– 4 –

LETTER FROM THE BOARD

INTRODUCTION

The purpose of this circular is to provide you with information on the businesses to be transacted at the EGM in respect of, among other matters, the Joint Venture Agreement      and the Capital Contribution Agreement in relation to  the  proposed Capital Contribution  and deemed disposal of equity interest in SMSC and any transactions contemplated hereunder.

Reference is made to the Company’s announcement dated 30 January 2018 in relation   to the proposed Capital Contribution to and deemed disposal of equity interest in SMSC pursuant to the Joint Venture Agreement and the Capital Contribution Agreement entered  into among SMIC Holdings, SMIC Shanghai, China IC Fund and Shanghai IC Fund. The principal terms of  the Joint Venture Agreement and the Capital Contribution Agreement    are set out as follows:

SUMMARY OF PRINCIPAL TERMS OF THE JOINT VENTURE AGREEMENT

Date:

30 January 2018

Parties:

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiry, Shanghai IC Fund and its ultimate beneficial owners (other than China  IC Fund) are third parties independent of the Company and its connected persons.

Business Scope of SMSC

SMSC will principally engage in wafer manufacturing, wafer probing and bumping, technology development, design service, mask manufacturing, assembly and final testing of integrated circuits and sales of self-manufactured products. SMSC is expected to establish  and build up large-scale manufacturing capacity focusing on 14 nanometer and  below  process and manufacturing technologies and aims to reach a manufacturing capacity  of 35,000 wafers per month after the completion of the first phase of development.

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LETTER FROM THE BOARD

Total Investment and Registered Capital

The parties will contribute in aggregate US$3.5 billion by nature of registered capital contribution in the following manner:

The consideration was arrived at after arm’s length negotiation among the parties with reference to the net asset value, future business prospects and development potential of SMSC. According to the unaudited accounts of SMSC, as at 31 December 2017, SMSC has total assets and total equity of approximately US$209.0 million and US$202.8 million, respectively. The assets of SMSC are mainly inter-group balances and cash, and hence the consideration of US$3.5 billion was also determined with reference to the future business prospects and development potential of SMSC. SMSC is a 12-inch wafer fab with advanced process capability built in line with the schedule of the Company’s 14 nanometre and below advanced technology node research and development and mass production. The  14 nanometre technology could be applied on mainstream mobile platforms, automotive,  Internet of Things and cloud computing, which are also fast growing  applications.  According to the Company’s development plan, the 12-inch wafer fab will be built by joint venture partnership with China IC Fund and Shanghai IC Fund and the  Company could  speed up the introduction of advanced manufacturing process and products. Majority of the amount of the Capital Contribution will be utilised as the capital expenditure in accordance with the development plan and allow the Group to develop the high-end and fast growing product stream, which would bring more growth opportunities to the Group and is essential  to maintain the Group’s competitiveness. The total investment for SMSC, as indicated in   the Joint Venture Agreement, is estimated to be US$10.24 billion. While the parties are only obliged to make contribution to the registered capital of SMSC in an aggregate amount of US$3.5 billion, the difference between the total investment of US$10.24 billion  and  enlarged registered capital of SMSC after the Capital Contribution is intended to be funded through SMSC’s internal cash flow, shareholders’ further contribution to the registered capital of SMSC or debt financing and the parties to the Joint Venture Agreement are not legally bound to contribute such difference between the total investment and the registered capital of SMSC.

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LETTER FROM THE BOARD

Each party shall complete 30% of its outstanding contributions prior to 30 June 2018, complete 30% of its outstanding contributions prior to 31 December 2018, and complete the remaining 40% of the contributions prior to 30 June 2019 (the ‘‘Time Frame’’).

Notwithstanding the above, the capital contribution by China IC Fund is subject to the following conditions (‘‘Condition Precedent’’):

The parties have further agreed that if China IC Fund fails to make Capital Contribution in accordance with the Time Frame, due to (i) the Condition Precedent is not satisfied or only satisfied within one month prior to the any deadline of the Time Frame; or

(ii) the expiry of the investment period of China IC Fund, the failure by China IC Fund to make its Capital Contribution will not constitute a breach of the Joint Venture Agreement. However, if the Condition Precedent is satisfied within one month prior to any deadline of the Time Frame, or beyond any such deadline (but within the investment period of China IC Fund), China IC Fund shall make the relevant capital contribution in accordance with the Joint Venture Agreement within one month after the satisfaction of the Condition Precedent. If China IC Fund fails to make capital contribution due to the Condition Precedent cannot be met on or before 25 August 2019, and/or if China IC Fund is unable to make capital contribution due to the expiry of its investment period, such failure to make capital contribution will not constitute a breach by China IC Fund, and the parties will further negotiate and amend the Joint Venture Agreement and the articles of association of SMSC as well as other relevant legal documents.

The cash capital contribution by SMIC Holdings will be funded by the internal cash flow. The proceeds of the Capital Contribution will be used by SMSC as capital expenditure and working capital.

