferred tax liabilities               
Capitalized interest   (3)   (69)   (167)
Property plant and equipment   (7,290)        
Deferred tax liabilities   (7,293)   (69)   (167)

 

2015.12.31

 

     

Opening

balance

      Recognized
in profit
or loss
      Closing
balance
 
      USD’000       USD’000       USD’000  
Deferred tax (liabilities)/assets in relation to:                        
Property plant and equipment     43,859       (6,626 )     37,233  
Capitalized interest     (69 )     66       (3 )
Others     524       (105 )     419  
      44,314       (6,665 )     37,649  

 

2014.12.31

 

      Opening
balance
      Recognized
 in profit
or loss
      Closing
balance
 
      USD’000       USD’000       USD’000  
Deferred tax (liabilities)/assets in relation to:                        
Property  plant  and  equipment     43,890       (31 )     43,859  
Capitalized interest     (167 )     98       (69 )
Others           524       524  
      43,723       591       44,314  

 

 54 

 

  

10.Income taxes (continued)

 

Deferred tax balances (continued)

 

2013.12.31

 

      Opening
balance
      Recognized
in profit
or loss
      Closing
balance
 
      USD’000       USD’000       USD’000  
Deferred tax (liabilities)/assets in relation to:                        
Property plant  and  equipment     38,955       4,935       43,890  
Allowances and reserves     3,829       (3,829 )      
Accrued  expenses     224       (224 )      
Capitalized interest     (373 )     206       (167 )
Unrealized exchange gain     (64 )     64        
Depreciation for asset held for sale     (3 )     3        
Others     372       (372 )      
      42,940       783       43,723  

 

Under the Law of the People’s Republic of China (the “PRC”) on Enterprise Income Tax, or the EIT Law, the profits of a foreign invested enterprise arising in 2008 and beyond that distributed to its immediate holding company who is a non-PRC tax resident will be subject to a withholding tax rate of 10%. A lower withholding tax rate may be applied if there is a favorable tax treaty between mainland China and the jurisdiction of the foreign holding company. For example, holding companies in Hong Kong that are also tax residents in Hong Kong (which should have commercial substance and proceed the formal treaty benefit application with in-charge tax bureau) are eligible for a 5% withholding tax on dividends under the Tax Memorandum between China and the Hong Kong Special Administrative Region.

 

The Company is incorporated in the Cayman Islands, where it is not currently subject to taxation.

 

The EIT law (became effective on January 1, 2008) applies a uniform 25% enterprise income tax rate to both tax resident enterprise and non-tax resident enterprise, except where a special preferential rate applies.

 

Pursuant to Caishui Circular [2008] No. 1 (“Circular No. 1”) promulgated on February 22, 2008, integrated circuit production enterprises whose total investment exceeds RMB8,000 million (approximately US$1,095 million) or whose integrated circuits have a line width of less than 0.25 micron are entitled to a preferential tax rate of 15%. Enterprises with an operation period of more than 15 years are entitled to a full exemption from income tax for five years starting from the first profitable year after utilizing all prior years’ tax losses and 50% reduction of the tax for the following five years. Pursuant to Caishui Circular [2009] No. 69 (“Circular No. 69”), the 50% reduction should be based on the statutory tax rate of 25%.

 

On January 28, 2011, the State Council of China issued Guofa [2011] No. 4 (“Circular No. 4”), the Notice on Certain Policies to Further Encourage the Development of the Software and Integrated Circuit Industries which reinstates the EIT incentives stipulated by Circular No. 1 for the software and integrated circuit enterprises.

 

 55 

 

  

10.Income taxes (continued)

 

Deferred tax balances (continued)

On April 20, 2012, State Tax Bureau issued CaiShui [2012] No. 27 (“Circular No. 27”), stipulating the income tax policies for the development of integrated circuit industry. Circular No. 1 was partially abolished by Circular No. 27 and the preferential taxation policy in Circular No. 1 was replaced by Circular No. 27.

 

On July 25, 2013, State Tax Bureau issued [2013] No. 43 (“Circular No. 43”), clarifying that the accreditation and preferential tax policy of integrated circuit enterprise established before December 31, 2010, is applied pursuant to Circular No. 1.

 

The detailed tax status of SMIC’s principal PRC entities with tax holidays is elaborated as follows:

 

1)Semiconductor Manufacturing International (Shanghai) Corporation (“SMIS” or “SMIC Shanghai”) Pursuant to the relevant tax regulations, SMIS is qualified as an integrated circuit enterprise and enjoyed a 10-year tax holiday (five year full exemption followed by five year half reduction) beginning from 2004 after utilizing all prior years’ tax losses. The income tax rate for SMIS was 15% in 2015 (2014: 15% and 2013: 12.5%).

 

2)Semiconductor Manufacturing International (Tianjin) Corporation (“SMIT” or “SMIC Tianjin”)
  In accordance with Circular No. 43 and Circular No. 1, SMIT is qualified as an integrated circuit enterprise and enjoying a 10-year tax holiday (five year full exemption followed by five year half reduction) beginning from 2013 after utilizing all prior years’ tax losses. The income tax rate for SMIT was 0% from 2013 to 2017 and 12.5% from 2018 to 2022. After that, the income tax rate will be 15%.

 

3)Semiconductor Manufacturing International (Beijing) Corporation (“SMIB” or “SMIC Beijing”)
  In accordance with Circular No. 43 and Circular No. 1, SMIB is qualified as an integrated circuit enterprise and enjoying a 10-year tax holiday (five year full exemption followed by five year half reduction) beginning from 2015 after utilizing all prior years’ tax losses. The income tax rate for SMIB was 0% from 2015 to 2019 and 12.5% from 2020 to 2024. After that, the income tax rate will be 15%.

 

4)Semiconductor Manufacturing International (Shenzhen) Corporation (“SMIC Shenzhen”), Semiconductor Manufacturing North China (Beijing) Corporation (“SMNC”) and SJ Semiconductor (Jiangyin) Corporation (“SJ Jiangyin”)
  In accordance with Circular No. 43, Circular No. 1 and Circular No. 27, SMIC Shenzhen, SMNC and SJ Jiangyin are entitled to the preferential tax rate of 15% and 10-year tax holiday (five year full exemption followed by five year half reduction) subsequent to its first profit-making year after utilizing all prior tax losses on or before December 31, 2017. SMIC Shenzhen, SMNC and SJ Jiangyin were in accumulative loss positions as of December 31, 2015 and the tax holiday has not begun to take effect.
   
  All the other PRC entities of SMIC were subject to income tax rate of 25%.

  

 56 

 

  

10.Income taxes (continued)

 

Unused tax losses

At the end of the reporting period, no deferred tax asset was recognized in respect of tax losses of US$577.3 million (December 31, 2014: US$532.8 million and December 31, 2013: US$851.7 million) due to the unpredictability of future profit streams, of which US$228.0 million, US$156.2 million, US$8.9 million, US$81.3 million and US$102.9 million will expire in 2016, 2017, 2018, 2019 and 2020, respectively.

 

11.Profit (loss) for the year

 

Profit (loss) for the year has been arrived at after charging (crediting)

11.1 Impairment losses (reversal of impairment losses) on trade receivables

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Allowance  on  trade  receivables (see Note 26)     528       1,616       617  
Reversal of allowance on doubtful trade receivables (see Note 26)     (541 )     (59 )     (1,213 )
      (13 )     1,557       (596 )

  

11.2 Depreciation and amortization expense

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Depreciation of property, plant and equipment     473,008       506,366       501,923  
Amortization of intangible assets and land use right     50,541       43,102       44,987  
Total depreciation and amortization expense     523,549       549,468       546,910  

 

11.3 Employee benefits expense

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Wages, salaries and social security contributions     299,267       249,622       233,025  
Bonus     107,859       50,157       68,618  
Paid  annual  leave     66       796       541  
Non-monetary  benefits     21,414       17,231       17,937  
Equity-settled share-based payments (Note 38)     18,329       18,388       16,402  
Total employee benefits expense     446,935       336,194       336,523  

 

 57 

 

  

11.Profit (loss) for the year (continued)

 

Profit (loss) for the year has been arrived at after charging (crediting) (continued)

11.4 Royalties expense

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Royalties  expense     36,262       26,344       32,546  

 

11.5 Government funding

Government funding under specific R&D projects

The Group received government funding (including those with primary condition that the Group should purchase, construct or otherwise acquire non-current assets) of US$40.2 million, US$57.3 million and US$145.8 million and recognized US$34.3 million, US$37.4 million and US$26.9 million as reductions of certain R&D expenses in 2015, 2014 and 2013 for several specific R&D projects respectively. The government funding is recorded as a liability upon receipt and recognized as reduction of R&D expenses until the milestones specified in the terms of the funding have been reached.

 

Government funding for specific intended use

The Group received government funding of US$4.9 million, US$21.4 million and US$7.1 million and recognized US$4.9 million, US$21.4 million and US$7.1 million as reduction of interest expense in 2015, 2014 and 2013 respectively. The government funding is recorded as a liability upon receipt and recognized as reduction of interest expense until the requirements (if any) specified in the terms of the funding have been reached.

 

11.6 Auditors’ remuneration

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Audit services     1,322       1,568       1,187  
Non-audit services     65       94        

 

 58 

 

 

12.Directors’ remuneration

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD’000       USD’000       USD’000  
Salaries     2,384       2,216       1,756  
Equity-settled share-based payments     1,550       1,305       1,504  
      3,934       3,521       3,260  

 

The equity-settled share-based payments granted to directors include both stock options and restricted share units (“RSUs”).

 

The Group granted 30,917,241, 7,773,789 and 27,083,220 options to purchase ordinary shares of the Company to the directors in 2015, 2014 and 2013, respectively. During the year ended December 31, 2015, 18,353,433 stock options were exercised and 1,117,811 stock options were expired. During the year ended December 31, 2014, 1,123,074 stock options were exercised and 3,369,223 stock options were expired. And during the year ended December 31, 2013, 1,000,000 stock options were exercised and 4,634,877 stock options were expired.

 

The Group granted 10,804,985, 2,910,836 and nil RSUs to purchase ordinary shares of the Company to the directors in 2015, 2014 and 2013, respectively. During the year ended December 31, 2015, 12,377,826 RSUs automatically vested and no RSUs were forfeited. During the year ended December 31, 2014, 12,250,480 RSUs automatically vested and no RSUs were forfeited. And during the year ended December 31, 2013, 11,650,116 RSUs automatically vested and no RSUs were forfeited.

 

In 2015, 2014 and 2013, no emoluments were paid by the Group to any of the directors as an inducement to join or upon joining the Group or as compensation for loss of office. In 2015, 2014 and 2013, no directors waived any emoluments.

 

(a)Independent non-executive directors

The fees paid or payable to independent non-executive directors of the Company during the year were as follows:

 

 

     

Salaries and

wages

      Employee
settle share-
based payment
      Total
remuneration
 
      USD’000       USD’000       USD’000  
2015                        
William Tudor  Brown     47       47       94  
Sean Maloney     50       46       96  
Lip-Bu  Tan     70             70  
Frank Meng***     28       6       34  
Carmen I-Hua Chang     42       149       191  
      237       248       485  

 

 59 

 

 

12.Directors’ remuneration (continued)

 

(a)Independent non-executive directors (continued)

 

      Salaries and
wages
      Employee
settle share-
based payment
      Total
remuneration
 
      USD’000       USD’000       USD’000  
2014                        
William Tudor  Brown     57       90       147  
Sean Maloney     62       87       149  
Lip-Bu Tan     92       1       93  
Frank Meng***     76       18       94  
Carmen I-Hua Chang     13       59       72  
      300       255       555  

  

       Employee
    
   Salaries and
wages
   settle share-
based
payment
  
Total
remuneration
 
  USD’000   USD’000   USD’000 
2013            
Tsuyoshi Kawanishi   20    5    25 
William Tudor Brown   18    45    63 
Sean Maloney   27    65    92 
Lip-Bu Tan   65    5    70 
Frank Meng***   54    36    90 
    184    156    340 

 

There were no other emoluments payable to the independent non-executive directors during the year (2014: Nil and 2013: Nil).

 

 60 

 

  

12.Directors’ remuneration (continued)

 

(b)Executive directors and non-executive director

 

 

      Salaries
and wages
      Employee
settle share-
based payment
      Total
remuneration
 
      USD’000       USD’000       USD’000  
2015                        
Executive directors:                        
Zhou Zixue     225       873       1,098  
Zhang Wenyi*     578       32       610  
Tzu-Yin Chiu**     918       130       1,048  
Gao  Yonggang     376       201       577  
      2,097       1,236       3,333  
Non-executive  director:
Chen Shangzhi     50             50  
Zhou Jie                  
Li Yonghua (Alternate to Chen Shanzhi)                  
Ren Kai           66       66  
      50       66       116  

 

       Employee     
   Salaries   settle share-   Total 
   and wages   based payment   remuneration 
  USD’000   USD’000   USD’000 
2014            
Executive directors:               
Zhang Wenyi*   524    124    648 
Tzu-Yin Chiu**   973    442    1,415 
Gao Yonggang   307    399    706 
    1,804    965    2,769 
Non-executive director:               
Chen Shangzhi   61    3    64 
Lawrence Juen-Yee Lau   51    82    133 
Zhou Jie            
Li Yonghua (Alternate to Chen Shanzhi)            
Chen Datong (Alternate to Lawrence Juen-Yee Lau)            
    112    85    197 

 

 61 

 

  

12.Directors’ remuneration (continued)

 

(b)Executive directors and non-executive director (continued)

 

 

      Salaries
and wages
      Employee
settle share-
based payment
     

 

Total
remuneration

 
      USD’000       USD’000       USD’000  
2013                        
Executive directors:                        
Zhang Wenyi*     391       274       665  
Tzu-Yin Chiu**     963       901       1,864  
Gao Yonggang     142       101       243  
      1,496       1,276       2,772  
Non-executive director:
Chen Shangzhi     54       10       64  
Lawrence Juen-Yee  Lau     22       62       84  
Zhou Jie                  
Li Yonghua (Alternate to Chen Shanzhi)                  
Chen  Datong (Alternate  to Lawrence  Juen-Yee Lau)                  
      76       72       148  

 

*Zhang Wenyi resigned as chairman of the Board and an executive director with effect from March 6, 2015.

 

**Tzu-Yin Chiu is also the Chief Executive Officer of the Company.

 

***Frank Meng resigned as an independent non-executive director with effect from June 26, 2015.

 

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

 

13.Five highest paid employees

 

The five highest paid individuals during the year included two (2014: three and 2013: two) directors, details of whose remuneration are set out in Note 12 above. Details of the remuneration of the remaining three (2014: two and 2013: three) non-directors, highest paid individuals (including one former director who resigned as an executive director in 2015) for the year are as follows:

 

   

Year ended

12/31/15

    Year ended
12/31/14
    Year ended
12/31/13
 
    USD’000     USD’000     USD’000  
Salaries and other benefits   962     633     955  
Bonus     636       328       386  
Stock  option  benefits     552       473       566  
      2,150       1,434       1,907  

  

 62 

 

  

13.Five highest paid employees (continued)

 

The bonus is determined on the basis of the basic salary and the performance of the Group and the individual.