Composition of the Board and the Supervisory Board of SMSC and General Management

The board of directors of SMSC will comprise five directors. SMIC  Holdings  and SMIC Shanghai together are entitled to appoint three directors in total and each of China      IC Fund and Shanghai IC Fund is entitled to appoint one  director. SMIC  Holdings  and SMIC Shanghai together are entitled to nominate the chairman of the board of directors of SMSC, who will also act as the legal representative of SMSC.

The supervisory board of SMSC will comprise three members. China IC Fund will appoint one member who will also be the chairman of the supervisory board. Each of Shanghai IC Fund and the employees of SMSC will be entitled to appoint one member.

The Company will be responsible for managing the daily operations of SMSC.

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LETTER FROM THE BOARD

Pre-Emptive Rights of Shareholders

Pursuant to the Joint Venture Agreement, in case of any proposed transfer of equity interest to third party(ies), subject to certain exceptions, each of the parties to the Joint Venture Agreement shall have a pre-emptive right to subscribe for the equity interest which any party to the Joint Venture Agreement intends to transfer to any third party, on pro rata basis among the remaining non-transfer parties and on terms not harsher than terms of transfer to third party(ies). The party(ies) that intend to transfer shares to third party(ies) are required to notify the non-transfer parties to such proposed transfer of equity interest. The Company will comply with the applicable requirements under Chapter 14 and/or Chapter 14A of the Listing Rules when the Company exercises its pre-emptive right to subscribe for the equity interest in SMSC. In case of any further contribution to the registered capital of SMSC, each party shall be entitled to a pro rata portion of such  proposed registered capital contribution equivalent to the respective percentage of the registered capital then owned by each of the parties immediately prior to the proposed registered capital contribution.

Other Terms

The term of operation of SMSC will be 50 years from the date of its establishment. The parties will decide whether to extend the term of operation of SMSC at least six months    prior to  the expiry date of the term of  operation, subject to  the approval of  the relevant  PRC authorities.

The Joint Venture Agreement will, after being agreed and signed by the  parties,  together with the transactions contemplated thereunder, be subject to the approval by Independent Shareholders at the EGM. Upon obtaining the regulatory approvals and the approval by the Independent Shareholders at the EGM, the Joint Venture Agreement will become effective and binding on the parties. The obligations of the parties under the Joint Venture Agreement are subject to compliance with applicable laws (including those of regulatory authorities (including but not limited to the Stock Exchange and the New York Stock Exchange, Inc.)).

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LETTER FROM THE BOARD

SUMMARY OF PRINCIPAL TERMS OF THE CAPITAL CONTRIBUTION AGREEMENT

Date:

30 January 2018

Parties:

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiry, Shanghai IC Fund and its ultimate beneficial owners (other than China  IC Fund) are third parties independent of the Company and the connected persons of the Company.

Subscription of Registered Capital

The registered capital of SMSC will increase from US$210 million to US$3.5 billion. In respect of the increase of US$3.29 billion, the parties have agreed that SMIC Holdings will contribute the amount of US$1.5435 billion in cash while China IC Fund and Shanghai IC Fund will contribute the RMB equivalent of US$946.5 million and US$800 million in cash (calculated at the middle exchange rate of RMB to US$ as announced by the People’s Bank of China on the date of the contribution), respectively.

Other Terms

The Capital Contribution Agreement will, after being agreed and signed by the parties, together with the transactions contemplated thereunder, be subject to the approval by the Independent Shareholders at the EGM. Upon obtaining the regulatory approvals  and  approval by the Independent Shareholders at the  EGM,  the  Capital  Contribution  Agreement will become effective and binding on the parties.

GENERAL INFORMATION ABOUT SMSC

SMSC was established on 1 December 2016. According to the unaudited accounts of SMSC prepared in accordance with IFRS, as at 31 December 2017, SMSC has total assets  and  total equity of  approximately US$209.0 million and US$202.8 million, respectively.  The net profit/(loss) (before taxation and extraordinary items) of SMSC for the year ended   31 December 2017 is approximately US$(115,240) and the net profit/(loss)  (after taxation and extraordinary items) of SMSC for the year ended 31 December 2017 is approximately US$(115,240). SMSC will continue to be a subsidiary of the Company following completion of the transactions contemplated under the Joint Venture Agreement and the Capital Contribution Agreement. The deemed disposal as a result of the Capital Contribution will  not result in the recognition of any gain or loss in profit or loss of the Group.

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LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE CAPITAL CONTRIBUTION

SMSC is a 12-inch wafer fab with advanced process capability built in line with the schedule of the Company’s 14  nanometre and  below advanced technology node research  and development and mass production. China IC Fund and  Shanghai  IC  Fund  mainly  invest in the value chain of integrated circuit industry via various approaches, primarily in integrated circuit chip manufacturing as well as chip designing, packaging test and  equipment and materials. The 12-inch wafer fab will be built by joint venture partnership  with China IC Fund and Shanghai IC Fund and the Company could  speed  up  the introduction of advanced manufacturing process and products with the support of the government industry funds. This will also relieve the Company from spending large amount of cash investment caused by the expansion of advanced production capacity.

The Company believes that  such partnership with China IC  Fund and Shanghai IC  Fund through the Joint Venture Agreement and the Capital Contribution Agreement and transactions contemplated thereunder are in the interests of the Company and the Shareholders as a whole and beneficial to the sustainable development of the Company. The Directors (excluding independent non-executive Directors whose view will be given after taking into account the advice from the Independent Financial Adviser) consider that it is in the best interests of the Company and the Shareholders as a whole to enter into the Joint Venture Agreement and the Capital Contribution Agreement and the transactions contemplated thereunder; the terms of the Joint Venture Agreement and the Capital Contribution Agreement are fair and reasonable; and the entering into of the Joint Venture Agreement and the Capital Contribution Agreement and the transactions contemplated thereunder are on normal commercial terms or better and  in  the  ordinary and  usual course of business.

IMPLICATIONS OF THE LISTING RULES

As China IC Fund held approximately 15.05% of the issued share capital of the Company through its wholly-owned subsidiary, Xinxin (Hongkong) Capital Co., Limited as  at the Latest Practicable Date, it is a connected person of the Company under the Listing Rules. The transactions contemplated under the Joint Venture Agreement and the Capital Contribution Agreement constitute connected transactions of the Company under Chapter 14A of the Listing Rules.

Pursuant to the Joint Venture Agreement and the Capital Contribution Agreement, as a result of the Capital Contribution, the Company’s equity interest in SMSC, through SMIC Holdings and SMIC Shanghai, will decrease from 100% to 50.1%, which constitutes a deemed disposal for the Company under Chapter 14 of the Listing Rules.

As certain applicable percentage ratios stipulated under Rule 14.07 of the Listing Rules in respect of the Joint Venture Agreement and the Capital Contribution Agreement exceed  5% but are less than 25%, the transactions contemplated under the Joint Venture Agreement and the Capital Contribution Agreement constitute discloseable transactions of  the Company under Chapter 14 of the Listing Rules, and a non-exempt  connected  transaction subject to reporting, announcement  and  the  Independent  Shareholders’  approval requirements of Chapter 14A of the Listing Rules.

– 10 –

LETTER FROM THE BOARD

In accordance with the Listing Rules, the Independent Board Committee has been established to advise and provide recommendation to the Independent Shareholders on the Joint Venture Agreement, the Capital Contribution Agreement and the transactions contemplated thereunder and to advise the Independent Shareholders on how to vote.

Messis Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the Joint Venture Agreement, the Capital Contribution Agreement and the transactions contemplated thereunder.

The letter from the Independent Board Committee to  the Independent Shareholders is set out on pages 14 to 15 of this circular. The letter from Messis Capital to the Independent Board Committee and the Independent Shareholders is set out on pages 16 to 24 of this circular.

INFORMATION ABOUT THE PARTIES

The Company, SMIC Holdings and SMIC Shanghai

The Company is one of the leading semiconductor foundries in the  world  and  the largest and most advanced foundry in the PRC. The Company provides integrated circuit foundry and technology services at 0.35-micron to 28-nanometer. Headquartered in  Shanghai, the PRC, the Company has a 300mm wafer fabrication facility  (fab)  and  a  200mm mega-fab in Shanghai; a 300mm mega-fab and a second majority owned 300mm fab under development for advance nodes in Beijing; 200mm fabs in Tianjin and Shenzhen. The Company also has marketing and customer service offices in the United States, Europe, Japan, and Taiwan, and a representative office in Hong Kong. SMIC Shanghai is a wholly- owned subsidiary of the Company established in the PRC. SMIC Holdings, as a  multinational company’s regional headquarters, was formed in 2015 and  is  a  wholly-  owned subsidiary of the Company.

China IC Fund

China IC Fund, incorporated in September 2014, mainly invests in the value chain of integrated circuit industry via various approaches, primarily in integrated circuit chip manufacturing as well as chip designing, packaging test and equipment and materials. Fund investors include CDB Capital, China National Tobacco Corporation, Beijing Yizhuang International Investment and Development Co., Ltd., China Mobile Communications Corporation, Shanghai Guosheng (Group) Co., Ltd., Beijing Purple Communications Technology Group Ltd and Sino IC Capital Co., Ltd.

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LETTER FROM THE BOARD

Shanghai IC Fund

Shanghai IC Fund is currently the largest local integrated circuit industry investment fund in Shanghai, the investors of which include, among others, Shanghai S&T Venture Capital (Group) Co., Ltd., SAIC Capital Co., Ltd., China IC Fund, Shanghai Guo Sheng Group Co., Ltd. and Shanghai International Group. The fund’s investment focuses on the integrated circuit manufacturing industry and extends to the entire industry chain. The fund aims to invest and build industrial star enterprises and enhance corporate value  and  accelerate the coordinated development of integrated circuit industry chain.