 

In 2015, 2014 and 2013, no emoluments were paid by the Group to any of the five highest paid individuals as an inducement to join or upon joining the Group or as compensation for loss of office.

 

The number of non-director, highest paid individuals whose remuneration fell within the following bands is as follows:

 

      Number of employees  
      2015       2014       2013  
                         
HK$3,500,001 (US$451,605) to HK$4,000,000 (US$516,119)                 1  
HK$4,500,001 (US$580,635) to HK$5,000,000 (US$645,150)     1              
HK$5,000,001 (US$645,151) to HK$5,500,000 (US$709,665)           1       1  
HK$5,500,001 (US$709,666) to HK$6,000,000 (US$774,180)     1       1       1  
HK$6,000,001 (US$774,181) to HK$6,500,000 (US$838,695)     1              
      3       2       3  

  

14.Earnings per share

 

     

Year ended

12/31/15

      Year ended
12/31/14
      Year ended
12/31/13
 
      USD       USD       USD  
Basic earnings per share     0.01       0.00       0.01  
Diluted earnings per share     0.01       0.00       0.01  

 

Basic earnings per share

The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:

 

   Year ended   Year ended   Year ended 
   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
               
Profit for the year attributable to owners of the Company   253,411    152,969    173,177 
               
Earnings used in the calculation of basic earnings per share   253,411    152,969    173,177 
               
Weighted average number of ordinary shares for the purposes of basic earnings per share   38,960,416,674    33,819,162,742    32,063,137,846 

 

 63 

 

  

14.Earnings per share (continued)

 

Diluted earnings per share

The earnings used in the calculation of diluted earnings per share are as follows:

 

   

Year ended

12/31/15

    Year ended
12/31/14
    Year ended
12/31/13
 
    USD’000     USD’000     USD’000  
Earnings used in the calculation of basic earnings per share     253,411       152,969       173,177  
Interest expense from convertible bonds     13,238       9,614       1,173  
Earnings used in the calculation of diluted earnings per share     266,649       162,583       174,350  

 

The weighted average number of ordinary shares used in the calculation of basic earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of diluted earnings per share as follows:

 

   Year ended
12/31/15
   Year ended
12/31/14
   Year ended
12/31/13
 
   USD’000   USD’000   USD’000 
Weighted average number of ordinary shares used in the calculation of basic earnings per share  38,960,416,674   33,819,162,742   32,063,137,846 
Employee option and restricted  share  units   369,448,306    343,030,318    237,913,672 
Convertible bonds   3,932,570,996    2,931,293,510    288,027,267 
Weighted average number of ordinary shares used in the calculation of diluted earnings per share   43,262,435,976    37,093,486,570    32,589,078,785 

 

During the year ended December 31, 2015, the Group had 403,670,171 weighted average outstanding employee stock options which were excluded from the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares.

 

During the year ended December 31, 2014, the Group had 528,860,129 weighted average outstanding employee stock options which were excluded from the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares.

 

During the year ended December 31, 2013, the Group had 785,159,938 weighted average outstanding employee stock options which were excluded from the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares.

 

15.Dividend

 

The Board did not recommend the payment of any dividend for the year ended December 31, 2015 (December 31, 2014: Nil and December 31, 2013: Nil).

 

 64 

 

 

16.Assets classified as held for sale

 

      12/31/15       12/31/14       12/31/13  
      USD’000       USD’000       USD’000  
Assets related to employee’s living quarters     72,197       44       3,265  

 

Non-current assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. The Group is committing to sell these self-constructed living quarters to its employees in the following year.

 

17.Property, plant and equipment

 

               Construction     
       Plant and   Office   in progress     
   Buildings   equipment   equipment   (CIP)   Total 
   USD’000   USD’000   USD’000   USD’000   USD’000 
Cost                         
Balance at December 31, 2012   335,542    7,577,375    103,954    410,067    8,426,938 
Transfer from (out) CIP   7,238    553,162    9,610    (570,010)    
Addition               670,853    670,853 
Disposals   (20,698)   (1,163)   (5,531)   (10,000)   (37,392)
Reclassified as held for sale   (2,999)       (2)       (3,001)
Balance at December 31, 2013   319,083    8,129,374    108,031    500,910    9,057,398 
Transfer from (out) CIP   6,896    366,298    13,652    (386,846)    
Addition               977,487    977,487 
Disposals   (635)   (23,486)   (1,611)   (3,471)   (29,203)
Balance at December 31, 2014   325,344    8,472,186    120,072    1,088,081    10,005,683 
Transfer from (out) CIP   263,476    985,820    14,966    (1,264,262)    
Addition               1,498,201    1,498,201 
Disposals       (53,550)   (180)   (655)   (54,385)
Reclassified as held for sale               (114,534)   (114,534)
Balance at December 31, 2015   588,820    9,404,456    134,858    1,206,831    11,334,965 

 

 65 

 

 

17.Property, plant and equipment (continued)

 

   Buildings   Plant and
equipment
   Office
equipment
   Construction
in progress
(CIP)
   Total 
   USD’000   USD’000   USD’000   USD’000   USD’000 
Accumulated depreciation and impairment                         
Balance at December 31, 2012   99,205    5,827,519    82,091    32,688    6,041,503 
Disposal   (3,030)   (1,405)   (5,073)   (4,490)   (13,998)
Depreciation expense   13,160    477,600    11,163        501,923 
Reclassified as held for sale   (862)       (2)       (864)
Balance at December 31, 2013   108,473    6,303,714    88,179    28,198    6,528,564 
Disposal   (170)   (21,687)   (1,610)   (867)   (24,334)
Depreciation expense   13,377    476,044    16,945        506,366 
Balance at December 31, 2014   121,680    6,758,071    103,514    27,331    7,010,596 
Disposal       (51,840)   (180)   (437)   (52,457)
Depreciation expense   13,858    451,027    8,123        473,008 
Balance at December 31, 2015   135,538    7,157,258    111,457    26,894    7,431,147 

 

   Buildings   Plant and
equipment
   Office
equipment
   Construction
in progress
(CIP)
   Total 
   USD’000   USD’000   USD’000   USD’000   USD’000 
Balance at December 31, 2013   210,610    1,825,660    19,852    472,712    2,528,834 
Balance at December 31, 2014   203,664    1,714,115    16,558    1,060,749    2,995,086 
Balance at December 31, 2015   453,282    2,247,198    23,401    1,179,937    3,903,818 

 

Construction in progress

The construction in progress balance of approximately US$1,180 million as of December 31, 2015, primarily consisted of US$274 million and US$392 million of the manufacturing equipment acquired to further expand the production capacity at our two 12” fabs in Beijing and one 12” fab in Shanghai, respectively, and US$136 million of the manufacturing equipment acquired to further expand the production capacity at the 8” fab in Shenzhen. The amount of US$59 million was for acquiring the manufacturing equipment in relation to bumping services in Jiangyin. In addition, the amount of US$77 million was related to the headquarter building in Shanghai and other US$242 million was in relation to various ongoing capital expenditures projects of other SMIC subsidiaries, which are expected to be completed by the second half of 2016.

 

Impairment losses recognized in the year

In 2015, 2014 and 2013, the Group didn’t record any impairment loss of property, plant and equipment.

 

 66 

 

 

17.Property, plant and equipment (continued)

 

Assets pledged as security

Property, plant and equipment with carrying amount of approximately US$324 million (2014: approximately US$306 million and 2013: approximately US$1,000 million) have been pledged to secure borrowings of the Group (see Note 31). The plant and equipment have been pledged as security for bank loans under a mortgage. The Group is not allowed to pledge these assets as security for other borrowings or to sell them to other entities.

 

18.Intangible assets

 

   Acquired
intangible
assets
 
   USD’000 
Cost
Balance at December 31, 2012   341,909 
Additions   23,139  
Expired and disposal   (16,627)
Balance at December 31, 2013   348,421 
Additions   37,595 
Expired and disposal   (15,295)
Balance at December 31, 2014   370,721 
Additions   65,269 
Expired and disposal   (44,813)
Balance at December 31, 2015   391,177 
Accumulated amortization and impairment
Balance at December 31, 2012   106,531 
Amortization expense for the year     40,796  
Expired and disposal   (14,171)
Balance at December 31, 2013   133,156 
Amortization expense for the year   41,046 
Expired and disposal   (11,303)
Balance at December 31, 2014   162,899 
Amortization expense for the year   48,812 
Expired and disposal   (44,813)
Balance at December 31, 2015   166,898 
Balance at December 31, 2013   215,265 
Balance at December 31, 2014   207,822 
Balance at December 31, 2015   224,279 

 

 67 

 

 

19.Subsidiaries

 

Details of the Company’s subsidiaries at the end of the reporting period are as follows:

 

Name of company   Place of establishment
and operation
  Class of
shares
held
  Paid up
registered capital
    Proportion of
ownership interest
held by the Company
  Proportion of
voting  power
held by the
Company
    Principal  activities
Better Way Enterprises Limited (“Better  Way”)#   Samoa   Ordinary   US$ 1,000,000     Directly     100 %     100 %   Provision of marketing related activities
Semiconductor Manufacturing International (Shanghai) Corporation (“SMIS” or “SMIC Shanghai”)#   People’s Republic of China (the  “PRC”)   Ordinary   US$ 1,740,000,000     Directly     100 %     100 %   Manufacturing and trading of semiconductor products
SMIC, Americas   United States of America   Ordinary   US$ 500,000     Directly     100 %     100 %   Provision of marketing related activities
Semiconductor Manufacturing International (Beijing) Corporation (“SMIB” or “SMIC Beijing”)#   PRC   Ordinary   US$ 1,000,000,000     Directly     100 %     100 %   Manufacturing and trading of semiconductor products
SMIC  Japan   Japan   Ordinary   JPY 10,000,000     Directly     100 %     100 %   Provision of marketing related activities
SMIC Europe S.R.L   Italy   Ordinary   Euros 100,000     Directly     100 %     100 %   Provision of marketing related activities
Semiconductor   Manufacturing   International (Solar  Cell)  Corporation   Cayman Islands   Ordinary   US$ 11,000     Directly     100 %     100 %   Investment holding
SMIC Commercial (Shanghai) Limited Company (formerly  SMIC  Consulting  Corporation)   PRC   Ordinary   US$ 800,000     Directly     100 %     100 %   Provision of marketing related activities
Semiconductor   Manufacturing   International (Tianjin)  Corporation (“SMIT” or “SMIC Tianjin”)#   PRC   Ordinary   US$ 690,000,000     Directly     100 %     100 %   Manufacturing and trading of semiconductor   products
SMIC  Development  (Chengdu)  Corporation (“SMICD”)#   PRC   Ordinary   US$ 5,000,000     Directly     100 %     100 %   Construction, operation, and management of SMICD’s living quarters, schools, and  supermarket
Semiconductor   Manufacturing   International (BVI) Corporation (“SMIC (BVI)”)#   British Virgin Islands   Ordinary   US$ 10     Directly     100 %     100 %   Provision of marketing related activities
Admiral  Investment  Holdings  Limited   British Virgin Islands   Ordinary   US$ 10     Directly     100 %     100 %   Investment holding
SMIC Shanghai (Cayman) Corporation   Cayman Islands   Ordinary   US$ 50,000     Directly     100 %     100 %   Investment holding
SMIC Beijing (Cayman) Corporation   Cayman Islands   Ordinary   US$ 50,000     Directly     100 %     100 %   Investment holding
SMIC Tianjin (Cayman) Corporation   Cayman Islands   Ordinary   US$ 50,000     Directly     100 %     100 %   Investment holding
SilTech  Semiconductor  Corporation   Cayman Islands   Ordinary   US$ 10,000     Directly     100 %     100 %   Investment holding
SMIC Shenzhen (Cayman) Corporation   Cayman Islands   Ordinary   US$ 50,000     Directly     100 %     100 %   Investment holding
SMIC Advanced Technology Research & Development  (Shanghai)  Corporation   PRC   Ordinary   US$ 99,000,000     Directly     89.697 %     89.697 %   Manufacturing and trading of semiconductor products
SMIC  Holdings  Corporation   PRC   Ordinary   US$ 50,000,000     Directly     100 %     100 %   Investment holding
SJ   Semiconductor   Corporation   Cayman Islands   Ordinary  and preferred   US$ 3,335     Directly     55.277 %     55.277 %   Investment holding
SMIC Energy Technology (Shanghai) Corporation  (“Energy  Science”)#   PRC   Ordinary   US$ 10,400,000     Indirectly     100 %     100 %   Manufacturing  and  trading  of  solar  cell related  semiconductor  products
Magnificent  Tower  Limited   British Virgin Islands   Ordinary   US$ 50,000     Indirectly     100 %     100 %   Investment holding
SMIC Shanghai (HK) Company Limited   Hong Kong   Ordinary   HK$ 1,000     Indirectly     100 %     100 %   Investment holding
SMIC Beijing (HK) Company Limited   Hong Kong   Ordinary   HK$ 1,000     Indirectly     100 %     100 %   Investment holding
SMIC Tianjin (HK) Company Limited   Hong Kong   Ordinary   HK$ 1,000     Indirectly     100 %     100 %   Investment holding
SMIC Solar Cell (HK) Company Limited   Hong Kong   Ordinary   HK$ 10,000     Indirectly     100 %     100 %   Investment holding
SMIC Shenzhen (HK) Company Limited   Hong Kong   Ordinary   HK$ 1,000     Indirectly     100 %     100 %   Investment holding
SilTech Semiconductor (Hong Kong) Corporation   Limited   Hong Kong   Ordinary   HK$ 1,000     Indirectly     100 %     100 %   Investment holding
Semiconductor   Manufacturing   International (Shenzhen)  Corporation   PRC   Ordinary   US$ 127,000,000     Indirectly     100 %     100 %   Manufacturing and trading of semiconductor products
SilTech Semiconductor (Shanghai) Corporation Limited   PRC   Ordinary   US$ 12,000,000     Indirectly     100 %     100 %   Manufacturing and trading of semiconductor products
Semiconductor Manufacturing North China (Beijing) Corporation (“SMNC”)#   PRC   Ordinary   US$ 937,500,000     Directly and indirectly     55 %     55 %   Manufacturing and trading of semiconductor products
China IC Capital Co., Ltd   PRC   Ordinary   RMB 500,000,000     Indirectly     100 %     100 %   Investment holding
Shanghai  Hexin  Investment  Management Limited Partnership   PRC   Ordinary   RMB 15,900,000     Indirectly     99 %     99 %   Investment holding
Shanghai  Rongxin  Investment  Management Limited Partnership   PRC   Ordinary         Indirectly     99 %     99 %   Investment holding
SJ Semiconductor (HK) Limited   Hong Kong   Ordinary   HK$ 1,000     Indirectly     55.277 %     55.277 %   Investment holding
SJ  Semiconductor  (Jiangyin)  Corp. (“SJ Jiangyin”)#   PRC   Ordinary   US$ 179,500,000     Indirectly     55.277 %     55.277 %   Bumping and circuit probe testing activities

 

#Abbreviation for identification purposes.