GENERAL INFORMATION

At the EGM, an ordinary resolution will be proposed to  the  Independent Shareholders to approve, among others, the Joint Venture Agreement,  the  Capital  Contribution Agreement and any transactions contemplated thereunder.

As China IC Fund is a connected person of the Company, its wholly-owned subsidiary Xinxin (Hongkong) Capital Co., Ltd. and other associates (as defined in  the Listing Rules)  of China IC Fund will abstain from voting on the ordinary resolutions to approve the Joint Venture Agreement and the Capital Contribution Agreement. As at the Latest Practicable Date, Xinxin (Hongkong) Capital Co., Limited was holding 740,000,000 Shares and representing approximately 15.05% of the total issued share capital of the Company.

Apart from Xinxin (Hongkong) Capital Co., Limited and other associates of China IC Fund, no other Shareholder will be required to abstain from voting on  the  relevant resolutions at the EGM.

No Director is considered to have a material interest in the Joint Venture Agreement or the Capital Contribution Agreement which would have required the Director to abstain from voting at the Board meeting authorising the Joint Venture Agreement and the Capital Contribution Agreement.

Your attention is drawn to the general information set out in Appendix I to this  circular.

RECOMMENDATION

The Board (including the independent non-executive Directors) considers that it is in the best interests of the Company and the Shareholders as a whole to enter into the Joint Venture Agreement and the Capital Contribution Agreement; the  terms  of the  Joint  Venture Agreement and the Capital Contribution Agreement are fair and reasonable; and     the entering into of the Joint Venture Agreement, the Capital Contribution Agreement and transactions contemplated thereunder are on normal commercial terms or better, in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends  the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at  the EGM to approve the Joint Venture  Agreement,  the  Capital  Contribution  Agreement and the transactions contemplated thereunder.

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LETTER FROM THE BOARD

EXTRAORDINARY GENERAL MEETING

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

To the best knowledge, information and belief of the Directors, having made all reasonable enquiries, there is (i) no voting trust or other agreement or arrangement or understanding entered into by or binding upon any Shareholders; and (ii) no obligation or entitlement of any Shareholder as at the Latest Practicable Date, whereby it/he has or may have temporarily or permanently passed control over the exercise of the voting right in respect of its/his Shares to a third party, either generally or on a case-by-case basis.

A form of proxy for the EGM is enclosed with this circular. Whether or not you intend to be present at the EGM, you are requested to complete the form of proxy and return it to the branch share registrar of the Company, Computershare Hong Kong Investor Services Limited, at Hopewell Centre, 17M Floor, 183 Queen’s Road East, Wanchai, Hong Kong in accordance with the instructions printed thereon not less than 48 hours before the time fixed for the EGM. The completion of a form of proxy will not preclude you from attending and voting at the EGM in person.

For determining the entitlement to attend and vote at the EGM,  the  register  of  members of the Company will be closed from Thursday, 22 March 2018 to Tuesday, 27 March 2018, both days inclusive, during which period no transfer of the Shares will be registered. In order to be eligible to attend and vote at the EGM, all properly completed transfer forms accompanied by the relevant share certificates must be lodged  with  the  branch share registrar of the Company, Computershare Hong Kong Investor Services  Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong by no later than 4 : 30 p.m. on Wednesday, 21 March  2018.  All persons who are registered holders of the Shares on 27 March 2018, the record date of the EGM, will be entitled to attend and vote at the EGM.

Shanghai, 6 March 2018

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Set out below is the text of the letter of recommendation, prepared for incorporation in LR14A.70(6) this circular, from the Independent Board Committee to the Independent Shareholders.

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: 981)

6 March 2018

To the Independent Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTIONS

IN RELATION TO PROPOSED CAPITAL CONTRIBUTION AND DEEMED DISPOSAL OF EQUITY INTEREST IN SMSC

We refer to the circular dated 6 March 2018 (the ‘‘Circular’’) issued by the Company to the Shareholders of which this letter forms part. Unless the context otherwise requires, capitalised terms used in this letter shall have the same meanings given to them in the Circular.

We have been appointed by the Board to advise the Independent Shareholders as to whether the terms of the Joint Venture Agreement and the Capital Contribution Agreement are fair and reasonable, and whether the entering into of the  Joint Venture Agreement and  the Capital Contribution Agreement is on normal commercial terms or better,  in the ordinary and usual course of business of the Company and in the interests of the Company  and the Shareholders as a  whole and to  advise the Independent Shareholders on  how to  vote, taking into account the recommendations of Messis Capital.

Messis Capital has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of the Joint Venture Agreement and the Capital Contribution Agreement are fair and reasonable, and whether the entering into of the Joint Venture Agreement and the Capital Contribution Agreement is on normal commercial terms or better, in the ordinary and usual course of business of the Company and in the interests of the Company and the Shareholders as a whole and to advise the Independent Shareholders on how to vote on the relevant resolution. Details of its advice, together with the principal factors and reasons taken into consideration in arriving at such advice, are set out on pages 16 to 24 of the Circular.

– 14 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We, having taken into account the advice of Messis Capital, consider that the terms of the Joint Venture Agreement and the Capital Contribution Agreement are fair  and  reasonable, and the entering into of the Joint Venture Agreement and the Capital  Contribution Agreement is on normal commercial terms or better, in the ordinary and usual course of business of the Company and in the interests of the  Company  and  the  Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM.  Your  attention  is  also drawn to the letter from the Board set out on pages 4 to 13 of  the  Circular  and  the  additional information set out in the Appendix I to the Circular.

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LETTER FROM MESSIS CAPITAL

The following is the full text of the letter from the Independent Financial Adviser which     sets out its advice to the Independent Board Committee and the Independent Shareholders for inclusion in this circular.

6 March 2018

The Independent Board Committee and the Independent Shareholders of Semiconductor Manufacturing International Corporation

Dear Sir/Madam,

DISCLOSEABLE AND CONNECTED TRANSACTIONS

IN RELATION TO PROPOSED CAPITAL CONTRIBUTION AND DEEMED DISPOSAL OF EQUITY INTEREST IN SMSC

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Joint Venture Agreement and the Capital Contribution Agreement. Details of which are set out in the letter from the Board (the ‘‘Letter from the Board’’) contained in the circular of the Company dated 6 March 2018 issued to the Shareholders (the ‘‘Circular’’), of which this  letter forms part. Terms used in this letter shall have the same meanings as those defined in the Circular, unless otherwise specified.

Reference is made to the Company’s announcement dated 30 January 2018 in relation   to the proposed Capital Contribution to and deemed disposal of equity interest in SMSC pursuant to the Joint Venture Agreement and the Capital Contribution Agreement entered  into among SMIC Holdings, SMIC Shanghai, China IC Fund and Shanghai IC Fund.

As China IC Fund held approximately 15.05% of the issued share capital of the Company through its wholly-owned subsidiary, Xinxin (Hongkong) Capital Co., Limited as  at the Latest Practicable Date, it is a connected person of the Company under the Listing Rules. The transactions contemplated under the Joint Venture Agreement and the Capital Contribution Agreement constitute connected transactions of the Company under Chapter 14A of the Listing Rules.

Pursuant to the Joint Venture Agreement and the Capital Contribution Agreement, as a result of the Capital Contribution, the Company’s equity interest in SMSC, through SMIC Holdings and SMIC Shanghai, will decrease from 100% to 50.1%, which constitutes a deemed disposal for the Company under Chapter 14 of the Listing Rules.

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LETTER FROM MESSIS CAPITAL

As certain applicable percentage ratios stipulated under Rule 14.07 of the Listing Rules in respect of the Joint Venture Agreement and the Capital Contribution Agreement exceed  5% but are less than 25%, the transactions contemplated under  the  Joint  Venture  Agreement and the Capital Contribution Agreement constitute discloseable transactions of  the Company under Chapter 14 of the Listing Rules, and a non-exempt  connected  transaction subject to reporting, announcement  and  the  Independent  Shareholders’  approval requirements of Chapter 14A of the Listing Rules.

In accordance with the Listing Rules, the Independent Board Committee has been established to advise and provide recommendation to the Independent Shareholders on the Joint Venture Agreement, the Capital Contribution Agreement and the transactions contemplated thereunder and to advise the Independent Shareholders on how to vote. We, Messis Capital Limited, have been appointed as the Independent Financial  Adviser  to  advise the Independent Board Committee and the Independent Shareholders as to  whether  the terms of (i) the Joint Venture Agreement; and (ii) the  Capital Contribution Agreement  are on normal commercial terms and in the ordinary and usual course of business of the Group, and fair and reasonable so far as  the Independent Shareholders are concerned and is  in the interests of the Company and the Shareholders as a whole.

OUR INDEPENDENCE

As at the Latest Practicable Date, we did not have any relationship with or interest in the Company or any other parties that could reasonably be regarded as relevant to our independence. In the last two years, we have acted as the independent financial adviser to the independent board committee and the independent shareholders of the Company for the following transactions:

Date of the relevant circular/

announcement and/or our

– 17 –

LETTER FROM MESSIS CAPITAL

Apart from normal professional fees paid or payable to us in connection with the previous appointments mentioned above as well as this appointment as the Independent Financial Adviser, no arrangement exist whereby we have received or will receive any fees  or benefits from the Company or any other parties that could reasonably be regarded as relevant to our independence. Accordingly, we consider that the aforementioned previous appointment would not affect our independence, and that we are independent pursuant to Rule 13.84 of the Listing Rules.