 

 68 

 

 

19.Subsidiaries (continued)

 

During this year, the Company lost control of Shanghai Xinxin Investment Centre (Limited Partnership) (“Shanghai Xinxin”) and Shanghai Chengxin Investment Center (Limited Partnership) (“Shanghai Chengxin”), but still has significant influence over both of them. The Company recorded its ownership of Shanghai Xinxin and Shanghai Chengxin as investment in joint ventures. Please refer to Note 21 for details.

 

Details of non-wholly owned subsidiaries that have material non-controlling interests (“NCI”)

The table below shows details of a non-wholly owned subsidiary of the Company that have material non-controlling interests:

 

Name of company  Place of
establishment
and operation
  Proportion of ownership interests
and voting rights held by
non-controlling interests
   Profit (loss) allocated to
non-controlling interests
   Accumulated
non-controlling interests
 
      12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13 
                  USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
Semiconductor   Manufacturing North China (Beijing) Corporation (“SMNC”)  Beijing,  PRC   45.0%   45.0%   45.0%   (25,596)   (26,353)   1,410    371,446    335,057    109,410 
SJ   Semiconductor   Corporation  Cayman Islands   44.7%   49.0%   N/A    (5,077)   (424)   N/A    79,621    24,076    N/A 
Total                     (30,673)   (26,777)   1,410    451,067    359,133    109,410 

 

Semiconductor Manufacturing North China (Beijing) Corporation (“SMNC”, the Company’s majority owned subsidiary in Beijing) shared part of Group’s advance-technology R&D expenses in 2014 and had the start-up cost in 2015, which also caused the change in loss of year attributable to non-controlling interests.

 

According to the joint venture agreements entered into by the Group and the NCI of SMNC, additional capital injection into SMNC was completed in 2015 and 2014. The additional capital injection from NCI amounted to US$61.9 million in 2015 and US$252 million in 2014 respectively.

 

According to the joint venture agreements entered into by the Company and the NCI of SJ Semiconductor Corporation, additional capital injection into SJ Semiconductor Corporation was completed in 2015 and 2014. The additional capital injection from NCI amounted to US$60.0 million in 2015 and US$24.5 million in 2014 respectively.

 

Summarized financial information in respect of the Company’s subsidiary that has material non- controlling interests is set out below. The summarized financial information below represents amounts before intragroup eliminations.

 

 69 

 

 

19.Subsidiaries (continued)

 

SMNC

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Current assets   381,640    659,596    243,719 
Non-current assets   917,719    550,859     
Current  liabilities   (350,298)   (347,217)   (586)
Non-current  liabilities   (123,626)   (118,667)    
Net assets   825,435    744,571    243,133 
Equity attributable to owners of the Company   453,989    409,514    133,723 
Non-controlling  interests   371,446    335,057    109,410 

 

   Year ended 12/31/15   Year ended 12/31/14   Year ended 12/31/13 
   USD’000   USD’000   USD’000 
Revenue   4,721         
Expense   (64,032)   (65,058)   (709)
Other income   2,430    6,496    3,843 
Profit (loss) for the year   (56,881)   (58,562)   3,134 
Profit (loss) attributable to owners of the Company   (31,285)   (32,209)   1,724 
Profit (loss) attributable to the non-controlling interests   (25,596)   (26,353)   1,410 
Profit (loss) for the year   (56,881)   (58,562)   3,134 
Other  comprehensive  income  attributable  to  owners of the Company            
Other comprehensive income attributable to the non-controlling interests            
Other comprehensive income for the year            
Total comprehensive income (loss) attributable to owners of the Company   (31,285)   (32,209)   1,724 
Total comprehensive income (loss) attributable to the non-controlling interests   (25,596)   (26,353)   1,410 
Total comprehensive income (loss) for the year   (56,881)   (58,562)   3,134 
Dividends paid to non-controlling interests            
Net cash (outflow) inflow from operating activities   (71,817)   7,758    1,959 
Net cash outflow from investing activities   (173,535)   (436,449)   (164,810)
Net  cash  inflow  from  financing  activities   137,500    560,000    240,000 
Net cash (outflow) inflow   (107,852)   131,309    77,149 

 

 70 

 

 

19.Subsidiaries (continued)

 

SJ Semiconductor Corporation and its subsidiaries

 

   12/31/15   12/31/14 
   USD’000   USD’000 
Current assets   164,495    49,901 
Non-current assets   66,772    59 
Current  liabilities   (18,904)   (825)
Non-current  liabilities   (34,331)    
Net assets   178,032    49,135 
Equity attributable to owners of the Company   98,411    25,059 
Non-controlling  interests   79,621    24,076 

 

   Year ended
12/31/15
   Year ended
12/31/14
 
   USD’000   USD’000 
Revenue   1,543     
Expense   (9,621)   (175)
Other expense   (3,274)   (690)
Loss for the year   (11,352)   (865)
Loss attributable to owners of the Company   (6,275)   (441)
Loss attributable to the non-controlling interests   (5,077)   (424)
Loss for the year   (11,352)   (865)
Other comprehensive income attributable to owners of the Company        
Other comprehensive income attributable to the non- controlling interests        
Other comprehensive income for the year        
Total comprehensive loss attributable to owners of the Company   (6,275)   (441)
Total comprehensive loss attributable to the non-controlling interests   (5,077)   (424)
Total comprehensive loss for the year   (11,352)   (865)
Dividends paid to non-controlling interests        
Net  cash  outflow  from  operating  activities   (9,841)   (38)
Net cash outflow from investing activities   (60,336)   (67)
Net  cash  inflow  from  financing  activities   175,211    50,000 
Net cash inflow   105,034    49,895 

 

 71 

 

 

20.Investments in associates

 

Details of the Group’s associates, which are all unlisted companies, at the end of the reporting period are as follows:

 

Name of company  Place of establishment
and operation
  Class of
share
held
  Proportion of ownership
interest and voting power held
by the Group
 
         12/31/15   12/31/14   12/31/13 
Toppan SMIC Electronic (Shanghai) Co., Ltd.  
(“Toppan”)
  Shanghai, PRC  Ordinary   30.0%   30.0%   30.0%
Zhongxin Xiecheng Investment (Beijing) Co.,  Ltd.  
(“Zhongxin  Xiecheng”)
  Beijing, PRC  Ordinary   49.0%   49.0%   49.0%
Brite  Semiconductor  Corporation  Cayman Island  Ordinary   47.8%   47.8%   48.7%
Suzhou Changjiang Electric Xinke Investment Co., Ltd.
(“Changjiang   Xinke”)
  Jiangsu, PRC  Ordinary   19.6%   NA    NA 
Sino IC Leasing Co., Ltd.
(“Sino IC Leasing”)
  Shanghai, PRC  Ordinary   8.8%*   NA    NA 
China Fortune-Tech Capital Co., Ltd
(“China   Fortune-Tech”)
  Shanghai, PRC  Ordinary   45.0%   45.0%   NA 
Beijing Wu Jin Venture Investment Center (Limited Partnership)
(“WuJin”)**
  Beijing, PRC  Ordinary   32.6%   32.6%   NA 
Shanghai Fortune-Tech Qitai Invest Center (Limited Partnership)
(“Fortune-Tech    Qitai”)**
  Shanghai, PRC  Ordinary   33.0%   NA    NA 
Shanghai Fortune-Tech Zaixing Invest Center (Limited Partnership)
(“Fortune-Tech   Zaixing”)**
  Shanghai, PRC  Ordinary   66.2%*   NA    NA 
Suzhou Fortune-Tech Oriental Invest Fund Center (Limited Partnership)
(“Fortune-Tech Oriental”)**
  Jiangsu, PRC  Ordinary   44.8%   NA    NA 

 

*In accordance with investment agreements, the Group has significant influence over Fortune-Tech Zaixing and Sino IC Leasing.

 

**The Group invested in these associates indirectly though China IC Capital Co., Ltd (the “Fund”), a wholly-owned investment fund company of the Group, as set out in Note 19. The Fund is intended to invest primarily in integrated circuits related fund products and investment projects. The Group’s joint ventures and available-for-sale investments invested indirectly through the Fund are disclosed in Note 21 and Note 23, respectively.

 

All of these associates are accounted for using the equity method in these consolidated financial statements.

 

 72 

 

 

20.Investments in associates (continued)

 

In December 2014, the Company entered into an investment agreement through SilTech Shanghai with Jiangsu Changjiang Electronics Technology Co., Ltd (“JCET”) and China Integrated Circuit Industry Investment Fund Co., Ltd., (“China IC Fund”) to set up Changjiang Xinke. The Group paid US$102 million to obtain 19.6% of total shares and 1 of 7 board seats. Changjiang Xinke and China IC Fund set up Suzhou Changdian Xinpeng Investment Ltd., Co. (“Changdian Xinpeng”) which acquired Stats ChipPAC Limited (“Stats ChipPAC”), a public company listed in Singapore capital market before acquired by Changdian Xinpeng. The investment was made in 2015 and the acquisition was completed in the same year.

 

Furthermore, JCET granted the Company an option to sell the shares of Changjiang Xinke to JCET at an exercise price equivalent to the Company’s initial investment plus an annual return rate at any time after Stats ChipPAC was acquired. Please refer to note 22.

 

Summarized financial information in respect of the Group’s material associates are set out below.

 

Toppan

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Current assets   51,661    44,538    47,554 
Non-current assets   22,554    28,789    22,660 
Current  liabilities   (2,062)   (311)   (2,117)
Non-current  liabilities            
Net assets   72,153    73,016    68,097 

 

   Year ended   Year ended   Year ended 
   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Total revenue  20,782   23,498   23,796 
Profit for the year   3,267    5,493    7,364 
Other comprehensive income for the year            
Total comprehensive income for the year   3,267    5,493    7,364 
Dividends received from the associate during the year            

 

Reconciliation of the above summarized financial information to the carrying amount of the interest in the associate recognized in the consolidated financial statements:

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Net assets of the associate   72,153    73,016    68,097 
Proportion of the Group’s ownership interest in Toppan   30%   30%   30%
Carrying amount of the Group’s interest in Toppan   21,646    21,905    20,429 

 

 73 

 

 

20.Investments in associates (continued)

 

Changjiang Xinke

 

   12/31/15 
   USD’000 
Current assets   445,709 
Non-current assets   1,837,445 
Current  liabilities   (581,838)
Non-current  liabilities   (1,093,368)
Net assets   607,948 
Equity attributable to owners of the associate   455,862 
Non-controlling  interests   152,086 

 

   Year ended 
   12/31/15 
   USD’000 
Total revenue   519,582 
Loss for the year   (67,135)
Loss attributable to owners of the associate   (65,589)
Loss  attributable  to  the  non-controlling  interests   (1,546)
Loss for the year   (67,135)
Other comprehensive income for the year   16,224 
Total comprehensive loss for the year   (50,911)
Total comprehensive loss attributable to owners of the associate   (51,473)
Total comprehensive income attributable to the non-controlling interests   562 
Total comprehensive loss for the year   (50,911)
Dividends received from the associate during the year    

 

Reconciliation of the above summarized financial information to the carrying amount of the interest in the associate recognized in the consolidated financial statements:

 

   12/31/15 
   USD’000 
Equity attributable to owners of the associate   455,862 
Proportion of the  Group’s ownership interest  in Changjiang Xinke   19.6%
Carrying amount of the Group’s interest in Changjiang Xinke   89,395 

 

Fortune-Tech Zaixing

 

   12/31/15 
   USD’000 
Current assets   15,513 
Non-current assets   7,581 
Current  liabilities   (3)
Non-current  liabilities    
Net assets   23,091 

 

 74 

 

 

20.Investments in associates (continued)

 

Fortune-Tech Zaixing (continued)

 

  

Year ended

12/31/15

 
   USD’000 
Total revenue    
Loss for the year   (178)
Other comprehensive income for the year    
Total comprehensive loss for the year   (178)
Dividends received from the associate during the year    

 

Reconciliation of the above summarized financial information to the carrying amount of the interest in the associate recognized in the consolidated financial statements:

 

   12/31/15 
   USD’000 
Net assets of the associate   23,091 
Proportion of the Group’s ownership interest in Fortune-Tech Zaixing   66.2%
Carrying amount of the Group’s interest in Fortune-Tech Zaixing   15,292 

 

Sino IC Leasing

 

   12/31/15 
   USD’000 
Current assets   502,454 
Non-current assets   21,374 
Current  liabilities   (8,679)
Non-current  liabilities   (190,021)
Net assets   325,128 

 

   Year ended 
   12/31/15 
   USD’000 
Total revenue   2,437 
Profit for the year   3,761 
Other comprehensive income for the year    
Total comprehensive income for the year   3,761 
Dividends received from the associate during the year    

 

 75 

 

 

20.Investments in associates (continued)

 

Sino IC Leasing (continued)

Reconciliation of the above summarized financial information to the carrying amount of the interest in the associate recognized in the consolidated financial statements:

 

   12/31/15 
   USD’000 
Net assets of the associate   325,128 
Proportion of the Group’s ownership interest in Sino IC Leasing   8.8%
Carrying amount of the Group’s interest in Sino IC Leasing   28,736 

 

21.Investments in joint ventures

 

Details of the Group’s joint ventures, which are all unlisted companies invested indirectly through China IC Capital Co., Ltd, at the end of the reporting period are as follows:

 

Name of company  Place of establishment
and operation
  Class of
share
held
   Proportion of ownership
interest and voting power held
by the Group
 
          12/31/15   12/31/14   12/31/13 
Shanghai Xinxin Investment Centre (Limited Partnership) (“Shanghai Xinxin”)  Shanghai, PRC  Ordinary     49.0%   NA    NA 
Shanghai Chengxin Investment Center (Limited Partnership) (“Shanghai Chengxin”)  Shanghai, PRC  Ordinary     42.0%   NA    NA 

 

Summarized financial information in respect of the Group’s material joint venture is set out below.

 

Shanghai Xinxin

 

   12/31/15 
   USD’000 
Current assets   4,917 
Non-current assets   28,631 
Current  liabilities   (3,287)
Non-current  liabilities    
Net assets   30,261 

 

   Year ended 
   12/31/15 
   USD’000 
Total revenue    
Loss for the year   (609)
Other comprehensive income for the year    
Total comprehensive loss for the year   (609)
Dividends received from the joint venture during the year    

 

 76 

 

 

21.Investments in joint ventures (continued)

 

Shanghai Xinxin (continued)

Reconciliation of the above summarized financial information to the carrying amount of the interest in the joint venture recognized in the consolidated financial statements:

 

   12/31/15 
   USD’000 
Net assets of the joint venture   30,261 
Proportion of the Group’s ownership interest in Shanghai Xinxin   49.0%
Carrying amount of the Group’s interest in Shanghai Xinxin   14,829 

 

22.Derivative financial instrument

 

As of December 31, 2015, the amount of the derivative financial instrument was US$30.2 million (2014: nil and 2013: nil), which is a put option granted by JCET to sell the shares of Changjiang Xinke to JCET, pursuant to an investment exit agreement entered into by SilTech Shanghai (a subsidiary of the Company), JCET and Jiangsu Xinchao Technology Group Co., Ltd (a substantial shareholder of JCET). The fair value change of the derivative financial instrument was US$30.2 million for the year ended 2015 (2014: nil and 2013: nil). Please refer to note 20 for more details of the put option and refer to note 39 for valuation techniques of the put option.

 

23.Other assets

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Available-for-sale investment   19,750    15,081    1,278 
Others   12,328    15,786    4,959 
Non-current   32,078    30,867    6,237 

 

Available-for-sale investments are primarily fund companies and investment projects invested indirectly through China IC Capital Co., Ltd in the integrated circuits industry.

 

24.Other financial assets

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Derivatives               
                
Foreign currency forward contracts   172         
Short-term investments               
Financial products sold by banks   257,583    616,862    240,311 
Bank deposits will mature over 3 months   25,125    27,209     
    282,880    644,071    240,311 

 

 77 

 

 

25.Inventories

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Raw  materials   88,134    65,598    56,242 
Work in progress   225,475    179,047    180,710 
Finished goods   73,717    71,396    49,299 
    387,326    316,041    286,251 

 

The cost of inventories recognized as an expense (income) during the year in respect of inventory provision (reversal) was US$(13.3) million (2014: US$29.6 million and 2013: US$(0.1) million).

 

26.Trade and other receivables

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Trade  receivables   399,200    424,661    352,872 
Allowance for doubtful debts   (41,976)   (42,014)   (44,643)
    357,224    382,647    308,229 
Other receivables and refundable deposits   142,622    73,741    71,132 
    499,846    456,388    379,361 

 

The Group determines credit terms mostly ranging from 30 to 60 days for each customer on a case- by-case basis, based on its assessment of such customer’s financial standing and business potential with the Group.

 

The Group determines its allowance for doubtful debts based on the Group’s historical experience and the relative aging of receivables as well as individual assessment of certain debtors. The Group provides allowance for doubtful debts based on recoverable amount by making reference to the age category of the remaining receivables and subsequent settlement. The Group’s allowance for doubtful debts excludes receivables from a limited number of customers due to their high credit worthiness. The Group recognized US$0.5 million, US$1.6 million and US$0.6 million of allowance for doubtful debts respectively during the year ended December 31, 2015, 2014 and 2013 respectively. The Group reviews, analyzes and adjusts allowance for doubtful debts on a monthly basis.

 

In evaluating the customers’ credit quality, the Group used an internal system based on each customer’s operation size, financial performance, listing status, payment history and other qualitative criteria. These criteria are reviewed and updated annually. Based on such evaluation, the Group believes the recoverability of those receivables that are not impaired is reasonably assured.

 

Trade receivables

Of the trade receivables balance at the end of the year of 2015, 2014 and 2013, US$125.7 million, US$131.3 million and US$129.4 million respectively are due from the Group’s two largest customers.

 

The following is an aged analysis of trade receivables presented based on the invoice date at the end of the reporting period.

 

 78 

 

 

26.Trade and other receivables (continued)

 

Trade receivables (continued)

Age of receivables

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Within 30 days   177,542    167,137    166,117 
31–60 days   151,377    122,387    110,470 
Over  60  days   70,281    135,137    76,285 
Total   399,200    424,661    352,872 

 

Trade receivables disclosed above include amounts (see below for aged analysis) that are past due at the end of the reporting for which the Group has not recognized an allowance for doubtful debts because there has not been a significant change in credit quality and the amounts are still considered recoverable.

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Current   312,479    270,220    269,740 
Past due but not impaired               
Within 30 days   39,737    55,412    24,480 
31–60 days   3,534    20,915    10,068 
Over  60  days   1,474    36,100    3,941 
Total   357,224    382,647    308,229 
Average  overdue  days   23    74    40 

 

Movement in the allowance for doubtful debts

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Balance at beginning of the year   42,014    44,643    45,340 
Addition in allowance for doubtful debts   528    1,616    617 
Amounts  written  off  during  the  year  as  uncollectible   (25)   (4,186)   (101)
Reversal of allowance for doubtful debts   (541)   (59)   (1,213)
Balance at end of the year   41,976    42,014    44,643 

 

In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the end of the reporting period.

 

 79 

 

 

26.Trade and other receivables (continued)

 

Trade receivables (continued)

Age of impaired trade receivables

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Within 30 days   315    306    192 
31–60 days   122    338    89 
Over  60  days   41,539    41,370    44,362 
Total   41,976    42,014    44,643 

 

27.Restricted cash

 

As of December 31, 2015, 2014 and 2013, restricted cash consisted of US$1.1 million, US$0.6 million and US$35.7 million, respectively of bank time deposits pledged against letters of credit and short-term borrowings, and US$74.0 million, US$135.4 million and US$111.9 million, respectively of government funding received mainly for the reimbursement of research and development expenses to be incurred.

 

As of December 31, 2015 the restricted cash of US$227.3 million was from a low interest cost entrusted loan granted by CDB Development Fund through China Development Bank, which is designated to be used for future capacity expansion. The Company expects to spend the restricted cash within the next 12 months.

 

As of December 31, 2014 the restricted cash of US$102 million was for the co-investment in the proposed acquisition of STATS ChipPAC through Changjiang Xinke. On June 18, 2015, the amount of US$102 million was applied as a capital contribution for 19.6% equity interest in Changjiang Xinke, which is accounted as an associate of the Group.

 

 80 

 

 

28.Shares and issued capital

 

Fully paid ordinary shares

 

   Number of
shares
   Share
capital
   Share
premium
 
       USD’000   USD’000 
Balance at December 31, 2012   32,000,139,623    12,800    4,083,588 
Issuance of shares under the Company’s employee share option plan and RSU (see note 38)        112,167,478           45           6,641   
The Company purchased shares  of  subsidiaries           (383)
Balance at December 31, 2013   32,112,307,101    12,845    4,089,846 
Issuance of shares under the Company’s employee share option plan and RSU (see note 38)        215,677,649           86           18,422   
Ordinary shares issued at June 12, 2014   2,590,000,000    1,036    196,161 
Ordinary shares issued at November 21, 2014   669,468,952    268    51,523 
Ordinary shares issued at November 27, 2014   268,642,465    107    20,678 
Balance at December 31, 2014   35,856,096,167    14,342    4,376,630 
Issuance of shares under the Company’s employee share option plan and RSU (see note 38)        232,284,137           93           20,819   
Ordinary shares issued at June 8, 2015   4,700,000,000    1,880    397,580 
Ordinary shares issued at September 25, 2015   323,518,848    130    27,392 
Ordinary shares issued at October 9, 2015   961,849,809    385    81,440 
Balance at December 31, 2015   42,073,748,961    16,830    4,903,861 

 

On February 12, 2015, the Company entered into a share purchase agreement with China IC Fund. Pursuant to the share purchase agreement, the Company proposed to issue 4,700,000,000 new ordinary shares (the “Placing of New Shares”) to the China IC Fund at a consideration of approximately HK$3,098.71 million. On June 8, 2015, the Placing of New Shares was completed and the Company issued 4,700,000,000 new ordinary shares to Xinxin (Hongkong) Capital Co., Limited, a wholly-owned subsidiary of the China IC Fund, at the issue price of HK$0.6593 per ordinary share. The net proceeds are recorded as share capital of approximately US$1.9 million and share premium of approximately US$397.6 million in the statements of financial position. Net proceeds of issue are measured after deducting directly attributable transaction costs of the share issue.

 

 81 

 

 

28.Shares and issued capital (continued)

 

Fully paid ordinary shares (continued)

On November 6, 2008 and April 18, 2011, respectively, the Company entered into share purchase agreements with Datang Telecom Technology & Industry Holdings Co., Ltd. (“Datang Holdings”) and Country Hill Limited (“Country Hill”) which granted each of Datang Holdings (Hongkong) Investment Company Limited (“Datang”) and Country Hill a pre-emptive right to subscribe for additional shares if the Company issues new shares to other investors. On March 2, 2015, the Company received irrevocable notices from both Datang and Country Hill about exercising their pre-emptive right as a result of the Placing of New Shares. On June 11, 2015, Datang and Country Hill entered into agreements with the Company (“2015 Datang Pre-emptive Share Purchase Agreement” and “2015 Country Hill Pre-emptive Share Purchase Agreement”, respectively) to subscribe for 961,849,809 ordinary shares and 323,518,848 ordinary shares of the Company, respectively, at a price of HK$0.6593 per share. On September 25, 2015, Country Hill subscribed 323,518,848 ordinary shares of the Company. On October 9, 2015, Datang subscribed 961,849,809 ordinary shares of the Company.

 

Fully paid ordinary shares, which have a par value of US$0.0004, carry one vote per share and carry a right to dividends.

 

Stock incentive plans

The Company has adopted the stock incentive plans under which options to subscribe for the Company’s shares have been granted to certain employees, officers and other service providers (Note 38).

 

29.Reserves

 

Equity-settled employee benefits reserve

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Balance at beginning of year   64,540    55,177    42,232 
Arising on share-based payments   18,088    18,388    16,402 
Transfer to share premium   (12,169)   (9,025)   (3,457)
Balance at end of year   70,459    64,540    55,177 

 

The above equity-settled employee benefits reserve related to share options and RSUs granted by the Company to the Group’s employees and service providers under stock incentive plans. Items included in equity-settled employee benefits reserve will not be reclassified subsequently to profit or loss. Further information about share-based payments to employees and service providers is set out in Note 38.

 

 82 

 

 

29.Reserves (continued)

 

Foreign currency translation reserve

Items that may be reclassified subsequently to profit or loss

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Balance at beginning of year   4,229    4,553    3,916 
Exchange differences arising on translating the foreign  operations   (8,185)   (324)   731 
Disposal of subsidiaries           (94)
Balance at end of year   (3,956)   4,229    4,553 

 

Exchange differences relating to the translation of the results and net assets of the Group’s foreign operations from their functional currencies to the Group’s presentation currency (i.e. United States dollars) are recognized directly in other comprehensive income and accumulated in the foreign currency translation reserve. Exchange differences previously accumulated in the foreign currency translation reserve (in respect of translating both the net assets of foreign operations and hedges of foreign operations) are reclassified to profit or loss on the disposal/deconsolidation of the foreign operation.

 

Change in value of available-for-sale financial assets

 

   12/31/15 
   USD’000 
Balance at beginning of year    
Change in value of available-for-sale financial assets during this year   447 
Balance at end of year   447 

 

The changes in the carrying amount of available-for-sale financial assets, which were initially recognized at fair value plus transaction costs and subsequently carried at fair value, recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.

 

Convertible bonds equity reserve

 

   12/31/15   12/31/14 
   USD’000   USD’000 
Balance at beginning of year   29,564    15,210 
Recognition of  the  equity component of convertible  bonds       14,354 
Balance at end of year   29,564    29,564 

 

 83 

 

 

29.Reserves (continued)

 

Convertible bonds equity reserve (continued)

The conversion option from the issuance of convertible bonds classified as equity is determined by deducting the amount of the liability component from the fair value of the compound instrument (i.e. convertible bond) as a whole. This is recognized and included in equity, net of income tax effects, and is not subsequently remeasured. In addition, the conversion option classified as equity will remain in equity until the conversion option is exercised, in which case, the balance recognized in equity will be transferred to share premium. Where the conversion option remains unexercised at the maturity date of the convertible bond, the balance recognized in equity will be transferred to retained earnings. No gain or loss is recognized in profit or loss upon conversion or expiration of the conversion option.

 

30.Accumulated deficit

 

As stipulated by the relevant laws and regulations applicable to China’s foreign investment enterprise, the Company’s PRC subsidiaries are required or allowed to make appropriations to non-distributable reserves. The general reserve fund requires annual appropriation of 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end), after offsetting accumulated losses from prior years, until the accumulative amount of such reserve fund reaches 50% of registered capital of the relevant subsidiaries. The general reserve fund can only be used to increase the registered capital and eliminate future losses of the relevant subsidiaries under PRC regulations. The staff welfare and bonus reserve is determined by the board of directors of the respective PRC subsidiaries and used for the collective welfare of the employee of the subsidiaries. The enterprise expansion reserve is for the expansion of the subsidiaries’ operations and can be converted to capital subject to approval by the relevant authorities. These reserves represent appropriations of the retained earnings determined in accordance with Chinese law. In 2015 the Group did not make any appropriation to non-distributable reserves. As of December 31, 2015, 2014 and 2013, the accumulated non-distributable reserve was US$30 million, US$30 million and US$30 million respectively.

 

In addition, due to restrictions on the distribution of paid-in capital from the Company’s PRC subsidiaries, the PRC subsidiaries’ paid-in capital of US$4,939 million at December 31, 2015 is considered restricted.

 

As a result of these PRC laws and regulations, as of December 31, 2015, reserve and capital of approximately US$4,969 million was not available for distribution to the Company by its PRC subsidiaries in the form of dividends, loans or advances.

 

In 2015, 2014 and 2013 the Company did not declare or pay any cash dividends on the ordinary shares.