BASIS OF OUR OPINION

In formulating our opinion and recommendation, we have considered, among other things, (i) the Joint Venture Agreement; (ii) the Capital Contribution Agreement; and (iii) other information as set out in the Circular. We have also relied on all relevant information, opinions and facts supplied and represented by the Company, the Directors and the management of the Company. We have assumed that all such  information, opinions,  facts and representations contained or referred to in the Circular, for which the Company is fully responsible, were true and accurate in all respects as at the date hereof and may be relied upon. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Company, and the Company has confirmed that     no material facts have been withheld or omitted from  the information provided and referred to in the Circular, which would make any statement therein misleading.

We consider that we have reviewed sufficient information currently available to  reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried out independent verification of the information provided by the Directors and the representatives of the Company, nor have we conducted any form of in-depth investigation into the  businesses, affairs, operations, financial position or  future prospects  of the Company or any of its subsidiaries.

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LETTER FROM MESSIS CAPITAL

PRINCIPAL FACTORS AND REASONS CONCERNED

In considering whether the terms of (i) the Joint Venture Agreement; and  (ii)  the Capital Contribution Agreement are fair and reasonable in so far as the Independent Shareholders are concerned, we have taken into account the principal factors and reasons     set out below:

Background of the Joint Venture Agreement and the Capital Contribution Agreement

Reference is made to the Company’s announcement dated 30 January 2018. As at even date, SMIC Holdings, SMIC Shanghai, China IC Fund and Shanghai IC Fund entered into the Joint Venture Agreement and the Capital Contribution Agreement pursuant to which SMIC Holdings, China IC Fund and Shanghai IC Fund agreed to make cash contribution to the Registered Capital of SMSC in the  amount  of  US$1.5435 billion, US$946.5 million and US$800 million, respectively. As a result of the Capital Contribution: (i) the Registered Capital of SMSC will increase  from  US$210 million to US$3.5 billion; (ii) the Company’s equity interest in SMSC, through SMIC Holdings and SMIC Shanghai, will decrease from 100% to 50.1%; and  (iii) SMSC will be owned as to 27.04% and 22.86% by China IC Fund and Shanghai IC Fund, respectively.

SMSC was established on 1 December 2016. According to the unaudited accounts of SMSC prepared in accordance with IFRS, as at 31 December 2017, SMSC has total assets and total equity of approximately US$209.0 million and US$202.8 million, respectively. The net loss of SMSC for the year ended 31 December 2017 is approximately US$115,240. SMSC will continue to be a subsidiary of the Company following completion of the transactions contemplated under the Joint Venture Agreement and the Capital Contribution Agreement. The  deemed disposal as  a  result  of the Capital Contribution will not result in the recognition of any  gain or  loss  in  profit or loss of the Group.

The Company is one of the leading semiconductor foundries in the world and the largest and most advanced foundry in the PRC. The Company  provides  integrated circuit foundry and technology services at 0.35-micron  to 28-nanometer. Headquartered in Shanghai, the PRC, the Company has a 300mm wafer fabrication facility (fab) and a 200mm mega-fab in Shanghai; a 300mm mega-fab and a second majority owned 300mm fab under development for advance nodes in Beijing; and 200mm fabs in Tianjin and Shenzhen. The Company also has marketing and customer service offices in the United States, Europe, Japan, and Taiwan, and a representative office in Hong Kong. SMIC Shanghai is a wholly-owned subsidiary of the Company established in the PRC. SMIC Holdings, as a multinational company’s regional headquarters, was formed in 2015 and is a wholly-owned subsidiary of the Company.

China IC Fund, incorporated in September 2014, mainly invests in the value chain of integrated circuit industry via various approaches, primarily  in  integrated  circuit chip manufacturing as well as chip designing, packaging test and equipment and materials. Fund investors include CDB Capital, China National Tobacco Corporation, Beijing Yizhuang International Investment and Development Co., Ltd., China Mobile Communications Corporation, Shanghai Guosheng (Group) Co., Ltd., Beijing Purple Communications Technology Group Ltd and Sino IC Capital Co., Ltd.

– 19 –

LETTER FROM MESSIS CAPITAL

Shanghai IC Fund is currently the largest local integrated circuit industry investment fund in Shanghai, the investors of which include, among others, Shanghai S&T Venture Capital (Group) Co., Ltd., SAIC Capital Co., Ltd., China IC Fund, Shanghai Guo Sheng Group Co., Ltd. and Shanghai International Group. The fund’s investment focuses on the integrated circuit manufacturing industry and extends to the entire industry chain. The fund aims to invest and build industrial star enterprises and enhance corporate value and accelerate the coordinated development of integrated  circuit industry chain.