 

 84 

 

 

31.Borrowings

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
At amortized cost               
Short-term commercial bank loans (i)   62,872    115,084    219,727 
    62,872    115,084    219,727 
Long-term debt by contracts               
2012  USD  Loan  (SMIC  Shanghai)  (ii)           201,000 
2013  USD  Loan  (SMIC  Shanghai)  (iii)   10,760    221,520    260,000 
2015  USD  Loan  (SMIC  Shanghai)  (iv)   52,854         
2015 RMB  Loan  I  (SMIC  Shanghai)  (v)   154,095         
2015 RMB  Loan  II  (SMIC  Shanghai)  (vi)   73,195         
2015  EXIM  RMB  Loan  (SMIC  Shanghai)  (vii)   73,966         
2012 USD Loan (SMIC Beijing) (viii)           260,000 
2013 EXIM  USD Loan  (SMIC Beijing) (ix)       40,000    40,000 
2013 CIC RMB Entrust loan (SMIC Beijing) (x)       2,450    10,795 
2014 EXIM RMB Loan (SMIC Beijing) (xi)   36,983    39,200     
2015 CDB RMB Loan (SMIC Beijing) (xii)   30,048         
2015 RMB Entrust Loan (SJ Jiangyin) (xiii)   14,331         
2015 CDB USD Loan (SJ Jiangyin) (xiv)   20,000         
    466,232    303,170    771,795 
Less: current maturities of long-term debt   50,196    46,970    170,820 
Non-current maturities of long-term debt   416,036    256,200    600,975 
Borrowing by repayment schedule:               
Within 1 year   113,068    162,054    390,547 
Within 1–2 years   15,830    125,200    209,965 
Within 2–5 years   172,916    131,000    367,990 
Over 5 years   227,290        23,020 
    529,104    418,254    991,522 

 

Summary of borrowing arrangements

(i)As of December 31, 2015, the Group had 29 short-term credit agreements that provided total credit facilities up to US$1,414.6 million on a revolving credit basis. As of December 31, 2015, the Group had drawn down US$62.9 million under these credit agreements. The outstanding borrowings under these credit agreements are unsecured. The interest rate on this loan facility ranged from 0.98% to 4.20% in 2015.

 

(ii)In March 2012, SMIS entered into a loan facility in the aggregate principal amount of US$268 million from a consortium of international and Chinese banks. This three-year bank facility was used to finance the working capital for SMIS’s 8-inch fab. The facility was secured by the manufacturing equipment located in the SMIS 8-inch fabs, buildings and land use right of SMIS. SMIS had drawn down US$268 million and repaid the outstanding balance on this loan facility in advance by December 2014.

 

 85 

 

 

31.Borrowings (continued)

 

Summary of borrowing arrangements (continued)

(iii)In August 2013, SMIS entered into a loan facility in the aggregate principal amount of US$470 million with a syndicate of financial institutions based in the PRC. This seven-year bank facility was used to finance the planned expansion for SMIS’ 12-inch fab. The facility is secured by the manufacturing equipment located in the SMIS’ 12-inch fab. As of December 31, 2015, SMIS had drawn down US$260 million and repaid US$249.2 million on this loan facility. The outstanding balance of US$10.8 million is repayable from February 2018 to August 2018. The interest rate on this loan facility ranged from 4.33% to 4.89% in 2015. SMIS was in compliance with the related financial covenants as of December 31, 2015.

 

(iv)In April 2015, SMIS entered into a loan facility in the aggregate principal amount of US$66.1 million with US Export-Import Bank. This five-year bank facility was used to finance the planned expansion for SMIS’ 12-inch fab. The facility is secured by the manufacturing equipment located in the SMIS’ 12-inch fab. As of December 31, 2015, SMIS had drawn down US$66.1 million and repaid US$13.2 million on this loan facility. The outstanding balance of US$52.9 million is repayable from June 2016 to December 2019. The interest rate on this loan facility ranged from 1.21% to 1.75% in 2015. SMIS was in compliance with the related financial covenants as of December 31, 2015.

 

(v)In December 2015, SMIS entered into a loan facility in the aggregate principal amount of RMB1,000 million with China Development Bank, which is guaranteed by SMIC. This fifteen-year bank facility was used for new SMIS’ 12-inch fab. As of December 31, 2015, SMIS had drawn down RMB1,000 million (approximately US$154.1 million) on this loan facility. The outstanding balance is repayable from November 2021 to November 2030. The interest rate on this loan facility was 1.20% in 2015.

 

(vi)In December 2015, SMIS entered into a loan facility in the aggregate principal amount of RMB475 million with China Development Bank, which is guaranteed by SMIC. This ten-year bank facility was used to expand the capacity of SMIS’ 12-inch fab. As of December 31, 2015, SMIS had drawn down RMB475 million (approximately US$73.2 million) on this loan facility. The outstanding balance is repayable from December 2018 to December 2025. The interest rate on this loan facility was 1.20% in 2015.

 

(vii)In December 2015, SMIS entered into a loan facility in the aggregate principal amount of RMB480 million with The Export-Import Bank of China, which is unsecured. This three-year bank facility was used for working capital purposes. As of December 31, 2015, SMIS had drawn down RMB480 million (approximately US$74.0 million) on this loan facility. The outstanding balance is repayable in December 2018. The interest rate on this loan facility was 2.65% in 2015.

 

 86 

 

 

31.Borrowings (continued)

 

Summary of borrowing arrangements (continued)

(viii)In March 2012, SMIB entered into the Beijing USD syndicate loan, a seven-year loan facility in the aggregate principal amount of US$600 million, with a syndicate of financial institutions based in the PRC. This seven-year bank facility was used to expand the capacity of SMIB’s 12-inch fabs. The facility was secured by the manufacturing equipment located in the SMIB and SMIT fabs, and 100% equity pledge of SMIB and SMIT. As of December 31, 2014, SMIB had drawn down US$260 million and repaid the outstanding balance on this loan facility in advance by September 2014.

 

(ix)In June 2013, SMIB entered into a USD Loan, a twenty-six-month working capital loan facility in the principal amount of US$60 million with The Export-Import Bank of China, which was unsecured. This twenty-six-month bank facility was used for working capital purposes. As of December 31, 2015, SMIB had drawn down US$40 million on this loan facility. The principal amount was repaid in August 2015. The interest rate on this loan facility was 3.33% in 2015.

 

(x)In June 2013, SMIB entered into a RMB Loan, a two-year working capital entrust loan facility in the principal amount of RMB70 million with China Investment Development Corporation through China CITIC Bank, which was unsecured. This two-year entrust loan facility was used for working capital purposes. SMIB drawn down RMB70 million (approximately US$10.8 million) and had repaid the outstanding balance on this loan facility in advance by May 2015. The interest rate on this loan facility was 12.0% in 2015.

 

(xi)In December 2014, SMIB entered into the new RMB Loan, a two-year working capital loan facility in the principal amount of RMB240 million with The Export-Import Bank of China, which is unsecured. This two-year bank facility was used for working capital purposes. As of December 31, 2015, SMIB had drawn down RMB240 million (approximately US$37.0 million) on this loan facility. The principal amount is repayable in December 2016. The interest rate on this loan facility ranged from 3.65% to 3.90% in 2015.

 

(xii)In December 2015, SMIB entered into the new RMB Loan, a fifteen-year working capital loan facility in the principal amount of RMB195 million with China Development Bank, which is unsecured. As of December 31, 2015, SMIB had drawn down RMB195 million (approximately US$30.0 million) on this loan facility. The principal amount is repayable from December 2017 to December 2030. The interest rate on this loan facility was 1.20% in 2015.

 

(xiii)In July 2015, SJ Jiangyin entered into the new RMB Loan of zero-interest rate, a five-year working capital loan facility in the principal amount of RMB93 million with Jiangyin Science and Technology New City Investment Management Company Ltd, which is unsecured. As of December 31, 2015, SJ Jiangyin had drawn down RMB93 million (approximately US$14.3 million) on this loan facility. The principal amount is repayable in July 2020.

 

 87 

 

 

31.Borrowings (continued)

 

Summary of borrowing arrangements (continued) 

(xiv)In September 2015, SJ Jiangyin entered into the new USD Loan, a seven-year working capital loan facility in the principal amount of US$44.5 million with China Development Bank. This bank facility was used to expand the capacity of SJ Jiangyin’s 12-inch bumping fab. The facility is guaranteed by SMIB. As of December 31, 2015, SJ Jiangyin had drawn down US$20 million on this loan facility. The principal amount is repayable from September 2017 to September 2022. The interest rate on this loan facility ranged from 4.20% to 4.23% in 2015.

 

As of December 31, 2015, property, plant and equipment and land use right with carrying amount of approximately US$324 million (2014: US$308 million and 2013: US$1,007 million) have been pledged to secure borrowings of the Group.

 

32.Convertible bonds

 

(i)Issue of US$200 million zero coupon convertible bonds due 2018

 

The Company issued convertible bonds at a par value of US$200,000 each with an aggregate principal amount of US$200,000,000 on November 7, 2013 (the “Original Bonds”).

 

The principal terms of the Original Bonds are as follows:

 

(1)Denomination of the Original Bonds — The Original Bonds are denominated in USD.

 

(2)Maturity date — Five years from the date of issuance, which is November 7, 2018 (“Maturity Date”).

 

(3)Interest — The Original Bonds do not bear any cash interest.

 

(4)Conversion —

 

a)Conversion price — The price is HK$0.7965 per each new share to be issued upon conversion of the Original Bonds (“Conversion Share”), subject to anti-dilutive adjustment in accordance with the terms of the bonds, including subdivision, reclassification or consolidation of shares of the Company, capitalization of profits or reserves, capital distribution, issuance of options or rights, and certain other events.

 

b)Conversion period — The Bondholder has the right to convert the Original Bonds into shares at any time on or after December 18, 2013 up to the close of business on the date falling seven days prior to the Maturity Date or if such bonds shall have been called or put for redemption at any time before the Maturity Date, then up to the close of business on a date no later than seven days prior to the date fixed for redemption, which is discussed below.

 

c)Number of Conversion Shares issuable — 1,946,817,325 Conversion Shares will be issued upon full conversion of the Original Bonds based on the initial conversion price of HK$0.7965 (translated at the fixed exchange rate of HK$7.7532 = US$1.0 as pre- determined).

 

 88 

 

 

32.Convertible bonds (continued)

 

(i)Issue of US$200 million zero coupon convertible bonds due 2018 (continued)

 

(5)Redemption —

 

a)At the option of the Company:

 

(I)Redemption at maturity — The Company will redeem the outstanding Original Bonds at principal amount on the Maturity Date.

 

(II)Redemption for tax reasons — The Company will redeem all and not only some of the Original Bonds at their principal amount, at its option, at any time, on giving not less than 30 nor more than 60 days’ notice to the Bondholders on the date specified in the Tax Redemption Notice.

 

(III)Redemption at the Option — The Company may redeem all and not only some of the Original Bonds on the date specified in the Option Redemption Notice at their principal amount at any time after November 7, 2015, provided that the Closing Price of a Share at least 120 percent of the Conversion Price then in effect immediately prior to the date upon which notice of such redemption is given. If at any time the aggregate principal amount of the outstanding Original Bonds is less than 10% of the aggregate principal amount originally issued, the Issuer may redeem all and not only some of such outstanding Original Bonds at their principal amount.

 

b)At the option of the Bondholder:

 

(I)Redemption on change of control — Upon the occurrence of a Change of Control, the Bondholder will have the right, at such holder’s option, to require the Company to redeem all or some only of such holder’s bonds on the Change of Control put date at their principal amount of the Original Bonds.

 

(II)Redemption at the option — The holders of each Bond will have the right at such holder’s option, to require the Issuer to redeem all or some only of the Original Bonds of such holder on the Optional Put Date (on November 7, 2016) at their principal amount.

 

(6)Purchase — The Issuer or any of their respective Subsidiaries may, subject to applicable laws and regulations, at any time and from time to time purchase the Original Bonds at any price in the open market or otherwise.

 

(7)Cancellation — All the Original Bonds which are redeemed, converted or purchased by the Issuer or any of its Subsidiaries, will forthwith be cancelled. Certificates in respect of all the Original Bonds cancelled will be forwarded to or to the order of the Registrar and such Original Bonds may not be reissued or resold.

 

 89 

 

 

32.Convertible bonds (continued)

 

(i)Issue of US$200 million zero coupon convertible bonds due 2018 (continued)

 

The Original Bonds issued at November 7, 2013 is a compound instrument included a liability component and an equity component. There are embedded derivatives in respect of the early redemption features of the Original Bonds, which are deemed to be clearly and closely related to the host contract and therefore, do not need to be separately accounted for. The fair value of the liability component of the Original Bonds was approximately US$179.4 million and the equity component was approximately US$15.2 million, determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole.

 

   USD’000 
Principal amount   200,000 
Transaction cost   (5,400)
Liability component at the date of issue   (179,390)
Equity  component   15,210 

 

Subsequent to the initial recognition, the liability component of the Original Bonds was carried at amortized cost using the effective interest method. The effective interest rate of the liability component of the Original Bonds was 3.69% per annum. The movement of the liability component and equity component of the Original Bonds for the year ended December 31, 2015 is set out below:

 

   Liability
Component
   Equity
Component
   Total 
   USD’000   USD’000   USD’000 
As at November 7, 2013   179,390    15,210    194,600 
Interest  charged  during  2013   1,173        1,173 
As at December 31, 2013   180,563    15,210    195,773 
Interest  charged  during  2014   6,593        6,593 
As at December 31, 2014   187,156    15,210    202,366 
Interest  charged  during  2015   6,910        6,910 
As at December 31, 2015   194,066    15,210    209,276 

 

The equity component will remain in convertible bond equity reserve until the embedded conversion option is exercised or the Original Bonds mature.

 

 90 

 

 

32.Convertible bonds (continued)

 

(ii)Issue of US$86.8 million zero coupon convertible bonds due 2018

On May 29, 2014, the Company issued convertible bonds at a par value of US$200,000 each with an aggregate principal amount of US$54,600,000 to Datang and an aggregate principal amount of US$32,200,000 to Country Hill (collectively, the “Original Pre-emptive Bonds”). The issue price was 100% of the aggregate principal amount of the Original Pre-emptive Bonds and the terms and conditions of the Original Pre-emptive Bonds are the same in all respects as those for the Original Bonds except for the issue date (details have been set out in Note 32(i)). The Original Pre-emptive Bonds is a compound instrument that included a liability component and an equity component. There are embedded derivatives in respect of the early redemption features of the Original Pre-emptive Bonds, which are deemed to be clearly and closely related to the host contract and therefore, do not need to be separately accounted for. The fair value of the liability component of the Original Pre-emptive Bonds was approximately US$81.2 million and the equity component was approximately US$5.6 million, determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole.

 

   USD’000 
Principal amount   86,800 
Transaction cost    
Liability component at the date of issue   (81,235)
Equity  component   5,565 

 

Subsequent to the initial recognition, the liability component of the Original Pre-emptive Bonds was carried at amortized cost using the effective interest method. The effective interest rate of the liability component of the Original Pre-emptive Bonds was 2.78% per annum. The movement of the liability component and equity component of the Original Pre-emptive Bonds for the year ended December 31, 2015 is set out below:

 

   Liability
Component
   Equity
Component
   Total 
   USD’000   USD’000   USD’000 
As at May 29, 2014   81,235    5,565    86,800 
Interest  charged  during  2014   1,315        1,315 
As at December 31, 2014   82,550    5,565    88,115 
Interest  charged  during  2015   2,292        2,292 
As at December 31, 2015   84,842    5,565    90,407 

 

The equity component will remain in convertible bond equity reserve until the embedded conversion option is exercised or the Original Pre-emptive Bonds mature.

 

The Original Pre-emptive Bonds have been consolidated and have formed a single series with the Original Bonds from the date of their issue.

 

 91 

 

 

32.Convertible bonds (continued)

 

(iii)Issue of US$95 million zero coupon convertible bonds due 2018

On June 24, 2014, the Company issued convertible bonds at a par value of US$200,000 each with an aggregate principal amount of US$95,000,000 (the “Further Bonds”). The issue price was 101.5% of the aggregate principal amount of the Further Bonds and the terms and conditions of the Further Bonds are the same in all respects as those for the Original Bonds except for the issue date (details have been set out in Note 32(i)). The Further Bonds is a compound instrument that included a liability component and an equity component. There are embedded derivatives in respect of the early redemption features of the Further Bonds, which are deemed to be clearly and closely related to the host contract and therefore, do not need to be separately accounted for. The fair value of the liability component of the Further Bonds was approximately US$87.1 million and the equity component was approximately US$7.1 million, determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole.

 

   USD’000 
Principal amount   95,000 
Premium of convertible bonds   1,425 
Transaction cost   (2,187)
Liability component at the date of issue   (87,090)
Equity  component   7,148 

 

Subsequent to the initial recognition, the liability component of the Further Bonds was carried at amortized cost using the effective interest method. The effective interest rate of the liability component of the Further Bonds was 3.79% per annum. The liability component and equity component of the Further Bonds for the year ended December 31, 2015 is set out below:

 

   Liability
Component
   Equity
Component
   Total 
   USD’000   USD’000   USD’000 
As at June 24, 2014   87,090    7,148    94,238 
Interest  charged  during  2014   1,650        1,650 
As at December 31, 2014   88,740    7,148    95,888 
Interest  charged  during  2015   3,362        3,362 
As at December 31, 2015   92,102    7,148    99,250 

 

The equity component will remain in convertible bond equity reserve until the embedded conversion option is exercised or the Further Bonds mature.

 

The Further Bonds have been consolidated and have formed a single series with the Original Bonds from the date of their issue.

 

 92 

 

 

32.Convertible bonds (continued)

 

(iv)Issue of US$22.2 million zero coupon convertible bonds due 2018

On December 4, 2014, the Company issued convertible bonds at a par value of US$200,000 each with an aggregate principal amount of US$22,200,000 to Datang (the “Further Pre-emptive Bonds”). The issue price was 101.5% of the aggregate principal amount of the Further Pre-emptive Bonds and the terms and conditions of the Further Pre-emptive Bonds are the same in all respects as those for the Original Bonds except for the issue date (details have been set out in Note 32(i)). The Further Pre-emptive Bonds is a compound instrument that included a liability component and an equity component. There are embedded derivatives in respect of the early redemption features of the Further Pre-emptive Bonds, which are deemed to be clearly and closely related to the host contract and therefore, do not need to be separately accounted for. The fair value of the liability component of the Further Pre-emptive Bonds was approximately US$20.9 million and the equity component was approximately US$1.6 million, determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole.

 

   USD’000 
Principal amount   22,200 
Premium of convertible bonds   333 
Liability component at the date of issue   (20,892)
Equity  component   1,641 

 

Subsequent to the initial recognition, the liability component of the Further Pre-emptive Bonds was carried at amortized cost using the effective interest method. The effective interest rate of the liability component of the Further Pre-emptive Bonds was 3.22% per annum. The liability component and equity component of the Further Pre-emptive Bonds for the year ended December 31, 2015 is set out below:

 

   Liability
Component
   Equity
Component
   Total 
   USD’000   USD’000   USD’000 
As at December 4, 2014   20,892    1,641    22,533 
Interest  charged  during  2014   56        56 
As at December 31, 2014   20,948    1,641    22,589 
Interest  charged  during  2015   674        674 
As at December 31, 2015   21,622    1,641    23,263 

 

The equity component will remain in convertible bond equity reserve until the embedded conversion option is exercised or the Further Pre-emptive Bonds mature.

 

The Further Pre-emptive Bonds have been consolidated and have formed a single series with the Original Bonds from the date of their issue.

 

The holders of each convertible bond may require the Company to redeem all or some only of the convertible bonds at their principal amount on November 7, 2016. Accordingly, all the convertible bonds disclosed above were classified as current liabilities at December 31, 2015.

 

 93 

 

 

33.Bonds payable

 

On October 7, 2014, the Company issued 5-year unsecured corporate bonds for a total amount of US$500 million. The corporate bonds carry a coupon interest rate of 4.125% with bond interest payable semi-annually on March 31 and September 30. As at the issue date, the net book value of the liabilities amounted to US$491.2 million after the deduction of (1) a discount of US$5.2 million and (2) issue expenses of US$3.6 million.

 

   USD’000 
Principal amount   500,000 
Discount of bonds payable   (5,185)
Transaction cost   (3,634)
Bonds payable   491,181 

 

The movement of the corporate bonds for the year ended December 31, 2015 is set out below:

 

   USD’000 
As at October 7, 2014   491,181 
Interest  charged  during  2014   5,554 
Interest payable recognized during 2014   (5,156)
As at December 31, 2014   491,579 
Interest  charged  during  2015   22,253 
Interest payable recognized during 2015   (20,625)
As at December 31, 2015   493,207 

 

34.Other liabilities

 

The amounts of other liabilities as of December 31, 2015 were US$65.8 million (2014: nil and 2013: nil), US$48.0 million (2014: nil and 2013: nil) of which were accrued bonus to be paid later than one year.

 

 94 

 

 

35.Trade and other payables

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Trade  payables   885,438    645,414    285,967 
Advance receipts from customers   72,865    54,724    41,164 
Deposit received   47,468    77,296    48,976 
Other payable   41,995    16,927    17,783 
    1,047,766    794,361    393,890 

 

Trade payables are non-interest bearing and are normally settled on 30-day to 60-day terms.

 

As of December 31, 2015, 2014 and 2013, trade payables were US$885.4 million, US$645.4 million and US$286.0 million, within which the payables for property, plant and equipment were US$660.7 million, US$425.1 million and US$117.6 million, respectively.

 

The following is an aged analysis of accounts payable presented based on the invoice date at the end of the reporting period.

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Within 30 days   788,936    555,556    214,219 
Between 31 to 60 days   36,596    25,729    20,295 
Over  60  days   59,906    64,129    51,453 
    885,438    645,414    285,967 

 

An aged analysis of the accounts payable is as follows:

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Current   814,553    599,584    237,337 
Overdue:               
Within 30 days   24,554    12,520    9,493 
Between 31 to 60 days   10,458    4,954    12,299 
Over  60  days   35,873    28,356    26,838 
    885,438    645,414    285,967 

 

36.Accrued liabilities

 

The amounts of accrued liabilities as of December 31, 2015, 2014 and 2013 were US$132.5 million, US$131.1 million and US$127.6 million, within which the amounts of accrued payroll expenses were US$71.5 million, US$62.5 million and US$55.5 million, respectively.

 

 95 

 

 

37.Other financial liabilities

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Derivatives carried at fair value through profit or loss (FVTPL)               
Cross currency swap contracts   1,459         
    1,459         

 

38.Share-based payments

 

Stock incentive plans

The Company’s stock incentive plans allow the Company to offer a variety of incentive awards to employees, consultants or external service advisors of the Group.

 

Stock option plan

The options are granted at the fair market value of the Company’s ordinary shares and expire 10 years from the date of grant and vest over a requisite service period of four years.

 

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the share options were granted.

 

Restricted share units (“RSUs”)

The Company adopted the Equity Incentive Plan (“EIP”) whereby the Company provides additional incentives to the Group’s employees, directors and external consultants through the issuance of restricted shares, RSUs and stock appreciation rights to the participants at the discretion of the Board of Directors. The RSUs vest over a requisite service period of 4 years and expire 10 years from the date of grant.

 

The fair value of each RSU granted is estimated on the date of grant using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the instruments were granted.

 

Share option plan for subsidiaries (“Subsidiary Plan”)

The options granted under the Subsidiary Plan shall entitle a participant of the Subsidiary Plan to purchase a specified number of subsidiary shares during a specified period at the price fixed by the relevant subsidiary committee at the time of grant or by a method specified by the relevant subsidiary committee at the time of grant and expire 10 years from the date of grant. The options vest over a requisite service period of four years.

 

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the share options were granted.

 

The expense recognized for employee services received during the year is shown in the following table:

 

   Year ended
12/31/15
   Year ended
12/31/14
   Year ended
12/31/13
 
   USD’000   USD’000   USD’000 
Expense arising from equity-settled share-based
payment transactions
   18,329    18,388    16,402 

 

 96 

 

 

38.Share-based payments (continued)

 

Movements during the year

(i)The following table illustrates the number and weighted average exercise prices (“WAEP”) of, and movements in, share options during the year (excluding RSUs and Subsidiary Plan):

 

   2015   2015   2014   2014   2013   2013 
   Number   WAEP   Number   WAEP   Number   WAEP 
Outstanding at January 1   1,163,627,269   US$0.08    1,320,383,853   US$0.09    1,285,367,372   US$0.09 
Granted during the year   56,565,258   US$0.10    153,998,051   US$0.10    270,695,247   US$0.08 
Forfeited and expired during the year   (87,928,903)  US$0.14    (161,539,854)  US$0.15    (158,907,830)  US$0.11 
Exercised during the year   (129,307,845)  US$0.07    (149,214,781)  US$0.06    (76,770,936)  US$0.04 
Outstanding at December 31   1,002,955,779   US$0.08    1,163,627,269   US$0.08    1,320,383,853   US$0.09 
Exercisable  at  December  31   513,197,994   US$0.08    489,477,234   US$0.09    483,679,899   US$0.11 

 

The weighted average remaining contractual life for the share options outstanding as at December 31, 2015 was 6.04 years (2014: 6.59 years and 2013: 6.58 years).

 

The range of exercise prices for options outstanding at the end of the year was from US$0.02 to US$0.15 (2014: from US$0.02 to US$0.22 and 2013: from US$0.02 to US$0.35).

 

The weighted average closing price of the Company’s shares immediately before the dates on which the share options were exercised was US$0.11 (2014: US$0.10 and 2013: US$0.07).

 

During the year ended December 31, 2015, share options were granted on February 24, 2015 May 20, 2015 and September 11, 2015. The fair values of the options determined at the dates of grant using the Black-Scholes Option Pricing model were US$0.04, US$0.04 and US$0.05, respectively.

 

During the year ended December 31, 2014, share options were granted on June 12, 2014 and November 17, 2014. The fair values of the options determined at the dates of grant using the Black-Scholes Option Pricing model were US$0.04 and US$0.05, respectively.

 

During the year ended December 31, 2013, share options were granted on May 7, 2013, June 11, 2013, June 17, 2013, September 6, 2013 and November 4, 2013. The fair values of the options determined at the dates of grant using the Black-Scholes Option Pricing model were US$0.04, US$0.04, US$0.04, US$0.04 and US$0.03, respectively.

 

The following table list the inputs to the Black Scholes Pricing models used for the option granted during the years ended 31 December 2015, 2014 and 2013 respectively:

 

   2015   2014   2013 
Dividend yield (%)            
Expected volatility   46.13%   50.93%   62.18%
Risk-free interest rate   1.61%   1.67%   1.23%
Expected life of share options   6 years    5 years    5 years 

 

 97 

 

 

38.Share-based payments (continued)

 

Movements during the year (continued)

(i)The following table illustrates the number and weighted average exercise prices (“WAEP”) of, and movements in, share options during the year (excluding RSUs and Subsidiary Plan): (continued)

 

The risk-free rate for periods within the contractual life of the option is based on the yield of the US Treasury Bond. The expected term of options granted represents the period of time that options granted are expected to be outstanding. Expected volatilities are based on the average volatility of the Company’s stock prices with the time period commensurate with the expected term of the options. The dividend yield is based on the Company’s intended future dividend plan.

 

The valuation of the options are based on the best estimates from Company by taking into account a number of assumptions and is subject to limitation of the valuation model. Changes in variables and assumptions may affect the fair value of these options.

 

(ii)The following table illustrates the number and weighted average fair value (“WAFV”) of, and movements in, RSUs during the year (excluding stock option plan and Subsidiary Plan):

 

   2015   2015   2014   2014   2013   2013 
   Number   WAFV   Number   WAFV   Number   WAFV 
Outstanding at January 1   274,057,667   US$0.09    233,158,731   US$0.07    125,358,288   US$0.06 
Granted during the year   146,852,985   US$0.11    114,726,892   US$0.11    151,336,161   US$0.08 
Forfeited during the year   (13,421,683)  US$0.10    (7,365,088)  US$0.09    (8,139,176)  US$0.07 
Exercised during the year   (102,976,292)  US$0.08    (66,462,868)  US$0.07    (35,396,542)  US$0.06 
Outstanding at December 31   304,512,677   US$0.10    274,057,667   US$0.09    233,158,731   US$0.07 

 

The weighted average remaining contractual life for the RSUs outstanding as at December 31, 2015 was 8.69 years (2014: 8.75 years and 2013: 8.88 years).

 

The weighted average closing price of the Company’s shares immediately before the dates on which the RSUs were exercised was US$0.09 (2014: US$0.08 and 2013: US$0.08).

 

During the year ended December 31, 2015, RSUs were granted on May 20, 2015, September 11, 2015 and November 23, 2015. The fair values of the RSUs determined at the dates of grant using the Black-Scholes Option Pricing model were US$0.11, US$0.09 and US$0.11.

 

During the year ended December 31, 2014, RSUs were granted on November 17, 2014. The fair values of the RSUs determined at the dates of grant using the Black-Scholes Option Pricing model were US$0.11.

 

During the year ended December 31, 2013, RSUs were granted on June 11, 2013. The fair values of the RSUs determined at the dates of grant using the Black-Scholes Option Pricing model were US$0.08.

 

 98 

 

 

38.Share-based payments (continued)

 

Movements during the year (continued)

 

(ii)The following table illustrates the number and weighted average fair value (“WAFV”) of, and movements in, RSUs during the year (excluding stock option plan and Subsidiary Plan): (continued)

 

The following table list the inputs to the models used for the plans for the years ended December 31, 2015, 2014 and 2013, respectively:

 

   2015   2014   2013 
Dividend yield (%)            
Expected volatility   37.07%   38.49%   47.03%
Risk-free interest rate   0.60%   0.54%   0.34%
Expected life of RSUs   2 years    2 years    2 years 

 

The risk-free rate for periods within the contractual life of the RSUs is based on the yield of the US Treasury Bond. The expected term of RSUs granted represents the period of time that RSUs granted are expected to be outstanding. Expected volatilities are based on the average volatility of the Company’s stock prices with the time period commensurate with the expected term of the RSUs. The dividend yield is based on the Company’s intended future dividend plan.