Reasons for and benefit of the Joint Venture Agreement and the Capital Contribution Agreement

According to the Letter from the Board, SMSC is a 12-inch wafer fab with  advanced process capability built in line with the schedule of the Company’s 14 nanometre and below advanced technology node research and development and mass production. China IC Fund and Shanghai IC Fund mainly invest in the value chain of integrated circuit industry via various approaches, primarily in integrated circuit chip manufacturing as well as chip designing, packaging test and equipment and materials along the industry chain. The 12-inch wafer fab will be built by joint  venture  partnership with China IC Fund and Shanghai IC Fund and the Company could speed   up the introduction of advanced manufacturing process and products. This will also relieve the Company from spending large amount of cash investment caused by the expansion of advanced production capacity. The proceeds of the Capital Contribution will be used by SMSC as capital expenditure and working capital.

For due diligence purpose, we have conducted research on the background of the   IC industry. According to information published by SEMI in July 2017 (the ‘‘SEMI Publication’’), the PRC is the largest consumer of semiconductors in the world, but the demand is mainly satisfied through imports. SEMI (www.semi.org), is a  global  industry association of companies that provide equipment, materials and  services for  the manufacture of semiconductors and other related micro and  nano-technologies. SEMI also provides market research reports for the semiconductor  equipment,  materials, and LED industries. According to the SEMI Publication, in 2015, the PRC’s IC production amounted to US$13.2 billion, while the PRC IC market demand approximated to US$104 billion. It is expected that in 2020, the PRC’s IC production would approximate to US$26.9 billion, while the PRC’s forecasted IC demand is expected to reach US$149 billion, indicating a wide gap between local IC supply and demand. In addition, we have reviewed the feasibility report in relation to the construction plan of SMSC (the ‘‘Feasibility Report’’). The Feasibility Report was prepared by a consulting company (the ‘‘Consultant’’), which is based in the PRC and has presence in over 30 major cities across the PRC. The Consultant is mainly engaged in the engineering consulting, engineering design and main contracting business, and is involved in industries such as electronic, high-end manufacturing and infrastructure. We noted from the Feasibility Report that, the 14 nanometre technology could  be applied on mainstream mobile platforms, automotive, Internet of Things and cloud computing, which are also the fast growing applications as stated in the SEMI Publication. Moreover, according to the Feasibility Report, the 16/14 nanometre products’ market share by revenue in the  global pure play foundry market is  expected  to grow from approximately 6% in 2016 to 22% in 2019.

Having considered the above factors, we consider that the Capital Contribution allows the Group to develop the high-end and  fast  growing  product stream, which in our view,

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LETTER FROM MESSIS CAPITAL

would bring more growth opportunities to the Group  and  essential  to maintain the Group’s competitiveness, and the entering into the Joint Venture  Agreement and the Capital Contribution Agreement is fair and reasonable and is in the interests of the Company and the Shareholders as a whole.

Effect of the capital injection on the shareholding structure

Pursuant to the Joint Venture Agreement and the Capital Contribution Agreement, SMIC Holdings, China IC Fund and Shanghai IC Fund agreed to make cash contribution to the Registered Capital of SMSC in the amount of US$1.5435 billion, US$946.5 million and US$800 million, respectively.

Immediately prior to the completion of the Joint Venture Agreement and the  Capital Contribution Agreement, SMSC is an indirect wholly-owned subsidiary of the Company and is owned as to approximately 26.2% by SMIC Holdings and 73.8% by SMIC Shanghai. The shareholding structure of SMSC immediately prior to the completion of the Joint Venture Agreement and the Capital Contribution Agreement is set out below for illustration purpose:

(Registered capital: US$210 million)

Note: SMIC Holdings and SMIC Shanghai are wholly-owned subsidiaries of the Company.

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LETTER FROM MESSIS CAPITAL

Immediately after completion of the Joint Venture Agreement and the Capital Contribution Agreement, SMSC will be owned as to 45.67% by SMIC Holdings, 4.43% by SMIC Shanghai, 27.04% by China IC Fund and 22.86% by Shanghai IC Fund.

(Registered capital: US$3.5 billion)

Note: SMIC Holdings and SMIC Shanghai are wholly-owned subsidiaries of the Company.

As demonstrated above, the equity interest of the Company through its wholly- owned subsidiaries in SMSC will be diluted from 100% to 50.1%.

Deemed Disposal

As stated in the Letter from the Board, SMSC was established on  1  December  2016 and according to the unaudited accounts of SMSC, as at 31  December 2017,  SMSC has total assets and total equity of approximately US$209.0 million and  US$202.8 million, respectively. The net loss of SMSC for the year ended 31 December 2017 is approximately US$115,240. SMSC will continue to be a subsidiary of the Company following the Capital Contribution. We have obtained the management accounts of SMSC and noted that the assets were mainly inter-group receivables and cash with no fixed assets. We consider that the deemed disposal is merely incidental to the Capital Contribution, the purpose of which is the development of SMSC and therefore, is fair and reasonable in so far as the Independent Shareholders  are  concerned.

Principal terms of the Joint Venture Agreement

Business Scope of SMSC

SMSC will be principally engaged in wafer manufacturing, wafer probing and bumping, technology development, design service, mask manufacturing, assembly and final testing of integrated circuits and sales of self-manufactured products.