 

The valuation of the RSUs is based on the best estimates from Company by taking into account a number of assumptions and is subject to limitation of the valuation model. Changes in variables and assumptions may affect the fair value of these RSUs.

 

(iii)The following table illustrates the number and weighted average exercise prices (“WAEP”) of, and movements in, share options of the Subsidiary Plan during the year (excluding stock option plan and RSUs):

 

   2015   2015 
   Number   WAEP 
Outstanding at January 1        
Granted during the year   8,330,000    US$0.06 
Forfeited and expired during the year   (1,192,500)   US$0.06 
Exercised during the year   (137,500)   US$0.05 
Outstanding at December 31   7,000,000    US$0.06 
Exercisable at December 31   689,479    US$0.05 

 

The weighted average remaining contractual life for the share options outstanding as at December 31, 2015 was 9.1 years.

 

The range of exercise prices for options outstanding at the end of the year was from US$0.05 to US$0.08.

 

During the year ended December 31, 2015, share options of the Subsidiary Plan were granted on January 1, 2015, May 4, 2015 and September 15, 2015. The fair values of the options of the Subsidiary Plan determined at the dates of grant using the Black-Scholes Option Pricing model were US$0.069, US$0.069 and US$0.099, respectively.

 

 99 

 

 

38.Share-based payments (continued)

 

Movements during the year (continued)

(iii)The following table illustrates the number and weighted average exercise prices (“WAEP”) of, and movements in, share options of the Subsidiary Plan during the year (excluding stock option plan and RSUs): (continued)

 

The following table list the inputs to the Black Scholes Pricing models used for the option of the Subsidiary Plan granted during the years ended 31 December 2015:

 

   2015 
Dividend yield (%)    
Expected volatility   36.0%
Risk-free interest rate   1.01%
Expected life of share options   3 years 

 

The risk-free rate for periods within the contractual life of the option of the Subsidiary Plan is based on the yield of the US Treasury Bond. The expected term of options of the Subsidiary Plan granted represents the period of time that options of the Subsidiary Plan granted are expected to be outstanding. Expected volatilities are based on the average volatility of the relevant subsidiary’s set of public comparables with the time period commensurate with the expected term of the options. The dividend yield is based on the relevant subsidiary’s intended future dividend plan.

 

The valuation of the options of the Subsidiary Plan are based on the best estimates from the relevant subsidiary by taking into account a number of assumptions and is subject to limitation of the valuation model. Changes in variables and assumptions may affect the fair value of these options.

 

39.Financial instruments

 

Capital management

The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximizing the return to stakeholders through the optimization of the capital structure.

 

The capital structure of the Group consists of net debt (debt as detailed in Note 31, Note 32 and Note 33 offset by cash and cash equivalent) and equity of the Group.

 

Where the entity manages its capital through issuing/repurchasing shares and raising/repayment of debts. The Group reviews the capital structure on a semi-annual basis. As part of this review, the Group considers the cost of capital and the risks associates with each class of capital. The Group will balance its overall capital structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt.

 

 100 

 

 

39.Financial instruments (continued)

 

Gearing ratio

The gearing ratio at end of the reporting period was as follows.

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Debt (i)   1,414,943    1,289,227    1,172,085 
Cash and cash equivalent   (1,005,201)   (603,036)   (462,483)
Other financial assets   (282,880)   (644,071)   (240,311)
Net debt   126,862    42,120    469,291 
Equity   4,190,255    3,307,722    2,593,182 
Net debt to equity ratio   3.0%   1.3%   18.1%

 

(i)Debt is defined as long-and short-term borrowings (excluding derivatives), convertible bonds, and bonds payables as described in Note 31, Note 32 and Note 33.

 

Financial risk management objectives

The Group’s corporate treasury function co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyze exposures by degree and magnitude of risks. These risks include market risk including currency risk, interest rate risk and other price risk, credit risk and liquidity risk.

 

The Group seeks to minimize the effects of these risks by using derivative financial instruments to hedge risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provide written principles on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed on continuous basis. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

 

Market risk

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group enters into a variety of derivative financial instruments to manage its exposure to foreign currency risk and interest rate risk, including:

 

forward foreign exchange contracts to hedge the exchange rate risk arising on the import from suppliers;

 

interest rate swaps to mitigate the risk of rising interest rates; and

 

cross-currency interest rate swap agreements to protect against volatility of future cash flows caused by the changes in both interest rates and exchange rates associated with outstanding long-term debt denominated in a currency other than the US dollar.

 

Market risk exposures are measured using the sensitivity analysis and the analysis in the following sections relate to the position as at December 31, 2015, 2014 and 2013.

 

 101 

 

 

39.Financial instruments (continued)

 

Market risk (continued)

There has been no change to the Group’s exposure to market risks or the manner in which these risks are managed and measured.

 

Foreign currency risk management

The Group undertakes transactions denominated in foreign currencies, consequently, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilizing forward foreign exchange contracts.

 

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the end of the reporting period were as follows:

 

   Liabilities Assets 
   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
EUR   76,462    2,488    3,037    33,968    480    2,595 
JPY   5,553    7,560    7,925    2,986    606    1,499 
RMB   586,931    221,336    133,177    909,497    1,148,146    766,960 
Others   14,127    4,684    8,226    2,529    1,100    7,323 

 

Foreign currency sensitivity analysis

The Group is mainly exposed to the currency of RMB, Japanese Yen (“JPY”) and Euros (“EUR”).

 

The following table details the Group’s sensitivity to a 5% increase in the foreign currencies against USD. 5% represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 5% change in foreign currency rates. For a 5% decrease of the foreign currency against USD, there would be an equal and opposite impact on the profit or equity below predicted.

 

   EUR   JPY   RMB   Others 
   2015   2014   2013   2015   2014   2013   2015   2014   2013   2015   2014   2013 
   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
Profit or loss   (2,125)   (100)   (22)   (128)   (366)   (338)   16,128    48,780    33,357    (580)   (190)   (1)
Equity   (2,125)   (100)   (22)   (128)   (366)   (338)   16,128    48,780    33,357    (580)   (190)   (1)

 

Forward foreign exchange contracts

It is the policy of the Group to enter into forward foreign exchange contracts to cover specific foreign currency payments and receipts within the exposure generated. The Group also enters into forward foreign exchange contracts to manage the foreign currency exposure from purchases/sales and financing activities.

 

 102 

 

 

39.Financial instruments (continued)

 

Foreign currency risk management (continued)

Forward foreign exchange contracts (continued)

The following table details the forward foreign currency (FC) contracts outstanding at the end of the reporting period:

 

Outstanding contracts

 

   Average exchange rate   Foreign currency   Notional value   Fair value assets/(liabilities) 
   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13 
               FC’000   FC’000   FC’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
Buy EUR                                                            
Less than 3 months   1.0895            39,192            42,872            172         

 

The Group does not enter into foreign currency exchange contracts for speculative purposes.

 

Cross currency swap contracts

It is the policy of the Group to enter into cross-currency swap agreements to protect against volatility of future cash flows caused by the changes in exchange rates associated with outstanding long-term debt denominated in a currency other than the US dollar.

 

The following table details the cross currency swap contracts outstanding at the end of the reporting period:

 

Outstanding contracts

 

   Average exchange rate   Foreign currency   Notional value   Fair value assets/(liabilities) 
   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13 
               FC’000   FC’000   FC’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
Buy RMB                                                            
1 year to 5 years   6.4360            480,000            73,966            (1,459)        

 

The Group does not enter into cross currency swap contracts for speculative purposes.

 

Interest rate risk management

The Group is exposed to interest rate risk relates primarily to the Group’s long-term debt obligations, which the Group generally assumes to fund capital expenditures and working capital requirements. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings, and by the use of interest rate swap contracts and cross currency swap contracts.

 

The Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note.

 

 103 

 

 

39.Financial instruments (continued)

 

Interest rate risk management (continued)

Interest rate sensitivity analysis

The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year.

 

A 10 basis point increase or decrease represents management’s assessment of the reasonably possible change in interest rates. If interest rates had been 10 basis points higher and all other variables were held constant, the Group’s profit for the year ended December 31, 2015 would decrease by US$0.4 million (2014: profit decrease by US$0.2 million and 2013: profit decrease by US$0.6 million). This is mainly attributable to the Group’s exposure to interest rates on its variable rate borrowings.

 

Credit risk management

Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group is mainly exposed to credit risk from trade and other receivables and deposits with banks and financial institutions.

 

Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control relating to customer credit risk management. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures and is offered credit terms only with the approval from Finance and Sales Division. Credit quality of a customer is assessed using publicly available financial information and its own trading records to rate its major customers. The Group’s exposure and credit ratings of its counterparties are continuously monitored. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant.

 

Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas.

 

Apart from Customers A, B, C and D , four largest customers of the Group, the Group does not have significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The Group defines counterparties as having similar characteristics if they are related entities. Concentration of credit risk related to Customers A, B, C and D did not exceed 5%, 4%, 3% and 3% respectively of gross monetary assets at the end of current year. Concentration of credit risk to any other counterparty did not exceed 3% of gross monetary assets at the end of current year.

 

Net revenue and accounts receivable for customers which accounted for 10% or more of the Group’s net sales and gross accounts receivable is disclosed in Note 6.

 

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings.

 

 104 

 

 

39.Financial instruments (continued)

 

Liquidity risk management

The Group manages liquidity risk by maintaining adequate cash reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities.

 

Liquidity and interest risk tables

The following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The tables include both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the end of the reporting period. The contractual maturity is based on the earliest date on which the Group may be required to pay.

 

  

Weighted
average
effective
interest rate

   Less than
3 months
  

3 months

to 1 year

   1–5 years   5+ years   Total 
   %   USD’000   USD’000   USD’000   USD’000   USD’000 
December 31, 2015                                 
Interest-bearing bank and  Fixed   1.69%   42,963        149,253    238,831    431,047 
other borrowings  Floating   4.98%       71,944    158,744        230,688 
Convertible bonds      2.78%–3.79%       404,000            404,000 
Bonds payable      4.52%           500,000        500,000 
Trade and other payables           920,426    28,508    5,350    93,482    1,047,766 
            963,389    504,452    813,347    332,313    2,613,501 

 

  

Weighted
average
effective

interest rate

   Less than
3  months
  

3 months

to 1 year

   1–5  years   5+ years   Total 
   %   USD’000   USD’000   USD’000   USD’000   USD’000 
December 31, 2014                                 
Interest-bearing bank and  Fixed   2.54%   39,075    77,099            116,174 
other borrowings  Floating   6.13%       48,408    287,596        336,004 
Convertible bonds      2.78%–3.79%           404,000        404,000 
Bonds payable      4.52%           500,000        500,000 
Trade and other payables           727,589    744    3,492    62,536    794,361 
            766,664    126,251    1,195,088    62,536    2,150,539 

 

  

Weighted
average
effective

interest rate

   Less than
3  months
  

3 months

to 1 year

   1–5  years   5+ years   Total 
   %   USD’000   USD’000   USD’000   USD’000   USD’000 
December 31, 2013                                 
Interest-bearing bank and  Fixed   3.72%   102,800    119,588            222,388 
other borrowings  Floating   5.66%   82,741    91,169    643,369    26,928    844,207 
Convertible bonds      3.69%           200,000        200,000 
Trade and other payables           334,622    56,383    2,885        393,890 
            520,163    267,140    846,254    26,928    1,660,485 

 

 105 

 

 

39.Financial instruments (continued)

 

Liquidity risk management (continued)

Liquidity and interest risk tables (continued)

The following table details the Group’s expected maturity for its non-derivative financial assets. The table has been drawn up based on the undiscounted contractual maturities of the financial assets including interest that will be earned on those assets. The inclusion of information on non-derivative financial assets is necessary in order to understand the Group’s liquidity risk management as the liquidity is managed on a net asset and liability basis.

 

  

Weighted
average
effective
interest

rate

   Less than
3 months
  

3 months

to 1 year

   1–5 years   5+ years   Total 
   %   USD’000   USD’000   USD’000   USD’000   USD’000 
December 31, 2015                              
Trade and other receivables        499,846                499,846 
Cash and cash equivalent, restricted cash & short-term investments   2.12%   1,549,692    45,038            1,594,730 
Available for sale financial assets                    19,750    19,750 
         2,049,538    45,038        19,750    2,114,326 

 

   Weighted                     
   average                     
   effective   Less than   3 months             
   interest rate   3 months   to 1 year   1 5 years   5+ years   Total 
   %   USD’000   USD’000   USD’000   USD’000   USD’000 
December 31, 2014                              
Trade and other receivables        456,388                456,388 
Cash and cash equivalent, restricted cash & short-term investments   2.60%   1,309,979    45,484            1,355,463 
Available for sale financial assets                    15,081    15,081 
         1,766,367    45,484        15,081    1,826,932 

 

   Weighted
average
effective
interest rate
   Less than
3  months
  

3 months

to 1 year

   1–5  years   5+ years   Total 
   %   USD’000   USD’000   USD’000   USD’000   USD’000 
December 31, 2013                              
Trade and other receivables        379,361                379,361 
Cash and cash equivalent, restricted cash & short-term investments   1.34%   680,525    59,437            739,962 
Available for sale financial assets                    1,278    1,278 
         1,059,886    59,437        1,278    1,120,601 

 

The amounts included above for variable interest rate instruments for both non-derivative financial assets and liabilities is subject to change if changes in variable interest rates differ to those estimates of interest rates determined at the end of the reporting period.

 

 106 

 

 

39.Financial instruments (continued)

 

Liquidity risk management (continued)

Liquidity and interest risk tables (continued) 

The Group has access to short-term financing facilities as described in below section, of which US$1,351.7 million were unused at the end of the reporting period (2014: US$767.4 million and 2013: US$927.5 million). The Group expects to meet its other obligations from operating cash flows and proceeds of maturing financial assets.

 

The following table details the Group’s liquidity analysis for its derivative financial instruments. The table has been drawn up based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrated by the yield curves at the end of the reporting period.

 

   1 month  

Less than

1 month

   1–3  months  

3 months

to 1 year

   1–5 years   5+ years 
   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
December31, 2015                              
Net  settled:                              
—  foreign  exchange  forward contracts       42,872                 
— cross currency swap contracts                   73,966     
        42,872            73,966     

 

Fair value of financial instruments

Fair value of financial instruments carried at amortized cost

The Group considers that the carrying amounts of financial assets and financial liabilities recognized in the consolidated financial statements approximate their fair values.

 

Valuation techniques and assumptions applied for the purposes of measuring fair value

The fair values of financial assets and financial liabilities are determined as follows:

 

the fair value of financial instruments based on quoted market prices in active markets, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. Pricing information that the Group obtains from third parties is internally validated for reasonableness prior to use in the consolidated financial statements. When observable market prices are not readily available, the Group generally estimates the fair value using valuation techniques that rely on alternate market data or inputs that are generally less readily observable from objective sources and are estimated based on pertinent information available at the time of the applicable reporting periods. In certain cases, fair values are not subject to precise quantification or verification and may fluctuate as economic and market factors vary and the Group’s evaluation of those factors changes.

 

 107 

 

 

39.Financial instruments (continued)

 

Fair value of financial instruments (continued)

Fair value measurements recognized in the consolidated statement of financial position

The following tables provide an analysis of financial instruments that are measured at fair value on a recurring basis subsequent to initial recognition, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. There is no transfer within different levels of the fair value hierarchy in the year ended December 31, 2015, 2014 and 2013:

 

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active market for identical assets or liabilities;

 

Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices), and

 

Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

      12/31/15 
   Valuation technique(s) and key input  Level 1   Level 2   Level 3   Total 
      USD’000   USD’000   USD’000   USD’000 
Financial assets at FVTPL                       
Short-term investment carried at fair  value  through  profit  or loss  Discounted cash flow. Future cash flows are estimated based on contracted interest rates and discounted.       257,583        257,583 
Foreign currency forward contracts classified as other financial assets in the statement  of  financial position  Discounted cash flow. Future cash flows are estimated based on forward exchange rates (from observable forward exchange rates at the end of the  reporting  period)  and  contracted forward rates and discounted.       172        172 
Available-for-sale investment  Quoted prices in active markets   3,300            3,300 
Available-for-sale investment  Recent transaction price           15,173    15,173 
Derivative financial instrument  Measured by Binational Model with key assumptions including exercise multiple (75%), risk free rate of interest  (1.2%),  expected  volatility (46.8%)  and  rate  of  return  (10%).           30,173    30,173 
Total      3,300    257,755    45,346    306,401 
Financial liabilities at FVTPL                       
Cross currency swap contracts classified as other financial liabilities in the statement of financial  position  Discounted cash flow. Future cash flows are estimated based on forward exchange rates (from observable forward exchange rates at the end of the  reporting  period)  and  contracted forward rates and discounted.       1,459        1,459 
Total          1,459        1,459 

 

 108 

 

 

39.Financial instruments (continued)

 

Fair value of financial instruments (continued)

Fair value measurements recognized in the consolidated statement of financial position

(continued)

 

      12/31/14 
   Valuation technique(s) and key input  Level 1   Level 2   Level 3   Total 
      USD’000   USD’000   USD’000   USD’000 
Financial assets at FVTPL                       
Short-term investment carried at fair  value  through  profit  or loss  Discounted cash flow. Future cash flows are estimated based on contracted interest rates and discounted.       616,862        616,862 
Available-for-sale investment  Recent transaction price.           13,803    13,803 
Total          616,862    13,803    630,665 

 

      12/31/13 
   Valuation technique(s) and key input  Level 1   Level 2   Level 3   Total 
      USD’000   USD’000   USD’000   USD’000 
Financial assets at FVTPL                       
Short-term investment carried at fair  value  through  profit  or loss  Discounted cash flow. Future cash flows are estimated based on contracted interest rates and discounted.       240,311        240,311 
Total          240,311        240,311 

 

40.Related party transactions

 

The names of the related parties which had transactions with the Group for the year ended December 31, 2015 and the relationships with the Group are disclosed below:

 

Related party name   Relationship with the Group
China Academy of Telecommunication Technology   A member of Datang Telecom Technology & Industry Group (“Datang  Group”),  which  owns  Datang  Holdings
Datang Telecom Technology & Industry Holdings Co., Ltd. (“Datang   Holdings”)   A substantial shareholder of the Company
Datang Microelectronics Technology Co., Ltd.   A member of Datang Group
Datang Semiconductor Co., Ltd.   A member of Datang Group
Leadcore Technology Co., Ltd and Leadcore Technology (Hong  Kong)  Co.,  Ltd  (“Leadcore”)   A member of Datang Group
Datang Telecom Group Finance Co., Ltd. (“Datang Finance”)   A member of Datang Group
China  IC  Fund   A substantial shareholder of the Company
China Investment Corporation (“CIC”)   A substantial shareholder of the Company in the middle of 2015, which was interested in less than 5% of the share capital of the Company as at December 31, 2015
Country  Hill   A wholly-owned subsidiary of Bridge Hill Investments Limited, which is a subsidiary controlled by CIC
Toppan   An associate of the Group
Brite Semiconductor Corporation and its subsidiaries (“Brite”)   An associate of the Group
China Fortune-Tech   An associate of the Group
Zhongxin Xiecheng   An associate of the Group

 

 109 

 

  

40.Related party transactions (continued)

 

Trading transactions

During the year, group entities entered into the following trading transactions with related parties that are not members of the Group:

 

   Sale of goods   Sale of services 
   Year ended   Year ended 
   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
Datang  Microelectronics Technology Co., Ltd   12,885    12,340    14,821             
Datang Semiconductor Co., Ltd   865                     
Leadcore   8,881    2,173    1,905             
Toppan               3,699    4,486    4,317 
Brite   31,379    31,444    NA            NA 
China Fortune-Tech           NA    60    41    NA 

 

   Purchase of goods   Purchase of services 
   Year ended   Year ended 
   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
China Academy of                              
Telecommunication                              
Technology                   1,163     
Toppan   7,996    1,345    7    3,516    22,726    22,854 
Zhongxin Xiecheng               1,199    2,673    1,930 
Brite           NA    2,582    3,201    NA 
China Fortune-Tech           NA    938    116    NA 

   

 110 

 

 

40.Related party transactions (continued)

 

Trading transactions (continued)

The following balances were outstanding at the end of the reporting period:

 

   Amounts due from   Amounts due to 
   related parties   related parties 
   12/31/15   12/31/14   12/31/13   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
China Academy of                              
Telecommunication                              
Technology       360                 
Datang Semiconductor Co., Ltd   61                     
Datang Microelectronics Technology Co., Ltd   5,338    5,642    6,124             
Datang Finance                       65,884 
Leadcore   1,948    619    405    3,667    7    140 
Toppan   317    387    370    1,148    2,739    2,397 
Zhongxin Xiecheng           6             
Brite   5,661    3,772    683    141    700    645 
China Fortune-Tech   40    41                 

 

On February 18, 2014, the Company entered into a framework agreement with Datang Holdings (the “Framework Agreement”). Pursuant to the agreement, the Group and Datang Holdings (including its associates) will engage in business collaboration including but not limited to foundry service. The effective period of the Framework Agreement is two years. The pricing for the transactions contemplated under the agreement will be determined by reference to reasonable market price.

 

On June 8, 2015, the Company issued 4,700,000,000 new ordinary shares to Xinxin (Hongkong) Capital Co., Limited, a wholly-owned subsidiary of the China IC Fund. Please refer to Note 28 for details.

 

On September 25, 2015, Country Hill subscribed 323,518,848 ordinary shares of the Company. Please refer to Note 28 for details.

 

On October 9, 2015, Datang subscribed 961,849,809 ordinary shares of the Company. Please refer to Note 28 for details.

 

On December 18, 2015, the Company and Datang Finance entered into a financial services agreement with a three year term commencing on January 1, 2016 and ending on December 31, 2018, pursuant to which Datang Finance has agreed to provide the Company and its subsidiaries, including its associated companies and companies under its management with a range of financial services (including deposit services, loan services, foreign exchange services and other financial services).

 

On December 28, 2015, the Company entered into a new framework agreement (the “Renewed Framework Agreement”) with Datang Holdings, pursuant to which the Group and Datang Holdings (including its associates) would engage in business collaboration including but not limited to foundry service. The term of the Renewed Framework Agreement is three years commencing from January 1, 2016. The pricing for the transactions contemplated under the Renewed Framework Agreement is determined based on the same as the Framework Agreement.

 

Compensation of key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors of the Company.

 

 111 

 

 

40.Related party transactions (continued)

 

Compensation of key management personnel (continued)

The remuneration of key management personnel during the year are as follows:

 

   Year ended
12/31/15
  

Year ended

12/31/14

  

Year ended

12/31/13

 
   USD’000   USD’000   USD’000 
Short-term benefit   4,731    4,593    4,318 
Share-based payments   2,618    2,535    3,028 
    7,349    7,128    7,346 

 

The remuneration of key management personnel is determined by the Compensation Committee having regard to the performance of individuals and market trends.

 

Arrangements/contracts for sale of self-developed living quarter unit

In 2015, the Group entered into arrangement/contracts with 4 of the Company’s directors and key management for sale of self-developed living quarter units and the amount of the considerations was approximately US$3.6 million. The transactions were not completed as of the date of this annual results announcement.

 

In 2013, amount of sale of self-developed living quarter units to one of directors of the Company and one of the key management, which were approved by the Board, were US$1.1 million and US$0.8 million.

 

41.Commitments for expenditure

 

Purchase commitments

As of December 31, 2015, 2014 and 2013, the Group had the following commitments to purchase machinery, equipment and construction obligations. The machinery and equipment is scheduled to be delivered to the Group’s facility by December 31, 2016.

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Commitments for the facility construction   165,274    211,696    114,878 
Commitments for the acquisition of property, plant and  equipment   1,146,275    292,867    178,382 
Commitments for the acquisition of intangible assets   29,392    14,109    10,147 
    1,340,941    518,672    303,407 

 

 112 

 

 

42.Financial information of parent company

 

(i)Statement of financial position

 

   12/31/15   12/31/14   12/31/13 
   USD’000   USD’000   USD’000 
Assets               
Non-current assets               
Property, plant and equipment   30,123    10,244    7,301 
Intangible assets   108,897    133,117    154,682 
Investment in subsidiaries   3,153,887    2,888,658    2,689,158 
Investments in associates   42,553    14,205    12,301 
Other assets   118,989    166,500    1,000 
Total non-current assets   3,454,449    3,212,724    2,864,442 
Current assets               
Prepayment and prepaid operating expenses   633    641    626 
Trade and other receivables   450,224    312,760    201,352 
Other financial assets   15,000    12,000     
Restricted cash           29,130 
Cash and cash equivalent   115,726    55,600    162,360 
Total current assets   581,583    381,001    393,468 
Total assets   4,036,032    3,593,725    3,257,910 
Equity and liabilities               
Capital and reserves               
Ordinary shares $0.0004 par value,50,000,000,000 shares authorized,42,073,748,961, 35,856,096,167 and 32,112,307,101 shares issued and outstanding at December 31, 2015, 2014 and 2013, respectively 16,830 14,342 12,845
Share premium   4,904,244    4,377,013    4,090,229 
Reserves   98,931    93,012    69,295 
Accumulated deficit   (1,918,402)   (1,850,292)   (1,763,481)
Total equity   3,101,603    2,634,075    2,408,888 
Non-current liabilities               
Convertible bonds       379,394    180,563 
Bonds payable   493,207    491,579     
Other long-term liabilities   2,080         
Total non-current liabilities   495,287    870,973    180,563 
Current liabilities               
Trade and other payables   33,445    18,391    527,035 
Borrowings       61,221    133,803 
Convertible bonds   392,632         
Accrued liabilities   11,606    9,065    7,615 
Other financial liabilities   1,459         
Current tax liabilities           6 
Total current liabilities   439,142    88,677    668,459 
Total liabilities   934,429    959,650    849,022 
Total equity and liabilities   4,036,032    3,593,725    3,257,910 

 

 113 

 

 

42.Financial information of parent company (continued)

 

(ii)Statement of change in equity

 

   Ordinary
shares
   Share
premium
   Equity-
settle
employee
benefits
reserve
   Foreign
currency
translation
reserve
   Convertible
bonds
equity
reserve
   Accumulated
deficit
   Attributable
to owners
of  the
Company
   Total
Equity
 
   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000   USD’000 
Balance at December 31, 2012   12,800    4,083,588    42,232    (1,092)       (1,701,430)   2,436,098    2,436,098 
Loss for the year                       (62,051)   (62,051)   (62,051)
Total comprehensive loss for the year                       (62,051)   (62,051)   (62,051)
Exercise of stock options   45    6,641    (3,457)               3,229    3,229 
Share-based compensation           16,402                16,402    16,402 
Recognition of equity component of convertible bonds                   15,210        15,210    15,210 
Subtotal   45    6,641    12,945        15,210        34,841    34,841 
Balance at December 31, 2013   12,845    4,090,229    55,177    (1,092)   15,210    (1,763,481)   2,408,888    2,408,888 
Loss for the year                       (86,811)   (86,811)   (86,811)
Total comprehensive loss for the year                       (86,811)   (86,811)   (86,811)
Issuance of ordinary shares   1,411    268,362                    269,773    269,773 
Exercise of stock options   86    18,422    (9,025)               9,483    9,483 
Share-based compensation           18,388                18,388    18,388 
Recognition of equity component of convertible bonds                   14,354        14,354    14,354 
Subtotal   1,497    286,784    9,363        14,354        311,998    311,998 
Balance at December 31, 2014   14,342    4,377,013    64,540    (1,092)   29,564    (1,850,292)   2,634,075    2,634,075 
Loss for the year                       (68,110)   (68,110)   (68,110)
Total comprehensive loss for the year                       (68,110)   (68,110)   (68,110)
Issuance of ordinary shares   2,395    506,412                    508,807    508,807 
Exercise of stock options   93    20,819    (12,169)               8,743    8,743 
Share-based compensation           18,088                18,088    18,088 
Subtotal   2,488    527,231    5,919                535,638    535,638 
Balance at December 31, 2015   16,830    4,904,244    70,459    (1,092)   29,564    (1,918,402)   3,101,603    3,101,603 

 

43.Approval of financial statements

 

The financial statements were approved and authorized for issue by the board of directors of the Company on March 30, 2016.

 

 114 

 

 

ANNUAL REPORT

 

The Annual Report for the year ended December 31, 2015 will be published on the website of the Hong Kong Stock Exchange (http://www.hkex.com.hk) as well as the website of the Company (www.smics.com) and will be dispatched to the shareholders of the Company in due course.

 

  By order of the Board
  Semiconductor Manufacturing International Corporation
Dr. Tzu-Yin Chiu
  Chief Executive Officer & Executive Director

 

Shanghai, PRC, March 30, 2016

 

As at the date of this announcement, the Directors are:

 

Executive Directors

Zhou Zixue (Chairman)

Tzu-Yin Chiu (Chief Executive Officer)

Gao Yonggang (Chief Financial Officer)

 

Non-executive Directors

Chen Shanzhi (Li Yonghua as his Alternate)

Zhou Jie

Ren Kai

Lu Jun

 

Independent Non-executive Directors

William Tudor Brown

Sean Maloney

Lip-Bu Tan

Carmen I-Hua Chang

 

* For identification purpose only

 

 115 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Semiconductor Manufacturing International Corporation
     
Date: April 11, 2016 By: /s/ Dr. Tzu-Yin Chiu
    Name: Dr. Tzu-Yin Chiu
    Title: Chief Executive Officer, Executive Director

  

116