Composition of the Board and the Supervisory Board of SMSC and General Management

The board of directors of SMSC will comprise five directors. SMIC Holdings and SMIC Shanghai together are entitled to appoint three directors in total and  each of China IC Fund and Shanghai IC Fund is entitled to appoint one director.  SMIC  Holdings and SMIC Shanghai together are entitled to nominate the chairman of the  board of directors of SMSC, who will also act as the legal representative of SMSC.

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LETTER FROM MESSIS CAPITAL

The supervisory board of SMSC will comprise three members. China IC Fund will appoint one member who will also be the chairman of the supervisory board. Each of Shanghai IC Fund and the employees of SMSC will be entitled to appoint one member.

The Company will be responsible for managing the daily operations of SMSC. We consider such compositions reflect the shareholding of each investor in SMSC and are therefore, fair and reasonable.

Principal terms of the Capital Contribution Agreement

Subscription of Registered Capital

The registered capital of SMSC will be increased from US$210 million to US$3.5 billion. In respect of the increase of US$3.29 billion, the parties have agreed that SMIC Holdings will contribute the amount of US$1.5435 billion in cash while China IC Fund and Shanghai IC Fund will contribute the RMB equivalent of US$946.5 million and US$800 million in cash (calculated at the middle exchange rate of RMB to US$ as announced by the People’s Bank of China on the date of the contribution), respectively.

As stated in the Letter from the Board, the consideration of the Capital  Contribution was arrived at after arm’s length negotiation among the parties with reference to the net asset value, future business prospects and development potential of SMSC. The assets of SMSC are mainly inter-group balances and cash, and hence the consideration of US$3.5 billion are also determined with reference to the  future  business prospects and development potential. As stated in the Feasibility Report, a  large investment amount totalling up to approximately US$10.2 billion would be required, with over 95% of  the investment being for the procurement and installation   of equipment. As discussed with the management of the Company, the balance of the investment amount required could be satisfied through SMSC’s internal cash flow, shareholders’ further contribution to the registered capital of SMSC or debt financing and the parties to the Joint Venture Agreement are not legally bound to contributing  such difference between the total investment and the registered capital of SMSC. Given the immense investment required, we consider that  such  contribution could speed up  the  introduction of advanced manufacturing process to  SMSC’s advanced wafer fab  and products while striking a balance between maintaining  a  majority  interest  in SMSC and minimising the capital outlay of the Group.

Financial effect of the Capital Contribution

Following completion of the transactions contemplated under the Joint Venture Agreement and the Capital Contribution Agreement, SMSC will continue to be a subsidiary of the Company. As such, the results of operations and financial position of SMSC will continue to be consolidated in the Group’s financial statements. Therefore,   it is expected that the Capital Contribution would not have material impact to the financial performance and financial conditions of the Group.

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RECOMMENDATION

We consider the Capital Contribution and the deemed disposal to be a strategic corporate action of the Group, which is not in the usual and ordinary course of business of the Group. Notwithstanding the above, based on the information and representations provided and opinions given by the Board and having taken into account the above principal factors and reasons, we are of the view that the terms of the Joint Venture Agreement and the Capital Contribution Agreement and the transactions contemplated thereunder are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the resolutions in connection with the Joint Venture Agreement, the Capital Contribution Agreement and the transactions contemplated thereunder at the EGM.

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RESPONSIBILITY STATEMENT

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

DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests or  short positions of  the  Directors and the chief executive officer in the Shares, underlying Shares and debentures of the Company  or any of its associated corporation (within the meaning of Part XV of the SFO), which     were notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or  deemed to have under such provisions of the SFO), and as recorded in the register required to be kept under section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers were as follows:

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Notes:

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Save as disclosed below, the Directors are not aware that there was any party who, as   at the Latest Practicable Date, had an interest or short position  in the  Shares  and  underlying Shares of the Company which would fall to be disclosed under Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company and its subsidiaries:

Notes:

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MATERIAL CHANGES

As at the Latest Practicable Date, the Directors were not aware of any material adverse changes in the financial and trading position of the Group since 31 December 2016, the date of the latest published audited accounts of the Group.

LITIGATION AND CLAIMS

As at the Latest Practicable Date, the Directors were not aware of any litigation or claims of material importance pending or threatened against any member of the Group.

DIRECTORS’ INTEREST IN SERVICE CONTRACTS

None of the Directors has entered into a service contract with any member  of  the  Group (excluding contracts expiring or determinable within one year without payment of compensation (other than statutory compensation)).

OTHER INTERESTS OF THE DIRECTORS

As at the Latest Practicable Date:

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EXPERT AND CONSENT

The following is the qualification of the Independent Financial  Adviser  which  has given opinions or advice contained in this circular:

Messis Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion of  its statements, letter, report and opinion (as the case may be)   as set out in this circular and references to its name in  the  form and context in which they  are included.